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filed a lawsuit - Structured Finance Litigation Blog

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									Case 2:33-av-00001 Document 16651 Filed 11/21/12 Page 1 of 229 PageID: 371389



                       UNITED STATES DISTRICT COURT
                          DISTRICT OF NEW JERSEY

THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA; COMMERCE
STREET INVESTMENTS, LLC; PRU
ALPHA FIXED INCOME OPPORTUNITY
MASTER FUND I, L.P.; PRUCO LIFE
INSURANCE COMPANY; PRUCO LIFE
INSURANCE COMPANY OF NEW
JERSEY; PRUDENTIAL INVESTMENT              COMPLAINT
PORTFOLIOS 2; THE PRUDENTIAL LIFE
INSURANCE COMPANY, LTD.;
PRUDENTIAL RETIREMENT INSURANCE
AND ANNUITY COMPANY; and                   Civil Action No.
PRUDENTIAL TRUST COMPANY,

      Plaintiffs,                          JURY TRIAL DEMANDED

v.                                         DOCUMENT FILED
                                           ELECTRONICALLY
CREDIT SUISSE SECURITIES (USA) LLC
(f/k/a CREDIT SUISSE FIRST BOSTON
LLC), CREDIT SUISSE FIRST BOSTON
MORTGAGE SECURITIES CORP., ASSET
BACKED SECURITIES CORPORATION,
and DLJ MORTGAGE CAPITAL, INC.,

      Defendants.
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                                                    TABLE OF CONTENTS

                                                                                                                                          Page

NATURE OF ACTION ...................................................................................................................1

PARTIES .........................................................................................................................................8

JURISDICTION AND VENUE ....................................................................................................15

BACKGROUND ...........................................................................................................................15

           A.         The Mechanics of Mortgage Securitization ...........................................................15

           B.         Securitization of Mortgage Loans: The Traditional Model ..................................18

           C.         The Systemic Violation of Underwriting and Related Standards in the
                      Mortgage Securitization Industry ..........................................................................20

           D.         Credit Suisse Was a Vertically Integrated RMBS Operation Controlling
                      Every Aspect of the Securitization Process ...........................................................23

SUBSTANTIVE ALLEGATIONS ...............................................................................................31

I.         DEFENDANTS’ FALSE STATEMENTS OF MATERIAL FACT AND
           MATERIAL OMISSIONS ................................................................................................31

           A.         Defendants’ Misrepresentations Regarding Compliance with Stated
                      Underwriting Guidelines ........................................................................................31

                      (1)        Defendants’ Misrepresentations Regarding Underwriting Standards........33

                      (2)        Defendants’ Omissions Regarding Due Diligence Results .......................35

           B.         Defendants’ Misrepresentations Regarding Owner-Occupancy Rates ..................36

           C.         Defendants’ Misrepresentations Regarding the Appraisal Process .......................37

           D.         Defendants’ Misrepresentations Regarding LTV Ratios and CLTV Ratios .........38

           E.         Defendants’ Misrepresentations Regarding Assignment to the Trusts ..................39

           F.         Defendants’ Misrepresentations Regarding Credit Ratings ...................................42

II.        EVIDENCE THAT DEFENDANTS’ REPRESENTATIONS WERE FALSE
           AND MISLEADING .........................................................................................................44

           A.         An Analysis of the Mortgage Loans and Certificates Directly at Issue .................44



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           (1)        A forensic analysis of the mortgaged properties’ true occupancy
                      status revealed a systematic misrepresentation problem ...........................44

           (2)        A forensic analysis of the Mortgage Loans’ true LTV and CLTV
                      ratios revealed a systematic misrepresentation problem ............................48

           (3)        A forensic analysis of the Mortgage Loans’ chain of title revealed
                      a systematic misrepresentation problem ....................................................53

           (4)        The dismal performance of the Mortgage Loans and Certificates
                      confirms they were infected by Defendants’ and Originators’
                      systemic underwriting problems ................................................................57

      B.   Multiple Forensic Reviews of Thousands of Loan Files Reflect the
           Systematic Nature of Credit Suisse’s Misrepresentations Regarding
           Underwriting Guidelines ........................................................................................59

           (1)        FHFA Re-Underwriting .............................................................................61

           (2)        Re-Underwriting by MBIA and Ambac ....................................................67

           (3)        Re-Underwriting by Assured .....................................................................69

      C.   Credit Suisse’s Representations Regarding Credit Ratings Were False and
           Misleading..............................................................................................................73

