UNITED STATES DISTRICT COURT EASTERN DISTRICT OF...

2:14-cv-13459-BAF-MKM Doc # 17 Filed 02/03/15 Pg 1 of 60 Pg ID 197

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN

JUSTIN G. LUBBERS, Individually and : Civil Action No.: 14-cv-13459 : on Behalf of All Others Similarly Situated, : AMENDED COMPLAINT

Plaintiff(s), v.

FLAGSTAR BANCORP INC., ALESSANDRO P. DINELLO, and PAUL D. BORJA,

Defendants.

: : : : : : : :

Hon. Bernard A. Friedman

Hon. Mona K. Majzoub

JURY TRIAL DEMANDED

Lead Plaintiff Rodney Boone (“Plaintiff”), individually and on behalf of all

other persons similarly situated, by his undersigned attorneys, for his complaint

against defendants, alleges the following based upon personal knowledge as to

himself and his own acts, and information and belief as to all other matters, based

upon, inter alia, the investigation conducted by and through his attorneys, which

included, among other things, a review of the defendants’ public documents,

conference calls and announcements made by defendants, United States Securities

and Exchange Commission (“SEC”) filings, wire and press releases published by

and regarding Flagstar Bancorp Inc., (“Flagstar” or the “Company”), analysts’

reports and advisories about the Company, interviews with Confidential Witnesses

(“CW”) and information readily obtainable on the Internet. Plaintiff believes that

substantial evidentiary support will exist for the allegations set forth herein after a

reasonable opportunity for discovery.


NATURE OF THE ACTION

1. This is a federal securities class action brought on behalf of all

persons and entities that purchased shares of Flagstar Bancorp Inc. (“Flagstar” or

the “Company”) common stock during the period of October 22, 2013 through

August 26, 2014, both dates inclusive (the “Class Period”), against Flagstar and

certain of its officers and/or directors for violations of the Securities Exchange Act

of 1934 (the “Exchange Act”).

2. Flagstar is the holding company for Flagstar Bank, FSB (“Flagstar

Bank”). Flagstar Bank accepts deposits from the general public and originates or

acquires residential mortgage loans. Flagstar Bank’s primary business is its

mortgage banking segment. As part of its mortgage banking segment, Flagstar

Bank originates mortgage loans and acts as a mortgage servicer responsible for the

day-to-day management of mortgage loans. In the capacity of servicing mortgages,

Flagstar Bank offers loan modifications to borrowers experiencing financial

difficulties in making loan payments. Flagstar Bank also administers “loss

mitigation” programs to delinquent borrowers on behalf of the owners or

guarantors of the loans.

3. During the Class Period, Flagstar Bank was being audited and

reviewed by the Consumer Financial Protection Bureau (“CFPB”) for years of

failing to comply with mortgage lending requirements, specifically loss mitigation

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and default servicing. As early as 2011, representatives of the Federal National

Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage

Corporation (“Freddie Mac”), Government Sponsored Entities (“GSE”) that

provides liquidity and stability for the mortgage market in the United States, had

been threatening Flagstar Bank with termination rights for servicing loans owned

or guaranteed by Fannie Mae and Freddie Mac in violation of consumer protection

laws.

4. Administering loan modifications and loss mitigation services is

regulated under the Consumer Financial Protection Act of 2010 (the “CFPA”).

Prior to and during the Class Period, Flagstar Bank violated the CFPA’s

prohibition against unfair, deceptive, or abusive acts or practices by, inter alia:

• Failing to review loss mitigation applications in a reasonable amount

of time;

• Withholding critical information that borrowers needed to complete

their loss mitigation applications;

• Improperly denying loan modifications to qualified borrowers;

• Applying prolonged trial periods for loan modifications;

• Depriving borrowers of the ability to make informed choices about

how to save or dispose of their property;

• Improperly closing loss mitigation applications;

• Improperly denying loan modifications to eligible borrowers;

• Charging borrowers excessive capitalized interest and fees; and,

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• Misrepresenting borrowers’ rights to appeal the denial of a loan

modification.

5. As evidenced by testimony from Confidential Witnesses – and

verified by the Findings and Conclusions of the CFPB noted in a Consent Order

entered into between Flagstar Bank and the CFPB – unfair, deceptive, or abusive

acts or practices were notorious and rampant within Flagstar Bank. Regardless,

throughout the Class Period, Defendants told the investing public that Flagstar

Bank’s mitigation activities were “effective,” “proactively worked with

borrowers,” “adopted a strategic focus that improved loss mitigation processes.”

Indeed, Defendants conditioned the market to believe in the effectiveness of its

loan modification and loss mitigation services prior to and during the Class Period

stating that it had converted to a nationally recognized mortgage loan servicing

system and made significant investments and enhancements in loss mitigation and

default servicing, when, in fact, Flagstar Bank’s mortgage servicing continually

failed to comply with the requirements of the CFPA.

6. Accordingly, throughout the Class Period, Defendants made

materially false and/or misleading statements, and failed to disclose material

adverse facts about the Company’s business, operations, prospects, performance,

and compliance with federal law. Specifically, during the Class Period, Defendants

made false and/or misleading statements and/or failed to disclose that: (i) dating

back to 2011, the Company’s loss mitigation practices and default servicing

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operations were not in compliance with federal financial consumer protections

laws; (ii) the Company lacked proper internal controls to assure compliance with

federal financial consumer protection laws; (iii) that it was at risk of having its

rights to servicing loans owned by or guaranteed by GSEs terminated; and (iv) that

the CFPB was investigating and/or bringing an action against Flagstar Bank for

violations of the CFPA going back as early as 2011.

7. Moreover, when Defendants chose to speak about Flagstar Bank’s

mortgage servicing, and specifically about loss mitigation and default servicing,

Defendants failed to speak completely and tell the whole truth about Flagstar

Bank’s inability and failure to comply with financial consumer protection laws, the

threats to terminate the bank’s rights, and the risk that the CFPB’s enforcement

procedures had on the bank’s financial condition.

8. The omissions and affirmative misrepresentations disseminated by

Defendants about the true nature of Flagstar Bank’s loss mitigation and default

servicing practices during the Class Period artificially maintained the price of

Flagstar common stock during the Class Period violation of the Exchange Act.

9. On August 26, 2014, the Company made the first of a series of partial

disclosures regarding their violations of the CFPA, when Defendants informed the

public that it was in discussions with the CFPB over alleged violations dating back

to 2011.

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10. In reaction to that partial disclosure, Mark Palmer, an analyst at BTIG,

downgraded its rating on Flagstar to sell, noting that the “allegations raise

questions regarding servicing operations amid uncertainty of potential rebound of

its mortgage business.”

11. On this news, Flagstar stock fell, on unusually heavy trading volume,

to close at $17.66 on August 27, 2014 from the previous day’s closing price of

$18.49 per share.

12. Over the next day, news filtered through the market that Flagstar’s

unusual disclosure meant that a settlement with the CFPB was “imminent,” as the

priced continued to decline to $17.33 per share.

13. As a result of disclosures of Defendants’ wrongful acts and omissions,

and the attendant decline in the market value of Flagstar common stock, Plaintiff

and other Class members have suffered significant losses and damages.

JURISDICTION AND VENUE

14. The claims asserted herein arise under and pursuant to §§10(b) and

20(a) of the Exchange Act (15 U.S.C. §§78j(b) and 78t(a)) and Rule 10b-5

promulgated thereunder by the SEC (17 C.F.R. §240.10b-5).

15. This Court has jurisdiction over the subject matter of this action under

28 U.S.C. §1331 and §27 of the Exchange Act.

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16. Venue is proper in this District pursuant to §27 of the Exchange Act

(15 U.S.C. §78aa) and 28 U.S.C. §1391(b), as a significant portion of the

Defendants’ actions, and the subsequent damages, took place within this District.

17. In connection with the acts, conduct and other wrongs alleged in this

Complaint, Defendants, directly or indirectly, used the means and instrumentalities

of interstate commerce, including but not limited to, the United States mail,

interstate telephone communications and the facilities of the national securities

exchange.

PARTIES

18. Lead Plaintiff purchased the common stock of Flagstar at artificially

inflated prices during the Class Period and was damaged upon the disclosure of

Defendants’ violations of the Exchange Act alleged herein.

19. Defendant Flagstar is a Michigan corporation with its principal

executive offices located at 5151 Corporate Drive, Troy, MI 48098-2639.

Flagstar’s common stock trades on the New York Stock Exchange under the ticker

symbol “FBC.”

20. Defendant Alessandro P. DiNello (“DiNello”) has served as the

Company’s President and Chief Executive Officer at all relevant times.

