FILED: NEW YORK COUNTY CLERK 01/19/2012

NYSCEF DOC. NO. 2

INDEX NO. 650180/2012 RECEIVED NYSCEF: 01/19/2012

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK DEXIA SA/NV; DEXIA HOLDINGS, INC.; FSA ASSET MANAGEMENT LLC; DEXIA CRDIT LOCAL SA, Plaintiffs, v. BEAR STEARNS & CO. INC., THE BEAR STEARNS COMPANIES, INC., BEAR STEARNS ASSET BACKED SECURITIES I LLC, EMC MORTGAGE LLC (f/k/a EMC MORTGAGE CORPORATION), STRUCTURED ASSET MORTGAGE INVESTMENTS II INC., J.P. MORGAN ACCEPTANCE CORPORATION I, J.P. MORGAN MORTGAGE ACQUISITION CORPORATION., J.P. MORGAN SECURITIES LLC (f/k/a J.P. MORGAN SECURITIES INC.), WAMU ASSET ACCEPTANCE CORP., WAMU CAPITAL CORP., WASHINGTON MUTUAL MORTGAGE SECURITIES CORP., LONG BEACH SECURITIES CORP., JPMORGAN CHASE & CO., and JPMORGAN CHASE BANK, N.A., Defendants. COMPLAINT

Index No.

JURY TRIAL DEMANDED

TABLE OF CONTENTS

I. II. III.

PRELIMINARY STATEMENT ............................................................................................ 2 JURISDICTION AND VENUE ............................................................................................. 7 THE PARTIES........................................................................................................................ 8 A. B. Plaintiffs ...................................................................................................................... 8 Defendants .................................................................................................................. 9

IV.

BACKGROUND FACTS AND NATURE OF THE FRAUD............................................. 15 A. B. The Securitization Process ........................................................................................ 15 Defendants Unique and Non-Public Knowledge About The Securitized Mortgages ................................................................................................................. 23 1. 2. C. Defendants Control and Unique Knowledge of the Loan Originators ........ 23 Defendants Control and Unique Knowledge of the Loan Pools Backing the RMBS ....................................................................................... 26

Defendants Fraudulently Included Poor Quality Loans in the Securitizations ......... 29 1. 2. 3. Bear Stearns .................................................................................................. 29 Washington Mutual ....................................................................................... 40 JPMorgan ...................................................................................................... 55

D.

Defendants Manipulated the RMBS Credit Ratings ................................................. 63 1. 2. 3. Defendants Knowingly Supplied False Information to the Rating Agencies ........................................................................................................ 63 Defendants Exerted Improper Pressure over the Rating Agencies ............... 65 The RMBS Have All Been Downgraded to Junk ......................................... 68

V.

DEFENDANTS FALSE AND MISLEADING STATEMENTS ....................................... 72 A. False and Misleading Statements Concerning Loan Origination and Underwriting Standards ............................................................................................ 73

B. C.

False and Misleading Statements Concerning Defendants Loan Selection and Due Diligence Practices ..................................................................................... 76 Defendants False and Misleading Statements Regarding the Risk of Default ........ 79 1. 2. Defendants False and Misleading Statements Concerning Borrower Credit Quality................................................................................................ 79 Bear Stearns False and Misleading Statements Concerning Early Payment Defaults .......................................................................................... 81

D. E. VI. VII.

Defendants False and Misleading Statements Concerning the Value of the Mortgage Collateral .................................................................................................. 82 Defendants False and Misleading Statements Concerning the RMBS Credit Ratings ...................................................................................................................... 84

PLAINTIFFS REASONABLY RELIED ON DEFENDANTS REPRESENTATIONS ......................................................................................................... 85 ADDITIONAL ALLEGATIONS DEMONSTRATING SCIENTER ................................. 89 A. B. C. D. Defendants Are Securitization Experts Who Consciously Included Poor Quality Loans in the Securitizations ......................................................................... 90 Numerous Confidential Witnesses Have Independently Confirmed that Defendants Were Deliberately Securitizing Poor Quality Loans ............................. 91 Defendants Profited Enormously from their Fraud .................................................. 93 Bear Stearns Deliberately Purged Its Due Diligence Records .................................. 93

VIII. PLAINTIFFS SUFFERED LOSSES BECAUSE OF DEFENDANTS FRAUDULENT CONDUCT................................................................................................ 94 IX. CAUSES OF ACTION ......................................................................................................... 95

PRAYER FOR RELIEF ................................................................................................................. 118 JURY DEMAND ............................................................................................................................ 118

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Plaintiffs Dexia SA/NV, Dexia Holdings, Inc., FSA Asset Management LLC, and Dexia Crdit Local SA (collectively, Dexia or Plaintiffs) hereby bring this complaint for common law fraud, fraud in the inducement, aiding and abetting fraud, negligent misrepresentation, and successor liability (Complaint) against Bear Stearns & Co. Inc., The Bear Stearns Companies, Inc., Bear Stearns Asset Backed Securities I LLC, EMC Mortgage LLC (f/k/a EMC Mortgage Corporation), Structured Asset Mortgage Investments II Inc., J.P. Morgan Acceptance Corporation I, J.P. Morgan Mortgage Acquisition Corporation, J.P. Morgan Securities LLC (f/k/a J.P. Morgan Securities Inc.), WaMu Asset Acceptance Corp., WaMu Capital Corp., Washington Mutual Mortgage Securities Corp., Long Beach Securities Corp., JPMorgan Chase & Co., and JPMorgan Chase Bank, N.A. (collectively, Defendants).1 The allegations herein are made on personal knowledge as to Plaintiffs own acts and on information and belief as to all other matters, such information and belief having been informed through the investigation conducted by, and under the supervision of, Plaintiffs counsel, Bernstein Litowitz Berger & Grossmann LLP (Counsel), the materials referenced in this Complaint, and Counsels interviews and consultations with numerous former employees of Defendants and other percipient witnesses. Many of the facts related to Plaintiffs allegations are known only by Defendants or are exclusively within their custody or control. Formal discovery, including document discovery and depositions of relevant witnesses, is expected to provide additional evidentiary support for the allegations herein. By and through Counsel, Plaintiffs allege as follows: I. PRELIMINARY STATEMENT 1. This case concerns an egregious fraud perpetrated by Bear Stearns, JPMorgan and For over three years, Defendants created, issued and sold residential

Washington Mutual.

Throughout the complaint, emphasis in quotations has been added, unless otherwise indicated. 2

mortgage-backed securities (RMBS) collateralized by loans that they knew to be exceptionally badmany of which were originated by Defendants themselveswhile giving the false impression and making false statements asserting that their RMBS were prudent investments. Bear Stearns quickly securitized defectively originated loans before they suffered from early payment defaults (a clear indication of mortgage fraud) to transfer default risks to investors, purposefully undermined the due diligence process to increase volume at the expense of mortgage quality, and allowed into its securitizations 50% of the mortgages that its own due diligence vendor had marked as fatally defective. JPMorgan similarly waived in 51% of the mortgages that its due diligence vendor had marked as fatally defective and securitized poor quality JPMorgan Chase mortgages after falsely assuring investors that they were very conservatively underwritten. Washington Mutual knowingly securitized fraudulent mortgages and off-loaded exceptionally poor loans from its balance sheet into securitizations after determining that those mortgages were of exceptionally poor quality and likely to default. Indeed, Washington Mutual also waived in 29% of the mortgage loans that its due diligence provider flagged as failing to comply with the originators underwriting guidelines and lacking sufficient compensating factors. In sum, Defendants knowingly included mortgages with a high risk of default into the mortgage pools that they securitized, concealed this course of conduct from investors and credit rating agencies, and falsely sold Plaintiffs supposedly conservative RMBS. 2. Plaintiffs purchased over $1.7 billion worth of Defendants RMBS in 53 offerings

between 2005 and 2007 (the Certificates). The Certificates gave Plaintiffs an interest in the mortgage payments from designated pools of residential mortgages supporting the securitization, and an interest in the collateral for those mortgages in case borrowers defaulted on their mortgage payments. Accordingly, the value of the RMBS depended on the quality of the mortgages in the 3

designated pools, including the borrowers ability to make their mortgage payments and the value of the collateral supporting the mortgages. 3. The mortgage industry has developed various metrics for assessing the quality of

mortgages and the related risks of default and loss. Among other things, loan originators, investment banks, credit rating agencies, and RMBS investors typically assess borrower credit scores, loan-to-value ratios, level of early payment defaults (EPDs), and level of mortgage documentation, to assess the risk that borrowers will not make their mortgage payments on time, and the potential losses suffered by the mortgage pool in case of borrower default. The reliability of these metrics depends on the loan origination and underwriting practices that were used to originate the mortgages in the mortgage pool. For example, credit scores assessing the

borrowers credit quality are only reliable if the loan files reflect the true FICO scores. Loan-tovalue ratios assessing the level of borrower equity in the collateral and, thereby, the risk that the mortgage pool suffers a loss in case of default, are only reliable if the mortgage appraisals in the loan files are accurate. For these reasons, strict adherence to loan origination and underwriting standardsincluding verification of the borrowers ability and incentives to make their mortgage payments, and the value of the collateralis essential for determining the quality and riskiness of the mortgage pool. 4. Undisclosed violations of loan origination and underwriting standards have The drastic consequences of undisclosed loan

devastating consequences for investors.

origination and underwriting practices are well-known to investment bank executives, who know that loan originators and investment banks cannot conceal their improper practices without exposing investors to catastrophic losses and the global economy to depredation. The adoption of prudent lending standards and underwriting guidelines are addressed in numerous federal regulations requiring financial institutions to adopt acceptable loan-to-value ratios, and minimum 4

FICO credit scores.2 The investment banks that selected, purchased and securitized billions of dollars in mortgage pools each year were paid millions of dollars to act as gatekeepers by ensuring that the loan originators adhered to their origination and underwriting standards, and by rejecting mortgages that they discovered to be defective. Defendants scheme to do the exact opposite. 5. Defendants are sophisticated financial institutions which collectively securitized This fraud action arises from

approximately $325 billion in mortgages from 2005 to 2007. Throughout this time, Defendants were active in every aspect of the mortgage securitization business, including loan origination and underwriting, creating, sponsoring and issuing RMBS, and underwriting and selling RMBS to investors. For example, from 2005 to 2007, Bear Stearns was one of the largest underwriters of RMBS in the country, and securitized at least $162 billion in loans. During this same time, WaMu similarly securitized at least $103 billion in loans, while JPMorgan securitized at least $62 billion in loans. 6. As the creators and underwriters of the RMBS, Defendants had exclusive access

to information about the quality of the mortgage pools that supported the securities, including the loan files and the results of their own due diligence. By contrast, Plaintiffs and other investors did not have access to the loan files or Defendants due diligence results, and could not perform similar due diligence themselves. Plaintiffs therefore reasonably relied on Defendants

disclosures regarding the quality of the mortgage pools backing the RMBS in Defendants registration statements, term sheets, prospectuses, draft prospectus supplements, prospectus supplements and other materials and communications (the Offering Materials). The Offering Materials contained numerous representations about the quality of mortgages and the related

See, e.g., 12 C.F.R. Part 34, subpart D (Office of the Comptroller of Currency Standards); 12 C.F.R. Part 208, subpart C (Federal Reserve standards); 12 C.F.R. Part 365 (Federal Deposit Insurance Corporation standards); 12 C.F.R. 560.100 and 12 C.F.R. 560.101 (Office of Thrift Supervision standards); and 12 C.F.R. 701.21 (National Credit Union Administration Standards). 5

risks of default and loss, including representations about borrower credit scores, loan-to-value ratios, and level of EPDs. The Offering Materials also contained representations about the credit ratings of the RMBS. Defendants provided the Offering Materials to Plaintiffs to induce the purchase of Defendants RMBS. 7. Defendants representations about the quality of the mortgages in the Offering

Materials were false and misleading. The mortgage pools backing the RMBS were of much poorer quality, and the related risks of default and loss were much higher, than Defendants represented because Defendants purposefully securitized defectively originated mortgages that they knew or recklessly disregarded to be of exceptionally poor quality. 8. Defendants Offering Materials also contained false and misleading

representations about the credit ratings of the RMBS. Unbeknownst to Plaintiffs, Defendants provided the credit rating agencies with the same false information about the quality of the mortgage pools discussed above. Defendants also coerced the credit rating agencies into

providing favorable credit ratings, including by threatening to withhold future business and targeting individual analysts who were not sufficiently attuned to Defendants demands. Gary Witt, former managing director at Moodys Investors Service, Inc. (Moodys) testified before the National Commission on the Causes of the Financial and Economic Crisis in the United States (the Financial Crisis Inquiry Commission or FCIC) that investment banks like Defendants threatened to withdraw their business if they did not get their desired rating, stating: All the time. I mean, thats routine. I mean, they would threaten you all the timeIts like, Well, next time were just going to go with Fitch and S&P. Defendants threats were

successful. Richard Michalek, former senior credit officer at Moodys, stated in his FCIC testimony that The threat of losing business to a competitor, even if not realized, absolutely tilted the balance away from an independent arbiter of risk towards a captive facilitator of risk 6

transfer. Here, Defendants used their power over the rating agencies to improperly transfer mortgage default and loss risks to RMBS investors, including Plaintiffs. 9. Defendants fraudulent strategy resulted in RMBS that were much riskier than

represented to investors, including the 53 securitizations at issue here. Defendants knew this when they sold their RMBS to Plaintiffs. As a former regional Vice-President at JPMorgan explained to The New York Times: The bigwigs of the corporations knew this, but they figured were going to make billions out of it, so who cares? The government is going to bail us out. And the problem loans will be out of here, maybe even overseas. By contrast, the full extent of Defendants scheme was not known, and could not have been known, to Plaintiffs until the FCIC published the findings of its investigation in January 2011 (the FCIC Report) and the U.S. Senate Permanent Subcommittee on Investigations published its report titled, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (the Senate Investigations Report) on April 13, 2011. Together, these reports revealed for the first time that Defendants were creating and selling RMBS backed by mortgage pools that they knew, or at the very least recklessly disregarded, to be much riskier than they represented to Plaintiffs and other investors. 10. The consequences of Defendants actions have been devastating, resulting in the

collapse and subsequent takeover of Bear Stearns and WaMu by Defendant JPMorgan. Defendants actions also contributed to substantial losses being suffered by Plaintiffs. This action seeks to hold Defendants and their successors-in-interest liable for the damages caused by their fraud. II. JURISDICTION AND VENUE 11. Jurisdiction is proper because a number of Defendants and Plaintiffs (other than

Dexia SA/NV and Dexia Crdit Local) are domiciled in New York County, as detailed below. Moreover, all of the RMBS at issue were purchased by FSA Asset Management LLC in New 7

York County. This Court has jurisdiction over each of the non-domiciliary Defendants because each of them regularly and systematically does business within the State of New York, each of them transacts business within the State of New York within the meaning of CPLR 302(a)(1), and each of them committed a tortious act inside the State of New York or outside the State of New York causing injury within the State of New York within the meaning of CPLR 302(a)(2) and 302(a)(3). The amount in controversy exceeds $150,000. 12. Venue is proper in this Court because Plaintiffs (other than Dexia SA/NV and

Dexia Crdit Local SA) maintain their principal places of business in New York County, and a number of Defendants maintain their principal places of business in New York County, as detailed below. III. THE PARTIES A. 13. Plaintiffs Dexia SA/NV is a Limited Company organized under Belgian law with its

principal place of business in Belgium. 14. Dexia Crdit Local SA (DCL) is a French banking institution having a branch in

New York which is licensed by the New York State Banking Department. DCL is a wholly owned subsidiary of Dexia SA/NV. 15. Dexia Holdings, Inc. (DHI) is a Delaware corporation with its principal place of

business in New York, New York. DHI is an indirect wholly owned subsidiary of Dexia SA/NV, is a subsidiary of DCL, and is an affiliate of DCLs New York branch. 16. FSA Asset Management LLC (FSAM) is a Delaware limited liability company

and has its principal place of business in New York, New York. FSAM is an indirect, wholly owned subsidiary of DHI, and is an affiliate of DCLs New York branch. FSAM purchased Certificates pursuant or traceable to the Offering Materials. 8

17.

Dexia SA/NV, DHI and DCL (through both its New York branch and Paris head

office) have economic interests in and have substantial losses on sales of the Certificates purchased by FSAM in accordance with intercompany agreements among these plaintiffs. FSAM, which purchased the RMBS, has assigned all right, title and interest in its RMBS assets, and thereby assigned all rights to this litigation and the remedies being sought to the other Dexia plaintiffs pursuant to the terms of intercompany agreements. FSAM, as the purchaser of the RMBS, is a proper plaintiff under the Federal Rules of Civil Procedure. B. 18. Defendants Defendant Bear Stearns & Co. Inc. was, at all relevant times, an SEC-registered

broker-dealer incorporated in Delaware, with its principal place of business at 383 Madison Avenue, New York, New York 10179. Bear Stearns & Co. Inc. was a wholly-owned subsidiary of The Bear Stearns Companies, Inc., and served as the lead underwriter for 21 of the securitizations at issue here. Bear Stearns & Co. Inc. directed the activities of its affiliates EMC Mortgage LLC, Structured Asset Mortgage Investments II Inc. and Bear Stearns Asset Backed Securities I LLC. On or about October 1, 2008, following the merger effective May 30, 2008, Bear Stearns & Co. Inc. merged with J.P. Morgan Securities LLC. All allegations against Bear Stearns & Co. Inc. are also made against its successor-in-interest, J.P. Morgan Securities LLC. 19. Defendant EMC Mortgage LLC (f/k/a EMC Mortgage Corporation) was, at all

relevant times, a Delaware corporation with its principal place of business at 2780 Lake Vista Drive, Lewisville, Texas 75067. EMC Mortgage LLC (EMC Mortgage) was at all relevant times a wholly-owned subsidiary of The Bear Stearns Companies, Inc. and served as the sponsor for nine of the securitizations at issue here. As a result of the merger between The Bear Stearns Companies, Inc. and JPMorgan Chase & Co., EMC became a wholly owned subsidiary of JPMorgan Chase & Co. All allegations against EMC are also made against its controlling parent 9

company, The Bear Stearns Companies, Inc., and against JPMorgan Chase & Co. (as successorin-interest to The Bear Stearns Companies, Inc.). 20. Defendant Structured Asset Mortgage Investments II Inc. (SAMI II) was, at all

relevant times, a Delaware corporation with its principal place of business at 383 Madison Avenue, New York, New York 10179. SAMI II was a wholly-owned subsidiary of The Bear Stearns Companies, Inc., and served as depositor for four of the securitizations at issue here. As a result of the merger between The Bear Stearns Companies, Inc. and JPMorgan Chase & Co., SAMI II became a wholly-owned subsidiary of JPMorgan Chase & Co. All allegations against SAMI II are also made against its controlling parent company, The Bear Stearns Companies, Inc., and against JPMorgan Chase & Co. (as successor-in-interest to The Bear Stearns Companies, Inc.). 21. Defendant Bear Stearns Asset Backed Securities I LLC (BSABS I) was, at all

relevant times, a Delaware limited liability company with its principal place of business at 383 Madison Avenue, New York, New York 10179. BSABS I was a limited purpose finance subsidiary of The Bear Stearns Companies, Inc., and an affiliate of Bear Stearns & Co. Inc. BSABS I served as the depositor for seven of the securitizations at issue here. As a result of the merger between The Bear Stearns Companies, Inc. and JPMorgan Chase & Co., BSABS I became a wholly-owned subsidiary of JPMorgan Chase & Co. All allegations against BSABS I are also made against its controlling parent company, The Bear Stearns Companies, Inc., and against JPMorgan Chase & Co. (as successor-in-interest to The Bear Stearns Companies, Inc.). 22. Defendant The Bear Stearns Companies, Inc. was, at all relevant times, a

Delaware corporation with its principal place of business at 383 Madison Avenue, New York, New York 10017. The Bear Stearns Companies, Inc. was a holding company that provided investment banking, securities, and derivative trading services to its clients through its 10

subsidiaries and, at the time of the securitizations at issue here, was the sole owner of Defendants Bear Stearns & Co. Inc., BSABS I, EMC Mortgage, and SAMI II. On March 16, 2008, The Bear Stearns Companies, Inc. entered into an agreement and plan of merger (the Merger) with JPMorgan Chase & Co., making The Bear Stearns Companies, Inc. a wholly-owned subsidiary of JPMorgan Chase & Co. All allegations against The Bear Stearns Companies, Inc. are also made against its successor-in-interest JPMorgan Chase & Co. 23. Defendants Bear Stearns & Co., EMC Mortgage, SAMI II, BSABS I, The Bear

Stearns Companies, Inc., and J.P. Morgan Securities LLC (as successor-in-interest to Bear Stearns & Co. Inc.) are collectively hereinafter referred to as Bear Stearns or the Bear Stearns Defendants. 24. At all relevant times, Washington Mutual Bank was a federal savings association At the time of the

that provided financial services to consumer and commercial clients.

securitizations, Washington Mutual Bank was the sole owner of Defendants WaMu Asset Acceptance Corporation, WaMu Capital Corporation, Washington Mutual Mortgage Securities Corporation, Long Beach Securities Corp, and non-party Long Beach Mortgage Company. Washington Mutual Bank was also the sponsor of two of the securitizations at issue here. On September 25, 2008, JPMorgan Chase Bank, N.A. entered into a purchase and assumption agreement (the PAA) with the FDIC, under which JPMorgan Chase Bank, N.A. agreed to assume substantially all of Washington Mutual Banks liabilities and purchase substantially all of Washington Mutual Banks assets including WaMu Asset Acceptance Corporation, WaMu Capital Corporation, Washington Mutual Mortgage Securities Corporation, Long Beach Mortgage Company, and Long Beach Securities Corporation. As such, this action is brought against JPMorgan Chase Bank, N.A. as the successor to Washington Mutual Bank.

11

25.

Defendant WaMu Capital Corporation (WaMu Capital) was, at all relevant

times, an SEC-registered broker-dealer incorporated under Washington law, with its principal place of business at 1301 Second Avenue, WMC 3501A, Seattle, Washington 98101. WaMu Capital was a wholly-owned subsidiary of Washington Mutual Bank, and served as the underwriter for 13 of the securitizations at issue here. WaMu Capital is not currently affiliated with Washington Mutual Bank and is now a wholly-owned subsidiary of JPMorgan Chase Bank, N.A. 26. Defendant WaMu Asset Acceptance Corporation (WaMu Asset) was, at all

relevant times, a wholly-owned subsidiary of Washington Mutual Bank incorporated under Delaware law, with its principal place of business at 1301 Second Avenue, WMC 3501A, Seattle, Washington 98101. WaMu Asset served as the depositor for six of the securitizations at issue here. WaMu Asset is not currently affiliated with Washington Mutual Bank and is now a wholly-owned subsidiary of JPMorgan Chase Bank, N.A., successor-in-interest to Washington Mutual Bank. 27. Defendant Washington Mutual Mortgage Securities Corp. (WaMu Securities) is

a Delaware corporation and was, at all relevant times, a wholly-owned, special purpose vehicle of Washington Mutual Bank with its principal offices located in Vernon Hills, Illinois. WaMu Securities was the sponsor for four of the securitizations at issue here. WaMu Securities it not currently affiliated with Washington Mutual Bank and is now a wholly-owned subsidiary of JPMorgan Bank, N.A., successor-in-interest to Washington Mutual Bank. 28. Defendants WaMu Capital Corp., WaMu Asset, WaMu Securities and non-party

Washington Mutual Bank are collectively hereinafter referred to as WaMu. Defendants WaMu Capital Corp., WaMu Asset, WaMu Securities, and JPMorgan Bank, N.A., successor-in-interest to Washington Mutual Bank, are collectively hereinafter referred to as the WaMu Defendants. 12

29. the country.

Long Beach Mortgage Company was one of the largest subprime originators in Long Beach Mortgage Company was acquired by Washington Mutual, Inc. At all relevant times, WMI was a savings and loan holding company

(WMI) in 1999.

incorporated in Washington State, subject to regulation by the Office of Thrift Supervision (OTS), and was the parent company of Washington Mutual Bank. From December 2000 to March 2006, Long Beach Mortgage Company operated as a subsidiary of WMI. In March 2006, Long Beach Mortgage Company became a wholly-owned subsidiary of Washington Mutual Bank. From March 2006 to July 2006, Long Beach Mortgage operated as a subsidiary of Washington Mutual Bank and was its primary subprime originator. In July 2006, Long Beach Mortgage Company was wholly integrated into its parent company and became a division of Washington Mutual Bank, operating as its Specialty Wholesale Lending channel. Long Beach Mortgage Company served as sponsor for seven of the securitizations at issue here. Washington Mutual Bank shut down Long Beach Mortgage Company in 2007. The liabilities associated with Long Beach Mortgage Companys securitization activities were assumed by JPMorgan Chase Bank, N.A., successor-in-interest to Washington Mutual Bank and Long Beach Mortgage Company. Therefore, this action is brought against JPMorgan Chase Bank, N.A. as the successor to Washington Mutual Bank and Long Beach Mortgage. WMI, Washington Mutual Bank, and Long Beach Mortgage Company are not defendants in this action. 30. Defendant Long Beach Securities Corporation (Long Beach Securities) is a

Delaware corporation and was, at all relevant times, a wholly-owned subsidiary of Washington Mutual Bank with a principal place of business at 1100 Town & Country Road, Orange, California 92868. Long Beach Securities served as the depositor for seven of the securitizations at issue here. Long Beach Securities is not currently affiliated with Washington Mutual Bank

13

and is now a wholly-owned subsidiary of JPMorgan Chase Bank, N.A, successor-in-interest to Washington Mutual Bank. 31. Long Beach Securities and Long Beach Mortgage Company are collectively

referred to herein as Long Beach 32. Long Beach Securities and JPMorgan Chase Bank, N.A. (as successor to

Washington Mutual Bank and Long Beach Mortgage Company) are collectively referred to herein as the Long Beach Defendants. 33. Defendant JPMorgan Chase & Co. is a financial holding company incorporated

under Delaware law with its principal place of business at 270 Park Avenue, New York, New York 10017. JPMorgan Chase & Co. is one of the largest banking institutions in the United States and is the ultimate owner of Defendants JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC (f/k/a J.P. Morgan Securities Inc.), J.P. Morgan Acceptance Corporation I, and J.P. Morgan Mortgage Acquisition Corp. JPMorgan Chase & Co. is also the successor-ininterest to The Bear Stearns Companies, Inc. 34. Defendant JPMorgan Chase Bank, N.A. is a national banking association, a

subsidiary of JPMorgan Chase & Co., and the sole owner of J.P. Morgan Mortgage Acquisition Corp. JP Morgan Chase Bank, N.A.s main office is located in Columbus, Ohio. JPMorgan Chase Bank, N.A. is the successor-in-interest to Defendant Washington Mutual Bank. All allegations against JPMorgan Chase Bank, N.A. are also made against its controlling parent company, JPMorgan Chase & Co. 35. Defendant JP Morgan Securities LLC (f/k/a J.P. Morgan Securities Inc.) is a

Delaware corporation with its principal place of business at 270 Park Avenue, New York, New York 10017. J.P. Morgan Securities LLC is a SEC-registered broker-dealer that engages in investment banking activities in the U.S., and served as the underwriter for 19 of the RMBS at 14

issue here.