      D.   Evidence from Analyses Conducted by Defendants’ Third-Party Due
           Diligence Firms ......................................................................................................77

      E.   Evidence of Defendants’ Loan Originators’ Misrepresentations Regarding
           Their Underwriting ................................................................................................80

           (1)        Third-party originator New Century systematically abandoned its
                      underwriting guidelines .............................................................................83

           (2)        Third-party originator Option One Mortgage Corporation
                      systematically abandoned its underwriting guidelines ..............................92

           (3)        Third-party originator Washington Mutual Bank systematically
                      abandoned its underwriting guidelines ......................................................96

           (4)        Third-party originator WMC systematically abandoned its
                      underwriting guidelines ...........................................................................105

           (5)        Third-party originator Fremont Investment & Loan systematically
                      abandoned its underwriting guidelines ....................................................109

           (6)        Third-party originator GreenPoint Mortgage Funding, Inc.
                      systematically abandoned its underwriting guidelines ............................114


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                 (7)        Third-party originator Aegis Mortgage Corporation systematically
                            abandoned its underwriting guidelines ....................................................116

                 (8)        Third-party originator Argent Mortgage systematically abandoned
                            its underwriting guidelines .......................................................................117

                 (9)        Third-party originator Ameriquest systematically abandoned its
                            underwriting guidelines ...........................................................................119

                 (10)       Third-party originator Decision One Mortgage Company, LLC
                            systematically abandoned its underwriting guidelines ............................121

                 (11)       Third-party originator People’s Choice Home Loan, Inc.
                            systematically abandoned its underwriting guidelines ............................122

                 (12)       Third-party originator Residential Funding Company, Inc.
                            systematically abandoned its underwriting guidelines ............................123

III.   DEFENDANTS KNEW THEIR REPRESENTATIONS WERE FALSE AND
       MISLEADING .................................................................................................................128

       A.        Overview ..............................................................................................................128

       B.        Facts Showing Defendants’ Knowledge of General Underwriting
                 Abandonment by Originators ...............................................................................132

                 (1)        The consistency of the loans’ errors ........................................................132

                 (2)        Defendants’ extensive due diligence processes made them aware
                            that the Mortgage Loans did not conform to represented
                            underwriting guidelines ...........................................................................133

                 (3)        The federal government and other parties have found that
                            Defendants’ due diligence process proved they had knowledge of
                            the massive fraud .....................................................................................140

                 (4)        Confidential witnesses confirm that the due diligence process was
                            well-equipped to catch the errors at issue here, but was directed to
                            “look the other way” ................................................................................146

                 (5)        Loan-file reviews conducted by others confirm that errors like this
                            would have been caught by a review of the loan files .............................167

                 (6)        Credit Suisse engaged in a scheme to clandestinely profit on
                            defective loans, to the detriment of investors, and then tried to
                            cover up evidence of non-compliance to reduce litigation risk ...............170

       C.        Facts Showing Defendants’ Knowledge of Appraisal Misrepresentations..........177



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          D.        Facts Showing Defendants’ Knowledge as to Owner-Occupancy
                    Representations ....................................................................................................186

          E.        Facts Showing Defendants’ Knowledge as to the Title-Transfer
                    Representations ....................................................................................................190

          F.        Facts Showing Defendants’ Knowledge as to the Credit Rating
                    Representations ....................................................................................................191

IV.       PRUDENTIAL’S DETRIMENTAL RELIANCE AND DAMAGES ............................193

          A.        Prudential’s Reasonable Reliance ........................................................................193

          B.        Prudential’s Damages ..........................................................................................199

V.        DEFENDANTS CONCEALED THEIR MISCONDUCT. .............................................203

FIRST CAUSE OF ACTION ......................................................................................................206

SECOND CAUSE OF ACTION .................................................................................................207

THIRD CAUSE OF ACTION .....................................................................................................209

FOURTH CAUSE OF ACTION .................................................................................................210

FIFTH CAUSE OF ACTION ......................................................................................................212

PRAYER FOR RELIEF ..............................................................................................................222

JURY DEMAND .........................................................................................................................224




                                                                   iv
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        Plaintiffs The Prudential Insurance Company of America, Commerce Street Investments,

LLC, Pru Alpha Fixed Income Opportunity Master Fund I, L.P., Pruco Life Insurance Company,

Pruco Life Insurance Company of New Jersey, Prudential Investment Portfolios 2, The

Prudential Life Insurance Company, Ltd., Prudential Retirement Insurance and Annuity