21. Defendant Paul D. Borja (“Borja”) has served as the Company’s

Executive Vice President and Chief Financial Officer at all relevant times.

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22. Defendants referenced above in ¶¶ 20 and 21 are sometimes referred

to herein, collectively, as the “Individual Defendants.”

23. Defendant Flagstar and the Individual Defendants are referred to

herein, collectively, as the “Defendants.”

SUBSTANTIVE ALLEGATIONS

Background

24. Flagstar operates as the holding company for Flagstar Bank, which

provides various financial products and services to individuals and businesses in

the United States. Flagstar Bank’s Mortgage Banking segment originates,

acquires, sells, and services mortgage loans through home loan centers, national

call centers, Internet, unaffiliated banks, and mortgage brokerage companies. Its

Community Banking segment offers various financial products and services to

individuals, small and middle market businesses, and mortgage lenders.

25. Flagstar Bank was originally chartered in 1987 as First Security

Savings Bank, FSB. In 1994, it purchased a Jackson, Michigan bank, Securities

Saving Bank, and the two were merged in 1996 as Flagstar. In 1997, Flagstar

Bancorp, Inc. went public and was listed on the NASDAQ under the symbol

FLGS. Flagstar was listed on the New York Stock Exchange in 2001 under its

current ticker, FBC.

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26. As the mortgage industry took off in the 2000’s, Flagstar Bank rose to

become the eighth largest mortgage originator in the United States. The bank

originates virtually all residential first mortgages for sale and, during the Class

Period, was one of the ten largest sellers to Fannie Mae and one of the ten largest

originators of FHA/VA mortgages. Flagstar Bank serviced upward to $76 million

in mortgages for others, primarily Fannie Mae and Freddie Mac.

27. The crash of the housing bubble, the decline of the mortgage backed

securities market, and the disclosure of fraud in the mortgage underwriting

industry beginning in 2008 had an adverse impact on Flagstar Bank. Flagstar Bank

was listed by Bloomberg News as the biggest bank in the U.S. with more than10%

of its loans non-performing in 2009. See Ari Levy, "Toxic Loans Topping 5%

May Push 150 Banks to Point of No Return," Bloomberg News (New York City,

NY) (Aug. 24, 2009).

28. In late 2008, faced with possible insolvency, Flagstar turned to an

investment firm that specialized in acquiring distressed assets, MatlinPatterson

Global Advisors LLC (“MatlinPatterson”), to bail the Company out. Flagstar

issued shares of convertible participating voting preferred stock pursuant to an

investment agreement between Flagstar and MatlinPatterson, which bypassed the

normal requirement of shareholder approval accordingly to the Shareholder

Approval Policy of the New York Stock Exchange. The Company stated that:

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The Audit Committee of the Board of Directors of Flagstar

determined that the delay necessary in securing shareholder approval

for the consummation of the stock issuance would seriously

jeopardize the financial viability of Flagstar . . . . The Audit

Committee believed that without the immediate receipt of additional

capital, rather than awaiting stockholder approval, significant

disruption of Flagstar’s operations could result as Flagstar’s business

model is reliant on selling assets, hedging interest rate risk and

obtaining funding from counterparties, including GSEs [Government

Sponsored Enterprises], the FHLB [Federal Home Loan Bank] and

certain depositors and customers, that are increasingly seeking to do

business with financial institutions operating at enhanced capital

levels due to the uncertainty in the current marketplace. Further, the

Audit Committee believed that the immediate receipt of private equity

capital would enhance Flagstar’s position with banking regulators and

the United States Department of Treasury in connection with

Flagstar’s application to participate in the TARP [Troubled Asset

Relief Program] Capital Purchase Program.

29. Accordingly, in December 2008, MatlinPatterson paid Flagstar $250

million, and Flagstar received $267 million of bailout money from the U.S.

Treasury’s TARP funds. Flagstar insiders added $5.23 million. In total, Flagstar

received a capital infusion of $523 million to stave off insolvency.

30. In January 2009, however, Flagstar reported $200 million in losses

which prompted MatlinPatterson to add another $100 million to protect its

investment. MatlinPatterson was now into Flagstar for $350 million. With its

investment, David Matlin and Mark Patterson, the two principals of

MatlinPatterson, were added to Flagstar’s Board of Directors. In September 2009,

MatlinPatterson changed Flagstar’s management and made Joseph Campanelli the

new Chief Executive Officer.

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31. The change of management did not result in improved financials or

better internal controls. In 2010, the Office of Thrift Supervision (“OTS”) entered

an enforcement action against Flagstar. The OTS cautioned that Flagstar needed to

raise additional capital as the Company had engaged in unsafe or unsound

practices. MatlinPatterson invested an additional $300 million in Flagstar, while

Flagstar agreed to improve its loan administration. Flagstar experienced an

increase in non-performing loans, which resulted in lower income and a need for

more capital infusion. MatlinPatterson invested another $350 million by October

2010.

32. By October 2010, MatlinPatterson had acquired approximately 70%

of Flagstar’s common stock, and sunk $1 billion in Flagstar. The value of

Flagstar’s stock and book value continued to decline, with MatlinPatterson’s

investment reduced to $200 million. In the first half of 2011, Flagstar lost another

$107 million.

33. With mortgage originations declining and mitigation and default

servicing rising, Flagstar was concerned about its Tier I capital and satisfying the

Federal Reserve’s stress tests which measure, among others, the ratio of risk to

capital. The infusion of capital by MatlinPatterson offset bank losses and sustained

retained earnings, which together with the Senior Preferred Stock purchased under

TARP were included in the Tier I capital ratios. With the high rate of non-

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performing loans, however, Flagstar needed to reduce its non-interest expenses to

help boost retained earnings.

34. One of the largest non-interest expenses is personnel. Although

Flagstar Bank experienced an increase in loan modification applications and

default servicing in 2010 through 2011, it did not adequately adjust the size and

management of the loss mitigation department to handle the increases. It also did

not adequately increase investment in technology systems to handle the increases.

As a result, Flagstar Bank had a significant backlog of loan modification

applications and loss mitigation cases, delays in foreclosure referrals, and failures

in meeting the timelines for foreclosures.

35. The significant backlog and failure to properly or timely perform loss

mitigation duties and obligations led Fannie Mae, one of the GSE’s whose loans

Flagstar serviced, to intervene on behalf of borrowers. The problems were such

that in September 2011, Fannie Mae threatened Flagstar Bank with termination of

its servicing rights on loans owned or guaranteed by Fannie Mae. At that time,

Flagstar was one of the largest servicers of Fannie Mae loans. The consequence of

losing the servicing rights would have been catastrophic to Flagstar.

36. In response, Flagstar Bank hired additional staff in the loss mitigation

department in the fourth quarter of 2011. Flagstar Bank’s non-interest expenses,

however, rose concomitantly in that same quarter compared to the prior three

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quarters and the same quarter of 2010. Although Flagstar Bank increased the

number of positions and attempted to restructure the loss mitigation department, it

continued to pay low, if not under-market, wages, used temporary employee

agencies, and by December 2012, reportedly had over 100 open positions.

37. Although it was understood throughout Flagstar Bank that positions

were not being filled, that there was increased employee turnaround, and that the

new employees hired were inexperienced, senior management – under pressure

from MatlinPatterson to show positive results and maintain adequate Tier I capital

ratios – reduced the bank’s non-investment expenses ( e.g. headcount) and touted

the fact to analysts as a positive development in the valuation of the Company’s

stock. In fact, the reduction of non-investment expenses was misleading as it hid

from investors the underlying failures on the part of Flagstar Bank to resolve the

backlog in loss mitigation and the myriad of violations under the CFPA which had

been raised by Fannie Mae and other GSEs to senior management at Flagstar Bank

in a letter dated September 12, 2011. Indeed, Flagstar Bank not only hid the truth

behind misleading statements about expenses, it further knowingly, or in reckless

disregard of the truth, touted the efficiency and adequacy of its loss mitigation and

default servicing in regular filings with the SEC.

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Confidential Witnesses

38. Interviews were conducted with former Flagstar Bank employees who

had first-hand knowledge of loan modification, loss mitigation and default

servicing throughout the relevant period, both prior to and during the Class Period.

Their testimony established that violations of the CFPB occurred, that Defendants

were aware of the violations, and that much of the violations were the result of a

lack of proper internal controls related to the software systems, lack of proper

training of managers and loss mitigation personnel, high turn-over, low wages, and

cost-cutting. Indeed, their statements attest to that fact that management turned a

blind eye to regulatory violations in order to be able to tell the market that Flagstar

Bank was keeping expenses down during a time of lowering mortgage

originations.