All allegations against J.P. Morgan Securities LLC are also made against its

controlling parent company, JPMorgan Chase & Co. 36. Defendant J.P. Morgan Mortgage Acquisition Corporation is a Delaware

corporation with its principal place of business at 270 Park Avenue, New York, New York 10017. J.P. Morgan Mortgage Acquisition Corporation is a direct, wholly-owned subsidiary of JPMorgan Chase Bank, N.A., and served as the sponsor for 13 of the securitizations at issue here. All allegations against J.P. Morgan Mortgage Acquisition Corporation are also made against its controlling parent company, JPMorgan Chase Bank, N.A. 37. Defendant J.P. Morgan Acceptance Corporation I, is a Delaware corporation with

its principal place of business at 270 Park Avenue, New York, New York 10017. J.P. Morgan Acceptance Corporation I is a direct, wholly-owned subsidiary of J.P. Morgan Securities Holdings LLC which, in turn, is a direct, wholly-owned subsidiary of JPMorgan Chase & Co. J.P. Morgan Acceptance Corporation I served as the depositor for 13 of the securitizations at issue here. All allegations against J.P. Morgan Acceptance Corporation I are also made against its ultimate controlling parent company JPMorgan Chase & Co. 38. Defendants JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan

Securities LLC, J.P. Morgan Mortgage Acquisition Corporation, and J.P. Morgan Acceptance Corporation I are collectively hereinafter referred to as JPMorgan or the JPMorgan Defendants. IV. BACKGROUND FACTS AND NATURE OF THE FRAUD A. 39. The Securitization Process Residential mortgage-backed securities provide investors with an interest in the The actual

income generated by one or more designated pools of residential mortgages.

securities themselves represent an equity interest in an issuing trust that holds the designated 15

mortgage pools. Payments from the underlying borrowers are collected by a loan servicer and distributed, through the issuing trust, to holders of the certificates at regular distribution intervals. Accordingly, the value of the RMBS depends on the quality of the mortgages in the designated pools, including the borrowers ability to make their mortgage payments and the value of the collateral supporting the mortgages. 40. Although the structure and underlying collateral of the mortgages may vary from

trust to trust, they all function in a similar manner: the cash flow from the borrowers who make interest and principal payments on their mortgages is passed through to certificate holders, like Plaintiffs. Accordingly, failure by borrowers to make their mortgage payments directly impacts the value of the RMBS. Defaults that are not cured will result in foreclosure, causing the trust to take possession or sell the collateral for the loan. Foreclosures will result in higher losses to the trust (and therefore to the RMBS investors) if the value of the collateral is lower than anticipated, for example because the mortgage appraisals overstated the value of the collateral. For these reasons, proper loan origination and underwriting of the mortgages underlying the RMBS including verification of the borrowers ability and incentives to make their mortgage payments, and the value of the collateralis essential for ensuring that the RMBS perform according to the representations made to investors like Plaintiffs. 41. The process of securitizing mortgages into RMBS involves a number of steps.

First, a sponsor creates a loan pool from mortgages the sponsor has originated, or from mortgages that the sponsor has purchased from other financial institutions. Prior to purchasing a mortgage pool from other financial institutions, sponsors generally will review a sample of the loans to verify compliance with the underwriting guidelines. The sponsors have the ability to reject loans from the pool before finalizing the purchase. In addition, the sponsor has the right to

16

force the seller to repurchase or replace loans that do not meet represented quality standards after purchasing a mortgage pool. 42. Second, the sponsor transfers the loans to a depositor, which segments the cash

flows and risks in the loan pool among different levels of investment or tranches. Generally, cash flows from the payments by borrowers whose mortgages are in the loan pool are applied in order of seniority, going first to the most senior tranches. In addition, any losses to the loan pool due to defaults, delinquencies, foreclosure or otherwise, are applied in reverse order of seniority, and are applied first to the most junior tranches. 43. In the meantime, the sponsor provides information about the RMBS tranche

structure, the expected cash flows from the designated mortgage pool, and the value of the collateral supporting the loans in the mortgage pool to credit rating agencies (CRAs) like Moodys and Standard & Poors Financial Services LLC (S&P). Certificates in the most senior tranches are often rated as the best quality or triple-A. Junior tranches have

subordinated rights to payment and are less insulated from risk, and therefore have lower credit ratings. Plaintiffs RMBS were all rated as high grade investment grade securities at the time of issuance, with all of the securities receiving the highest possible triple-A credit rating by at least one CRA. 44. Third, the depositor transfers the mortgage pool to the issuing trust so that it can

be used as collateral for RMBS that will be issued and sold to investors. Once the mortgage pool is deposited and the tranches are established, the issuing trust transfers the Certificates to the depositor as payment for the mortgages. 45. The depositor then passes the RMBS to the underwriters, who sell them to

investors in exchange for payment. After selling the RMBS to investors, the underwriters will pass the payment back to the depositor, less any fees that are collected for serving as an 17

underwriter of the securitization. At all relevant times, underwriters like Defendants typically collected up to 1.5% in discounts, concessions, or commissions for serving as an underwriter of an RMBS securitization. On the securitizations at issue in this case, these commissions would have yielded Defendants up to $1 billion in underwriting fees. By serving as a sponsor and depositor of the securitizations, Defendants earned even more. 46. In sum, the steps in the securitization process can be depicted as follows:

47.

For 35 of the 53 securitizations at issue here, Defendants controlled the sponsor, As a result, Defendants controlled each step of the

the depositor, and the underwriter.

securitization process for such RMBS, including: (i) the selection and acquisition of the loans in the pool; (ii) the creation of the securitization structure, including the segmentation of cash flows and risks into tranches; (iii) providing critical information about the quality of the mortgage pool to the credit rating agencies as part of the process of obtaining investment grade credit ratings for the RMBS; and (iv) the registration, underwriting and sale of the RMBS to Plaintiffs, including providing critical information about the quality of the mortgages that was used by investors to decide whether to purchase the RMBS. 48. For the remaining securitizations, Defendants worked with the sponsor of the

securitization as lead underwriter of the RMBS. Defendants had access to non-public due 18

diligence results and detailed borrower information, including loan files, had access to personnel responsible for creating the securitization, reviewing draft Offering Materials, and distributed, directly or indirectly, Offering Materials to Plaintiffs. 49. Because of their central role in creating, issuing and selling the RMBS,

Defendants had exclusive access to information about the highly risky nature of the designated mortgage poolsinformation that Defendants fraudulently withheld from Plaintiffs and which Plaintiffs did not, and could not have known. 50.
# 1 2 3 4

The investments and RMBS at issue in this case include:

Original Expenditure $38,000,000 $15,000,000 $30,000,000 $24,179,000 Underwriter Defendant JPMorgan JPMorgan JPMorgan JPMorgan TopOriginators ArgentMortgageCo.LLC(91%) AmeriquestMortgageCo.(9%) ArgentMortgageCo.LLC(100%) ArgentMortgageCo.LLC(100%) AmeriquestMortgageCo.(11%) NewCenturyMortgageCorp.(43%) WilmingtonFinance,Inc.(28%) IndyMacBank,FSB(100%) JPMorganChaseBank,N.A.andChaseHomeFinance LLC(ChaseOriginators)(16%)*[[1] CountrywideHomeLoans(27%) M&TMortgageCorp.(17%) PHHMortgageCorp.(24%) ChaseOriginators(16%)* CountrywideHomeLoans(27%) M&TMortgageCorp.(17%) PHHMortgageCorp.(24%) ChaseOriginators(68%)* ChaseOriginators(30%)* CountrywideHomeLoans(28%) PHHMortgageCorp.(26%) GreenPointMortgageFunding,Inc.(15%)

Offering&Tranche ARSI 2006M2A2D ARSI 2006W4A2C ARSI 2006W4A2D CBASS 2007CB6A3 INDX 2006AR29A5 JPALT 2006A21A3

5 6

$53,132,000 $14,605,000

JPMorgan JPMorgan

JPALT 2006A21A5

$14,334,000

JPMorgan

8 9

JPALT 2006A31A3 JPALT 2006A51A5

$50,888,000 $28,480,000

JPMorgan JPMorgan

[2] [1]

* Defendant in this Action Affiliate of a Defendant in this Action. 19

# 10

Offering&Tranche JPALT 2006A51A5

Original Expenditure $9,785,000

Underwriter Defendant JPMorgan

TopOriginators ChaseOriginators(30%)* CountrywideHomeLoans(28%) PHHMortgageCorp.(26%) GreenPointMortgageFunding,Inc.(15%) CountrywideHomeLoans(57%) ChaseOriginators(17%)* PHHMortgageCorp.(16%) FlagstarBank,FSB(50%) CountrywideHomeLoans(20%) ChaseOriginators(17%)* FlagstarBank,FSB(50%) CountrywideHomeLoans(20%) ChaseOriginators(17%)* ChaseOriginators(42%)* GreenPointMortgageFunding,Inc.(39%) CountrywideHomeLoans(13%) ChaseOriginators(42%)* GreenPointMortgageFunding,Inc.(39%) CountrywideHomeLoans(13%) ChaseOriginators(55%)* AmericanHomeMortgageCorp.(20%) GreenPointMortgageFunding,Inc.(13%) CountrywideHomeLoans(100%) ResMAEMortgageCorp.(60%) NovaStarMortgage,Inc.(20%) FieldstoneMortgageCo.(18%) NewCenturyMortgageCorp.(100%) NewCenturyMortgageCorp.(100%) ResMAEMortgageCorp.(100%) WMCMortgageCorp.(100%) WMCMortgageCorp.(100%) HomeComingsFinancialNetwork,Inc.(19%) EFCHoldingsCorp.(16%) DecisionOneMortgageCo.LLC(13%) HomecomingFinancialLLC(19%) NewCenturyMortgageCorp.(34%) EMCMortgageCo.(67%)*2] IndyMacBank,FSB(25%)

11

JPALT 2006A61A5 JPALT 2006A71A4 JPALT 2006A71A5 JPALT 2007A11A4 JPALT 2007A11A5 JPALT 2007A212A3 JPMAC 2006CW1A4 JPMAC 2006HE3A5 JPMAC 2006NC1A4 JPMAC 2006NC1A5 JPMAC 2006RM1A5 JPMAC 2006WMC2A4 JPMAC 2006WMC3A5 RASC 2006KS7A4 RASC 2007KS2AI4 BALTA 2006413A2

$25,000,000

JPMorgan

12

$9,239,000

JPMorgan

13

$27,135,000

JPMorgan

14

$35,000,000

JPMorgan

15

$15,000,000

JPMorgan

16

$20,228,000

JPMorgan

17 18

$22,000,000 $15,000,000

JPMorgan JPMorgan

19 20 21 22 23 24

$26,000,000 $14,000,000 $28,831,000 $25,000,000 $10,000,000 $21,000,000

JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan

25 26

$25,200,000

JPMorgan

$27,201,000 BearStearns

20

# 27

Offering&Tranche BALTA 200671A2 BSABS 2006EC2A4 BSABS 2006HE81A3 BSABS 2006HE821A3 BSABS 2006IM1A6 BSABS 2006IM1A7 BSABS 20072A1 CARR 2006NC3A4 CARR 2006NC5A4 CARR 2006RFC1A3 CARR 2006RFC1A4 CARR 2007FRE1A3 ELAT 20071A2B IMM 2007AM1 IMSA 200621A12 IMSA 20073A1B MSST 20071A3 NAA 20073A3 NAA 20073A4

Original Expenditure

Underwriter Defendant

TopOriginators CountrywideHomeLoans(51%) EMCMortgageCo.(37%)* HomeBancMortgageCorp.(5%) EncoreCreditCorp.(100%) EMCMortgageCo.(77%)* BearStearnsResidentialMortgageCorporation (20%) EMCMortgageCo.(77%)* BearStearnsResidentialMortgageCorporation (20%) ImpacFundingCorp.(100%) ImpacFundingCorp.(100%) EquiFirstCorp.(14%) PerformanceCreditCorp.(34%) WellsFargoAssetSecuritiesCorp.(30%) NewCenturyMortgageCorp.andHome123Corp. (100%) NewCenturyMortgageCorp.andHome123Corp. (100%) EFCHoldingsCorp.(11%) FMFCapitalLLC(12%) People'sChoiceHomeLoan,Inc.(16%) EFCHoldingsCorp.(11%) FMFCapitalLLC(12%) People'sChoiceHomeLoan,Inc.(16%) FremontInvestment&Loan(100%) FremontInvestment&Loan(100%) ImpacFundingCorp.(100%) ImpacFundingCorp.(100%) ImpacFundingCorp.(100%) AccreditedHomeLenders,Inc.(37%) FirstNLC(55%) AmericanHomeMortgageCorp.(14%) BrooksAmericaMortgageCorp(12%) AmericanHomeMortgageCorp.(14%) BrooksAmericaMortgageCorp(12%)

$19,734,000 BearStearns

28 29

$7,069,000 BearStearns $4,814,000 BearStearns

30

$6,269,000 BearStearns

31 32 33

$20,730,000 BearStearns $30,000,000 BearStearns $35,784,000 BearStearns

34 35 36

$44,529,000 BearStearns $24,222,000 BearStearns $21,000,000 BearStearns

37

$20,000,000 BearStearns

38 39 40 41 42 43 44 45

$20,000,000 BearStearns $48,271,000 BearStearns $100,000,000 BearStearns $17,445,000 BearStearns $10,000,000 BearStearns $50,000,000 BearStearns $10,000,000 BearStearns $29,600,000 BearStearns

21

# 46 47

Offering&Tranche NCMT 200712A3 NHELI 200712A4A SACO 200622A SAMI 2006AR7A13B SAMI 2006AR8A6B LBMLT 2006112A2 LBMLT 2006112A2 LBMLT 200632A3 LBMLT 200632A4 LBMLT 200642A3 LBMLT 200642A4 LBMLT 200652A3 LBMLT 200652A4 LBMLT 200662A2 LBMLT 200662A4 LBMLT 200672A4 LBMLT 200682A4 WAMU 2006AR7C1B2 WMABS 2006HE2A3

Original Expenditure

Underwriter Defendant

TopOriginators FremontInvestment&Loan(100%) FirstNationalBankofNevada(18%) SilverStateFinancialServices,Inc.,d/b/aSilverState Mortgage(16%) SunTrustMortgage,Inc.(15%) WaterfieldMortgageCo.,Inc.(13%) CountrywideHomeLoans(100%) CountrywideHomeLoans(52%) SouthStarFundingLLC(24%) LongBeachMortgageCo.(100%) LongBeachMortgageCo.(100%) LongBeachMortgageCo.(100%) LongBeachMortgageCo.(100%) LongBeachMortgageCo.(100%) LongBeachMortgageCo.(100%) LongBeachMortgageCo.(100%) LongBeachMortgageCo.(100%) LongBeachMortgageCo.(100%) LongBeachMortgageCo.(100%) LongBeachMortgageCo.(100%) LongBeachMortgageCo.(100%) WashingtonMutualBank(100%) HomeLoanCorp.(12%) LimeFinancialServices,Ltd.(11%) LongBeachMortgageCo.(33%) MandalayMortgageLLC(17%)

$19,250,000 BearStearns $16,167,000 BearStearns

48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64

$71,300,000 BearStearns $50,000,000 BearStearns $25,000,000 BearStearns $15,000,000 $6,000,000 $20,000,000 $10,000,000 $8,000,000 $16,000,000 $10,000,000 $30,000,000 $21,000,000 $24,000,000 $16,569,000 $13,000,000 $11,700,000 $24,414,000 WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu

22

# 65

Offering&Tranche WMABS 2007HE22A2 WMABS 2007HE22A3 WMALT 2007HY1A2B WMALT 2007OC2A2 WMHE 2007HE22A3

Original Expenditure $57,000,000

Underwriter Defendant WaMu

TopOriginators CITGroup/ConsumerFinance,Inc.(19%) LendersDirectCapitalCorp.(17%) WMCMortgageCorp.(50%) CITGroup/ConsumerFinance,Inc.(19%) LendersDirectCapitalCorp.(17%) WMCMortgageCorp.(50%) ArgentMortgageCo.,LLC(13%) WashingtonMutualBank(71%) GreenPointMortgageFunding,Inc.(24%) WashingtonMutualBank(60%) WashingtonMutualBank(100%)

66

$17,070,000

WaMu

67 68 69

$5,820,000 $30,000,000 $50,000,000

WaMu WaMu WaMu

B.

Defendants Unique and Non-Public Knowledge About The Securitized Mortgages 1. Defendants Control and Unique Knowledge of the Loan Originators

51.

Bear Stearns, WaMu and JPMorgan were central actors in the mortgage

securitization industry. From 2005 to 2007, Bear Stearns securitized more than $162 billion in loans, WaMu securitized more than $103 billion in loans, and JPMorgan securitized more than $62 billion in loans that they then sold to investors. 52. Defendants had unique access to the senior management of the financial

institutions that originated the loans in the mortgage pools at issue. The Offering Materials identify Defendants and their wholly-owned affiliates as originators for a substantial number of the loans backing 22 of the securitizations at issue, as illustrated in the table above. For each of these securitizations, Defendants and their affiliates originated the loans that were securitized into RMBS and sold to Plaintiffs. As a result, Defendants had unique, non-public insight into the loan origination and underwriting practices that were used for originating the loans that they included these securitizations. 53. Defendants had very close relationships with the financial institutions that

originated a substantial number of the loans backing the other securitizations such as 23

Countrywide, Encore, GreenPoint, Impac, American Home, Fremont, and SouthStar Funding, among others. In November 2008, the Office of the Comptroller of the Currency (part of the U.S. Treasury Department) issued an Index to the Worst Subprime Originators, based on the number of foreclosures on 2005-2007 loan originations in the 10 worst metropolitan areas, which included Long Beach Mortgage, Countrywide, New Century Mortgage, WMC, Argent, Ameriquest, Fremont, ResMAE, American Home, IndyMac, GreenPoint, Peoples Choice, and Fieldstone, all originators at issue here. 54. Between 2005 and 2007, Bear Stearns securitized more than $14 billion of

Countrywide-originated loans. During the same time, JPMorgan securitized nearly $10 billion of Countrywide-originated loans. JPMorgan also assisted Countrywide with raising capital by acting as a lead underwriter in Countrywides bond issuances, and served as managing administrative agent to material credit agreements for Countrywide, including a $2.64 billion 364-day revolving credit facility. In these capacities and in fulfilling related due diligence obligations, Bear Stearns and JPMorgan obtained unique access to material, non-public information about Countrywides operations, including its loan origination and loan underwriting practices, loan quality and performance, and reserve methodologies for nonperforming loans. 55. JPMorgan securitized more than $1.6 billion worth of GreenPoint-originated

loans. Former GreenPoint executive vice-president, Kevin Hughes, testified that GreenPoint executives were in daily contact with large investors such as Defendants to provide them with extensive loan level data on the mortgages that GreenPoint was originating. 56. Bear Stearns was also among Fremonts key business partners, securitizing

approximately $1 billion worth of Fremont-originated loans between 2005 and 2007. 57. Bear Stearns also had a very close relationship with Impac Mortgage, and

American Home. Between 2005 and 2007, Bear Stearns securitized more than $1.4 billion of 24

Impac-originated loans and more than $350 million of American Home-originated loans. In addition, between 2005 and 2007, Bear Stearns provided a $2.5 billion credit facility to American Home and approximately $300 million in loans to Impac Mortgage, thereby allowing these mortgage originators to originate and fund new mortgages that Bear Stearns could securitize and sell to investors. In these capacities, and to protect its own interests, Bear Stearns conducted due diligence and reviewed material, non-public information about American Homes and Impacs loan origination and underwriting practices, loan quality and performance, and reserve methodologies for nonperforming loans. As a major creditor of American Home and Impac, Bear Stearns had the power to cut off hundreds of millions of dollars of operational funding, thereby ensuring that Bear Stearns had continuing access to material non-public information at all relevant times. 58. Bear Stearns also had a close connection to SouthStar Funding. Bear Stearns

provided SouthStar Funding with millions of dollars in credit that SouthStar Funding used to originate mortgages for Bear Stearns securitizations. A search of SEC filings yielded 49 Bear Stearns securitizations of mortgages that were originated by SouthStar Funding between May 2002 and April 2007almost one securitization per month for close to five years. As a seasoned market participant, Bear Stearns would not have provided SouthStar Funding with a substantial line of credit without having conducted a thorough due diligence audit. SouthStar Funding depended on Bear Stearns credit facility for its corporate survival, thereby ensuring Bear Stearns access to senior management and non-public information about SouthStar Fundings mortgage origination and underwriting practices. SouthStar Funding filed for bankruptcy in April 2007 when Bear Stearns revoked the credit facility. 59. Bear Stearns also possessed material non-public information regarding Encore.

After securitizing more than $2.2 billion of Encore-originated loans, Bear Stearns purchased 25

Encore in October 2006. Following the acquisition, Bear Stearns merged Encore with another affiliate, Bear Stearns Residential Mortgage Corporation. As a major business partner and future owner of the firm, Bear Stearns had daily contact with Encore executives, conducted due diligence, and reviewed material, non-public information about Encores loan origination and underwriting practices, loan quality and performance, and reserve methodologies for nonperforming loans. 2. 60. Defendants Control and Unique Knowledge of the Loan Pools Backing the RMBS

Defendants utilized three methods to securitize the mortgages into RMBS for sale

to investors. Specifically, Defendants either: (1) acted as sponsor, depositor and underwriter of RMBS backed by mortgages that their own affiliates had originated; (2) acted as sponsor, depositor and underwriter of RMBS backed by mortgages that they had selected and purchased from other loan originators; or (3) acted as underwriter for RMBS backed by mortgages that were securitized by other financial institutions. 61. Defendants acted as a sponsor, depositor and underwriter for 35 of the 53 RMBS For these securitizations,

at issue here (herein referred to as a principal securitization).

Defendants had exclusive control over the selection of the mortgage pools. In addition, for 22 of the securitizations, Defendants affiliates originated a substantial number of the mortgages backing the RMBS. For these securitizations, Defendants also had exclusive control over the loan origination and loan underwriting practicesDefendants own personnel originated the loans and monitored compliance with loan underwriting guidelines. Unlike Plaintiffs,

Defendants had access to detailed borrower information, including the individual loan files and delinquency information for the loans backing these securitizations before securitizing them. 62. Defendants acted as lead underwriter for the remaining RMBS. As lead

underwriter, and unlike Plaintiffs, Defendants had access to the personnel that created these 26

securitizations as well as to detailed due diligence results for the loans backing these securitizations. Moreover, because of their close relationships with the originators of the loans backing these securitizations, Defendants had unique, non-public knowledge of the loan origination and underwriting standards that were used to originate the mortgages backing these RMBS. 63. Before purchasing loans, Defendants performed due diligence on the mortgage

loan pools by examining three areascredit, compliance, and valuation. Credit due diligence involved examining a sample of the individual loans to assess their quality and compliance with the originators loan underwriting guidelines, and is a critical tool for evaluating the risk that the borrowers of the mortgages in the pool will not make their mortgage payments on time. Compliance diligence focused on whether the loans were originated in compliance with state, federal and local laws, including predatory lending and truth-in-lending statutes. Valuation diligence used automated valuation models (AVMs) to verify the accuracy of reported valuations of the collateral backing the mortgages in the pool. The value of the collateral is critical for determining the amount of equity a borrower has in the collaterala key driver for determining whether the borrower will continue to make the mortgage payments and the potential recovery in case of default. 64. Defendants routinely used outside third-party due diligence providers, such as

Clayton Holdings, Inc. (Clayton), the Bohan Group (Bohan), and Watterson Prime LLC, to perform due diligence on the mortgage pools they would purchase for securitization. As part of this due diligence, the vendor calculated important data points, such as LTV ratios and debt-toincome ratios, and provided detailed quantitative and qualitative findings to Defendants, including a score for each loan. For example, John Mongelluzzo, a former Bear Stearns due diligence manager, acknowledged in testimony before the FCIC that Bear Stearns received 27

individual asset summary (IAS) reports on a daily basis. Bear Stearns also received tracking reports showing the kinds of exceptions that were commonly discovered for Defendants top loan originators. Claytons senior vice president, Vicki Beal, testified before the FCIC that in

developing these reports, Clayton received a lot of feedback from Bear Stearns of things that would be helpful to them. CW 1, a former EMC Associate Vice-President who worked at the company in various due diligence and compliance roles from 1998 to 2008 in Fort Worth, Texas, confirmed that Bear Stearns knew the intimate details of each loan that was reviewed in the due diligence process. Defendants did not extrapolate the due diligence results for the sample reviewed by the due diligence vendors to the mortgage pools they purchased. 65. Defendants due diligence efforts and access to the individual loan files gave them

material, non-public knowledge about the loans that were included in the securitizations at issue. Defendants due diligence efforts and access to the loan files also provided comfort to investors that Defendants only securitized mortgage pools which conformed to the stated loan origination and underwriting standards. Investors did not have access to the loan files or Defendants due diligence information, and could not conduct similar due diligence themselves. Plaintiffs

therefore relied on Defendants disclosure of the quality of the mortgage pools backing the RMBS. As the Attorney General for the State of Massachusetts explained, there are two related information asymmetries that arise from the RMBS structure: First, investment banks, through their diligence process, may discover that loans have poorer quantifiable criteria than present on the loan tape (for example, if the banks review calls into question the quality of the appraisals underlying the calculation of the loanto-value ratios). Second, investment banks may discover concentrations of otherwise unquantifiable risks like fraud. These information asymmetries were even more pronounced in the case of principal securitizations where Defendants created, sponsored, and underwrote the deal.

