HERE IS THE COMPLAINT--ALLSTATE SUES GOLDMAN OVER TOXIC INVESTMENTS AUGUST 2011

8/6/2019 HERE IS THE COMPLAINT--ALLSTATE SUES GOLDMAN OVER TOXIC INVESTMENTS AUGUST 2011

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SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NEW YORK

ALLSTATE INSURANCE COMPANY and

ALLSTATE LIFE INSURANCE COMPANY,

Plaintiffs,

-against-

GOLDMAN, SACHS & COMPANY;

GOLDMAN SACHS GROUP, INC.;

GOLDMAN SACHS MORTGAGE

COMPANY; and GS MORTGAGE

SECURITIES CORPORATION,

Defendants.

Index No.

SUMMONS

TO: GOLDMAN, SACHS & COMPANY

200 West Street

New York, NY 10282

GOLDMAN SACHS MORTGAGE

COMPANY

200 West Street

New York, NY 10282

GOLDMAN SACHS GROUP, INC.

200 West StreetNew York, NY 10282

GS MORTGAGE SECURITIES

CORPORATION200 West Street

New York, NY 10282

ILED: NEW YORK COUNTY CLERK 08/15/2011 INDEX NO. 652273/

YSCEF DOC. NO. 1 RECEIVED NYSCEF: 08/15/


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YOU ARE HEREBY SUMMONED to answer the complaint in this action and to serve a

copy of your answer on Plaintiffs attorneys within twenty (20) days after the service of this

summons, exclusive of the day of service (or within thirty (30) days after the service is complete

if this summons is not personally delivered to you within the State of New York). In case of

your failure to appear, judgment will be taken against you by default for the relief demanded in

the complaint.

Plaintiffs designate New York County as the place of trial. The basis of the venue

designated is that Defendants do business in or derive substantial revenue from activities carried

out in this County. The Defendants engaged in significant business activity in this County as it

pertains to the securitization of the mortgage loans at issue.


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SUPREME COURT OF THE STATE OF NEW YORKCOUNTY OF NEW YORK

ALLSTATE INSURANCE COMPANY andALLSTATE LIFE INSURANCE

COMPANY,

Plaintiffs,

-against-

GOLDMAN, SACHS & COMPANY;GOLDMAN SACHS GROUP, INC.;GOLDMAN SACHS MORTGAGECOMPANY; and GS MORTGAGESECURITIES CORPORATION,

Defendants.

Index No.

COMPLAINT


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TABLE OF CONTENTS

NATURE OF ACTION ...................................................................................................................1PARTIES .........................................................................................................................................6JURISDICTION AND VENUE ......................................................................................................8BACKGROUND .............................................................................................................................9

A. The Mechanics of Mortgage Securitization .............................................................9B. Securitization of Mortgage Loans: The Traditional Model ..................................12C. The Systemic Violation Of Underwriting And Appraisal Standards In The

Mortgage Securitization Industry ..........................................................................13SUBSTANTIVE ALLEGATIONS ...............................................................................................17I. THE OFFERING MATERIALS UNTRUE STATEMENTS OF MATERIAL

FACT AND OMISSIONS .................................................................................................17A. Goldmans Misrepresentations Regarding Underwriting Standards and

Practices .................................................................................................................17B. Goldmans Misrepresentations Regarding Due Diligence Results ........................22C. Owner-Occupancy Statistics ..................................................................................23D. Goldmans Misrepresentations Regarding Loan-to-Value and Combined

Loan-to-Value Ratios .............................................................................................24E. Goldmans Misrepresentations Regarding The Sufficiency of Borrower

Income....................................................................................................................25 F. Goldmans Misrepresentations Regarding Credit Ratings ....................................26G. Goldmans Misrepresentations Regarding Credit Enhancement ...........................28H. Goldmans Misrepresentations Regarding Underwriting Exceptions ...................29

II. EVIDENCE THAT ALL OF GOLDMANS REPRESENTATIONS WEREUNTRUE AND MISLEADING ........................................................................................30A. Evidence of the Securities High Default Rates and Plummeting Credit

Ratings ...................................................................................................................30


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B. Loan-Level Evidence That The Mortgaged Properties Were NotOwner-Occupied ................................................................................................................32

C. Evidence That The LTV And CLTV Ratios Were MateriallyMisrepresented .......................................................................................................35

D. Evidence That Goldmans Due Diligence Identified Loans That Did NotMeet The Stated Underwriting Guidelines ............................................................40

E. Evidence That The Ratings Were Meaningless .....................................................42F. Originator-Specific Evidence That The Loans Were Generated Outside

The Disclosed Guidelines ......................................................................................46(1) IndyMac .....................................................................................................48(2) Long Beach ................................................................................................53(3) Fremont ......................................................................................................56(4) Aames ........................................................................................................62(5) American Home Mortgage Corporation ....................................................64(6) NovaStar ....................................................................................................68

III. EVIDENCE THAT GOLDMAN KNEW ITS REPRESENTATIONS WEREUNTRUE AND MISLEADING ........................................................................................70A. Evidence Regarding Goldmans Due Diligence ....................................................71

(1) Goldmans Due Diligence Benefitted From A Direct Window IntoThe Originators Practices .........................................................................71

(2) Third-Party Due Diligence Data Confirms Goldman Was MadeAware, On A Daily Basis, Of The Number Of Non-PerformingLoans ..........................................................................................................75

B. Other Evidence Of Goldmans Willingness To Capitalize On Its UniqueKnowledge At The Expense Of Investors .............................................................84(1) Goldman Began Shorting Its Own Offerings In 2006 And Into

2007............................................................................................................84 (2) Goldmans Targeted Campaign To Put Back Defective Loans To

Originators Demonstrates That It Knew The Targeted OriginatorsLoans Violated Underwriting Guidelines ..................................................88


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C. Numerous Government Investigations Have Confirmed Goldman ActedWith Scienter .........................................................................................................92

D. Further Evidence that Goldman Knew the Appraisals Were Inflated ...................93IV. ALLSTATES DETRIMENTAL RELIANCE AND DAMAGES ...................................94FIRST CAUSE OF ACTION ......................................................................................................100SECOND CAUSE OF ACTION .................................................................................................101THIRD CAUSE OF ACTION .....................................................................................................101FOURTH CAUSE OF ACTION .................................................................................................103PRAYER FOR RELIEF ..............................................................................................................105

JURY TRIAL DEMANDED .......................................................................................................106


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Plaintiffs Allstate Insurance Company and Allstate Life Insurance Company (together,

Allstate), by and through their attorneys, bring this action against Goldman, Sachs &

Company, Goldman Sachs Group, Inc., Goldman Sachs Mortgage Company, and GS Mortgage

Securities Corporation (together, Defendants or Goldman), and allege as follows:

NATURE OF ACTION

1. This action arises out of Goldmans fraudulent sale of residential mortgage-backed securities (RMBS or the Certificates) to Allstate. Allstate invested more than a

hundred million dollars in Goldmans securities in reliance on Goldmans representations

regarding the quality of those Certificates and the residential mortgages underlying them (the

Mortgage Loans). Goldman knew these types of securities were, to use Goldmans own

wordswords recently revealed to the public by the numerous governmental investigations into

Goldmans role in the markets collapsejunk, dogs, crap, and lemons.

2. To offload the securities it knew were crap, Goldman made numerousmisrepresentations to Allstate regarding the features of the Mortgage Loans. These

misrepresentations were repeated in registration statements, prospectuses, prospectus

supplements, free writing prospectuses, term sheets, and other draft and final written materials

(both herein and in the Exhibits, the Offering Materials) provided to Allstate in connection

with the Certificates. For example:

(i) Underwriting guidelines. The Offering Materials represented that theloans were originated according to certain underwriting guidelines. These guidelines were

purportedly intended to ensure that only loans that the borrower could repay would be included

in the pools underlying the Certificates. In fact, Goldman knew that lenders had systematically

abandoned the stated underwriting guidelines, producing loans without regard to the likelihood

of repayment.


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(ii) Purpose and Use of Exceptions. Similarly, the Offering Materialsrepresented that loans that did not meet certain criteria were approved as exceptions only if the

loans showed countervailing features that made up for negative aspects of the risk profile. In

fact, exceptions were not based on legitimate compensating factors, and instead were used as a

way to increase loan volume by circumventing the applicable underwriting guidelines.

