FHFA Vs Citi Group

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE
FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, JURY TRIAL DEMANDED -againstCITIGROUP, INC.; CITIGROUP MORTGAGE LOAN TRUST, INC.; CITIGROUP GLOBAL MARKETS, INC.; CITIGROUP GLOBAL MARKETS REALTY CORP.; SUSAN MILLS; RANDALL COSTA; SCOTT FREIDENRICH; RICHARD A. ISENBERG; MARK I. TSESARSKY; PETER PATRICOLA; JEFFREY PERLOWITZ; and EVELYN ECHEVARRIA, Defendants.
___ CIV. ___ (___)
COMPLAINT
TABLE OF CONTENTS Page
NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................6 JURISDICTION AND VENUE ......................................................................................................9 FACTUAL ALLEGATIONS ........................................................................................................10 I. THE SECURITIZATIONS................................................................................................10 A. B. C. Residential Mortgage-Backed Securitizations In General .....................................10 The Securitizations At Issue In This Case .............................................................12 The Securitization Process .....................................................................................12 1. 2. II. CGMR Pools Mortgage Loans In Special Purpose Trusts.........................12 The Trusts Issue Securities Backed By The Loans ....................................13
THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................16 A. The Role Of Each Of The Defendants ...................................................................16 1. 2. 3. 4. 5. B. CGMR ........................................................................................................17 CGMLT......................................................................................................18 CGMI .........................................................................................................18 Citi..............................................................................................................19 The Individual Defendants .........................................................................20
Defendants Failure To Conduct Proper Due Diligence ........................................25
III.
THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS ..........30
A. B. C. D. IV.
Compliance With Underwriting Guidelines ..........................................................30 Statements Regarding Occupancy Status Of Borrower .........................................33 Statements Regarding Loan-To-Value Ratios .......................................................35 Statements Regarding Credit Ratings ....................................................................37
FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS......................................................................................39 A. The Statistical Data Provided In The Prospectus Supplements Concerning Owner Occupancy And LTV Ratios Was Materially False...................................39 1. 2. B. Owner Occupancy Data Was Materially False ..........................................40 Loan-To-Value Data Was Materially False ...............................................42
The Originators Of The Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................45 1. Government Investigations Have Confirmed That The Originators Of The Loans In The Securitizations Systematically Failed To Adhere To Their Underwriting Guidelines ................................................45 i. ii. iii. iv. v. vi. 2. Wells Fargo ....................................................................................46 Countrywide...................................................................................49 American Home .............................................................................50 Argent ............................................................................................52 WMC..............................................................................................54 Inflated Appraisals .........................................................................55
The Collapse Of The Certificates Credit Ratings Further Indicates That The Mortgage Loans Were Not Originated In Adherence To The Stated Underwriting Guidelines .........................................................56
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3.
The Surge In Mortgage Delinquencies And Defaults Further Indicates That The Mortgage Loans Were Not Originated In Adherence To The Stated Underwriting Guidelines ..................................58
V.
FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES .................................................59
FIRST CAUSE OF ACTION ........................................................................................................61 SECOND CAUSE OF ACTION ...................................................................................................64 THIRD CAUSE OF ACTION .......................................................................................................68 FOURTH CAUSE OF ACTION ...................................................................................................72 FIFTH CAUSE OF ACTION ........................................................................................................75 SIXTH CAUSE OF ACTION .......................................................................................................78 SEVENTH CAUSE OF ACTION .................................................................................................82 EIGHTH CAUSE OF ACTION ....................................................................................................85 PRAYER FOR RELIEF ................................................................................................................89 JURY TRIAL DEMANDED .........................................................................................................90
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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 Citigroup, Inc. (Citi), Citigroup Mortgage Loan Trust, Inc. (CGMLT), Citigroup Global Markets, Inc. (CGMI), Citigroup Global Markets Realty Corp. (CGMR) (collectively, the Citi Defendants), Susan Mills, Randall Costa, Richard A. Isenberg, Scott Freidenrich, Mark I. Tsesarsky, Peter Patricola, Jeffrey Perlowitz, and Evelyn Echevarria (the Individual Defendants) (together with the Citi Defendants, the Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the
offer and sale of certain residential mortgage-backed securities to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or GSEs). These securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans. These representations were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, and constitutes common law negligent misrepresentation.
2.
Between September 13, 2005 and May 31, 2007, Fannie Mae and Freddie Mac
purchased over $3.5 billion in residential mortgage-backed securities (the GSE Certificates) issued in connection with ten securitizations sponsored or underwritten by the Citi Defendants.1 The GSE Certificates purchased by Freddie Mac, along with date and amount of the purchases, are listed infra in Table 10. The GSE Certificates purchased by Fannie Mae, along with date and amount of the purchases, are listed infra in Table 11. The following ten securitizations are at issue in this case: i. Argent Securities Inc., Asset-Backed Pass-Through Certificates, Series 2005-W2 (ARSI 2005-W2); ii. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2005-7 (CMLTI 2005-7); iii. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 200510 (CMLTI 2005-10); iv. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2005HE3 (CMLTI 2005-HE3); v. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2005HE4 (CMLTI 2005-HE4); vi. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2006AR2 (CMLTI 2006-AR2); vii. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2006-
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.
AR5 (CMLTI 2006-AR5); viii. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2006WF1 (CMLTI 2006-WF1); ix. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2006WF2 (CMLTI 2006-WF2); x. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2007AR7 (CMLTI 2007-AR7); and (collectively, the Securitizations). 3. The Certificates were offered for sale pursuant to one of five shelf registration
statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC). Defendant CGMLT filed four Shelf Registration Statements that pertained to nine of the Securitizations at issue in this action. The Individual Defendants signed one or more of the Shelf Registration Statements and the amendments thereto. With respect to all of the Securitizations, CGMI was the lead underwriter, and with respect to all but one of the Securitizations, CGMI was also the underwriter who sold the Certificates to the GSEs. 4. For each Securitization, a prospectus (Prospectus) and prospectus supplement
(Prospectus Supplement) were filed with the SEC as part of the Shelf Registration Statement for that Securitization.2 The GSE Certificates were marketed and sold to Fannie Mae and Freddie Mac pursuant to the Registration Statements, including the Shelf Registration Statements and the corresponding Prospectuses and Prospectus Supplements. 5.
2
The Registration Statements contained statements about the characteristics and
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.
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 investors decision to purchase 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 stated underwriting standards and origination practices and had materially poorer credit quality than what was represented in the Registration Statements. 6. The Registration Statements 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 groups aggregate principal balance with loan-to-value ratios within specified ranges. This information was also material to reasonable investors. However, a loan level analysis for each Securitizationan analysis that encompassed a statistically significant sample of thousands of mortgages across all of the Securitizationshas revealed that these statistics were also false and omitted material facts due to inflated property values and misstatements of other key characteristics of the mortgage loans. 7. For example, the percentage of owner-occupied properties is a material risk factor
to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties
relative to the amount of the underlying loans. 8. Defendants CGMLT (the depositor for nine of the Securitizations), CGMI (the
lead underwriter for all of the Securitizations and selling underwriter for nine of the Securitizations), and the Individual Defendants (the signatories to the Registration Statements with respect to nine of the Securitizations) are directly responsible for the misstatements and omissions of material fact contained in the Registration Statements because they prepared, signed, filed and/or used these documents to market and sell the GSE Certificates to Fannie Mae and Freddie Mac, and/or directed and controlled such activities. 9. Defendants CGMR (the sponsor of nine of the Securitizations) and Citi are also
responsible for the misstatements and omissions of material fact contained in the Registration Statements by virtue of their direction and control over Defendants CGMLT and CGMI. Citi also directly participated in and exercised dominion and control over the business operations of Defendants CGMLT, CGMR, and CGMI. 10. Fannie Mae and Freddie Mac purchased over $3.5 billion of the Certificates
pursuant to the Registration Statements filed with the SEC. These documents contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate such loans. As a result of Defendants misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 11. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against
the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for
common law negligent misrepresentation. 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). 13. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by
Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. The Defendants 14. Defendant CitiGroup, Inc. is a diversified global financial services holding
company, incorporated under the laws of the State of Delaware, and headquartered at 399 Park Avenue, New York, New York. Citi offers a broad range of financial services to consumer and corporate customers, with more than 200 million customer accounts and operations in more than 100 countries. All of the Citi Defendants are direct or indirect subsidiaries of Citi.
15.
Defendant CitiGroup Global Markets, Inc., formerly known as Salomon Smith
Barney or Smith Barney, is a New York corporation with its principal place of business at 388 Greenwich St. in New York, New York. CGMI is a registered broker-dealer with the SEC, and is a wholly owned subsidiary of Citi. CGMI was the lead underwriter for each Securitization and was intimately involved in the offerings of the Certificates. With one exception, Fannie Mae and Freddie Mac purchased all of the GSE Certificates from CGMI in its capacity as underwriter of the Securitizations. 16. Defendant CitiGroup Mortgage Loan Trust, Inc. is a Delaware corporation with
its principal place of business located at 390 Greenwich Street, 6th Floor, New York, New York 10013. It is a wholly owned subsidiary of Citi. It was the depositor for nine of the ten Securitizations, the registrant for certain Registration Statements filed with the SEC, and an issuer of certain Certificates purchased by the GSEs. 17. Defendant Citigroup Global Markets Realty Corp. is a New York corporation
with its principal place of business at 390 Greenwich St. in New York, New York. It is an affiliate of CGMI, a wholly owned subsidiary of Citi. CGMR was the sponsor of nine of the ten Securitizations.3 18. Defendant Susan Mills is an individual residing in Rockville Centre, New York.
Ms. Mills was Vice President and Managing Director of Defendant CGMLT. Ms. Mills was also the head of CGMIs Mortgage Finance Group since 1999. Ms. Mills signed the Shelf Registration Statements and the amendments thereto, and did so in New York. 19. Defendant Richard A. Isenberg is an individual residing in New York, New York.
The remaining securitization was sponsored by non-party Ameriquest Mortgage Company.
Mr. Isenberg was a Director and President (Principal Executive Officer) of Defendant CGMLT. Mr. Isenberg signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 20. Defendant Randall Costa is an individual residing in Evanston, Illinois. Mr.
Costa was a Director and President (Principal Executive Director) of Defendant CGMLT. Mr. Costa signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 21. Defendant Scott Freidenrich is an individual residing in Westfield, New Jersey.
Mr. Freidenrich was a Treasurer (Principal Financial Officer) of Defendant CGMLT. Mr. Freidenrich signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 22. Defendant Mark I. Tsesarsky is an individual residing in New York, New York.
Mr. Tsesarsky was a Director of Defendant CGMLT. Mr. Tsesarsky signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 23. Defendant Peter Patricola is an individual residing in Holmdel, New Jersey. Mr.
Patricola was a Controller of Defendant CGMLT. Mr. Patricola signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 24. Defendant Jeffrey Perlowitz is an individual residing in Short Hills, New Jersey.
Mr. Perlowitz was a Director of Defendant CGMLT. Mr. Perlowitz signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 25. Defendant Evelyn Echevarria is an individual residing in Charlotte, North
Carolina. Ms. Echevarria was a Director of Defendant CGMLT. Ms. Echevarria signed certain Registration Statements and the amendments thereto, and did so in New York.
The Non-Party Originators: 26. CitiMortgage, Inc. (CitiMortgage) is a Florida corporation with its principal
place of business at 1000 Technology Drive, Mailstop 730, OFallon, Missouri. It was engaged in the business of, among other things, originating and acquiring residential mortgage loans and selling those loans through securitizations. It originated and serviced many of the residential mortgage loans at issue here. 27. In addition, many of the loans underlying the Certificates were acquired by the
sponsor for each Securitization from other non-party mortgage originators. The originators responsible for the loans underlying the Certificates include Countrywide Home Loans, Inc. (Countrywide), Greenpoint Mortgage Funding, Inc., Quicken Loans, Inc., MortgageIT, Inc., Wells Fargo Bank, N.A. (Wells Fargo), WMC Mortgage Corp. (WMC), American Home Mortgage Corp. (American Home), and Argent Mortgage Company (Argent), among others. JURISDICTION AND VENUE 28. 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. 29. 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 of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o. This Court further has jurisdiction over the Securities Act claims pursuant to Section 22 of the Securities Act of 1933, 15 U.S.C. 77v. 30. 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 Courts 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 Courts supplemental jurisdiction under 28 U.S.C. 1367(a). 31. 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). Several of the Citi Defendants are principally located in this district, several of the Individual Defendants reside in this district, and many of the acts and transactions alleged herein, including the preparation and dissemination of the Registration Statements occurred in substantial part in the State of New York. Additionally, the GSE Certificates were actively marketed and sold from this State and several of the Defendants can be found and transact business in this District. Defendants are also subject to personal jurisdiction in this District. FACTUAL ALLEGATIONS I. THE SECURITIZATIONS A. 32. Residential Mortgage-Backed Securitizations In General Asset-backed securitization distributes risk by pooling cash-producing financial
assets and issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans. 33. The most common form of securitization of mortgage loans involves a sponsor or
sellerthe 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
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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). 34. Residential mortgage-backed securities (RMBS) are backed by the underlying
mortgage loans. Some RMBS are created from more than one cohort of loans called collateral groups, in which case the trust issues securities backed by different loan groups. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. The purchasers of the securities receive the cash-flows from the designated mortgage groups, such as homeowners payments of principal and interest on the mortgage loans held by the related trust. 35. RMBS are issued pursuant to registration statements filed with the SEC. These
registration statements include prospectuses, which explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the mortgage group underlying the certificates. Certificates are issued by the trust pursuant to the registration statement and the prospectus and prospectus supplement. Underwriters sell the certificates to investors. 36. A mortgage servicer is necessary to manage the collection of proceeds from the
mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers 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
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servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 37. The Securitizations At Issue In This Case This case involves the ten Securitizations listed in Table 1 below, nine of which
were sponsored and structured by CGMR, and all of which were underwritten by CGMI. For each of the ten Securitizations, Table 1 identifies the (1) sponsor; (2) depositor; (3) lead underwriter; (4) principal amount issued for the tranches purchased by the GSEs; (5) 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
Securitization Tranche
4
Sponsor
Depositor
Lead Underwriter
Principal Amount Issued per Tranche ($)

1,351,319,000 151,768,000 132,099,000 380,972,000 344,773,000 161,220,000 36,920,000 425,206,000 484,445,000 117,893,000
Date of Issuance
Supporting Loan Groups

Group I Group I-3 Group 1-2 Group I Group I Group I-1 Group 1-2 Group I Group I Group 2
ARSI 2005-W2 CMLTI 2005-10 CMLTI 2005-7 CMLTI 2005-HE3 CMLTI 2005-HE4 CMLTI 2006-AR2 CMLTI 2006-AR5 CMLTI 2006-WF1 CMLTI 2006-WF2 CMLTI 2007-AR7
A1 IA3A IA2 A1 A1 IA1 1A2A A1 A1 A2A
Ameriquest Mortgage Company CGMR CGMR CGMR CGMR CGMR CGMR CGMR CGMR CGMR
Argent Securities Inc. CGMLT CGMLT CGMLT CGMLT CGMLT CGMLT CGMLT CGMLT CGMLT
CGMI CGMI CGMI CGMI CGMI CGMI CGMI CGMI CGMI CGMI
9/27/2005 12/ 30/2005 9/30/2005 9/13/2005 11/30/2005 3/30/2006 6/30/2006 3/30/2006 5/31/2006 5/31/2007
C.
The Securitization Process 1. CGMR Pools Mortgage Loans In Special Purpose Trusts
38.
As the sponsor for nine of the ten Securitizations, Defendant CGMR purchased
the mortgage loans underlying the Certificates for those nine Securitizations after the loans were
A tranche is one of a series of certificates or interests created and issued as part of the same transaction.
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originated, either directly from the originators or through affiliates of the originators, including CitiMortgage.5 39. CGMR then sold the mortgage loans for the nine Securitizations that it sponsored
to the depositor, Defendant CGMLT, a Citi-affiliated entity. With respect to the remaining securitization, a non-party sponsor sold the mortgage loans to a non-party depositor, as reflected in Table 1, supra at paragraph 37. Defendant CGMI was the lead or co-lead underwriter, and the selling underwriter, for that securitization. 40. CGMLT was a wholly-owned, limited-purpose financial subsidiary of Defendant
Citi. The sole purpose of CGMLT as depositor was to act as a conduit through which loans acquired by the sponsor could be securitized and sold to investors. 41. As depositor for nine of the Securitizations, Defendant CGMLT 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 securitization 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. 2. 42. The Trusts Issue Securities Backed By The Loans
Once the mortgage loans were transferred to the trusts in accordance with the
PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an Non-party sponsor Ameriquest Mortgage Company was a sponsor of the one non-Citi sponsored Securitizations. The sponsor for each Securitization is included in Table 1, supra at paragraph 37.
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ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cash-flows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates was a function of the capital structure of the related transaction and the credit quality of the underlying mortgages. 43. The Certificates were issued pursuant to one of the five Shelf Registration
Statements, filed with the SEC on Form S-3. Certain Shelf Registration Statements were amended by one or more Forms S-3/A filed with the SEC. Each Individual Defendant signed one or more of the four Shelf Registration Statements, including any amendments thereto, which were filed by CGMLT. The SEC filing number, registrants, signatories, and filing dates for each Shelf Registration Statement and amendments thereto, as well as the Certificates covered by each Shelf Registration Statement, are reflected in Table 2 below. Table 2
SEC File No.
333124036
Date Registration Statement Filed

4/13/2005
Date(s) Amended Registration Statement Filed

N/A
Registrant
Covered Certificates
Signatories of Registration Statements

Susan Mills Richard A. Isenberg Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria Susan Mills Richard A. Isenberg Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria
Signatories of Amendments
CGMLT
CMLTI 2005HE3
N/A
333127834
8/25/2005
9/7/2005
CGMLT
333131136
1/19/2006
2/28/2006; 3/30/2006; 4/5/2006
CGMLT
CMLTI 2005-7; CMLTI 200510; CMLTI 2005HE4; CMLTI 2006WF1; CMLTI 2006AR2 CMLTI 2006AR5; CMLTI 2006WF2
Susan Mills Richard A. Isenberg Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria
333-
10/25/2006
11/17/2006;
CGMLT
CMLTI 2007-
Susan Mills Randall Costa Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria Susan Mills
Susan Mills Randall Costa Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria Susan Mills
14
SEC File No.

138237

12/4/2006; 12/12/2006
Registrant
Signatories of Registration Statements

Randall Costa Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria Adam J. Bass John P. Grazer Andrew L. Stidd
AR7
Randall Costa Scott Freidenrich6 Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria N/A
333112237
1/27/2004
N/A
Argent Securities Inc.
ARSI 2005-W2
44.
The Prospectus Supplement for each Securitization describes the underwriting
guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide detailed and accurate information regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loanto-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debt-to-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes; information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property; and information concerning whether the loans were delinquent. 45. The Prospectus Supplements associated with each Securitization were filed with
the SEC as part of the Registration Statements. The Forms 8-K attaching the PSAs for each Securitization were also filed with the SEC. The date on which the Prospectus Supplement and Form 8-K was filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below.
6
Scott Freidenrich did not sign the 11/17/2006 amendment to the Shelf Registration Statement.
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Table 3
Transaction
Date Prospectus Supplement Filed

9/28/05 12/30/2005 10/3/2005 9/13/2005 11/29/2005 3/30/2006 6/30/2006 3/27/2006 5/25/2006 6/1/2007
Date of Filing Form 8-K Attaching PSA Filed

10/12/2005 3/22/2006 10/19/2005 9/28/2005 12/15/2005 5/1/2006 7/31/2006 4/18/2006 6/20/2006 10/2/2007
Filing No. of Related Registration Statement