28

C.

Defendants Fraudulently Included Poor Quality Loans in the Securitizations 1. Bear Stearns

66.

Defendant EMC Mortgage was established to facilitate the purchase and servicing

of whole loan portfolios. Since its inception in 1990, EMC had purchased over $100 billion in residential loans and servicing rights. As stated in the BSABS 2006-HE8 prospectus supplement, when EMC purchased loans, it was with the ultimate strategy of securitization into an array of Bear Stearns securitizations. From 2003 to 2006, EMC securitized nearly $200 billion in residential mortgage loans. 67. EMC Mortgage was the sponsor for nine of the Bear Stearns securitizations at

issue. The Offering Materials also identified EMC Mortgage as the originator for a substantial percentage of the loans backing three of those securitizations, as illustrated in the table above. 68. Although identified as the originator of the loans in three of these

securitizations, EMC Mortgage did not originate any of the loans in the securitizations at issue. Instead, EMC Mortgage purchased loans from unidentified financial institutions while representing in the Offering Materials that those loans were originated in accordance with the underwriting guidelines established by [EMC]. Former senior managing director and co-head of Bear Stearns mortgage finance department, Mary Haggerty, confirmed in testimony before the FCIC that EMC Mortgage did not originate loans, explaining that EMC Mortgage only purchased loans while making its underwriting guidelines available to financial institutions that wanted to sell loans to Bear Stearns: EMC was a purchaser and seller of loans. EMC did not originate itself. a. 69. Bear Stearns Undisclosed Policy to Securitize Loans before Expiration of the EPD Period

Until 2005, Bear Stearns had a policy preventing the securitization of mortgages

before expiration of the early payment default (EPD) period. If a loan defaulted during the 29

EPD periodtypically between 30 and 90 days after Bear Stearns purchased the loan from an originatorBear Stearns could force the originator to repurchase the loan, to replace the loan, or to provide alternative compensation. Early payment defaults are recognized in the mortgage industry an indicator of mortgage fraud and borrower inability to pay. 70. Starting in 2005, to increase the volume of its securitization business and overall

profitability, Bear Stearns changed its EPD policy to allow for securitization of loans before expiration of the EPD period. Bear Stearns revised EPD policy greatly increased the default and loss risks of the mortgage pools backing Bear Stearns RMBS. At the same time, the revised EPD policy transferred the default and loss risks from Bear Stearns to investors like Plaintiffs, while ensuring that Bear Stearns could continue to collect the sponsor, depositor and underwriting fees for each securitization. This created a strong financial incentive for Bear Stearns to churn out as many securitizations as possible, regardless of the quality of the supporting mortgage pools. 71. After changing the EPD policy, senior Bear Stearns executives pressured Bear

Stearns personnel to securitize acquired loans as quickly as possible regardless of loan quality, and in any event before expiration of the EPD period. For example, a June 13, 2006 email from senior managing director and head of whole loan trading, Jeffrey L. Verschleiser, reminded Bear Stearns personnel of the need to be certain we can securitize the loans with 1 month epd before the epd period expires. When his directive was not followed, Verschleiser demanded an

explanation as to why loans were dropped from deals and not securitized before their epd period expired. Similarly, a May 5, 2007 email from managing director Keith Lind demanded to know why we are taking losses on 2nd lien loans from 2005 when they could have been securitized????? These emails are consistent with the account of former EMC analyst Matt Van Leeuwen, reported in The Atlantic on May 14, 2010, that: 30

Bear traders pushed EMC analysts to get loan analysis done in only one to three days. That way, Bear could sell them off fast to eager investors and didn't have to carry the cost of holding these loans on their books. 72. Bear Stearns did not disclose to Plaintiffs and other investors that it had adopted a

deliberate policy to securitize loans before expiration of the EPD period or that it was pressuring its employees to quickly securitize mortgages regardless of loan quality. It was foreseeable that investors who purchased Bear Stearns RMBS would suffer losses as a result. b. 73. Bear Stearns Deliberately Undermined the Due Diligence Process

As the sponsor, EMC Mortgage was responsible for selecting and evaluating the

mortgage pools for each of the Bear Stearns securitizations at issue. EMC Mortgage operated under the strict supervision and control of Bear Stearns. CW 2, an assistant underwriting manager at EMC from 2006-2008 in Carrollton, Texas, stated that the EMC Mortgage loan selection process was closely overseen by Bear Stearns, noting that EMC was basically a subcompany of Bear Stearns in New York, and of course they had a day to day influence as to what was being purchased from the various sellers. CW 2 further stated that I know credit decisions and such were made out of New York. CW 3, a Senior Underwriter at Bear Stearns, EMC and JPMorgan from 2000-2009 in Dallas, Texas, independently confirmed CW 2s account, stating that Bear Stearns made all the decisions. Thats the mother ship right there. Theyre the ones who ran the show. 74. In addition to reducing its exposure to poor quality loans by changing the EPD

policy, Bear Stearns undermined the due diligence process, which was now merely slowing down its securitization machine. Specifically, Bear Stearns implemented a due diligence process that was designed to maximize the number of Bear Stearns securitizations regardless of the quality of the loans in the designated mortgage pools. CW 4, who served as an auditor and subsequently as 31

a Senior Product Guide Analyst at EMC Mortgage from 2005-2007 in Lewisville, Texas, stated that the Bear Stearns mindset was The more volume, the more money. 75. Bear Stearns ensured the loan volume for its securitizations in a number of ways.

First, Bear Stearns pressured its employees to purchase loans regardless of the quality of the mortgage pools. For example, on April 4, 2006, EMC senior vice president Jo-Karen Whitlock informed her staff that she would hold them personally accountable if EMC Mortgage did not meet Bear Stearns loan acquisition targets, stating: I refuse to receive any more emails from [senior managing director and head of whole loan trading, Jeffrey L. Verschleiser] (or anyone else) questioning why were not funding more loans each day. Im holding each of you responsible for making sure we fund at least 500 each and every day. . . . [I]f we have 500+ loans in this office we MUST find a way to underwrite them and buy them. . . . I was not happy when I saw the funding numbers and I knew that NY would NOT BE HAPPY. I expect to see 500+ each day. . . . Ill do whatever is necessary to make sure youre successful in meeting this objective. 76. Second, EMC Mortgage did not do any due diligence on loans that were

originated by Bear Stearns Residential Mortgage Corporation (BSRM), including for the securitization in which BSRM mortgages constituted a substantial portion of the mortgage pool at issue here. 77. Third, Bear Stearns limited the due diligence for subprime loan originators that

were selling Bear Stearns large volumes of loans, such as Countrywide, Encore, Impac and SouthStar. On February 11, 2005, Bear Stearns associate director Biff Rogers forwarded an email from due diligence manager John Mongelluzo to Bear Stearns analysts, stating that the amount of due diligence on subprime loans would be reduced in order to make us more competitive on bids with larger sub-prime sellers. Bear Stearns senior managing director and

32

co-head of mortgage finance Baron Silverstein similarly testified that, Bear Stearns would evaluate our due diligence strategy, depending upon who the seller was 78. CW 2, an assistant underwriting manager at EMC Mortgage from 2006-2008,

explained how this worked in practice, stating that there were certain major lenders and very few of those loans were audited, they were just reviewed in bulk. According to CW 2, EMC Mortgage limited the due diligence sample for such major lenders to 10% of the loan pool. Moreover, CW 2 stated that EMC Mortgage would not conduct credit due diligence on all of the loans in the 10% sample, using part of the sample only for a valuation review of the collateral. CW 2s statements were confirmed by internal Bear Stearns audit reports dated February 28, 2006, and June 22, 2006, which concluded that Bear Stearns had reduced the number of loans in the loan samples that were reviewed as part of the due diligence process, was conducting due diligence only after the loans were processed (post-closing due diligence), had eliminated internal reports on defective loans, and was conducting no due diligence if such due diligence would interfere with mortgage pools being securitized. In combination with Bear Stearns revised EPD policy, this meant in many instances that Bear Stearns conducted no due diligence before securitizing and selling the loans to Plaintiffs and other investors. 79. Finally, Bear Stearns pressured its due diligence vendors to limit the number of

loans that were identified as defective. As such, according to one contract underwriter who was previously employed by Clayton and cited in the book, Chain of Blame by Paul Muolo and Mathew Padilla, the number of defective loans reviewed by Clayton may have been even higher. Indeed, the contract underwriter stated that while at Clayton, [y]ou werent supposed to fail loans unless they were horrendous and that he was told by [his] supervisors at Clayton never to use a certain wordfraud.

33

80.

As alleged in a complaint filed on behalf of Allstate Insurance Company against

Deutsche Bank, Clayton materially understated the number of deficient loans due to pressure from clients such as Bear Stearns. See Allstate Insurance Company v. ACE Securities Corp., et al., No. 650431/2011 Dkt. 34 (1st Dept, filed Sept. 29, 2011) (the ACE Complaint). As alleged in the ACE Complaint, an Underwriting Project Lead at Clayton from 2003 until October 2006 stated that approximately 20-25% of loans reviewed by Clayton that it identified as properly originated should have been flagged as a grade 3 loans to be kicked out of securitizations, but Claytons project managers were being pressured by all of their clients approve as many loans as possible. Further, the Underwriting Project Lead estimates that 80% of the loans initially rated 3, managed to be upgraded because missing documentation would somehow miraculously appear. As alleged in the ACE Complaint, the Underwriting Project Lead understood that Clayton did not want to assign too many failing grades to loans because clients such as Bear Stearns would take their business elsewhere. In just one example, the Underwriting Project Lead explained that one Clayton client sought to fire a Clayton underwriter who was an expert on appraisals because the underwriter failed too many loans based on appraisal issues. The ACE Complaint further alleges that a contract underwriter at Clayton from 2003 to 2004 who later served as a transaction specialist from 2005 to 2007 stated that if clients wanted to purchase grade 3 loans, the grade may be changed upon the receipt of additional documents, but also sometimes merely by stipulation. 81. CW 5, a due diligence underwriter at Clayton and Bohan from 2005-2008 in

Stamford, Connecticut and Irvine, California, confirmed that Bear Stearns pressured Clayton and Bohan to be more lenient with their credit and compliance due diligence, stating that Bear Stearns exerted downward pressure to ensure that more loans would be approved. For

example, in an April 5, 2007 email, an EMC assistant manager for quality control underwriting 34

and vendor management instructed Bear Stearns due diligence vendor not to review appraisals, not to verify occupancy status of the residence and employment, and not to identify misrepresentations regarding the occupancy of the property to Bear Stearns, stating: Effective immediately, in addition to not ordering occupancy inspections and review appraisals, DO NOT PERFORM REVERIFICATIONS OR RETRIVE CREDIT REPORTS ON THE SECURITIZATION BREACH AUDITS. Do not make phone calls on employment, and Occupancy misrep is not a securitization breach. Bear Stearns never disclosed to investors that it pressured its personnel and due

82.

diligence vendors to approve loans regardless of credit quality, that it encouraged falsifying loan information, that it limited the due diligence for numerous loan originators, or that it did not do any due diligence on loans that were originated by BSRM. c. 83. Bear Stearns Knowingly Included Poor Quality Loans in the Securitizations

Bear Stearns knew that numerous loans that it included in securitizations failed to

meet the stated loan origination and underwriting standards, and were based on inflated property values. For example, CW 4, an auditor at EMC Mortgage from 2005 to 2007, reviewed many loan files in which the stated income was way overstated and the property values were way overinflatedcausing both the borrowers ability to pay and the value of the collateral to be overstated. EMC Mortgage would nevertheless approve and purchase those loans. As CW 4 stated, as long as it was not totally ridiculous, we took it. 84. In the individual asset summary and trending reports, Clayton reported

discovering numerous defective loans in the mortgage samples that Clayton reviewed for Bear Stearns. For example, Clayton reported to the FCIC that, during the 18 months that ended June 30, 2007, it rated only 54% of all reviewed loans as meeting the stated underwriting guidelines. 35

During this time, Clayton further determined that 18% of the loans did not meet the underwriting guidelines but had compensating factors, and that 28% of the loans were fatally defective and should not be purchased. Discussing this data during his testimony before the FCIC, Claytons former President and Chief Operating Officer, Keith Johnson, said: That 54% to me says there [was] a quality control issue in the factory for mortgage-backed securities. Bear Stearns was one of Claytons largest customers and no exception to the quality control issues in the factory. 85. Bear Stearns routinely overruled its due diligence vendors and waived in

materially defective loans. Claytons data showed for the 18 months that ended June 30, 2007, that EMC Mortgage waived in 50% of the loans that failed to meet credit and compliance underwriting standardsone of the highest waiver rates in the industry. Johnson explained during a June 8, 2010 interview with FCIC investigators that, of all the RMBS issuers, Bear Stearns was the worst on exceptions. 86. Loan traders, whose compensation depended in large measure on the volume of

loans that Bear Stearns purchased and securitized, made the decision to waive in defective loans. CW 2, assistant underwriting manager at EMC Mortgage, stated that the decision to waive in materially defective loans was made by Bear Stearns traders in New York, stating that they would be contacted as to whether an exception would be made. Between 2005 and 2007, Bear Stearns securitized more than $14 billion of Countrywide loans, and its loan traders were not willing to jeopardize this lucrative business relationship (and their bonuses) by rejecting many defective loans for due diligence reasons. 87. Bear Stearns also had strong incentives to waive in many defective loans that were

originated by Impac, SouthStar Funding and Encore. Between 2005 and 2007, Bear Stearns securitized more than $2.2 billion of Encore-originated mortgages, and more than $1.4 billion of Impac Mortgage loans. Similarly, between May 2002 and April 2007, Bear Stearns created, 36

issued and sold 49 securitizations with SouthStar Funding mortgages. Moreover, Bear Stearns extended hundreds of millions of dollars in credit to Impac Mortgage and SouthStar Funding. Claytons Keith Johnson explained to the FCIC that the practice of waiving in defective loans was particularly prevalent among investment banks, such as Bear Stearns, that extended warehouse lines of credit. To explain why, Johnson offered a hypothetical showing that these securitizers had a conflict of interest: either the securitizer could reject the loan and force the loan originator to take it backresulting in a loss because the rejection would be financed with the warehouse line of credit extended by the securitizeror the securitizer could waive the loan into the pool and pass the loss on to the RMBS investor. As Johnson explained: if Bob was originating for me as the client and I had a warehouse line to Bob, I think what happened is a conflict of interest. That if I put back loans to you, Bob and you dont have the financial capability to honor those, then Im kind of caught; right? [] Im going to take a loss on the warehouse line. 88. As a result, Bear Stearns included a startlingly high percentage of defective loans

in loan pools that were securitized and sold to Plaintiffs and other investors. Bear Stearns never disclosedand investors did not know, and could not have knownthat Bear Stearns due diligence vendors reported numerous defective loans in the loan pools that Bear Stearns purchased for securitization, or that Bear Stearns waived in 50% of the loans that failed to meet minimum credit and compliance standards. d. Bear Stearns Kept Hundreds of Millions of Dollars in Payments for the Poor Quality Loans That It Sold to Investors

89.

In 2006, Bear Stearns developed a new reporting system to identify and track

mortgages that were suffering from EPDs. CW 1, a former EMC associate vice president who worked at the company in various due diligence and compliance roles from 1998 to 2008 in Fort Worth, Texas, stated that Bear Stearns had hired vice president Robert Glenny to develop the 37

technology, and that the reporting system was very innovative. CW 1 further stated that the system would generate report cards for the loan sellers, and that this report card was rolled up to a host of people, including to senior managing director and co-head of Bear Stearns mortgage finance department, Mary Haggerty. According to CW 1, these report cards were also used during meetings to discuss delinquent loans. 90. Over the course of 2006 and 2007, Bear Stearns noticed that increasing numbers

of the loans it purchased and securitized were experiencing early payment defaults. Bear Stearns notified loan originators that their loans were suffering from EPDs. Bear Stearns did not inform the originators that the loans had already been securitized, or that it was seeking recovery on behalf of the securitization trust. Instead of demanding that the loan originator repurchase the loan or replace the loan in the securitization at full value, Bear Stearns pretended to accommodate the loan originators by requesting payment of a fraction of the purchase price to reflect the decrease in value caused by the EPDa so-called down bid. 91. Bear Stearns received hundreds of millions of dollars in down bids for defective

loans that it had included in its securitizations. Documents and testimony obtained in other litigation show, for example, that between April 2006 and April 2007, Bear Stearns resolved $1.9 billion in EPD claims against loan originators, and that the largest percentage of those resolutions were settlements. Bear Stearns improperly pocketed the down bids, and never disclosed to Plaintiffs and other investors that it received payments from loan originators for defective loans that it had securitized and sold. Bear Stearns improperly kept hundreds of millions of dollars in recoveries for itself rather than crediting the trusts holding the defective mortgages for the benefit of Plaintiffs and other certificateholders. e. Bear Stearns Reckless RMBS Sales Practices

38

92.

Bear Stearns routinely acted as lead underwriter for RMBS that were created by

other financial institutions, including Impac. 93. Bear Stearns knew, or at the very least recklessly disregarded the poor quality of

the mortgages backing those securitizations. As lead underwriter and repeat business partner of the mortgage originators and the sponsors, Bear Stearns had access to: (i) unique non-public information concerning the quality of the mortgages backing the securitizations, including detailed loan information and due diligence results; (ii) personnel responsible for selecting the mortgages and creating the securitizations. 94. Bear Stearns had strong financial incentives to ignore the toxic nature of the

mortgages backing those securitizations and to sell them as supposedly prudent investments to Plaintiffs and other investors. Bear Stearns obtained substantial fees for underwriting these securitizations. Moreover, Bear Stearns was not willing to jeopardize its lucrative business relationships with the mortgage originators by sharing their non-public knowledge about the toxic nature of the mortgages backing the securitizations with Plaintiffs or other investors. f. 95. Bear Stearns Misconduct Had a Devastating Impact on the Performance of the RMBS Mortgage Pools

The Bear Stearns Defendants misconduct dramatically affected the mortgage

pools underlying the RMBS purchased by Plaintiffs. As of December 2011, on average, almost 43% of the mortgage loans backing the Bear Stearns RMBS were over 60- or 90-days delinquent, in foreclosure, bankruptcy, or repossession as reflected by the chart below: Collateral Performance of Securities Underwritten by Bear Stearns & Co. Inc. Serious Delinquencies ( = 60 Day + 90 Day + REO + Foreclosure + Bankruptcy)
Offering BALTA 2006-4 BALTA 2006-7 BSABS 2006-EC2 BSABS 2006-HE8 1 Yr. 10.72 11.34 16.82 20.47 2 Yr. 28.82 25.28 36.90 40.81 3 Yr. 41.90 39.96 55.69 58.62 4 Yr. 49.04 41.42 65.52 51.63 5 Yr. 49.01 42.02 56.75 55.64 Dec. 2011 46.35 42.82 57.84 55.64

39

Offering BSABS 2006-IM1 BSABS 2007-2 CARR 2006-NC3 CARR 2006-NC5 CARR 2006-RFC1 CARR 2007-FRE1 ELAT 2007-1 IMM 2007-A IMSA 2006-2 IMSA 2007-3 MSST 2007-1 NAA 2007-3 NCMT 2007-1 NHELI 2007-1 SACO 2006-2 SAMI 2006-AR7 SAMI 2006-AR8

1 Yr. 7.96 46.55 15.44 20.51 11.04 24.03 22.32 8.25 8.05 15.56 28.78 33.56 14.73 21.03 8.36 5.96 6.18

2 Yr. 30.35 58.42 36.07 42.88 32.75 49.59 37.86 15.01 24.98 33.01 49.71 53.78 24.69 38.90 13.38 28.87 31.49

3 Yr. 42.69 64.42 49.31 53.92 37.44 67.43 54.49 17.66 25.67 35.89 50.61 55.73 32.92 50.38 16.71 55.82 50.73

4 Yr. 45.13 57.41 53.82 52.41 51.22 72.98 51.39 17.76 17.44 30.19 31.18 51.28 28.86 46.39 20.43 61.45 55.20

5 Yr. 42.66 N/A 42.30 44.36 44.44 N/A N/A N/A 12.86 N/A N/A N/A N/A 42.84 16.85 61.25 56.10

Dec. 2011 42.79 56.05 39.96 44.36 39.54 74.85 50.27 18.34 14.50 31.02 30.79 52.28 30.05 43.62 12.17 61.34 56.02

2. 96.

Washington Mutual

Defendant WaMu Asset Acceptance Corporation (WaMu Asset) was the

depositor of six securitizations at issue, and Defendant Long Beach Securities Corp. (Long Beach Securities) served as the depositor for seven of the securitizations at issue here. Their affiliate, Defendant WaMu Capital Corporation (WaMu Capital) was the securitization arm of Washington Mutual Bank (WaMu Bank) and acted as the underwriter for the RMBS. WaMu Bank, along with Defendants Washington Mutual Mortgage Securities Corp. (WaMu Securities) and Long Beach Mortgage Company (Long Beach Mortgage), were the sponsors of the securitizations, and WaMu Bank and Long Beach Mortgage originated all or a substantial number of the loans in all but one of the WaMu RMBS at issue: Offering LBMLT 2006-11 Sponsor Long Beach Mortgage Depositor Long Beach Securities Underwriter WaMu Capital Loan Originators Long Beach Mortgage (100%)

40

LBMLT 2006-3 LBMLT 2006-4 LBMLT 2006-5 LBMLT 2006-6 LBMLT 2006-7 LBMLT 2006-8 WAMU 2006-AR7 WMABS 2006-HE2

Long Beach Mortgage Long Beach Mortgage Long Beach Mortgage Long Beach Mortgage Long Beach Mortgage Long Beach Mortgage WaMu Bank WaMu Securities

Long Beach Securities Long Beach Securities Long Beach Securities Long Beach Securities Long Beach Securities Long Beach Securities WaMu Asset WaMu Asset

WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital WaMu Capital

Long Beach Mortgage (100%) Long Beach Mortgage (100%) Long Beach Mortgage (100%) Long Beach Mortgage (100%) Long Beach Mortgage (100%) Long Beach Mortgage (100%) WaMu Bank (100%) Long Beach Mortgage (33%) Home Loan Corp. (12%) Lime Financial Services, Ltd. (11%) Mandalay Mortgage LLC (17%) WMC Mortgage Corp. (50%) CIT Group/Consumer Finance, Inc. (19%) Lenders Direct Capital Corp. (17%) WaMu Bank (71%) Argent Mortgage Co., LLC (13%) WaMu Bank (60%) GreenPoint Mortgage Funding, Inc. (24%) WaMu Bank (100%)

WMABS 2007-HE2

WaMu Securities

WaMu Asset

WaMu Capital

WMALT 2007-HY1

WaMu Securities WaMu Securities

WaMu Asset

WaMu Capital

WMALT 2007-OC2

WaMu Asset

WaMu Capital

WMHE 2007-HE2 a.
97.

WaMu Bank

WaMu Asset

WaMu Capital

WaMus High Risk Lending Strategy to Grow Profits without Implementing Necessary Controls

In 2004, WaMu launched a five year strategic plan to dramatically grow the

banks revenues and profits. In a June 1, 2004 memorandum that was first publicly disclosed with the Senate Investigations Report in April 2011, WaMus Chief Executive Officer, Kerry 41

Killinger, stated that WaMus financial targets for the next five years would be to grow our asset base and revenues by approximately 10% per year while limiting our expense growth to about 5%, in order to achieve an average [return on equity] of at least 18% and average [earnings per share] growth of at least 13%.
98.