(iii) Owner Occupancy Statistics. The Offering Materials made specificrepresentations regarding the percentage of borrowers who would be occupying the property

being mortgageda key risk metric given that borrowers are less likely to walk away from

properties they live in, as compared to properties being used as a vacation home or as an

investment. Analytical tools recently made available to investors confirm that, in truth, of the

loans underlying the Certificates, a far greater percentage than that represented by Goldman were

given to borrowers who did not live in the homes that secured the mortgages in question.

(iv) Loan-to-Value Ratios. The Offering Materials represented that the loanshad specific loan-to-value (LTV) and combined loan-to-value (CLTV) ratios. The LTV and

CLTV represent the size of the borrowers obligation as compared to the value of the property

being used as collateral. The CLTV is the LTV after all loans are considered, not just the first

mortgage. These are important risk metrics, because borrowers who have substantial equity in

their homes are less likely to default. Additionally, the larger the equity cushion that

borrowers have, the greater the likelihood of repayment to lenders upon foreclosure. Analytical

tools recently made available to investors confirm that the Offering Materials vastly overstated

the value of the collateral being included in the loan pools, and hid additional liens that had been

placed on the properties.


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3. These and other key representations were false, and Goldman knew it. As theUnited States Senate Permanent Subcommittee on Investigations (SPSI) found in its April

2011 report, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (SPSI

Report), Goldman was keenly aware of the poor quality of many of the loan pools, and thus it

knew [the loan pools] were likely to incur abnormally high rates of default. (SPSI Report at

487, 513 (emphasis added).)

4. As the SPSI found, Goldman underwrote securities using loans from subprimelenders known for issuing high risk, poor quality mortgages, and sold risky securities to investors

across the United States and around the world. (Id.at 11.) Many of the loans came from

lenders such as Long Beach, IndyMac, and Fremontwho are among the Office of the

Comptroller of the Currencys Worst Ten in the Worst Ten list of originators. (Id. at 239.)

Goldman knew that these now-notorious lenders were selling loans outside their stated

guidelines. Previously undisclosed materials from Goldmans third-party due diligence firm,

Clayton Holdings, confirm that Goldman was aware, on nearly a real-time basis, of how many

loans were being identified by its due diligence reviews as failing to meet the stated guidelines.

Yet Goldman waived those defective loans into securitizations such as those at issue here.

5. Even as the market started to turn, and Goldman gave the internal dictate toreduce its own exposure to the U.S. housing market, the firm kept right on packaging up,

underwriting, and selling mortgage-related securities. (William D. Cohan,Money and Power:

How Goldman Sachs Came to Rule the World, 2011.) Goldman did so because, by

misrepresenting the quality of the loans, it was able to reap millions in fees for the numerous

roles it played along the securitization chain.


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6. Goldman also did so despite what it knew about the Mortgage Loans because itwas able, through the process of securitization, to move the loans off of its booksand off the

books of lenders who were indebted to Goldman. Goldman provided many originators with

warehouse lines of credit. The originators owed Goldman billions, which gave it incentive to

move the originators mortgages down the securitization pipeline, and thus ensure that the

originators could repay Goldmans lines of credit. As the Financial Crisis Inquiry Commission

(FCIC) found in its January 2011 report (FCIC Report), Goldman, through its cheap

warehouse financing of subprime loans and other fraudulent business practices, multiplied the

effects of the collapse in subprime. (FCIC Report at 142.)

7. Goldman not only stood to benefit from the fees the securitizations generated, butalso positioned itself to cash in even more when the true nature of the junk was revealed. This

is because Goldman was taking outside bets against many of the same assets and asset types it

was securitizing. Of course, Goldman failed to disclose to clients that, at the same time it was

recommending investments in Goldman-originated RMBS and CDO securities, it was

committing billions of dollars to short the same types of securities, as well as their underlying

assets, and even some of the lenders whose mortgage pools were included or referenced in the

securities. (SPSI Report at 513, 618.)

8. Goldman was able to engage in such profiteering because it was in prime positionto know the true quality of the loans it was packaging into securities such as the Certificates here.

Goldmans longstanding relationships, and its warehouse lending agreements, gave it a direct

window into the originators underwriting abandonment. Tellingly, only when the securitization

market started to dry up did Goldman confront these lenders with its knowledge of their poor

practices. That Goldman forced the same lenders at issue here to repurchase loans Goldman was


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stuck with (despite its best efforts) is an admission that the originators relevant to this case were

churning out defective loans. That Goldman knew to specifically target the same lenders at issue

in this case for repurchase demands is evidence that Goldman knew those lenders had abandoned

their guidelines. That Goldman continued to try to securitize these lenders loans even as it was

forcing them to repurchase the loans left on Goldmans books confirms Goldmans disregard for

the truth.

9. Allstate purchased more than $123 million of Certificates across five differentsecuritizations from April 2006 to March 2007, in reliance on Goldmans misrepresentations and

omissions. These purchases are further detailed in the Exhibits to this Complaint, all of which

are incorporated herein.

Transaction

Total

Investment

GSAMP Trust 2006-HE7, M2 $11,850,937.20

GSAMP Trust 2006-HE5, M2 $19,789,062.00

GSAMP Trust 2006-S4, A1 $33,000,000.00

GSAMP Trust 2006-S3, A1 $24,999,975.00

GSAA Trust 2006-13, AF2 $34,050,000.00

10. The systemic (but hidden) abandonment of the disclosed underwriting guidelinesled to soaring default rates in the Mortgage Loans underlying the Certificates, which in turn led

to catastrophic losses in market value, revealing the true value of the Certificates to be far less

than what Allstate paid. The delinquency rates on the Mortgage Loans underlying Allstates

investments are astronomical, far above the delinquency rate one would expect from properly-

underwritten loans. Moreover, despite the fact that all of the Certificates started out with high

AAA or AA ratings, all have been downgraded to junk by at least one of the major rating

agencies, and their market value has plummeted. The drop in market value of these Certificates,

which is indicative of their true value, and the spike in delinquency rates, was not caused by the


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downturn in the U.S. housing market, but rather by faulty underwriting of the mortgages

themselves. As Senator Carl Levin summarized:

Investment banks such as Goldman Sachs were not simply market-makers, they

were self-interested promoters of risky and complicated financial schemes thathelped trigger the crisis. They bundled toxic mortgages into complex financialinstruments, got the credit rating agencies to label them as AAA securities, andsold them to investors, magnifying and spreading risk throughout the financialsystem, and all too often betting against the instruments they sold and profiting atthe expense of their clients.

(SPSI Press Release, dated April 24, 2010.)

PARTIES

11. The Plaintiffs. Plaintiff Allstate Insurance Company is an insurance companyformed under the laws of, and domiciled in, the State of Illinois, with its principal place of

business in Northbrook, Illinois. It is the nations largest publicly held personal-lines insurer,

selling property and casualty insurance. Allstate Insurance Company is licensed to do business

in New York and writes insurance policies to New York residents. Allstate Insurance Company

is a wholly owned subsidiary of Allstate Insurance Holdings, LLC, which is a Delaware limited

liability company. Allstate Insurance Holdings, LLC is a wholly owned subsidiary of The

Allstate Corporation, which is a Delaware corporation.

12. Plaintiff Allstate Life Insurance Company is an insurance company formed underthe laws of, and domiciled in, the State of Illinois, with its principal place of business in

Northbrook, Illinois. It sells life insurance and annuity products. Allstate Life Insurance

Company is a wholly owned subsidiary of Allstate Insurance Company.

13. The Defendants. All of the Defendants in this action are part of the samecorporate family, and acted together to control the entire creation, marketing, and sale of the

Certificates at issue here, including buying and pooling together mortgage loans, underwriting

securities, and selling the securities to Allstate and other investors. From 2004 to 2008,


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Goldman was a major player in the mortgage market. Its business activities included buying and

selling mortgage-related securities on behalf of itself and its clients, and amassing billions of

dollars worth of proprietary mortgage-related holdings. In 2006 and 2007 alone, it designed and

underwrote 93 RMBS and 27 mortgage-related CDO securitizations, totaling approximately

$100 billion.