Company, and Prudential Trust Company (collectively, “Prudential”), by and through their

attorneys, bring this action against Credit Suisse Securities (USA) LLC, Credit Suisse First

Boston Mortgage Securities Corp., Asset Backed Securities Corporation, and DLJ Mortgage

Capital, Inc., (collectively, “Defendants” or “Credit Suisse”), and allege as follows:

                                        NATURE OF ACTION

        1.      Prudential seeks to recover damages it suffered as a result of Defendants’

fraudulent sale of over $466 million in residential mortgage-backed securities (the

“Certificates”). 1 Prudential made purchases in reliance on Defendants’ misrepresentations

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

“Mortgage Loans”). Prudential has undertaken its own analysis of the Mortgage Loans backing

the Certificates, and found them not to comply with Defendants’ representations. Prudential’s

loan-level analysis has revealed systematic failures in Defendants’ loan underwriting and

assignment practices that caused Prudential’s Certificates to be backed by countless Mortgage

Loans that have since defaulted, been foreclosed upon, and for which Defendants lack proper

title to seek recourse.

        2.      In addition, civil lawsuits and government investigations regarding the third-party

lenders that contributed Mortgage Loans to Defendants (the “Originators”) have made public a


        1
           The term “residential mortgage-backed securities” is abbreviated herein “RMBS.” The
securitizations that correspond with each Certificate Prudential purchased (collectively, the “Offerings” or
“Securitizations”) are described in the Exhibits to this Complaint, which are all incorporated as if set forth
fully herein.
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flood of previously hidden information. Multiple investigators have reached the same

conclusion: Defendants were engaged in a wide-ranging fraud.

       3.      To induce investors like Prudential to purchase RMBS Certificates, Defendants

provided information through offering materials, including registration statements, prospectuses,

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

materials (the “Offering Materials”). Prudential’s loan-level analysis has revealed that many of

the representations Defendants made about the underlying collateral were false, and Defendants

knew it.

       4.      The Offering Materials falsely represented that a stated set of underwriting

guidelines would be followed. Underwriting guidelines set the rules used to decide whether to

grant, or securitize, a given loan. Though “exceptions” can be made, Defendants represented

these would be limited to loans where “compensating factors” were present. If the underwriting

guidelines are not actually followed—or if “exceptions” are granted where there are no

compensating factors—the quality of the collateral underlying the Certificates is badly

compromised. Contrary to Defendants’ representations, Defendants and the Originators

systematically abandoned their stated guidelines and repeatedly granted exceptions on loans that

had no compensating factors. This is confirmed by Prudential’s forensic analysis of 18,400 of

the Mortgage Loans at issue here, and many other facts discussed below.

       5.      Defendants fraudulently omitted their “waiver” of loans flagged as being

defective. Recently released reports confirm that Defendants’ due diligence processes were

consistently flagging numerous loans that were both outside the guidelines and that could not be

justified through the presence of any purported “compensating factors.” These same reports

show that Defendants nonetheless provided “waivers” for a third of these defective loans.



                                                2
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Defendants omitted to disclose in the Offering Materials that they were providing such “waivers,”

rendering them even more misleading.

       6.         The Offering Materials falsely represented that a specific number of properties

would be owner-occupied. Whether or not a borrower is living at a mortgaged house is

important, because borrowers are less likely to default on their primary residence. At the time

Prudential made its investments, there was no way for investors to “test” Defendants’

representations about owner-occupancy. However, recent advancements allowed Prudential to

analyze the tax and property records for the Mortgage Loans. This analysis revealed that the

Offering Materials for each Certificate inflated owner-occupancy statistics. For example,

Prudential’s forensic analysis revealed that, for the AABST 2004-4 Securitization, the Offering

Materials overstated the percentage of owner-occupied properties by over 13%.

       7.         The Offering Materials misrepresented the appraisal process, and presented

false and misleading loan-to-value statistical data. The Offering Materials state that the

mortgaged properties would be appraised using a particular process, such as the Uniform

Standards of Professional Appraisal Practice. These appraisals were then used to calculate

important statistics about the Mortgage Loans, such as their loan-to-value (“LTV”) and

combined loan-to-value (“CLTV”) ratios. These representations were material because they tell

investors how much of an equity “cushion” the borrower has, and the likely recovery in the event

of foreclosure.

       8.         The falsity of these representations is confirmed by Prudential’s forensic analysis.

Using an unbiased, industry-standard, automated valuation model (“AVM”), Prudential was

recently able to test the reasonableness of Defendants’ appraisal values. Across every Certificate,

Defendants consistently inflated the property values. The consistency and size of the “gap,” and



                                                   3
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other facts set forth below, confirms that the appraisal process was being rigged, and that

Defendants knew it.

