Allstate Complaint

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Allstate and others sue the banks over toxic MBS. Great summary of the ripoff tactics that resulted in the real estate bubble and the crash.

Transcript of Allstate Complaint

FILED: NEW YORK COUNTY CLERK 02/16/2011NYSCEF DOC. NO. 2

INDEX NO. 650398/2011 RECEIVED NYSCEF: 02/15/2011

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK ALLSTATE BANK, ALLSTATE INSURANCE COMPANY, ALLSTATE LIFE INSURANCE COMPANY, ALLSTATE NEW JERSEY INSURANCE COMPANY, ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK, AGENTS PENSION PLAN, and ALLSTATE RETIREMENT PLAN, Plaintiffs, -againstJPMORGAN CHASE BANK, N.A.; J.P. MORGAN ACQUISITION CORPORATION; J.P. MORGAN SECURITIES INC.; J.P. MORGAN ACCEPTANCE CORPORATION I; WM ASSET HOLDINGS CORPORATION; WAMU ASSET ACCEPTANCE CORPORATION; WAMU CAPITAL CORPORATION; WASHINGTON MUTUAL MORTGAGE SECURITIES CORPORATION; LONG BEACH SECURITIES CORPORATION; DAVID BECK; DIANE NOVAK; THOMAS LEHMANN; EMC MORTGAGE CORPORATION; STRUCTURED ASSET MORTGAGE INVESTMENTS II INC.; BEAR STEARNS ASSET BACKED SECURITIES I LLC; and SACO I INC. Defendants. Index No. COMPLAINT

NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................7 JURISDICTION AND VENUE ....................................................................................................16 BACKGROUND ...........................................................................................................................17 A. B. C. D. THE MECHANICS OF MORTGAGE SECURITIZATION ...........................................17 SECURITIZATION OF MORTGAGE LOANS: THE TRADITIONAL MODEL ........19 THE SYSTEMIC VIOLATION OF UNDERWRITING AND APPRAISAL STANDARDS IN THE MORTGAGE SECURITIZATION INDUSTRY .......................21 DEFENDANTS WERE AN INTEGRATED VERTICAL OPERATION CONTROLLING EVERY ASPECT OF THE SECURITIZATION PROCESS ..............24 (1) (2) (3) E. JPMorgan Defendants ................................................................................24 WaMu Defendants .....................................................................................26 Bear Stearns Defendants ............................................................................27

DEFENDANTS OFFERING MATERIALS....................................................................29 (1) (2) (3) (4) The JPMorgan Offerings............................................................................29 The WaMu Offerings .................................................................................30 The Long-Beach Offering ..........................................................................32 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

i

(2) (3) (4) B.

WaMu Defendants Misrepresentations Regarding Underwriting Standards and Practices..............................................................................35 Long Beach Defendants Misrepresentations Regarding Underwriting Standards and Practices .......................................................36 Bear Stearns Defendants Misrepresentations Regarding Underwriting Standards and Practices .......................................................39

Defendants Misrepresentations Regarding Owner-Occupancy Statistics ............40 (1) (2) (3) JPMorgan Defendants Misrepresentations Regarding OwnerOccupancy Statistics ..................................................................................40 WaMu Defendants Misrepresentations Regarding Owner Occupancy Statistics ..................................................................................41 Bear Stearns Defendants Misrepresentations Regarding Owner Occupancy Statistics ..................................................................................41

C.

Defendants Misrepresentations Regarding Loan-to-Value and Combined Loan-to-Value Ratios .............................................................................................42 (1) (2) (3) JPMorgan Defendants Misrepresentations Regarding LTV and CLTV Ratios ..............................................................................................42 WaMu Defendants Misrepresentations Regarding LTV and CLTV Ratios .........................................................................................................42 Bear Stearns Defendants Misrepresentations Regarding LTV and CLTV Ratios ..............................................................................................43

D.

Defendants Misrepresentations Regarding Debt-to-Income Ratios .....................44 (1) (2) (3) JPMorgan Defendants Misrepresentations Regarding Debt-toIncome Ratios ............................................................................................44 WaMu Defendants Misrepresentations Regarding Debt-to-Income Ratios .........................................................................................................44 Bear Stearns Defendants Misrepresentations Regarding Debt-toIncome Ratios ............................................................................................45

E.

Defendants Misrepresentations Regarding Credit Ratings ...................................46 (1) (2) JPMorgan Defendants Misrepresentations Regarding Credit Ratings .......................................................................................................46 WaMu Defendants Misrepresentations Regarding Credit Ratings...........47 ii

(3) (4) F.

Long Beach Defendants Misrepresentations Regarding Credit Ratings .......................................................................................................48 Bear Stearns Defendants Misrepresentations Regarding Credit Ratings .......................................................................................................48

Defendants Misrepresentations Regarding Credit Enhancements........................49 (1) (2) (3) (4) JPMorgan Defendants Misrepresentations Regarding Credit Enhancements ............................................................................................49 WaMu Defendants Misrepresentations Regarding Credit Enhancements ............................................................................................50 Long Beach Defendants Misrepresentations Regarding Credit Enhancements ............................................................................................50 Bear Stearns Defendants Misrepresentations Regarding Credit Enhancements ............................................................................................51

G.

Defendants Misrepresentations Regarding Underwriting Exceptions..................51 (1) (2) (3) (4) JPMorgan Defendants Misrepresentations Regarding Underwriting Exceptions ...........................................................................51 WaMu Defendants Misrepresentations Regarding Underwriting Exceptions ..................................................................................................52 Long Beach Defendants Misrepresentations Regarding Underwriting Exceptions ...........................................................................53 Bear Stearns Defendants Misrepresentations Regarding Underwriting Exceptions ...........................................................................53

H.

Defendants Misrepresentations Regarding Alternative Documentation Loans ......................................................................................................................53 (1) (2) (3) JPMorgan Defendants Misrepresentations Regarding Alternative Documentation Loans ................................................................................54 WaMu Defendants Misrepresentations Regarding Alternative Documentation Loans ................................................................................54 Bear Stearns Defendants Misrepresentations Regarding Alternative Documentation Loans .............................................................55

I.

Defendants Misrepresentations Regarding Full-Documentation Loans ...............55

iii

J. K. II.

Defendants Misrepresentations Regarding Adverse Selection of Mortgage Loans ......................................................................................................................56 Defendants Failure to Disclose the Negative Results of Due Diligence ..............57

ALL OF DEFENDANTS REPRESENTATIONS WERE UNTRUE AND MISLEADING BECAUSE DEFENDANTS SYSTEMATICALLY IGNORED THEIR OWN UNDERWRITING GUIDELINES ............................................................58 A. B. Evidence Demonstrates Defendants Underwriting Abandonment: High Default Rates And Plummeting Credit Ratings .....................................................59 Statistical Evidence of Faulty Underwriting: Borrowers Did Not Actually Occupy The Mortgaged Properties As Represented ..............................................62 (1) (2) (3) C. The JPMorgan Offerings............................................................................64 The WaMu Offerings ........................................................