14. As discussed below, the process of issuing an RMBS securitization involvesseveral entities, but their efforts are joint. The Goldman sponsor, depositor, and underwriter

Defendants all worked together to create, market, and issue the Certificates. Each is prominently

identified on the front of the Offering Materials. Thus, they all spoke in those materials, and

are jointly responsible for the material misstatements and omissions therein.

15. Defendant Goldman, Sachs & Company is a New York limited partnership withits principal place of business in New York, New York. Defendant Goldman, Sachs & Company

was the sole underwriter for the Certificates.

16. Defendant Goldman Sachs Group, Inc. is a Delaware corporation with itsprincipal executive office in New York, New York. Goldman Sachs Group, Inc., itself and

through its subsidiaries, engaged in mortgage lending and other real estate finance-related

businesses, including mortgage lending, securities dealing, and insurance underwriting. It is the

corporate parent of all of the Defendants. Defendant Goldman Sachs Group, Inc., is a limited

partner in Goldman Sachs Mortgage Company, and controls the general partner of Goldman

Sachs Mortgage Company.

17. Defendant Goldman Sachs Mortgage Company is a New York limited partnershipwith its principal place of business in New York, New York. Goldman Sachs Mortgage

Company is an affiliate of Goldman, Sachs & Company, and was the sponsor for the Certificates.


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18. Defendant GS Mortgage Securities Corporation is a Delaware corporation with itsprincipal place of business in New York, New York. Defendant GS Mortgage Securities

Corporation, which is an affiliate of Goldman, Sachs & Company, served as the depositor for the

Securitizations.

19. Relevant Non-Parties. Avelo Mortgage LLC served as servicer for some of theMortgage Loans, including those in GSAMP Trust 2006-HE7 and GSAMP Trust 2006-HE5.

Avelos role as servicer is established through Pooling and Servicing Agreements (PSAs),

which are governed by New York law. It is an affiliate, through common parent ownership, of

Goldman Sachs Mortgage Company.

20. At all relevant times, Goldman committed the acts, caused or directed others tocommit the acts, or permitted others to commit the acts alleged in this Complaint. Any

allegations about acts of Defendants means that those acts were committed through their officers,

directors, employees, agents, and/or representatives while those individuals were acting within

the actual or implied scope of their authority.

21. None of the causes of action in this Complaint seek relief from any bankruptentity.

JURISDICTION AND VENUE

22. Pursuant to CPLR 301 and 302, this Court has jurisdiction over Goldmanbecause Goldman transacts business in New York and because Goldman committed acts in New

York causing injury to plaintiffs.

23. Venue is proper in this County pursuant to CPLR 503(a) because each cause ofaction arose, in part, in New York County; because Goldman resides within this county and has

its principal places of business here; and because a majority of the acts giving rise to the causes

of action set forth in this complaint occurred in New York. Specifically: (a) the disclosures


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were prepared and approved in New York; (b) decisions regarding which loans to securitize were

made in and directed from New York; (c) Goldmans underwriting policies and practices were

set and implemented in New York; and (d) many of the collateral loans were originated or

acquired in New York. Many of the key witnesses and documents also still reside in New York.

BACKGROUND

A. The Mechanics of Mortgage Securitization24. Mortgage pass-through securities, or certificates, represent interests in a pool of

mortgage loans; the securities are shares of the pool that are sold to investors. The pass-

through securities entitle the holder to principal and interest payments from the pool of

mortgages. Although the structure and underlying collateral may vary by offering, the basic

principle of pass-through securities remains the same: The cash flow from the pool of mortgages

is passed through to the securities holders as payments are made by the underlying mortgage

borrowers.

25. The initial step in creating a mortgage pass-through security is the generation ofthe loans by the initial originators. Loans are then pooled into groups by a sponsor or seller.

The sponsor of a mortgage-backed security (MBS) is often a Wall Street investment bank.

Here, the sponsor was Goldman Sachs Mortgage Company. In order to ensure that it had

access to sufficient numbers of loans to feed its securitization machine, in many cases Goldman

would provide a warehouse line of credit to the loan originator, with the warehouse line

providing the funds that were loaned to the ultimate borrower.

26. After pooling the loans, the sponsor transfers them to the depositor. Thedepositor is typically a special-purpose affiliate of the sponsor, and exists solely to receive

and then pass on the rights to the pools of loans. It is also often controlled directly by the same

officers and directors who run the sponsor. The depositor GS Mortgage Securities Corporation


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is a wholly-owned subsidiary of the sponsor, Goldman Sachs Mortgage Company, and has no

business operations other than securitizing mortgage assets and related activities. (see, e.g.,

GSAMP 2006-HE5 Pro. Supp. at S-59.)

27. Upon acquisition, the depositor transfers, or deposits, the acquired pool of loansto an issuing trust. The depositor then securitizes the pool of loans in the issuing trust so that

the rights to the cash-flows from the pool can be sold to investors. The securitization

transactions are structured such that the risk of loss is divided among different levels of

investment, or tranches. Tranches consist of multiple series of related securities offered as part

of the same offering, each with a different level of risk and reward. Any losses on the underlying

loanswhether due to default, delinquency, or otherwiseare generally applied in reverse order

of seniority. As such, the most senior tranches of pass-through securities receive the highest

credit ratings because they are the least risky. Junior tranches, being less insulated from risk,

typically obtain lower credit ratings, but offer greater potential returns.

28. Once the tranches are established, the issuing trust passes the securities orcertificates back to the depositor, who becomes the issuer of the securities. The depositor then

passes the securities to one or more underwriters, who offer and sell the securities to investors in

exchange for cash that is passed back to the depositor, minus any fees owed to the underwriters.

29. The underwriter (in this case, Goldman) plays a critical role in the securitizationprocess by purchasing the securities from the issuing trust through the depositor and then selling

them to investors. The underwriter provides information about the loans and the securities that

potential investors like Allstate use to decide whether to purchase the securities.

30. Because the cash flow from the loans in the collateral pool of a securitization isthe source of payments to holders of the securities issued by the trust, the credit quality of the


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securities depends directly upon the credit quality of the loans in the collateral pool, particularly

the likelihood that mortgage holders will make their mortgage payments. The most important

information about the credit quality of the loans is contained in the loan files that the mortgage

originator develops while making the loans.

31. For residential mortgage loans, each loan file normally contains documentsincluding the borrowers application for the loan; verification of the borrowers income, assets,

and employment; references; credit reports on the borrower; an appraisal of the property that will

secure the loan and provide the basis for measures of credit quality, such as LTV ratios; and a

statement of the occupancy status of the property. The loan file also typically contains the record

of the investigation by the loan originator of the documents and information provided by the

borrower, as well as the detailed notes of the underwriter setting forth the rationale for making

each loan. Investors like Allstate were not given access to the loan files; rather, they had to rely

upon the representations made by Goldman in the Offering Materials.

32. The collateral pool for each securitization usually includes thousands of loans.Instead of each potential investor reviewing thousands of loan files, Goldman is responsible for

gathering, verifying, and presenting to potential investors accurate and complete information

about the credit quality and characteristics of the loans that are deposited in the trust. In

accordance with industry standards, this involves performing due diligence on the loan pool and

the originators to ensure the representations being made to investors are accurate.

33. Investors, like Allstate, rely on the description of the quality and nature of theloans in the offering materials.

34. The Wall Street Journal has summarized the securitization process as follows:


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B. Securitization of Mortgage Loans: The Traditional Model35. Traditionally, mortgage originators financed their mortgage business through

customer deposits, retained ownership of the loans they originated, and the originator received

and retained the mortgage payment streams. When an originator held a mortgage through the

term of the loan, the originator also bore the risk of loss if the borrower defaulted and the value

of the collateral was insufficient to repay the loan. As a result, the originator had a strong

economic incentive to verify the borrowers creditworthiness through prudent underwriting, and

to obtain an accurate appraisal of the value of the underlying property before making the

mortgage loan.