333-112237 333-127834 333-127834 333-124036 333-127834 333-127834 333-131136 333-127834 333-131136 333-138237
46.
The Certificates were issued pursuant to the PSAs, and Defendant CGMI offered
and sold the Certificates to Fannie Mae and Freddie Mac pursuant to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements. II. THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS A. 47. The Role Of Each Of The Defendants Each of the Defendants, including the Individual Defendants, had a role in the
securitization process and the marketing for most or all of the Certificates, which included purchasing the mortgage loans from the originators, structuring and arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 48. With respect to each Securitization, the depositor, underwriters, and the
Individual Defendants who signed the Registration Statements, as well as the Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statements, and omitting material facts
16
required to be stated therein or necessary to make the statements contained therein not misleading. 1. 49. CGMR
Defendant CGMR was organized in 1979 and has been securitizing residential
mortgage loans since 1987. CGMR is an affiliate of CGMI, and acted as the sponsor of nine of the Securitizations. CGMR is a leading sponsor of mortgage-backed securities. As stated in the Prospectus Supplement for the CMLTI 2007-AR7 Securitization, during the 2003, 2004, 2005, and 2006 fiscal years, CGMR securitized approximately $2.9 billion, $7.1 billion, $18.4 billion, and $21 billion of mortgage loans, respectively. 50. CGMR was the sponsor of nine of the ten Securitizations. In that capacity,
CGMR determined the structure of the Securitizations, initiated the Securitizations, purchased the mortgage loans to be securitized, determined the distribution of principal and interest, and provided data to the credit rating agencies to secure investment grade ratings for the GSE Certificates. For nine of the Securitizations, Defendant CGMR also selected CGMLT as the special purpose vehicle that would be used to transfer the mortgage loans from CGMR to the trusts, and selected CGMI as the underwriter for the Securitizations. In its role as sponsor, CGMR 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. 51. For the nine Securitizations that it sponsored, CGMR also conveyed the mortgage
loans to CGMLT pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. In these agreements, CGMR made certain representations and warranties to CGMLT regarding the groups of loans collateralizing the Certificates. These representations
17
and warranties were assigned by CGMLT to the trustees for the benefit of the Certificateholders. 2. 52. CGMLT
Defendant CGMLT is engaged in the securitization of mortgage loans as a
depositor. It is a special purpose entity formed for the sole purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 53. Defendant CGMLT was the depositor for nine of the ten Securitizations. In its
capacity as depositor, CGMLT purchased the mortgage loans from CGMR (as sponsor) pursuant to the Assignment and Recognition Agreements or Mortgage Loan Purchase Agreements, as applicable. CGMLT then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. CGMLT, together with the other Defendants, was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 3. 54. CGMI
Defendant CGMI, formerly known as Salomon Smith Barney, was founded in
1910 and acquired by Travelers Group in 1998, which subsequently merged with Citi that year. Defendant CGMI is an investment bank, and was, at all relevant times, a registered broker/dealer and one of the leading underwriters of mortgage- and other asset-backed securities in the United States. CGMI was Citis private label securities arm, specializing in nonconforming and alternative pools of loans. Mortgage Banking Magazine, CitiMortgage on the Move, December
18
2006. 55. Defendant CGMI was the lead underwriter for the Securitizations. In that role, it
was responsible for underwriting and managing the offer and sale of the Certificates to Fannie Mae and Freddie Mac and other investors, with the exception of the CMLTI 2006-AR2 Securitization, which was sold to the GSEs by non-party UBS Securities, LLC. CGMI was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred and underwritten. 4. 56. Citi
Defendant Citi wholly owns its subsidiaries CGMLT, CGMI, CGMR, and
CitiMortgage. Unlike typical arms-length securitizations, the Securitizations here involved various Citi subsidiaries and affiliates at virtually each step in the chain. With respect to over two-thirds of the Securitizations, the sponsor was CGMR, the depositor was CGMLT, the master servicer was CitiMortgage, and the lead underwriter was CGMI. As for the remaining deals, with the exception of CMLTI 2006-AR2, CGMI was the lead and selling underwriter. 57. As the sole corporate parent of CGMI, CGMLT, and CGMR, Citi had the
practical ability to direct and control the actions of CGMI, CGMLT, and CGMR related to the Securitizations, and in fact exercised such direction and control over the activities of CGMR, CGMLT, CitiMortgage, and CGMI related to the issuance and sale of the Certificates. 58. Citi, through its subsidiaries CGMI, CGMLT, CGMR, and CitiMortgage, was
deeply involved in the RMBS market. Citi expanded its share of the residential mortgagebacked securitization market to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and
19
omissions of material facts in the Registration Statements. 59. From 2002 to 2005, Citi experienced intense growth in its residential mortgage
business, doubling its origination business from $73 billion in 2002 to nearly $140 billion in 2005. Mortgage Banking Magazine, CitiMortgage on the Move, December 2006. The growth was even more striking at the subprime level. From 2005 to 2007, Citi issued at least $26.3 billion in subprime loans. Center for Public Integrity, The Subprime 25. Such massive quantities of loans were the result of rapid and uncontrolled growth. In 2006, Citis subprime lending increased by 85%, to a total of $38 billion. Mortgage Banking Magazine, Inside the Market Correction, May 2007. 60. As detailed above, the Securitizations here involved Citi entities, including the
aforementioned subsidiaries, at virtually each step in the process. Citi profited substantially from this vertically integrated approach to mortgage backed securitization. Furthermore, Citi shares, and, on information and belief, shared, overlapping management with the other Citi Defendant entities. For instance, Defendant Susan Mills was Vice President and Managing Director of Defendant CGMLT, and signed four Shelf Registration Statements on behalf of CGMLT; she is also the head of CGMIs Mortgage Finance Group. 5. 61. The Individual Defendants
Defendant Susan Mills was the Vice President and then Managing Director of
Defendant CGMLT. Under one of these two capacities, she signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005;
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Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005; Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006. 62. Defendant Richard A. Isenberg was a Director and President (Principal Executive
Officer) of Defendant CGMLT. In that capacity, he signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005; and Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005. 63. Defendant Randall Costa was a Director and President (Principal Executive
Officer) of Defendant CGMLT. In that capacity, he signed the following Registration Statements: Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and
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Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006.
64.
Defendant Scott Freidenrich was a Treasurer (Principal Financial Officer) of
Defendant CGMLT. In that capacity, he signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005; Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005; Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006. 65. Defendant Mark I. Tsesarsky was a Director of Defendant CGMLT. In that
capacity, he signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005; Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005;
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Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006. 66. Defendant Peter Patricola was a Controller of Defendant CGMLT. In that
capacity, he signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005; Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005; Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006. 67. Defendant Jeffrey Perlowitz was a Director of Defendant CGMLT. In that
capacity, he signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005;
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Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005; Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006. 68. Defendant Evelyn Echevarria was a Director of Defendant CGMLT. In that
capacity, she signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005. Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005; Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006.
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B. 69.
Defendants Failure To Conduct Proper Due Diligence The Defendants failed to conduct adequate and sufficient due diligence to ensure
that the mortgage loans underlying the Securitizations complied with the representations in the Registration Statements. 70. During the time period in which the Certificates were issuedapproximately
2005 through 2007Citis involvement in the mortgage-backed securitization market was rapidly expanding. In an effort to increase revenue and profits, Citi vastly expanded the volume of mortgage-backed securities it issued as compared to prior years. From 2003 to 2004, the volume of mortgage loans that CGMR securitized more than doubled to $7.1 billion. In 2005, the volume again more than doubled from $7.1 billion to $18.4 billion. In 2006, CGMR securitized its largest volume of mortgage loans $21.5 billion. CGMRs growth in subprime loans was particularly astronomical. CGMR issued $300 million in subprime loans in 2003. By 2004, that number increased eight-fold to $2.4 billion, and then nearly quadrupled again in 2005 to $8.2 billion. By 2006, CGMR had securitized its largest volume of subprime loans, over $10.3 billion. See CMLTI 2007-AR7 Prospectus Supplement, filed May 30, 2007. 71. The Defendants had enormous financial incentives to complete as many offerings
as quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements or conducting adequate and reasonable due diligence of the underlying mortgage loans. For example, CGMLT, as the depositor, was paid a percentage of the total dollar amount of the offerings upon completion of the Securitizations, and CGMI, as the underwriter, was paid a commission based on the amount it received from the sale of the Certificates to the public. Thus, the greater the number of offerings, the greater the profit to CGMLT and CGMI.
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72.
The push to securitize large volumes of mortgage loans contributed to the absence
of controls needed to prevent the inclusion of untrue statements and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or otherwise to ensure the accuracy of the statements in the Registrations Statements pertaining to the Securitizations. 73. For instance, Citi retained third-parties, including Clayton Holdings, Inc.
(Clayton), to analyze the loans it was considering for inclusion in its securitizations, but waived a significant number of loans into its securitizations that these third-parties had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with the applicable guidelines or had compensating factors that excused the failure of the loans to comply with underwriting guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. 74. Citi was negligent in allowing into the Securitizations a substantial number of
mortgage loans that, as reported to Citi by third-party due diligence firms, did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements. Even upon learning from its third-party due diligence firms that there were high percentages of defective or at least questionable loans in the sample of loans reviewed
26
by the third-party due diligence firms, Citi 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. 75. Claytons trending reports revealed that in the period from the first quarter of
2006 to the second quarter of 2007, 42 percent of the mortgage loans Citi submitted to Clayton to review in RMBS loan pools were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 31 percent of the loans were subsequently waived in by Citi without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested. See FCIC Report at 167. 76. Likewise, in 2006, Richard Bowen, the Business Chief Underwriter for
Correspondent Lending in the Consumer Lending Group within Citi, began raising serious concerns to Citis senior management about the poor quality of the loans Citi was acquiring from third-party originators and then securitizing. The Consumer Lending Group housed Citis consumer-lending activities, including prime and subprime mortgages, as well as Citis purchase of loans from originators other than Citis origination arm, CitiMortgage. As chief underwriter, Mr. Bowen was charged with the underwriting responsibility for over $90 billion annually of residential mortgage production; in other words, his responsibility was to ensure that these mortgages met the credit standards required by Citi credit policy. Written Testimony of Richard M. Bowen, III to the FCIC, April 7, 2010 (Bowen Testimony) at 1. 77. Mr. Bowen discovered serious issues with the loans Citi purchased, both prime
and subprime loans. On the prime side, Citi had represented and warranted that the mortgages were underwritten to Citis credit guidelines. However, in 2006, Mr. Bowen discovered that
27
some 60% of these mortgages were defective, with that figure rising to 80% in 2007. On the subprime side, vast pools of subprime loans, totaling over $300 million, were purchased even though they failed to meet Citis credit policy criteria. Bowen Testimony at 1-2. 78. Citis due diligence process was woefully inadequate. For example, an
underwriting department called Quality Assurance was supposed to review the prime loans that Citi purchased, as Citi would subsequently represent and warrant to investors that these loans met Citis underwriting criteria. According to Citis policy, at least 95% of the prime loans the Quality Assurance department reviewed were required to have an agree designation, meaning Citis underwriters agreed with the originators underwriting decision. The Quality Assurance Department would then report these results to the Third Party Originators Committee (TPO Committee), which had overall responsibility for managing the selling mortgage company relationships. Bowen Testimony at 4-5. 79. However, Mr. Bowen soon discovered that the reports to the TPO Committee
were, at the least, highly misleading. In fact, many of the agree decisions were actually agree contingent, meaning that the agree decision was contingent upon receiving documents that were missing from the loan file. Quality Assurance was reporting both types of designations together, even though the agree contingent decisions were missing documents required by Citis policies. In reality, only 40% of the loans Quality Assurance reviewed properly received an agree designation, with 55% receiving the misleading agree contingent label. Bowen Testimony at 5-6. A follow-up study found even more staggering results, with a 70% defect rate in the agree designations. Bowen Testimony at 7. 80. The same themes of underwriting breaches ran through the subprime origination
channel as well. According to Citis policy, Citi underwriters were required to underwrite a
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statistically significant sample of a prospective pool of subprime loans, approving only those loans that met Citi policy guidelines. However, in the third quarter of 2006, Citis Wall Street Chief Risk Officer started changing many of the underwriting decisions from turn down to approve in order to artificially increase[] the approval rate on the sample. This higher approval rate was then used as justification to purchase these pools. Bowen Testimony 8-9. 81. These flawed due diligence practices were especially troubling, because, in the
words of Defendant Susan Mills, the Managing Director of Defendant CGMLT, these due diligence reviews served as the primary . . . means by which we evaluated the loans that we purchased and securitized. Written Testimony of Susan Mills to the FCIC, April 7, 2010 (Mills Testimony) at 4. 82. Defendant Mills personally witnessed a near tripling of early payment default
rates in the loans her group was purchasing during the period from 2005 to 2007. By the same token, Bowen repeatedly expressed concerns to his direct supervisor and company executives about the quality and underwriting of mortgages that CitiMortgage purchased and then sold to the GSEs. FCIC Report at 168. Yet Citi failed to take any corrective action or improve its due diligence practices. 83. To the contrary, despite these serious flaws in Citis due diligence practices,
securitization of these faulty loans became a factory line, in the words of former Citi CEO Charles Prince. As more and more of these subprime mortgages were created as raw material for the securitization process, not surprisingly in hindsight, more and more of it was of lower and lower quality. And at the end of that process, the raw material going into it was actually bad quality, it was toxic quality, and that is what ended up coming out the other end of the pipeline. FCIC Report at 102-03.
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III.
THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 84. Compliance With Underwriting Guidelines The Prospectus Supplements for each Securitization describe the mortgage loan
underwriting guidelines pursuant to which the mortgage loans underlying the related Securitizations were to have been originated. These guidelines were intended to assess the creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 85. The statements made in the Prospectus Supplements, which, as discussed, formed
part of the Registration Statement for each Securitization, were material to a reasonable investors decisions 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. 86. 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 CMLTI 2006-WF2 Securitization, for which Wells Fargo was the originator, CGMR was the sponsor, CGMLT was the depositor, and CGMI was the underwriter, stated that All of the mortgage loans were originated by Wells Fargo Bank or acquired by Wells Fargo Bank from correspondent lenders after re-underwriting such acquired mortgage loans generally in accordance with its underwriting guidelines then in effect. 87. The CMLTI 2006-WF2 Prospectus Supplement stated that the originator may
make the determination that the prospective borrower warrants loan parameters beyond those
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shown above, but emphasized that such decisions are made [o]n a case-by-case basis and only upon the presence of acceptable compensating factors. 88. With respect to the information evaluated by the originator, the CMLTI 2006-
WF2 Prospectus Supplement stated that: The underwriting standards that guide the determination represent a balancing of several factors that may affect the ultimate recovery of the loan amount, including, among others, the amount of the loan, the ratio of the loan amount to the property value (i.e., the lower of the appraised value of the mortgaged property and the purchase price), the borrowers means of support and the borrowers credit history. 89. The Prospectus Supplement further stated that: Verifications of employment,
income, assets or mortgages may be used to supplement the loan application and the credit report in reaching a determination as to the applicants ability to meet his or her monthly obligations on the proposed mortgage loan, as well as his or her other mortgage payments (if any), living expenses and financial obligations. A mortgage verification involves obtaining information regarding the borrowers payment history with respect to any existing mortgage the applicant may have. This verification is accomplished by either having the present lender complete a verification of mortgage form, evaluating the information on the credit report concerning the applicants payment history for the existing mortgage, communicating, either verbally or in writing, with the applicants present lender or analyzing cancelled checks provided by the applicant. Verifications of income, assets or mortgages may be waived under certain programs offered by [the originator], but [the originators] underwriting guidelines require, in most instances, a verbal or written verification of employment to be obtained. In some cases, employment histories may be obtained through one of various employment verification sources, including the borrowers employer, employer-sponsored web sites, or third-party services
31
specializing in employment verifications. 90. The Prospectuses and Prospectus Supplements for each of the Securitizations had
similar representations to those quoted above. The relevant representations in the Prospectuses and Prospectus Supplement pertaining to originating bank underwriting standards for each Securitization are reflected in Appendix A to this Complaint. As discussed at paragraphs 120 through 149 below, in fact, the originators of the mortgage loans in the Supporting Loan Group for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 91. Further, for the vast majority of the Securitizations, the Prospectuses and
Prospectus Supplements described additional representations and warranties concerning the mortgage loans backing the Securitizations that were made by the originator to the sponsor in the PSA. Such representations and warranties, which are described more fully for each Securitization in Appendix A, included: (i) the mortgage loans were underwritten in accordance with the originators underwriting guidelines in effect at the time of origination, subject to only limited exceptions; (ii) the mortgage loan was made in compliance with, and is enforceable under, all applicable local, state and federal laws and regulations; (iii) each mortgage loan was current as to all required payments; (iv) the mortgage loan seller had good title to each mortgage loan and each loan was subject to no offsets, defenses, counterclaims, or rights of rescission; and (v) the origination and collection practices used by the originator with respect to each mortgage note and mortgage have been in all respects legal, proper, prudent and customary in the mortgage origination and servicing business. 92. The inclusion of these representations in the Prospectuses and Prospectus
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Supplements had the purpose and effect of providing additional assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations and its compliance with the underwriting guidelines described in the Prospectuses and Prospectus Supplements. These representations were material to a reasonable investors decision to purchase the Certificates. B. 93. Statements Regarding Occupancy Status Of Borrower The Prospectus Supplements contained collateral group-level information about
the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplements for each of the Securitizations presented this information in tabular form, usually in a table entitled Occupancy Status of the Mortgage Loans. This table divided all the loans in the collateral group by occupancy status, e.g., into the categories: (i) Primary, or Owner Occupied; (ii) Second Home, or Secondary; and (iii) Investment or Non-Owner. For each category, the table stated the number of loans in that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:7 Table 4
Transaction
ARSI 2005-W2 CMLTI 2005-10 CMLTI 2005-7 CMLTI 2005-HE3 CMLTI 2005-HE4
Supporting Loan Group

Group I Group I-3 Group 1-2 Group I Group I
Primary or Owner Occupied

86.10% 72.35% 85.05% 92.08% 85.35%
Second Home/Secondary
1.10% 4.84% 2.93% 3.84% 1.76%
Investor
12.80% 22.81% 12.02% 4.08% 12.89%
Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner occupied, investor, and second home. These numbers have been converted to percentages.
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Transaction
CMLTI 2006-AR2 CMLTI 2006-AR5 CMLTI 2006-WF1 CMLTI 2006-WF2 CMLTI 2007-AR7

Group I-1 Group 1-2 Group I Group I Group 2

88.75% 89.26% 58.08% 60.10% 36.23%
4.20% 9.40% 4.79% 3.55% 8.83%
Investor
7.05% 1.34% 37.14% 36.36% 54.94%
94.
As Table 4 makes clear, the Prospectus Supplements for all but one Securitization
reported that a majority, and usually an overwhelming majority, of the mortgage loans in the Supporting Loan Groups were owner occupied, while a much smaller percentage were reported to be non-owner occupied (i.e. a second home or investor property). 95. The statements about occupancy status were material to a reasonable investors
decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to default and more likely to care for their primary residence than borrowers who purchase homes as second homes or investments and live elsewhere, the percentage of loans in the collateral group of a securitization that are not secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. As stated in the Prospectus Supplement for the CMLTI 2005-HE4 Securitization and other Securitizations: With respect to each mortgaged property, unless otherwise provided in the related prospectus supplement, the borrower will have represented that the dwelling is either an owner-occupied primary residence or a vacation or second home that is not part of a mandatory rental pool and is suitable for year-round occupancy. 96. Other things being equal, the higher the percentage of loans not secured by
owner-occupied residences, the greater the risk of loss to the certificateholders. Even small
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differences in the percentages of primary/owner-occupied, second home/secondary, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed at paragraphs 108 through 118 below, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 97. Statements Regarding Loan-To-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV, is the ratio of the balance of
the mortgage loan to the value of the mortgaged property when the loan is made. 98. The denominator in the LTV ratio is the value of the mortgaged property, and is
generally the lower of the purchase price or the appraised value of the property. In a refinancing or home equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risk associated with a given loan. 99. The Prospectus Supplements for each Securitization also contained group-level
information about the LTV ratio for the underlying group of loans as a whole. The percentage of loans with an LTV ratio at or less than 80 percent and the percentage of loans with an LTV ratio greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan Groups are reflected in Table 5 below.8
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
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Table 5
Transaction Supporting Loan Group
Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80%
62.07% 87.38% 94.00% 72.59% 57.93% 96.28% 94.44% 46.05% 43.46% 88.12%
Percentage of loans, by aggregate principal balance, with LTV greater than 100%
0% 0% 0% 0.03% 0% 0% 0% 0% 0% 0%
100.
As Table 5 makes clear, the Prospectus Supplement for eight of the ten
Securitizations reported that the majority of the mortgage loans in the Supporting Loan Groups had an LTV ratio of 80 percent or less, and the Prospectus Supplements for all but one of the Securitizations reported that no mortgage loans in the Supporting Loan Group had an LTV ratio over 100 percent. 101. The LTV ratio is among the most important measures of the risk of a mortgage
loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV, the greater the equity cushion, so the greater the
in the securitization (i.e., only the securitized lien is included in the numerator of the LTV calculation). Where the securitized lien is junior to another loan, the more senior lien has been added to the securitized one to determine the numerator in the LTV calculation (this latter calculation is sometimes referred to as the combined-loan-to-value ratio, or CLTV).
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likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 102. Thus, LTV ratio is a material consideration to a reasonable investor in deciding
whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed at paragraphs 113 through 118 below, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates. D. 103. Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of securities in mortgage-backed
securitizations by the credit rating agencies, including Moodys Investors Service, Standard & Poors, 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 their GSE Certificates in the Securitizations, 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, RMBS securities with credit ratings between AAA or its equivalent through BBB or its equivalent were generally referred to as
37
investment grade. 104. Rating agencies determine the credit rating for each tranche of securities in a
mortgage-backed securitization by comparing the likelihood of contractual principal and interest payments to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cash-flows 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.9 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 credit characteristics of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating. 105. Credit ratings have been an important tool to gauge risk when making investment
decisions. In testimony before the Senate Permanent Subcommittee on Investigations, Susan Barnes, the North American Practice Leader for RMBS at S&P from 2005 to 2008, confirmed that the rating agencies relied upon investment banks to provide accurate information about the loan pools:
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.
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The securitization process relies on the quality of the data generated about the loans going into the securitizations. S&P relies on the data produced by others and reported to both S&P and investors about those loans . . . . S&P does not receive the original loan files for the loans in the pool. Those files are reviewed by the arranger or sponsor of the transaction, who is also responsible for reporting accurate information about the loans in the deal documents and offering documents to potential investors. (SPSI hearing testimony, April 23, 2010). 106. For almost a hundred years, investors like pension funds, municipalities,
insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Mae and Freddie Macs respective internal policies limited their purchases of private label RMBS to those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their equivalent). 107. Each tranche in 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 Statements. The credit rating provided for each of the GSE Certificates was always AAA or its equivalent. The accuracy of these ratings was material to a reasonable investors decision to purchase the Certificates. As set forth in Table 8, infra at paragraph 153, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates as AAA (or its equivalent) when, in fact, they were not. IV. FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 108. 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
39
statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, at a statistically-significant level, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data review demonstrates that the data concerning owner occupancy percentages and LTV ratios was false and misleading. 1. 109. Owner Occupancy Data Was Materially False
The data review has revealed that the owner occupancy statistics reported in the
Prospectus Supplements were materially false and inflated. In fact, far fewer underlying properties were occupied by their owners than disclosed in the Prospectus Supplements, and more correspondingly were held as second homes or investment properties. 110. To determine whether a given borrower actually occupied the property as
claimed, a number of tests were conducted, including, inter alia, (i) whether, months after the loan closed, the borrowers tax bill was being mailed to the property securing the mortgage or to a different address; (ii) whether the borrower had claimed a tax exemption on the property; and (iii) whether the mailing address of the property was reflected in the borrowers 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 more likely that a borrower will not repay the loan. 111. A significant number of the loans failed two or more of these tests, indicating that
the owner occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. For example, for the CMLTI 2005-HE3 Securitization, for which CGMR was
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the sponsor, CGMLT was the depositor, and CGMI was the underwriter, the Prospectus Supplement stated that only 7.92 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied. But the data review revealed that, for 14.39 percent of the properties represented as owner-occupied, the owners in fact lived elsewhere, indicating that the true percentage of non-owner occupied properties was 21.17 percent, nearly triple the percentage reported in the Prospectus Supplement.10 112. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of non-owner occupied properties. The true percentage of nonowner occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for each Securitization understated the percentage of non-owner occupied properties by at least 5 percent, and for many Securitizations by ten percent or more. Table 6
Transaction Supporting Loan Group Reported Percentage of Non-Owner Occupied Properties
13.90% 27.65%
Percentage of Properties Reported as Owner-Occupied With Strong Indication of NonOwner Occupancy11

11.81% 16.22%
Actual Percentage of Non-OwnerOccupied Properties

24.07% 39.98%
Prospectus Understatement of Non-Owner Occupied Properties

10.17% 11.73%
ARSI 2005-W2 CMLTI 2005-10
Group I Group I-3
This conclusion is arrived at by summing (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 7.92 percent), and (b) the product of (i) the stated owner-occupied percentage (here, 92.08 percent) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 14.39 percent). As described more fully in paragraph 110, failing two or more tests of owneroccupancy is a strong indication that the borrower did not live at the mortgage property and instead used it as a second home or an investment property.
11
10
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Transaction
Reported Percentage of Non-Owner Occupied Properties

14.95% 7.92% 14.65% 11.25% 10.74% 41.92% 39.90% 63.77%
Percentage of Properties Reported as Owner-Occupied With Strong Indication of NonOwner Occupancy11

