ALLSTATE FILES SUIT LAYING OUT ALL THE ALLEGATIONS YOU NEED
Posted on February 24, 2011 by Neil Garfield
REQUIRED READING
2.24.2011 Chase -Allstate-Complaint
JUST LOOKING AT THE TABLE OF CONTENT WILL TELL YOU WHAT YOU NEED TO KNOW
NATURE OF ACTION …………………………………………………………………………………………………….1
PARTIES ………………………………………………………………………………………………………………………..7
JURISDICTION AND VENUE ……………………………………………………………………………………….16
BACKGROUND ……………………………………………………………………………………………………………17
A. THE MECHANICS OF MORTGAGE SECURITIZATION …………………………………….17
B. SECURITIZATION OF MORTGAGE LOANS: THE TRADITIONAL MODEL ……..19
C. THE SYSTEMIC VIOLATION OF UNDERWRITING AND APPRAISAL STANDARDS IN THE MORTGAGE SECURITIZATION INDUSTRY …………………..21
D. DEFENDANTS WERE AN INTEGRATED VERTICAL OPERATION CONTROLLING EVERY ASPECT OF THE SECURITIZATION PROCESS…………..24
(1) JPMorgan Defendants……………………………………………………………………..24 (2)
PARTIES ………………………………………………………………………………………………………………………..7
JURISDICTION AND VENUE ……………………………………………………………………………………….16
BACKGROUND ……………………………………………………………………………………………………………17
A. THE MECHANICS OF MORTGAGE SECURITIZATION …………………………………….17
B. SECURITIZATION OF MORTGAGE LOANS: THE TRADITIONAL MODEL ……..19
C. THE SYSTEMIC VIOLATION OF UNDERWRITING AND APPRAISAL STANDARDS IN THE MORTGAGE SECURITIZATION INDUSTRY …………………..21
D. DEFENDANTS WERE AN INTEGRATED VERTICAL OPERATION CONTROLLING EVERY ASPECT OF THE SECURITIZATION PROCESS…………..24
(1) JPMorgan Defendants……………………………………………………………………..24 (2)
WaMu Defendants ………………………………………………………………………….26 (3)
Bear Stearns Defendants ………………………………………………………………….27
E. DEFENDANTS’ OFFERING MATERIALS…………………………………………………………..29 (1)
E. DEFENDANTS’ OFFERING MATERIALS…………………………………………………………..29 (1)
The JPMorgan Offerings………………………………………………………………….29 (2)
The WaMu Offerings………………………………………………………………………30 (3)
The Long-Beach Offering………………………………………………………………..32 (4)
The Bear Stearns Offerings………………………………………………………………32
SUBSTANTIVE ALLEGATIONS …………………………………………………………………………………..34
I. THE OFFERING MATERIALS CONTAINED UNTRUE STATEMENTS OF MATERIAL FACT AND OMISSIONS ABOUT THE MORTGAGE ORIGINATORS’ UNDERWRITING STANDARDS AND PRACTICES, AND MATERIAL CHARACTERISTICS OF THE MORTGAGE LOAN POOLS ……………..34
A. Defendants’ Misrepresentations Regarding Underwriting Standards And Practices …………………………………………………………………………………………………..34
(1) JPMorgan Defendants’ Misrepresentations Regarding Underwriting Standards And Practices………………………………………………35
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(2) WaMu Defendants’ Misrepresentations Regarding Underwriting Standards and Practices……………………………………………………………………35
(3) Long Beach Defendants’ Misrepresentations Regarding Underwriting Standards and Practices……………………………………………….36
(4) Bear Stearns Defendants’ Misrepresentations Regarding Underwriting Standards and Practices……………………………………………….39
B. Defendants’ Misrepresentations Regarding Owner-Occupancy Statistics …………40
(1) JPMorgan Defendants’ Misrepresentations Regarding Owner- Occupancy Statistics ……………………………………………………………………….40
(2) WaMu Defendants’ Misrepresentations Regarding Owner Occupancy Statistics ……………………………………………………………………….41
(3) Bear Stearns Defendants’ Misrepresentations Regarding Owner Occupancy Statistics ……………………………………………………………………….41
C. Defendants’ Misrepresentations Regarding Loan-to-Value and Combined Loan-to-Value Ratios…………………………………………………………………………………42
(1) JPMorgan Defendants’ Misrepresentations Regarding LTV and CLTV Ratios………………………………………………………………………………….42
(2) WaMu Defendants’ Misrepresentations Regarding LTV and CLTV Ratios ……………………………………………………………………………………………42
(3) Bear Stearns Defendants’ Misrepresentations Regarding LTV and CLTV Ratios………………………………………………………………………………….43
D. Defendants’ Misrepresentations Regarding Debt-to-Income Ratios …………………44
(1) JPMorgan Defendants’ Misrepresentations Regarding Debt-to- Income Ratios …………………………….................…………………………………………………..44