36. Mortgage loan securitization, however, shifted the traditional originate to holdmodel to an originate to distribute model, in which originators sell residential mortgages and

transfer credit risk to investors through the issuance and sale of RMBS. Under the new model,

originators no longer hold the mortgage loans to maturity. Instead, by selling the mortgages to

investment banks, which issue securities collateralized by the mortgages to investors, the

originators obtain the funds to make more loans. Securitization also enables originators to earn


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most of their income from transaction and loan-servicing fees, rather than from the spread

between interest rates paid on deposits and interest rates received on mortgage loans, as in the

traditional model. Thus, securitization gives originators an incentive to increase the number of

mortgages they issue regardless of credit quality. However, contractual terms, adherence to solid

underwriting standards, and good business practices obligate originators to underwrite loans in

accordance with their stated policies and to obtain accurate appraisals of the mortgaged

properties.

37. Traditionally, most mortgage securitizations were conducted through the majorGovernment Sponsored Enterprises (the Agencies), i.e., the Federal National Mortgage

Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac),

and the Government National Mortgage Association (Ginnie Mae). The Agencies purchased

loans from originators and securitized the loans. The Agency securitizations had high credit

quality because the Agencies required the underlying loans to be originated in accordance with

strict underwriting guidelines. Most non-Agency mortgage securitizations traditionally also had

relatively high credit quality because they typically complied with the Agencies underwriting

standards.

C. The Systemic Violation Of Underwriting And Appraisal Standards In TheMortgage Securitization Industry

38. During the 1980s and 1990s, the mortgage securitization business grew rapidly,making it possible for mortgage originators to make more loans than would have been possible

using only the traditional primary source of funds from deposits. Originators during this early

growth period generally made loans in accordance with their stated underwriting and appraisal

standards and provided accurate information about the loans, borrowers, and mortgaged


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properties to the Wall Street banks that securitized the loans. In turn, the Wall Street banks

provided accurate information about the loans, borrowers, and properties to RMBS investors.

39. Unbeknownst to investors, the game fundamentally changed in the early 2000s.While both originators and Wall Street banks, through the 1990s, played by the rules and

complied with their obligations to underwrite loans responsibly and provide accurate information

to RMBS investors, this ceased to be the case in the following decade. The history of the recent

market collapse was investigated by the FCIC, which reviewed millions of pages of documents,

interviewed more than 700 witnesses, and held 19 days of public hearings in New York,

Washington, D.C., and communities across the country, and concluded:

[I]t was the collapse of the housing bubblefueled by low interest rates, easy andavailable credit, scant regulation, and toxic mortgagesthat was the spark thatignited a string of events, which led to a full-blown crisis in the fall of 2008.Trillions of dollars in risky mortgages had become embedded throughout thefinancial system, as mortgage-related securities were packaged, repackaged, andsold to investors around the world.

(FCIC Report at xi, xvi.)

40. With historically low interest rates decreasing the profits of traditional lendingand securitization through Fannie Mae or Freddie Mac, Wall Street banks looked for new ways

to increase fees. Banks began to focus on creating products outside the traditional lending

guidelines and expanding the number of borrowers who could purportedly qualify for loans,

while also charging those borrowers much higher fees than they would have paid on conforming

Fannie Mae or Freddie Mac loan terms. As a result, the number of loans that were riskier than

those that could be securitized through Fannie Mae or Freddie Mac skyrocketed. For instance,

according to an April 7, 2010 report by the FCIC, loans that did not conform to Fannie Mae and

Freddie Mac guidelines grew from around $670 billion in 2004 to over $2 trillion in 2006.


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41. Such an enormous rise in mortgage volume over a short period of time createdproblems with loan funding capital and risk allocation. As the FCIC put it: [U]nder the radar,

the lending and financial services industry had mutated. (FCIC Report at 7.) It found that

[s]ecuritization and subprime originations grew hand in hand, as [t]he nonprime mortgage

securitization process created a pipeline through which risky mortgages were conveyed and sold

throughout the financial system. This pipeline was essential to the origination of the burgeoning

numbers of high-risk mortgages. (FCIC Report at 70, 125.)

42. In other words, the shift towards non-traditional loans sparked a growing focus onthe originate to distribute model. What has now become clear is that, because the risk of non-

payment was transferred to investors, originators, underwriters, and others in the securitization

chain were incentivized to pump out as many loans as possible, the more exotic (and thus the

more lucrative), the betteras long as they could be sold. Originators and securitizers were

willing to abandon sound underwriting practices because they offloaded the risk onto investors

like Allstate, in the process misrepresenting the loan collateral to ensure the securities

marketability. As the FCIC concluded: The originate-to-distribute model undermined

responsibility and accountability for the long-term viability of the mortgages and mortgage-

related securities and contributed to the poor quality of mortgage loans. (FCIC Report at 125.)

43. The underwriters of the offerings and originators of the underlying mortgageloans make large amounts of money from the fees and other transaction revenues associated with

their efforts to create and sell mortgage-backed securities. These fees and revenues are generally

calculated as a percentage of the securitizations principal balance, and can amount to millions of

dollars in the context of large transactions. From 2000 through 2008, Wall Street banks had

learned that they could earn much more from arranging and selling mortgage-backed securities


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than they could make by simply making loans and selling them. The securitization business was

a gold mine for the investment banks that were able to control significant market share.

44. Underwriters of RMBS offerings like those at issue typically would collectbetween 0.2% to 1.5% in discounts, concessions, or commissions. On the five offerings at issue

here, these commissions would have yielded Goldman millions of dollars in underwriting fees

alone. By providing warehouse loans and serving as a sponsor and depositor of the offerings,

Goldman earned even more. It was, in part, the fees Goldman was receiving for its promised

underwriting, diligence, and oversight that kept Goldman in the business of acquiring mortgage

loans from originators for securitization, even after the company became aware that the loans

being provided by these originators did not comport with basic underwriting practices.

45. Because the underlying loans were on non-traditional terms, banks could offerinvestors higher rates of return on the securitized pools, even as the deals structure (such as, for

instance, including extra mortgage loans in the collateral pool) purportedly made the

investments safe. Unknown to investors like Allstate, however, the securities were much riskier

than disclosed because Goldman misrepresented many aspects of the Mortgage Loans.

46. For instance, Goldman: (1) overstated how many loans were owner-occupied(owner-occupied properties have lower risks), (2) understated the loan pools average LTV and

CLTV ratios (suggesting the borrowers had more of an equity cushion than they did), (3)

misrepresented the loans adherence to standard underwriting practices, and (4) failed to inform

investors such as Allstate that high numbers of defective loans were waived into the mortgage

pools (making representations regarding the quality of the underwriting process even more

misleading). Each misrepresentation and omission created an additional, hidden layer of risk


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well beyond that known to be associated with an adjustable rate mortgage or a home equity

loan in the abstract.

47. Since the payment streams from borrowers ultimately fund payments to investors,if enough loans in the pool default, investors will not be paid the interest returns promised and

may even lose their principal. The true value of the Certificates is revealed to be lower as the

higher risk is discoveredas evidenced by, among other things, a drop in market value as the

true risk profile of the underlying mortgage pool is revealed. As such, any representation

bearing on the riskiness of the underlying mortgage loans was material to investors, including

Allstate. In short, by misrepresenting the true risk profile of the underlying loan pools, Goldman

defrauded investors like Allstate.

48. As the FCIC found:The Commission concludes that firms securitizing mortgages failed to performadequate due diligence on the mortgages they purchased and at times knowinglywaived compliance with underwriting standards. Potential investors were notfully informed or were misledabout the poor quality of the mortgages containedin some mortgage-related securities. These problems appear to have beensignificant.

(FCIC Report at 187 (emphasis added).)

SUBSTANTIVE ALLEGATIONS

I. THE OFFERING MATERIALS UNTRUE STATEMENTS OF MATERIALFACT AND OMISSIONS

A. Goldmans Misrepresentations Regarding Underwriting Standards andPractices

49. Consistent with its roles as sponsor and underwriter of the Certificates, Goldmanrepresented to investors in the Offering Materials that the Mortgage Loans were originated or

acquired in accordance with stated underwriting guidelines. For example, according to the

Prospectus Supplement for GSAMP 2006-HE7, Goldman stated that [t]he mortgage loans were


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originated or acquired generally in accordance with the underwriting guidelines of the original

loan sellers, or in the sponsors underwriting guidelines in the case of the conduit mortgage

loans. (GSAMP 2006-HE7 Pro. Supp. at S-36.) Similar representations are made in each of the

other Certificates Prospectus Supplements.

