Ally Financial Inc.

143 Pages·2012·1 MB·English

Case 1:11-cv-07010-DLC Document 114 Filed 06/12/12 Page 1 of 143
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TABLE OFCONTENTS
Page
NATUREOF ACTION..................................................................................................................1
PARTIES........................................................................................................................................5
PlaintiffandFreddieMac...................................................................................................5
Defendants..........................................................................................................................6
AllyDefendants......................................................................................................6
Non-AllyDefendants..............................................................................................7
Non-PartyAllyDebtors........................................................................................10
Non-PartyOriginators.......................................................................................................11
JURISDICTIONANDVENUE...................................................................................................11
FACTUALALLEGATIONS.......................................................................................................12
I. FACTUALALLEGATIONS APPLICABLETO ALLCLAIMS...................................12
A. TheSecuritizations................................................................................................13
1. Residential Mortgage-BackedSecuritizations Generally.........................13
2. Securitizations at Issueinthis Case..........................................................14
3. SecuritizationProcess...............................................................................17
a. TheSponsors Grouped Mortgage Loans in
Special-PurposeTrusts..................................................................17
b. TheTrusts IssuedSecurities Backedbythe Loans.......................18
B. Defendants’andthe AllyDebtors’Participationin the
SecuritizationProcess...........................................................................................21
1. TheAllySponsor: RFC...........................................................................22
2. TheAllyDepositors: RALI,RASC andRAMP......................................24
3. TheAllyUnderwriter: Defendant AllySecurities...................................25
4. TheAllyControl Persons: Defendants AllyFinancial andGMACM.....25
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5. Non-AllyDefendants................................................................................31
C. Statements intheRegistrationStatements............................................................31
1. CompliancewithUnderwritingGuidelines..............................................32
2. OccupancyStatus ofBorrower.................................................................36
3. Loan-to-ValueRatios................................................................................38
4. Credit Ratings...........................................................................................41
D. FalsityofStatements intheRegistrationStatements............................................43
1. TheStatistical DataProvidedintheProspectus Supplements
ConcerningOwner-Occupancyand Loan-to-Value Ratios
WereMateriallyFalseor Misleading.......................................................43
a. Owner-OccupancyData Was MateriallyFalseor Misleading.....43
b. Loan-to-ValueDataWas MateriallyFalse...................................46
2. TheOriginators ofthe UnderlyingMortgage Loans Systematically
DisregardedTheir UnderwritingGuidelines............................................50
a. AForensicReviewof LoanFiles Has RevealedPervasive
FailuretoAdheretoUnderwritingGuidelines.............................50
i. Stated IncomeWas Not Reasonable.................................53
ii. Evidenceof OccupancyMisrepresentations.....................57
iii. Debts IncorrectlyCalculated; DTIExceeded
Guidelines.........................................................................59
iv. Credit Inquiries That IndicatedMisrepresentations
ofDebts.............................................................................61
b. BothGovernment andPrivate Investigations Confirm
that theOriginators ofthe Loans intheSecuritizations
SystematicallyFailedto AdheretoTheirUnderwriting
Guidelines.....................................................................................64
i. NewCenturyViolated Its UnderwritingGuidelines........65
ii. HFNViolated Its UnderwritingGuidelines......................69
iii. MLNViolated Its UnderwritingGuidelines.....................71
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iv. Ownit Violated Its UnderwritingGuidelines....................72