39. CW 1 was a Loss Mitigation Manager, Assistant Vice-President of

Loss Mitigation, and Assistant Vice-President of the Escalation Department. CW

1 worked at Flagstar Bank from 2002 through September 2013. CW 1stated that

loss mitigation managers lacked sufficient knowledge of loss mitigation

regulations and willfully ignored servicing processes, which exacerbated the

backlog of loan modification applications submitted by borrowers.

40. Indeed, CW 1 stated that there were discussions within the loss

mitigation department that another Assistant Vice-President of Loss Mitigation

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held “denial parties” on Saturdays where loss mitigation staff simply denied loan

modification requests in bulk, even though in some cases, it was Flagstar Bank’s

fault that applications were not complete. The Assistant Vice-President who held

the denial parties worked until January 2013.

41. Complaints by CW 1 and others to senior management about delayed

loan modifications, missing documents and other modification issues fell on deaf

ears until an audit by Fannie Mae personnel revealed rampant problems at Flagstar.

42. CW 1 stated that things were so bad in the loss mitigation department

that, in nine times out of ten, loss mitigation staff closed files without actually

doing what they were required to do with the files. Much of this was because the

staff was not properly trained, and that the department was headed by incompetent

managers. The loss mitigation department failed to send missing documents letters

to people that applied for loan modifications if their packages were incomplete,

although such letters were required.

43. CW 1 stated that, although required to do so, loss mitigation staff

failed to put loan modification applicants through forbearance plans according to

each borrower’s requirements before setting up a loan modification. The

department was required to find ways to work out about 80% of the applications

for modification, but the numbers were way below that figure.

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44. In July 2011, Fannie Mae and Freddie Mac mandated that Flagstar

Bank create an Escalation Department to independently examine loss mitigation

complaints received by Flagstar Bank customers. The Escalation Department was

up and running by October 2011. CW 1 stated that weekly reports were sent to

senior management that detailed the loss mitigation department’s failure to

properly handle loan modifications, but that they did not pay any attention to the

problems until Fannie Mae held them accountable.

45. CW 1 stated that the loss mitigation department was a mess, run by a

Vice President of Loss Mitigation who was not versed in the full scope of loss

mitigation and regulatory requirements, hired staff without regard for

qualifications, and did not properly train new staff. The Vice President applied one

guideline for all borrowers, without taking into consideration each borrower’s

unique requirements. In defense of the Vice President, CW 1 stated that the Vice

President’s intention was to cure the backlog, but, on the contrary, had the effect of

amplifying the backlog. The Vice President relied on colleagues that also lacked

experience and training in loss mitigation, and even promoted them.

46. CW 1 stated that proper and common sense loss mitigation procedures

were ignored. The backlog grew from 2011 forward. Staff quit, inexperienced and

poorly trained replacements were hired, and the backlog grew further, along with

systemic problems that fed it.

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47. CW 1 stated that borrowers had 15 days to respond to missing

document letters, but in many cases never received the correspondence. Upon

investigation, many letters were never sent, cases were improperly closed and

properties were sent to foreclosure without the borrower knowing that Flagstar

Bank needed more information.

48. CW 1 was among the employees that complained to senior

management about the problems experienced in the loss mitigation department, but

such complaints fell on deaf ears. Eventually, management closed the loss

mitigation department and escalation department and subcontracted the work,

selling its default servicing operations. Selene Finance was hired to handle default

servicing. The rationale given to CW 1 was that it was cheaper shipping out the

operations than keeping permanent employees and paying benefits. Some of

Flagstar Bank’s staff went to work for Selene Finance, while others returned to

Flagstar on a contract basis.

49. CW 2 was an Assistant Vice-President of Loss Mitigation and Senior

Vice-President of Collections. CW 2 worked at Flagstar Bank from June 2008

through July 2013. CW 2 stated that Flagstar Bank lacked policies, procedures and

technology to manage the growing loan modifications and default servicing. The

absence of written policies and procedures resulted in a huge backlog of loan

modification requests that were not processed for many months.

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50. CW 2 stated that some borrowers had to send in their loan

modification packages six to eight times, and that Flagstar Bank took more than

fourteen months to process the requests. By the second half of 2012, Fannie Mae

was leaning pretty hard on management to clean up Flagstar Bank’s operations.

CW 2 stated that the Chief Executive Officer and Chief Operating Officer were

aware of the problems. Indeed, CW 2 was told by Executive Vice-President

Czaplicki and Executive Vice-President Mike Maher (“Maher”) that Fannie Mae

had threatened to pull Flagstar Bank’s servicing authority in 2012.

51. CW 2 stated that Flagstar Bank initially worked well when CW 2

started, but that as Flagstar Bank began taking on riskier loans, problems arose.

CW 2 noted that when the market declined, Flagstar Bank realized how poorly

prepared it was to handle delinquent loans and got hammered. The bank’s systems

were outdated and management was sloppy and inadequate to the task.

52. CW 2 stated that loss mitigation staff struggled to reach its goals.

Loan modification applications were snagged at different stages. A single

application could go back and forth six times before being approved. By the time

the approval was granted, evidentiary documents in the application had often

expired, prompting the whole process to start again.

53. CW 2 stated that Flagstar Bank’s loss mitigation managers did not

know anything about servicing. Had the CFBP looked back farther, Flagstar Bank

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would have paid a bigger fine. The senior managers did not come from a real

estate background. Moreover, when problems came to their attention, fixing them

would have required admitting they had a problem – something few were willing

to do. Furthermore, managers had a monetary incentive to hide their incompetence.

The size of one’s bonus or deferred compensation was dependent on whether or

not it appeared that they were making forward progress.

54. CW 2 stated that while people attempted to mask their ignorance or

hide the dysfunction in their departments, the problems only mounted. At virtually

every level, people were both under-qualified and undertrained. Flagstar Bank was

hiring people off the street and paying them $12 an hour. Even managers and

assistant manager level positions were often paid between $11 to $16 dollars per

hour, thus the quality of people hired was, in general, low.

55. CW 2 stated that only when mandated by federal regulators were

policies and procedures developed. The entire loss mitigation operation was

managed on inaccurate and inconsistent Excel spreadsheets. Bank staff was using

different versions of spreadsheets and there was no networked, consistent formula

or format employed. A technology system for loss mitigation was not addressed

until 2012, when a new IT platform began to be phased in.

56. CW 2 stated that senior management had to have known about the

extreme backlog in loss mitigation, as Executive Vice-President Joan Anderson

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(“Anderson”) walked through half of the department when she got off the elevator

to go to her own office. The desks Anderson walked past had 80 to 150 files

stacked on their desks, on the floor. The process was paper-based, so there were

paper files. Anderson knew people were working until 8 p.m. or 10 p.m. at night,

as she knew the timelines. Anderson’s office was next to First Vice-President

Linda Krasicky’s office.

57. CW 2 stated that by the second half of 2012, Fannie Mae was leaning

pretty hard on management to clean up Flagstar Bank’s operations, and that the

frequency of meeting with Flagstar staff was stepped up and the level of

management invited to participate became higher and higher. Indeed, everybody

was aware of the problems with loss mitigation and default servicing. At one point

there was a meeting that included senior management, MatlinPatterson, and all

managers from the default department. Flagstar had been told in no uncertain

terms to fix this. MaitlinPatterson had invested $1 billion in Flagstar by this time

and they wanted to protect their investment and were pushing hard on

management.

58. CW 2 noted that toward the end of 2012 and beginning of 2013, the

Office of the Comptroller of the Currency (“OCC”) ordered Flagstar Bank to sell

risky assets from its balance sheet because more than 50% of the Flagstar Bank’s

assets were comprised of Mortgage Service Rights (“MSR”). An MSR refers to a

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loan the bank originates and sells to an investor, but for which the bank retains the

right to service in exchange for the servicing fee. These can be highly volatile, and

the OCC determined that Flagstar Bank’s assets should be comprised of less than

25% MSR.

59. CW 2 stated that the response by Flagstar to the OCC’s order included

the closing of the bulk of its Loss Mitigation department by selling a portion of its

portfolio to Selene Finance. The divestiture program to Selene Finance involved

only GSE loans, not Flagstar Bank’s Held For Investment (“HFI”) portfolio. Half

of the GSE portfolio was sold to Selene Finance. The terms required the purchaser

to immediately subcontract servicing back to Flagstar Bank for all loans less than

sixty days delinquent, while Selene would accept servicing responsibilities for all

loans sixty or more days delinquent. Thus, Flagstar Bank outsourced all loans in

default.