       9.      The Offering Materials falsely represented that the credit ratings would

reasonably relate to the Certificates being offered. Defendants fed the rating agencies the same

false data discussed herein. Because the quality of the credit ratings is only as good as the

quality of the data given to the agencies, this rendered Defendants’ representations regarding the

credit ratings false and misleading.

       10.     Assignment of Mortgage Loans to the Trusts. The Offering Materials

represented (i) that the underlying Mortgage Loans had been validly assigned to the RMBS trusts

(the “Trusts”) that issued the Certificates (or to Mortgage Electronic Registration Systems

(“MERS”)), and (ii) that the Trusts, acting through loan servicers or the trustees, would have the

ability to foreclose in the event of borrower defaults on the loans. But in fact, as reflected in

Prudential’s loan-level analysis of the chain of title of 18,400 Mortgage Loans underlying its

securities, Defendants did not actually assign over 38% of these Mortgage Loans to the Trusts.

And of the Mortgage Loans that were assigned to the Trusts, over 55% were not properly

assigned, as represented in the Offering Materials. Defendants’ misrepresentations and failures

related to the transfer of title have harmed Prudential.

       11.     Defendants knew the representations were false. Defendants knew that large

quantities of loans were defective, but securitized them anyway. At the time of these Offerings,

Defendants had, in fact, abandoned sound underwriting practices and knew the companies from

which they were acquiring the Mortgage Loans had similarly abandoned sound loan-origination

practices. Defendants’ focus was on maintaining a large volume of loans for their securitization

business, rather than on keeping defective loans out of the collateral pools. In fact, according to



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a lawsuit filed this week by the New York Attorney General, Defendants implemented an

“incentives” program that rewarded originators based on loan volume and, according to internal

e-mails “encourage[d]” originators “to continue delivering . . . crap.” Defendants also extended

warehouse lines of credit to originators worth hundreds of millions of dollars to pump up loan

volume even further. All the while, Defendants knew that many of the originators were

producing what Defendants’ own senior RMBS traders referred to as “garbage.”

        12.     Defendants’ abandonment of sound underwriting practices was systematic and

significant and pervaded Defendants’ RMBS offerings during this period. Indeed, in late June

2007, Defendants’ own Head of Due Diligence admitted in an internal e-mail that Defendants

had “systemic problems” in their due diligence process. In addition to the New York Attorney

General’s suit, Credit Suisse reached an agreement with the Securities and Exchange

Commission (“SEC”) this month, in which it will pay $120 million to settle claims that it

collected cash payments from originators after purchasing defective loans, only to keep the

proceeds rather than pass them to investors who owned the loans through RMBS trusts.

        13.     Defendants also used a third-party due diligence firm, Clayton Holdings, Inc.

(“Clayton”), to pre-screen the loans they were securitizing. Clayton told Defendants that many

of these loans were defective but securitized them anyway and sold the securitizations to

Prudential and other investors. Specifically, Clayton gave loans that failed to meet the guidelines

and lacked any “compensating factors” a failing grade of “3.” These grades—and the reasoning

for them—were given to Defendants on a daily basis. Defendants could see in real-time how

many defective loans they were purchasing. Defendants were told that 32% of the loans failed to

meet the guidelines and lacked any “compensating factors,” yet Defendants “waived” 33% of

these loans into their securitizations.



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       14.     Testimony from Clayton’s representatives confirms that Defendants were using

the defect information to negotiate a lower price with the Originators. In other words,

Defendants used their due diligence processes not as a way to ensure the accuracy of the

Offering Materials, but merely as bargaining leverage to increase their own profits.

       15.     As detailed below, numerous sources show a systemic underwriting breakdown.

Prudential’s forensic analysis of 18,400 Mortgage Loans confirms those systemic problems

infected the Certificates at issue. The Federal Housing Finance Agency (“FHFA”), conservator

for Fannie Mae and Freddie Mac, obtained the loan origination files for mortgage loans

underlying certain offerings—including one of the Offerings at issue in this case, ABSHE

2006-HE7—and determined that between 74% and 99% of the loans were not underwritten in

accordance with originators’ underwriting standards. Like Prudential, Fannie Mae and Freddie

Mac did not have access to the loan files at the time of purchase.