18.07% 14.39% 15.57% 15.78% 18.70% 10.76% 12.56% 13.89%
Actual Percentage of Non-OwnerOccupied Properties

30.32% 21.17% 27.94% 25.25% 27.43% 48.17% 47.45% 68.80%
Prospectus Understatement of Non-Owner Occupied Properties

15.37% 13.25% 13.29% 14.01% 16.69% 6.25% 7.55% 5.03%
CMLTI 2005-7 CMLTI 2005-HE3 CMLTI 2005-HE4 CMLTI 2006-AR2 CMLTI 2006-AR5 CMLTI 2006-WF1 CMLTI 2006-WF2 CMLTI 2007-AR7
Group 1-2 Group I Group I Group I-1 Group 1-2 Group I Group I Group 2
2. 113.
Loan-To-Value Data Was Materially False
The data review has further revealed that the LTV ratios disclosed in the
Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review and servicing. AVMs rely upon similar data as appraisersprimarily county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data. 114. Applying the AVM to the available data for the properties securing the sampled
loans shows that the appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of LTV. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. As stated in the Prospectus Supplement for CMLTI 2005-10, mortgage loans with high loan-to-value ratios leave the related borrower with
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little or no equity in the related mortgaged property which may result in losses with respect to these mortgage loans. 115. For example, for the CMLTI 2006-WF1 Securitization, which was sponsored by
CGMR, deposited by CGMLT, and underwritten by CGMI, the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 17.24 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 46.05 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 36.35 percent of the loans had LTV ratios at or below 80 percent. 116. The data review revealed that for each Securitization, the Prospectus Supplement
misrepresented the percentage of loans with an LTV ratio above 100 percent, as well as the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage as reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregated principal balance. Table 7
PROSPECTUS Supporting Loan Group Percentage of Loans Reported to Have LTV Ratio At Or Under 80%
62.07% 87.38% 94.00% 72.59% 57.93% 96.28% 94.44%
Transaction
DATA REVIEW True Percentage of Loans With LTV Ratio At Or Under 80%
45.67% 50.17% 49.18% 43.66% 44.45% 55.61% 62.25%
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio Over 100%

0% 0% 0% 0.03% 0% 0% 0%
DATA REVIEW True Percentage of Loans With LTV Ratio Over 100%
12.38% 7.73% 7.71% 10.84% 14.50% 4.77% 5.16%
ARSI 2005-W2 CMLTI 2005-10 CMLTI 2005-7 CMLTI 2005-HE3 CMLTI 2005-HE4 CMLTI 2006-AR2 CMLTI 2006-AR5
Group I Group I-3 Group 1-2 Group I Group I Group I-1 Group 1-2
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CMLTI 2006-WF1 CMLTI 2006-WF2 CMLTI 2007-AR7
Group I Group I Group 2
46.05% 43.46% 88.12%
36.35% 36.40% 49.76%
0% 0% 0%
17.24% 14.60% 16.71%
117.
As Table 7 demonstrates, the Prospectus Supplements for the Securitizations
reported that for all but one of the Securitizations none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent. With respect to that one exception, the percentage of mortgage loans with a reported LTV ratio over 100 percent was very smallless than 1 percent. In contrast, the data review revealed that at least 4.77 percent of the mortgage loans for each Securitization had an LTV ratio over 100 percent, and for most Securitizations this figure was much higher. Indeed, for six of the Securitizations the data review revealed that ten percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. 118. These inaccuracies with respect to reported LTV ratios also indicate that the
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 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 Report at 91-92.
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B. 119.
The Originators Of The Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statements contained material misstatements and omissions
regarding compliance with 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) government investigations into originators underwriting practices, which have revealed widespread abandonment of the 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 Have Confirmed That The Originators Of The Loans In The Securitizations Systematically Failed To Adhere To Their Underwriting Guidelines
120.
For nine of the ten Securitizations the Citi Defendants sold to the GSEs, CGMR
would purchase loans originated by other entities, including CitiMortgage, as listed supra in paragraphs 26-27. The prospectus supplements for the Securitizations represented that the underlying mortgages were originated according to the originators guidelines. For example, the CMLTI 2006-WF2 Securitization stated that [a]ll of the mortgage loans were originated by Wells Fargo Bank or acquired by Wells Fargo Bank from correspondent lenders after reunderwriting such acquired mortgage loans generally in accordance with its underwriting guidelines then in effect. However, in reality, these originators systematically failed to adhere to their underwriting guidelines. 121. Several government reports and investigations have focused on the abandonment
of underwriting guidelines, describing rampant underwriting failures throughout the period of the
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Securitizations, and, more specifically, describing underwriting failures by the very originators whose loans were included by the Citi Defendants in the Securitizations. 122. For instance, in November 2008, the Office of the Comptroller of the Currency,
an office within the United States Department of the Treasury, issued a report identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 20052007 originations. Numerous originators who originated loans that the Citi Defendants eventually sold to the GSEs are on that list, including Wells Fargo, Countrywide, American Home, Argent, and WMC. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008. 123. The Citi Defendants had the opportunity to review loan files from such originators
as part of their due diligence and their obligations in the securitization process. Such a review would have revealed that the actual underwriting practices of the originators, including originators such as Wells Fargo, Countrywide, American Home, Argent, and WMC were vastly inconsistent with the statements in the Offering Materials regarding the high standards of the originators and the Citi Defendants. That the originators had serious origination underwriting breakdowns is also confirmed by the testimony of Mr. Bowen, who gave detailed statistics about the reject rates for loans bought by Citigroup from third party originators like Wells Fargo, Countrywide, and American Home. i. 124. Wells Fargo
Wells Fargo Bank, N.A. originated all of the mortgage loans for the CMLTI
2006-WF1 and CMLTI 2006-WF2 offerings. Wells Fargo Bank, N.A. also originated approximately 78.90 percent of the Group I-1 Mortgage Loans in the CMLTI 2006-AR2
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offering. 125. In March 2009, residential mortgage-backed securities investors filed suit against
Wells Fargo, alleging that it had misrepresented its underwriting guidelines and loan quality. See In re Wells Fargo Mortgage-Backed Certificates Litig., No. 09-CV-01376 (N.D. Cal. 2009). In denying in part a motion to dismiss, the court found that plaintiffs had adequately pled that variance from the stated [underwriting] standards was essentially [Wells Fargos] norm and that this conduct infected the entire underwriting process. In re Wells Fargo Mortgage-Backed Certificates Litig., 712 F. Supp. 2d 958, 972 (N.D. Cal. 2010). Wells Fargo agreed to settle the investors claims. 126. Further, a number of government actors have announced investigations of Wells
Fargos lending practices. In July 2009, the Attorney General of Illinois filed a lawsuit, People v. Wells Fargo & Co., No. 09-CH-26434 (Ill. Cir. Ct. 2009), alleging that Wells Fargo engaged in deceptive practices by misleading Illinois borrowers about their mortgage terms. The complaint details how borrowers were placed into loans that were unaffordable and unsuitable, and how Wells Fargo failed to maintain proper controls. 127. In April 2010, the City of Memphis filed its First Amended Complaint in
Memphis v. Wells Fargo Bank, No. 09-CV-02857 (W.D. Tenn. 2009), alleging that Wells Fargo failed to underwrite African-American borrowers properly. A similar lawsuit was filed by the City of Baltimore, Mayor and City Council of Baltimore v. Wells Fargo Bank, N.A., No. 08-CV00062 (D. Md. 2008). The City of Memphis and City of Baltimore complaints include sworn declarations from many former Wells Fargo employees, which provide evidence of predatory lending and abandonment of underwriting guidelines. For instance, Camille Thomas, a loan processor at Wells Fargo from January 2004 to January 2008, stated under oath that loans were
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granted based on inflated appraisals, which allowed borrowers to get larger loans than they could afford due to the impact on the LTV calculation and some loans were even granted based on falsified income documents. Similarly, another affidavit by Doris Dancy, a credit manager at Wells Fargo from July 2007 to January 2008, stated that managers put pressure on employees to convince people to apply for loans, even if the person could not afford the loan or did not qualify for it. She was also aware that loan applications contained false data, used to get customers to qualify for loans. 128. The FCIC interviewed Darcy Parmer, a former employee of Wells Fargo, who
worked as an underwriter and a quality assurance analyst from 2001 until 2007. Ms. Parmer confirmed that, during her tenure, Wells Fargos underwriting standards were loosening, adding that they were being applied on the fly and that [p]eople were making it up as they went. She also told the FCIC that 99 percent of the loans she would review in a day would get approved, and that, even though she later became a fraud analyst, she never received any training in detecting fraud. The FCICs January 2011 Report described how hundreds and hundreds and hundreds of fraud cases that Ms. Palmer knew were identified within Wells Fargos home equity loan division were not reported to FinCEN.12 In addition, according to Ms. Palmer, at least half the loans she flagged for fraud were nevertheless funded, over her objections. 129. In July 2011, the Federal Reserve Board issued a consent cease and desist order
and assessed an $85 million civil money penalty against Wells Fargo & Co. and Wells Fargo Financial, Inc. According to the Federal Reserves press release, the order addressed in part
FinCEN is the Financial Crimes Enforcement Network, a bureau within the Treasury Department that collects and analyzes information regarding financial fraud.
12
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allegations that Wells Fargo Financial sales personnel falsified information about borrowers incomes to make it appear that the borrowers qualified for loans when they would not have qualified based on their actual incomes. The Federal Reserve Board also found that the poor practices of Wells Fargo were fostered by Wells Fargo Financials incentive compensation and sales quota programs, and the lack of adequate controls to manage the risks resulting from these programs. ii. 130. Countrywide
Countrywide was similarly derelict in its underwriting obligations. Countrywide
originated approximately 43.26 percent of the Group I mortgage loans in the CMLTI 2006-AR5 offering. 131. In January 2011, the FCIC issued its final report, which detailed, among other
things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. The FCIC Report singled out Countrywide for its role: Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities. As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in catastrophic consequences. Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in financial and reputational catastrophe for the firm. But they did not stop. See FCIC Report, at xxii. 132. Countrywide has also been the subject of several investigations and actions
concerning its lax and deficient underwriting practices. In June 2009, for instance, the SEC initiated a civil action against Countrywide executives Angelo Mozilo (founder and Chief Executive Officer), David Sambol (Chief Operating Officer), and Eric Sieracki (Chief Financial Officer) for securities fraud and insider trading. In a September 16, 2010 opinion denying these
49
defendants motions for summary judgment, the United States District Court for the Central District of California found that the SEC raised genuine issues of fact as to, among other things, whether the defendants had misrepresented the quality of Countrywides underwriting processes. The court noted that the SEC presented evidence that Countrywide routinely ignored its official underwriting to such an extent that Countrywide would underwrite any loan it could sell into the secondary mortgage market, and that a significant portion (typically in excess of 20%) of Countrywides loans were issued as exceptions to its official underwriting guidelines . . . . The court concluded that a reasonable jury could conclude that Countrywide all but abandoned managing credit risk through its underwriting guidelines . . . . S.E.C. v. Mozilo, No. CV 093994, 2010 WL 3656068, at *10 (C.D. Cal. Sept. 16, 2010). Mozilo, Sambol, and Sieracki subsequently settled with the SEC. 133. The testimony and documents only recently made available to the GSEs by way
of the SECs investigation confirm that Countrywide was systematically abusing exceptions and low-documentation processes in order to circumvent its own underwriting standards. For example, in an April 13, 2006 e-mail, Mozilo wrote to Sieracki and others that he was concerned that certain subprime loans had been originated with serious disregard for process [and] compliance with guidelines, resulting in the delivery of loans with deficient documentation. Mozilo further stated that I have personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan[s]. iii. 134. American Home
Likewise, American Home failed to follow its origination guidelines. American
Home originated 83.30 percent of the mortgage loans in Loan Group I for the CMLTI 2007-AR7
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offering. 135. An internal American Home Credit Update presentation from October 2005,
which was made public in June 2008, made clear that American Homes underwriting guidelines were to be either relaxed substantially or essentially rendered meaningless, in order to allow American Home to make loans to high-risk borrowers. Specifically, the Credit Update sets forth a new interpretation of guidelines that included: 136. Not requiring verification of income sources on stated income loans; Reducing the time that needs to have passed since the borrower was in bankruptcy or credit counseling; Reducing the required documentation for self-employed borrowers; and Broadening the acceptable use of second and third loans to cover the full property value. An internal American Home e-mail sent on November 2, 2006, made public in
June 2008, from Steve Somerman, an American Home Senior Vice President of Product and Sales Support in California and co-creator of the American Homes Choice Point Loans program, to loan officers nationwide, stated that American Home would make a loan to virtually any borrower, regardless of the borrowers ability to verify income, assets or even employment. The e-mail specifically encouraged loan officers to make a variety of loans that were inherently risky and extremely susceptible to delinquencies and default, including (1) stated income loans, where both the income and assets of the borrower were taken as stated on the credit application without verification; (2) NINA or No Income, No Asset loans, which allowed for loans to be made without any disclosure of the borrowers income or assets; and (3) No Doc loans, which allowed loans to be made to borrowers who did not disclose their income, assets or employment history. See Complaint, In re American Home Mortgage Securities Litigation, No. 07-MD-1898 (TCP) (E.D.N.Y. June 3, 2008).
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137.
American Home is involved in several criminal probes and investigations, and
federal prosecutors have convicted one American Home sales executive, Kourash Partow, of mortgage fraud. See Judgment in a Criminal Case, U.S. v. Partow, Case No. 3:06-CR-00070-08HRH, Aug. 31, 2007; see also U.S. v. Partow, 283 Fed. Appx. 476 (9th Cir. 2008). After his conviction, Partow, who worked for Countrywide before joining American Home, sought a lighter sentence on the grounds that his former employers (Countrywide and American Home) both had knowledge of the loan document inaccuracies and in fact encouraged manipulation by intentionally misrepresenting the performance of loans and the adequacy of how the loans were underwritten. Partow admitted that he would falsify clients income or assets in order to get loans approved, and that American Home did not require documentary verification of such figures. Loan Data Focus of Probe, Countrywide Files May Have Included Dubious Information, The Wall Street Journal, March 22, 2008; MSNBC.com, Inside the fiasco that led to the mortgage mess and Countrywides collapse, updated March 22, 2009. iv. 138. Argent
Argent also failed to follow its underwriting guidelines. Argent originated
86.32% percent of the mortgage loans in Loan Group I for the CMLTI 2005-HE4 offering; it also originated the loans in the ARSI 2005-W2 offering. 139. According to a December 7, 2008 article in the Miami Herald, employees of
Argent Mortgage had a practice of actively assisting brokers to falsify information on loan applications. They would tutor[] . . . mortgage brokers in the art of fraud. Employees taught [brokers] how to doctor credit reports, coached them to inflate [borrower] income on loan applications, and helped them invent phantom jobs for borrowers so that loans could be approved. Borrowers Betrayed, Part 4, Miami Herald, Dec. 7, 2008.
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140.
Orson Benn, a former Argent Vice President who went to prison for his role in
facilitating mortgage fraud, has stated that at Argent the accuracy of loan applications was not a priority. Borrowers Betrayed, Part 4, Miami Herald, Dec. 7, 2008. Mr. Benn was the head of a crime ring that fabricated loan applications in order to pocket the loan fees; Mr. Benn himself pocketed a $3,000 kickback for each loan he helped secure. FCIC Report at 164. Of the 18 defendants charged in the Argent ring, 16 have been convicted or pled guilty, FCIC Report at 164, including Mr. Benn, who was sentenced to 18 years in prison, Ex-Argent Mortgage VP Sentenced For Fraud, North Country Gazette, Sept. 5, 2008. 141. Other jurisdictions have also investigated Argent for its mortgage origination
practices. On June 22, 2011, a grand jury in Cuyahoga County, Cleveland, indicted nine employees of Argent for their suspected roles in approving fraudulent home loans. The case, investigated by the Cuyahoga County Mortgage Fraud Task Force, alleges that the employees helped coach mortgage brokers about how to falsify loan documents to misstate the source or existence of down payments, as well as a borrowers income and assets. Argent was Clevelands number one lender in 2004, and originated over 10,000 loans during the time span 2002 through 2005. This was the first time in Ohio, and one of few instances nationwide, that a mortgage fraud investigation has led to criminal charges against employees of a subprime lender. Mark Gillespie, Former employees of subprime mortgage lender indicted by Cuyahoga County grand jury, The Plain Dealer, June 23, 2011. 142. Indeed, Jacquelyn Fishwick, who worked for more than two years at an Argent
loan processing center near Chicago as an underwriter and account manager, noted that some Argent employees played fast and loose with the rules. She personally saw some stuff [she] didnt agree with, such as [Argent] account managers remove documents from files and create
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documents by cutting and pasting them. The Subprime House of Cards, Cleveland Plain Dealer, May 11, 2008. 143. Similarly, Argent was also not diligent about confirming accurate appraisals for
the properties for which it was issuing mortgages. Steve Jernigan, a fraud investigator at Argent, said that he once went to check on a subdivision for which Argent had made loans. The address on the loans turned out to be in the middle of a cornfield; the appraisals had all been fabricated. The same fake picture had been included in each file. Michael W. Hudson, Silencing the Whistle-blowers, The Investigative Fund, May 10, 2010. 144. In 2007, Citigroup acquired Argent from its parent ACC Capital Holdings Corp.
This acquisition is notable because Mr. Bowen, who was described above was a Chief Underwriter within Citigroups Consumer Lending Group was given the opportunity to review Argent before Citigroup acquired it. He reported that large numbers of Argents loans were not underwritten according to the representations that were there. FCIC Hearing Transcript, Apr. 7, 2010, p. 239. Despite Mr. Bowens warnings, however, Citigroup proceeded with the acquisition and in fact touted it, stating that [t]hrough this acquisition, we gain important operational and pricing efficiencies . . . from point of origination through securitization and servicing. Citigroup Press Release, Aug. 31, 2007. v. 145. WMC
WMC also failed to follow its underwriting guidelines. WMC originated 82.97
percent of the mortgage loans in Loan Group I for the CMLTI 2005-HE3 offering. 146. WMC employed reckless underwriting standards and practices, as described more
fully below, that resulted in a huge amount of foreclosures, ranking WMC fourth in the report presented to the FCIC in April 2010 identifying the Worst Ten mortgage originators in the
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Worst Ten metropolitan areas. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008. General Electric, which had purchased WMC in 2004, closed down operations at WMC in late 2007 and took a $1.4 billion charge in the third quarter of that year. See, e.g., Diane Brady, Adventures of a Subprime Survivor, Bloomberg Businessweek, Oct. 29, 2007 (available at http://www.businessweek.com /magazine/content/07_44/b4056074.htm). 147. WMCs reckless loan originating practices were noticed by regulatory authorities.
In June 2008, the Washington State Department of Financial Institutions, Division of Consumer Services filed a Statement of Charges and Notice of Intention to Enter an Order to Revoke License, Prohibit From Industry, Impose Fine, Order Restitution and Collect Investigation Fees (the Statement of Charges) against WMC Mortgage and its principal owners individually. See Statement of Charges, No. C-07-557-08-SC01, Jun. 4, 2008. The Statement of Charges described a review of 86 loan files, which revealed that at least 76 of those loans were defective or otherwise in violation of Washington state law. Id. Among other things, the investigation uncovered that WMC had originated loans with unlicensed or unregistered mortgage brokers, understated amounts of finance charges on loans, understated amounts of payments made to escrow companies, understated annual percentage rates to borrowers and committed many other violations of Washington State deceptive and unfair practices laws. Id. vi. 148. Inflated Appraisals
The originators of the mortgage loans underlying the Securitizations went beyond
the systematic disregard of their own underwriting guidelines. Indeed, as the FCIC has confirmed, mortgage loan originators throughout the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed
55
for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. This resulted in lower LTV ratios, discussed above, which in turn made the loans appear less risky to the investors than they were. 149. As described by Patricia Lindsay, a former wholesale lender who testified before
the FCIC in April 2010, appraisers fear[ed] for their livelihoods, and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. See 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 Hobsons Choice. See Testimony of Jim Amorin to the FCIC, April 23, 2009, 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
150.
The total collapse in the credit ratings of the GSE Certificates, typically from
AAA or its equivalent to non-investment speculative grade, is further evidence of the originators systematic disregard of underwriting guidelines, amplifying that the GSE Certificates were impaired from the start. 151. The GSE Certificates that Fannie Mae and Freddie Mac purchased were originally
56
assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 152. The Citi Defendants provided or caused to be provided loan level information to
the rating agencies that they relied upon to calculate the Certificates assigned ratings, including the borrowers LTV ratio, debt-to-income ratio, owner occupancy status, and other loan level information described in the aggregation reports Prospectus Supplements. Because the information that the Citi Defendants provided or caused to be was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA (or its equivalent) certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported AAA (or its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and inadequate credit enhancement. 153. Since the issuance of the Certificates, the ratings agencies have dramatically
downgraded their ratings to reflect the revelations regarding the true underwriting practices used to originate the mortgage loans, and the true value and credit quality of the mortgage loans. Table 8 details the extent of the downgrades.13
Applicable ratings are shown in sequential order separated by forward slashes: Moodys/S&P/Fitch. A hyphen between forward slashes indicates that the relevant agency did not provide a rating at issuance.
13
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Table 8
Transaction
Tranche
A1 IA3A 1A2 A1 A1 IA1 1A2A A1 A1 A2A
Rating at Issuance (Moodys/S&P/Fitch)

Aaa/AAA/AAA Aaa/AAA/-Aaa/Not Rated/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/--/AAA - -/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/--/AAA
Rating at July 31, 2011 (Moodys/S&P/Fitch)

Baa1/AA/B Caa3/CCC/-Caa3/--/D Aa1/AAA/AAA A3/AAA/BB Caa3/--/C - -/CCC/C Caa3/CCC/C Caa3/CCC/C Ca/--/D
3.
The Surge In Mortgage Delinquencies And Defaults Further Indicates That The Mortgage Loans Were Not Originated In Adherence To The Stated Underwriting Guidelines
154.
Even though the Certificates purchased by Fannie Mae and Freddie Mac were
supposed to represent long-term, stable investments, a significant percentage of the mortgage loans backing the Certificates have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is a direct consequence of the fact that they were not underwritten in accordance with the applicable underwriting guidelines as represented in the Registration Statements. 155. Loan groups that were properly underwritten and contained loans with the
characteristics represented in the Registration Statements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011.
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Table 9
Percentage of Delinquent/Defaulted/Foreclosed Loans
34.8% 28.1% 28.2% 70.7% 34.3% 14.3% 17.5% 32.9% 37.0% 53.8%
Transaction