50. Goldman reassured investors that the originators from which it had acquired loans(either through bulk purchases or through its conduit program) had, in fact, adhered to their own

underwriting standards. This representation was important, because it reflected Goldmans own

verification of the loan-origination practices, which investors like Allstate were not in a position

to assess. For example, the Prospectus for GSAMP 2006-HE7 (and other Offering Materials

which contained similar representations) reassured investors that:

The lender or an agent acting on the lenders behalf applies theunderwriting standards to evaluate the borrowers credit standing andrepayment ability, and to evaluate the value and adequacy of themortgaged property as collateral. GSAMP 2006-HE7 Prospectus datedOctober 6, 2006, at 29.

In general, the lender may require that a prospective borrower fill out adetailed application designed to provide to the underwriting officerpertinent credit information. As a part of the description of the borrowersfinancial condition, the lender may require the borrower to provide acurrent list of assets and liabilities and a statement of income and expenseas well as an authorization to apply for a credit report, which summarizesthe borrowers credit history with local merchants and lenders and anyrecord of bankruptcy. The lender may obtain employment verificationfrom an independent source (typically the borrowers employer). Theemployment verification reports the length of employment with thatorganization, the current salary and whether it is expected that theborrower will continue such employment in the future. If a prospectiveborrower is self employed, the lender may require the borrower to submitcopies of signed tax returns. The lender may require the borrower toauthorize verification of deposits at financial institutions where theborrower has demand or savings accounts. In determining the adequacy ofthe mortgaged property as collateral, the lender will generally obtain anappraisal to determine the fair market value of each property consideredfor financing.Id.


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[T]he lender makes a determination as to whether the prospectiveborrower has sufficient monthly income available as to meet theborrowers monthly obligations on the proposed mortgage loan and otherexpenses related to the mortgaged property such as property taxes andhazard insurance. Id.

51. The Offering Materials also made specific representations about the underwritingcriteria of certain third-party originators from whom Goldman purchased the Mortgage Loans.

For example, for the GSAMP 2006-HE7 securitization, Goldman acquired approximately

30.87% of the loans from SouthStar Funding, LLC. To reassure Allstate and other investors that

the loans had been made in accordance with reasonable underwriting criteria, Goldman

represented, among other things, that SouthStars guidelines are intended to evaluate the

borrowers ability to repay the mortgage loan, evaluate the borrowers credit and evaluate the

value and adequacy of the collateral. SouthStar does not approve mortgage loans based solely on

the value of the collateral. (Id. at S-45.) Moreover, the borrowers must show the ability to

repay the mortgage loan, have acceptable credit, and acceptable collateral.

52. The Offering Materials further: (1) described the criteria for acceptable collateral;(2) described Risk Categories, the borrower eligibility criteria, including maximum debt to

income ratio, minimum FICO score, and valid credit score, which must be met; and (3)

described the appraisal procedures which [c]omply with rules of regulators set forth by state and

federal agencies. (Id. at S-47.) The Offering Materials reassured investors that [t]he mortgage

loans originated or acquired by SouthStar were generally in accordance with the underwriting

criteria described in this section. (Id. at 45.) Goldman put its own stamp of approval on the

loans, telling investors that Goldman believed that originators like SouthStar applied the

described underwriting guidelines. (Id. at S-45; see also Prospectus Supplement for GSAMP

Trust 2006-S3 at S-33 (describing Fremonts underwriting guidelines which Goldman believed .

. . to have been applied).)


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53. The Offering Materials for GSAMP 2006-HE7 and GSAMP 2006-HE5 madesimilar representations regarding Aames underwriting criteria. They represented, among other

things, that: (a) Aames Fundings underwriting policy was to analyze the overall situation of

the borrower and to take into account compensating factors that may be used to offer certain

areas of weakness; (b) [a] critical function of Aames Fundings underwriting process was to

identify the level of credit risk associated with each applicant for a mortgage loan; and (c)

Aames Funding was required to approve all loan applications in accordance with its

underwriting criteria. (Id. at S-48S-49.)

54.

With respect to the loans Goldman acquired through the GS Conduit Program.

Goldman represented in the Offering Materials, including the materials for GSAMP 2006-HE7,

that it purchase[] mortgage loans originated by the original loan sellers if the mortgage loans

generally satisfy the sponsors underwriting guidelines. (Id. at S-7.) The underwriting criteria

for the GS Conduit Program are described in each of the Prospectuses for the Certificates, and

include a detailed discussion of Goldmans underwriting guidelines, borrower credit

applications, documentation guidelines, debt-to-income and loan-to-value thresholds, and

appraisal standards. (See, e.g., id. at 29-33.)

55. For example, Goldman represented that All of the mortgage loans that GSMC may acquire through its conduit

program will be acquired generally in accordance with the underwritingcriteria described in this section. In certain instances, compensating factorsdemonstrated to the mortgage loan originator by a prospective borrowermay warrant GSMC to make certain exceptions to these guidelines. Insuch instances GSMC would purchase a mortgage loan that did notcompletely conform to the guidelines set out below. (Id. at 30.)

[E]ach borrower applying for a mortgage loan must complete a creditapplication. The credit application is designed to provide the originatinglender with relevant credit information about the prospective borrower


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such as information with respect to the borrowers assets, liabilities,income . . . credit history, employment history and personal information.

Based on the data referred to above . . . the originating lender makes adetermination about whether the borrowers monthly income (if required

to be stated) will be sufficient to enable the borrower to meet its monthlyobligations on the mortgage loans and other expenses related to theproperty.

An appraisal is generally conducted on each mortgaged property by theoriginating lender. The appraisal must be conducted in accordance withestablished appraisal procedure guidelines acceptable to the originator inorder to determine the adequacy of the mortgaged property as security forrepayment of the mortgaged loan. All appraisals must . . . conform to theUniform Standards of Professional Appraisal Practice.

56. The underwriting process used to originate the pools of Mortgage Loansunderlying Allstates Certificates was very important to Allstate and other investors because, as

discussed above, the quality of loans in the pool determines the risk of the certificates backed by

those loans. If a reasonable underwriting process was not followed, the chances that the loans

had riskier features than Goldman claimed would greatly increase, making the entire loan pool

much riskier and thus more prone to default and market losses. A systemic underwriting failure

would decrease the reliability ofall the information investors have about the loans, and thus

would significantly increase the perceived and actual risk to investors, thus resulting in a lower

true value of the Certificates.

57. As set forth in Exhibits C-G, similar representations were made in all of theOffering Materials. Goldmans representations regarding its and its originators underwriting

practices were false and misleading. The Mortgage Loans underlying Allstates Certificates did

not comply with the underwriting standards the Offering Materials described because those

standards were systemically ignored by Goldman and by its originators. They disregarded

borrowers actual repayment ability and the value and adequacy of mortgaged property that was

used as collateral. That the loans were systematically generated without regard to the stated


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underwriting guidelines is confirmed by Allstates loan-level analysis of the Mortgage Loans at

issue here, statistics regarding Goldmans waiver of guidelines, the collateral pools dismal

performance, internal e-mails and documents reflecting Goldmans own discovery of borrower

misrepresentations and underwriting defects, recent revelations regarding the practices of the

originators at issue here, and other facts set forth more fully below.

B. Goldmans Misrepresentations Regarding Due Diligence Results58. Goldmans representations regarding the underwriting process were understood

by investors, including Allstate, to mean that Goldman had taken appropriate measures to ensure

that non-compliant loans would not be included in the mortgage pools.

59. Goldman, however, did not disclose that: (1) Goldman in many instances failedto perform adequate due diligence prior to securitization; (2) when Goldman was informed from

its quality review processes that a substantial percentage of loans in the collateral pools were

defective, it nonetheless waived the defects as to a substantial percentage of these loans; (3)

Goldman instead used its analysis of the loans to negotiate a lower price for the loan pools, or

even an outright cash payment, while retaining the defective loans for inclusion in the loan pools;

and (4) Goldman improperly failed to adjust its due diligence procedures (such as by increasing

its sampling size or refusing to continue to work with problem originators) when its due

diligence identified a high number of non-conforming loans.