60. CW 2 had figured out for some time that Flagstar Bank’s published

delinquency rate was artificially lowered. Certain delinquent loans that CW 2

managed for the HFI portfolio were kept in bucket called Other Assets, while

certain non-delinquent loans were held in the standard, and more prominent, HFI

bucket. After discussing with the Chief Accounting Officer, CW 2 confirmed that

if loans repurchased from Fannie Mae were current at the time of repurchase, they

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were placed in the HFI bucket. If the repurchased loans were delinquent, they

were put in the Other Assets bucket.

61. CW 2 reviewed the Company’s Form 10-K filed with the SEC and

found a long and tortured statement describing the accounting, but noted that the

disclosure of the Other Assets was several pages after the explanation of loans that

were placed in the HFI category. CW 2 mentioned the situation to Executive Vice-

President Maher in 2012 or 2013, who confirmed what CW 2 had discovered.

62. CW 3 was a commercial loan officer and Assistant Vice-President,

Senior Risk Analyst. CW 3 worked at Flagstar Bank from January 2011 through

February 2014. CW 3 stated that Flagstar Bank was plagued by antiquated data

management systems with unreliable data that was hard to access. The unreliable

data management systems undermined the credibility of risk analysis. CW 3 stated

that DiNello and Borja both were aware of the data weaknesses at all relevant

times.

63. One of the major projects that CW 3 worked on was a review of all

loan modifications to assess their impact on the Flagstar Bank’s risk for future

losses. The project was commenced in March or April 2014 at the request of the

OCC. The results were reported to senior management on the Allowance for Loan

and Lease Losses (“ALLL”) Committee. The ALLL used the reports in their

calculations for loan loss reserves.

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64. CW 3 reviewed loan documents to ascertain the original and modified

loan terms. CW 3 incorporated that data into a master spreadsheet that would

calculate the resulting loss in revenue to the bank. CW 3 stated that across the

board, there was a lack of current appraisals and data. Flagstar Bank’s data

systems that kept track of loan modifications were outmoded. CW 3 said that there

were multiple versions of documents in files, and that loan modifications all

needed interpretation because they were not done the same way.

65. CW 3 stated that because Flagstar Bank had been under a Consent

Order with the OCC since 2012, senior management was closely involved in

responding to the federal regulators, and that one of the concerns of the federal

regulators was the accuracy of Flagstar Bank’s data. The OCC had required

Flagstar Bank to establish written procedures and policies for the ALLL, and that

DiNello and Borja were members of the ALLL Committee. In fact, CW 3 attended

monthly meetings with the ALLL Committee at which DiNello and Borja were

present. At these meetings, CW 3 reported on Flagstar Bank’s lost revenue from

loan modifications as part of the Troubled Debt Restructuring Analysis.

66. CW 3 stated that Flagstar Bank was required to undertake the review

of losses from loan modifications because in the past, the bank either did not

conduct the reviews or was not conducting them properly. Initially the group

working on the ALLL was short-staffed and only had about four people from the

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enterprise risk group. CW 3 ended up pulling in about eight or ten additional

credit analysts to help.

67. CW 3 was not surprised about the settlement with the CFPB. CW 3

echoed the same issues as the other confidential witnesses: when there are

processes and procedure that require a lot of work and skilled people, and you have

layoffs, that is what happens.

68. CW 4 was a Senior Administrative Assistant at Flagstar Bank. CW 4

worked at Flagstar Bank from December 2010 until January 6, 2014. CW 4

reported to several supervisors through frequent management changes, including

an Assistant Vice-President in Default Servicing. CW 4 stated that Flagstar Bank

hired scores of new employees with no experience in loan modifications or default

servicing to work in the loss mitigation department. Further, the new employees

were inadequately trained, and had experienced high turnover rates.

69. CW 4 worked at Flagstar’s headquarters in Troy, Michigan on the

third floor where loss mitigation, foreclosure, bankruptcy, mediation and reporting

departments were located. Part of CW 4’s duties included setting up new hires

with computers and outfitting new computers with necessary software and

programs. CW 4, therefore, was aware of the turnover rate in loss mitigation. In a

single year, Flagstar Bank hired about 200 people in the department alone. The

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large number of hires was partly due to address the backlog, as well as to fill gaps

from the high turnover rate in the department.

70. CW 4 stated that in the loss mitigation department, 90% of the new

hires had no experience and only six weeks of training before handling mortgages

for loss mitigation. They were also undercompensated at $14 to $16 dollars per

hour, which led to high turnover. Moreover, people who worked at Flagstar Bank

for four years may still only make $14 per hour. The turnover rate was so high that

Flagstar began to hire from temporary agencies.

71. CW 5 was loan processor and underwriter at Flagstar Bank. CW 5

worked at Flagstar Bank from August 2011 through September 2013. CW 5

worked in the loss mitigation call center which was chaotic with a high turnover

rate. A borrower could call in one day and be told all of the necessary paperwork

was in, and the next day would be told their application was incomplete or that

they were going into foreclosure.

72. CW 5 stated that loans were not supposed to stay in the pipeline for

more than thirty days. At day thirty-one, an unresolved loan modification

application was to be closed out, meaning the borrower would have to send a new

packet for review and start from scratch to apply for a loan modification. If the

loan became four months delinquent at any point in the process, it was referred for

foreclosure. Some borrowers’ loans were foreclosed due to the Bank’s errors in

25


handling the processing, even though the borrowers had submitted or thought that

they had submitted all of the necessary paperwork to apply for a loan modification.

73. CW 5 stated that Flagstar Bank was always in trouble with Fannie

Mae, and that it had threatened to pull Flagstar Bank’s servicing rights.

Management sent directives to the staff, as it was clear there was some type of

trouble if Fannie Mae is coming every week or every month. CW 5 spoke with

people that worked at other banks in the area that serviced mortgages, and none of

them said that Fannie Mae or Freddie Mac were on site or ever sat side-by-side

with employees to monitor their work as Fannie Mae and Freddie Mac did at

Flagstar Bank.

74. CW 5 stated that Flagstar Bank managers frequently met with Fannie

Mae agents starting in late 2012 and into early 2013. The loss mitigation

department was moved to an annex on Big Beaver Road in Troy around the end of

2012, and meetings were conducted in that facility. The meetings took place on

the third floor, where loss mitigation was located. Fannie Mae agents attended

conference calls, and Flagstar managers and supervisors attended in the same

room, including upper management.

75. CW 5 also cited the high turnover rate as exacerbating the high

backlogs of applications for loan modification. When someone would leave, the

cases in that person’s pipeline would be inaccessible until a supervisor re-assigned

26


the cases. This slowed down the department’s ability to respond to a borrower

until the reassignment. It also clogged up the pipeline for others who got the

reassignments. At one time, the call center staffers had 200 borrowers each in their

pipelines, which is a lot when the staffers are expected to follow up with each

borrower every two or three business days. The turnover rate was caused by

dissatisfaction at Flagstar Bank, including the poor pay. CW 5 was paid $14.32 an

hour at the loss mitigation call center, whereas bilingual workers were brought in

at $16 per hour. Moreover, former colleagues that had left Flagstar were being

paid $22 to $26 per hour for the same work at Quicken. Even temporary workers

at Flagstar were being paid as much as full time employees. The low pay with the

lack of training caused a lot of people to leave, which increased the backlog.

76. CW 6 started as a wholesale processor and ultimately was an

Assistant Vice-President of Default servicing. CW 6 worked at Flagstar Bank from

January 2008 through January 2013. CW 6 stated that senior management was

unresponsive to complaints from middle management about internal deficiencies in

the loss mitigation and default servicing departments, and that backlog resulted

from inadequate staffing. CW 6 implemented policies and procedures that had not

previously existed for employee training in 2012 and 2013.

77. CW 6 stated that when first working at Flagstar Bank, the expected

turnaround time for loan modification was 30 to 45 days from application to

27


resolution, and one individual specialist handled the entire process from beginning

to end. The volume spiked during the mortgage crisis and some borrowers did not

get any attention to their loan modification applications for several months. There

was no question that the backlog was caused by deficient staffing, which extended

the amount of time loss mitigation cases went unresolved.

78. According to CW 6, there was never appropriate staffing. When CW 6

started, a loss mitigation staffer would be responsible for about 70 loans, and there

were 12 people in the entire department. By the time CW 6 left in 2013, there

were 16,000 to 17,000 accounts in the loss mitigation department, probably double

that number in default servicing. CW 6 was never able to fully staff the 125

positions in CW 6’s charge because the positions were always in flux with high

turnover. There were generally 110 to 120 active employees at any one time in CW

6’s area, which did not include foreclosure, bankruptcy or collections.