       16.     It is not surprising, then, that the Mortgage Loans have performed terribly. For

those Offerings that were tested, over 23% of the Mortgage Loans have already been written off

for a loss or are currently delinquent. Of the Mortgage Loans that are currently active, over 33%

are delinquent. The Certificates’ credit ratings have plummeted. Even though all started out as

investment-grade, with many being AAA-rated, a substantial number are now rated as “junk” by

at least one of the major rating agencies. With the underlying loans performing so poorly, the

value of Prudential’s Certificates has plummeted, causing Prudential to incur significant losses.

These losses were not caused by the housing market downtown, but by Defendants’ knowing

failure to originate and securitize these Mortgage Loans in accordance with the stated

underwriting guidelines.




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       17.     Evidence confirming the systematic and pervasive nature of Defendants’

fraudulent practices continues to emerge. Entities that, unlike Prudential, have access to

Defendants’ individual loan files were recently able to conduct forensic reviews of those files,

re-underwriting over 12,000 loans Defendants packaged into offerings from October 2005

through August 2007. Those entities found that between 67% and 93% of the loans Defendants

securitized during this period failed to comply with the underwriting guidelines that

Defendants represented would apply.

       18.     These findings are consistent with Prudential’s own loan-level analysis of the

Offerings at issue here. Prudential found that across the twenty-three Offerings that it tested, a

staggering 48.67% of the Mortgage Loans contained at least one material defect. This means

that over 60,000 of the Mortgage Loans underlying the tested Certificates alone were materially

defective:

                                         Number of      Percentage of    Number of
                                          Mortgage      Loans With a    Mortgage Loans
                       Trust
                                         Loans in the     Material      With a Material
                                          Loan Pool        Defect           Defect
              AABST 2004-2                  6,025          55.75%            3,359
              AABST 2004-4                  5,770          32.38%            1,868
              AABST 2005-2                  7,847          33.13%            2,600
              ABSHE 2004-HE1                4,600          91.88%            4,226
              ABSHE 2004-HE3                4,702          56.50%            2,657
              ABSHE 2005-HE1                6,066          53.50%            3,245
              ABSHE 2005-HE6                8,176          62.00%            5,069
              ABSHE 2005-HE8                7,879          63.13%            4,974
              ABSHE 2006-HE7                2,368          62.63%            1,483
              ABSHE 2007-HE1                3,059          39.25%            1,201
              HEAT 2004-2                   5,019          72.38%            3,633
              HEAT 2004-3                   4,051          71.88%            2,912
              HEAT 2004-4                   6,764          52.50%            3,551
              HEAT 2004-5                   5,300          41.25%            2,186
              HEAT 2004-6                   4,857          43.13%            2,095
              HEAT 2004-8                   6,224          37.00%            2,303
              HEAT 2005-1                   6,306          33.00%            2,081
              HEAT 2005-3                   5,284          38.88%            2,054
              HEAT 2005-5                   7,680          32.50%            2,496
              HEAT 2005-6                   5,521          33.88%            1,871
              HEAT 2005-9                   4,617          34.75%            1,604


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                                         Number of      Percentage of    Number of
                                          Mortgage      Loans With a    Mortgage Loans
                        Trust
                                         Loans in the     Material      With a Material
                                          Loan Pool        Defect           Defect
              HEAT 2006-1                   4,687          42.00%            1,969
              HEAT 2006-2                   2,098          36.25%             761

       19.     These defect rates are likely just the tip of the iceberg—Prudential does not yet

have access to the Defendants’ loan files. Rather, it has been limited in its investigation to what

is publicly available. Discovery is likely to uncover additional problems, as Prudential only then

will be able to test fully other representations, such as those regarding the income, employment,

and housing history verification processes used, the qualifications of the appraisers, compliance

with state laws, FICO score requirements, and other features that all were part of the Defendants’

underwriting guidelines.

                                            PARTIES

       The Plaintiffs

       20.     Plaintiff The Prudential Insurance Company of America (“Prudential Insurance”)

is an insurance company formed under the laws of, and domiciled in, New Jersey, with its

principal place of business at 751 Broad Street, Newark, New Jersey 07102. Prudential

Insurance is a wholly-owned subsidiary of Prudential Holdings, LLC, which is a Delaware

limited liability company. Prudential Holdings, LLC is a wholly-owned subsidiary of Prudential

Financial, Inc., a company formed under the laws of, and domiciled in, New Jersey, with its

principal place of business at 751 Broad Street, Newark, New Jersey.