WaMu understood that it would undertake significant new risks to meet

Killingers ambitious goals. As Killingers June 1, 2004 memorandum stated: It is important that we all focus on growth initiatives and risk taking. Above average creation of shareholder value requires significant risk taking. In this regard, Killingers memorandum identified residential nonprime and adjustable rate mortgages as key drivers for achieving WaMus financial targets, noting that there is a good opportunity to expand the origination of non-prime residential first and second mortgages through both our consumer banking and home loan stores. 99. On January 18, 2005, WaMus board of directors approved WaMus High Risk

Lending Strategy. WaMu implemented the High Risk Lending Strategy and immediately began to accelerate the origination and securitization of subprime and adjustable rate mortgages. WaMus subprime mortgage subsidiary, Long Beach Mortgage, was instrumental in realizing the expansion. WaMus financial targets required Long Beach to originate $30 billion in subprime mortgages in 2005 and $36 billion in 2006. 100. As WaMu aggressively expanded the origination of highly risky loans, it made no

effort to implement adequate oversight over its loan origination and underwriting practices. In fact, WaMu reduced its investment in loan underwriting. As Killinger explained in the June 1, 2004 memorandum, WaMu would need to significantly reduce mortgage origination costs if WaMu was to meet its ambitious financial targets, stating: We must significantly reduce the cost of originating mortgages by adopting automated underwriting and other loan fulfillment 42

processes. Our multiple origination platforms have led to very poor efficiency. Our goal is to increase automated underwriting to 80% or more, which we expect to have a positive effect on the cost of origination. 101. As a result, WaMu lost its ability to properly originate and underwrite mortgages.

For example, WaMus Chief Credit Officer warned Killinger in June 2005 that WaMus business was growing so fast that it could not catch up and quantify the risk. This was particularly true for the increased origination of subprime mortgages by Long Beach Mortgage. An internal audit dated September 21, 2005 (publicly disclosed in April 2011 with the Senate Investigations Report) noted serious problems in Long Beach Mortgages loan underwriting practices, including: Underwriting guidelines established to mitigate the risk of unsound credit decisions were not always followed, and the decisioning methodology was not always fully documented. The majority of exceptions resulted from using unverified income or the unsupported exclusion of debt items in the debt-to-income calculation. Controls within the loan origination system can be overridden to allow employees without documented authority to approve loans. The loan approval forms documenting the clearing of conditions were not fully completed in 60% of the files reviewed. WaMu never addressed Long Beach Mortgages inadequate loan acquisition

102.

practices. An internal audit dated September 28, 2007 (publicly disclosed in April 2011 with the Senate Investigations Subcommittee Report) continued to note serious problems in Long Beach Mortgages subprime loan underwriting practices, stating: The overall system of risk management and internal controls has deficiencies related to multiple, critical origination and underwriting processes. * * *

43

Repeat IssueUnd derwriting guidelines es g stablished to mitigate the risk of unsound underwritin are not always fol f ng llowed. [] Improv vement in controls designed to ensure ad d dherence to o Exception Oversig Policy and Proce dures is re ght equired [] Accura reporting and tracki of excep ate g ing ptions to pol licy does no ot exist. b. 103. WaM Incentiv Mu vized Emplo oyees to Originate High Risk h Loa Regardless of Loan Quality ans

WaMu employees in charge of originati ing mortgag were pa accordin to ges aid ng

volume, re egardless of loan quality In fact, WaMu emplo f y. W oyees receiv higher co ved ompensation for n originating riskier loa g ans. As CW 6, a senior underwriter credit risk manager an credit quality W r, k nd manager at WaMu fro 2003-20 in Bellev a om 008 vue, Washin ngton, stated The mor you slam d, re mmed out, the more you mad m de. 104 4. WaMus sales mes ssage was re einforced fro the top. In late 2006 WaMu H om 6, Home

Loans Pre esident Dav Schneid gave a presentation to thousa vid der n ands of Wa aMu employ yees, including loan underw writers and risk managers, emphasiz r zing the imp portance of sales to Wa aMu. ion ng Schneiders presentati included the followin slide:

105.

Schneid testified before the Senate Inve der d estigations S Subcommitte that We Are ee

ALL in Sa ales was an appropriate message, in ncluding for WaMus ris managers. sk .

44

106.

The Senate Investigations Report documents how WaMus pervasive sales

culture, ambitious financial targets, and lack of risk controls resulted in shoddy lending practices that produced billions of dollars in poor quality loans. WaMus lending practices included: (i) offering high risk borrowers large loans; (ii) steering borrowers to higher risk loans; (iii) accepting loan applications without verifying the borrowers income; (iv) using loans with low teaser rates to entice borrowers to take out larger loans; and (v) promoting negative amortization loans which led to many borrowers increasing rather than paying down their debt over time. Numerous confidential witnesses who worked at WaMu during the relevant time period support these findings. For example: 107. CW 7, a senior loan consultant at WaMu from 2005-2007 in Riverside, California,

stated that WaMus commission guidelines for loan origination personnel contained extra commissions for teaser rate loans. CW 7 also recalled emails about commission specials that granted increased commissions for riskier non-conforming or subprime loans. 108. CW 8, a WaMu loan closing coordinator from 2003-2007 in Bethel Park,

Pennsylvania, stated that mortgages were not explained properly to the buyer, so they didnt know the [interest] rate was going to go up. 109. CW 9, a senior loan coordinator at WaMu from 2006-2007 in San Antonio, Texas,

reported tremendous pressure from the sales guys to approve loans and that, with the involvement of WaMu management, even questionable loans usually got taken care of one way or another. CW 9 further explained that WaMus loan sales personnel and managers were above [WaMus] loan processors, and therefore WaMus loan processors were supposed to yield to whatever their needs were. 110. CW 10, a senior underwriter at WaMu/Long Beach from 2004 to 2007 in Dallas,

Texas, stated that WaMu routinely issued mortgages to borrowers without establishing their 45

credit score if they provided three alternative trade lines. An alternative trade line was anything that did not appear on the borrowers credit report, including documentation of car insurance payments, verification of rent payment, or a note from a person claiming the borrower had repaid a personal debt. CW 10 stated that by the end of 2006 these mortgages constituted a majority of first payment defaultsloans on which the borrower failed to make even the first paymentand that It was just a disaster. 111. CW 11, a senior underwriter at Long Beach from 2004 to 2007 in Illinois, stated

that WaMus companywide culture required employees to do. CW 11 stated that There really were no restrictions to approve a loan. For example, according to CW 11, WaMu allowed salespeople to give interest-rate exceptions to borrowers to push loans through. CW 11 stated that WaMus rate exceptions were ridiculous, and some really bad loans went through. The attitude at WaMu was push, push, pushBasically, sales is what ran Long Beach Mortgage, it wasnt the Operations part. 112. CW 12, a mortgage underwriter at Long Beach from 2005 to 2006 in Lake

Oswego, Oregon, stated that there was always a sense of working the underwriting guidelines to close loans, rather than to mitigate credit risk. CW 12 said that there was simply an environment to approve, approve, approve and that any exception that was needed to approve a loan was not only done, but was sought after. CW 12 felt that Long Beach consistently pressured its underwriters to find a way to make it work. 113. CW 13, a senior underwriter at WaMu from 2003 through 2007 in Livermore,

California, said that if Long Beachs competitors could not approve a loan, it was known to send the loan to Long Beach and they would make an exception to get the loan through. CW 13 explained that guidelines were loose to the point of disbelief, describing Long Beachs lending

46

approach as follows: If they were breathing and had a heartbeat, you could probably get the loan done. 114. Numerous additional witnesses who came forward after WaMu collapsed

corroborate these accounts. For example, The New York Times published an article quoting Steven M. Knobel, founder of an appraisal company that did business with WaMu, saying that If you were alive, [WaMu] would give you a loan. Actually, I think if you were dead, they would still give you a loan. c. 115. WaMu Pressured Appraisers to Increase the Stated Value of the Collateral

Accurate appraisals are critical for properly evaluating the risk and magnitude of

loss in case of borrower default. If the appraisal is artificially inflated, investors will be under the mistaken impression that the collateral supporting their investment is worth more than it really is. 116. Starting in 2006, WaMu outsourced the vast majority of its residential lending

appraisal work to two appraisal companies, First American eAppraiseIT (eAppraiseIT) and LSI Appraisal (LSI). WaMu instructed eAppraiseIT and LSI to only use appraisers from a list of pre-approved appraisers. This WaMu appraiser list was created and continually updated by WaMu sales personnel with a financial interest in purchasing more mortgages regardless of the quality of the collateral. 117. Appraisers who submitted appraisals that were too low to get loans approved were

told to inflate their appraisals or risk exclusion from the WaMu appraiser list. For example, CW 14, a chief appraiser at WaMu from 1990 to 2002, who later worked for an appraisal management company that bid on work from WaMu, stated that a WaMu vice president for appraisal oversight made it clear that CW 14s company would only get the contract if it agreed to use appraisers on the WaMu appraiser list. CW 14 understood that WaMu wanted her company to use appraisers that would give WaMu loan originators the appraisals they needed to 47

get loans approvedthe same WaMu Vice-President for appraisal oversight told her that he had informed another appraisal company that it would Get the work if you can make the appraisal noise stop. CW 14s statements are confirmed by internal WaMu documents that have only recently been disclosed, including an April 27, 2007 email from former WaMu oversight officer Sabina Senorans who discussed the WaMu appraiser list as follows: The sales people finally got their way at WAMU. The appraisal list that Eappraiseit and LSI is using has been totally scrubbed, but instead of keeping good appraisers, they went for the Badd [sic] onesSo many appraisers have been knocked off the listI did manage to salvage a few in Nassau County, but other areas, forget about it. Now sales can easily threaten to take an appraiser off their list if they cannot get what they want. Scary, huh? 118. After awarding appraisal contracts, WaMu continued to pressure its appraisal

companies, including eAppraiseIT, to change appraisals by increasing the value of the collateral. CW 15, a senior loan coordinator and mortgage processor at WaMu in 2007 in Jacksonville, Florida, recalled meetings between WaMu senior managers and eAppraiseIT because WaMu was concerned that the appraisals were coming out too low. One of CW 15s managers reported on those meetings, telling CW 15 that WaMu management had met with eAppraiseIT to demand less resistance against WaMus efforts to obtain higher appraisal values, and that eAppraiseIT were going to do everything possible within reason to accommodate [WaMus] needs in terms of the appraised values. 119. WaMus senior management also pressured WaMu employees to increase the

value of appraisals for WaMu mortgages. CW 16, a loan coordinator at WaMu from 2005 to 2007 in Jacksonville, Florida, stated that management was always on top of loan coordinators such as herself to make loans go through. CW 16 explained that the pressure from management caused WaMu loan consultants to work with appraisers to try to make loans go through.

48

120.

CW 17, an appraisal coordinator at WaMu from 2001-2006 in Florida, explained

how this worked in practice. When the appraised value was too low to support the mortgage, WaMu sales personnel submitted a reconsideration of value or ROV to the appraiser. Appraisers routinely complied with WaMus reconsideration of value submissions. CW 17 stated that around 80% of the time when an ROV was requested by WaMu, the appraisal value was increased. CW 17 stated that reconsiderations of value were done constantly and that, compared with the number of ROVs between 2002 and 2005, the number of ROVs doubled or tripled during the period between 2005 and 2007. 121. WaMu also paid appraisers to increase the value of their appraisals for WaMu

mortgages. CW 18, a loan consultant at WaMu from 2003 to 2005 in Largo, Maryland, stated that many appraisers received kickbacks from loan consultants to provide the desired valuation, describing the WaMu appraisal process as corrupt and dysfunctional. 122. WaMus strategy allowed WaMu and its divisions to originate billions of dollars

in additional mortgages, but undermined the accuracy of the valuation of the collateral supporting those mortgages. WaMu transferred this risk to Plaintiffs and other investors by including those mortgages into securitizations, including into the WaMu securitizations at issue here. As the New York Attorney General stated in a complaint against eAppraiseIT dated November 1, 2007: The integrity of our mortgage system depends on independent appraisers. Washington Mutual compromised the fairness of this system by illegally pressuring appraisers to provide inflated values. 123. It was foreseeable that WaMus improper appraisal strategy would cause

enormous damage to Plaintiffs and other investors who purchased WaMu RMBS. d. 124. WaMu Consciously Securitized Fraudulent Mortgages

As revealed by the FCIC, approximately 27% of the WaMu-securitized loans

sampled by Clayton during the height of the mortgage boom failed to meet the originators 49

underwriting guidelines and lacked sufficient compensating factors. Strikingly, WaMu waived in approximately 29% of such defectively originated loans and securitized them into RMBS that were sold to investors like Plaintiffs. As described above, the percentage of mortgages that failed to meet guidelines and accordingly, the percentage of defective loans being included into WaMu securitizations was, in truth, likely far higher than reported because investment banks such as WaMu pressured their due diligence vendors to provide the desired results. 125. Further, the Senate Investigations Report revealed that WaMu originated large

volumes of fraudulent mortgages, involving at least five separate WaMu loan offices in California alone. For example, in 2005, WaMu launched an internal investigation into the loan origination practices of two loan offices in Southern California that originated numerous WaMu mortgages, following a sustained history of confirmed fraud findings over the past three years. A November 2005 memorandum summarizing the investigation stated that the investigation uncovered an extensive level of loan fraud virtually all of it stemming from employees circumventing bank policy surrounding loan verification and review. The investigation

discovered that 42% of the loans reviewed contained suspect activity or fraud, virtually all of it attributable to some sort of employee malfeasance or failure to execute company policy. A November 16, 2005 presentation by WaMus Credit Risk Management stated that the fraud primarily involved misrepresentations of loan qualifying data, including misrepresentations of income and employment, false credit letters and appraisal issues. WaMu undertook no action to address the fraud problems in these two officesthe persons responsible for the fraud remained in charge of the offices and continued to win WaMu awards for originating large volumes of mortgages. 126. A separate WaMu investigation into another WaMu loan office revealed

fabricated asset statements, altered statements, income misrepresentation and one statement that 50

is believed to have been used in two separate loans. A WaMu sales employee stated that if it was too late to call the borrower, sales associates would take bank statements from other files and cut and paste the current borrowers name and address onto old bank statements. In addition, it was discovered that sales employees would manufacture asset statements from previous loan documents. As the sales employee explained, the pressure was tremendous, and they were told to get the loans funded with whatever it took. 127. Documents uncovered by the Senate Investigations Subcommittee also revealed

that WaMu had no effective internal controls to prevent the securitization of fraudulent mortgages. Indeed, the Senate Investigations Subcommittee established that WaMu securitized mortgages after WaMu determined that they contained fraudulent information. For example, a WaMu Internal Corporate Credit Review memorandum discovered by the Senate Investigations Subcommittee stated: The controls that are intended to prevent the sale of loans that have been confirmed [...] to contain misrepresentations or fraud are not currently effective. There is not a systematic process to prevent a loan [...] confirmed to contain suspicious activity from being sold to an investor. * * *

Of the 25 loans tested, 11 reflected a sale date after the completion of the investigation which confirmed fraud. There is evidence that this control weakness has existed for some time. As a result, the Senate Investigations Report determined that even loans marked with a red flag indicating fraud were being sold to investors. e. 128. WaMu Deliberately Securitized Delinquency-Prone Mortgages

In September 2006, senior WaMu executives expressed concern about exposure to

delinquencies in adjustable rate option-arm mortgages that the bank was holding in its Held For Investment (HFI) portfolio. In response, WaMu began to explore the possibility of quickly 51

selling these mortgages into securitizations. Documents discovered by the Senate Investigations Subcommittee show that, in the meantime, WaMu closely monitored the delinquencies in its HFI portfolio. For example, on February 14, 2007, WaMu research and portfolio executive Youyi Chen sent an email to the head of Defendant WaMu Capital, David Beck, informing him about the delinquencies in the HFI option-arm portfolio, noting that Low fico, low doc, and newer vintages are where most of the delinquency comes from. Beck immediately sent an email to WaMu Home Loans President David Schneider and the Chief Risk Officer of WaMus Home Loans Division, Cheryl Feltgen, urging the sale of HFI option-arm mortgages that WaMu was holding for investment, stating in part: The performance of newly minted option arm loans is causing us problems. Cheryl can validate but my view is our alt a (high margin) option arms [are] not performing well. We should address selling 1Q [first quarter] as soon as we can before we loose [sic] the oppty. We should have a figure out how to get this feedback to underwriting and fulfillment. 129. In light of its analysis that HFI option-arm loans were rapidly deteriorating,

WaMu no longer wanted to treat those loans as investments it would keep, but sell them. Schneider and Feltgen agreed. Moreover, Feltgen informed Beck and Schneider that WaMu CEO Kerry Killinger had also expressed interest in the idea of selling HFI option-arm loans, and offered to help in analyzing the impact of selling certain groupings of Option-Arms on overall delinquencies. By removing delinquency-prone loans from WaMus HFI option-arm portfolio, WaMu would be reducing the overall delinquencies. In response, Schneider formulated a plan of action, instructing Beck to select the HFI option-arm loans along the lines we discussed at the [monthly business review] and Feltgen to run credit scenarios. The documents discovered by the Senate Investigations Subcommittee reveal that during the referenced monthly business

52

review, WaMu executives discussed a review of the 2007 high margin production (Jan and Feb so far) and the seasoned COFI [Cost of Funds Index] book. 130. On February 20, 2007 Feltgen informed her team that WaMu was contemplating

the sale of a larger portion of our Option Arms than we have in the recent past, and asked for their recommendations as which loans were particularly delinquency-prone and should be included in upcoming securitizations, stating: In addition to the specific information that David Beck asks for, I would like your input on portions of the Option ARM portfolio that we should be considering selling. We may have a different view than David Becks team as to the most desirable to sell and we should provide that input. Our suggestion, for instance, might include loans in California markets where housing prices are declining. There may be other factors. 131. A WaMu risk analyst responded the same day, noting that the HFI option-arm

loans in January 2007 were suffering from 79% more 60+ day delinquencies than the HFI optionarm loans in January 2006, that WaMu was now holding $60.6 billion in loans with such severe delinquencies, and that more than one-third of these delinquent mortgages had been originated in California. Between January 2006 and January 2007 the 60+ day delinquency rate for delinquent mortgages in California had increased 312%. 132. On February 25, 2007, the head of Defendant WaMu Capital, David Beck, sent an

email with the subject HFI Options Arms redirect to HFS, informing WaMus senior management that $3 billion in recent Option Arms would be sold into securitizations. Beck stated: I would like to get these loans into HFS immediately so that can sell as many as possible in Q1. 133. On February 29, 2007, WaMu executive Youyi Chen sent an email with the

subject line HFI criteria changes to WaMus Market Risk Management Department, copying Beck. The email informed WaMus Market Risk Management Department that going forward, 53

only certain unsellable loans would be held for investment: (a) Super Jumbos loans equal or greater than $3 million; (b) high LTV loans without mortgage insurance; (c) foreign nationals; and (d) 3-4 units (due to Standard Poors rating model). Moreover, Chen requested that

mortgages that did not meet these criteria and that were funded or locked between January 1, 2007 and March 7, 2007 be classified as Held for Sale. Chen described the impact of these changes as follows: As a result of this change, we expected to securitize and settle about $2 billion more option/COFI ARMS in Q1-07 [] and going forward $1 billion per month potential incremental volume into the HFS. 134. The Senate Investigations Subcommittee determined that WaMu carried out this

plan and transferred at least $1.5 billion of Option Arms originated in the first quarter of 2007 from the HFI to the HFS portfolio. None of the WaMu witnesses heard by the Senate

Investigations Subcommittee denied that the loans that were reclassified from Held for Investment to Held for Sale were selected because of their propensity toward delinquency. 135. Defendant WaMu Capital sold the RMBS for the WaMu securitizations without

informing Plaintiffs about WaMus change in policy to include delinquency-prone mortgages into the pool by reclassifying those mortgages from Held for Investment to Held for Sale. WaMu Capital knew or recklessly disregarded that this would cause damages to investors who purchased the WaMu RMBS. f. 136. WaMus Misconduct Had a Devastating Impact on the Performance of the RMBS Mortgage Pools

The WaMu Defendants and Long Beach Defendants misconduct has

dramatically affected the mortgage pools underlying the RMBS purchased by Plaintiffs. As of December 2011, on average almost 46% of the loans backing the Certificates were over 60- or 90-days delinquent, in foreclosure, bankruptcy, or repossession as reflected by the chart below: 54

Collateral Performance of Securities Underwritten by WaMu Capital Corp. Serious Delinquencies in % of mortgage pools (60 Day + 90 Day + Foreclosure + REO + Bankruptcy)
Offering LBMLT 2006-11 LBMLT 2006-3 LBMLT 2006-4 LBMLT 2006-5 LBMLT 2006-6 LBMLT 2006-7 LBMLT 2006-8 WAMU 2006-AR7 WMABS 2006-HE2 WMABS 2007-HE2 WMALT 2007-HY1 WMALT 2007-OC2 WMHE 2007-HE2 1 Yr. 24.15 19.98 20.03 18.74 18.79 20.00 20.58 0.99 12.95 31.22 10.63 24.29 26.86 2 Yr. 38.05 43.34 43.49 39.06 42.26 38.97 42.82 9.31 39.59 48.62 25.13 44.07 41.46 3 Yr. 53.71 51.91 50.03 48.87 50.76 48.78 51.34 27.49 47.14 58.63 33.75 46.09 52.83 4 Yr. 48.43 57.51 56.29 53.12 53.84 49.79 48.98 34.61 50.96 52.90 35.24 41.13 49.77 5 Yr. 43.69 54.80 54.92 54.99 55.65 53.07 50.17 34.62 51.07 N/A N/A N/A N/A Dec. 2011 43.69 50.70 51.83 51.50 50.64 49.60 47.16 33.43 46.71 49.39 33.18 38.34 46.76

3. 137.

JPMorgan

As the sponsor, Defendant J.P. Morgan Mortgage Acquisition Corp. (J.P.

Morgan Acquisition) was responsible for selecting and evaluating the mortgages backing 13 of the 19 JPMorgan RMBS at issue here. J.P. Morgan Acquisition operated under the strict

supervision and control of its corporate parents, Defendants JPMorgan Chase Bank, N.A. and JPMorgan Chase & Co. JPMorgan Chase Bank, N.A. and Chase Home Finance LLC (a whollyowned subsidiary of JPMorgan Chase Bank and JPMorgan Chase & Co.) (together Chase Originators), originated a substantial number of the loans that J.P. Morgan Acquisition included in seven of the deals for which it served as sponsor: Offering JPALT 2006-A2 Sponsor J.P. Morgan Acquisition Underwriter J.P. Morgan Securities Inc. Loan Originators Chase Originators (16%) Countrywide Home Loans (27%) M&T Mortgage Corporation (17%) PHH Mortgage Corporation (24%) Chase Originators (68%)

JPALT 2006-A3

J.P. Morgan Acquisition J.P. Morgan Securities Inc. 55

Offering JPALT 2006-A5

Sponsor Underwriter J.P. Morgan Acquisition J.P. Morgan Securities Inc.

JPALT 2006-A6

J.P. Morgan Acquisition J.P. Morgan Securities Inc.

JPALT 2006-A7

J.P. Morgan Acquisition J.P. Morgan Securities Inc.

JPALT 2007-A1

J.P. Morgan Acquisition J.P. Morgan Securities Inc.

JPALT 2007-A2

J.P. Morgan Acquisition J.P. Morgan Securities Inc.

Loan Originators Chase Originators (30%) Countrywide Home Loans (28%) PHH Mortgage Corporation (26%) GreenPoint Mortgage Funding, Inc. (15%) Chase Originators (17%) Countrywide Home Loans (57%) PHH Mortgage Corporation (16%) Chase Originators (17%) Flagstar Bank, FSB (50%) Countrywide Home Loans (20%) Chase Originators (42%) GreenPoint Mortgage Funding, Inc. (39%) Countrywide Home Loans (13%) Chase Originators (55%) American Home Mortgage Corp. (20%) GreenPoint Mortgage Funding, Inc. (13%)

138.

JPMorgan knew or recklessly disregarded that the loans it originated and

securitized into its RMBS were of much poorer quality than represented to Plaintiffs and other investors. a. 139. JPMorgans Lagging Performance in 2005 and 2006

In 2005, JPMorgan was seriously underperforming the market. By October 2005,

JPMorgans share price was down 12% and underperforming the S&P 500, the Dow Jones Industrial Average, the NASDAQ Composite, as well as every other major financial institution, including Bear Stearns, Washington Mutual, Morgan Stanley, and Goldman Sachs. This created intense pressure at JPMorgan to improve revenues. JPMorgans CEO, Jamie Dimon, stated in JPMorgans 2005 Annual Report: 56

We are underperforming financially in many areas. We need to understand the reasons and focus our energy on making improvements, not excuses. We cannot afford to waste time justifying mediocrity. Each line of business now assesses its performance in a rigorous and very detailed way. Each compares results to targets in a variety of areas, including sales force productivity, customer service and systems development. 140. Dimon emphasized that it was imperative for JPMorgan to begin designing the

right products that are also profitable to improve performance. As a result, JPMorgan began to expand its high risk loan origination and securitization activities with a focus on new product expansion activities. 141. In 2006, JPMorgans performance was still trailing the performance of major

competitors, including Bear Stearns, Morgan Stanley, and Goldman Sachs. Dimon identified increased origination and securitization of residential mortgages as a key area for JPMorgans growth in 2007, stating in the 2006 Annual Report: Historically, our two businesses, Home Lending and the Investment Bank, barely worked together. In 2004, almost no Home Lending mortgages were sold through our Investment Bank. This past year, however, our Investment Bank sold 95% of the non-agency mortgages (approximately $25 billion worth) originated by Home Lending. As a result, Home Lending materially increased its product breadth and volume because it could distribute and price more competitively. This arrangement obviously helped our sales efforts, and the Investment Bank was able to build a better business with a clear, competitive advantage. In 2006, our Investment Bank moved up several places in the league-table rankings for mortgages. (Importantly, Home Lending maintained its high underwriting standards; more on this later.) 142. As JPMorgan was expanding its loan origination and securitization practices,

JPMorgan understood that investors would be particularly focused on its underwriting practices with respect to the mortgages that JPMorgan securitized. JPMorgans 2006 Annual Report reassured investors that JPMorgan had materially tightened its underwriting standards and would be even more conservative in originating mortgages. 57

143.