156.
The confirmed misstatements concerning owner occupancy and LTV ratios, the
confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations, and the extraordinary drop in credit rating and rise in delinquencies across the 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 MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES 157. In total, between September 13, 2005 and May 31, 2007, Fannie Mae and Freddie
Mac purchased over $3.5 billion in residential mortgage-backed securities issued in connection with the Securitizations. 158. Table 10 reflects Freddie Macs purchases of the Certificates.14
Purchased securities in Tables 10 and 11 are stated in terms of unpaid principal balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par. The Settlement Date, refers to the date by which a buyer must pay for the securities delivered by the seller.
14
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Table 10
Transaction Tranche CUSIP Settlement Date of Purchase by Freddie Mac
9/27/2005 9/13/2005 11/30/2005 5/31/2007
Initial Unpaid Principal Balance ($)

1,351,319,000 380,972,000 340,420,000 117,893,000
Purchase Price (% of Par)

100 100 100 101.9063
Seller to Freddie Mac

CGMI CGMI CGMI CGMI
ARSI 2005-W2 CMLTI 2005HE3 CMLTI 2005HE4 CMLTI 2007AR7
A1 A1 A1 A2A
040104NW7 17307GXJ2 17307GQ84 17312YAB8
159.
Table 11 reflects Fannie Maes purchases of the Certificates:
Table 11
Transaction Tranche CUSIP Settlement Date of Purchase by Fannie Mae
2/3/2006 10/17/2005 6/30/2006
Initial Unpaid Principal Balance ($)