60. That Goldman was not performing its represented due diligence responsibilities,and instead was knowingly including loans flagged as being defective, has been confirmed by

the recent release of documents from Goldmans third-party due diligence firm, Clayton

Holdings, internal e-mails and documents, and other facts set forth below.


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61. Goldmans failure to disclose that high numbers of loans had been identified bythe due diligence process, and yet waived into the collateral pools anyway was a fraudulent

omission, and rendered its underwriting disclosures false and misleading.

C. Owner-Occupancy Statistics62. The Offering Materials also made represented that a high number of loans were

issued on owner-occupied properties, as compared to investment properties or second homes.

63. Owner-occupancy statistics were material to Allstate because high owner-occupancy rates should have made the Certificates safer investments than certificates backed by

second homes or investment properties. Homeowners who reside in mortgaged properties are

less likely to default than owners who purchase homes as investments or vacation homes. This is

because such owners are likely to have made investments in improving the property; purchased

furnishings for their homes; have children enrolled in the local school system; and are otherwise

incentivized to fulfill their mortgage terms rather than default. If a property is foreclosed upon,

losing possession of an owner-occupied property means losing the roof over your head, whereas

foreclosure on an investment property or second home simply means losing an investment.

64. The Offering Materials contained detailed statistics regarding the Mortgage Loansin the collateral pool, including the reported owner-occupancy characteristics of the Mortgage

Loans. For example, the Offering Materials for GSAMP Trust 2006-HE5 claimed that among

the 6,692 loans in the collateral pool, 93% were purportedly for owner-occupied properties; the

Offering Materials for GSAMP Trust 2006-HE7 claimed that among the 4,899 loans in the

collateral pool, 92% were purportedly for owner-occupied properties; and the Offering Materials

for GSAMP Trust 2006-S4 claimed that among the 11,624 loans in the collateral pool, 88% were

purportedly for owner-occupied properties.


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65. As set forth in Exhibits C-G, similar representations were made in all of theOffering Materials. These representations were false and misleading. In truth, a much lower

percentage of the loans were owner-occupied. Occupancy was being misrepresented first by the

originator to get the borrower approved for the loan, then by Goldman to investors to get the loan

sold as securities. This is confirmed by a loan-level analysis of the specific Mortgage Loans at

issue here, and other facts set forth below.

D. Goldmans Misrepresentations Regarding Loan-to-Value and CombinedLoan-to-Value Ratios

66. As discussed above, the LTV ratio is the ratio of a Mortgage Loans originalprincipal balance to the appraised value of the mortgaged property. The related CLTV ratio

takes into account other liens on the property. These ratios were material to Allstate and other

investors because higher ratios are correlated with a higher risk of default. A borrower with a

small equity position in a property has less to lose if he or she defaults on the loan. There is also

a greater likelihood that a foreclosure will result in a loss for the lender if the borrower fully

leveraged the property. LTV and CLTV ratios are common metrics for analysts and investors to

evaluate the price and risk of mortgage-backed securities.

67. The Offering Materials contained detailed statistics regarding these ratios for theMortgage Loans in the collateral pool. For example, the Offering Materials for GSAMP Trust

2006-HE7 represented that only 11.45% of the Mortgage Loans had original LTV ratios in

excess of 90%. It also represented that no loan in this Trust had an LTV ratio above 100%.

68. As set forth in Exhibits C-G, similar representations were made in all of theOffering Materials. These representations were false and misleading. The underlying data was

being manipulated in order to get loans approved, making the LTV and CLTV ratios baseless.

Goldman knew that the appraisal process was being actively manipulated, so the originators


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could keep churning out loans to borrowers that could not afford them, and thus knew that the

reported appraisal values did not, in fact, reasonably reflect the value of the mortgaged

properties. Goldman thus knew that the LTV ratios reported in the Offering Materials were not

reliable indicators of the quality of the loans. The CLTV ratios also sometimes omitted the

effect of additional liens on the underlying properties, rendering them even less accurate. That

the LTV and CLTV statistics were false and misleading is confirmed by a loan-level analysis of

the specific Mortgage Loans at issue here, by testimony showing widespread appraisal fraud, and

other facts set forth below.

E.

Goldmans Misrepresentations Regarding The Sufficiency of BorrowerIncome

69. Information regarding a borrowers income, such as the ratio of a borrowers debtto his or her income, was material to Allstate because it represents a borrowers ability to afford

the mortgage payments at issue, and thus directly implicates the likelihood of default.

70. In the Offering Documents for GSAMP Trust 2006-HE5 and GSAMP Trust2006-HE7, Goldman represented that borrowers were required to furnish a current list of assets

and liabilities and a statement of income and expense as well as an authorization to apply for a

credit report, which summarizes the borrowers credit history with local merchants and lenders

and any record of bankruptcy. Similar representations were also made for specific originators.

For example, the Offering Materials for GSAMP Trust 2006-S4 represented as to IndyMac that

its underwriting criteria includes an analysis of the borrowers credit history, ability to repay the

mortgage loan and the adequacy of the mortgaged property as collateral. (GSAMP 2006-S4

Pro. Supp at. S-35.)

71. Similarly, regarding loans obtained through the GS Conduit Program, in GSAMPTrust 2006-HE5 and GSAMP Trust 2006-HE7, Goldman represented that its underwriting


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included an analysis of whether the borrowers monthly income (if required to be stated) will be

sufficient to enable the borrower to meet its monthly obligations on the mortgage loan and other

expenses related to the property, including property taxes, utility costs, standard hazard insurance

and other fixed and revolving obligations other than housing expenses. (See, e.g.,GSAMP

2006-HE7 Pro. Supp. at 30.)

72. As set forth in Exhibits C-G, similar representations were made in all of theOffering Materials. These representations were false and misleading. The abandonment of

sound underwriting practices facilitated the widespread falsification of these statistics within the

Offering Materials. This abandonment is evidenced by recent revelations regarding the practices

of the originators at issue here, the alarmingly high rate of delinquency and default in the

mortgage pools, and Allstates statistical analysis of the loans at issue here. In reality, the

borrowers claimed income was regularly inflated, such that the borrowers true ability to repay

the loan was much worse than represented.

F. Goldmans Misrepresentations Regarding Credit Ratings73. Each tranche of the Allstate Certificates received a credit rating indicating the

rating agencies view of its risk profile. The ratings were material to reasonable investors,

including Allstate, because the ratings provided additional assurances that investors would

receive the expected interest and principal payments. The Certificates would have been

unmarketable to investors like Allstate and would not have been issued but for the provision of

these ratings, as almost every prospectus stated that, [i]n order to be issued, the Offered

Certificate must be assigned certain, specified ratings from the rating agencies. (See, e.g.,

GSAMP 2006-HE5 Pro. Supp. at S-136.)

74. The initial ratings given to the Certificates were AAA or AA, the two highestratings available. According to S&Ps Web site: An obligation rated AAA has the highest


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rating assigned by Standard & Poors. The obligors capacity to meet its financial commitment

on the obligation is extremely strong. And an obligation rated AA by S&P has a very strong

capacity to meet financial commitments.

75. The Offering Materials represented that the ratings came from analysis done bythe rating agencies to assess the likelihood of delinquencies and defaults in the underlying

mortgage pools. For example, the Offering Materials for GSAMP Trust 2006-HE5 represented:

A securities rating addresses the likelihood of the receipt by a certificateholder of distributions

on the mortgage loans to which they are entitled by the Final Scheduled Distribution Date. The

rating takes into consideration the characteristics of the mortgage loans and the structural, legal

and tax aspects associated with the certificates. Id. at S-136; see also GSAMP 2006-HE5 Pro.

Supp. at 127 (It is a condition to the issuance of the securities of each series offered by this

prospectus and by the related prospectus supplement that the nationally recognized statistical

rating agency or agencies specified in the prospectus supplement shall have rated the securities in

one of the four highest rating categories. Ratings on mortgage-backed securities address the

likelihood of receipt by securityholders of all distributions on the underlying mortgage loans or

other assets. These ratings address the structural, legal and issuer-related aspects associated with

such securities, the nature of the underlying mortgage loans or other assets and the credit quality

of the guarantor, if any.) The Offering Materials for each of the Certificates made materially

identical representations. See also Exhibits C-G.