In fact, by October 2006, JPMorgan had itself become alarmed by the increasing

number of late payments in its own subprime portfolio, causing JPMorgan to sell its own investments in subprime mortgages. A February 17, 2010 article in Bloomberg reported that In October 2006, Mr. Dimon, JPMorgans CEO, told William A. King, its then head of securitized products, that [JPMorgan] needs to start selling its subprime mortgage positions. A September 2, 2008 article in Fortune Magazine quoted Dimon saying to King, Billy, I really want you to watch out for subprime! We need to sell a lot of our positions. I've seen it before. This stuff could go up in smoke! 144. However, as JPMorgan was selling its own subprime positions because it could

go up in smoke, JPMorgan aggressively expanded the origination and securitization of high risk mortgages. From 2006 to 2007, JPMorgan nearly doubled its securitizations of residential mortgagesfrom $16.8 billion in 2006 to $28.9 billion in 2007. To generate these enormous amounts of securities, JPMorgan incentivized its Chase Home Finance employees to originate high-risk mortgages, loosened underwriting standards, and included the resulting poor-quality mortgages into JPMorgan securitizations, including those set forth in the table above. 145. JPMorgan did not tighten already conservative underwriting standards, as Dimon To the contrary, JPMorgan materially loosened already lax underwriting

had represented.

standards. In 2006 and 2007, JPMorgan incentivized its Chase Home Finance employees to originate high-risk loans. Former regional Vice-President, James Theckston, was the 2006

recipient of the Chase Home Finance sales manager of the year award. He explained to The New York Times that 60% of his 2006 performance review depended on him increasing the origination of high-risk loans. Theckston further stated that Chase Home Finance executives could earn a commission for the origination of subprime loans that was seven times higher than for prime mortgages, and that they therefore looked for less savvy borrowersthose with less 58

education, without previous mortgage experience, or without fluent Englishand directed them toward subprime loans. According to Theckston, these borrowers were disproportionately

African-American and Latino borrowers who, as a result of Chase Home Finance practices, ended up paying higher mortgage rates and were more likely to default and lose their homes. 146. CW 19, a senior mortgage underwriter at Chase Home Finance from 2002 to 2008 CW 19 stated that for

in Fort Washington, Pennsylvania, confirmed Theckstons account.

subprime mortgages, underwriters were compensated based on the number of mortgages that they approved, whereas for prime mortgages underwriters were compensated based on the number of loans reviewed, regardless of whether the loan was approvedthus skewing the system in favor of approving subprime loans, regardless of quality. Moreover, CW 19 stated that underwriters who denied approval of subprime loans would not receive credit if their determinations were subsequently overruled by managementgiving underwriters an extra financial incentive to approve high risk loans. 147. JPMorgans skewed incentives encouraged its employees to find ways to

circumvent stated loan underwriting and approval standards. For example, Chase Home Finance personnel circulated a JPMorgan memorandum explaining how to circumvent JPMorgans automated loan underwriting system (referred to as ZIPPY) in order to get high risk loans approved. A March 27, 2008 article from The Oregonian, described this JPMorgan

memorandum as follows: The memos title says it all: Zippy Cheats & Tricks. It is a primer on how to get risky mortgage loans approved by Zippy, Chases in-house automated loan underwriting system. The secret to approval? Inflate the borrowers income or otherwise falsify their loan application.

59

148.

Numerous witnesses have independently confirmed that JPMorgan materially

loosened its underwriting standards while it was incentivizing the origination and approval of low quality mortgages. For example: CW 20, a senior mortgage underwriter at Chase Home Finance from 2002 to 2008 in Covina, California, stated that CW 20 participated in meetings and conference calls with the manager of underwriting, who instructed underwriters to loosen up because we were being too conservative. CW 21, a senior mortgage processor and junior underwriter at Chase Home Finance between 2002 and 2007, stated that underwriters were discouraged [from] checking out [the borrowers] place of employment and other critical information reflecting mortgage quality. As an example, CW 21 recalled one instance where an underwriter wanted to confirm a borrowers employment and the loan officer and branch manager came to the underwriter and said, Cant you just pretend like you didnt check the job? CW 22, a mortgage funder at Chase Home Finance between 2002 and 2006 in Thousand Oaks, California, stated that many of her co-workers shared her opinion that Chase Home Finance was originating riskier and riskier loans: I remember coworkers saying, Whats going on? This is crazysomething bads going to happen. These accounts were confirmed by testimony from JPMorgans Chief Risk

149.

Officer, Barry Zubrow, and JPMorgans CEO, Jamie Dimon, before the FCIC. In August 2010, Zubrow testified that at JPMorgan there was a tradeoff between certain financial covenants and protections versus a desire to maintain market share. Dimon admitted during his October 2010 testimony that In mortgage underwriting, somehow we just missed, you know, that home prices dont go up forever and that its not sufficient to have stated income. 150. Relying on poor underwriting, JPMorgan originated numerous mortgages that

were destined to fail. As James Theckston stated to The New York Times, If you had some old bag lady walking down the street and she had a decent credit score, she got a loan. The New York Times noted that, when asked for a response to Theckstons account, JPMorgan didnt deny the accounts of manic mortgage-writing and noted that Chase no longer writes subprime or no-document mortgages. 60

b. 151.

JPMorgan Consciously Securitized Poor Quality Loans

JPMorgan routinely included poor quality mortgages in its securitizations.

Indeed, Theckston noted that senior JPMorgan executives were more likely to turn a blind eye to mortgage origination and underwriting short cuts when mortgages were going to be securitized. 152. JPMorgans low standards for mortgage quality with respect to its securitizations

was confirmed by information that JPMorgans due diligence vendor, Clayton, provided to the FCIC. Clayton stated that JPMorgan had waived in 51% of the loans that Clayton had marked as fatally defective into mortgage pools that JPMorgan securitized between January 2006 and June 2007higher than any other financial institution during the same period. As stated above, this waiver rate is likely materially understated given that investment banks such as JPMorgan pressured their due diligence providers to provide favorable grades to loans. 153. JPMorgan did not disclose to Plaintiffs that it was incentivizing its employees to

originate and securitize high-risk loans, that it was loosening its underwriting standards, or that it was waiving in a majority of mortgages that its due diligence vendor had marked as fatally defective. To the contrary, JPMorgan reassured investors that it was using even more

conservative and materially tightened underwriting standards for the mortgages it originated and securitized in 2007. c. 154. JPMorgans Reckless RMBS Sales Practices

JPMorgan routinely acted as lead underwriter for RMBS that were created by

other institutions. In this capacity, JPMorgan sold to Plaintiffs RMBS that were backed by loans originated by those institutions or other mortgage lenders. 155. JPMorgan knew, or at the very least recklessly disregarded the poor quality of the

mortgages backing those securitizations. As lead underwriter and repeat business partner of those mortgage lenders, JPMorgan had access to: (i) unique, non-public information concerning 61

the mortgages backing the deals, including detailed loan information and due diligence results; and (ii) personnel responsible for originated and underwriting the mortgages that were included in those securitizations; and (iii) personnel responsible for selecting the mortgages and creating the deals.
156.

JPMorgan had strong financial incentives to ignore the toxic nature of the

mortgages that backed those securitizations and to sell the RMBS as supposedly prudent investments to Plaintiffs. JPMorgan obtained a substantial amount of fees for underwriting those deals, and did not want to jeopardize its lucrative business relationships by sharing its non-public knowledge about the true quality of the loans that backed those RMBS. d. 157. JPMorgans Misconduct Had a Devastating Impact on the Performance of the RMBS Mortgage Pools

The JPMorgan Defendants misconduct dramatically affected the mortgage pools

underlying the RMBS purchased by Plaintiffs. As of December 2011, on average almost 41% of the loans backing the JPMorgan RMBS were over 60- or 90-days delinquent, in foreclosure, bankruptcy, or repossession by December 2011: Collateral Performance of Securities Underwritten by JPMorgan Serious Delinquencies in % of mortgage pools (60 Day + 90 Day + Foreclosure + REO + Bankruptcy)
Offering ARSI 2006-M2 ARSI 2006-W4 CBASS 2007-CB6 INDX 2006-AR29 JPALT 2006-A2 JPALT 2006-A3 JPALT 2006-A5 JPALT 2006-A6 JPALT 2006-A7 JPALT 2007-A1 JPALT 2007-A2 JPMAC 2006-CW1 JPMAC 2006-HE3 JPMAC 2006-NC1 JPMAC 2006-RM1 1 Yr. 19.72 18.88 22.28 7.39 4.32 4.16 5.22 6.38 8.00 16.61 21.07 9.58 22.65 11.48 21.80 2 Yr. 41.76 41.69 39.22 26.68 15.11 15.61 18.30 20.59 23.48 38.71 44.73 30.72 41.24 32.01 45.17 3 Yr. 45.56 57.77 47.62 40.74 32.97 34.02 35.26 37.55 42.57 51.32 53.17 50.75 55.10 42.36 55.64 4 Yr. 39.34 49.05 42.47 38.01 37.82 43.85 41.96 44.12 47.74 53.71 53.05 59.43 46.71 48.37 44.57 5 Yr. 34.09 40.33 N/A 35.40 38.82 41.20 39.73 42.86 41.65 51.86 N/A 63.42 45.63 43.58 45.46 Dec. 2011 34.64 38.89 43.43 35.66 35.68 33.71 37.67 41.12 41.79 46.94 47.44 64.34 43.18 39.82 42.21

62

JPMAC 2006-WMC2 JPMAC 2006-WMC3 RASC 2006-KS7 RASC 2007-KS2

16.43 17.50 13.44 21.12

38.35 37.34 26.66 33.71

47.94 53.68 35.34 45.91

49.57 45.14 30.25 32.35

50.59 47.52 28.57 N/A

46.80 44.69 28.85 30.65

D. 158.

Defendants Manipulated the RMBS Credit Ratings Defendants knew that, to sell their RMBS, they needed to obtain the highest

possible investment grade ratings from the credit rating agencies (CRAs)Moodys and S&P. Defendants featured the credit ratings prominently in the Offering Materials. Defendants knew, however, that the ratings were not accurate or reliable because they were: (i) based on false information that Defendants provided to the CRAs; and (ii) the result of improper influence exerted by Defendants over the CRAs. 1. 159. Defendants Knowingly Supplied False Information to the Rating Agencies

RMBS credit ratings assess the risk of loss for each tranche in a securitization by

determining the likelihood that the mortgage payments in the designated mortgage pool will be made on a timely basis. S&Ps former North American Practice Leader for RMBS, Susan Barnes, testified before the Senate Investigations Subcommittee that: [a]t their core, S&P credit ratings represent our opinion of the likelihood that a particular obligor or financial obligation will timely repay owed principal and interest. The Chairman and Chief Executive Officer of

Moodys, Raymond McDaniel, similarly testified that Moodys ratings provide predictive opinions on one characteristic of an entityits likelihood to repay a debt in a timely manner. 160. CRAs review information concerning the borrowers willingness and ability to

pay, the value of the collateral, and the results of the credit, compliance and valuation due diligence of the mortgage pool. As Barnes testified, S&P collects from the arranger of the securitization up to 70 different data points related to each underlying mortgage loan, including but not limited to: the amount of equity the borrower has in the home; the loan type; the extent of income verification; whether the borrower occupies the home; and the purpose of the loan. Our 63

analysis of this data allows us to quantify multiple risk factors, or the layered risk, and allows us to assess the increased default probability that is associated with each factor. 161. Importantly, CRAs do not undertake any independent due diligence. McDaniel

similarly testified on behalf of Moodys that, We do not receive or review individual loan files; we do not conduct due diligence; we do not structure the security; and we do not sell or in any way participate in the sales of a security. In addition, McDaniel explained that the credit ratings depended on the information that Moodys received from the investment banks, stating that the quality of our opinions is directly tied to the quality of the information we receive from the originators and the investment banks. 162. Defendants knew at all relevant times that the CRAs did not have access to the

loan files and would not independently verify the information that Defendants provided concerning the quality of the mortgage pools backing the RMBS at issue. For example, S&Ps standard terms and conditionsincluded with each S&P letter assigning credit ratingsstated that Standard & Poors undertakes no duty of due diligence or independent verification of information received from you or your agents. 163. Defendants knew at all relevant times that the CRAs did not have access to the

loan files and would not independently verify the information that Defendants provided concerning the quality of the mortgage pools backing the RMBS at issue. For example, S&Ps standard terms and conditionsincluded with each S&P letter assigning credit ratingsstated that S&P undertakes no duty of due diligence or independent verification of information received from your or your agents. 164. Defendants provided the CRAs with critical information about the quality of the

mortgage pools backing their RMBS, including information about the borrowers purported ability and willingness to pay, the value of the collateral, and the results of their due diligence of 64

the mortgage pools. However, Defendants knew or, at a minimum, recklessly disregarded that the information they provided to the CRAs overstated the borrowers ability to pay and the value of the collateral. For example, Bear Stearns did not disclose to the CRAs that it had adopted a deliberate policy to securitize loans before expiration of the EPD period. WaMu did not disclose that it was securitizing fraudulent mortgages and mortgages it had identified as delinquencyprone. And JPMorgan did not disclose that it was incentivizing its employees to originate and securitize high-risk mortgages while simultaneously loosening its underwriting standards. Defendants also did not disclose to the CRAs that they: (i) deliberately limited their due diligence of the mortgage pools; (ii) put pressure on their due diligence vendors to limit the number of identified fatally defective loans; and (iii) waived in numerous loans that they knew to be fatally defective. 165. The information in above was material to the CRAs ratings of the RMBS. If the

CRAs had received full and accurate disclosure about the quality of the mortgage pools, Defendants underwriting standards, and Defendants due diligence results, they would not have issued investment grade credit ratings for the RMBS at issue. 2. 166. Defendants Exerted Improper Pressure over the Rating Agencies

In April 2011, the Senate Investigations Report revealed that a number of

investment banks, including Bear Stearns, JPMorgan, and WaMu, were pressuring [the rating agencies] to ease rating standards for RMBS. For example, Defendants routinely threatened to take their business to a different CRA. Defendants also blacklisted individual CRA analysts who refused to provide favorable credit ratings for the toxic mortgage portfolios they were offloading to investors. 167. Until recently, the CRAs were conservative institutions that provided independent

opinions on the credit risk of corporations to a paying subscribership. This changed, however, 65

with the transformation of the CRAs subscriber fee-based businesses to a business that derived revenues largely from the issuers of the securities they rated. From 2004 to 2007, Moodys and S&Ptwo CRAs that were regularly employed by Defendants and that rated all of the RMBS at issueproduced a record number of ratings and revenues for rating structured finance products. During that time, S&P issued more than 5,500 RMBS ratings and Moodys issued over 4,000 RMBS ratings. To obtain a RMBS rating, CRAs charged issuers a fee ranging from $50,000 to more than $1 million. The CRAs also charged an additional surveillance fee per RMBS ranging from $35,000 to $50,000. As a result, S&Ps net annual revenues nearly doubled from $517 million in 2002 to $1.16 billion in 2007, with the structured finance groups revenues tripling from $184 million in 2002 to $561 million in 2007. Moodys reported an increase in its gross revenues for credit ratings from approximately $61 million in 2002 to $208 million in 2006. 168. This change in the CRAs business model created an acute conflict of interest,

which Defendants skillfully exploited to the Plaintiffs detriment. On June 11, 2008, former SEC Chairman Christopher Cox explained the conflict as follows: When the Congress passed the Credit Rating Agency Reform Act a year and a half ago, it was well understood that certain conflicts of interest were hardwired into the rating agency business model. But we have learned since then that the ratings of structured products in the subprime area made those conflicts of interest even more acute. Thats because structured products were specifically designed for each tranche to achieve a particular credit rating and the ratings agencies then made a lucrative business of consulting with issuers on exactly how to go about getting those ratings. Selling consulting service to entities that purchased ratings became a triple-A conflict of interest. 169. The pressure on CRAs was acknowledged by Moodys Chairman and CEO

Raymond W. McDaniel who stated in an interview with The Wall Street Journal in 2008 that [e]verybody always seeks to pressure us. Anyone with a position in the credit markets will hope

66

that the credit-rating agencies agree with its opinion. Its a conflict of interest question. We cant avoid conflicts of interest. 170. The CRAs became dependent upon Defendants and other investment banks to

generate business, and were therefore vulnerable to the threat that those banks would take their business elsewhere. As Moodys Chief Credit Officer Andy Kimball explained to the Senate Investigations Committee, the practice of ratings shoppingor choosing the ratings agency that offered the highest ratingsbecame prevalent during the 2004 to 2007 time period. Gary Witt, former Managing Director at Moodys, confirmed the widespread practice of ratings shopping during his testimony before the FCIC. When asked if investment banks frequently threatened to withdraw their business if they didnt get their desired rating, Witt responded: Oh God, are you kidding? All the time. I mean, thats routine. I mean, they would threaten you all the timeIts like, Well, next time were just going to go with Fitch and S&P. 171. The threat of ratings shopping had an immediate effect on the credit ratings issued

by the CRAs. Richard Michalek, a former Moodys Vice-President and senior credit officer explained during his testimony before the FCIC that [t]he threat of losing business to a competitor, even if not realized, absolutely tilted the balance away from an independent arbiter of risk towards a captive facilitator of risk transfer. Former Moodys senior Vice President Mark Froeba explained to the FCIC that Moodys senior management put in place a new culture that would not tolerate for long any answer that hurt Moodys bottom line, resulting in a palpable erosion of institutional support for rating analysis that threatened market share. Froeba stated: When I joined Moodys in late 1997, an analysts worst fear was that he would contribute to the assignment of a rating that was wrong, damage Moodys reputation for not getting the answer right and lose his job as a result. When I left Moodys [in 2007], an analysts worst fear was that he would do something that would allow him to be singled out for jeopardizing Moodys market share, for impairing Moodys 67

revenue or for damaging Moodys relationships with its clients and lose his job as a result. 172. Defendants employed former CRA analysts to convince their former colleagues to

accede to Defendants demands, and pressured individual CRA employees, whose jobs and compensation depended on the number of ratings they issued, if they resisted. For example, Defendants would complain to the CRAs senior management about specific ratings analysts who refused to go along with Defendants demands, causing those ratings analysts to be replaced. A Moodys managing director confirmed to The Wall Street Journal, that Moodys agreed to switch analysts on deals after bankers complained. 173. Defendants routinely used their influence and leverage over the CRAs to obtain

favorable ratings for the RMBS they created and sold. For example, the Senate Investigations Report revealed a February 20, 2007 email exchange between JPMorgan investment banker, Robert Miller, and Moodys Managing Director Mark DiRienz. Miller complained that Moodys was rating certain RMBS much lower than another CRA, noting that this would lead to serious investor concerns, stating: the optics here are difficult. Theres going to be a three notch difference when we print the deal if it goes out as is. Im already having agita about the investor calls Im going to get. DiRienz responded that Moodys would increase its credit rating for the RMBS, stating: I spoke to Osmin earlier and confirmed that Jason is looking into some adjustments to his methodology that should be a benefit to you folks. 3. 174. The RMBS Have All Been Downgraded to Junk

Triple-A rated investments typically have an expected cumulative loss rate of less In general, investment grade rated

than 0.5%, with an annual loss rate of close to zero.

investments are not expected to suffer annual default rates exceeding 0.5%. For example, according to S&P, the default rate on all investment grade corporate bonds (including AA, A and BB) from 1981 to 2007 averaged about .094% per year. 68

175.

The RMBS at issue were all rated high grade investment grade securities when

they were purchased by Plaintiffs. As illustrated by the table below, all of the RMBS at issue were rated triple-A by at least one CRA. All but two of the RMBS have since been downgraded to junk by at least one CRA, thereby confirming that Defendants included large numbers of exceptionally poor quality loans into these securitizations:
# 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Offering&Tranche ARSI 2006M2A2D ARSI 2006W4A2C ARSI 2006W4A2D CBASS 2007CB6A3 INDX 2006AR29A5 JPALT 2006A21A3 JPALT 2006A21A5 JPALT 2006A31A3 JPALT 2006A51A5 JPALT 2006A51A5 JPALT 2006A61A5 JPALT 2006A71A4 JPALT 2006A71A5 JPALT 2007A11A4 JPALT 2007A11A5 JPALT 2007A212A3 JPMAC 2006CW1A4 JPMAC 2006HE3A5 JPMAC 2006NC1A4 Original Expenditure $38,000,000 $15,000,000 $30,000,000 $24,179,000 $53,132,000 $14,605,000 $14,334,000 $50,888,000 $28,480,000 $9,785,000 $25,000,000 $9,239,000 $27,135,000 $35,000,000 $15,000,000 $20,228,000 $22,000,000 $15,000,000 $26,000,000 Underwriter Defendant JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan
Initial
Moody's Fitch S&P Moody's

Current
Fitch S&P

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

Ca Ca Ca Ca WR B3 C B2 C C C Ca C C C Ca Ba3 Ca

C C C CCC C BB B CCC C CC

CCC CCC CCC CCC D CCC CCC CCC D D D CCC D D D CCC B CCC CCC

AAA AAA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AAA AAA AAA

AAA AAA AAA

AAA Caa2

69

# 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

Offering&Tranche JPMAC 2006NC1A5 JPMAC 2006RM1A5 JPMAC 2006WMC2A4 JPMAC 2006WMC3A5 RASC 2006KS7A4 RASC 2007KS2AI4 BALTA 2006413A2 BALTA 200671A2 BSABS 2006EC2A4 BSABS 2006HE81A3 BSABS 2006HE821A3 BSABS 2006IM1A6 BSABS 2006IM1A7 BSABS 20072A1 CARR 2006NC3A4 CARR 2006NC5A4 CARR 2006RFC1A3 CARR 2006RFC1A4 CARR 2007FRE1A3 ELAT 20071A2B IMM 2007AM1 IMSA 200621A12 IMSA 20073A1B MSST 20071A3

Original Expenditure $14,000,000 $28,831,000 $25,000,000 $10,000,000 $21,000,000 $25,200,000 $27,201,000 $19,734,000 $7,069,000 $4,814,000 $6,269,000 $20,730,000 $30,000,000 $35,784,000 $44,529,000 $24,222,000 $21,000,000 $20,000,000 $20,000,000 $48,271,000

Underwriter Defendant JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan JPMorgan BearStearns BearStearns BearStearns BearStearns BearStearns BearStearns BearStearns BearStearns BearStearns BearStearns BearStearns BearStearns BearStearns BearStearns

Initial
Moody's Fitch S&P Moody's

Current
Fitch S&P

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

Ca Ca Ca Ca Ca C C C Aa1 C

CC C C C CC CC CC CC

CCC CCC CCC CCC B CCC D D AAA CCC B D D BB CCC CCC B B CCC B

AAA Caa2 AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA C C A1 Ca Ca

AAA Caa1 CCC AAA AAA Ca C CCC CC

AAA Caa3

40 41 42 43

$100,000,000 $17,445,000 $10,000,000 $50,000,000

BearStearns BearStearns BearStearns BearStearns

Aa1 Aaa Aaa Aaa

AAA AAA

Aa3 WR

AA+/* D CCC CCC

AAA Caa3 AAA C

70

# 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68

Offering&Tranche NAA 20073A3 NAA 20073A4 NCMT 200712A3 NHELI 200712A4A SACO 200622A SAMI 2006AR7A13B SAMI 2006AR8A6B LBMLT 2006112A2 LBMLT 2006112A2 LBMLT 200632A3 LBMLT 200632A4 LBMLT 200642A3 LBMLT 200642A4 LBMLT 200652A3 LBMLT 200652A4 LBMLT 200662A2 LBMLT 200662A4 LBMLT 200672A4 LBMLT 200682A4 WAMU 2006AR7C1B2 WMABS 2006HE2A3 WMABS 2007HE22A2 WMABS 2007HE22A3 WMALT 2007HY1A2B WMALT 2007OC2A2

Original Expenditure $10,000,000 $29,600,000 $19,250,000 $16,167,000 $71,300,000 $50,000,000 $25,000,000 $15,000,000 $6,000,000 $20,000,000 $10,000,000 $8,000,000 $16,000,000 $10,000,000 $30,000,000 $21,000,000 $24,000,000 $16,569,000 $13,000,000 $11,700,000 $24,414,000 $57,000,000 $17,070,000 $5,820,000 $30,000,000

Underwriter Defendant BearStearns BearStearns BearStearns BearStearns BearStearns BearStearns BearStearns WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu WaMu

Initial
Moody's Fitch S&P Moody's

Current
Fitch S&P

Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa AAA AAA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

Ca Ca Ca Ca C C C Ca Ca Ca Ca Ca Ca Ca Ca

C C C

D D CCC D D CC D CCC CCC CCC CCC CCC CCC CCC CCC CCC CCC CCC CCC D CCC CCC CCC D CC

AAA Caa3 AAA AAA AAA AAA AAA AAA AAA AAA Ca Ca Ca C Ca Ca Ca C

AAA Caa3

71

# 69

Offering&Tranche WMHE 2007HE22A3

Original Expenditure $50,000,000

Underwriter Defendant WaMu

Initial
Moody's Fitch S&P Moody's

Current
Fitch S&P

Aaa

AAA

AAA

Ca

CCC

176.