79. CW 6 stated that in the last year CW 6 was at Flagstar Bank, things

began to heat up as with fines being imposed by federal regulators and an increase

in auditing activities. Audits by Fannie Mae and the CFPB overlapped. The last

nine to ten months of CW 6’s employment involved the CFPB audit, which was

very extensive. All of the audits, Fannie Mae and CFPB, were coordinated by the

Senior Vice-President and Director of Mortgage Banking Operations, Governance

and Analytics. During this period, there were weekly meetings with every manager

28


in default servicing, as well as Fannie Mae representatives, Senior Vice-President

Judy Fehler, Senior Vice-President John Czaplicki, and Executive Vice-President

Maher. The meetings occurred in Flagstar’s annex building on Big Beaver Road

where the loss mitigation department had been moved. These audits were in

addition to the monthly or quarterly audits by Wetzell Trott (currently d/b/a/

Stewart Lender Services).

80. CW 6 also stated that there were times during 2012 when CW 6 was

called into the board room by Mike Tierney, who was then-president of Flagstar

Bank, to discuss the CFPB audit. MatlinPatterson representatives attended by

telephone. CW 6 was told by Tierney that the federal regulators were Flagstar

Bank’s investors and the Bank works for them, so we have to do what they want

and quit complaining.

81. CW 6 stated that a lot of the computer systems at Flagstar Bank were

deficient and that there were a lot of issues with senior management not lending

support. There were a lot of times when it felt like things would fall on deaf ears if

one was experiencing an issue with a system, or not having the necessary

equipment or staffing. Although one could ask and ask, and write a report that

went through many individuals, if a solution was ever presented, it did not

necessarily address the problem at hand. There was a lot of bureaucracy and red

tape, and if one was too vocal, it was said that you were the problem.

29


82. CW 7 was a Loan Administrative Assistant in the loss mitigation

department from January 2012 through September 2013. CW 7’s responsibilities

were with document preparation. If loan modification applications were not

complete, CW 7 would send the applicant a new application to start from scratch.

Examples of technical deficiencies that prompted a new application were: missing

or incorrectly placed signatures; signatures that did not match others on file for the

borrower; missing notarization or incomplete documentation of the notary’s

credentials; signatures or other writing that bled into the one-inch margin on the

application, which was required to be kept clear.

83. CW 7 stated that when a loan modification was returned to a

borrower, one cover letter was a form letter that accompanied all new applications,

and the second letter was a template correction letter intended to explicitly direct

the borrower on how to apply correctly. Administrative assistants abandoned the

template correction letter they were supposed to send, and instead, sent their own

customized letters although directed by the Loss Mitigation Manager to send the

template correction letter.

84. CW 8 was a Senior Loan Counselor at Flagstar Bank from May 2009

through February 2014. CW 8 worked at the Company’s headquarters in Troy,

Michigan until the collections department was moved to the annex building. Part

of CW 8’s responsibilities included talking to borrowers that were behind in their

30


mortgage payments and discuss options with them. If the borrowers chose loan

modification, their case would go to the loss mitigation department.

85. CW 8 stated that managers did not know their jobs, the Company

hired inept employees, and the system was difficult for mortgagees to understand --

all contributing to delays in the loan modification applications. It was important

for borrowers to be notified regarding what they needed to do for their loan

modification applications and on what timeframe. Flagstar, however, failed to

keep borrowers informed, and that the loss mitigation department would not even

answer their phones. CW 8, and other collections personnel, would receive calls

from borrowers needing to speak with the loss mitigation department, and that CW

8 and collections personnel would pull up the borrowers’ information from the loss

mitigation screen on their computers and attempt to tell the borrowers what they

needed to do.

86. CW 9 was a counselor in the loss mitigation call center at Flagstar

Bank from January 2012 through January 2014. CW 9 contacted borrowers who

were behind in their mortgage payments to advise them on what options were

available and tell them the deadlines for filing loan modifications. CW 9 is

bilingual and translated and explained documents for Spanish-speaking borrowers.

CW 9 was in charge of Freddie Mac loans, which had different documentation

from Fannie Mae loans and government loans, e.g., FHA/VA loans.

31


87. CW 9 stated that there were many complaints from borrowers that it

took too long to modify their loans. There were many calls from Spanish speaking

borrowers and not enough loss mitigation counselors who spoke Spanish. The

volume of applicants in the other government loans department was even larger

than the Freddie Mac and the Fannie Mae departments, and the departments were

understaffed to handle the wave of requests for loan modifications.

The CFPB Consent Order

88. On September 29, 2014, The CFPB filed a Consent order in an

Administrative Proceeding captioned, In the Matter of: Flagstar Bank, FSB, File

No. 2014-CFPB-0014. The Consent Order was executed pursuant to a Stipulation

between Flagstar Bank and the Bureau consenting to the issuance of the Consent

Order. Per the Stipulation, Flagstar Bank did not admit or deny any of the findings

of fact or conclusions of law, except those facts which established the Bureau’s

jurisdiction over Flagstar Bank and subject matter of the action.

89. In the Consent Order, the Bureau found that Flagstar Bank had failed

to review loss mitigation application in a reasonable amount of time from at least

2011 until September 2013 in violation of sections 1036(a)(1)(B) and 1031(C)(1)

of the CFPA. The Bureau specifically found that Flagstar Bank, inter alia:

• failed to review loss mitigation application documents before they

expired under investor guidelines;

32


• failed to make a decision on loss mitigation applications prior to referring borrowers to foreclosure;

• caused the improper closure of loss mitigation applications;

• caused borrowers to drop out from the loss mitigation process; and

• deprived borrowers of their ability to make an informed choice about

how to retain or dispose of their homes.

90. The Bureau found that Flagstar Bank withheld critical information

that borrowers needed to complete their loss mitigation applications for at least a

nine month period in 2012 through 2013 2013 in violation of sections

1036(a)(1)(B) and 1031(C)(1) of the CFPA. The Bureau specifically found that

Flagstar Bank, inter alia:

• failed to send, or delayed sending, missing document letters to

borrowers;

• failed to resolve underlying systems problems related to missing

document letters;

• caused improper closure of loss mitigation applications; and

• rejected borrowers’ loss mitigation applications for reasons outside of

their control.

91. The Bureau found that Flagstar Bank denied loan modifications to

qualified borrowers by regularly and frequently miscalculating borrower income in

violation of sections 1036(a)(1)(B) and 1031(C)(1) of the CFPA. The Bureau

specifically found that Flagstar Bank, inter alia:

• lacked a systemized, controlled process for calculating borrower

income;

33


. failed to accurately calculate borrower income;

• deprived borrower of their ability to make an informed choice about

how to retain or dispose of their home.

92. The Bureau found that Flagstar Bank improperly prolonged

borrowers’ trial period plans for loan modifications in violation of sections

1036(a)(1)(B) and 1031(C)(1) of the CFPA. The Bureau specifically found that

Flagstar Bank, inter alia:

• the majority of trial period plans entered between October 2011 and

June 2013 lasted more than 120 days, and a substantial number lasted

more than 150 days.

93. The Bureau found that Flagstar Bank violated the loss mitigation

procedures, see 12 C.F.R. § 1024.41, and general servicing policies, procedures

and requirement, see 12 C.F.R. §§ 1024.38, of the Mortgage Servicing Rule, in

violation of sections 1036(a)(1)(B) and 1031(C)(1) of the CFPA. The Bureau

specifically found that Flagstar Bank, inter alia:

• failed to notify borrowers, in writing, within five business days of

receiving their loss mitigation applications whether their applications

were complete and what documents were missing;

• failed to provide written evaluation notices timely, or at all, with the

specific reason for denial of a loan modification option;

• allowed denial of loan modification simply by stating “does not fulfill investor requirements/guidelines” when Flagstar Bank’s internal

system indicated a different and more specific reason for denial;

• failed to provide appeal forms to borrowers;

34


• incorrectly stated that borrowers have the right to appeal the denial of

a loan modification only if they reside in certain states, when in fact

borrowers in all states have the right to appeal the denial of a loan

modification option;

• failed to maintain policies and procedures designed to ensure the bank

can provide accurate and timely disclosures to borrowers;

• failed to maintain policies and procedures designed to ensure the bank

can provide timely and accurate acknowledgement notices;

• failed to provide clear and consistent guidance in its manuals

regarding the content and timing of the acknowledgement notices.

94. In support of the Consent Order findings of fact, the CFPB cited

testimony from employees of Flagstar Bank referencing events similar or identical

to the testimony from the Confidential Witnesses referenced above.