(2) WaMu Defendants’ Misrepresentations Regarding Debt-to-Income Ratios ……………………………………………………………………………………………44
(3) Bear Stearns Defendants’ Misrepresentations Regarding Debt-to- Income Ratios ............................................................................................................................................45
E. Defendants’ Misrepresentations Regarding Credit Ratings……………………………..46
(1) JPMorgan Defendants’ Misrepresentations Regarding Credit Ratings ………………………………………………………………………………………….46
(2) WaMu Defendants’ Misrepresentations Regarding Credit Ratings………..47 ii
(3) Long Beach Defendants’ Misrepresentations Regarding Credit Ratings ………………………………………………………………………………………….48
(4) Bear Stearns Defendants’ Misrepresentations Regarding Credit Ratings ………………………………………………………………………………………….48
F. Defendants’ Misrepresentations Regarding Credit Enhancements……………………49
(1) JPMorgan Defendants’ Misrepresentations Regarding Credit Enhancements ………………………………………………………………………………..49
(2) WaMu Defendants’ Misrepresentations Regarding Credit Enhancements ………………………………………………………………………………..50
(3) Long Beach Defendants’ Misrepresentations Regarding Credit Enhancements ………………………………………………………………………………..50
(4) Bear Stearns Defendants’ Misrepresentations Regarding Credit Enhancements ………………………………………………………………………………..51
G. Defendants’ Misrepresentations Regarding Underwriting Exceptions………………51
(1) JPMorgan Defendants’ Misrepresentations Regarding Underwriting Exceptions …………………………………………………………………51
(2) WaMu Defendants’ Misrepresentations Regarding Underwriting Exceptions ……………………………………………………………………………………..52
(3) Long Beach Defendants’ Misrepresentations Regarding Underwriting Exceptions …………………………………………………………………53
(4) Bear Stearns Defendants’ Misrepresentations Regarding Underwriting Exceptions …………………………………………………………………53
H. Defendants’ Misrepresentations Regarding Alternative Documentation Loans ……………………………………………………………………………………………………….53
(1) JPMorgan Defendants’ Misrepresentations Regarding Alternative Documentation Loans ……………………………………………………………………..54
(2) WaMu Defendants’ Misrepresentations Regarding Alternative Documentation Loans ……………………………………………………………………..54
(3) Bear Stearns Defendants’ Misrepresentations Regarding Alternative Documentation Loans …………………………………………………….55
I. Defendants’ Misrepresentations Regarding Full-Documentation Loans……………55
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J. Defendants’ Misrepresentations Regarding Adverse Selection of Mortgage Loans ……………………………………………………………………………………………………….56
K. Defendants’ Failure to Disclose the Negative Results of Due Diligence …………..57
II. ALL OF DEFENDANTS’ REPRESENTATIONS WERE UNTRUE AND MISLEADING BECAUSE DEFENDANTS SYSTEMATICALLY IGNORED THEIR OWN UNDERWRITING GUIDELINES ……………………………………………………58
A. Evidence Demonstrates Defendants’ Underwriting Abandonment: High Default Rates And Plummeting Credit Ratings ……………………………………………..59
B. Statistical Evidence of Faulty Underwriting: Borrowers Did Not Actually Occupy The Mortgaged Properties As Represented……………………………………….62
(1) The JPMorgan Offerings………………………………………………………………….64 (2)
SUBSTANTIVE ALLEGATIONS …………………………………………………………………………………..34
I. THE OFFERING MATERIALS CONTAINED UNTRUE STATEMENTS OF MATERIAL FACT AND OMISSIONS ABOUT THE MORTGAGE ORIGINATORS’ UNDERWRITING STANDARDS AND PRACTICES, AND MATERIAL CHARACTERISTICS OF THE MORTGAGE LOAN POOLS ……………..34
A. Defendants’ Misrepresentations Regarding Underwriting Standards And Practices …………………………………………………………………………………………………..34
(1) JPMorgan Defendants’ Misrepresentations Regarding Underwriting Standards And Practices………………………………………………35
i
(2) WaMu Defendants’ Misrepresentations Regarding Underwriting Standards and Practices……………………………………………………………………35