Until recently, Plaintiffs did not know, and could not have known, that they had

suffered losses because of Defendants fraudulent practices. Plaintiffs did not know, and could not have known, that Defendants had deliberately abandoned their gatekeeper role and fraudulently securitized toxic mortgages into the RMBS sold to Plaintiffs. 177. In January 2011, the FCIC published the findings of its investigation into the

causes of the financial crisis. The FCIC report provided for the first time information about Defendants conduct in originating and securitizing residential mortgages, including testimony from critical participants in Defendants fraudulent schemes. A few months later, on April 13, 2011, the Senate Investigations Subcommittee published its findings and numerous internal documents from Defendants. Together, these reports and the underlying information revealed for the first time that Defendants created securitizations from mortgage pools that they knew, or at the very least recklessly disregarded, to be much riskier than they represented to Plaintiffs. V. DEFENDANTS FALSE AND MISLEADING STATEMENTS 178. As alleged above, strict adherence to loan origination and underwriting

standardsincluding verification of the borrowers ability and incentives to make their mortgage payments and the value of the collateralis essential for determining the value of the RMBS. As sponsors, depositors, and underwriters of the RMBS, Defendants had exclusive access to the loan files and due diligence results, and were paid to act as gatekeepers to ensure the quality of the mortgages in the pools backing the RMBS. 179. Defendants made specific representations about the quality of the mortgage pools

backing the RMBS in the Offering Materials. Defendants sent Plaintiffs marketing materials, 72

free writing prospectuses and term sheets, among other things, describing the quality of the mortgage pools and the anticipated RMBS credit ratings to induce Plaintiffs into participating in the Offerings. Defendants made the same or substantially similar representations about the quality of the securitized mortgage pools and the final RMBS credit ratings in the registration statements, prospectuses and prospectus supplements that Defendants filed publicly with the SEC. Defendants intended for investors to rely on their representations about the quality of the loan pool and the riskiness of the mortgage-backed securities in the Offering Materials. Indeed, that is why Defendants sent Plaintiffs and other investors the Offering Materials in the first place. 180. Defendants made materially false and misleading statements in the Offering Defendants

Materials regarding the quality of the mortgages backing the RMBS at issue.

materially misrepresented the risks that borrowers would not make their mortgage payments on time, the value of the collateral supporting the mortgages, and the riskiness of the RMBS. A. 181. False and Misleading Statements Concerning Loan Origination and Underwriting Standards In the Offering Materials, Defendants described the loan origination and

underwriting standards that were used to originate the loans in the mortgage pools. For example, with regard to Bear Stearns securitizations, the prospectus supplement for the BALTA 2006-4 RMBS stated: Performing loans purchased will have been originated pursuant to the Sponsors underwriting guidelines or the originators underwriting guidelines that are acceptable to the Sponsor. * * *

The EMC mortgage loans have either been originated or purchased by an originator and were generally underwritten in accordance with the standards described herein. Exceptions to the underwriting guidelines are permitted when the sellers performance supports such action and the variance request is approved by credit management. 73

Such underwriting standards are applied to evaluate the prospective borrowers credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. 182. With regard to WaMus securitizations, the prospectus supplement for the WMHE

2007-HE2 RMBS stated: All of the mortgage loans owned by the trust have been either originated by the sponsor through wholesale brokers or purchased by the sponsor from approved correspondents and were underwritten or re-underwritten by the sponsor generally in accordance with the [WaMu] sub-prime underwriting standards as described in this prospectus supplement. The WMB sub-prime underwriting standards are primarily intended to evaluate the prospective borrowers credit standing and repayment ability as well as the value and adequacy of the mortgaged property as collateral. * * *

On a case-by-case basis and only with the approval of an employee with appropriate risk level authority, the sponsor may determine that, based upon compensating factors, a prospective borrower not strictly qualifying under [WaMus] sub-prime underwriting risk category guidelines warrants an underwriting exception. Compensating factors may include, but are not limited to, low loan-to-value ratio, low debt-to-income ratio, good credit history, stable employment and time in residence at the prospective borrowers current address. It is expected that some of the mortgage loans owned by the trust will be underwriting exceptions. * * *

During the underwriting or re-underwriting process, the sponsor reviews and verifies the prospective borrowers sources of income (only under the full documentation residential loan program), calculates the amount of income from all such sources indicated on the loan application, reviews the credit history and credit score(s) of the prospective borrower and calculates the debt-to-income ratio to determine the prospective borrowers ability to repay the loan, and determines whether the mortgaged property complies with the WMB sub-prime underwriting standards. 183. With regard to the JPMorgan RMBS, the prospectus supplement for the JPALT

2007-A2 deal stated: 74

The Sponsor selected the Mortgage Loans for sale to the Depositor from among its portfolio of mortgage loans based on a variety of considerations, including type of mortgage loan, geographic concentration, range of mortgage interest rates, principal balance, credit scores and other characteristics. In making this selection, the Sponsor took into account investor preferences and the Sponsors objective of obtaining the most favorable combination of ratings on the Certificates. * * *

The Chase Originator Mortgage Loans were underwritten substantially in accordance with the underwriting criteria set forth below under The Chase Originators.

Underwriting standards are applied by or on behalf of a lender to evaluate a borrowers credit standing and repayment ability, and the value and adequacy of the related Mortgaged Property as collateral * * *

From time to time, exceptions to a lenders underwriting policies may be made. Such exceptions may be made on a loan by loan basis at the discretion of the lenders underwriter. Exceptions may be made after careful consideration of certain mitigating factors such as borrower liquidity, employment and residential stability and local economic conditions. 184. Plaintiffs relied on the statements set forth above and on substantially similar

statements contained in the Offering Materials to inform themselves about the quality of the mortgage pools. The reliability of commonly used metrics to assess the risk of borrower default and the value of the mortgage collateral depended on the originators adherence to the stated loan origination and underwriting guidelines. For example, credit scores and loan-to-value ratios would not be reliable if the loan originators deviated from the stated loan origination and underwriting guidelines. 185. The statements set forth above and the substantially similar statements were

materially false and misleading. Defendants were focused on increasing the volume of their 75

mortgage origination and securitization practice regardless of mortgage quality, and routinely included mortgages that deviated from the stated loan origination and underwriting standards. WaMu routinely originated and securitized fraudulent mortgages. JPMorgan targeted borrowers who could be persuaded to take high-risk mortgages, knowing that those borrowers were likely to default and lose their homes in the future. Bear Stearns gave its sales personnel the authority to overrule determinations of credit and underwriting personnel. Defendants knew that their loan origination and underwriting practices materially decreased the quality of the mortgage pools backing the securitizations. Defendants nevertheless included those defective mortgages into the securitizations at issue, and sold them along with RMBS backed by other toxic mortgages to investors. Defendants misrepresentations and material omissions concerning the loan

origination and underwriting practices used for originating the mortgages backing the RMBS rendered the Offering Materials materially false and misleading. As a result, Plaintiffs were misled into believing that the securitizations at issue were far less risky than they truly were. It was reasonably foreseeable that Plaintiffs would suffer a loss as a result of their reliance on the information provided by Defendants. B. 186. False and Misleading Statements Concerning Defendants Loan Selection and Due Diligence Practices Defendants represented that they were carefully selecting properly underwritten

loans for inclusion in the securitizations. For example, with regard to the Bear Stearns RMBS, the prospectus supplement for the BSABS 2006-HE8 RMBS stated: During the underwriting process, BSRM reviews and verifies the loan applicants sources of income (except under the Stated Documentation type, under which programs such information may not be independently verified), calculates the amount of income from all such sources indicated on the loan application, reviews the credit history of the applicant, calculates the debt-to-income ratio to determine the applicants ability to repay the loan, and reviews the mortgaged property for compliance with the BSRM Underwriting Guidelines. 76

EMC Mortgage Corporation, referred to in this prospectus supplement as EMC or the sponsor, in its capacity as seller, purchased the mortgage loans directly in privately negotiated transactions. * * *

Loans are generally purchased with the ultimate strategy of securitization into an array of Bear Stearns securitizations based upon product type and credit parameters, including those where the loan has become re-performing or cash-flowing. Performing loans include first lien fixed rate and ARMs, as well as closed end fixed rate second liens and lines of credit (HELOCs). Performing loans acquired by the sponsor are subject to varying levels of due diligence prior to purchase. Portfolios may be reviewed for credit, data integrity, appraisal valuation, documentation, as well as compliance with certain laws. Performing loans purchased will have been originated pursuant to the sponsors underwriting guidelines or the originators underwriting guidelines that are acceptable to the sponsor. 187. With regard to the WaMu RMBS, the prospectus supplement for the WAMU

2006-AR7 RMBS stated: The sponsor selected the mortgage loans from among the portfolio of mortgage loans available to it for sale based on a variety of considerations, including type of mortgage loan, geographic concentration, range of mortgage interest rates, principal balance, credit scores and other characteristics described in Appendix B to this prospectus supplement, and taking into account investor preferences and the depositors objective of obtaining the most favorable combination of ratings on the certificates. * * *

The sponsors underwriting guidelines generally are intended to evaluate the prospective borrowers credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. Some mortgage loans are manually underwritten, in which case an underwriter reviews a loan application and supporting documentation, if required, and a credit report of the borrower, and based on that review determines whether to originate a loan in the amount and with the terms stated in the loan application. Some mortgage loans are underwritten through the sponsors automated underwriting system, described below. 77

The sponsors credit risk oversight department conducts quality control reviews of statistical samplings of previously originated mortgage loans on a regular basis. 188. that: The mortgage loan sellers used no adverse selection procedures in selecting the mortgage loans from among the outstanding adjustable rate conventional mortgage loans owned by it which were available for sale and as to which the representations and warranties in the mortgage loan sale agreement could be made. 189. With regard to the JPMorgan RMBS, the prospectus supplement for the JPALT The prospectus supplement for the WAMU 2006-AR7 RMBS further represented

2007-A2 RMBS stated: The Sponsor selected the Mortgage Loans for sale to the Depositor from among its portfolio of mortgage loans based on a variety of considerations, including type of mortgage loan, geographic concentration, range of mortgage interest rates, principal balance, credit scores and other characteristics. In making this selection, the Sponsor took into account investor preferences and the Sponsors objective of obtaining the most favorable combination of ratings on the Certificates. 190. Plaintiffs relied on the statements set forth above and the substantially similar

statements contained in the Offering Materials to ensure that Defendants only selected and securitized mortgages that met the represented quality standards. Defendants were well-known experts in securitizing mortgages and Plaintiffs reasonably relied on Defendants role as a gatekeeper for the quality of the mortgages backing their securitizations when Plaintiffs purchased the RMBS. 191. The statements set forth above and the substantially similar statements in the

Offering Materials were materially false and misleading. Having chosen to speak about their loan selection efforts in creating the mortgage pools that they securitized, Defendants had a duty to speak fully and truthfully on that subject. Thus, WaMu had a duty to disclose that it adversely selected delinquency-prone loans on its balance sheet and offloaded them into securitizations. 78

WaMu also had a duty to disclose that it securitized fraudulent loans after determining that those loans were tainted by fraud and that it waived in 29% of the loans that its due diligence provider marked as failing to comply with the originators underwriting guidelines and lacking sufficient compensating factors. Similarly, Bear Stearns and JPMorgan each had a duty to disclose that they waived in 50% or more of the loans which their due diligence vendor identified as fatally defective. Defendants knew that their loan selection and due diligence practices materially decreased the quality of the mortgage pools backing the securitizations at issue. Defendants misrepresentations and material omissions concerning their loan selection and due diligence practices rendered the Offering Materials materially false and misleading. As a result, Plaintiffs were misled into believing that the securitizations at issue were far less risky than they truly were. It was reasonably foreseeable that Plaintiffs would suffer a loss as a result of their reliance on the information provided by Defendants. C. 192. Defendants False and Misleading Statements Regarding the Risk of Default In the Offering Materials, Defendants provided detailed and quantitative

information describing the risk of borrower default. For each mortgage pool, the Offering Materials described average borrower credit scores, level of EPDs, and loan documentation. Defendants statements were false and misleading, and materially understated the risk of default. 1. 193. Defendants False and Misleading Statements Concerning Borrower Credit Quality

Defendants made affirmative representations about the credit quality of the

borrowers whose mortgages Defendants selected for securitization. For example, the prospectus supplement for the WMALT 2007-HY1 RMBS stated the following regarding credit scores: Credit scores are designed to assess a borrowers creditworthiness and likelihood to default on an obligation over a defined period (usually two to three years) based on a borrowers credit history.

79

194 4.

The Offering Mat terials for th other RM he MBS at iss containe the same or sue ed e

substantially similar statements. Plaintiffs relied on the statements set forth a s e s above at and on d substantially similar st tatements co ontained in th Offering Materials to assess the c he o credit quality of y the borrow in the mortgage poo backing the RMBS, a their abi wers m ols t and ility to make their mortg e gage payments. 195. tatements were material false and misleading Having c w lly d g. chosen to sp peak Such st

ality of the borrowers of the mo ortgages ba acking their securitizati ions, about the credit qua Defendant had a duty to speak fully and trut ts y fu thfully on th subject. Thus, WaM had a dut to hat Mu ty disclose th it routine securitized WaMu mortgages th were orig hat ely m hat ginated with hout determin ning the borrow wers credit score. CW 10, a forme senior und er derwriter at WaMu from 2004 to 2007, m stated that WaMu gran a signi t nted ificant amou of loans to borrowe without e unt s ers establishing t their credit scor if they pr re rovided three alternative trade lines, such as a n e e , note from a person claim ming the borrow had repa a person debt. Be Stearns h a duty to disclose it had a polic to wer aid nal ear had o t cy quickly se ecuritize mo ortgages reg gardless of the credit q t quality of th borrower he rs. Indeed, The Atlantic re eported on May 14, 201 that Bea Stearns ex M 10, ar xpressly enc couraged EM personne to MC el 80

just make up data like FICO scores if the lenders they purchased the loans in bulk from wouldnt get back to them promptly. Similarly, JPMorgan had a duty to disclose that it loosened its underwriting standards and purposefully steered borrowers to high-risk mortgages that JPMorgan would securitize and sell to investors. 196. Defendants knew that their practices caused the credit quality of the borrowers of

the mortgages in the pools backing the RMBS to be much lower than represented in the Offering Materials. As a result, Plaintiffs were misled into believing that the securitizations at issue were far less risky than they truly were. Moreover, it was foreseeable that Plaintiffs would suffer a loss as a result of their reliance on Defendants false and misleading information. 2. 197. Bear Stearns False and Misleading Statements Concerning Early Payment Defaults

Bear Stearns prospectus supplements represented that none of mortgages

supporting the RMBS were in default at the time of the securitization. For example, the SAMI 2006-AR8 prospectus supplement stated that [a]s of the Cut-off Date, no scheduled payment on any mortgage loan was more than 30 days past due and no scheduled payment on any mortgage loan has been more than 30 days past due since origination. The Offering Materials for the other Bear Stearns securitizations contained the same or substantially similar statements. 198. Bear Stearns representations were important to Plaintiffs because early payment

defaults are an indication of mortgage fraud and a high risk of loss. Plaintiffs relied on the statements set forth above and the substantially similar statements contained in the Offering Materials to assess the likelihood of mortgage fraud and future loss in the mortgage pools backing the RMBS. 199. Such statements were materially false and misleading. Having chosen to speak

about the level of defaults in the mortgage pools, Bear Stearns had a duty to speak fully and truthfully on that subject. Thus, Bear Stearns had a duty to disclose that it had changed its policy 81

to quickly securitize mortgages before expiration of the early payment default period. Bear Stearns knew that this change in policy materially increased the risk that its securitizations would suffer from default and termination events, and would suffer losses. Bear Stearns failure to disclose these facts rendered the Offering Materials materially false and misleading. As a result, Plaintiffs were misled into believing that the Bear Stearns securitizations at issue were far less risky than they truly were. D. 200. Defendants False and Misleading Statements Concerning the Value of the Mortgage Collateral The value of the collateral determines the risk of loss in case of borrower default

and is critically important to investors. Property valuations are the denominator in the loan-tovalue ratio, which is a key criterion for assessing the risk of loss. Higher loan-to-value ratios correspond to lower borrower equity in the home, and therefore: (i) less equity that can be used to avoid losses to the mortgage pool backing the securitization; and (ii) lower borrower incentives to continue to make their mortgage payments. 201. To induce Plaintiffs and other investors to purchase the RMBS, Defendants made

affirmative representations about the value of the collateral, including loan-to-value ratios, and the independence of the appraisers who prepared the appraisals. For example, the BSABS 2006HE8 prospectus supplement represented that the weighted average original loan-to-value ratio of the mortgages in the pool was 81.38%. The prospectus supplement further stated with regard to EMC-originated and Bear Stearns Residential Mortgage Corporation-originated loans that: Mortgaged properties that are to secure mortgage loans generally are appraised by qualified independent appraisers. These appraisers inspect and appraise the subject property and verify that the property is in acceptable condition. Following each appraisal, the appraiser prepares a report that includes a market value analysis based on recent sales of comparable homes in the area and, when deemed appropriate, market rent analysis based on the rental of comparable homes in the area. All appraisals are required to conform to the Uniform Standard of Professional Appraisal 82

Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and are generally on forms acceptable to Fannie Mae and Freddie Mac. * * *

The BSRM Underwriting Guidelines are applied in accordance with a procedure that complies with applicable federal and state laws and regulations and requires (i) an appraisal of the mortgaged property that conforms to the Uniform Standards of Professional Appraisal Practice and are generally on forms similar to those acceptable to Fannie Mae and Freddie Mac and (ii) a review of such appraisal, which review may be conducted by a representative of BSRM. The maximum allowable loan-to-value ratio varies based upon the income documentation, property type, creditworthiness, debt service-to-income ratio of the applicant and the overall risks associated with the loan decision
202.

The Offering Materials for the other RMBS contained the same or substantially

similar statements. Plaintiffs relied on the statements set forth above and the substantially similar statements in the Offering Materials to assess the risk of loss in case of borrower default. 203. Such statements were materially false and misleading because Defendants

substantially overstated the value of the collateral securing the mortgages backing the RMBS, and thereby materially understated the risk of loss in case of borrower default. Having chosen to speak about the value of the collateral, Defendants had a duty to speak fully and truthfully on that subject. Thus, Defendants had a duty to disclose that the appraisals did not confirm to the standards set by UPAP, Fannie Mae and Freddie Mac because Defendants sales personnel (with a financial interest in increasing the number of securitizations regardless of mortgage quality) had the authority to overrule the collateral appraisals. Defendants were also duty-bound to disclose that they only performed limited valuation due diligence on the mortgages. Bear Stearns never disclosed that its due diligence efforts depended on the importance of the loan originator for generating large fees. WaMu never disclosed that it pressured appraisers to artificially increase their appraisals. Defendants knew, or recklessly disregarded, that their securitization practices 83

increased the risk that the mortgage pools would suffer losses in case of borrower default. Moreover, it was foreseeable that Plaintiffs would suffer a loss as a result of their reliance on the information about the value of the collateral provided by Defendants. E. 204. Defendants False and Misleading Statements Concerning the RMBS Credit Ratings In the Offering Materials, Defendants represented that all of the RMBS purchased

by Plaintiffs were worthy of being rated triple-A signifying that the risk of loss was virtually nonexistent. For example, the SAMI 2006-AR7 prospectus supplement stated that the credit ratings address the likelihood of the receipt by certificateholders of all distributions to which the certificateholders are entitled, and that: It is a condition to the issuance of the certificates that the offered securities receive the following ratings from Standard & Poors Ratings Services, a division of The McGraw Hill Companies, Inc., which is referred to herein as S&P and Moodys Investors Service, Inc., which is referred to herein as Moodys: Offered Certificates A-1A Grantor Trust A-1B A-2A Grantor Trust A-2B A-3 A-4 A-5 A-6 A-8 A-9 A-10 A-11 A-12 A-13A A-13B X B-1 B-2 B-3 B-4 S&P AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AA+ AA AAA+ 84 Moodys Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aa1 Aa1 Aa1

B-5 B-6 B-7 205.

A BBB BBB-

A1 Baa2 Baa3

The Offering Materials for the other RMBS contained the same or substantially

similar statements. 206. Defendants also represented that the CRAs made their determinations on an

independent basis. For example, the prospectus supplement for the WAMU 2006-AR7 RMBS stated: The rating assigned to each class of offered certificates by each rating agency is based on that rating agencys independent evaluation of that class of certificates.
207.

Plaintiffs relied on the statements set forth above and the substantially similar

statements in the Offering Materials to inform themselves about the accuracy and reliability of the credit ratings assigned to the RMBS they purchased.
208.

Such statements were materially false and misleading.

Defendants pressured

CRAs to provide them with triple-A ratings and threatened to use a different CRA if they did not receive the desired rating. Defendants also did not disclose to the CRAs that they deliberately undermined the due diligence process and waived in loans that had been rejected in third-party due diligence reviews because of credit and compliance defects. This was material information for the CRAs, and it was reasonably foreseeable that Plaintiffs and other investors who purchased the RMBS would suffer losses as a result of Defendants practices. VI. PLAINTIFFS REASONABLY RELIED ON DEFENDANTS REPRESENTATIONS 209. The RMBS for all offerings were issued pursuant to the Offering Materials, and in

two instances, a private placement memorandum, which contained the false and misleading statements set forth above. These documents also generally explained the structure and provided an overview of the RMBS. The relevant underwriter or depositor prepared the Offering 85

Materials. Prior to purchasing each RMBS, Plaintiffs read and relied on Defendants false representations and omissions of material fact contained in the Offering Materials regarding the characteristics of the mortgage loans underlying the RMBS. But for Defendants fraudulent representations and omissions, Plaintiffs would not have purchased the RMBS. 210. Plaintiffs purchased each RMBS at issue in reliance on the information contained

in the applicable Offering Materials, and based on additional information provided to Plaintiffs investment personnel or managers by Defendants. In connection with the offers and sales of the RMBS to Plaintiffs, Defendants provided directly or indirectly to Plaintiffs investment personnel or managers in New York the Offering Materials, including prospectus supplements and additional documents, such as statistical tables to be included in the prospectus supplements. 211. The prospectus supplements and other Offering Materials distributed prior to the

prospectus supplements contained detailed descriptions of the mortgage pools underlying the RMBS and provided the specific terms of the particular RMBS offering, including tabular data concerning the loans underlying the RMBS, including (but not limited to) the type of loans; the number of loans; the mortgage rate and net mortgage rate (the mortgage rate net of the premium for any lender paid mortgage insurance less the sum of the master servicing fee and the trustee fee on the mortgage loan); the aggregate scheduled principal balance of the loans; the weighted average original combined LTV ratio; occupancy rates; credit enhancement; and the geographic concentration of the mortgaged properties. The prospectus supplements also contained a

summary of the originators underwriting and appraisal standards, guidelines and practices. The registration statements incorporated by reference the subsequently filed prospectuses and prospectus supplements. 212. Defendants also provided to Plaintiffs numerous other types of documents and

data including: term sheets, that contained a description of the collateral components of the deal, 86

including information on the originators of the underlying loans, the LTV and DTI ratios of the loans, the borrowers FICO scores and other relevant information used by Plaintiffs in assessing the terms of the deal; information about the capital structure of the offering and information identifying the key parties to the transaction, among other things; an Intex CMO Description Information software file that allowed Plaintiffs analysts to run various analyses of the information summarized in the term sheets to further vet the terms of the deal; free writing prospectuses or draft prospectus supplements which contained all relevant information and representations made to Plaintiffs; pooling and servicing agreements; computational material; and computer models of the financial structures of the securitizations. Defendants also made oral representations to Plaintiffs regarding the quality of the collateral backing the RMBS. Similar information was sent to and analyzed by Plaintiffs investment personnel and managers if the RMBS was sold to them in the secondary market. The information sent to and relied upon by Plaintiffs in the course of making their investment decisions was ultimately contained in the final prospectus supplements issued once the terms of the deal were finalized. 213. To the extent that Plaintiffs purchased an RMBS before the final prospectus

supplement was issued, Plaintiffs understood that the final terms would be identical to the terms they initially received and that Defendants were obligated to inform Plaintiffs if those terms changed. Plaintiffs also periodically reviewed the final prospectus supplements to make sure that their terms conformed to those Defendants promised. 214. Plaintiffs reviewed and analyzed the information provided directly or indirectly by

Defendants with respect to each offering of RMBS and performed various analyses of the RMBS-specific data for each offering before deciding to purchase RMBS in the offering. The analyses conducted by Plaintiffs before deciding to purchase RMBS included various credit analyses based on the information provided by Defendants with respect to both the credit 87

characteristics of the mortgage loan pool (including, for example, geographic concentration; weighted average life; fixed- or floating-rate loans; full-, low-, or no-documentation stated income loans; and owner-occupied, second home, or investment properties), and the structure of the securitization with respect to the seniority and risk characteristics of the particular tranche of RMBS (including, for example, position in the payment waterfall). Plaintiffs focus

throughout this review was on the characteristics of the underlying collateral, the originators of the underlying loans, and the credit ratings assigned to the Certificates. 215. Plaintiffs reasonably relied upon Defendants representations in the Offering

Materials regarding loan quality. Defendants had exclusive access to information unknown by and unavailable to Plaintiffs, including the underlying loan files from the originators and the results of Defendants own due diligence and the due diligence performed for them by due diligence vendors hired by Defendants, such as Clayton. In contrast, Plaintiffs did not know at the time they purchased the RMBS, and could not have known, that the originators were not following their stated underwriting guidelines, leading to a drastic increase in the origination of risky loans, nor did they know that the property appraisals secured by the originators were not independent and resulted in false appraisal values. Plaintiffs also did not know that the

originators knowingly or recklessly accepted false information concerning, among other things, material facts such as borrowers stated income and other characteristics, which caused Defendants representations about the loan quality and collateral, including the DTI and LTV ratios, to be false. Plaintiffs also did not know that Defendants due diligence had identified significant problems with the originators loans. If Plaintiffs had known these and other material facts regarding Defendants fraudulent misrepresentations and omissions of material fact, Plaintiffs would not have purchased the RMBS.