148,577,697 130,480,732 115,073,166

100.6719 100.2539 99.5703
Seller to Fannie Mae

CGMI CGMI UBS Securities LLC CGMI CGMI CGMI
CMLTI 200510 CMLTI 2005-7 CMLTI 2006AR2 CMLTI 2006AR5 CMLTI 2006WF1 CMLTI 2006WF2
IA3A 1A2 IA1
17307GT73 17307GA57 17307G6K9
1A2A A1 A1
17309FAD0 17307G4E5 17309BAL1
6/30/2006 3/30/2006 5/31/2006
36,920,000 425,206,000 484,445,000
99.8034 101.3047 101.1875
160.
The statements and assurances in the Registration Statements regarding the credit
quality and characteristics of the mortgage loans underlying the GSE Certificates, and the origination and underwriting practices used to make these loans, were material to a reasonable investors decision to purchase the GSE Certificates. 161. 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 securities. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would
60
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. 162. Fannie Maes and Freddie Macs losses have been much greater than they would
have been if the mortgage loans had the credit quality represented in the Registration Statements. 163. Defendants misstatements and omissions in the Registration Statements
regarding the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchase of the GSE Certificates. 164. Defendants misstatements and omissions in the Registration Statements
regarding the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchases of the GSE Certificates. Based upon sales of the Certificates or similar certificates in the secondary market, Defendants proximately caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants CGMI, CGMLT, and the Individual Defendants) 165. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 166. This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act of
1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against Defendant CGMI with respect to each of the Registration Statements, and is brought against Defendants CGMLT and the Individual Defendants with respect to the Registration Statements
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filed by CGMLT that registered securities that were bona fide offered to the public on or after September 6, 2005. 167. This claim is predicated upon Defendant CGMIs strict liability for making false
and materially misleading statements in each of the Registration Statements for the Securitizations and for omitting facts necessary to make the facts stated therein not misleading. CGMLT and the Individual Defendants are strictly liable for making false and materially misleading statements in the Registration Statements filed by CGMLT that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to eight of the ten Securitizations (as specified in Tables 1 and 2 above), including the related Prospectus Supplements, and for omitting facts necessary to make the facts stated therein not misleading. 168. Defendant CGMI served as the underwriter of each of the Securitizations, and as
such, is liable for the misstatements and omissions in the Registration Statements under Section 11 of the Securities Act. 169. Defendant CGMLT filed the four Registration Statements under which nine of the
ten Securitizations were carried out. As a depositor, Defendant CGMLT is an issuer of the GSE Certificates issued pursuant to the Registration Statements it filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, it is liable under Section 11 of the Securities Act for the misstatements and omissions in those Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 170. At the time Defendant CGMLT filed four Registration Statements applicable to
nine of the Securitizations, the Individual Defendants were officers and/or directors of CGMLT.
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In addition, the Individual Defendants signed those Registration Statements and either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in those Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 171. At the time that they became effective, each of the Registration Statements
contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading, as set forth above. The facts misstated or omitted were material to a reasonable investor reviewing the Registration Statement, including to Fannie Mae and Freddie Mac. 172. The untrue statements of material facts and omissions of material facts in the
Registration Statements are set forth above in Section IV and pertain to, among other things, compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 173. Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE
Certificates pursuant to the false and misleading Registration Statements. Fannie Mae and Freddie Mac made these purchases in the primary market and shortly after issuance. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know of the facts concerning the false and misleading statements and omissions alleged herein, and if they had known those facts, they would not have purchased the GSE Certificates. 174. CGMI owed to Fannie Mae, Freddie Mac, and other investors a duty to make a
reasonable and diligent investigation of the statements contained in the Registration Statements at the time they became effective to ensure that such statements were true and correct and that
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there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Individual Defendants owed the same duty with respect to the Registration Statements they signed that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to eight of the Securitizations. 175. CGMI and the Individual Defendants did not exercise such due diligence and
failed to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. In addition, CGMLT, though subject to strict liability without regard to whether it performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations. 176. Fannie Mae and Freddie Mac sustained substantial damages as a result of the
misstatements and omissions in the Registration Statements. 177. The time period from June 2, 2009 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. 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). 178. By reason of the conduct herein alleged, CGMI, CGMLT, and the Individual
Defendants are jointly and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against Defendants CGMLT and CGMI) 179. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud.
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180.
This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities
Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements for the Securitizations listed in paragraph 2, with the exception of CMLTI 2006-AR2. 181. This claim is predicated upon CGMIs negligence in making materially false and
misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for each of the Securitizations listed in paragraph 2 that CGMI sold. Defendant CGMLT acted negligently in making false and materially misleading statements in the Prospectuses for the Securitizations carried out under the Registration Statements, which are applicable to nine of the Securitizations. 182. CGMI is prominently identified in the Prospectuses, the primary documents that it
used to sell the GSE Certificates, except for CMLTI 2006-AR2. CGMI offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac its GSE Certificates, except for CMLTI 2006-AR2, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 183. CGMI offered and sold the GSE Certificates, except for CMLTI 2006-AR2, to
Fannie Mae and Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances which they were made, not misleading. CGMI reviewed and participated in drafting the Prospectuses. 184. CGMI successfully solicited Fannie Maes and Freddie Macs purchases of the
GSE Certificates, except for CMLTI 2006-AR2. As underwriter, CGMI obtained substantial commissions based upon the amount it received from the sale of the Certificates to the public.
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185.
CGMI offered the GSE Certificates, except for CMLTI 2006-AR2, for sale, sold
them, and distributed them by the use of means or instruments of transportation and communication in interstate commerce. 186. CGMLT is prominently identified in the Prospectuses for the Securitizations
carried out under the Registration Statements it filed. These Prospectuses were the primary documents CGMLT used to sell Certificates for the nine Securitizations under those Registration Statements. CGMLT offered the Certificates publicly and actively solicited their sale, except for CMLTI 2006-AR2, including to Fannie Mae and Freddie Mac. 187. With respect to the nine Securitizations for which it filed Registration Statements,
CGMLT offered GSE Certificates, except for CMLTI 2006-AR2, to Fannie Mae and Freddie Mac by means of Prospectuses that 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. Upon information and belief, CGMLT reviewed and participated in drafting the Prospectuses. 188. CGMLT offered the GSE Certificates, except for CMLTI 2006-AR2, for sale by
the use of means or instruments of transportation and communication in interstate commerce. 189. Each of CGMI and CGMLT actively participated in the solicitation of the GSEs
purchase of the GSE Certificates, except for CMLTI 2006-AR2, 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, except for CMLTI 2006-AR2. 190. Each of the Prospectuses contained material misstatements of fact and omitted
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted
66
were material to a reasonable investor reviewing the Prospectuses, and were specifically material to Fannie Mae and Freddie Mac. 191. The untrue statements of material facts and omissions of material fact in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 192. CGMLT and CGMI offered and sold the GSE Certificates, except for CMLTI
2006-AR2, offered pursuant to the Registration Statements directly to Fannie Mae and Freddie Mac, pursuant to the false and misleading Prospectuses. 193. CGMI owed to Fannie Mae and Freddie Mac, as well as to other investors in these
trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. CGMLT owed the same duty with respect to the Prospectuses for the Securitizations carried out under the four Registration Statements filed by it. 194. CGMLT and CGMI failed to exercise such reasonable care. These defendants in
the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 195. In contrast, Fannie Mae and Freddie Mac did not know, and in the exercise of
reasonable diligence could not have known, of the untruths and omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If they had known of those untruths and omissions, they would not have purchased the GSE Certificates.
67
196.
Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market
and shortly after issuance pursuant to the Prospectuses. 197. Fannie Mae and Freddie Mac sustained substantial damages in connection with
their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 198. The time period from June 2, 2009 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. 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). THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against Defendants CGMR, Citi, and the Individual Defendants) 199. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 200. This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.
77o (Section 15), against CGMR, Citi, 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. 201. The Individual Defendants at all relevant times participated in the operation and
management of CGMLT and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of CGMLTs business affairs. Defendant Susan Mills was the Vice President and the Managing Director of CGMLT. Defendant Randall Costa was a President and Director of CGMLT. Defendant Richard A. Isenberg was a President and Director of CGMLT. Defendant Scott Freidenrich was a Treasurer and Principal Financial Officer of
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CGMLT. Defendant Peter Patricola was a Controller of CGMLT. Defendant Mark I. Tsesarsky was a Director of CGMLT. Defendant Jeffrey Perlowitz was a Director of CGMLT. Defendant Evelyn Echevarria was a Director of CGMLT. 202. Defendant CGMR was the sponsor for the nine Securitizations carried out under
the four Registration Statements filed by CGMLT, and culpably participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting CGMLT as the special purpose vehicle, and selecting CGMI as underwriter. In its role as sponsor, CGMR knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cash-flows from the mortgages would be issued by the relevant trusts. 203. Defendant CGMR also acted as the seller of the mortgage loans for the
Securitizations carried out under the four Registration Statements filed by CGMLT, in that it conveyed such mortgage loans to CGMLT pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. 204. Defendant CGMR also controlled all aspects of the business of CGMLT, as
CGMLT was merely a special purpose entity created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, the officers and directors of CGMR overlapped with the officers and directors of CGMLT, such as Susan Mills, who was the Vice President and Managing Director of CGMLT, as well as head of CGMIs Mortgage Finance Group. In addition, because of its position as sponsor, CMGR was able to, and did in fact, control the contents of the four Registration Statements filed by CGMLT, including the
69
Prospectuses and Prospectus Supplements, which pertained to nine Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 205. Defendant Citi controlled the business operations of CGMLT and CGMI.
Defendant Citi is the corporate parent of CGMLT and CGMI. As the sole corporate parent of CGMI and CGMLT, Citi had the practical ability to direct and control the actions of CGMI and CGMLT in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of CGMLT and CGMI in connection with the issuance and sale of the Certificates. 206. Citi expanded its share of the residential mortgage-backed securitization market in
order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 207. Citi culpably participated in the violations of Section 11 and 12(a)(2) set forth
above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as CGMLT and the issuing trusts to serve as conduits for the mortgage loans. 208. Defendant Citi wholly owns CGMR, CGMI and CGMLT. Citi culpably
participated in the violations of Section 11 and 12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as CGMLT and the issuing trusts to serve as conduits for the mortgage loans. 209. Citi, CGMR, and the Individual Defendants are controlling persons within the
70
meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of CGMI and CGMLT at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 210. Fannie Mae and Freddie Mac purchased in the primary market and shortly after
issuance the GSE Certificates issued pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and were specifically material to Fannie Mae and Freddie Mac. 211. Fannie Mae and Freddie Mac did not know, and in the exercise of reasonable
diligence could not have known, of the misstatements and omissions in the Registration Statements. Had the GSEs known of those misstatements and omissions, they would not have purchased the GSE Certificates. 212. Fannie Mae and Freddie Mac have sustained damages as a result of the
misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 213. The time period from June 2, 2009 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. 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).
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FOURTH CAUSE OF ACTION Violation of Section 13.1-522(A)(ii) of the Virginia Code (Against CGMI and CGMLT) 214. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 215. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the
Virginia Code and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain to only those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. 216. This claim is predicated upon CGMIs negligence in making materially false and
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 that CGMI sold. Defendant CGMLT acted negligently in making materially false and misleading statements in the Prospectuses for the Securitizations effected under the four Shelf Registration Statements CGMLT filed, which are applicable to nine of the Securitizations. 217. CGMI is prominently identified in the Prospectuses, the primary documents it
used to sell the Certificates, except for CMLTI 2006-AR2. CGMI 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. 218. CGMI offered and sold the GSE Certificates, except for CMLTI 2006-AR2, 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. CGMI reviewed and participated in drafting the Prospectuses.
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219.
CGMI successfully solicited Freddie Macs purchases of the GSE Certificates,
except for CMLTI 2006-AR2. As underwriter, CGMI obtained substantial commissions based on the amount it received from the sale of the Certificates to the public. 220. CGMI offered the GSE Certificates for sale, sold them, and distributed them,
except for CMLTI 2006-AR2, to Freddie Mac in the State of Virginia. 221. CGMLT is prominently identified in the Prospectuses for the Securitizations
carried out under the Registration Statements it filed. These Prospectuses were the primary documents CGMLT used to sell Certificates for the Securitizations under those Registration Statements. CGMLT offered the Certificates publicly and actively solicited their sale, except for CMLTI 2006-AR2, including to Freddie Mac. 222. With respect to the nine Securitizations for which it filed Registration Statements,
including the related Prospectus Supplements, CGMLT offered the GSE Certificates, except for CMLTI 2006-AR2, to Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, CGMLT reviewed and participated in drafting the Prospectuses. 223. Each of CGMI and CGMLT actively participated in the solicitation of Freddie
Macs purchase of the GSE Certificates, except for CMLTI 2006-AR2, and did so in order to benefit itself. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates, except for CMLTI 2006-AR2. 224. Each of the Prospectuses contained material misstatements of fact and omitted
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted
73
were material to a reasonable investor reviewing the Prospectuses, and specifically to Freddie Mac. 225. The untrue statements of material facts and omissions of material facts in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 226. CGMI and CGMLT offered and sold the GSE Certificates, except for CMLTI
2006-AR2, pursuant to the Registration Statements directly to Freddie Mac, pursuant to the materially false, misleading, and incomplete Prospectuses. 227. CGMI owed to Freddie Mac, as well as to other investors, a duty to make a
reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. CGMLT owed the same duty with respect to the Prospectuses for the Securitizations effected under the four Registration Statements filed by it. 228. CGMI and CGMLT failed to exercise such reasonable care. These defendants in
the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 229. In contrast, Freddie Mac did not know, and in the exercise of reasonable diligence
could not have known, of the untruths and omissions contained in the Prospectuses at the time it purchased the GSE Certificates. If Freddie Mac had known of those untruths and omissions, it would not have purchased the GSE Certificates.
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230.
Freddie Mac sustained substantial damages in connection with their investments
in the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 231. 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). FIFTH CAUSE OF ACTION Violation of Section 13.1-522(C) of the Virginia Code (Against CGMR, Citi, and the Individual Defendants) 232. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 233. This claim is brought by Plaintiff under Section 13.1-522(C) of the Virginia Code
and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. This claim is brought against CGMR, Citi, and the Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action set forth above. 234. The Individual Defendants at all relevant times participated in the operation and
management of CGMLT and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of CGMLTs business affairs. Defendant Susan Mills was the Vice President and Managing Director of Defendant CGMLT, and was also the head of CGMIs Mortgage Finance Group. Defendant Richard A. Isenberg was a Director and President of Defendant CGMLT. Defendant Randall Costa was a Director and President of Defendant CGMLT. Defendant Scott Freidenrich was a Treasurer of Defendant CGMLT. Defendant Mark
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I. Tsesarsky was a Director of Defendant CGMLT. Defendant Peter Patricola was a Controller of Defendant CGMLT. Defendant Jeffrey Perlowitz was a Director of Defendant CGMLT. Defendant Evelyn Echevarria was a Director of Defendant CGMLT. 235. Defendant CGMR was the sponsor for the nine Securitizations carried out under
the four Registration Statements filed by CGMLT, and culpably participated in the violation of Section 13.1-522(A)(ii) set forth above with respect to the offering of GSE Certificates by initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting CGMLT as the special purpose vehicle, and selecting CGMI as the lead underwriter. In its role as sponsor, CGMR knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cash-flows would be issued by the relevant trusts. 236. Defendant CGMR also acted as the seller of the mortgage loans for the
Securitizations carried out under the four Registration Statements filed by CGMLT, in that it conveyed such mortgage loans to the CGMLT pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. 237. Defendant CGMR also controlled all aspects of the business of CGMLT, as
CGMLT was merely a special purpose vehicle created to for the purpose of acting as a passthrough for the issuance of the Certificates. Upon information and belief, the officers and directors of CGMR overlapped with the officers and directors of CGMLT, such as Susan Mills, who was the Vice President and Managing Director of CGMLT, as well as head of CGMIs Mortgage Finance Group. In addition, because of its position as sponsor, CGMR was able to, and did in fact, control the contents of the Registration Statements filed by CGMLT, including
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the Prospectuses and Prospectus Supplements, which pertained to nine Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 238. Defendant Citi controlled the business operations of CGMLT and CGMI.
Defendant Citi is the corporate parent of CGMLT and CGMI. As the sole corporate parent of CGMI and CGMLT, Citi had the practical ability to direct and control the actions of CGMI and CGMLT in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of CGMLT and CGMI in connection with the issuance and sale of the Certificates. 239. Citi expanded its share of the residential mortgage-backed securitization market in
order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 240. Defendant Citi wholly owns CGMR, CGMI and CGMLT. Citi culpably
participated in the violation of Section 13.1-522(A)(ii) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as CGMLT and the issuing trusts to serve as conduits for the mortgage loans. 241. Citi, CGMR, and the Individual Defendants are controlling persons within the
meaning of Section 13.1-522(C) of the Virginia Code by virtue of their actual power over, control of, ownership of, and/or directorship of CGMLT and CGMI at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements.
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242.
Freddie Mac purchased the GSE Certificates, which were issued pursuant to the
Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and were specifically material to Freddie Mac. 243. Freddie Mac did not know, and in the exercise of reasonable diligence could not
have known, of the misstatements and omissions in the Registration Statements. Had Freddie Mac known of those misstatements and omissions, it would not have purchased the GSE Certificates. 244. Freddie Mac has sustained damages as a result of the misstatements and
omissions in the Registration Statements, for which it is entitled to compensation, and for which CGMR, Citi, and the Individual Defendants are jointly and severally liable. 245. 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). SIXTH CAUSE OF ACTION Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against CGMLT and CGMI) 246. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 247. This claim is brought by Plaintiff pursuant to 31-5606.05(a)(1)(B) of the District
of Columbia Code and is asserted on behalf of Fannie Mae with respect to the GSE Certificates identified in Table 11 above that were purchased by Fannie Mae, which were issued pursuant to the Registration Statements for the Securitizations, with the exception of CMLTI 2006-AR2.
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248.
This claim is predicated upon CGMIs negligence in making materially false and
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 that CGMI sold. Defendant CGMLT acted negligently in making materially false and misleading statements in the Prospectuses for the Securitizations carried out under the four Registration Statements, which are applicable to nine of the Securitizations. 249. CGMI is prominently identified in the Prospectuses, the primary documents it
used to sell the Certificates, except for CMLTI 2006-AR2. CGMI offered the Certificates publicly, including selling to Fannie Mae the GSE Certificates, except for CMLTI 2006-AR2, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 250. CGMI offered and sold the GSE Certificates, except for CMLTI 2006-AR2, 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. CGMI reviewed and participated in drafting the Prospectuses. 251. CGMI successfully solicited Fannie Maes purchases of the GSE Certificates,
except for CMLTI 2006-AR2. As underwriter, CGMI obtained substantial commissions based on the amount it received from the sale of the Certificates to the public. 252. CGMI offered the GSE Certificates for sale, sold them, and distributed them,
except for CMLTI 2006-AR2, to Fannie Mae in the District of Columbia. 253. CGMLT is prominently identified in the Prospectuses for the Securitizations
carried out under the Registration Statements it filed. These Prospectuses were the primary documents CGMLT used to sell Certificates for the Securitizations under those Registration
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Statements. CGMLT offered the Certificates publicly and actively solicited their sale, except for CMLTI 2006-AR2, including to Fannie Mae. 254. With respect to the nine Securitizations for which it filed Registration Statements,
including the related Prospectus Supplements, CGMLT offered the GSE Certificates, except for CMLTI 2006-AR2, to Fannie Mae by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, CGMLT reviewed and participated in drafting the Prospectuses. 255. Each of CGMI and CGMLT actively participated in the solicitation of the Fannie
Maes purchase of the GSE Certificates, except for CMLTI 2006-AR2, and did so in order to benefit itself. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates, except for CMLTI 2006-AR2. 256. Each of the Prospectuses contained material misstatements of fact and omitted
facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and specifically to Fannie Mae. 257. The untrue statements of material facts and omissions of material facts in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 258. CGMI and CGMLT offered and sold the GSE Certificates, except for CMLTI
2006-AR2, pursuant to the Registration Statements directly to Fannie Mae pursuant to the
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materially false, misleading, and incomplete Prospectuses. 259. CGMI owed to Fannie Mae, as well as to other investors, a duty to make a
reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. CGMLT owed the same duty with respect to the Prospectuses for the Securitizations effected under the four Registration Statements filed by it. 260. CGMI and CGMLT failed to exercise such reasonable care. These defendants in
the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 261. In contrast, Fannie Mae did not know, and in the exercise of reasonable diligence
could not have known, of the untruths and omissions contained in the Prospectuses at the time it purchased the GSE Certificates. If Fannie Mae had known of those untruths and omissions, it would not have purchased the GSE Certificates. 262. Fannie Mae sustained substantial damages in connection with their investments in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 263. The time period from June 2, 2009 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. 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).
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SEVENTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against CGMR, Citi, and the Individual Defendants) 264. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 265. This claim is brought under Section 31-5606.05(c) of the District of Columbia
Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above, that were purchased by Fannie Mae, with the exception of CMLTI 2006-AR2. This claim is brought against CGMR, Citi, and the Individual Defendants for controlling-person liability with regard to the Sixth Cause of Action set forth above. 266. The Individual Defendants at all relevant times participated in the operation and
management of CGMLT and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of CGMLTs business affairs. Defendant Susan Mills was the Vice President and Managing Director of Defendant CGMLT, and was also the head of CGMIs Mortgage Finance Group. Defendant Richard A. Isenberg was a Director and President of Defendant CGMLT. Defendant Randall Costa was a Director and President of Defendant CGMLT. Defendant Scott Freidenrich was a Treasurer of Defendant CGMLT. Defendant Mark I. Tsesarsky was a Director of Defendant CGMLT. Defendant Peter Patricola was a Controller of Defendant CGMLT. Defendant Jeffrey Perlowitz was a Director of Defendant CGMLT. Defendant Evelyn Echevarria was a Director of Defendant CGMLT. 267. Defendant CGMR was the sponsor for the nine Securitizations carried out under
the four Registration Statements filed by CGMLT, and culpably participated in the violation of Section 31-5606.05(a)(1)(B) set forth above with respect to the offering of GSE Certificates by
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initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting CGMLT as the special purpose vehicle, and selecting CGMI as the lead underwriter. In its role as sponsor, CGMR knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cash-flows would be issued by the relevant trusts. 268. Defendant CGMR also acted as the seller of the mortgage loans for the
Securitizations carried out under the four Registration Statements filed by CGMLT, in that it conveyed such mortgage loans to the CGMLT pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. 269. Defendant CGMR also controlled all aspects of the business of CGMLT, as
CGMLT was merely a special purpose vehicle created to for the purpose of acting as a passthrough for the issuance of the Certificates. Upon information and belief, the officers and directors of CGMR overlapped with the officers and directors of CGMLT, such as Susan Mills, who was the Vice President and Managing Director of CGMLT, as well as head of CGMIs Mortgage Finance Group. In addition, because of its position as sponsor, CGMR was able to, and did in fact, control the contents of the Registration Statements filed by CGMLT, including the Prospectuses and Prospectus Supplements, which pertained to nine Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 270. Defendant Citi controlled the business operations of CGMLT and CGMI.
Defendant Citi is the corporate parent of CGMLT and CGMI. As the sole corporate parent of CGMI and CGMLIT, Citi had the practical ability to direct and control the actions of CGMI and
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CGMLT in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of CGMLT and CGMI in connection with the issuance and sale of the Certificates. 271. Citi expanded its share of the residential mortgage-backed securitization market in
order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 272. Defendant Citi wholly owns CGMR, CGMI and CGMLT. Citi culpably
participated in the violation of Section 31-5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as CGMLT and the issuing trusts to serve as conduits for the mortgage loans. 273. Citi, CGMR, and the Individual Defendants are controlling persons within the
meaning of Section 31-5606.05(c) of the District of Columbia Code by virtue of their actual power over, control of, ownership of, and/or directorship of CGMLT and CGMI at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 274. Fannie Mae purchased the GSE Certificates, which were issued pursuant to the
Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and specifically to Fannie Mae. 275. Fannie Mae did not know, and in the exercise of reasonable diligence could not
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have known, of the misstatements and omissions in the Registration Statements. Had Fannie Mae known of those misstatements and omissions, it would not have purchased the GSE Certificates. 276. Fannie Mae has sustained substantial damages as a result of the misstatements and
omissions in the Registration Statements, for which it is entitled to compensation, and for which CGMR, Citi, and the Individual Defendants are jointly and severally liable. 277. The time period from June 2, 2009 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. 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). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against Defendants CGMLT and CGMI) 278. forth herein. 279. This a claim for common law negligent misrepresentation against Defendants Plaintiff realleges each allegation in paragraphs 1 through 164 above as if fully set
CGMLT and CGMI. 280. Between September 13, 2005 and May 31, 2007, CGMI and CGMLT sold the
GSE Certificates to the GSEs as described above. Because CGMLT owned and then conveyed the underlying mortgage loans that collateralized the Securitizations for which it served as depositor, CGMLT had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through its possession of the loan files and other documentation. 281. Likewise, as lead underwriter of the Securitizations, CGMI was obligated toand
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had the opportunity toperform 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 underwriterwhich gave it access to loan file information and obligated it to perform adequate due diligence to ensure the accuracy of the Registration StatementsCGMI had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 282. CGMI also had unique, exclusive, and special knowledge of the work of third-
party due diligence providers, such as Clayton, who identified significant failures of originators to adhere to the underwriting standards represented in the Registration Statements. The GSEs, like other investors, had no access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on CGMIs knowledge and its express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans. 283. CGMLT and CGMI were aware that the GSEs reasonably relied on CGMLTs
and CGMIs reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the Securitizations, and that the GSEs depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing
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of the Securitizations. In purchasing the GSE Certificates from CGMLT and CGMI, the GSEs relied on their special relationship with those Defendants, and the purchases were made, in part, in reliance on that relationship. 284. Based upon their unique, exclusive, and special knowledge and expertise about
the loans held by the trusts in the Securitizations, CGMLT and CGMI had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. CGMLT and CGMI breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the terms sheets and Prospectus Supplements. 285. In addition, having made actual representations about the underlying collateral in
the Securitizations and the facts bearing on the riskiness of the Certificates, CGMLT and CGMI had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon CGMLT and CGMIs 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. 286. Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the
representations by the Citi Defendants as the sponsors, depositors, and lead and selling underwriters in all nine of the Citi-sponsored Securitizations. The Citi Defendants provided term
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sheets to the GSEs that contained critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner occupancy statistics. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 287. The GSEs relied upon the accuracy of the data transmitted to them and
subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by CGMR and CGMI 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. 288. The Citi Defendants, as sponsors, depositors, and lead and selling underwriters in
all nine of the Citi-sponsored Securitizations, provided detailed information about the underlying collateral and structure of each Securitization it sponsored to the credit rating agencies. The credit rating agencies based their ratings on the information provided to them by the Citi Defendants, 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 the Citi Defendants representations in the term sheets and Prospectus Supplements. 289. In addition, the GSEs relied on the fact that the originators of the mortgage loans
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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 GSEs purchase of the GSE Certificates in that the GSEs decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards. 290. In purchasing the GSE Certificates, the GSEs justifiably relied on the Citi
Defendants false representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. 291. But for the above misrepresentations and omissions, the GSEs would not have
purchased or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decision to acquire the GSE Certificates, as described above. 292. The GSEs were damaged in an amount to be determined at trial as a direct,
proximate, and foreseeable result of CGMLTs and CGMIs misrepresentations, including any half truths. 293. The time period from June 2, 2009 through August 29, 2011 has been tolled for
statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. 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: 294. An award in favor of Plaintiff against all Defendants, jointly and severally, for all
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damages sustained as a result of Defendants wrongdoing, in an amount to be proven at trial, but including: a. Rescission and recovery of the consideration paid for the GSE
Certificates, with interest thereon; b. Each GSEs monetary losses, including any diminution in value of the
GSE Certificates, as well as lost principal and lost interest payments thereon; c. d. e. Attorneys fees and costs; Prejudgment interest at the maximum legal rate; and Such other and further relief as the Court may deem just and proper. JURY TRIAL DEMANDED 295. Pursuant to Federal Rule of Civil Procedure 38(b), Plaintiff hereby demands a
trial by jury on all issues triable by jury.
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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstHSBC NORTH AMERICA HOLDINGS INC., HSBC USA INC., HSBC MARKETS (USA) INC., HSBC BANK USA, N.A., HSI ASSET SECURITIZATION CORPORATION, HSBC SECURITIES (USA) INC., NEAL LEONARD, GERARD MATTIA, TODD WHITE, NORMAN CHALEFF, and JON VOIGTMAN, Defendants.
___ CIV. ___ (___)
COMPLAINT JURY TRIAL DEMANDED
TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................6 The Plaintiff and the GSEs...................................................................................................6 The Defendants ....................................................................................................................6 The Non-Party Originators ..................................................................................................8 JURISDICTION AND VENUE ......................................................................................................9 FACTUAL ALLEGATIONS ........................................................................................................10 I. THE SECURITIZATIONS................................................................................................10 A. B. C. Residential Mortgage-Backed Securitizations in General .....................................10 The Securitizations At Issue in This Case .............................................................11 The Securitization Process .....................................................................................13 1. 2. II. HSBC Bank Groups Mortgage Loans in Special Purpose Trusts ..............13 The Trusts Issue Securities Backed by the Loans ......................................14
THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................16 A. The Role of Each of the Defendants ......................................................................16 1. 2. 3. 4. 5. 6. 7. HSBC Bank................................................................................................17 HSI Asset ...................................................................................................17 HSBC Securities ........................................................................................18 HSBC USA ................................................................................................19 HSBC Markets ...........................................................................................19 HSBC North America ................................................................................19 The Individual Defendants .........................................................................20 i
B. III.
Defendants Failure to Conduct Proper Due Diligence .........................................21
THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS................................................................................................................23 A. B. C. D. Compliance With Underwriting Guidelines ..........................................................23 Statements Regarding Occupancy Status of Borrower ..........................................26 Statements Regarding Loan-to-Value Ratios.........................................................28 Statements Regarding Credit Ratings ....................................................................31
IV.
FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS......................................................................................33 A. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ....................................33 1. 2. B. Owner Occupancy Data Was Materially False ..........................................33 Loan-to-Value Data Was Materially False ................................................35
The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................38 1. Government Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines ..............................................................39 The Collapse of the Certificates Credit Ratings Further Indicates That the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines .................................................................46 The Surge in Mortgage Delinquency and Default Further Demonstrates That the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................48
2.
3.
V.
FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES .................................................49
FIRST CAUSE OF ACTION ........................................................................................................52 SECOND CAUSE OF ACTION ...................................................................................................55 THIRD CAUSE OF ACTION .......................................................................................................58 FOURTH CAUSE OF ACTION ...................................................................................................61 ii
FIFTH CAUSE OF ACTION ........................................................................................................64 SIXTH CAUSE OF ACTION .......................................................................................................67 SEVENTH CAUSE OF ACTION .................................................................................................70 EIGHTH CAUSE OF ACTION ....................................................................................................73 PRAYER FOR RELIEF ................................................................................................................77 JURY TRIAL DEMANDED .........................................................................................................79
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 HSBC North America Holdings Inc. (HSBC North America), HSBC USA Inc. (HSBC USA), HSBC Markets (USA) Inc. (HSBC Markets), HSBC Bank USA, N.A. (HSBC Bank), HSI Asset Securitization Corporation (HSI Asset), HSBC Securities (USA) Inc. (HSBC Securities) (collectively, HSBC or the HSBC Defendants), Neal Leonard, Gerard Mattia, Todd White, Norman Chaleff, and Jon Voigtman (the Individual Defendants) (together with the HSBC Defendants, the Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the
offer and sale of certain residential mortgage-backed securities to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or GSEs). These securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans. These representations were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, and constitutes common law negligent misrepresentation.
2.
Between December 20, 2005 and July 3, 2007, Fannie Mae and Freddie Mac
purchased over $6.2 billion in residential mortgage-backed securities (the GSE Certificates) issued in connection with 17 HSBC-sponsored securitizations.1 The GSE Certificates purchased by Freddie Mac, along with the date and amount of the purchases, are listed infra in Table 10. The GSE Certificates purchased by Fannie Mae, along with the date and amount of the purchases, are listed infra in Table 11. The 17 securitizations at issue are: i. ii. iii. iv. v. vi. vii. viii. ix. x. First Franklin Mortgage Loan Trust 2006-FF1, Mortgage Pass-Through Certificates, Series 2006-FF1 (FFML 2006-FF1) First Franklin Mortgage Loan Trust 2006-FF5, Mortgage Pass-Through Certificates, Series 2006-FF5 (FFML 2006-FF5) First Franklin Mortgage Loan Trust 2006-FF7, Mortgage Pass-Through Certificates, Series 2006-FF7 (FFML 2006-FF7) First Franklin Mortgage Loan Trust 2006-FF9, Mortgage Pass-Through Certificates, Series 2006-FF9 (FFML 2006-FF9) First Franklin Mortgage Loan Trust 2006-FF11, Mortgage Pass-Through Certificates, Series 2006-FF11 (FFML 2006-FF11) HSI Asset Securitization Corporation Trust 2005-I1, Mortgage Pass-Through Certificates, Series 2005-I1 (HASC 2005-I1) HSI Asset Securitization Corporation Trust 2006-HE1, Mortgage Pass-Through Certificates, Series 2006-HE1 (HASC 2006-HE1) HSI Asset Securitization Corporation Trust 2006-HE2, Mortgage Pass-Through Certificates, Series 2006-HE2 (HASC 2006-HE2) HSI Asset Securitization Corporation Trust 2006-NC1, Mortgage Pass-Through Certificates, Series 2006-NC1 (HASC 2006-NC1) HSI Asset Securitization Corporation Trust 2006-OPT1, Mortgage Pass-Through Certificates, Series 2006-OPT1 (HASC 2006-OPT1)
For purposes of this Complaint, the securities issued under the Registration Statements (as defined in note 2, infra) 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
xi. xii. xiii. xiv. xv. xvi. xvii.
HSI Asset Securitization Corporation Trust 2006-OPT2, Mortgage Pass-Through Certificates, Series 2006-OPT2 (HASC 2006-OPT2) HSI Asset Securitization Corporation Trust 2006-OPT3, Mortgage Pass-Through Certificates, Series 2006-OPT3 (HASC 2006-OPT3) HSI Asset Securitization Corporation Trust 2006-OPT4, Mortgage Pass-Through Certificates, Series 2006-OPT4 (HASC 2006-OPT4) HSI Asset Securitization Corporation Trust 2007-HE1 Mortgage Pass-Through Certificates, Series 2007-HE1 (HASC 2007-HE1) HSI Asset Securitization Corporation Trust 2007-HE2, Mortgage Pass-Through Certificates, Series 2007-HE2 (HASC 2007-HE2) HSI Asset Securitization Corporation Trust 2007-OPT1, Mortgage Pass-Through Certificates, Series 2007-OPT1 (HASC 2007-OPT1) HSI Asset Securitization Corporation Trust 2007-WF1, Mortgage Pass-Through Certificates, Series 2007-WF1 (HASC 2007-WF1)
(collectively, the Securitizations). 3. The Certificates were offered for sale pursuant to one of three shelf registration
statements (the Shelf Registration Statements) filed by Defendant HSI Asset with the Securities and Exchange Commission (the SEC). The three Shelf Registration Statements, and the amendments thereto, were signed by or on behalf of the Individual Defendants. For all of the Securitizations, HSBC Securities was the lead underwriter and the underwriter who sold the GSE Certificates to the GSEs. 4. 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
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. 3
Mac pursuant to the Registration Statements, including the Shelf Registration Statements and the corresponding Prospectuses and Prospectus Supplements. 5. The Registration Statements contained statements about the characteristics and
credit quality of the mortgage loans underlying the Securitizations, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investors 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 groups aggregate principal balance with loan-to-value ratios within specified ranges. This information also was material to reasonable investors. However, a loan-level analysis of a sample of loans for each Securitizationa review that encompassed thousands of mortgages across all of the Securitizationshas revealed that these statistics were also false and omitted material facts due to inflated property values and misstatements of other key characteristics of the mortgage loans. 7. For example, the percentage of owner-occupied properties is a material risk factor
to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan-level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower
than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans. 8. Defendants HSBC Securities (an underwriter), HSI Asset (a depositor), and the
Individual Defendants are directly responsible for the misstatements and omissions of material fact contained in the Registration Statements because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. 9. Defendants HSBC North America, HSBC USA, HSBC Markets, HSBC Bank,
and the Individual Defendants are also responsible for the misstatements and omissions of material fact contained in the Registration Statements by virtue of their direction and control over Defendants HSBC Securities and HSI Asset. HSBC North America, HSBC USA, and HSBC Markets directly participated in and exercised dominion and control over the business operations of HSBC Securities and HSI Asset. HSBC Bank (the sponsor) directly participated in and exercised dominion and control over the business operations of HSI Asset. 10. Fannie Mae and Freddie Mac purchased over $6.2 billion of the Certificates
pursuant to the Registration Statements filed with the SEC. These documents contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans and the practices used to originate such loans. As a result of Defendants misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 11. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against
the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code,
Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for common law negligent misrepresentation. 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). 13. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by
Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. The Defendants 14. Defendant HSBC North America is a Delaware corporation and headquartered at
452 Fifth Avenue, New York, New York 10018. It is one of the nations ten largest bank holding companies by assets and is a wholly owned subsidiary of HSBC Holdings plc, one of the worlds largest banking groups by assets.
15.
Defendant HSBC USA is a Maryland corporation and headquartered at 452 Fifth
Avenue, New York, New York 10018. It is a wholly owned subsidiary of HSBC North America. HSBC USAs principal subsidiary is HSBC Bank. 16. Defendant HSBC Markets is a Delaware corporation with its principal place of
business at 452 Fifth Avenue, New York, New York 10018. It is a wholly owned subsidiary of HSBC North America and the direct parent of HSI Asset and HSBC Securities. 17. Defendant HSBC Securities is a Delaware corporation with its principal place of
business at 452 Fifth Avenue, New York, New York 10018. HSBC Securities is a direct, wholly owned subsidiary of HSBC Markets. HSBC Securities is an SEC-registered brokerdealer. It was the lead underwriter for each of the Securitizations, and was intimately involved in the offerings. Fannie Mae and Freddie Mac purchased all of the GSE Certificates from HSBC Securities in its capacity as the underwriter of the Securitizations. 18. Defendant HSBC Bank, a national banking association, is a New York
corporation with its principal place of business at 452 Fifth Avenue, New York, New York 10018. HSBC Bank is the principal subsidiary of HSBC USA. HSBC Bank was the sponsor for all of the Securitizations. 19. Defendant HSI Asset is a Delaware corporation with its principal place of
business at 452 Fifth Avenue, New York, New York 10018. HSI Asset is a direct, wholly owned subsidiary of HSBC Markets. HSI Asset was the depositor for all the Securitizations at issue in this action. HSI Asset, as the depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 20. Defendant Neal Leonard is an individual residing in Mount Kisco, New York.
Mr. Leonard was, at relevant times, Chairman, Principal Executive Officer, and Director of HSI
Asset. He was also co-head of mortgage-backed securities at HSBC Securities. Mr. Leonard signed all three Shelf Registration Statements and the amendments thereto, and, upon information and belief, did so in New York, New York. 21. Defendant Gerard Mattia is an individual residing in Armonk, New York. Mr.
Mattia was, at relevant times, Treasurer, Principal Financial Officer, Principal Accounting Officer, and a Director of HSI Asset. He was also an inside director of HSBC Securities. Mr. Mattia signed all three Shelf Registration Statements and the amendments thereto, and, upon information and belief, did so in New York, New York. 22. Defendant Todd White is an individual residing in Hamel, Minnesota. Mr. White
was, at relevant times, co-head of mortgage-backed securities at HSBC Securities. He was also a Director of HSI Asset. Mr. White signed all three Shelf Registration Statements and the amendments thereto, and, upon information and belief, did so in New York, New York. 23. Defendant Norman Chaleff is an individual residing in West Orange, New Jersey.
Mr. Chaleff was, at relevant times, a Director of HSI Asset. Mr. Chaleff signed one Shelf Registration Statement and, upon information and belief, did so in New York, New York. 24. Defendant Jon Voigtman is an individual residing in Summit, New Jersey. Mr.
Voigtman was, at relevant times, a Managing Director at both HSBC Securities and HSI Asset. Mr. Voigtman signed two Shelf Registration Statements, as well as amendments to one of those Shelf Registration Statements, and the amendment to another Shelf Registration Statement, and, upon information and belief, did so in New York, New York. The Non-Party Originators 25. The loans underlying the Certificates were acquired by HSBC Bank, as the
sponsor for each Securitization, from non-party mortgage originators. The originators principally responsible for the loans underlying the Certificates include First Franklin Financial 8
Corporation (First Franklin); Option One Mortgage Corporation (Option One); New Century Mortgage Corporation (New Century); WMC Mortgage Corp. (WMC); and Countrywide Home Loans, Inc. (Countrywide). JURISDICTION AND VENUE 26. 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. 27. 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. 28. 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 Courts 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 Courts supplemental jurisdiction under 28 U.S.C. 1367(a). 29. Venue is proper in this district pursuant to Section 22 of the Securities Act, 15
U.S.C. 77v, and 28 U.S.C. 1391(b). All of the HSBC Defendants are principally located in this district, two of the Individual Defendants reside in this district, and many of the acts and transactions alleged herein, including the preparation and dissemination of the Registration Statements, occurred in substantial part within this district. Defendants are also subject to personal jurisdiction in this district.
FACTUAL ALLEGATIONS I. THE SECURITIZATIONS A. 30. Residential Mortgage-Backed Securitizations in General Asset-backed securitization distributes risk by pooling cash-producing financial
assets and issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans. 31. The most common form of securitization of mortgage loans involves a sponsor
the entity that acquires or originates the mortgage loans and initiates the securitizationand the creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage loans. The trust is generally established pursuant to a Pooling and Servicing Agreement entered into by, among others, the depositor for that securitization. In many instances, the transfer of assets to a trust is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor . . . and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions. Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 32. Residential mortgage-backed securities are backed by the underlying mortgage
loans. Some residential mortgage-backed securitizations are created from more than one cohort of loans called collateral groups, in which case the trust issues securities backed by different groups. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. Within this framework, the purchasers of the securities acquire rights to the
10
cash-flows from the designated mortgage group, such as homeowners payments of principal and interest on the mortgage loans held by the related trust. 33. Residential mortgage-backed securities are issued pursuant to registration
statements filed with the SEC. These registration statements include prospectuses, which explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the mortgage groups underlying the certificates. Certificates are issued by the trust pursuant to the registration statement, the prospectus and the prospectus supplement. Underwriters sell the certificates to investors. 34. A mortgage servicer is necessary to manage the collection of proceeds from the
mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers 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 trusts funds and delivers payments due each month on the certificates to the investors. B. 35. The Securitizations At Issue in This Case This case involves the 17 Securitizations listed in paragraph 2 supra, all of which
were sponsored by HSBC Bank and underwritten by HSBC Securities. For each Securitization, Table 1 identifies: (1) the sponsor; (2) the depositor; (3) the lead underwriter; (4) the principal amount issued for the tranches3 purchased by the GSEs; (5) the date of issuance; and (6) the loan
A tranche is one of a series of certificates or interests created and issued as part of the same transaction. 11
group or groups backing the GSE Certificate for that Securitization (referred to as the Supporting Loan Groups). Table 1
Lead Underwriter Principal Amount Issued ($)
266,292,000.00
Transaction
Tranche
Sponsor
Depositor
Date of Issuance