(3) Long Beach Defendants’ Misrepresentations Regarding Underwriting Standards and Practices……………………………………………….36
(4) Bear Stearns Defendants’ Misrepresentations Regarding Underwriting Standards and Practices……………………………………………….39
B. Defendants’ Misrepresentations Regarding Owner-Occupancy Statistics …………40
(1) JPMorgan Defendants’ Misrepresentations Regarding Owner- Occupancy Statistics ……………………………………………………………………….40
(2) WaMu Defendants’ Misrepresentations Regarding Owner Occupancy Statistics ……………………………………………………………………….41
(3) Bear Stearns Defendants’ Misrepresentations Regarding Owner Occupancy Statistics ……………………………………………………………………….41
C. Defendants’ Misrepresentations Regarding Loan-to-Value and Combined Loan-to-Value Ratios…………………………………………………………………………………42
(1) JPMorgan Defendants’ Misrepresentations Regarding LTV and CLTV Ratios………………………………………………………………………………….42
(2) WaMu Defendants’ Misrepresentations Regarding LTV and CLTV Ratios ……………………………………………………………………………………………42
(3) Bear Stearns Defendants’ Misrepresentations Regarding LTV and CLTV Ratios………………………………………………………………………………….43
D. Defendants’ Misrepresentations Regarding Debt-to-Income Ratios …………………44
(1) JPMorgan Defendants’ Misrepresentations Regarding Debt-to- Income Ratios …………………………….................…………………………………………………..44
(2) WaMu Defendants’ Misrepresentations Regarding Debt-to-Income Ratios ……………………………………………………………………………………………44
(3) Bear Stearns Defendants’ Misrepresentations Regarding Debt-to- Income Ratios ............................................................................................................................................45
E. Defendants’ Misrepresentations Regarding Credit Ratings……………………………..46
(1) JPMorgan Defendants’ Misrepresentations Regarding Credit Ratings ………………………………………………………………………………………….46
(2) WaMu Defendants’ Misrepresentations Regarding Credit Ratings………..47 ii
(3) Long Beach Defendants’ Misrepresentations Regarding Credit Ratings ………………………………………………………………………………………….48
(4) Bear Stearns Defendants’ Misrepresentations Regarding Credit Ratings ………………………………………………………………………………………….48
F. Defendants’ Misrepresentations Regarding Credit Enhancements……………………49
(1) JPMorgan Defendants’ Misrepresentations Regarding Credit Enhancements ………………………………………………………………………………..49
(2) WaMu Defendants’ Misrepresentations Regarding Credit Enhancements ………………………………………………………………………………..50
(3) Long Beach Defendants’ Misrepresentations Regarding Credit Enhancements ………………………………………………………………………………..50
(4) Bear Stearns Defendants’ Misrepresentations Regarding Credit Enhancements ………………………………………………………………………………..51
G. Defendants’ Misrepresentations Regarding Underwriting Exceptions………………51
(1) JPMorgan Defendants’ Misrepresentations Regarding Underwriting Exceptions …………………………………………………………………51
(2) WaMu Defendants’ Misrepresentations Regarding Underwriting Exceptions ……………………………………………………………………………………..52
(3) Long Beach Defendants’ Misrepresentations Regarding Underwriting Exceptions …………………………………………………………………53
(4) Bear Stearns Defendants’ Misrepresentations Regarding Underwriting Exceptions …………………………………………………………………53
H. Defendants’ Misrepresentations Regarding Alternative Documentation Loans ……………………………………………………………………………………………………….53
(1) JPMorgan Defendants’ Misrepresentations Regarding Alternative Documentation Loans ……………………………………………………………………..54
(2) WaMu Defendants’ Misrepresentations Regarding Alternative Documentation Loans ……………………………………………………………………..54
(3) Bear Stearns Defendants’ Misrepresentations Regarding Alternative Documentation Loans …………………………………………………….55
I. Defendants’ Misrepresentations Regarding Full-Documentation Loans……………55
iii
J. Defendants’ Misrepresentations Regarding Adverse Selection of Mortgage Loans ……………………………………………………………………………………………………….56
K. Defendants’ Failure to Disclose the Negative Results of Due Diligence …………..57