76. These representations were false and misleading. The rating agencies were fedbaseless and false statistics regarding the loans (including the same statistics and

misrepresentations discussed herein), as evidenced by a statistical analysis of the Mortgage

Loans at issue here. This made representations regarding the ratings process false (as a rigged


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process does not address the likelihood of receipt by Allstate) and rendered the ratings

themselves similarly false and misleading, as they only represented the credit agencies analysis

of a non-existent mortgage pool that had no relation to that truly underlying Allstates

Certificates.

G. Goldmans Misrepresentations Regarding Credit Enhancement77. Credit enhancement represents the amount of cushion or protection from loss

exhibited by a given security. This cushion is intended to improve the likelihood that holders of

highly rated certificates receive the interest and principal they expect based on the Offering

Documents. The level of credit enhancement offered is based on the makeup of the loans in the

underlying collateral pool. Riskier pools necessarily need higher levels of credit enhancement to

ensure payment to senior certificate holders. Credit enhancements for a given trust also impact

the overall credit rating that a given tranche of certificates receives. The level of credit

enhancement for the Certificates was material to Allstate because it represented the protection

purportedly afforded from loss.

78. The Offering Materials for each of the offerings described the creditenhancements applicable to the certificates. For example, the Offering Materials for GSAMP

Trust 2006-HE7 represented that such enhancements included overcollateralization, excess

interest . . . to cover losses on the mortgage loans and as a distribution of principal to restore

overcollateralization to a specified level as a result of losses, and subordination.

79. Excess interest and overcollateralization generally refer to the purportedeffects of including in the collateral pool more mortgage loans than would be strictly necessary

to pay off all investors, assuming that every mortgage made every payment on time.

Subordination refers to the fact that, should loans become delinquent or default, not all

investors are treated equally; instead, investors are paid out of what funds are available despite


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those losses first. Any leftover funds from what was actually received then flow through the

payment waterfall to the next class of investors, and so on.

80. As set forth in Exhibits C-G, similar representations were made in all of theOffering Materials. These representations were false and misleading. All of the purported

enhancements depended on or derived from false representations regarding the quality of the

Mortgage Loans underlying the Certificates. Highly risky, misrepresented loans piled on top of

other highly risky, misrepresented loans do not provide a true enhancement.

H. Goldmans Misrepresentations Regarding Underwriting Exceptions81. Whether Goldman and/or the originators were making case-by-case (rather than

bulk) exceptions to the otherwise-applicable underwriting guidelines was material to Allstate and

other investors. A disclosed guideline is factually irrelevantand indeed misleadingfrom a

risk-analysis perspective if large numbers of loans were peremptorily excused from those

standards.

82. Goldman represented that it and the originators made only case-by-caseexceptions to the disclosed underwriting standards, based on compensating factors that balanced

out the risks of a loan application and thereby improved the quality of a loan application. For

example, the Offering Materials for GSAMP Trust 2006-HE5 and GSAMP Trust 2006-HE7

represented that, for the Conduit Program, [i]n certain instances, compensating factors

demonstrated to the mortgage loan originator by a prospective borrower may warrant [Goldman

Sachs Mortgage Company] to make certain exceptions to these [underwriting] guidelines. (See,

e.g.,GSAMP 2006-HE5 Pro. Supp. at 30.)

83. As set forth in Exhibits C-G, similar representations were made in all of theOffering Materials. These representations were false and misleading. Loans were routinely

granted outside of the stated guidelines, without regard to whether there were any purported


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countervailing features justifying a lending or underwriting exception. This is evidenced by,

among other things, the high percentage of Goldman loans identified by the third-party due

diligence firm Clayton Holdings that both failed the given underwriting guidelines and that did

not show any countervailing features, and the numerous facts showing underwriting

abandonment by many of the key originators at issue here.

II. EVIDENCE THAT ALL OF GOLDMANS REPRESENTATIONS WEREUNTRUE AND MISLEADING

A. Evidence of the Securities High Default Rates and Plummeting CreditRatings

84. The drastic rise in default rates on the Mortgage Loans underlying AllstatesCertificates is itself evidence that the underwriting practices Goldman represented were followed

were, in fact, violated. The Certificates were supposed to be long-term, stable investments. Yet,

as seen in the following chart, they have already experienced payment problems at an

astronomical rate, well beyond what should have occurred for loan pools that had been properly

underwritten and contained loans that actually had the characteristics Goldmans Offering

Materials claimed.

Securitization

Percentage of original

loans already written

off

Percentage of current

loans 30, 60, or 90+

days delinquent

GSAMP Trust 2006-HE7 29.76% 48.38%

GSAMP Trust 2006-HE5 33.13% 46.08%

GSAMP Trust 2006-S4 45.52% 19.11%

GSAMP Trust 2006-S3 54.26% 19.74%

GSAA Trust 2006-13 21.30% 28.69%

Shockingly, overall, approximately36.79% of the Mortgage Loans underlying the Certificates

that Allstate invested in have already had to be written off, and approximately 32.40% of the

remaining loans are currently 30, 60, or 90 or more days delinquentall within a few years of

when the loans were made.


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85. Relatedly, the ratings given to the Certificates have significantly deteriorated.Allstates investments were all initially investment grade, receiving AAA or AA ratings.

Because of the systemic abandonment of underwriting standards and the resulting inclusion of

highly risky or outright fraudulent Mortgage Loans in the collateral pools backing the

Certificates, as seen in the following table, the majority of Allstates Certificates have been

downgraded to junk-bond ratings. All of the most serious downgrades (i.e., to non-investment

grade) did not take place until mid-2008 or later.

Certificate Initial RatingCurrent

Rating

GSAMP Trust 2006-HE7, M2 AA/Aa2 C/CCGSAMP Trust 2006-HE5, M2 AA/Aa2 CCC/C

GSAMP Trust 2006-S4, A1 AAA/Aaa CCC/C

GSAMP Trust 2006-S3, A1 AAA/Aaa D/C

GSAA Trust 2006-13, AF2 AAA/Aaa CCC/Caa3

86. These downgrades underscore the fact that the investment-grade ratings reportedin the Offering Materials were unjustifiably high and misstated the true credit risk of the RMBS

purchased by Allstate.

87. Defaults are usually caused by a large and unexpected disruption to a borrowersincome. In a properly underwritten pool of loans, there should not be a large spike of defaults

occurring shortly after origination, because it is unlikely that many borrowers would all incur a

sudden and unexpected change to their payment ability so soon after purchasing a home.

However, when borrowers are put into loan products they cannot actually afford, they quickly

and predictably fall behind on their payments. As such, high, early rates of default and

delinquencysuch as the high rates hereare cogent evidence that the loans were not properly

underwritten.


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88. The defaults and related drop in value thus are due to Goldmans wrongdoing, andnot because of the general change in economic conditions. Economic studies confirm this

common-sense conclusion. For instance, the F.B.I. investigated three million residential

mortgages, and found that between 30% and 70% of early payment defaults were linked to

significant misrepresentations in the original loan applications. Loans containing egregious

misrepresentations werefive times more likely to default in the first six months than loans that

did not.

89. The defaults and related drop in value thus are due to Goldmans wrongdoing, andnot because of the general change in economic conditions. Investment banks were the driving

force behind the structured finance products that provided a steady stream of funding for lenders

originating high risk, poor quality loans and that magnified risk throughout the U.S. financial

system. The investment banks that engineered, sold, traded, and profited from mortgage related

structured finance products were a major cause of the financial crisis. (SPSI Report at 11

(emphasis added).)

B. Loan-Level Evidence That The Mortgaged Properties Were NotOwner-Occupied

90. Using techniques that only recently became available to investors, Allstate testedGoldmans representations on a loan-level basis for thousands of loans across all of the

Securitizations.

91. For each offering, Allstate analyzed between 1,444 and 1,600 randomly-selectedloans from within the collateral pool. This sample size is more than sufficient to provide

statistically-significant data to demonstrate the degree of misrepresentation of the Mortgage

Loans characteristics. Analyzing data for each Mortgage Loan in each Offering would have

been unnecessary for purposes of Allstates pleading. Statistical sampling is an accepted method


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95. A review of other lien records was also conducted. If the property was subject toadditional liens but those materials were sent elsewhere, that is good evidence the borrower was

not living at the mortgaged property. If the other lien involved a conflicting declaration of

residency, that too would be good evidence that the borrower did not live in the subject property.