88

216.

Defendants misrepresentations and omissions of material fact caused Plaintiffs to

suffer losses on the RMBS, because the RMBS were in fact far riskierand their rate of default far higherthan Defendants had described them to be. The mortgage loans underlying the RMBS experienced defaults and delinquencies at a much higher rate due to the originators abandonment of their loan-origination guidelines. 217. Thus, Dexia justifiably and reasonably relied on the information in the term

sheets, computational material, prospectus supplements and other data provided directly or indirectly by Defendants for each offering of the RMBS. These documents contained numerous statements of material fact about the RMBS, including statements concerning: (i) the mortgage originators underwriting guidelines that were purportedly applied to evaluate the ability of the borrowers to repay the loans underlying the RMBS; (ii) the appraisal guidelines that were purportedly applied to evaluate the value and adequacy of the mortgaged properties as collateral; (iii) the LTV and DTI ratios; (iv) Defendants due diligence of the loans and the originators underwriting practices; and (v) the ratings assigned to the RMBS. 218. These statements of material fact were untrue because: (i) the originators violated

their stated underwriting guidelines and did not originate loans based on the borrowers ability to repay; (ii) inflated appraisals caused the listed LTV ratios to be untrue; (iii) Defendants waived into their securitizations loans that they knew to be defectively originated, and did not perform any due diligence on a majority of the loans known to be defective; and (iv) the credit ratings on which Plaintiffs relied were materially misleading, did not reflect the true credit quality of the RMBS and were the result of intentional manipulation. VII. ADDITIONAL ALLEGATIONS DEMONSTRATING SCIENTER 219. In addition to the facts alleged above, numerous additional facts establish that

Defendants misstatements about the quality of the mortgage pools backing the RMBS at issue 89

were intentional or reckless, including the facts that: (1) Defendants were all securitization experts with many years of experience in creating, issuing, and selling mortgage-backed securities; (2) the fraud was both massive and lengthy, taking place over a number of years, and resulting in massive losses threatening the global financial system; (3) numerous confidential witnesses have confirmed that Defendants were well aware of the improper origination and securitization practices; (4) Defendants reaped enormous profits from the fraud by creating, issuing and selling RMBS at artificially inflated prices, deriving millions of dollars in illicit proceeds; and (5) Bear Stearns deliberately purged its records from the audit trail showing how many fatally flawed mortgages its due diligence vendor identified for each mortgage pool. These facts are discussed in more detail below. A. 220. Defendants Are Securitization Experts Who Consciously Included Poor Quality Loans in the Securitizations As discussed in detail above, the fundamental principle at issue in this case is

straightforward: any investment bank that creates, issues, and sells mortgage-backed securities is paid to act as a gatekeeper when it selects loans for securitization, and must provide accurate information concerning the mortgage pools to investors and the credit rating agencies. Unlike Defendants, Plaintiffs and the credit rating agencies did not have access to the loan files or the due diligence results, and could not independently verify Defendants representations about the quality of the mortgages backing the RMBS at issue. 221. Defendants are sophisticated financial institutions who collectively securitized

$325 billion of mortgages from 2005 to 2007. During this time, Defendants were active in every aspect of the mortgage securitization business, including loan origination and underwriting, creating and issuing RMBS, and underwriting and selling RMBS to investors. Defendants had separate mortgage trading, RMBS structuring, and RMBS underwriting groups, each employing

90

highly qualified personnel specialized in creating, issuing and underwriting RMBS securitizations. 222. Given their extensive professional securitization experience, it is not plausible that

Defendants inadvertently subverted the entire securitization process by including numerous fraudulent and toxic mortgages into the mortgage pools backing the RMBS at issue. As CW 5, a former due diligence underwriter at Clayton and Bohan, explained, Defendants knew that they were securitizing poor quality loans for securitization, but were playing a game of financial hot potato. Former Chase Home Finance Vice President, James Theckston, similarly stated that the bigwigs knew that they were taking improper shortcuts, but they figured were going to make billions out of it, so who cares? The government is going to bail us out. And the problem loans will be out of here, maybe even overseas. B. 223. Numerous Confidential Witnesses Have Independently Confirmed that Defendants Were Deliberately Securitizing Poor Quality Loans Numerous former employees who worked for Defendants during the relevant time

period and who have direct knowledge of Defendants origination and securitization practices have independently confirmed Defendants fraudulent practices. CW 4, who served as an auditor and subsequently as a Senior Product Guide Analyst at EMC from 2005 to 2007 in Lewisville, Texas, CW 1, an associate vice-president at EMC from 1998 to 2008 in Fort Worth, Texas, CW 3, a senior underwriter at Bear Stearns, EMC and JPMorgan in Dallas, Texas from 2000 to 2009, CW 2, an assistant underwriting manager at EMC from 2006 to 2008 in Texas, and CW 5, a due diligence underwriter in Stamford, Connecticut and Irvine, California, described Bear Stearns deliberate strategy to quickly securitize loans before expiration of the EPD period and, once default risks were transferred to unsuspecting investors, Bear Stearns deliberate actions to undermine the due diligence process in order to increase volume regardless of mortgage quality. As CW 4 stated, the Bear Stearns mindset was the more volume, the more money. 91 These

confidential witnesses further described Bear Stearns state of the art tracking system to track the loans it purchased, and its use in demanding down bids from originators for low quality loans that Bear Stearns had already sold to investors in securitizations. 224. Numerous other confidential witnesses described WaMus deliberate strategy to

originate and securitize mortgages regardless of their quality, resulting in the securitization of fraudulent and poor quality loans, including, CW 6, a senior underwriter, credit risk manager, and credit quality manager at WaMu from 2003-2008, CW 7, a senior loan consultant at WaMu from 2005-2007 in Riverside, California, CW 8, a loan closing coordinator at WaMu from 20032007 in Bethel Park, Pennsylvania, CW 9, a senior loan coordinator at WaMu from 2006-2007 in San Antonio, Texas, CW 11, a senior underwriter at Long Beach from 2004-2007 in Illinois, CW 12, a mortgage underwriter at Long Beach from 2004-2007 in Lake Oswego, Oregon, CW 13, a senior underwriter at WaMu from 2003-2007 in Livermore, California, CW 14, a chief appraiser at WaMu from 1990-2002 in Seattle, Washington, CW 10, a senior underwriter at WaMu from 2004-2007 in Dallas, Texas, CW 17, an appraisal coordinator at WaMu from 2001-2006 in Florida, CW 16, a loan coordinator at WaMu from 2005-2007 in Jacksonville, Florida, CW 15, a senior loan coordinator and mortgage processor at WaMu in 2007 in Jacksonville, Florida, and CW 18, a loan consultant at WaMu from 2003-2005 in Largo, Maryland. This strategy included pressuring appraisers to increase the appraised value of the collateral, incentivizing employees with higher compensation for originating high risk loans, and extra commissions for teaser rate loans that were more likely to default. As CW 11 stated, WaMu created a companywide culture of push, push, push to close loans and to do whatever it took to make that happen. 225. Further, numerous confidential witnesses described JPMorgans deliberate

practices of originating and securitizing poor quality mortgages to catch up with JPMorgans competition, including by steering borrowers to high risk mortgages, loosening the underwriting 92

standards, and encouraging the falsification of loan applications, such as CW 23, a lending specialist and loan officer at Chase Home Finance in Fort Washington, Pennsylvania from 20052008, CW 21, a senior mortgage processor and junior underwriter at Chase Home Finance from 2002-2007, CW 19 a senior mortgage underwriter at Chase Home Finance in Fort Washington, Pennsylvania from 2002-2008, CW 22, a mortgage funder at Chase Home Finance in Thousand Oaks, California from 2002-2007, and CW 20, a senior mortgage underwriter at Chase Home Finance in Covina, California from 2002 to 2008. As CW 23 stated, As the market was changing, we would investigate to find out what our competitors were doing, and wed try to do it too. C. 226. Defendants Profited Enormously from their Fraud Defendants profited from every step of the defective securitization process: (i)

loan origination fees; (ii) profits on sale of the loans to the securitization trusts; and (iii) fees from underwriting the RMBS. Defendants profits increased when the number of originated and securitized loans increased. However, Defendants suffered no downside for originating and securitizing poor quality loans because they passed on the default and loss risks to Plaintiffs and other investors who purchased their RMBS. 227. Defendants reaped enormous profits from securitizing and selling poor-quality

loans to unsuspecting investors. Indeed, by serving as the sponsor, depositor and underwriter, Defendants earned even more. D. 228. Bear Stearns Deliberately Purged Its Due Diligence Records Bear Stearns interacted with its due diligence vendors, including Clayton,

throughout the loan acquisition process. As discussed above, Clayton sent Bear Stearns on a daily basis individual asset summary reports showing which loans were defective. Defendants would discuss these defective loans with the due diligence vendor in an iterative process to 93

determine whether defective loans should be included in the pool, with Bear Stearns making the final determination. At the end of the loan acquisition and due diligence process, the due diligence vendor would send a final report, showing the number of loans that were included in the acquired mortgage pool. 229. Discovery in other litigation has recently revealed that Bear Stearns implemented

a standing policy to purge and destroy the daily individual asset summary reports once the loans were acquired, leaving only the final report in the deal file. As Bear Stearns co-head of mortgage finance department, Mary Haggerty, acknowledged in a deposition, this final report did not show how many loans the due diligence vendor had initially identified as materially defective, the back and forth communications with the due diligence vendor, or how many loans were included in the pool because Defendants overruled the due diligence vendors determination that a loan was fatally defective. 230. Bear Stearns decision to systematically purge the audit trail showing how many

loans its due diligence providers identified as fatally defective before Bear Stearns purchased and securitized them is extremely troubling. Most plausibly, Bear Stearns was destroying evidence of its fraudulent loan origination and securitization policies in anticipation of enormous losses once the truth began to emerge. VIII. PLAINTIFFS SUFFERED LOSSES BECAUSE OF DEFENDANTS FRAUDULENT CONDUCT 231. Defendants fraudulent practices caused Plaintiffs RMBS to be much riskier than

represented at the time of issuance. All of the RMBS purchased by Plaintiffs were rated high grade investment grade securities, and all were rated triple-A by at least one credit rating agency. Currently, all but two of the RMBS purchased by Plaintiffs have been downgraded to junk by at least one credit rating agency.

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232.

The true value of the RMBS was much less than the amount paid by Plaintiffs at

the time of purchase. As discussed above, Defendants misconduct caused the mortgage pools supporting the RMBS to be much riskier than disclosed to Plaintiffs or the credit rating agencies, and the delinquency and foreclosure rates on the underlying mortgages have soared since issuance. As of December 2011, on average, almost 43% of the loans backing the RMBS that Plaintiffs purchased were over 60- or 90-days delinquent, in foreclosure, bankruptcy, or repossession. The delinquency and foreclosure rates are all the more remarkable because they do not include loans that were already foreclosed upon since issuance and that are therefore no longer included within the loan pools. IX. CAUSES OF ACTION FIRST CAUSE OF ACTION (Common Law Fraud against the Bear Stearns Defendants) 233. Plaintiffs repeat and reallege the allegations set forth in the preceding paragraphs,

as if fully set forth herein. 234. As alleged above, the Bear Stearns Defendants made fraudulent and false

statements of material fact, and omitted material facts necessary in order to make their statements in their Offering Materials not misleading. 235. As a corporate parent, Defendant The Bear Stearns Companies, Inc. directed the

activities of its wholly-owned and controlled subsidiaries Bear Stearns & Co. Inc., EMC Mortgage, SAMI II, and BSABS I (collectively the Bear Stearns Subsidiaries). All profits generated by the Bear Stearns Subsidiaries accrued to the benefit of Defendant The Bear Stearns Companies, Inc. An organizational chart of the Bear Stearns Defendants is set forth below:

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Defen ndant The Bea ar Stearns Companies, I Inc.

Defen ndant EMC Mortgage (RMB sponsor) BS

Defen ndant SAMI II I (RMB depositor) BS )

Defen ndant BSABS I S r) (RM MBS depositor

D Defendant Bea ar Ste earns & Co. Inc. (RM underwr MBS riter)

236.

Defend dant The Be Stearns Companies Inc. used its control over the B ear s, d l Bear

Stearns Subsidiaries to commit the fraudu S ulent miscon nduct allege herein, t ed thereby cau using Plaintiffs damages. 237. The Be Stearns Defendants knew at the time they s ear D k e sold and ma arketed: BAL LTA

2006-4, BALTA 2006-7, BSABS 2006-EC2 BSABS 2 B S 2, 2006-HE8, B BSABS 200 06-IM1, BSA ABS 2007-2, CARR 2006C -NC3, CAR 2006-NC CARR 2 RR C5, 2006-RFC1, CARR 200 07-FRE1, EL LAT 2007-1, IM 2007-A, IMSA 2006-2, IMSA 2007-3, MSS 2007-1, N MM 2 ST NAA 2007-3, NCMT 20 0071, NHELI 2007-1, SA I ACO 2006-2 SAMI 2006-AR7, an SAMI 20 2, nd 006-AR8 (th Bear Ste he earns RMBS) that the fore t egoing statem ments were false or, at t very leas made rec f the st, cklessly, wit thout any belief in the truth of the stat f h tements. Th Bear Stearns Defend he dants made these mater rially false and misleading statements and omission for the pu m s ns urpose of ind ducing Plain ntiffs to purchase its Certific cates in the Bear Stearn RMBS, and it was f ns a foreseeable that Plaintif would su ffs uffer damages as a result. Furthermor these stat a re, tements rela ated to these Defendants own acts and e omissions. 238. The Be Stearns Defendants knew or rec ear cklessly disregarded tha investors like at

Plaintiffs were relying on their sec w g curitization expertise. T Bear Stea Defend e The arns dants encoura aged such relian through the Offering Materials and their pub represen nce g a blic ntations, as d described her rein.

96

239.

The Bear Stearns Defendants knew or recklessly disregarded that investors like

Plaintiffs would rely upon their representations in connection with their decision to purchase the Certificates. Defendants were in a position of unique and superior knowledge regarding the true facts concerning the foregoing material misrepresentations and omissions. It was only by making such misrepresentations and by omitting material information that Defendants were able to induce Plaintiffs to buy the Certificates. Plaintiffs would not have purchased or otherwise acquired the Certificates but for these Defendants fraudulent representations and omissions about the quality of the Certificates in the Bear Stearns RMBS. 240. Plaintiffs justifiably, reasonably and foreseeably relied upon the Bear Stearns

Defendants false and misleading statements regarding the quality of the Bear Stearns RMBS. 241. As a result of the Bear Stearns Defendants false and misleading statements and

omissions, as alleged herein, Plaintiffs purchased Certificates that were worth far less than what they paid for them, and have suffered substantial damages. SECOND CAUSE OF ACTION (Common Law Fraud against the JPMorgan Defendants) 242. Plaintiffs repeat and reallege the allegations set forth in the preceding paragraphs,

as if fully set forth herein. 243. As alleged above, the JPMorgan Defendants made fraudulent and false statements

of material fact, and omitted material facts necessary in order to make their statements in the Offering Materials not misleading. 244. As a corporate parent, Defendant JPMorgan Chase & Co. directed the activities of

its wholly-owned and controlled subsidiaries JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, J.P. Morgan Mortgage Acquisition Corporation and J.P. Morgan Acceptance Corporation I (collectively the JPMorgan Subsidiaries). All profits generated by the JPMorgan

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Subsidiari accrued to the benefit of Defenda JPMorga Chase & C An orga ies t ant an Co. anizational c chart of the JPM Morgan Defe endants is set forth below t w:

Defend JPMorga dant an Ch hase & Co.

Defe endant JPMor rgan Ch hase Bank, NA A

Non-Party JPMorgan y Securities Holdings LLC H C

Defendant J JPMorgan Securitie Inc. es, (RMBS und derwriter)

Defe endant JPMor rgan Mortgage Ac cquisition Cor rp. (R RMBS sponsor)

Defendan JPMorgan nt Acceptan Corp. I nce (RMBS depositor)

245.

Defend dant JPMor rgan Chase & Co. u used its co ontrol over the JPMorgan

Subsidiari to comm the fraud ies mit dulent misconduct alleg herein, thereby cau ged using Plaint tiffs damages. 246. The JPMorgan Def fendants kne at the tim they sold and market ew me d ted: ARSI 20 006-

M2, ARSI 2006-W4, CBASS 200 I 07-CB6, IND 2006-AR DX R29, JPALT 2006-A2, JP PALT 2006-A3, JPALT 2006-A5, JP PALT 2006-A6, JPALT 2006-A7, JPALT 2007-A1, JP T , PALT 2007-A2, JPMAC 2006-CW1, JPMAC 2006 J 6-HE3, JPM MAC 2006-N NC1, JPMAC 2006-RM1 JPMAC 20 C 1, 006WMC2, JPMAC 2006-WMC3, RASC 2006-KS7, RASC 2007-KS2 (the JPM J R C 2 Morgan RMB BS) that the fo oregoing stat tements were false or, at the very le e t east, made re ecklessly, wi ithout any belief in the tru of the st uth tatements. The JPMor rgan Defend dants made these mate erially false and misleading statement and omissions for the purpos e of induc g ts cing Plaintif to purchase ffs

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Certificates in the JPMorgan RMBS, and it was foreseeable that Plaintiffs would suffer damages as a result. Furthermore, these statements related to these Defendants own acts and omissions. 247. The JPMorgan Defendants knew or recklessly disregarded that investors like

Plaintiffs were relying on their expertise. The JPMorgan Defendants encouraged such reliance through the Offering Materials and their public representations, as described herein. 248. The JPMorgan Defendants knew or recklessly disregarded that investors like

Plaintiffs would rely upon their representations in connection with their decision to purchase the Certificates. Defendants were in a position of unique and superior knowledge regarding the true facts concerning the foregoing material misrepresentations and omissions. It was only by making such misrepresentations that the JPMorgan Defendants were able to induce Plaintiffs to buy Certificates in the JPMorgan RMBS. Plaintiffs would not have purchased or otherwise acquired the Certificates but for these Defendants fraudulent representations and omissions about the quality of the Certificates. 249. Plaintiffs justifiably, reasonably and foreseeably relied upon the JPMorgan

Defendants representations and false statements regarding the quality of the JPMorgan RMBS. 250. As a result of the JPMorgan Defendants false and misleading statements and

omissions, as alleged herein, Plaintiffs purchased Certificates that were worth far less than what they paid for them and have suffered substantial damages. THIRD CAUSE OF ACTION (Common Law Fraud against the WaMu and Long Beach Defendants) 251. Plaintiffs repeat and reallege the allegations set forth in the preceding paragraphs,

as if fully set forth herein. 252. As alleged above, Defendants made fraudulent and false statements of material

fact, and omitted material facts necessary in order to make their statements in the Offering Materials not misleading. 99

253.

As a co orporate pare non-part WaMu Bank directed the activities of its who ent, ty d olly-

owned an controlle subsidiar nd ed ries, includ ding Defend dants Long Beach Sec curities, Wa aMu Securities, WaMu Asset, WaMu Capital, and non-party L , d Long Beach Mortgage (collectively the h y WaMu Subsidiaries). All profit generated by the WaM Subsidiar accrued to the benef of ts Mu ries fit WaMu Ba ank. An orga anizational chart of the WaMu Defe ndants is set forth below c W t w:

Non n-Party WaM Mu Bank

Non-Pa arty WaMu k Bank (RMB BS sponso or)

No on-Party Lon Beach ng Mortgage M (R RMBS sp ponsor)

Defendant t Long Beac ch Securities s (RMBS depositor) )

Defe endant Wa aMu Secu urities (RM MBS spon nsor)

Defendant WaMu Asset (RMBS depositor)

Defend dant WaM Mu Capit tal (RMB BS underwr riter)

254 4.

WaMu Bank used its contro over the WaMu Subsidiaries to commit the d ol e

fraudulent misconduct alleged he t erein, thereb causing P by Plaintiffs da amages. As alleged her s rein, Defendant JPMorgan Chase Ban N.A. is liable for the actions of WaMu Bank and its t n nk, s u d subsidiarie their successors-in-int es terest. 255. The WaMu and Lo Beach Defendants kn at the ti ong D new ime they sol and marke ld eted:

2 2 MLT 2006-5 LBMLT 2 5, 2006-6, LBM MLT LBMLT 2006-11, LBMLT 2006-3, LBMLT 2006-4, LBM 2006-7, LBMLT 2006-8, WAM 2006-A L MU AR7, WMA ABS 2006-H HE2, WMA ABS 2007-H HE2, WMALT 2007-HY1, WMALT 2007-OC2, WMHE 200 2 W 07-HE2 (the WaMu R e RMBS) that the t foregoing statements were false or, at the ver least, ma recklessl without a belief in the o ry ade ly, any n he s. Mu g fendants mad these mat de terially false and e truth of th statements The WaM and Long Beach Defe 100

misleading statements and omissions for the purpose of inducing Plaintiffs to purchase Certificates in the WaMu RMBS. Furthermore, these statements related to these Defendants own acts and omissions. 256. The WaMu and Long Beach Defendants knew or recklessly disregarded that

investors like Plaintiffs were relying on their expertise, and they encouraged such reliance through the Offering Materials and their public representations, as described herein. 257. The WaMu and Long Beach Defendants knew or recklessly disregarded that

investors like Plaintiffs would rely upon their representations in connection with their decision to purchase the Certificates. Defendants were in a position of unique and superior knowledge regarding the true facts concerning the foregoing material misrepresentations and omissions. It was only by making such misrepresentations that the WaMu and Long Beach Defendants were able to induce Plaintiffs to buy the Certificates in the WaMu RMBS. Plaintiffs would not have purchased or otherwise acquired the Certificates but for these Defendants fraudulent representations and omissions about the quality of the Certificates. 258. Plaintiffs justifiably, reasonably and foreseeably relied upon the WaMu and Long

Beach Defendants representations and false statements regarding the quality of the RMBS. 259. As a result of the WaMu and Long Beach Defendants false and misleading

statements and omissions, as alleged herein, Plaintiffs purchased Certificates that were worth far less than what they paid for them and have suffered substantial damages. FOURTH CAUSE OF ACTION (Fraudulent Inducement against The Bear Stearns Companies, Inc. and Bear Stearns & Co., Inc.) 260. Plaintiffs repeat and reallege the allegations set forth in the preceding paragraphs

as if set forth herein.

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261.

Defendant The Bear Stearns Companies, Inc. directed the activities of the Bear

Stearns Subsidiaries, including RMBS underwriter Defendant Bear Stearns & Co. Inc. All profits generated by the Bear Stearns Subsidiaries accrued to the benefit of Defendant The Bear Stearns Companies, Inc. Defendant The Bear Stearns Companies, Inc. used its control over the Bear Stearns Subsidiaries to commit the fraudulent inducement alleged herein, thereby causing Plaintiffs damages. 262. As alleged above, in the Offering Materials and in other communications to

Plaintiffs, Defendant Bear Stearns & Co., Inc. made false and misleading statements of material fact, and omitted material facts necessary in order to make their statements, in light of the circumstances under which the statements were made, not misleading. Defendant Bear Stearns & Co., Inc. knew at the time it sold and marketed each of the Bear Stearns RMBS that the foregoing statements were false, or at the very least, made recklessly, without any belief in the truth of the statements. 263. Defendant Bear Stearns & Co., Inc. made these materially misleading statements

and omissions for the purpose of inducing Plaintiffs to purchase the Bear Stearns RMBS. Furthermore, these statements related to the acts and omissions of Defendant Bear Stearns & Co., Inc. and its affiliates. 264. Defendant Bear Stearns & Co., Inc. knew that, unlike Plaintiffs, it had exclusive

access to critical information about the quality of the mortgage pools supporting the Bear Stearns RMBS, including access to the loan files and the due diligence results. Defendant Bear Stearns & Co., Inc. was in a position of unique and superior knowledge regarding the true facts concerning the foregoing material misrepresentations and omissions. 265. Defendant Bear Stearns & Co., Inc. knew that it had a greater level of expertise

than Plaintiffs with respect to the Bear Stearns RMBS at issue. 102

266.

Defendant Bear Stearns & Co., Inc. knew that Plaintiffs relied on its

representations concerning the Bear Stearns RMBS in connection with the decision to purchase the Bear Stearns Certificates, and Bear Stearns & Co., Inc. encouraged such reliance through its representations, as described herein. 267. It was only by making such representations that Defendant Bear Stearns & Co.,

Inc. was able to induce Plaintiffs to buy the Bear Stearns RMBS. Plaintiffs would not have purchased or otherwise acquired those RMBS but for Defendants fraudulent representations and omissions about the quality of the Bear Stearns RMBS. 268. By virtue of Bear Stearns & Co., Inc.s false and misleading statements and

omissions, as alleged herein, Plaintiffs purchased Bear Stearns Certificates that were worth far less than what they paid for them and have suffered substantial damages. Plaintiffs are also entitled to a rescission of the sale of the Bear Stearns RMBS or to rescissory damages. FIFTH CAUSE OF ACTION (Fraudulent Inducement against JPMorgan Chase & Co. and J.P. Morgan Securities, Inc.) 269. Plaintiffs repeat and reallege the allegations set forth in the preceding paragraphs

as if set forth herein. 270. Defendant JPMorgan Chase & Co. directed the activities of the JPMorgan

Subsidiaries, including RMBS underwriter Defendant J.P. Morgan Securities, Inc. All profits generated by the JPMorgan Subsidiaries accrued to the benefit of Defendant JPMorgan Chase & Co. Defendant JPMorgan Chase & Co. used its control over the JPMorgan Subsidiaries to commit the fraudulent inducement alleged herein, thereby causing Plaintiffs damages. 271. As alleged above, in the Offering Materials and in other communications to

Plaintiffs, Defendant J.P. Morgan Securities, Inc. made false and misleading statements of material fact, and omitted material facts necessary in order to make their statements, in light of the circumstances under which the statements were made, not misleading. 103 Defendant J.P.