II. ALL OF DEFENDANTS’ REPRESENTATIONS WERE UNTRUE AND MISLEADING BECAUSE DEFENDANTS SYSTEMATICALLY IGNORED THEIR OWN UNDERWRITING GUIDELINES ……………………………………………………58
A. Evidence Demonstrates Defendants’ Underwriting Abandonment: High Default Rates And Plummeting Credit Ratings ……………………………………………..59
B. Statistical Evidence of Faulty Underwriting: Borrowers Did Not Actually Occupy The Mortgaged Properties As Represented……………………………………….62
(1) The JPMorgan Offerings………………………………………………………………….64 (2)
The WaMu Offerings………………………………………………………………………64 (3)
The Bear Stearns Offerings………………………………………………………………65
C. Statistical Evidence of Faulty Underwriting: The Loan-to-Value Ratios In The Offering Materials Were Inaccurate ………………………………………………………65
(1) The JPMorgan Offerings………………………………………………………………….66 (2) T
C. Statistical Evidence of Faulty Underwriting: The Loan-to-Value Ratios In The Offering Materials Were Inaccurate ………………………………………………………65
(1) The JPMorgan Offerings………………………………………………………………….66 (2) T
he WaMu Offerings………………………………………………………………………68 (3)
The Bear Stearns Offerings………………………………………………………………71
D. Other Statistical Evidence Demonstrates That The Problems In Defendants’ Loans Were Tied To Underwriting Guideline Abandonment………..72
E. Evidence Demonstrates That Credit Ratings Were A Garbage-In, Garbage-Out Process …………………………………………………………………………………75
F. Evidence From Defendants’ Own Documents And Former Employees Demonstrates That The Representations In Defendants’ Offering Materials Were False ……………………………………………………………………………………………….76
(1) The JPMorgan Offerings………………………………………………………………….76 (2)
D. Other Statistical Evidence Demonstrates That The Problems In Defendants’ Loans Were Tied To Underwriting Guideline Abandonment………..72
E. Evidence Demonstrates That Credit Ratings Were A Garbage-In, Garbage-Out Process …………………………………………………………………………………75
F. Evidence From Defendants’ Own Documents And Former Employees Demonstrates That The Representations In Defendants’ Offering Materials Were False ……………………………………………………………………………………………….76
(1) The JPMorgan Offerings………………………………………………………………….76 (2)
The WaMu Offerings………………………………………………………………………80 (3)
The Long Beach Offerings……………………………………………………………….87 (4)
The Bear Stearns Offerings………………………………………………………………92
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G. Evidence From Defendants’ Third-Party Due Diligence Firm Demonstrates That Defendants Were Originating Defective Loans………………….94
H. Evidence Of Other Investigations Demonstrates The Falsity Of Defendants’ Representations ………………………………………………………………………97
(1) The WaMu and Long Beach Offerings………………………………………………97
(2) The Bear Stearns Offerings………………………………………………………………99
III. DEFENDANTS’ REPRESENTATIONS CONCERNING UNAFFILIATED ORIGINATORS’ UNDERWRITING GUIDELINES WERE ALSO FALSE ……………102
A. Countrywide ……………………………………………………………………………………………104
(1) Defendants’ Misrepresentations Concerning Countrywide’s Underwriting Practices…………………………………………………………………..104
(2) These Representations Were Untrue And Misleading………………………..105 B.
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G. Evidence From Defendants’ Third-Party Due Diligence Firm Demonstrates That Defendants Were Originating Defective Loans………………….94
H. Evidence Of Other Investigations Demonstrates The Falsity Of Defendants’ Representations ………………………………………………………………………97
(1) The WaMu and Long Beach Offerings………………………………………………97
(2) The Bear Stearns Offerings………………………………………………………………99
III. DEFENDANTS’ REPRESENTATIONS CONCERNING UNAFFILIATED ORIGINATORS’ UNDERWRITING GUIDELINES WERE ALSO FALSE ……………102
A. Countrywide ……………………………………………………………………………………………104
(1) Defendants’ Misrepresentations Concerning Countrywide’s Underwriting Practices…………………………………………………………………..104
(2) These Representations Were Untrue And Misleading………………………..105 B.