v. EquiFirst Violated Its UnderwritingGuidelines...............72
vi. InflatedAppraisals............................................................73
c. TheCollapseoftheCertificates’Credit Ratings Further
Shows that theMortgage Loans Werenot Originatedin
AdherencetotheStated UnderwritingGuidelines.......................74
d. TheSurgeinMortgage Delinquencyand Default Further
Demonstrates that theMortgage Loans WereNot Originated
inAdherencetotheStatedUnderwritingGuidelines...................76
E. FreddieMac’s Purchases oftheCertificates.........................................................78
F. FreddieMacWas DamagedbyDefendants’Violations ofSections 11,12
and15oftheSecurities Act..................................................................................79
II. ADDITIONALFACTUALALLEGATIONS.................................................................80
A. TheFraudDefendants Were IncentivizedtoFund RiskyResidential Mortgage
Loans andtoSecuritizeandSell Them to Investors.............................................81
B. TheFraudDefendants’ Material Misrepresentations andOmissions inthe
OfferingMaterials.................................................................................................83
C. TheFraudDefendants, AllySponsor,andAllyDepositors Knewor
WereReckless innot Knowingthat TheirRepresentations Were
Falseand Misleading............................................................................................88
1. TheFraudDefendants IgnoredDue DiligenceResults............................89
2. Warehouse Lendingand Vertical IntegrationGave TheFraud
Defendants InsideKnowledgeofUnderwritingDefects..........................97
3. OtherEvidenceDemonstratingthat TheFraudDefendants Knew
OrWereReckless InNot KnowingThat TheirRepresentations Were
False........................................................................................................101
D. FreddieMacJustifiablyReliedontheMisrepresentations andOmissions
intheOfferingMaterials andWas DamagedbytheFraudDefendants’ Fraudulent
Conduct...............................................................................................................116
FIRSTCAUSEOFACTION.....................................................................................................120
SECONDCAUSEOFACTION................................................................................................122
THIRDCAUSEOFACTION....................................................................................................124
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FOURTHCAUSEOFACTION................................................................................................127
FIFTHCAUSEOFACTION.....................................................................................................130
SIXTHCAUSEOFACTION....................................................................................................133
SEVENTHCAUSEOF ACTION..............................................................................................135
PRAYER FOR RELIEF.............................................................................................................137
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PlaintiffFederal HousingFinanceAgency(“Plaintiff”or“FHFA”),as Conservatorofthe
Federal Home LoanMortgageCorporation(“FreddieMac”),byits attorneys Kasowitz,Benson,
Torres &Friedman LLP, forits Complaint against thedefendants namedherein(“Defendants”),
alleges as follows:
NATURE OFACTION
1. This actionarises from falseandmisleadingstatements andomissions in
registrationstatements, prospectuses, andotherofferingmaterials, pursuant towhichcertain
residential mortgage-backedsecurities (“RMBS”) werepurchasedbyFreddieMac. Among
otherthings, thesedocuments falselyrepresented that themortgageloans underlyingtheRMBS
compliedwithcertainunderwritingguidelines and standards, andpresented afalsepictureofthe
characteristics and riskiness ofthoseloans. These representations werematerial toFreddieMac,
as theywouldhavebeen toanyreasonableinvestor,andtheirfalsityviolates Sections 11,
12(a)(2),and15oftheSecurities Act of1933,15 U.S.C.§77aet seq.,as well as Sections 13.1-
522(A)(ii)and13.1-522(C)oftheVirginiaCode(the“VirginiaSecurities Act”). FreddieMac
justifiablyreliedonDefendants’misrepresentations andomissions ofmaterial fact toits
detriment. Inadditiontoits strict statutoryliabilityunderfederal securities lawandliability
understatelaw, Defendants’statements andomissions giverisetoliabilityunderstatecommon
law.
2. BetweenSeptember23, 2005andMay30,2007, FreddieMacpurchasedover$6
billioninCertificates issuedinconnectionwith21securitizations that werevirtuallyall
underwrittenbyDefendants.1
1 Forpurposes ofthis AmendedComplaint,thesecurities issuedundertheRegistration
Statements (definedinnote2andparagraph3, infra)are referredtoas “Certificates.” Holders of
Certificates arereferredtoas “Certificateholders.”