Group I
FFML 2006-FF1
IA
HSBC Bank
HSI Asset
HSBC Securities
1/27/2006
FFML 2006-FF5
IA
HSBC Bank
HSI Asset
HSBC Securities
401,180,000.00
5/5/2006
Group I
FFML 2006-FF7
IA
HSBC Bank
HSI Asset
HSBC Securities
336,603,000.00
5/31/2006
Group I
FFML 2006-FF9
IA
HSBC Bank
HSI Asset
HSBC Securities
712,134,000.00
7/7/2006
Group I
IA1 FFML 2006-FF11 IA2
HSBC Bank
HSI Asset
HSBC Securities
547,964,800.00
9/6/2006
Group I
HSBC Bank
HSI Asset
HSBC Securities
136,991,200.00
9/6/2006
Group I
HASC 2005-I1
IA
HSBC Bank
HSI Asset
HSBC Securities
132,963,000.00
12/20/2005
Group I
HASC 2006-HE1
IA
HSBC Bank
HSI Asset
HSBC Securities
591,377,000.00
11/3/2006
Group I
HASC 2006-HE2
IA
HSBC Bank
HSI Asset
HSBC Securities
384,335,000.00
12/5/2006
Group I
HASC 2006-NC1
IA
HSBC Bank
HSI Asset
HSBC Securities
119,285,000.00
3/7/2006
Group I
HASC 2006-OPT1
IA
HSBC Bank
HSI Asset
HSBC Securities
265,088,000.00
2/3/2006
Group I
HASC 2006-OPT2
IA
HSBC Bank
HSI Asset
HSBC Securities
368,076,000.00
2/28/2006
Group I
IA HASC 2006-OPT3 IIA
HSBC Bank
HSI Asset
HSBC Securities
141,005,000.00
5/12/2006
Group I
HSBC Bank
HSI Asset
HSBC Securities
230,449,000.00
4/5/2006
Group II
12
Transaction
Tranche
Sponsor
Depositor
Lead Underwriter
Principal Amount Issued ($)

284,847,000.00
Date of Issuance

Group I
HASC 2006-OPT4
IA
HSBC Bank
HSI Asset
HSBC Securities
4/28/2006
HASC 2007-HE1
IA
HSBC Bank
HSI Asset
HSBC Securities
371,150,000.00
3/8/2007
Group I
HASC 2007-HE2
IA
HSBC Bank
HSI Asset
HSBC Securities
326,874,000.00
5/4/2007
Group I
HASC 2007-OPT1
IA
HSBC Bank
HSI Asset
HSBC Securities
438,787,000.00
1/30/2007
Group I
HASC 2007-WF1
IA
HSBC Bank
HSI Asset
HSBC Securities
195,515,000.00
7/3/2007
Group I
C.
The Securitization Process 1. HSBC Bank Groups Mortgage Loans in Special Purpose Trusts
36.
As the sponsor for the Securitizations, Defendant HSBC Bank purchased
mortgage loans after the loans were originated, either directly from the originators or through affiliates of the originators. HSBC Bank then sold the mortgage loans to Defendant HSI Asset, the depositor. HSI Asset was a wholly owned, limited-purpose financial subsidiary of HSBC Markets and an affiliate of HSBC Bank. The sole purpose of HSI Asset was to act as a conduit through which loans acquired by HSBC Bank could be securitized and sold to investors. 37. For each of the Securitizations, HSBC Bank sold the relevant mortgage loans to
HSI Asset pursuant to a Mortgage Loan Purchase Agreement, which contained various representations and warranties regarding the mortgage loans. 38. 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 13
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. 39. The Trusts Issue Securities Backed by the Loans
Once the mortgage loans were transferred to the trusts in accordance with the
PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cashflows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates was a function of the capital structure of the related transaction and the credit quality of the underlying mortgages. 40. The Certificates were issued pursuant to one of three Shelf Registration
Statements, 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 Individual Defendants each signed one or more of the Shelf Registration Statements (and/or one of the amendments) that were filed by HSI Asset. The SEC filing number, registrant, signatories and filing dates for the Shelf Registration Statements and amendments thereto, as well as the Certificates covered by each Shelf Registration Statement, are set forth in Table 2 below. Table 2
SEC File No.
333124032

4/13/2005

7/7/2005
Registrant
FFML 2006-FF1 HASC 2005-I1 HASC 2006-NC1 HASC 2006-OPT1 HASC 2006-OPT2
Signatories of Registration Statement

Neal Leonard, Gerard Mattia, Todd White, Norman Chaleff
Neal Leonard, Gerard Mattia, Todd White, Jon Voigtman
HSI Asset
14
SEC File No.
Registrant
FFML 2006-FF5 FFML 2006-FF7 FFML 2006-FF9 FFML 2006-FF11 HASC 2006-HE1 HASC 2006-HE2 HASC 2006-OPT3 HASC 2006-OPT4 HASC 2007-HE1 HASC 2007-OPT1 HASC 2007-HE2 HASC 2007-WF1
Signatories of Registration Statement
333131607
2/6/2006
3/9/2006 3/21/2006 3/28/2006
HSI Asset
333140923
2/27/2007
3/27/2007
HSI Asset
Neal Leonard, Gerard Mattia, Todd White
41.
The Prospectus Supplement for each Securitization describes the underwriting
guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debtto-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes; information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property; and information concerning whether the loans were delinquent. 42. The Prospectus Supplements associated with each Securitization were filed with
the SEC as part of the Registration Statements. The Form 8-Ks attaching the PSAs for each Securitization were also filed with the SEC. The date on which the Prospectus Supplement and Form 8-K were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below.
15
Table 3
Filing No. of Related Registration Statement
333-124032 333-131607 333-131607 333-131607 333-131607 333-124032 333-131607 333-131607 333-124032 333-124032 333-124032 333-131607 333-131607 333-131607 333-140923 333-131607 333-140923
Transaction
Date Prospectus Supplement Filed

1/27/2006 5/8/2006 5/31/2006 7/10/2006 8/16/2006 12/21/2005 11/3/2006 12/5/2006 3/8/2006 2/7/2006 3/1/2006 4/5/2006 5/1/2006 3/12/2007 5/7/2007 1/31/2007 7/3/2007
Date of Filing Form 8-K Attaching PSA

2/9/2006 5/19/2006 6/14/2006 N.A. 9/19/2006 1/4/2006 11/21/2006 1/8/2007 3/21/2006 2/21/2006 3/14/2006 4/19/2006 5/17/2006 3/22/2007 5/21/2007 2/9/2007 7/18/2007
FFML 2006-FF1 FFML 2006-FF5 FFML 2006-FF7 FFML 2006-FF9 FFML 2006-FF11 HASC 2005-I1 HASC 2006-HE1 HASC 2006-HE2 HASC 2006-NC1 HASC 2006-OPT1 HASC 2006-OPT2 HASC 2006-OPT3 HASC 2006-OPT4 HASC 2007-HE1 HASC 2007-HE2 HASC 2007-OPT1 HASC 2007-WF1
43.
The Certificates were issued pursuant to the PSAs, and Defendant HSBC
Securities offered and sold the GSE Certificates to Fannie Mae and Freddie Mac pursuant to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements. II. THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS A. 44. The Role of Each of the Defendants Each of the Defendants, including the Individual Defendants, had a role in the
securitization process and the marketing of the Certificates, which included purchasing the mortgage loans from the originators, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 45. With respect to each Securitization, the depositor, underwriter, and Individual
Defendants who signed the Registration Statement, as well as the Defendants who exercised 16
control over their activities, are liable, jointly and severally, as participants in the registration, issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 46. HSBC Bank
Defendant HSBC Bank is the principal subsidiary of HSBC USA and a wholly
owned subsidiary of HSBC North America. HSBC Bank acted as the sponsor of each of the 17 Securitizations. In that capacity, HSBC Bank 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 GSE Certificates. HSBC Bank also selected HSI Asset as the special purpose vehicle that would be used to transfer the mortgage loans from HSBC Bank to the trusts, and selected HSBC Securities as the lead underwriter for the Securitizations. In its role as sponsor, HSBC Bank 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. 47. Defendant HSBC Bank also conveyed the mortgage loans to HSI Asset pursuant
to a Mortgage Loan Purchase Agreement. In this agreement, HSBC Bank made certain representations and warranties to HSI Asset regarding the groups of loans collateralizing the Certificates. These representations and warranties were assigned by HSI Asset to the trustees for the benefit of the Certificateholders. 2. 48. HSI Asset
HSI Asset is a direct, wholly owned subsidiary of HSBC Markets and a wholly
owned subsidiary of HSBC North America. It is a special purpose entity formed solely for the 17
purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 49. In its capacity as depositor, HSI Asset purchased the mortgage loans from HSBC
Bank pursuant to a Mortgage Loan Purchase Agreement. HSI Asset then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. HSI Asset, together with the other Defendants, was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 3. 50. HSBC Securities
Defendant HSBC Securities is an investment bank, and was, at all relevant times,
a registered broker-dealer and a major underwriter of mortgage- and other asset-backed securities in the United States. HSBC Securities is a direct, wholly owned subsidiary of HSBC Markets and a wholly owned subsidiary of HSBC North America. 51. Defendant HSBC Securities was the lead underwriter for each of the
Securitizations. In that role, it was responsible for underwriting and managing the offer and sale of the Certificates to Fannie Mae and Freddie Mac and other investors. HSBC Securities was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred, and underwritten.
18
4. 52.
HSBC USA
Defendant HSBC USA employed its wholly owned subsidiary HSBC Bank to
serve as the sponsor for the Securitizations. As the corporate parent of HSBC Bank, HSBC USA had the practical ability to direct and control HSBC Banks actions related to the Securitizations, and in fact exercised such direction and control over the activities of this entity related to the issuance and sale of the Certificates. 5. 53. HSBC Markets
Defendant HSBC Markets employed its wholly owned subsidiaries, HSI Asset
and HSBC Securities, in the key steps of the securitization process. Unlike typical arms length securitizations, the Securitizations here involved the subsidiaries and affiliates of HSBC Markets at virtually each step in the chainthe sponsor was HSBC Bank, the depositor was HSI Asset, and the lead underwriter was HSBC Securities. 54. As the corporate parent of HSI Asset and HSBC Securities, HSBC Markets had
the practical ability to direct and control these Defendants actions related to the Securitizations, and in fact exercised such direction and control over the activities of these entities related to the issuance and sale of the Certificates. 6. 55. HSBC North America
Defendant HSBC North America wholly owns HSBC USA and HSBC Markets
and is the ultimate US-based parent of HSBC Bank, HSI Asset, and HSBC Securities. As detailed, supra, the Securitizations here involved HSBC entities, including the aforementioned subsidiaries of HSBC North America, at virtually each step in the process. HSBC North America profited substantially from this vertically integrated approach to mortgage-backed securitization. Furthermore, HSBC North America shares, and, on information and belief, shared, overlapping management with the other Defendant entities. For example, Irene Dorner is 19
President and Chief Executive Officer at HSBC Bank, President at HSBC USA, and is part of the senior management team at HSBC North America. 7. 56. The Individual Defendants
Defendant Neal Leonard was Chairman, Principal Executive Officer, and a
Director of HSI Asset. In that capacity, Mr. Leonard signed Shelf Registration Statements applicable to all of the Securitizations and either signed or authorized another to sign the amendments to those Shelf Registration Statements. 57. Defendant Gerard Mattia was Treasurer, Principal Financial Officer, Principal
Accounting Officer, and a Director of HSI Asset. In that capacity, Mr. Mattia signed Shelf Registration Statements applicable to all of the Securitizations and either signed or authorized another to sign the amendments to those Shelf Registration Statements. 58. Defendant Todd White was a Director of HSI Asset. In that capacity, Mr. White
signed Shelf Registration Statements applicable to all of the Securitizations and either signed or authorized another to sign the amendments to those Shelf Registration Statements. 59. Defendant Norman Chaleff was a Director at HSI Asset. In that capacity, Mr.
Chaleff signed one Shelf Registration Statement applicable to five of the Securitizations. 60. Defendant Jon Voigtman was Managing Director at both HSBC Securities and
HSI Asset. In that capacity, Mr. Voigtman signed two Shelf Registration Statements applicable to twelve of the Securitizations, as well as the amendments to one of those Shelf Registration Statements, and the amendment to another Shelf Registration Statement applicable to five of the Securitizations.
20
B. 61.
Defendants Failure to Conduct Proper Due Diligence Defendants failed to conduct adequate and sufficient due diligence to ensure that
the mortgage loans underlying the Securitizations complied with the representations in the Registration Statements. 62. HSBC Bank began securitizing residential mortgage loans in 2005 to take
advantage of the rapidly expanding market for residential mortgage-backed securities. It securitized large volumes of mortgage loans acquired from various lenders in an effort to boost its fee revenue. In 2005, HSBC issued over half a billion dollars of subprime, residential mortgage-backed securities. By 2006, that number increased more than ten-fold to over $9.6 billion. HSBCs issuance of subprime, residential mortgage-backed securities remained high in 2007: over $6.7 billion. 63. Defendants had enormous financial incentives to complete as many offerings as
quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, HSI Asset, as the depositor, was paid a percentage of the total dollar amount of the offerings upon completion of the Securitizations, and HSBC Securities, as the underwriter, was paid a commission based on the amount it received from the sale of the Certificates to the public. 64. The push to securitize large volumes of mortgage loans contributed to the absence
of controls needed to prevent the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or to otherwise ensure the accuracy of the statements in the Registrations Statements pertaining to the Securitizations. 65. For instance, HSBC retained third-parties, including Clayton Holdings, Inc.
(Clayton), to analyze the loans it was considering placing in its securitizations, but waived a 21
significant number of loans into the Securitizations that these firms had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines or had compensating factors that excused the loans non-compliance with those guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. 66. HSBC was negligent in allowing into the Securitizations a substantial number of
mortgage loans that, as reported to HSBC 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, HSBC 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. 67. Claytons trending reports revealed that in the period from the first quarter of
2006 to the second quarter of 2007, 27 percent of the mortgage loans HSBC submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 62 percent of the loans were subsequently waived in by HSBC, without proper
22
consideration and analysis of compensating factors, and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/the-impact-of-the-financial-crisissacramento#documents. 68. HSBC has also come under the scrutiny of the SEC. As reported in HSBC USAs
Form 10-Q for the period ending March 31, 2011, HSBC USA has received three subpoenas from the SEC seeking production of documents and information relating to [its] involvement, and the involvement of [its] affiliates, in specified private-label residential mortgage-backed securitiestransactions as an issuer, sponsor, underwriter, depositor, trustee or custodian as well as [its] involvement as a servicer. The first subpoena was received in December 2010, the second was received in February 2011 and the third was received in April 2011. III. THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS A. 69. Compliance With Underwriting Guidelines The Prospectus Supplement for each Securitization describe the mortgage loan
underwriting guidelines pursuant to which the mortgage loans underlying the related Securitizations were to have been originated. These guidelines were intended to assess the creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 70. The statements made in the Prospectus Supplements, which, as discussed, formed
part of the Registration Statement for each Securitization, were material to a reasonable investors 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
23
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. 71. 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 HASC 2006-OPT1 Securitization, for which Option One was the originator, HSBC Securities was the underwriter, and HSI Asset was the depositor, stated that the loans in the Securitization will have been originated generally in accordance with Option Ones Guidelines, and that [t]he 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 applicants ability to repay the mortgage loan. 72. The HASC 2006-OPT1 Prospectus Supplement 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 emphasized that exceptions are made where compensating factors exist. 73. With respect to the information evaluated by Option One, the Prospectus
Supplement stated that [e]ach mortgage loan applicant completes an application that includes information with respect to the applicants 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
24
merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions or judgments. 74. Additionally, the Prospectus Supplement stated that the Option One
Underwriting Guidelines require that mortgage loans be underwritten in a standardized procedure which complies with applicable federal and state laws and regulations and require Option Ones underwriters to be satisfied that the value of the property being financed, as indicated by an appraisal, supports the loan balance. 75. The Prospectus and Prospectus Supplement for each of the Securitizations had
similar representations to those quoted above. The relevant representations in the Prospectus and Prospectus Supplement pertaining to originating entity underwriting standards for each Securitization are set forth in Appendix A to this Complaint. As discussed infra at paragraphs 103 through 126, in fact, the originators of the mortgage loans in the Supporting Loan Group for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 76. Further, for the vast majority of the Securitizations, the Prospectuses and
Prospectus Supplements described additional representations and warranties in the PSA concerning the mortgage loans backing the Securitizations, which were made by the originator. Such representations and warranties, which are described more fully for each Securitization in Appendix A, included: (i) the mortgage loans were underwritten in accordance with the originators underwriting guidelines in effect at the time of origination, subject to only limited exceptions; and (ii) any and all requirements of any federal, state or local law applicable to the origination and servicing of the mortgage loans had been complied with.
25
77.
The inclusion of these representations in the Prospectuses and Prospectus
Supplements had the purpose and effect of providing additional assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations and the compliance of that collateral with the underwriting guidelines described in the Prospectuses and Prospectus Supplements. These representations were material to a reasonable investors decision to purchase the Certificates. B. 78. Statements Regarding Occupancy Status of Borrower The Prospectus Supplements contained collateral group-level information about
the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplement 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 each collateral group by occupancy status, generally into the following categories: (i) Primary, or Owner Occupied; (ii) Second Home, or Secondary; and (iii) Investment or Non-Owner. For each category, the table stated the number of loans in that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:4
Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner occupied, second home, and investor. These numbers have been converted to percentages. 26
Table 4
Transaction

Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group II Group I Group I Group I Group I Group I

91.47 94.06 95.08 93.61 98.29 94.47 95.51 95.68 94.05 88.88 92.19 98.51 87.17 96.49 90.27 95.76 92.47 92.31
0.82 1.02 0.74 0.84 0.23 3.93 1.64 1.91 5.79 2.18 1.46 0.00 2.15 1.03 1.24 0.89 0.76 1.79
Investor
7.71 4.92 4.17 5.56 1.48 1.60 2.85 2.41 0.16 8.94 6.35 1.49 10.68 2.48 8.49 3.35 6.77 5.90
79.
As Table 4 makes clear, the Prospectus Supplements for each Securitization
reported that an overwhelming majority of the mortgage loans in the Supporting Loan Groups were owner occupied, while a small percentage were reported to be non-owner occupied (i.e., a second home or investment property). 80. The statements about occupancy status were material to a reasonable investors
decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to default than borrowers who purchase homes as second homes or investments and live elsewhere, and are more likely to care for their primary residence, the percentage of loans in the collateral group of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. As stated in most of the Registration Statements, Mortgage Loans secured by properties acquired by investors for the purposes of rental income or capital appreciation, or properties acquired as second homes, 27
tend to have higher severities of default than properties that are regularly occupied by the related borrowers. See, e.g., FFML 2006-FF5 Prospectus Supplement, filed May 8, 2006. 81. Other things being equal, the higher the percentage of loans not secured by
owner-occupied residences, the greater the risk of loss to the certificateholders. Even small differences in the percentages of primary/owner-occupied, second home/secondary, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and, thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed infra at paragraphs 93 through 96, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 82. Statements Regarding Loan-to-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the
balance of the mortgage loan to the value of the mortgaged property when the loan is made. 83. The denominator in the LTV ratio is the value of the mortgaged property, and is
generally the lower of the purchase price or the appraised value of the property. In a refinancing or home-equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risk associated with a given loan. 84. The Prospectus Supplements for each Securitization also contained group-level
information about the LTV ratio for the underlying group of loans as a whole. The percentage of loans with an LTV ratio at or less than 80 percent and the percentage of loans with an LTV ratio
28
greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan Groups are set forth in Table 5 below.5 Table 5
Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I Group I HASC 2006-OPT3 Group II HASC 2006-OPT4 HASC 2007-HE1 HASC 2007-HE2 HASC 2007-OPT1 HASC 2007-WF1 Group I Group I Group I Group I Group I 57.90 66.04 38.90 25.03 45.00 30.20 0.00 0.00 0.00 0.00 0.00 0.00
Transaction
FFML 2006-FF1 FFML 2006-FF5 FFML 2006-FF7 FFML 2006-FF9 FFML 2006-FF11 HASC 2005-I1 HASC 2006-HE1 HASC 2006-HE2 HASC 2006-NC1 HASC 2006-OPT1 HASC 2006-OPT2
Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80%
72.46 60.92 70.80 62.94 66.13 51.16 31.56 72.49 56.86 49.30 52.56 67.53
Percentage of loans, by aggregate principal balance, with LTV greater than 100%
0.00 0.10 0.00 0.15 0.04 0.00 0.00 0.00 0.00 0.00 0.00 0.00
85.
As Table 5 makes clear, the Prospectus Supplements for most Securitizations
reported that the majority of mortgage loans in the Supporting Loan Groups had an LTV ratio of
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). 29
80 percent or less,6 and the Prospectus Supplements for nearly all of the Securitizations reported that zero mortgage loans in the Supporting Loan Group had an LTV ratio over 100 percent. 86. The LTV ratio is among the most important measures of the risk of a mortgage
loan, and, thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owners 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. 87. Thus, LTV ratio is a material consideration to a reasonable investor in deciding
whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed infra at paragraphs 97 through 102, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates.
The exceptions are HASC 2006-HE1, HASC 2006-OPT1, HASC 2007-HE1, HASC 2007-HE2, HASC 2007-OPT1, and HASC 2007-WF1, for which more than half of the mortgage loans by aggregate balance were reported as having an LTV ratio greater than 80 percent and below 100 percent. 30
D. 88.
Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of mortgage-backed securitizations by
the credit rating agencies, including Moodys Investors Service, Standard & Poors, 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 through BBB- or their equivalents were generally referred to as investment grade. 89. 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.7 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
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. 31
offered is based on the make-up of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating. 90. Credit ratings have been an important tool to gauge risk when making investment
decisions. For almost a hundred years, investors like pension funds, municipalities, insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Maes and Freddie Macs 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). 91. 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 investors decision to purchase the GSE Certificates. As set forth in Table 8, infra at paragraph 123, 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.
32
IV.
FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 92. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False A review of loan-level data was conducted in order to assess whether the
statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, on a statistically significant basis, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data review demonstrates that the data concerning owner occupancy and LTV ratios was materially false and misleading. 1. 93. Owner Occupancy Data Was Materially False
The data review has revealed that the owner occupancy statistics reported in the
Prospectus Supplements were materially false and inflated. In fact, far fewer underlying properties were occupied by their owners than disclosed in the Prospectus Supplements, and more correspondingly were held as second homes or investment properties. 94. To determine whether a given borrower actually occupied the property as
claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrowers 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 borrowers 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. 33
95.
A significant number of the loans failed two or more of these tests, indicating that
the owner occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. For example, for Supporting Loan Group I in the HASC 2006-OPT3 Securitization, which was sponsored by HSBC Bank and underwritten by HSBC Securities, the Prospectus Supplement stated that 1.49 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied. But the data review revealed that, for 9.74 percent of the properties represented as owner-occupied, the owners lived elsewhere, indicating that the true percentage of non-owner occupied properties was 11.09 percent, more than seven times the percentage reported in the Prospectus Supplement.8 96. The data review revealed that, for each Securitization, the Prospectus Supplement
misrepresented the percentage of non-owner occupied properties. The true percentage of nonowner occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for each Securitization understated the percentage of non-owner occupied properties by at least 8 percent, and for many Securitizations by 10 percent or more.
This conclusion is arrived at by summing (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 1.49 percent), and (b) the product of (i) the stated owner-occupied percentage (here, 98.51 percent) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 9.74 percent). 34
Table 6
Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-Owner Occupancy9
12.02 10.51 10.77 12.49 10.25 13.75 11.58 10.97 14.10 10.77 9.24 9.74 11.63 11.03 10.53 11.41 9.43 11.73
Transaction
Reported Percentage of NonOwner Occupied Properties