95. Throughout the Class Period, Defendants were aware that the CFPB

was auditing Flagstar Bank’s compliance with federal regulations, which

overlapped with Fannie Mae and Freddie Mac enforcement that began as early as

September 2011. The threat of termination by Fannie Mae and Freddie Mac in

2011 and the risk of violations evidenced in the audit by the CFPB during the Class

Period were known material events that were withheld from disclosure to investors

by the Defendants, who further materially misled investors by touting the

efficiency of their loss mitigation and default servicing practices in periodic filings

with the SEC.

96. During 2013, with mounting pressure by federal regulators to cease

the violations of federal consumer protection laws, Flagstar Bank decided to sell

35


off loss mitigation and loan servicing of loans, especially non-performing or loans

in default, instead of correcting the systematic violations referenced above, and

represented that the sale was simply an attempt to lower non-interest expenses.

Defendants continued to tout the Company’s loss mitigation and default servicing,

and withheld from the investing public the fact that Flagstar Bank had failed to

comply with federal consumer protection laws since at least as early as 2011, that

the severity of the violations of borrowers’ rights was such that Fannie Mae

threatened terminating Flagstar Bank’s right to loan servicing of mortgages owned

or guaranteed by Fannie Mae, and that the CPFB had served Civil Investigative

Demands on Flagstar Bank. Indeed, regardless of the sale of servicing rights,

Flagstar Bank was still liable for violations of consumer protection laws going

back to 2011.

Materially False and Misleading Statements Issued During the Period

97. On October 22, 2013, Flagstar filed a Form 8-K with the SEC which

included a press release disseminated that day announcing financial results for the

third quarter of fiscal 2013, emphasizing that “non-interest expense decreased by

$16 million during the quarter, with further savings anticipated.” The press release

further stated that “compensation and benefits decreased . . . . driven by . . . a

decrease in both headcount and contract employees. .. .”

36


98. The statements in paragraph 97 were materially misleading as

Defendants failed to disclose that the reduction in headcount was driven by the

failure to comply with consumer protection regulations that had caused Fannie

Mae to threaten to terminate Flagstar’s rights to loan servicing as early as 2011.

Moreover, Defendants failed to disclose that the sale of servicing rights did not end

Flagstar Bank’s liability for violations of the CFPA going back to 2011.

99. On October 30, 2013, Flagstar filed its Form 10-Q for the third quarter

of fiscal 2013, which was signed by Defendants Di Nello and Borja, and included

the same materially misleading references to non-interest expense as in the press

release above. In addition, the Form 10-Q stated:

Mortgage-Related Litigation, Regulatory and Other Matters

Regulatory Matters

From time to time, governmental agencies conduct investigations or examinations of various mortgage related practices

of the Bank. Ongoing investigations relate to whether the Bank has

properly complied with laws or regulations relating to mortgage

origination or mortgage servicing practices and to whether its

practices with regard to servicing residential first mortgage loans are

adequate. The Bank is cooperating with such agencies and providing

information as requested. In addition, the Bank has routinely been

named in civil actions throughout the country by borrowers and

former borrowers relating to the origination, purchase, sale and

servicing of mortgage loans.

100. The statements referring to “investigations” in paragraph 99 are

boilerplate information that had been in Flagstar’s SEC filings for years, with no

reference to specific investigations. Moreover, the introduction of the statement as

37


“from time to time,” make the investigations or examinations appear routine,

whereas the actual investigations were caused by violations of consumer protection

laws that resulted in foreclosures of homes due to only to Flagstar Bank’s

wrongdoing. The statements are further materially misleading because they fail to

disclose that Fannie Mae had threatened to terminate Flagstar’s rights to loan

servicing as early as 2011, and that Flagstar was being investigated for violations

of the CFPA by the CFPB.

101. On December 18, 2013, Flagstar filed a Form 8-K with the SEC

which included a press release disseminated that day announcing that Flagstar

Bank had entered an agreement to sell mortgage servicing rights to Matrix

Financial Services Corporation. The agreement covered mortgage loans serviced

for both Fannie Mae and Ginnie Mae.


Defendants failed to disclose that Fannie Mae to threaten to terminate Flagstar’s

rights to loan servicing as early as 2011. Moreover, Defendants failed to disclose

that the sale of servicing rights did not end Flagstar Bank’s liability for violations

of the CFPA going back to 2011, and that Flagstar was being investigated for

violations of the CFPA.

103. On January 22, 2014, Flagstar filed a Form 8-K with the SEC which


38


fourth quarter of fiscal 2013, which emphasized “organization restructuring,”

described as including “workforce reductions” and the “outsourcing of default

servicing.” Defendant DiNello added that Flagstar had “increased our Tier I ratio,

lowered our MSR concentration, reduced operating costs .....”






Flagstar Bank’s liability for violations of the CFPA going back to 2011, and that

Flagstar was being investigated for violations of the CFPA.

105. On March 5, 2014, the Company filed an annual report on Form 10-K

with the SEC which was signed by defendants DiNello and Borja. The Form 10-K

contained signed certifications pursuant to the Sarbanes-Oxley Act of 2002 by

defendants DiNello and Borja, falsely and misleadingly stating that: the

information contained in the Form 10-K was accurate and complete, and all

material changes to the Company’s internal controls were disclosed.

106. In the 10-K, the Company stated:

Expanded regulatory oversight over our business could significantly

increase our risks and costs associated with complying with current

and future regulations, which could adversely affect our financial

condition and results of operations.

39


As a result of increasing scrutiny and regulation of the banking

industry and consumer practices, we may face a greater number or

wider scope of investigations, enforcement actions and litigation,

thereby increasing our costs associated with responding to or

defending such actions.

107. The underscored statement in paragraph 106 above was materially

false and misleading when made, as Flagstar was, at that time, the subject of an

investigation. The representations made in the entire section under “Regulatory

Risk” in the Form 10-K gave the false representation that any investigation or

oversight would be in the future, when in fact Flagstar had been investigated since

as early as 2011 by Fannie Mae and Freddie Mac, and was subject of a criminal

action for predatory lending by the United States Attorney for the Southern District

of New York.

108. The Form 10-K also stated:

The CFPB may reshape the consumer financial laws through

rulemaking and enforcement. Compliance with any such changes

may impact our operations.

The CFPB has broad and unique rulemaking authority to

administer and carry out the provisions of the Dodd-Frank Act with

respect to financial institutions that offer covered financial products and

services to consumers, including prohibitions against unfair, deceptive

or abusive practices in connection with any transaction with a

consumer for a consumer financial product or service, or the offering of

a consumer financial product or service. The concept of what may be

considered to be an "abusive" practice is new under the law. Moreover,

the Bank will be supervised and examined by the CFPB for compliance with the CFPB’s regulations and policies. While the full scope of the

CFPB’s rulemaking and regulatory agenda relating to the mortgage

40


industry remains unclear, it has already been active in issuing

guidelines, rules and regulations affecting our business, and it has also

been active in enforcing consumer financial protection laws against

mortgage originators and servicers.

109. The statements in paragraph 108 were materially false and/or

misleading when made. Aside from giving the misleading impression that the

CFPB was not then-currently investigating Flagstar Bank for violations of the

CFPA, certain if the statements were directly false. The underscored statement

that “abusive” practices was new under the law was belied by the investigation by

Fannie Mae in 2011 and the Letter received by the Company from Fannie Mae

which specifically listed practices that were abusive violations of consumer

protection laws.

110. The Form 10-K also stated:

We may incur fines, penalties and other negative consequences from

regulatory violations, possibly even for inadvertent or unintentional

violations.

We maintain systems and procedures designed to ensure that

we comply with applicable laws and regulations. However, some legal

and regulatory frameworks provide for the imposition of fines or

penalties for noncompliance even though the noncompliance was

inadvertent or unintentional and even though there was in place at the

time systems and procedures designed to ensure compliance.


Defendants failed to disclose that Flagstar since at least as early as 2011, Fannie

Mae had exposed violations that were neither inadvertent nor unintentional.

41


Indeed, the testimony of the Confidential Witnesses referenced above, as well as

the findings of fact in the Consent Order, demonstrate that Flagstar Bank had

committed intentional violations of the consumer protection laws, including the

CFPA, and that they were clearly subject to fines and possible termination of their

rights. Moreover, senior management at Flagstar Bank had ignored complaints and

issues raised by middle management and other personnel in the loss mitigation,

loan modification, and default servicing departments since as early as 2011. As

such, any representation to Flagstar Bank having systems and procedures ensuring

compliance were materially misleading at best, if not intentionally false.

112. On April 22, 2014, Flagstar filed a Form 8-K with the SEC which


first quarter of fiscal 2014, which emphasized “cost reductions,” which Defendant

DiNello described as “enhancing efficiency across the organization led to a

reduction of noninterest expense as we completed the previously announced

workforce reduction.”