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3. TheCertificates wereofferedforsalepursuant tooneofsix shelfregistration
statements (the“ShelfRegistrationStatements”) filedwiththeSecurities andExchange
Commission(the“SEC”). Foreachofthe21securitizations soldtoFreddieMac(the
“Securitizations”),aprospectus (“Prospectus”) andprospectus supplement (“Prospectus
Supplement,”togetherwiththeShelfRegistration Statements andProspectus Supplements, the
“RegistrationStatements”)werefiledwiththeSEC as part oftheRegistrationStatement forthat
Securitization.2 TheCertificates weremarketed andsoldtoFreddieMacpursuant tothe
RegistrationStatements andotherofferingmaterials (“OfferingMaterials”).
4. TheOfferingMaterials containedrepresentations concerning, amongother things,
thecharacteristics andcredit qualityofthemortgageloans underlyingtheSecuritizations, the
creditworthiness oftheborrowers onthoseunderlyingmortgageloans, and theoriginationand
underwritingpractices usedtomakeand approvetheloans. Suchrepresentations werematerial
toareasonableinvestor’s decisiontoinvest intheCertificates, andtheywerematerial toFreddie
Mac. Unbeknownst toFreddieMac,thoserepresentations weremateriallyfalsebecause, among
otherreasons,manyoftheunderlyingmortgageloans werenot originatedinaccordancewiththe
representedunderwritingstandards andoriginationpractices, anddidnot havethecredit quality
andothercharacteristics set forthintheOfferingMaterials.
5. Amongotherthings, the OfferingMaterials presentedtheloanorigination
guidelines ofthemortgageloanoriginators whooriginatedtheloans that underliethe
Certificates. The OfferingMaterials falselyrepresentedthat those guidelines wereadheredto
2 Theterm “RegistrationStatement”as usedherein, andinAppendix Aattachedhereto,
incorporates theShelfRegistrationStatement,the Prospectus, andtheProspectus Supplement for
eachreferencedSecuritization,except whereotherwiseindicated.
2
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except inspecifiedcircumstances, wheninfact theguidelines systematicallyweredisregardedin
that theloans werenot originatedinaccordancewiththoseguidelines.
6. Aninitial forensicreviewofloanoriginationfiles has revealedthat thevast
majorityofloans revieweddidnot adheretotheoriginator’s underwritingguidelines as
representedintheOfferingMaterials. Amaterial discrepancyfrom underwritingguidelines is
veryserious, andmeans that theloanshouldnever havebeenincludedintheSecuritizations. For
example,theloanapplicationmay: (i)lackkeydocumentationnecessaryto properlyunderwrite
theloan; (ii)includeaninvalid,incomplete,orunsupportedappraisal; (iii)evidencethe
underwriter’s failuretoconfirm thereasonableness oftheborrower’s stated income; or(iv)
reflect that theborrower’s income,FICOscore,debt,debt-to-incomeratio(“DTI”),orloan-to-
valueratio(“LTV”)areoutsideoftherangepermittedunderthe guidelines. Adherenceto
underwritingguidelines, particularlyonsuchkeycriteriabearingonloan eligibility,is amaterial
considerationtoreasonableinvestors.
7. TheOfferingMaterials also set forthforeachSecuritizationstatistical summaries
ofthecharacteristics oftheunderlyingmortgageloans, suchas thepercentageofloans secured
byowner-occupiedproperties andthepercentageoftheloan group’s aggregateprincipal balance
withloan-to-valueratios withinspecifiedranges. This informationwas material toreasonable
investors, andit was material toFreddieMac. However, aloan-level analysis ofasampleof
loans foreachSecuritization--areviewthat encompassedintheaggregate thousands of
mortgages across all oftheSecuritizations --has revealedthat foreachSecuritizationthese
statistical summaries werefalse andmisleading. Thestatistics reflectedor werebasedupon
misrepresentations ofotherkeycharacteristics ofthemortgageloans andinflatedproperty
values.