8.53 5.94 4.92 6.39 1.71 5.53 4.49 4.32 5.95 11.12 7.81 1.49 12.83 3.51 9.73 4.24 7.53 7.69
Actual Percentage of NonOwner Occupied Properties

19.53 15.83 15.15 18.08 11.79 18.52 15.55 14.81 19.21 20.69 16.33 11.09 22.96 14.16 19.23 15.17 16.26 18.52
Prospectus Percentage Understatement of Non-Owner Occupied Properties

11.00 9.89 10.23 11.69 10.08 12.99 11.06 10.49 13.26 9.57 8.52 9.60 10.13 10.65 9.50 10.93 8.73 10.83
2. 97.
Loan-to-Value Data Was Materially False
The data review has further revealed that the LTV ratios disclosed in the
Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review and servicing. AVMs rely upon similar data as appraisersprimarily county assessor records, tax rolls, and data on comparable
As described more fully in paragraph 94, failing two or more tests of owner-occupancy is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property. 35
properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data. 98. Applying the AVM to the available data for the properties securing the sampled
loans shows that the appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of LTV. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. As stated in the Prospectus Supplement for HASC 2006-OPT1: Mortgage loans with higher loan-to-value ratios may present a greater risk of loss than mortgage loans with loan-to-value ratios of 80% or below. 99. For example, for the FFML 2006-FF7 Securitization, which was sponsored by
HSBC Bank and underwritten by HSBC Securities, the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 16.57 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 70.80 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 39.50 percent of the loans had LTV ratios at or below 80 percent. 100. The data review revealed that, for each Securitization, the Prospectus Supplement
misrepresented the percentage of loans with an LTV ratio above 100 percent, as well the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true percentage of mortgages in each Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of
36
mortgages in each Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregated principal balance. Table 7
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio At or Less Than 80%
72.46 60.92 70.80 62.94 66.13 51.16 31.56 72.49 56.86 49.30 52.56 67.53 57.90 66.04 38.90 25.03 45.00 30.20
Transaction
DATA REVIEW True Percentage of Loans With LTV Ratio At or Less Than 80%
48.64 40.55 39.50 44.05 42.42 33.58 26.61 42.57 35.37 40.63 42.14 53.44 42.05 46.49 25.37 15.17 32.77 23.31
PROSPECTUS
DATA REVIEW True Percentage of Loans With LTV Ratio Over 100%
9.41 14.91 16.57 14.87 14.45 17.53 30.32 14.95 18.12 17.05 18.46 11.66 17.13 16.08 28.18 39.51 23.54 24.73
Percentage of Loans Reported to Have LTV Ratio Over 100%

0.00 0.10 0.00 0.15 0.04 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
101.
As Table 7 demonstrates, the Prospectus Supplements for all but three of the
Securitizations reported that none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100. With respect to those three exceptions, the percentage of mortgage loans with a reported LTV ratio over 100 percent was extremely smallunder 0.15 percent in all instances. In contrast, the data review revealed that for all of the Supporting Loan Groups in the Securitizations, at least 9.41 percent of the mortgage loans had an actual LTV ratio over 100 percent, and for most Securitizations this figure was much larger. Indeed, for 16 of the
37
Securitizations, the data review revealed that more than 10 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. For five of the Securitizations, the data review revealed that more than 20 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. 102. These inaccuracies with respect to reported LTV ratios also indicate that the
representations in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing 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) (FCIC Report) at 91-92. B. 103. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statements contained material misstatements and omissions
regarding compliance with underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage lending businesses. This is confirmed by the systematically misreported owner occupancy and LTV 38
statistics, discussed supra, and by (1) government investigations into originators underwriting practices, which have revealed widespread abandonment of originators reported underwriting guidelines during the relevant period; (2) the collapse of the Certificates credit ratings; and (3) the surge in delinquency and default in the mortgage loans in the Securitizations. 1. Government Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines
104.
The abandonment of underwriting guidelines is confirmed by several government
reports and investigations that have described rampant underwriting failures throughout the period of the Securitizations and, more specifically, underwriting failures by the very originators whose loans were included by the Defendants in the Securitizations. 105. For instance, in November 2008, the Office of the Comptroller of the Currency
(OCC), an office within the United States Department of the Treasury, issued a report identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 2005-2007 originations. Option One, Countrywide, WMC, and New Century, which originated many of the loans for the Securitizations at issue here, were all on that list. See Office of the Comptroller of the Currency Press Release, Worst Ten in the Worst Ten, Nov. 13, 2008. 106. Option One originated all of the mortgage loans in the Supporting Loan Groups in
the HASC 2005-I1, HASC 2006-OPT1, HASC 2006-OPT2, HASC 2006-OPT3, HASC 2006OPT4, HASC 2007-OPT1, and HASC 2007-WF1 Securitizations. On June 3, 2008, 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 39
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 Ones] residential subprime loans to the secondary market. See Option One Complaint. The Massachusetts Attorney General alleged that Option Ones agents and brokers frequently overstated an applicants income and/or ability to pay, and inflated the appraised value of the applicants home, and that Option One avoided implementing reasonable measures that would have prevented or limited these fraudulent practices. Option Ones origination policies employed from 2004 through 2007 have resulted in an explosion of foreclosures. Id. at 1. On November 24, 2008, the Superior Court of Massachusetts granted a preliminary injunction that prevented Option One from foreclosing on thousands of its loans issued to Massachusetts residents. Commonwealth v. H&R Block, Inc., No. 08-2474-BLS1, 2008 WL 5970550 (Mass. Super. Ct. Nov. 24, 2008). On October 29, 2009, the Appeals Court of Massachusetts affirmed the preliminary injunction. See Commonwealth v. Option One Mortgage Co., No. 09-P-134, 2009 WL 3460373 (Mass. App. Ct. Oct. 29, 2009). 107. On August 9, 2011, the Massachusetts Attorney General announced that H&R
Block, Inc., Option Ones 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
40
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. 108. Countrywide originated 40.68 percent and 29.48 percent of the loans in the
Supporting Loan Groups in the HASC 2006-HE1 and HASC 2006-HE2 Securitizations, respectively. In January 2011, the FCIC issued its final report, which detailed, among other things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. The FCIC Report singled out Countrywide for its role: Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities. As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in catastrophic consequences. Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in financial and reputational catastrophe for the firm. But they did not stop. FCIC Report at xxii. 109. Countrywide has also been the subject of several investigations and actions
concerning its lax and deficient underwriting practices. In June 2009, for instance, the SEC initiated a civil action against Countrywide executives Angelo Mozilo (founder and Chief Executive Officer), David Sambol (Chief Operating Officer), and Eric Sieracki (Chief Financial Officer) for securities fraud and insider trading. In a September 16, 2010 opinion denying these defendants motions for summary judgment, the United States District Court for the Central District of California found that the SEC raised genuine issues of fact as to, among other things, whether the defendants had misrepresented the quality of Countrywides underwriting processes.
41
The court noted that the SEC presented evidence that Countrywide routinely ignored its official underwriting to such an extent that Countrywide would underwrite any loan it could sell into the secondary mortgage market, and that a significant portion (typically in excess of 20%) of Countrywides loans were issued as exceptions to its official underwriting guidelines . The court concluded that a reasonable jury could conclude that Countrywide all but abandoned managing credit risk through its underwriting guidelines . S.E.C. v. Mozilo, No. CV 09-3994, 2010 WL 3656068, at *10 (C.D. Cal. Sept. 16, 2010). Mozilo, Sambol, and Sieracki subsequently settled with the SEC. 110. The testimony and documents only recently made available to the GSEs by way
of the SECs investigation confirm that Countrywide was systematically abusing exceptions and low-documentation processes in order to circumvent its own underwriting standards. For example, in an April 13, 2006 e-mail, Mozilo wrote to Sieracki and others that he was concerned that certain subprime loans had been originated with serious disregard for process [and] compliance with guidelines, resulting in the delivery of loans with deficient documentation. Mozilo further stated that I have personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan[s]. 111. WMC originated 58.74 percent, 58.29 percent, and 26.05 percent of the loans in
the Supporting Loan Groups in the HASC 2006-HE1, HASC 2006-HE2, and HASC 2007-HE2 Securitizations, respectively. WMC employed reckless underwriting standards and practices, as described more fully below, that resulted in a huge number of foreclosures, ranking WMC fourth in the report presented to the FCIC in April 2010 identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. See OCC Press Release, Worst Ten in the
42
Worst Ten. General Electric, which had purchased WMC in 2004, closed down operations at WMC in late 2007 and took a $1.4 billion charge in the third quarter of that year. See, e.g., Diane Brady, Adventures of a Subprime Survivor, Bloomberg Businessweek, Oct. 29, 2007 (available at http://www.businessweek.com/magazine/ content/07_44/b4056074.htm). 112. WMCs reckless loan originating practices were noticed by regulatory authorities.
In June 2008, the Washington State Department of Financial Institutions, Division of Consumer Services filed a Statement of Charges and Notice of Intention to Enter an Order to Revoke License, Prohibit From Industry, Impose Fine, Order Restitution and Collect Investigation Fees (the Statement of Charges) against WMC Mortgage and its principal owners individually. See Statement of Charges, No. C-07-557-08-SC01, Jun. 4, 2008. The Statement of Charges included 86 loan files, which revealed that at least 76 loans were defective or otherwise in violation of Washington state law. Id. Among other things, the investigation uncovered that WMC had originated loans with unlicensed or unregistered mortgage brokers, understated amounts of finance charges on loans, understated amounts of payments made to escrow companies, understated annual percentage rates to borrowers and committed many other violations of Washington State deceptive and unfair practices laws. Id. 113. New Century originated 34.51 percent and 100 percent of the loans in the
Supporting Loan Groups in the HASC 2005-I1 and HASC 2006-NC1 Securitizations, respectively. As stated in the Prospectus Supplement for the HASC 2006-NC1 Securitization, [f]or the quarter ending September 30, 2005, New Century Financial Corporation originated $40.4 billion in mortgage loans. And before its collapse in the first half of 2007, New Century was one of the largest subprime lenders in the country.
43
114.
In 2010, the OCC identified New Century as the worst subprime lender in the
country based on the delinquency rates of the mortgages it originated in the ten metropolitan areas between 2005 and 2007 with the highest rates of delinquency. See OCC Press Release, Worst Ten in the Worst Ten: Update, Mar. 22, 2010. Further, in January 2011, the FCIC issued its final report and, as it did with Countrywide, singled out New Century for its role: New Centuryonce the nations second-largest subprime lenderignored early warnings that its own loan quality was deteriorating and stripped power from two risk-control departments that had noted the evidence. In a June 2004 presentation, the Quality Assurance staff reported they had found severe underwriting errors, including evidence of predatory lending, federal and state violations, and credit issues, in 25% of the loans they audited in November and December 2003. In 2004, Chief Operating Officer and later CEO Brad Morrice recommended these results be removed from the statistical tools used to track loan performance, and in 2005, the department was dissolved and its personnel terminated. The same year, the Internal Audit department identified numerous deficiencies in loan files; out of nine reviews it conducted in 2005, it gave the companys loan production department unsatisfactory ratings seven times. Patrick Flanagan, president of New Centurys mortgage-originating subsidiary, cut the departments budget, saying in a memo that the group was out of control and tries to dictate business practices instead of audit. FCIC Report at 157. 115. On February 29, 2008, after an extensive document review and conducting over
100 interviews, Michael J. Missal, the Bankruptcy Court Examiner for New Century, issued a detailed report on the various deficiencies at New Century, including lax mortgage standards and a failure to follow its own underwriting guidelines. Among his findings, the Examiner reported: New Century had a brazen obsession with increasing loan originations, without due regard to the risks associated with that business strategy. Although a primary goal of any mortgage banking company is to make more loans, New Century did so in an aggressive manner that elevated the risks to dangerous and ultimately fatal levels. New Century also made frequent exceptions to its underwriting guidelines for borrowers who might not otherwise qualify for a particular loan. A senior officer of New Century warned in 2004 that the number one issue is
44
exceptions to the guidelines. Moreover, many of the appraisals used to value the homes that secured the mortgages had deficiencies. New Century layered the risks of loan products upon the risks of loose underwriting standards in its loan originations to high risk borrowers.
Final Report of Michael J. Missal, Bankruptcy Examiner, In re New Century TRS Holdings, Inc., No. 07-10416 (KJC) (Bankr. Del. Feb. 29, 2008), available at http://graphics8.nytimes.com/packages/pdf/business/Final_Report_New_Century.pdf. 116. On December 9, 2009, the SEC charged three of New Centurys top officers with
violations of federal securities laws. The SECs complaint details how New Centurys representations regarding its underwriting guidelines, e.g., that New Century was committed to adher[ing] to high origination standards in order to sell [its] loan products in the secondary market and only approv[ing] subprime loan applications that evidence a borrowers ability to repay the loan, were blatantly false. 117. Patricia Lindsay, a former Vice President of Corporate Risk at New Century,
testified before the FCIC in April 2010 that, beginning in 2004, underwriting guidelines had been all but abandoned at New Century. Ms. Lindsay further testified that New Century systematically approved loans with 100 percent financing to borrowers with extremely low credit scores and no supporting proof of income. See Written Testimony of Patricia Lindsay for the FCIC Hearing, April 7, 2010 (Lindsay Testimony), http://fcic-static.law.stanford.edu/cdnmedia/fcic.testimony/2010-0407-Lindsay.pdf, at 3. 118. The originators of the mortgage loans underlying the Securitizations went beyond
the systematic disregard of their own underwriting guidelines. As the FCIC has confirmed, mortgage loan originators throughout the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed for the 45
subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. This resulted in lower LTV ratios, discussed supra, which in turn made the loans appear to the investors less risky than they were. 119. As described by Patricia Lindsay, appraisers fear[ed] for their livelihoods,
and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. See Lindsay Test. at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that [i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again . [T]oo often state licensed and certified appraisers are forced into making a Hobsons 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
120.
The total collapse in the credit ratings of the GSE Certificates, typically from
AAA or its equivalent to non-investment speculative grade, is further evidence of the originators systematic disregard of underwriting guidelines, indicating that the GSE Certificates were impaired from the start. 121. The GSE Certificates that Fannie Mae and Freddie Mac purchased were originally
assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of 46
the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 122. HSBC provided or caused to be provided loan-level information to the rating
agencies that they relied upon in order to calculate the Certificates assigned ratings, including the borrowers 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 HSBC provided or caused to be provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA (or its equivalent) certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported AAA (or its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and carried inadequate credit enhancement. 123. Since the issuance of the Certificates, the ratings agencies have dramatically
downgraded their ratings to reflect the revelations regarding the true underwriting practices used to originate the mortgage loans, and the true value and credit quality of the mortgage loans. Table 8 details the extent of the downgrades.10 Table 8
Transaction
FFML 2006-FF1 FFML 2006-FF5 FFML 2006-FF7 FFML 2006-FF9 FFML 2006-FF11
Tranche
IA IA IA IA IA1 IA2

Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA

B3/AAA/B Caa1/BB-/CC Caa1/CCC/CC Caa3/B-/CC B3/CCC/CC Ca/CCC/C
Applicable ratings are shown in sequential order separated by forward slashes: Moodys/S&P/Fitch. A hyphen between forward slashes indicates that the relevant agency did not provide a rating at issuance. 47
10
Transaction
HASC 2005-I1 HASC 2006-HE1 HASC 2006-HE2 HASC 2006-NC1 HASC 2006-OPT1 HASC 2006-OPT2 HASC 2006-OPT3 HASC 2006-OPT4 HASC 2007-HE1 HASC 2007-HE2 HASC 2007-OPT1 HASC 2007-WF1
Tranche
IA IA IA IA IA IA IA IIA IA IA IA IA IA

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/--

Caa1/CCC/CC Ca/CCC/C Caa3/CCC/C B3/BB+/-A2/AAA/B Aa1/AAA/A Aa2/AAA/BB Baa2/AAA/CCC Ba1/A/CCC Caa3/CCC/C Caa3/CCC/C Caa3/BBB-/CC Caa2/B-/--
3.
The Surge in Mortgage Delinquency and Default Further Demonstrates That the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines
124.
Even though the Certificates purchased by Fannie Mae and Freddie Mac were
supposed to represent long-term, stable investments, a significant percentage of the mortgage loans backing the Certificates have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is a direct consequence of the fact that they were not underwritten in accordance with applicable underwriting guidelines as represented in the Registration Statements. 125. Loan groups that were properly underwritten and contained loans with the
characteristics represented in the Registration Statements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011. Table 9
Transaction
FFML 2006-FF1 FFML 2006-FF5 FFML 2006-FF7
Tranche
IA IA IA

54.3 52.4 48.6
48
Transaction
FFML 2006-FF9 FFML 2006-FF11
Tranche
IA IA1 IA2

49.6 42.3 42.3 67.4 56.9 58.7 53.0 38.4 37.7 32.2 38.7 40.5 60.7 66.5 45.5 39.9
HASC 2005-I1 HASC 2006-HE1 HASC 2006-HE2 HASC 2006-NC1 HASC 2006-OPT1 HASC 2006-OPT2 HASC 2006-OPT3
IA IA IA IA IA IA IA IIA
HASC 2006-OPT4 HASC 2007-HE1 HASC 2007-HE2 HASC 2007-OPT1 HASC 2007-WF1
IA IA IA IA IA
126.
The confirmed misstatements concerning owner occupancy and LTV ratios, the
confirmed, systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations, and the extraordinary drop in credit 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 MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES 127. In total, between December 20, 2005 and July 3, 2007, Fannie Mae and Freddie
Mac purchased over $6.2 billion in residential mortgage-backed securities issued in connection with the Securitizations. Table 10 reflects each of Freddie Macs purchases of the Certificates.11
Purchased securities in Tables 10 and 11 are stated in terms of unpaid principal balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par. 49
11
Table 10
Settlement Date of Purchase by Freddie Mac
1/27/2006 5/5/2006 7/7/2006 12/20/2005 11/3/2006 3/7/2006 2/3/2006 2/28/2006 4/5/2006 3/8/2007 5/4/2007 1/30/2007 7/3/2007
Transaction
Tranche
CUSIP
Initial Unpaid Principal Balance

266,292,000.00 401,180,000.00 712,134,000.00 132,963,000.00 591,377,000.00 119,285,000.00 265,088,000.00 368,076,000.00 230,449,000.00 371,150,000.00 326,874,000.00 438,787,000.00 195,515,000.00

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
Seller to Freddie Mac
FFML 2006-FF1 FFML 2006-FF5 FFML 2006-FF9 HASC 2005-I1 HASC 2006-HE1 HASC 2006-NC1 HASC 2006-OPT1 HASC 2006-OPT2 HASC 2006-OPT3 HASC 2007-HE1 HASC 2007-HE2 HASC 2007-OPT1 HASC 2007-WF1
IA IA IA IA IA IA IA IA IIA IA IA IA IA
32027NYL9 32027EAB7 320276AB4 40430HCV8 44328AAA8 40430HEQ7 40430HCZ9 40430HDV7 40430HFH6 40430FAA0 40430RAA4 40431JAA1 40431RAA3
HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities
128.
Table 11 below reflects each of Fannie Maes purchases of the Certificates:
Table 11
Settlement Date of Purchase by Fannie Mae
5/31/2006 9/6/2006 9/6/2006 12/5/2006 4/5/2006 4/28/2006
Transaction
Tranche
CUSIP
Initial Unpaid Principal Balance

336,603,000.00 538,016,000.00 134,504,000.00 384,335,000.00 141,005,000.00 284,847,000.00