42




114. On May 9, 2014, Flagstar filed its Form 10-Q for the first quarter of

fiscal 2014, which was signed by Defendants Di Nello and Borja, and included the

same materially misleading references to cost reductions as in the press release

above. In addition, the Form 10-Q stated:

Mortgage-Related Litigation, Regulatory and Other Matters

Regulatory Matters











115. The statements referring to “investigations” in the paragraph 114 are







43





116. On July 22, 2014, Flagstar filed a Form 8-K with the SEC which


second quarter of fiscal 2014, which emphasized “continued focus on expense

management.”








118. On July 29, 2014, Flagstar filed its Form 10-Q for the first quarter of

fiscal 2014, which was signed by Defendants Di Nello and Borja, and included the

same materially misleading references expenses as in the press release above. In

addition, the Form 10-Q stated:




44









119. The statements referring to “investigations” in the paragraph 118 are










The Truth Begins to Emerge

120. On August 26, 2014, the Company filed a Form 8-K with the SEC,

announcing that it has begun settlement discussions with the CFPB over alleged

violations of consumer finance laws dating back to 2011. In the 8-K, the Company

stated, in part:

Flagstar Bancorp, Inc., the holding company of Flagstar Bank,

FSB (the “Bank”), announced today that the Bank has

45


commenced discussions with the Consumer Financial

Protection Bureau, or CFPB, related to alleged violations of

various federal consumer financial laws arising from the Bank's

loss mitigation practices and default servicing operations dating

back to 2011. The Bank previously provided the CFPB with

documents and other information concerning the Bank’s loss

mitigation practices and default servicing operations in

response to Civil Investigative Demands received from the

CFPB. While the Bank intends to vigorously defend against any

enforcement action that may be brought, it has commenced

discussions with the CFPB staff to determine if a settlement can

be achieved. Those discussions are ongoing.

121. As a result of these allegations, Mark Palmer, an analyst at BTIG,

downgraded its rating on Flagstar to sell, noting that the “allegations raise

questions regarding servicing operations amid uncertainty of potential rebound of

its mortgage business.”

122. On the news, Flagstar stock fell $0.83, or almost 4.5%, on unusually

heavy trading volume, to close at $17.66 on August 27, 2014.

123. The market understood that the disclosure of the “discussions with the

CFPB” were not part of the usual investigations conducted by the CFPB.

Accordingly to an article on Housing Wire News dated August 27, 2014, a report

from Compass Point Trading and Research stated that it was “unusual” for a bank

such as Flagstar to disclose the Civil Investigation Demands (“CIDs”), as other

“large mortgage servicers . . . have received CIDs from the CFPB before.”

Accordingly, the report found that because “FBC felt it was necessary to mention

the company was in discussion with the CFPB, . . . a material settlement may be

46


imminent.” See Brena Swanson, Flagstar Mortgage Servicing Settlement With

CFPB Imminent , http://www.housingwire.com/articles/31179-flagstar-mortgage -

servicing-settlement-with-cfpb-imminent (Aug. 27, 2014).

124. With additional disclosure of an imminent settlement with the CFPB

filtered through the market through outlets such as Housing Wire News and

Compass Point Trading and Research, the price of Flagstar continued to decline the

following day, closing at $17.33 on August 28, 2014.

125. As a result of Defendants’ wrongful acts and omissions, and the

precipitous decline in the market value of the Company’s securities, Plaintiff and

other Class members have suffered significant losses and damages.

PLAINTIFF’S CLASS ACTION ALLEGATIONS

126. Plaintiff brings this action as a class action pursuant to Federal Rule of

Civil Procedure 23(a) and (b)(3) on behalf of a Class of all persons and entities that

purchased shares of Flagstar Bancorp Inc. common stock during the period of

October 22, 2013 through August 26, 2014, both dates inclusive. Excluded from

the Class are Defendants herein, the officers and directors of the Company, at all

relevant times, members of their immediate families and their legal representatives,

heirs, successors or assigns and any entity in which Defendants, officer or directors

have or had a controlling interest.

47


127. The members of the Class are so numerous that joinder of all

members is impracticable. Throughout the Class Period, Flagstar securities were

actively traded on the NYSE. While the exact number of Class members is

unknown to Plaintiff at this time and can be ascertained only through appropriate

discovery, Plaintiff believes that there are hundreds or thousands of members in the

proposed Class. Record owners and other members of the Class may be identified

from records maintained by Flagstar or its transfer agent and may be notified of the

pendency of this action by mail, using the form of notice similar to that

customarily used in securities class actions.

128. Plaintiff’s claims are typical of the claims of the members of the Class

as all members of the Class are similarly affected by Defendants’ wrongful

conduct in violation of federal law that is complained of herein.

129. Plaintiff will fairly and adequately protect the interests of the

members of the Class and has retained counsel competent and experienced in class

and securities litigation. Plaintiff has no interests antagonistic to or in conflict with

those of the Class.

130. Common questions of law and fact exist as to all members of the

Class and predominate over any questions solely affecting individual members of

the Class. Among the questions of law and fact common to the Class are:

• whether the federal securities laws were violated by

Defendants’ acts as alleged herein;

48


• whether statements made by Defendants to the investing public

during the Class Period misrepresented material facts about the

business, operations and management of Flagstar;

• whether the Individual Defendants caused Flagstar to issue

false and misleading financial statements during the Class

Period;

• whether Defendants acted knowingly or recklessly in issuing

false and misleading financial statements;

• whether the prices of Flagstar securities during the Class Period

were artificially inflated because of the Defendants’ conduct

complained of herein; and,

• whether the members of the Class have sustained damages and,

if so, what is the proper measure of damages.

131. A class action is superior to all other available methods for the fair

and efficient adjudication of this controversy since joinder of all members is

impracticable. Furthermore, as the damages suffered by individual Class members

may be relatively small, the expense and burden of individual litigation make it

impossible for members of the Class to individually redress the wrongs done to

them. There will be no difficulty in the management of this action as a class

action.

132. Plaintiff will rely, in part, upon the presumption of reliance

established by the fraud-on-the-market doctrine in that:

• Defendants made public misrepresentations or failed to disclose

material facts during the Class Period;

49


~ the omissions and misrepresentations were material;

~ Flagstar securities are traded in efficient markets;

~ the Company’s shares were liquid and traded with moderate to

heavy volume during the Class Period;

~ the Company traded on the NYSE, and was covered by multiple

analysts;

~ the misrepresentations and omissions alleged would tend to

induce a reasonable investor to misjudge the value of the

Company’s securities; and

~ Plaintiff and members of the Class purchased and/or sold

Flagstar securities between the time the Defendants failed to

disclose or misrepresented material facts and the time the true

facts were disclosed, without knowledge of the omitted or

misrepresented facts.

133. Based upon the foregoing, Plaintiff and the members of the Class are

entitled to a presumption of reliance upon the integrity of the market.

134. Alternatively, Plaintiff and the members of the Class are entitled to

the presumption of reliance established by the Supreme Court in Affiliated Ute

Citizens of the State of Utah v. United States , 406 U.S. 128, 92 S. Ct. 2430 (1972),

as Defendants omitted material information in their Class Period statements in

violation of a duty to disclose such information, as detailed above.

COUNT I

Violations of Section 10(b) of The Exchange Act and Rule 10b-5

Against All Defendants

50


135. Plaintiff repeats and realleges each and every allegation contained

above as if fully set forth herein.

136. This Count is asserted against Defendants and is based upon Section

10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated

thereunder by the SEC.

137. During the Class Period, Defendants engaged in a plan, scheme,

conspiracy and course of conduct, pursuant to which they knowingly or recklessly

engaged in acts, transactions, practices and courses of business which operated as a

fraud and deceit upon Plaintiff and the other members of the Class; made various

untrue statements of material facts and omitted to state material facts necessary in

order to make the statements made, in light of the circumstances under which they

were made, not misleading; and employed devices, schemes and artifices to

defraud in connection with the purchase and sale of securities. Such scheme was

intended to, and, throughout the Class Period, did: (i) deceive the investing public,

including Plaintiff and other Class members, as alleged herein; (ii) artificially

inflate and maintain the market price of Flagstar securities; and (iii) cause Plaintiff

and other members of the Class to purchase or otherwise acquire Flagstar securities

and options at artificially inflated prices. In furtherance of this unlawful scheme,

plan and course of conduct, Defendants, and each of them, took the actions set

forth herein.