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8. Forexample,thepercentageofowner-occupiedproperties intheloanpool
underlyingaRMBS is a material risk factortothe purchasers ofcertificates, suchas Freddie
Mac,because aborrower whoactuallylives ina mortgagedpropertyis generallyless likelyto
stoppayingthemortgage andmorelikelytotakecareoftheproperty. The loan-level review
revealedthat thetruepercentageofowner-occupiedproperties fortheloans supportingthe
Certificates was materiallylowerthanthat representedintheOfferingMaterials. Likewise,the
OfferingMaterials misrepresentedsuchmaterial informationas loan-to-valueratios --that is, the
relationshipbetweenthe principal amount oftheloans andthetruevalueofthemortgaged
properties securingthose loans --andthe abilityoftheindividual mortgage holders tosatisfy
theirdebts.
9. TheOfferingMaterials also set forthratings foreachoftheSecuritizations.
ThoseAAAratings were material toareasonable investor’s decisiontopurchasetheCertificates,
andtheywerematerial toFreddieMac. Theratings fortheSecuritizations werebaseduponfalse
informationsuppliedbyDefendants andweremateriallymisleadingwithrespect tothecredit
qualityoftheCertificates. Uponinformationand belief,neitherthe Defendants northerating
agencies that issuedthe ratings believedorhad anysound basis tobelieveintheirtruthfulness.
10. Defendants, whoareunderwriters and/orcontrolledtheissuers andsponsors of
theCertificates purchasedbyFreddieMac areliableforthemisstatements andomissions of
material fact containedin theRegistrationStatements andotherOfferingMaterials becausethey
prepared,filed,and/orusedthesedocuments tomarket andsell theCertificates toFreddieMac,
orbecausetheydirected andcontrolledtheentities that didso.3
3 TheCertificates purchasedbyFreddieMac areidentifiedbelowinparagraph46andare
listed infra inTable10.
4
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11. Defendants’misstatements andomissions ofmaterial facts havecausedloss and
injurytoFreddieMac. FreddieMacpurchasedthehighest ratedtranches ofCertificates offered
forsalebyDefendants. FreddieMacwouldnot havepurchasedtheseCertificates but for
Defendants’material misrepresentations andomissions concerningthemortgageloans
underlyingtheRMBS. As thetruthconcerningthemisrepresentedandomittedfacts has cometo
light,andas thehidden risks havematerialized,themarket valueoftheCertificates purchasedby
FreddieMachas declined. FreddieMachas sufferedenormous financial losses as aresult of
Defendants’misrepresentations andomissions. FHFA,as Conservatorfor FreddieMac,now
seeks rescissionanddamages forthoselosses.
PARTIES
Plaintiff and FreddieMac
12. Plaintiff,theFederal HousingFinance Agency,is afederal agencylocated at 400
7thStreet,S.W.inWashington,D.C. FHFA was createdonJuly30,2008, pursuant tothe
HousingandEconomic RecoveryAct of2008,Pub L.No.110-289,122Stat.2654,codifiedat
12U.S.C.§4617 et seq.(“HERA”),tooverseetheFederal National MortgageAssociation
(“FannieMae”), Freddie Macandthe Federal Home LoanBanks. OnSeptember6,2008,the
Directorof FHFA, also pursuant toHERA,placed FreddieMacintoconservatorshipand
appointedFHFAas Conservator. Inthat capacity, FHFAhas the authoritytoexerciseall rights
andremedies ofFreddie Mac,including,but not limitedto,theauthorityto bringsuits onbehalf
ofand/orforthebenefit ofFreddieMac. 12U.S.C.§4617(b)(2).
13. FreddieMacis a government-sponsoredenterprisecharteredbyCongress witha
missiontoprovideliquidity,stabilityand affordabilitytotheUnitedStates housingandmortgage
markets. As part ofthis mission,FreddieMacinvestedinRMBS. Freddie Macis located at
8200Jones BranchDrive inMcLean,Virginia.
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