100.00 100.00 100.00 100.00 100.00 100.00
Seller to Fannie Mae

HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities HSBC Securities
FFML 2006-FF7
IA IA1
320277AB2 32028PAA3 32028PAB1 44328BAB4 40430HFG8 40430KAB7
FFML 2006-FF11 IA2 HASC 2006-HE2 HASC 2006-OPT3 HASC 2006-OPT4 IA IA IA
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129.
The statements and assurances in the Registration Statements regarding the credit
quality and characteristics of the mortgage loans underlying the GSE Certificates, and the origination and underwriting practices pursuant to which the mortgage loans were originated, which were summarized in such documents, were material to a reasonable investors decision to purchase the GSE Certificates. 130. 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 securities. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements. 131. Fannie Maes and Freddie Macs losses have been much greater than they would
have been if the mortgage loans had the credit quality represented in the Registration Statements. 132. HSBCs misstatements and omissions in the Registration Statements regarding
the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchase of the GSE Certificates. Based upon sales of the Certificates or similar certificates in the secondary market, HSBC proximately caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial.
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FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants HSBC Securities, HSI Asset, Neal Leonard, Gerard Mattia, Todd White, and Jon Voigtman) 133. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 134. This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act of
1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against Defendant HSBC Securities with respect to each of the Registration Statements. This claim is brought against (i) Defendant HSI Asset and (ii) Defendants Neal Leonard, Gerard Mattia, Todd White, and Jon Voigtman (the foregoing Individual Defendants collectively referred to as the Section 11 Individual Defendants), each with respect to the Registration Statements filed by HSI Asset that registered securities that were bona fide offered to the public on or after September 6, 2005. 135. This claim is predicated upon the strict liability of Defendant HSBC Securities for
making false and materially misleading statements in the Registration Statements for the Securitizations and for omitting facts necessary to make the facts stated therein not misleading. Defendant HSI Asset and the Section 11 Individual Defendants are strictly liable for making false and materially misleading statements in the Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to 12 of the 17 Securitizations (as specified in Tables 1 and 2 above), and for omitting facts necessary to make the facts stated therein not misleading.
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136.
Defendant HSBC Securities served as underwriter of each of the Securitizations,
and as such, is liable for the misstatements and omissions in the Registration Statements under Section 11 of the Securities Act. 137. Defendant HSI Asset is the registrant for the Securitizations and filed the Shelf
Registration Statements. As depositor, Defendant HSI is the issuer of the GSE Certificates issued pursuant to the Registration Statements it filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, HSI Asset is liable under Section 11 of the Securities Act for the misstatements and omissions in those Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 138. The Section 11 Individual Defendants were officers and/or directors of Defendant
HSI Asset at the time the Registration Statements were filed in connection with the Securitizations. In addition, they signed the Registration Statements and either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the Section 11 Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in those Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 139. At the time that they became effective, each of the Registration Statements
contained material misstatements of fact and omitted information necessary to make the facts stated therein not misleading, as set forth above. The facts misstated or omitted were material to a reasonable investor reviewing the Registration Statements.
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140.
The untrue statements of material facts and omissions of material fact in the
Registration Statements are set forth above in Section IV and pertain to compliance with underwriting guidelines, occupancy status and loan-to-value ratios. 141. Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE
Certificates pursuant to the false and misleading Registration Statements. Fannie Mae and Freddie Mac made these purchases in the primary market. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know of the facts concerning the false and misleading statements and omissions alleged herein, and if the GSEs would have known those facts, they would not have purchased the GSE Certificates. 142. HSBC Securities owed to Fannie Mae, Freddie Mac, and other investors a duty to
make a reasonable and diligent investigation of the statements contained in the Registration Statements at the time they became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Section 11 Individual Defendants owed the same duty with respect to the Registration Statements that they signed that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to 12 of the Securitizations. 143. HSBC Securities and the Section 11 Individual Defendants did not exercise such
due diligence and failed to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. In addition, HSI Asset, though subject to strict liability without regard to whether it
54
performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations. 144. Fannie Mae and Freddie Mac sustained substantial damages as a result of the
misstatements and omissions in the Registration Statements. 145. 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). 146. By reason of the conduct herein alleged, HSBC Securities, HSI Asset, and the
Section 11 Individual Defendants are jointly and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against HSI Asset and HSBC Securities) 147. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 148. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities
Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements in the Securitizations listed in paragraph 2. 149. This claim is predicated upon HSBC Securities and HSI Assets 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. 150. HSBC Securities and HSI Asset are prominently identified in the Prospectuses,
the primary documents that they used to sell the GSE Certificates. HSBC Securities and HSI
55
Asset 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. 151. HSBC Securities and HSI Asset offered and sold the GSE Certificates to Fannie
Mae and Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. HSBC Securities and HSI Asset reviewed and participated in drafting the Prospectuses. 152. HSBC Securities and HSI Asset successfully solicited Fannie Maes and Freddie
Macs purchases of the GSE Certificates. As underwriter, HSBC Securities also obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 153. HSBC Securities and HSI Asset offered the GSE Certificates for sale, sold them,
and distributed them by the use of means or instruments of transportation and communication in interstate commerce. 154. Each of HSBC Securities and HSI Asset actively 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. 155. Each of the Prospectuses contained material misstatements of fact and omitted
information necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses.
56
156.
The untrue statements of material facts and omissions of material fact in the
Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios. 157. HSBC Securities and HSI Asset offered and sold the GSE Certificates offered
pursuant to the Registration Statements directly to Fannie Mae and Freddie Mac, pursuant to the false and misleading Prospectuses. 158. HSBC Securities and HSI Asset owed to Fannie Mae and Freddie Mac, as well as
to other investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. 159. HSBC Securities and HSI Asset failed to exercise such reasonable care. These
defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 160. In contrast, Fannie Mae and Freddie Mac did not know of the untruths and
omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If the GSEs would have known of those untruths and omissions, they would not have purchased the GSE Certificates. 161. Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market
pursuant to the Prospectuses.
57
162.
Fannie Mae and Freddie Mac sustained substantial damages in connection with
their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 163. 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). THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the Individual Defendants) 164. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 165. This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.
77o (Section 15), against HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the Individual Defendants for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of action set forth above. 166. The Individual Defendants at all relevant times participated in the operation and
management of HSI Asset, and conducted and participated, directly and indirectly, in the conduct of HSI Assets business affairs. Defendant Neal Leonard was Chairman, Principal Executive Officer, and a Director of HSI Asset. Defendant Gerard Mattia was Treasurer, Principal Financial Officer, Principal Accounting Officer, and a Director of HSI Asset. Defendant Todd White was a Director of HSI Asset. Defendant Norman Chaleff was a Director of HSI Asset. Defendant Jon Voigtman was a Managing Director at both HSBC Securities and HSI Asset. 167. Defendant HSBC Bank was the sponsor for all of the Securitizations and culpably
participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the 58
offering of the GSE Certificates by initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting HSI Asset as the special purpose vehicle, and selecting HSBC Securities as underwriter for the Securitizations. In its role as sponsor, HSBC Bank knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 168. Defendant HSBC Bank also acted as the seller of the mortgage loans for the
Securitizations in that it conveyed such mortgage loans to Defendant HSI Asset pursuant to a Mortgage Loan Purchase Agreement. 169. Defendant HSBC Bank also controlled all aspects of the business of HSI Asset, as
HSI Asset was merely a special purpose entity created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, the officers and directors of HSBC Bank overlapped with the officers and directors of HSI Asset. In addition, because of its position as sponsor, HSBC Bank was able to, and did in fact, control the contents of the Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 170. Defendant HSBC USA controlled the business operations of HSBC Bank, and
Defendant HSBC Markets controlled the business operations of HSI Asset and HSBC Securities. As the corporate parents of HSBC Bank, HSI Asset, and HSBC Securities, HSBC USA and HSBC Markets had the practical ability to direct and control the actions of HSBC Bank, HSI Asset, and HSBC Securities in issuing and selling the Certificates, and in fact exercised such
59
direction and control over the activities of these Defendants in connection with the issuance and sale of the Certificates. 171. HSBC USA and HSBC Markets expanded their share of the residential mortgage-
backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 172. HSBC USA and HSBC Markets culpably participated in the violations of
Section 11 and 12(a)(2) set forth above. They oversaw the actions of their subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as HSI Asset and the issuing trusts to serve as conduits for the mortgage loans. 173. Defendant HSBC North America wholly owns HSBC USA and HSBC Markets
and is the ultimate US-based parent of HSBC Bank, HSI Asset, and HSBC Securities. HSBC North America culpably participated in the violations of Sections 11 and 12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as HSI Asset and the issuing trusts to serve as conduits for the mortgage loans. 174. HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the
Individual Defendants are controlling persons within the meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of HSBC Securities and HSI Asset at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements.
60
175.
Fannie Mae and Freddie Mac purchased in the primary market Certificates issued
pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 176. Fannie Mae and Freddie Mac did not know of the misstatements and omissions in
the Registration Statements; had the GSEs known of those misstatements and omissions, they would not have purchased the GSE Certificates. 177. Fannie Mae and Freddie Mac have sustained damages as a result of the
misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 178. 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 13.1-552(A)(ii) of the Virginia Code (Against HSI Asset and HSBC Securities) 179. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 180. This claim is brought by Plaintiff pursuant to Section 13.1-552(A)(ii) of the
Virginia Code and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006.
61
181.
This claim is predicated upon HSBC Securities and HSI Assets negligence for
making false and materially misleading statements in the Prospectuses for the Securitizations listed in paragraph 2. 182. HSBC Securities and HSI Asset are prominently identified in the Prospectuses,
the primary documents that they used to sell the GSE Certificates. HSBC Securities and HSI Asset offered the Certificates publicly, including selling to Freddie Mac the GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 183. HSBC Securities and HSI Asset 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. HSBC Securities and HSI Asset reviewed and participated in drafting the Prospectuses. 184. HSBC Securities and HSI Asset successfully solicited Freddie Macs purchases of
the GSE Certificates. As underwriter, HSBC Securities also obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 185. HSBC Securities offered the GSE Certificates for sale, sold them, and distributed
them to Freddie Mac in the State of Virginia. 186. Each of HSBC Securities and HSI Asset actively participated in the solicitation of
Freddie Macs 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.
62
187.
Each of the Prospectuses contained material misstatements of fact and omitted
information necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses. 188. The untrue statements of material facts and omissions of material fact in the
pursuant to the Registration Statements directly to Freddie Mac, pursuant to the false and misleading Prospectuses. 190. HSBC Securities and HSI Asset owed to Freddie Mac, as well as to other
investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. 191. HSBC Securities and HSI Asset failed to exercise such reasonable care. These
Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 192. In contrast, Freddie Mac did not know of the untruths and omissions contained in
the Prospectuses at the time it purchased the GSE Certificates. If Freddie Mac would have known of those untruths and omissions, it would not have purchased the GSE Certificates.
63
193.
Freddie Mac sustained substantial damages in connection with its investments in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 194. 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). FIFTH CAUSE OF ACTION Violation of Section 13.1-552(C) of the Virginia Code (Against HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the Individual Defendants) 195. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 196. This claim is brought under Section 13.1-552(C) of the Virginia Code and is
asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. This claim is brought against HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action set forth above. 197. The Individual Defendants at all relevant times participated in the operation and
management of HSI Asset, and conducted and participated, directly and indirectly, in the conduct of HSI Assets business affairs. Defendant Neal Leonard was Chairman, Principal Executive Officer, and a Director of HSI Asset. Defendant Gerard Mattia was Treasurer, Principal Financial Officer, Principal Accounting Officer, and a Director of HSI Asset. Defendant Todd White was a Director of HSI Asset. Defendant Norman Chaleff was a Director of HSI Asset. Defendant Jon Voigtman was a Managing Director at both HSBC Securities and HSI Asset. 64
198.
Defendant HSBC Bank was the sponsor for all of the Securitizations and culpably
participated in the violation of Section 13.1-552(A)(ii) of the Virginia Code set forth above with respect to the offering of the GSE Certificates by initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting HSI Asset as the special purpose vehicle, and selecting HSBC Securities as underwriter for the Securitizations. In its role as sponsor, HSBC Bank knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 199. Defendant HSBC Bank also acted as the seller of the mortgage loans for the
Defendant HSBC Markets controlled the business operations of HSI Asset and HSBC Securities. As the corporate parents of HSBC Bank, HSI Asset, and HSBC Securities, HSBC USA and
65
HSBC Markets had the practical ability to direct and control the actions of HSBC Bank, HSI Asset, and HSBC Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of these Defendants in connection with the issuance and sale of the Certificates. 202. HSBC USA and HSBC Markets expanded their share of the residential mortgage-
backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 203. HSBC USA and HSBC Markets culpably participated in the violation of Section
13.1-552(A)(ii) of the Virginia Code set forth above. They oversaw the actions of their subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as HSI Asset and the issuing trusts to serve as conduits for the mortgage loans. 204. Defendant HSBC North America wholly owns HSBC USA and HSBC Markets
and is the ultimate US-based parent of HSBC Bank, HSI Asset, and HSBC Securities. HSBC North America culpably participated in the violation of Section 13.1-552(A)(ii) of the Virginia Code set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established specialpurpose financial entities such as HSI Asset and the issuing trusts to serve as conduits for the mortgage loans. 205. HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the
Individual Defendants are controlling persons within the meaning of Section 13.1-522(C) of the Virginia Code by virtue of their actual power over, control of, ownership of, and/or directorship
66
of HSBC Securities and HSI Asset at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 206. Freddie Mac purchased Certificates issued pursuant to the Registration
Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 207. Freddie Mac did not know of the misstatements and omissions in the Registration
Statements; had Freddie Mac known of those misstatements and omissions, it would not have purchased the GSE Certificates. 208. Freddie Mac has sustained damages as a result of the misstatements and
omissions in the Registration Statements, for which it is entitled to compensation. 209. 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). SIXTH CAUSE OF ACTION Violation of Section 31.5606.05(a)(1)(B) of the District of Columbia Code (Against HSI Asset and HSBC Securities) 210. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 211. This claim is brought by Plaintiff pursuant to Section 31-5606.05(a)(1)(B) of the
District of Columbia Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above that were purchased by Fannie Mae.
67
212.
This claim is predicated upon HSBC Securities and HSI Assets negligence for
making false and materially misleading statements in the Prospectuses for the Securitizations listed in paragraph 2. 213. HSBC Securities and HSI Asset are prominently identified in the Prospectuses,
the primary documents that they used to sell the GSE Certificates. HSBC Securities and HSI Asset 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. 214. HSBC Securities and HSI Asset 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. HSBC Securities and HSI Asset reviewed and participated in drafting the Prospectuses. 215. HSBC Securities and HSI Asset successfully solicited Fannie Maes purchases of
the GSE Certificates. As underwriter, HSBC Securities also obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 216. HSBC Securities offered the GSE Certificates for sale, sold them, and distributed
them to Fannie Mae in the District of Columbia. 217. Each of HSBC Securities and HSI Asset actively participated in the solicitation of
Fannie Maes 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.
68
218.
Each of the Prospectuses contained material misstatements of fact and omitted
information necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses. 219. The untrue statements of material facts and omissions of material fact in the
pursuant to the Registration Statements directly to Fannie Mae, pursuant to the false and misleading Prospectuses. 221. HSBC Securities and HSI Asset owed to Fannie Mae, as well as to other investors
in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. 222. HSBC Securities and HSI Asset failed to exercise such reasonable care. These
Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 223. In contrast, Fannie Mae did not know of the untruths and omissions contained in
the Prospectuses at the time it purchased the GSE Certificates. If Fannie Mae would have known of those untruths and omissions, it would not have purchased the GSE Certificates.
69
224.
Fannie Mae sustained substantial damages in connection with its investments in
the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 225. 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 HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the Individual Defendants) 226. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 227. This claim is brought under Section 31-5606.05(c) of the District of Columbia
Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above that were purchased by Fannie Mae. This claim is brought against HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the Individual Defendants for controlling-person liability with regard to the Sixth Cause of Action set forth above. 228. The Individual Defendants at all relevant times participated in the operation and
management of HSI Asset, and conducted and participated, directly and indirectly, in the conduct of HSI Assets business affairs. Defendant Neal Leonard was Chairman, Principal Executive Officer, and a Director of HSI Asset. Defendant Gerard Mattia was Treasurer, Principal Financial Officer, Principal Accounting Officer, and a Director of HSI Asset. Defendant Todd White was a Director of HSI Asset. Defendant Norman Chaleff was a Director of HSI Asset. Defendant Jon Voigtman was a Managing Director at both HSBC Securities and HSI Asset. 70
229.
Defendant HSBC Bank was the sponsor for all of the Securitizations and culpably
participated in the violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code set forth above with respect to the offering of the GSE Certificates by initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting HSI Asset as the special purpose vehicle, and selecting HSBC Securities as underwriter for the Securitizations. In its role as sponsor, HSBC Bank knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 230. Defendant HSBC Bank also acted as the seller of the mortgage loans for the
Defendant HSBC Markets controlled the business operations of HSI Asset and HSBC Securities. As the corporate parents of HSBC Bank, HSI Asset, and HSBC Securities, HSBC USA and
71
HSBC Markets had the practical ability to direct and control the actions of HSBC Bank, HSI Asset, and HSBC Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of these Defendants in connection with the issuance and sale of the Certificates. 233. HSBC USA and HSBC Markets expanded their share of the residential mortgage-
backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 234. HSBC USA and HSBC Markets culpably participated in the violation of Section
31-5606.05(a)(1)(B) of the District of Columbia Code set forth above. They oversaw the actions of their subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as HSI Asset and the issuing trusts to serve as conduits for the mortgage loans. 235. Defendant HSBC North America wholly owns HSBC USA and HSBC Markets
and is the ultimate US-based parent of HSBC Bank, HSI Asset, and HSBC Securities. HSBC North America culpably participated in the violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as HSI Asset and the issuing trusts to serve as conduits for the mortgage loans. 236. HSBC North America, HSBC USA, HSBC Markets, HSBC Bank, and the
Individual Defendants are controlling persons within the meaning of Section 31-5606.05(c) of the District of Columbia Code by virtue of their actual power over, control of, ownership of,
72
and/or directorship of HSBC Securities and HSI Asset at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 237. Fannie Mae purchased Certificates issued pursuant to the Registration Statements,
including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 238. Fannie Mae did not know of the misstatements and omissions in the Registration
Statements; had Fannie Mae known of those misstatements and omissions, it would not have purchased the GSE Certificates. 239. Fannie Mae has sustained damages as a result of the misstatements and omissions
in the Registration Statements, for which it is entitled to compensation. 240. 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). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against HSI Asset and HSBC Securities) 241. Plaintiff realleges each allegation above as if fully set forth herein, except to the
extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 242. This is a claim for common law negligent misrepresentation against Defendants
HSI Asset and HSBC Securities. 243. Between December 20, 2005 and July 3, 2007, HSI Asset and HSBC Securities
sold the GSE Certificates to the GSEs as described above. Because HSI Asset owned and then
73
conveyed the underlying mortgage loans that collateralized the Securitizations for which it served as depositor, HSI Asset had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through its possession of the loan files and other documentation. 244. Likewise, as underwriter for all of the Securitizations, HSBC Securities was
obligated toand had the opportunity toperform sufficient due diligence to ensure that the Registration Statements, including without limitation the corresponding Prospectus Supplements, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as underwriterwhich gave it access to loan file information and obligated it to perform adequate due diligence to ensure the accuracy of the Registration StatementsHSBC Securities had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 245. HSBC Securities also had unique, exclusive, and special knowledge of the work
of third-party due diligence providers, such as Clayton, who identified significant failures of originators to adhere to the underwriting standards represented in the Registration Statements. The GSEs, like other investors, had no access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on HSBC Securities knowledge and its express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans. 246. HSI Asset and HSBC Securities were aware that the GSEs reasonably relied on
HSI Assets and HSBC Securities reputations and unique, exclusive, and special expertise and
74
experience, as well as their express representations made prior to the closing of the Securitizations, and that the GSEs depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. 247. Based upon their unique, exclusive, and special knowledge and expertise about
the loans held by the trusts in the Securitizations, HSI Asset and HSBC Securities had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. HSI Asset and HSBC Securities negligently breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. 248. In addition, having made actual representations about the underlying collateral in
the Securitizations and the facts bearing on the riskiness of the Certificates, HSI Asset and HSBC Securities had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon HSI Assets and HSBC Securities 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.
75
249.
Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the
representations by HSBC as the sponsor, depositor, and lead and selling underwriter in all 17 of the Securitizations. HSBC provided term sheets to the GSEs that contained critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner occupancy statistics. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 250. The GSEs relied upon the accuracy of the data transmitted to them and
subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by HSBC 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. 251. HSBC, as sponsor, depositor, and lead and selling underwriter in all 17 of the
Securitizations, provided detailed information about the underlying collateral and structure of each Securitization it sponsored to the credit rating agencies. The credit rating agencies based their ratings on the information provided to them by HSBC, 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 HSBCs representations in the term sheets and Prospectus Supplements.
76
252.
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 GSEs purchase of the GSE Certificates in that the GSEs decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards. 253. In purchasing the GSE Certificates, the GSEs justifiably relied on HSBCs false
representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. 254. But for the above misrepresentations and omissions, the GSEs would not have
purchased or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decision to acquire the GSE Certificates, as described above. 255. The GSEs were damaged in an amount to be determined at trial as a direct,
proximate, and foreseeable result of HSI Assets and HSBC Securities misrepresentations, including any half truths. 256. 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: 257. An award in favor of Plaintiff against all Defendants, jointly and severally, for all
damages sustained as a result of Defendants wrongdoing, in an amount to be proven at trial, but including: 77
a.
Rescission and recovery of the consideration paid for the GSE
Certificates, with interest thereon; b. Each GSEs monetary losses, including any diminution in value of the
GSE Certificates, as well as lost principal and lost interest payments thereon; c. d. e. Attorneys fees and costs; Prejudgment interest at the maximum legal rate; and Such other and further relief as the Court may deem just and proper.
78

FHFA Vs Citi Group

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FHFA Vs Citi Group

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

___ CIV. ___ (___)

TABLE OF CONTENTS Page

Defendants Failure To Conduct Proper Due Diligence ........................................25

THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS ..........30

The Registration Statements contained statements about the characteristics and

Defendant CitiGroup Global Markets, Inc., formerly known as Salomon Smith

The remaining securitization was sponsored by non-party Ameriquest Mortgage Company.

Principal Amount Issued per Tranche ($)

Supporting Loan Groups

A1 IA3A IA2 A1 A1 IA1 1A2A A1 A1 A2A

Date Registration Statement Filed

Date(s) Amended Registration Statement Filed

Signatories of Registration Statements

2/28/2006; 3/30/2006; 4/5/2006

SEC File No.

Date Registration Statement Filed

Date(s) Amended Registration Statement Filed

Signatories of Registration Statements

Argent Securities Inc.

The Prospectus Supplement for each Securitization describes the underwriting

Date Prospectus Supplement Filed

Date of Filing Form 8-K Attaching PSA Filed

Filing No. of Related Registration Statement

Defendant CGMLT is engaged in the securitization of mortgage loans as a

Defendant CGMI, formerly known as Salomon Smith Barney, was founded in

Defendant Scott Freidenrich was a Treasurer (Principal Financial Officer) of

Supporting Loan Group

Primary or Owner Occupied

Supporting Loan Group

Primary or Owner Occupied

Percentage of Properties Reported as Owner-Occupied With Strong Indication of NonOwner Occupancy11

Actual Percentage of Non-OwnerOccupied Properties

Prospectus Understatement of Non-Owner Occupied Properties

ARSI 2005-W2 CMLTI 2005-10

Group I Group I-3

Supporting Loan Group

Reported Percentage of Non-Owner Occupied Properties

Percentage of Properties Reported as Owner-Occupied With Strong Indication of NonOwner Occupancy11

Actual Percentage of Non-OwnerOccupied Properties

Prospectus Understatement of Non-Owner Occupied Properties

Loan-To-Value Data Was Materially False

PROSPECTUS Percentage of Loans Reported to Have LTV Ratio Over 100%

CMLTI 2006-WF1 CMLTI 2006-WF2 CMLTI 2007-AR7

Group I Group I Group 2

46.05% 43.46% 88.12%

36.35% 36.40% 49.76%

17.24% 14.60% 16.71%

As Table 7 demonstrates, the Prospectus Supplements for the Securitizations

Countrywide was similarly derelict in its underwriting obligations. Countrywide

Likewise, American Home failed to follow its origination guidelines. American

American Home is involved in several criminal probes and investigations, and

Argent also failed to follow its underwriting guidelines. Argent originated

Rating at Issuance (Moodys/S&P/Fitch)

Rating at July 31, 2011 (Moodys/S&P/Fitch)

Supporting Loan Group

Initial Unpaid Principal Balance ($)

Purchase Price (% of Par)

Seller to Freddie Mac

ARSI 2005-W2 CMLTI 2005HE3 CMLTI 2005HE4 CMLTI 2007AR7

040104NW7 17307GXJ2 17307GQ84 17312YAB8

Table 11 reflects Fannie Maes purchases of the Certificates:

Initial Unpaid Principal Balance ($)

_ CIV. _ (___)

_ CIV. _ (___)