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138. Pursuant to the above plan, scheme, conspiracy and course of conduct,

each of the Defendants participated directly or indirectly in the preparation and/or

issuance of the quarterly and annual reports, SEC filings, press releases and other

statements and documents described above, including statements made to

securities analysts and the media that were designed to influence the market for

Flagstar securities. Such reports, filings, releases and statements were materially

false and misleading in that they failed to disclose material adverse information

and misrepresented the truth about Flagstar’s finances and business prospects.

139. By virtue of their positions at Flagstar, Defendants had actual

knowledge of the materially false and misleading statements and material

omissions alleged herein and intended thereby to deceive Plaintiff and the other

members of the Class, or, in the alternative, Defendants acted with reckless

disregard for the truth in that they failed or refused to ascertain and disclose such

facts as would reveal the materially false and misleading nature of the statements

made, although such facts were readily available to Defendants. Said acts and

omissions of Defendants were committed willfully or with reckless disregard for

the truth. In addition, each defendant knew or recklessly disregarded that material

facts were being misrepresented or omitted as described above.

140. Defendants were personally motivated to make false statements and

omit material information necessary to make the statements not misleading in order

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to salvage the investment by MatlinPatterson after having invested approximately

$1 billion and seeing that investment evaporate as the mortgage industry imploded.

Indeed, Defendants, senior management and the directors of the Company owed

their employment at Flagstar to MatlinPatterson, and they were motivated to bring

the Company back to profitability by any means necessary.

141. Information showing that Defendants acted knowingly or with

reckless disregard for the truth is peculiarly within Defendants’ knowledge and

control. As the senior managers and/or directors of Flagstar, the Individual

Defendants had knowledge of the details of Flagstar’s internal affairs.

142. The Individual Defendants are liable both directly and indirectly for

the wrongs complained of herein. Because of their positions of control and

authority, the Individual Defendants were able to and did, directly or indirectly,

control the content of the statements of Flagstar. As officers and/or directors of a

publicly-held company, the Individual Defendants had a duty to disseminate

timely, accurate, and truthful information with respect to Flagstar’s businesses,

operations, future financial condition and future prospects. As a result of the

dissemination of the aforementioned false and misleading reports, releases and

public statements, the market price of Flagstar securities was artificially inflated

throughout the Class Period. In ignorance of the adverse facts concerning

Flagstar’s business and financial condition which were concealed by Defendants,

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Plaintiff and the other members of the Class purchased or otherwise acquired

Flagstar securities at artificially inflated prices and relied upon the price of the

securities, the integrity of the market for the securities and/or upon statements

disseminated by Defendants, and were damaged thereby.

143. During the Class Period, Flagstar securities were traded on an active

and efficient market. Plaintiff and the other members of the Class, relying on the

materially false and misleading statements described herein, which the Defendants

made, issued or caused to be disseminated, or relying upon the integrity of the

market, purchased or otherwise acquired shares of Flagstar securities at prices

artificially inflated by Defendants’ wrongful conduct. Had Plaintiff and the other

members of the Class known the truth, they would not have purchased or otherwise

acquired said securities, or would not have purchased or otherwise acquired them

at the inflated prices that were paid. At the time of the purchases and/or

acquisitions by Plaintiff and the Class, the true value of Flagstar securities was

substantially lower than the prices paid by Plaintiff and the other members of the

Class. The market price of Flagstar securities declined sharply upon public

disclosure of the facts alleged herein to the injury of Plaintiff and Class members.

144. By reason of the conduct alleged herein, Defendants knowingly or

recklessly, directly or indirectly, have violated Section 10(b) of the Exchange Act

and Rule 10b-5 promulgated thereunder.

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145. As a direct and proximate result of Defendants’ wrongful conduct,

Plaintiff and the other members of the Class suffered damages in connection with

their respective purchases, acquisitions and sales of the Company’s securities

during the Class Period, upon the disclosure that the Company had been

disseminating misrepresented financial statements to the investing public.

COUNT II

Violations of Section 20(a) of The Exchange Act

Against The Individual Defendants

146. Plaintiff repeats and realleges each and every allegation contained in

the foregoing paragraphs as if fully set forth herein.

147. During the Class Period, the Individual Defendants participated in the

operation and management of Flagstar, and conducted and participated, directly

and indirectly, in the conduct of Flagstar’s business affairs. Because of their senior

positions, they knew the adverse non-public information about Flagstar’s

misstatement of income and expenses and false financial statements.

148. As officers and/or directors of a publicly owned company, the

Individual Defendants had a duty to disseminate accurate and truthful information

with respect to Flagstar’s financial condition and results of operations, and to

correct promptly any public statements issued by Flagstar which had become

materially false or misleading.

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149. Because of their positions of control and authority as senior officers,

the Individual Defendants were able to, and did, control the contents of the various

reports, press releases and public filings which Flagstar disseminated in the

marketplace during the Class Period concerning Flagstar’s results of operations.

Throughout the Class Period, the Individual Defendants exercised their power and

authority to cause Flagstar to engage in the wrongful acts complained of herein.

The Individual Defendants therefore, were “controlling persons” of Flagstar within

the meaning of Section 20(a) of the Exchange Act. In this capacity, they

participated in the unlawful conduct alleged which artificially inflated the market

price of Flagstar securities.

150. Each of the Individual Defendants, therefore, acted as a controlling

person of Flagstar. By reason of their senior management positions and/or being

directors of Flagstar, each of the Individual Defendants had the power to direct the

actions of, and exercised the same to cause, Flagstar to engage in the unlawful acts

and conduct complained of herein. Each of the Individual Defendants exercised

control over the general operations of Flagstar and possessed the power to control

the specific activities which comprise the primary violations about which Plaintiff

and the other members of the Class complain.

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151. By reason of the above conduct, the Individual Defendants are liable

pursuant to Section 20(a) of the Exchange Act for the violations committed by

Flagstar.

PRAYER FOR RELIEF

WHEREFORE , Plaintiff demands judgment against Defendants as follows:

A. Determining that the instant action may be maintained as a class

action under Rule 23 of the Federal Rules of Civil Procedure, and certifying

Plaintiff as the Class representative;

B. Requiring Defendants to pay damages sustained by Plaintiff and the

Class by reason of the acts and transactions alleged herein;

C. Awarding Plaintiff and the other members of the Class prejudgment

and post-judgment interest, as well as their reasonable attorneys’ fees, expert fees

and other costs; and

D. Awarding such other and further relief as this Court may deem just

and proper.

DEMAND FOR TRIAL BY JURY

Plaintiff hereby demands a trial by jury.

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Respectfully submitted,

POMERANTZ LLP

/s/ Jeremy A. Lieberman

Jeremy A. Lieberman Gustavo F. Bruckner Francis P. McConville 600 Third Avenue, 20th Floor New York, New York 10016 Telephone: (212) 661-1100 Facsimile: (212) 661-8665 E-mail: [email protected]

[email protected]

[email protected]

POMERANTZ LLP Patrick V. Dahlstrom Ten South LaSalle Street, Suite 3505 Chicago, Illinois 60603 Telephone: (312) 377-1181 Facsimile: (312) 377-1184 E-mail: [email protected]

CAFFERTY CLOBES MERIWETHER

& SPRENGEL LLP Patrick E. Cafferty 101 North Main Street, Suite 565 Ann Arbor, MI 48104 Telephone: (734)769-2144 Facsimile: (734) 769-1207 E-mail: [email protected]

Mich. Bar No. P35613

Attorneys for Plaintiff

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CERTIFICATE OF SERVICE

I hereby certify that on February 3, 2015, I electronically filed the foregoing paper

with the Clerk of the Court using the ECF system which will send notification of such

filing to the following:

Jeffrey Alan Crapko Miller Canfield 840 W. Long Lake Road Suite 200 Troy, MI 48098 (248) 879-2000 Fax: (248) 879-2001 [email protected]

Matthew P. Allen Miller, Canfield, Paddock and Stone, PLC 840 West Long Lake Road Suite 200 Troy, MI 48098-6358 (248) 267-3290 Fax: (248) 879-2001 [email protected]

Thomas W. Cranmer Miller Canfield Paddock and Stone PLC 840 W. Long Lake Road Suite 200 Troy, MI 48098-6358 (248) 879-2000 Fax: (248) 879-2001 [email protected]

Todd A. Holleman Miller, Canfield, (Detroit) 150 W. Jefferson Avenue Suite 2500 Detroit, MI 48226-4415 (313) 963-6420 [email protected]

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/s/ Jeremy A. Lieberman

POMERANTZ LLP 600 Third Avenue, 20th Floor New York, New York 10016 Telephone: (212)1-1100 Facsimile: (212) 661-8665 E-mail: [email protected]

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