GreenPoint ……………………………………………………………………………………………..109
(1) Defendants’ Misrepresentations Concerning GreenPoint’s Underwriting Practices…………………………………………………………………..109
(2) These Representations Were Untrue And Misleading………………………..111 C. PHH……………………………………………………………………………………………………….115
(1) Defendants’ Misrepresentations Concerning PHH’s Underwriting Practices ………………………………………………………………………………………115
(2) These Representations Were Untrue And Misleading………………………..116 D.
(1) Defendants’ Misrepresentations Concerning GreenPoint’s Underwriting Practices…………………………………………………………………..109
(2) These Representations Were Untrue And Misleading………………………..111 C. PHH……………………………………………………………………………………………………….115
(1) Defendants’ Misrepresentations Concerning PHH’s Underwriting Practices ………………………………………………………………………………………115
(2) These Representations Were Untrue And Misleading………………………..116 D.
Option One……………………………………………………………………………………………..118
(1) Defendants’ Misrepresentations Concerning Option One’s Underwriting Practices…………………………………………………………………..118
(2) These Representations Were Untrue and Misleading:………………………..120 E. Fremont ………………………………………………………………………………………………….122
(1) Defendants’ Misrepresentations Concerning Fremont’s Underwriting Practices…………………………………………………………………..122
(2) These Representations Were Untrue and Misleading…………………………124 IV.
(1) Defendants’ Misrepresentations Concerning Option One’s Underwriting Practices…………………………………………………………………..118
(2) These Representations Were Untrue and Misleading:………………………..120 E. Fremont ………………………………………………………………………………………………….122
(1) Defendants’ Misrepresentations Concerning Fremont’s Underwriting Practices…………………………………………………………………..122
(2) These Representations Were Untrue and Misleading…………………………124 IV.
THE DEFENDANTS KNEW THEIR REPRESENTATIONS WERE FALSE ………….126
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A. The Statistical Evidence Is Itself Persuasive Evidence Defendants Knew Or Recklessly Disregarded The Falsity Of Their Representations………………….126
B. Evidence From Third Party Due Diligence Firms Demonstrates That Defendants Knew Defective Loans Were Being Securitized …………………………127
C. Evidence Of Defendants’ Influence Over The Appraisal Process Demonstrates That Defendants Knew The Appraisals Were Falsely Inflated …………………………………………………………………………………………………..130
D. Evidence Of Internal Documents And Former Employee Testimony Demonstrates That Defendants Knew Their Representations Were False ……….131
(1) (2) (3) (4)
JPMorgan Defendants Knew Their Representations Were False…………131 WaMu Defendants Knew Their Representations Were False ……………..133 Long Beach Defendants Knew Their Representations Were False………138 Bear Stearns Defendants Knew Their Representations Were False ……..140
V. ALLSTATE’S DETRIMENTAL RELIANCE AND DAMAGES ……………………………144
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A. The Statistical Evidence Is Itself Persuasive Evidence Defendants Knew Or Recklessly Disregarded The Falsity Of Their Representations………………….126
B. Evidence From Third Party Due Diligence Firms Demonstrates That Defendants Knew Defective Loans Were Being Securitized …………………………127
C. Evidence Of Defendants’ Influence Over The Appraisal Process Demonstrates That Defendants Knew The Appraisals Were Falsely Inflated …………………………………………………………………………………………………..130
D. Evidence Of Internal Documents And Former Employee Testimony Demonstrates That Defendants Knew Their Representations Were False ……….131
(1) (2) (3) (4)
JPMorgan Defendants Knew Their Representations Were False…………131 WaMu Defendants Knew Their Representations Were False ……………..133 Long Beach Defendants Knew Their Representations Were False………138 Bear Stearns Defendants Knew Their Representations Were False ……..140
V. ALLSTATE’S DETRIMENTAL RELIANCE AND DAMAGES ……………………………144
VI. TOLLING OF THE SECURITIES ACT OF 1933 CLAIMS …………………………………..146
FIRST CAUSE OF ACTION …………………………………………………………………………………………149
SECOND CAUSE OF ACTION …………………………………………………………………………………….150
THIRD CAUSE OF ACTION………………………………………………………………………………………..152
FOURTH CAUSE OF ACTION …………………………………………………………………………………….155
FIFTH CAUSE OF ACTION …………………………………………………………………………………………157
PRAYER FOR RELIEF ………………………………………………………………………………………………..157
JURY TRIAL DEMANDED……………………………………………
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