Morgan Securities, Inc. knew at the time it sold and marketed each of the JPMorgan RMBS that the foregoing statements were false, or at the very least, made recklessly, without any belief in the truth of the statements. 272. Defendant J.P. Morgan Securities, Inc. made these materially misleading

statements and omissions for the purpose of inducing Plaintiffs to purchase the JPMorgan RMBS. Furthermore, these statements related to the acts and omissions of Defendant J.P. Morgan Securities, Inc. and its affiliates. 273. Defendant J.P. Morgan Securities, Inc. knew that, unlike Plaintiffs, it had

exclusive access to critical information about the quality of the mortgage pools supporting the JPMorgan RMBS, including access to the loan files and the due diligence results. Defendant J.P. Morgan Securities, Inc. was in a position of unique and superior knowledge regarding the true facts concerning the foregoing material misrepresentations and omissions. 274. Defendant J.P. Morgan Securities, Inc. knew that it had a greater level of expertise

than Plaintiffs with respect to the JPMorgan RMBS. 275. Defendant J.P. Morgan Securities, Inc. knew that Plaintiffs relied on its

representations concerning the JPMorgan RMBS in connection with their decision to purchase the Certificates, and J.P. Morgan Securities, Inc. encouraged such reliance through its representations, as described herein. 276. It was only by making such representations that Defendant J.P. Morgan Securities,

Inc. was able to induce Plaintiffs to buy the JPMorgan RMBS. Plaintiffs would not have purchased or otherwise acquired the JPMorgan RMBS but for Defendants fraudulent representations and omissions about the quality of those RMBS. 277. By virtue of Defendant J.P. Morgan Securities, Inc.s false and misleading

statements and omissions, as alleged herein, Plaintiffs purchased JPMorgan Certificates that were 104

worth far less than what they paid for them and have suffered substantial damages. Plaintiffs are also entitled to either a rescission of the sale of the JPMorgan RMBS or to rescissory damages. SIXTH CAUSE OF ACTION (Fraudulent Inducement against WaMu Capital) 278. Plaintiffs repeat and reallege the allegations set forth in the preceding paragraphs

as if set forth herein. 279. WaMu Bank directed the activities of the WaMu Subsidiaries, including RMBS

underwriter Defendant WaMu Capital. All profits generated by the WaMu Subsidiaries accrued to the benefit of WaMu Bank. WaMu Bank used its control over the WaMu Subsidiaries to commit the fraudulent inducement alleged herein, thereby causing Plaintiffs damages. As

alleged herein, Defendant JPMorgan Chase Bank, N.A. is liable for the actions of WaMu Bank as its successor-in-interest. 280. As alleged above, in the Offering Materials and in other communications to

Plaintiffs, Defendant WaMu Capital made false and misleading statements of material fact, and omitted material facts necessary in order to make their statements, in light of the circumstances under which the statements were made, not misleading. Defendant WaMu Capital knew at the time it sold and marketed each of the WaMu RMBS that the foregoing statements were false, or at the very least, made recklessly, without any belief in the truth of the statements. 281. Defendant WaMu Capital made these materially misleading statements and

omissions for the purpose of inducing Plaintiffs to purchase the WaMu RMBS. Furthermore, these statements related to the acts and omissions of Defendant WaMu Capital and its affiliates. 282. Defendant WaMu Capital knew that, unlike Plaintiffs, it had exclusive access to

critical information about the quality of the mortgage pools supporting the WaMu RMBS, including access to the loan files and the due diligence results. Defendant WaMu Capital was in

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a position of unique and superior knowledge regarding the true facts concerning the foregoing material misrepresentations and omissions. 283. Defendant WaMu Capital knew that it had a greater level of expertise than

Plaintiffs with respect to the WaMu RMBS. 284. Defendant WaMu Capital knew that Plaintiffs relied on its representations

concerning the WaMu RMBS in connection with the decision to purchase the WaMu Certificates, and WaMu Capital encouraged such reliance through its representations, as described herein. 285. It was only by making such representations that Defendant WaMu Capital was

able to induce Plaintiffs to buy Certificates in the WaMu RMBS. Plaintiffs would not have purchased or otherwise acquired the WaMu RMBS but for Defendants fraudulent representations and omissions about the quality of those RMBS. 286. By virtue of Defendants false and misleading statements and omissions, as

alleged herein, Plaintiffs purchased WaMu Certificates that were worth far less than what they paid for them and have suffered substantial damages and is also entitled to a rescission of the sale of the WaMu RMBS or to rescissory damages. SEVENTH CAUSE OF ACTION (Aiding and Abetting Fraud and Fraudulent Inducement against The Bear Stearns Companies, Inc., EMC Mortgage, SAMI II, and BSABS I) 287. Plaintiffs repeat and reallege the allegations set forth in the preceding paragraphs,

as if fully set forth herein. 288. This is a claim against EMC Mortgage, SAMI II, and BSABS I (the Bear Stearns

Sponsor and Depositor Defendants) and The Bear Stearns Companies, Inc., for aiding and abetting the fraud and fraudulent inducement committed by the Bear Stearns Defendants. Each

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of the Bear Stearns Sponsor and Depositor Defendants aided and abetted the fraud and fraudulent inducement committed by and among all of the other Bear Stearns Defendants. 289. Defendant The Bear Stearns Companies, Inc. directed the activities of the Bear

Stearns Subsidiaries, including the Bear Stearns Sponsor and Depositor Defendants. All profits generated by the Bear Stearns Subsidiaries accrued to the benefit of Defendant The Bear Stearns Companies, Inc. Defendant The Bear Stearns Companies, Inc. used its control over the Bear Stearns Sponsor and Depositor Defendants to commit the fraud and fraudulent inducement alleged herein, thereby causing Plaintiffs damages. 290. As alleged above, the Bear Stearns Sponsor and Depositor Defendants knowingly

selected and deposited exceptionally poor quality mortgages into the Bear Stearns securitizations at issue. For example, the Bear Stearns Sponsor and Depositor Defendants waived in 50% of the mortgages that their due diligence vendor had marked as fatally defective. The Bear Stearns Sponsor and Depositor Defendants implemented a policy to purge the records revealing the Bear Stearns Defendants fraudulent conduct. 291. The Bear Stearns Sponsor and Depositor Defendants participated in, or had actual

knowledge of, the Bear Stearns Defendants reckless or intentional dissemination of false and misleading information to the credit rating agencies. 292. It was foreseeable to the Bear Stearns Sponsor and Depositor Defendants at the

time they actively assisted in the commission of the fraud that Plaintiffs would be harmed as a result of their assistance. 293. Plaintiffs have suffered damages as a direct and natural result of the fraud

committed by the Bear Stearns Defendants and the Bear Stearns Sponsor and Depositor Defendants knowing and active participation therein.

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EIGHTH CAUSE OF ACTION (Aiding and Abetting Fraud and Fraudulent Inducement against JPMorgan Chase & Co., JPMorgan Mortgage Acquisition Corp., and JPMorgan Acceptance Corp. I) 294. Plaintiffs repeat and reallege the allegations set forth in the preceding paragraphs,

as if fully set forth herein. 295. This is a claim against JPMorgan Mortgage Acquisition Corp., JPMorgan

Acceptance Corp. I (the JPMorgan Sponsor and Depositor Defendants) and JPMorgan Chase & Co., for aiding and abetting the fraud and fraudulent inducement committed by the JPMorgan Defendants. Each of the JPMorgan Sponsor and Depositor Defendants aided and abetted the fraud and fraudulent inducement committed by and among all of the other JPMorgan Defendants. 296. Defendant JPMorgan Chase & Co. directed the activities of the JPMorgan

Subsidiaries, including the JPMorgan Sponsor and Depositor Defendants. All profits generated by the JPMorgan Subsidiaries accrued to the benefit of Defendant JPMorgan Chase & Co. Defendant JPMorgan Chase & Co. used its control over the JPMorgan Sponsor and Depositor Defendants to commit the fraud and fraudulent inducement alleged herein, thereby causing Plaintiffs damages. 297. As alleged above, the JPMorgan Sponsor and Depositor Defendants knowingly

selected and deposited exceptionally poor quality mortgages into the JPMorgan securitizations at issue. For example, the JPMorgan Sponsor and Depositor Defendants waived in 51% of the mortgages that their due diligence vendor had marked as fatally defective, knowing that their affiliates were loosening the JPMorgan mortgage underwriting standards. 298. The JPMorgan Sponsor and Depositor Defendants participated in, or had actual

knowledge of, the JPMorgan Defendants reckless or intentional dissemination of false and misleading information to the credit rating agencies.

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299.

It was foreseeable to the JPMorgan Sponsor and Depositor Defendants at the time

they actively assisted in the commission of the fraud that Plaintiffs would be harmed as a result of their assistance. 300. Plaintiffs have suffered damages as a direct and natural result of the fraud

committed by the JPMorgan Defendants and the JPMorgan Sponsor and Depositor Defendants knowing and active participation therein. NINTH CAUSE OF ACTION (Aiding and Abetting Fraud and Fraudulent Inducement against WaMu Asset, WaMu Securities and Long Beach Securities) 301. Plaintiffs repeat and reallege the allegations set forth in the preceding paragraphs,

as if fully set forth herein. 302. This is a claim against WaMu Asset, WaMu Securities and Long Beach Securities

(the WaMu and Long Beach Sponsor and Depositor Defendants) for aiding and abetting the fraud by the WaMu and Long Beach Defendants. 303. WaMu Bank directed the activities of the WaMu and Long Beach Subsidiaries,

including the WaMu and Long Beach Sponsor and Depositor Defendants. All profits generated by the WaMu Subsidiaries accrued to the benefit of WaMu Bank. WaMu Bank used its control over the WaMu and Long Beach Sponsor and Depositor Defendants to commit the fraud and fraudulent inducement alleged herein, thereby causing Plaintiffs damages. As alleged herein, Defendant JPMorgan Chase Bank, N.A. is liable for the actions of WaMu Bank as its successorin-interest. 304. As alleged above, the WaMu and Long Beach Sponsor and Depositor Defendants

knowingly deposited exceptionally poor quality mortgages into the WaMu securitizations at issue. For example, WaMu Asset knowingly included fraudulent mortgages and mortgages that were particularly delinquency-prone. 109

305.

The WaMu and Long Beach Sponsor and Depositor Defendants participated in, or

had actual knowledge of, WaMus reckless or intentional dissemination of false and misleading information to the credit rating agencies. 306. It was foreseeable to the WaMu and Long Beach Sponsor and Depositor

Defendants at the time they actively assisted in the commission of the fraud that Plaintiffs would be harmed as a result of its assistance. 307. Plaintiffs have suffered damages as a direct and natural result of the fraud

committed by the WaMu and Long Beach Sponsor and Depositor Defendants knowing and active participation therein. TENTH CAUSE OF ACTION (Negligent Misrepresentation against Bear Stearns & Co. Inc., J.P. Morgan Securities, Inc., and WaMu Capital) 308. Plaintiffs repeat and reallege each and every allegation set forth in the preceding

paragraphs as if fully set forth herein, except any allegations that Defendants made any untrue statements and omissions intentionally or recklessly. For the purpose of this Count only,

Plaintiffs disclaim any claim of fraud or intentional misconduct. 309. This is a claim for negligent misrepresentation against Bear Stearns & Co. Inc.,

J.P. Morgan Securities, Inc., and WaMu Capital (the RMBS Underwriter Defendants). 310. The RMBS Underwriter Defendants had exclusive, non-public knowledge about

the mortgages supporting the RMBS in the Offerings, including their quality, the nature of the underwriting, and the value of the collateral. Unlike Plaintiffs, the RMBS Underwriter

Defendants had access to the loan files and the due diligence results. In addition, for many of the RMBS, affiliates of the RMBS Underwriter Defendants had originated all or a majority of the mortgages supporting the RMBS.

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311.

Plaintiffs could not evaluate the loan files for the mortgage loans underlying the

RMBS and did not have access to the due diligence results. Plaintiffs therefore reasonably relied on the RMBS Underwriter Defendants exclusive and non-public knowledge regarding the underlying mortgage loans to determine whether to make each purchase of RMBS. Plaintiffs were completely reliant on the RMBS Underwriter Defendants to provide accurate information regarding the mortgages in each securitization. 312. The RMBS Underwriter Defendants had exclusive, non-public knowledge about

the mortgages supporting the RMBS in the Offerings. The RMBS Underwriter Defendants therefore had a duty to Plaintiffs to verify the accuracy of the Offering Materials and to provide complete, accurate, and timely information regarding the mortgages in each securitization. Defendants breached their duty to provide such information to Plaintiffs. 313. Over the course of approximately two years, for 69 separate investments,

Plaintiffs relied on Defendants exclusive and non-public knowledge regarding the underlying mortgage loans and their underwriting when determining whether to invest in the RMBS. This longstanding relationship, coupled with Defendants unique and special knowledge about the underlying loans and the underwriting standards of the mortgage originators, created a special relationship of trust, confidence, and dependence between Defendants and Plaintiffs. 314. The RMBS Underwriter Defendants likewise made negligent misrepresentations

to induce Plaintiffs investment in the RMBS. The RMBS Underwriter Defendants provided the Offering Materials to Plaintiffs in connection with the RMBS for the purpose of informing Plaintiffs of material facts necessary to make an informed judgment about whether to purchase the RMBS. In providing these documents, the RMBS Underwriter Defendants knew that the information contained and incorporated therein would be used for a serious purpose, and that Plaintiffs, like other reasonably prudent investors, intended to rely on the information. 111

315.

As alleged above, the Offering Materials contained materially false and The RMBS Underwriter Defendants should have known that the

misleading information.

information in the Offering Materials was materially false and misleading. Unaware that the Offering Materials contained materially false and misleading statements, Plaintiffs reasonably relied on those false and misleading statements when deciding to purchase the RMBS in the offerings. 316. Plaintiffs purchased the RMBS from the RMBS Underwriter Defendants and are

therefore in privity with these defendants. 317. Based on Defendants expertise and specialized knowledge, and in light of the

false and misleading representations in the Offering Materials, the RMBS Underwriter Defendants owed Plaintiffs a duty to provide them with complete, accurate, and timely information regarding the quality of the RMBS, and breached their duty to provide such information to Plaintiffs. 318. Plaintiffs have suffered substantial damages as result of the RMBS Underwriter

Defendants negligent misrepresentations. ELEVENTH CAUSE OF ACTION (Successor Liability Against JPMorgan Chase & Co. and J.P. Morgan Securities LLC as successors-in-interest to The Bear Stearns Companies, Inc.) 319. Plaintiffs repeat and reallege the allegations set forth in the preceding paragraphs,

as if fully set forth herein. 320. On March 16, 2008, The Bear Stearns Companies, Inc. entered into an Agreement

and Plan of Merger with JPMorgan Chase & Co. for the purpose of consummating a strategic business combination transaction between the two entities (Bear Stearns Merger Agreement). Pursuant to the Bear Stearns Merger Agreement, The Bear Stearns Companies, Inc. merged with

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Bear Stearns Merger Corporation, a wholly-owned subsidiary of JPMorgan Chase & Co., making The Bear Stearns Companies, Inc. a wholly-owned subsidiary of JPMorgan Chase & Co. 321. In a June 30, 2008 press release describing internal restructuring to be undertaken

pursuant to the Merger, JPMorgan stated its intent to assume Bear Stearns and its debts, liabilities, and obligations as follows: Following completion of this transaction, Bear Stearns plans to transfer its broker-dealer subsidiary Bear, Stearns & Co. Inc. to JPMorgan Chase. In connection with such transfer, JPMorgan Chase will assume (1) all of Bear Stearns then-outstanding registered U.S. debt securities; (2) Bear Stearns obligations relating to trust preferred securities; (3) Bear Stearns thenoutstanding foreign debt securities; and (4) Bear Stearns guarantees of then-outstanding foreign debt securities issued by subsidiaries of Bear Stearns, in each case, in accordance with the agreements and indentures governing these securities. 322. Following the merger, JPMorgan Chase & Co. became the ultimate corporate

parent of The Bear Stearns Companies, Inc. and its subsidiaries, including EMC, SAMI II, and BSABS I. JPMorgan Chase & Co. took immediate control of The Bear Stearns Companies business and personnel decisions. An article in The New York Times dated April 6, 2008 cited an internal JPMorgan memo stating that JPMorgan Chase, which is taking over the rival investment bank Bear Stearns, will dominate the management ranks of the combined investment banking and trading businesses. Of the 26 executive positions in the new merged investment banking and trading division, only five came from Bear Stearns. 323. Defendant Bear, Stearns & Co., Inc. merged with Defendant J.P. Morgan

Securities, Inc. and is now doing business as J.P. Morgan Securities, Inc. JPMorgans 2008 Annual Report stated that On October 1, 2008, J.P. Morgan Securities Inc. merged with and into Bear, Stearns & Co. Inc., and the surviving entity changed its name to J.P. Morgan Securities Inc.

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324.

The former Bear Stearns website, www.bearstearns.com, redirects visitors to J.P.

Morgan Securities website, and the EMC website, www.emcmortgagecorp.com, now identifies EMC Mortgage as a brand of Defendant JPMorgan Chase Bank, N.A. 325. As a result of The Bear Stearns Companies Inc.s acquisition, JPMorgan Chases

transfer of substantially all of Bear Stearns assets to JPMorgan Chase, and explicit and implicit assumption of Bear Stearns debt, JPMorgan Chase & Co. is a mere continuation of The Bear Stearns Companies, Inc. As the successor-in-interest to Bear Stearns, JPMorgan Chase & Co. is jointly and severally liable for The Bear Stearns Companies Inc.s wrongdoing in its entirety under common law. 326. As a result of its merger with Bear Stearns & Co., Inc., Defendant J.P. Morgan

Securities, Inc. is a mere continuation of Bear, Stearns & Co., Inc. As such, Defendant J.P. Morgan Securities, Inc. is the successor-in-interest to Bear, Stearns & Co., Inc. and jointly and severally liable for Bear, Stearns & Co. Inc.s wrongdoing in its entirety under common law. Therefore, this action is brought against Defendant JPMorgan Chase & Co. and J.P. Morgan Securities, Inc. in their own capacity and as the successors-in-interest to The Bear Stearns Companies, Inc. and Bear, Stearns & Co., Inc., respectively. TWELFTH CAUSE OF ACTION (Successor Liability Against JPMorgan Chase Bank, N.A. as successor-in-interest to WaMu Bank) 327. On September 25, 2008, Washington Mutual Bank was officially declared a

failed bank, and closed by the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC). That same day, Defendant JPMorgan Chase Bank, N.A.

(JPMorgan Chase Bank) entered into a Purchase and Assumption Agreement (the PAA) with the FDIC in its capacity as receiver of Washington Mutual Bank (WaMu Bank).

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328.

Pursuant to the PAA, dated September 25, 2008, Defendant JPMorgan Chase

Bank purchased substantially all of the assets and assume[d] all deposit and substantially all other liabilities of the Failed Bank. As a result of the WaMu Bank acquisition, JPMorgan Chase Bank is a mere continuation of WaMu Bank. For example, JPMorgan Chase Bank consolidated and renamed more than 2,000 WaMu Bank branches into JPMorgan Chase Bank branches, and the former WaMu Bank website, www.wamu.com, redirects visitors to a JPMorgan Chase Bank website proposing that visitors update [their] favorites to include www.chase.com. 329. Bank. This action is brought against JPMorgan Chase Bank as the successor to WaMu

After JPMorgan Chase Bank acquired substantially all of the assets and assumed

substantially all WaMu Bank liabilities, WaMu Banks parent company, Washington Mutual, Inc. filed for bankruptcy. Washington Mutual, Inc. is not a defendant in this action. 330. follows: 3.1 Assets Purchased by Assuming Bank. Subject to Sections 3.5, 3.6 and 4.8, the Assuming Bank hereby purchases from the Receiver, and the Receiver hereby sells, assigns, transfers, conveys, and delivers to the Assuming Bank, all right, title, and interest of the Receiver in and to all of the assets (real, personal and mixed, wherever located and however acquired) including all subsidiaries, joint ventures, partnerships, and any and all other business combinations or arrangements, whether active, inactive, dissolved or terminated, of the Failed Bank whether or not reflected on the books of the Failed Bank as of Bank Closing. 331. Pursuant to the PAA, Defendants WaMu Capital, WaMu Asset, WaMu Securities The PAA described the assets purchased by Defendants JPMorgan Chase Bank as

and Long Beach Securities became wholly-owned subsidiaries of Defendant JPMorgan Chase Bank. 332. liabilities: 115 Defendant JPMorgan Chase Bank assumed substantially all of WaMu Banks

2.1 Liabilities Assumed by Assuming Bank. Subject to Sections 2.5 [Borrower Claims] and 4.8 [Agreement with Respect to Certain Existing Agreements], the Assuming Bank expressly assumes at Book Value (subject to adjustment pursuant to Article VIII) and agrees to pay, perform, and discharge, all of the liabilities of the Failed Bank which are reflected on the Books and Records of the Failed Bank as of Bank Closing, including the Assumed Deposits and all liabilities associated with any and all employee benefit plans, except as listed on the attached Schedule 2.1, and as otherwise provided in this Agreement (such liabilities referred to as Liabilities Assumed). Notwithstanding Section 4.8, the Assuming Bank specifically assumes all mortgage servicing rights and obligations of the Failed Bank. 333. Defendant JPMorgan Chase Bank understood that it was assuming WaMu Banks

obligations in connection with WaMu securitizations. As noted in the Final Report of the CourtAppointed Examiner in connection with the bankruptcy proceedings of non-party Washington Mutual, Inc., the FDIC offered five different transaction structures to prospective bidders for the assets of WaMu Bank. Defendant JPMorgan Chase Bank elected to bid on what was described as Transaction #3: C. Transaction #3 Whole Bank, All Deposits. Under this transaction, the Purchase and Assumption (Whole Bank), the Potential Acquirer whose Bid is accepted by the Corporation assumes the Assumed Deposits of the Bank and all other liabilities but specifically excluding the preferred stock, non-asset related defensive litigation, subordinated debt and senior debt, and purchases all of the assets of the Bank, excluding those assets identified as excluded assets in the Legal Documents and subject to the provisions thereof. This is in contrast with Transactions #4 and #5, which offered JPMorgan Bank the option of assuming only certain other liabilities. 334. In addition, before Defendant JPMorgan Chase Bank acquired WaMu Bank, the

FDIC provided a FAQ for potential acquirers. The FDICs unequivocal position was that the mortgage securitization obligations passed to the acquirer 9. Are the off-balance sheet credit card portfolio and mortgage securitizations included in the transaction? Do you expect the 116

acquirer to assume the servicing obligations? If there are pricing issues associated with the contracts (e.g., the pricing is disadvantageous to the assuming institution), can we take advantage of the FDICs repudiation powers to effect a repricing? Answer: The banks interests and obligations associated with the off-balance sheet credit card portfolio and mortgage securitizations pass to the acquirer. Only contracts and obligations remaining the receivership are subject to repudiation powers. 335. The WaMu RMBS Offerings were reflected on the Books and Records of

WaMu Bank as September 25, 2008. Liability relating to WaMu RMBS Offerings was not expressly disclaimed in the PAA, and therefore assumed by Defendant JPMorgan Chase Bank. 336. The FDIC has determined that Defendant JPMorgan Chase Bank assumed the

liabilities associated with the WaMu RMBS Offerings. The FDIC stated in a November 22, 2010 filing, that FDIC Receivers exercise of the transfer provision in this case is consistent with the general principle that when an entity purchases the assets of an ongoing business and expressly or impliedly assumed the related liabilities, the acquiring entity succeeds to the pre-sale debts and obligations of the business, thereby extinguishing the liability of the seller. Deutsche Bank Natl Trust Co. v. FDIC (as receiver for WaMu Bank) and JPMorgan Chase Bank, N.A., No. 091656 RMC, Dkt. No 54 at 38 (D. D.C.). The FDIC further noted that [i]n connection with that purchase, FDIC Receiver transferred to [Defendant JPMorgan Chase Bank], and [JPMorgan Chase Bank] expressly agreed to assume and to pay, perform and discharge, substantially all of [WaMu Banks] liabilities. 337. Defendant JPMorgan Chase Bank was fully aware of the pending claims and

potential claims against WaMu Bank when it purchased and assumed WaMu Banks assets and liabilities, and continued WaMu Banks operations. Defendant JPMorgan Chase Bank is

therefore jointly and severally liable as the successor-in-interest to WaMu Bank.

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PRAYER FOR RELIEF WHEREFORE, Plaintiffs pray for relief and judgment, as follows: (a) Awarding compensatory and/or rescissory damages in favor of Plaintiffs against

all Defendants, jointly and severally, for all damages sustained as a result of Defendants wrongdoing, in an amount to be proven at trial, including interest thereon; (b) (c) Awarding punitive damages for Plaintiffs common-law fraud claims; Awarding Plaintiffs their reasonable costs and expenses incurred in this action,

including counsel fees and expert fees; and (d) Such other relief as the Court may deem just and proper. JURY DEMAND Plaintiffs demand a trial by jury on all claims so triable.

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