96. Though the ability to gather such information for large numbers of loans and runthese tests was only recently made available to investors like Allstate, these tests draw from data

contemporaneous with the transactions at issue. They thus are evidence that a then-existing

factowner occupancywas misrepresented.

97.

The results of Allstates loan-level analysis of true owner-occupancy rates on the

Mortgage Loans underlying its Certificates are set forth below and are further detailed in the

Exhibits. Failing multiple of the tests described above is strong evidence that the borrowers did

not in fact reside at the mortgaged properties. The results thus show that, despite Goldmans

representations, a much higher percentage of borrowers did not occupy the mortgaged properties:

Asset

Percentage of

Owner-OccupiedProperties in

Prospectus

Actual Percentage

of Owner-Occupied

Properties

Prospectus

Overstatement

GSAMP 2006-HE7 91.9% 82.2% 9.7%

GSAMP 2006-HE5 92.2% 82.1% 10.1%

GSAMP 2006-S4 88.0% 75.3% 12.7%

GSAMP 2006-S3 94.0% 81.6% 12.4%

GSAA 2006-13 77.8% 69.5% 8.3%

98. The consistency of these misrepresentations across the offerings confirms that theunderwriting problems within the Mortgage Loans and the Certificates were systemic. As such,

Allstates loan-level analysis not only shows that the specific owner-occupancy statistics were

false and misleading, but also supports the conclusion that the Offering Materials


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representations regarding the originators adherence to the given underwriting guidelines were

also false and misleading.

99. Further, the consistency of the results shows that these were not simply borrowersthat changed their mind. Rather, Goldman and the originators knew that borrowers were

misrepresenting their intent to live at the property, because Goldman, the originators, and the

borrowers all knew it would help shuffle the loan through the approval and securitization

process.

C. Evidence That The LTV And CLTV Ratios Were Materially Misrepresented100. Using techniques and methodologies that only recently became available to

investors, Allstate had the underlying property valued, at the time of origination, using data

contemporaneous with the original valuation that Goldman would have done, by an industry-

standard automated valuation model (AVM). AVMs are routinely used in the industry as a

way of valuing properties during prequalification, origination, portfolio review, and servicing.

AVMs have become so ubiquitous that their testing and use is specifically outlined in regulatory

guidance, and is discussed in the 2010 Dodd-Frank Act.

101. AVMs rely upon data similar to what appraisers useprimarily county assessorrecords, tax rolls, and data on comparable properties. AVMs produce independent, statistically-

derived valuation estimates by applying modeling techniques to these data. The AVM that

Allstate used incorporates a database of500 million mortgage transactions covering zip codes

that represent more than 97% of the homes in the United States, occupied by more than 99% of

the population. Independent testing services have determined that this AVM is the most accurate

of all such models.

102. The results of this analysis for each Certificate are set forth in the Exhibits.Applying the AVM to the available data for the loans underlying the Certificates shows that the


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value used by Goldman in the represented LTVs were materially and consistently inflated. This

caused the disclosed LTV and CLTV ratios to be lower than they really were. In other words,

the owners were represented to have more of an equity cushion than they really did, and the

prospects for recovery of any funds upon a foreclosure were represented to be much higher than

they really were.

103. As with owner-occupancy, though the availability to gather such information andrun these tests was only recently made available to investors like Allstate, these tests draw from

data contemporaneous with the transactions at issue. They thus are evidence that the LTV and

CLTV ratios were misrepresented at the time the representations were made.

104. For sampled loans that had sufficient information to test, the LTV ratio for14.42% had true LTV ratios more than 10% higher than what Goldman purportedly calculated.

Almost 4% were understated by more than 25%. The CLTV ratios were similarly understated.

Over 28% were understated by 10% or more, while over9% were understated by 25% or more.

These overvaluations affected numerous statistics in the Offering Materials.

105. The Offering Materials for GSAMP 2006-HE7, GSAMP 2006-HE5, and GSAA2006-13 made representations about the percent of loans that had LTV ratios higher than 90%.

LTV ratios in excess of 90% provide the lender little value cushion to protect against borrower

default and loss upon foreclosure. Consequently, an accurate disclosure of the number is

important to investors assessing the riskiness of the security. However, the AVM indicates that a

vastly higher percentage of the loans had LTV ratios higher than 90%:


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Asset

Percentage of

Loans

Represented to

Have LTV RatiosGreater than 90%

Actual Percentage

of Loans With

LTV RatiosGreater than 90%

Prospectus

Understatement of

Percent of Loans

With High LTVRatios

GSAMP 2006-HE7

11.45% 44.68% 33.23%

GSAMP 2006-HE5

9.34% 38.89% 29.55%

GSAA 2006-13 4.27% 25.13% 33.23%

106. The Offering Materials from GSAMP 2006-HE5 and HE7 also maderepresentations about how many of the Mortgage Loans had LTV ratios greater than 100%,

meaning the size of the loan is greater than the value of the property. (This is known as being

underwater, where a borrower owes more on the property than it is worth.) Loans with LTV

ratios over 100% not only provide the lender no equity cushion, but in fact leave the lender with

inadequate collateral from the outset of the loan. Allstates analysis has found that, despite

Goldmans representations, an enormous number of the Mortgage Loans had LTV ratios greater

than 100%:

Asset

Percentage of Loans

Represented to Have

LTV Ratios Greater

than 100%

Actual Percentage of

Loans With LTV Ratios

Greater than 100%

GSAMP 2006-HE7 0% 24.64%

GSAMP 2006-HE5 0% 20.60%

GSAA 2006-13 0% 7.62%

107. Allstate also analyzed the weighted-average LTV ratio of each collateral pool.This statistic, too, was misrepresented:


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Asset

Represented

Weighted Average

LTV

Actual Weighted

Average LTV

Prospectus

Understatement of

Weighted Average

LTVGSAMP 2006-HE7 76.97% 89.07% 12.10%

GSAMP 2006-HE5 80.51% 88.34% 7.83%

GSAA 2006-13 74.02% 82.00% 7.98%

108. The Offering Materials also contained CLTV ratios of the underlying loans. ACLTV ratio should take into account the total value of the liens on the property, and thus is more

commonly used when the underlying Mortgage Loans are secured by second lien mortgages.

The AVM again found that the Offering Materials statistics were false and misleading. For

example, the true number of loans with CLTVs in excess of 90% in GSAMP 2006-HE7 and

GSAMP 2006-HE5 was grossly understated:

Asset

Percentage of

Loans Represented

to Have CLTVs

Greater than 90%

Actual Percentage

of Loans With

CLTVs Greater

than 90%

Prospectus

Understatement of

Percent of Loans

With High CLTVs

GSAMP 2006-

HE7

20.94% 65.54% 44.6%

GSAMP 2006-HE5

9.34% 71.86% 49.86%

GSAMP 2006-S4 72.66% 80.95% 8.29%

GSAA 2006-13 39.61% 58.46% 18.85%

109. The Offering Materials for GSAMP 2006-S4 and GSAA 2006-13 maderepresentations about the percent of loans that had CLTVs higher than 100%. Just as with LTVs,

CLTVs in excess of 100% provide the lender no cushion to protect against borrower default and

loss upon foreclosure. Using both the AVM to recalculate the value of the property and

researching the existence of additional, hidden liens revealed that a much higher percentage of

the loans had CLTVs higher than 100%:


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Asset

Percentage of Loans

Represented to Have

CLTVs Greater than

100%

Actual Percentage of

Loans With CLTVs

Greater than 100%

GSAMP 2006-S4 0% 58.41%

GSAA 2006-13 0% 43.18%

110. Allstate also analyzed the weighted average CLTV of the Mortgage Loans in eachpool and has found that the weighted average CLTV in most of the deals was overstated:

Asset

Represented

Weighted Average

CLTV

Actual Weighted

Average CLTV

Prospectus

Understatement

HERE IS THE COMPLAINT--ALLSTATE SUES GOLDMAN OVER TOXIC INVESTMENTS AUGUST 2011

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