       21.     Plaintiff Commerce Street Investments, LLC (“Commerce Street”) is a company

formed under the laws of Delaware, with its principal place of business at 751 Broad Street,

Newark, New Jersey 07102. Commerce Street is a wholly-owned subsidiary of Prudential

Financial, Inc, a company formed under the laws of, and domiciled in, New Jersey, with its


                                                    8
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principal place of business at 751 Broad Street, Newark, New Jersey 07102. Commerce Street’s

sole member is Prudential Financial, Inc.

       22.     Plaintiff Pru Alpha Fixed Income Opportunity Master Fund I, L.P. (“Pru Alpha”)

is a Cayman Islands Exempted Limited Partnership, with its principal place of business at 2

Gateway Center, Third Floor, Newark, New Jersey 07102. Pru Alpha is a wholly-owned

subsidiary of Prudential Investment Management, Inc. (“PIM”), a company formed under the

laws of, and domiciled in, New Jersey, with its principal place of business at 751 Broad Street,

Newark, New Jersey 07102, and ultimately Prudential Financial, Inc. Pru Alpha’s partners are

Pru Alpha Partners I LLC, whose sole member is PIM, and ED Ltd., a Cayman Islands

corporation.

       23.     Plaintiff Pruco Life Insurance Company is an insurance company formed under

the laws of Arizona, with its principal place of business at 213 Washington Street, Newark, New

Jersey 07102. Pruco is a wholly-owned subsidiary of Prudential Insurance.

       24.     Plaintiff Pruco Life Insurance Company of New Jersey is a life insurance

company formed under the laws of New Jersey, with its principal place of business at 213

Washington Street, Newark, New Jersey 07102. Pruco Life Insurance Company of New Jersey

is a wholly-owned subsidiary of Prudential Insurance.

       25.     Plaintiff Prudential Investment Portfolios 2 is a Delaware statutory trust with a

principal place of business at Gateway Center Three, 100 Mulberry Street Newark, New Jersey

07102. It is an open-ended management investment company registered with the SEC and is

comprised of the following funds: Prudential Core Short-Term Bond Fund and Prudential Core

Taxable Money Market Fund.




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         26.   Plaintiff The Prudential Life Insurance Company, Ltd. is an insurance company

formed under the laws of, and domiciled in Japan, with its principal place of business in Tokyo,

Japan. Prudential Ltd. is a wholly-owned subsidiary of Prudential Holdings of Japan, Inc., and

ultimately, Prudential Financial, Inc.

         27.   Plaintiff Prudential Retirement Insurance and Annuity Company (“PRIAC”) is an

insurance company formed under the laws of, and domiciled in, Connecticut, with its principal

place of business at 280 Trumbull Street, Hartford, Connecticut 06103. PRIAC is a wholly-

owned subsidiary of Prudential Insurance.

         28.   Plaintiff Prudential Trust Company is a corporation formed under the laws of

Pennsylvania, with its principal place of business at 30 Scranton Office Park, Scranton,

Pennsylvania 18509. Prudential Trust Company is a wholly-owned subsidiary of PIM, and

ultimately Prudential Financial, Inc. Prudential Trust Company serves as Trustee for Prudential

Merged Retirement Plan, a Prudential fund which purchased Certificates in the NCHET 2004-4

Trust.

         Relevant Prudential Non-Party

         29.   PIM is a privately-owned investment manager. It primarily provides its services

to institutions, pension plans, charitable organizations, state or municipal government entities,

churches, foreign agencies, public funds, insurance companies, foundations, and endowments.

PIM manages client-focused portfolios and launches and manages equity, fixed income, and

mutual funds. PIM also launches and manages hedge funds and structured vehicles. PIM is a

wholly-owned subsidiary of Prudential Financial, Inc.

         30.   Each of the Plaintiffs in this action is an investment advisory client of PIM,

pursuant to investment management agreements in which the entities have delegated investment

discretion to PIM, subject to certain mandates and restrictions. In its role as an investment
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advisor to the Plaintiffs, PIM purchased the Certificates on behalf of those entities. While PIM

makes purchases for its clients pursuant to such investment discretion, it still must act according

to the investment client’s mandates and restrictions. At all times, PIM acted as an agent for the

Plaintiffs in purchasing the Certificates at issue in this lawsuit.

        31.       The Plaintiffs hold (or held) title to the Certificates at issue in this Complaint, and

each bears (or bore) the risk of loss for the Certificates. PIM does not have legal title to the

Certificates at issue in this action, nor does it have a proprietary interest in the claims asserted by

the Plaintiffs. PIM purchased the Certificates for the benefit of and in the name of (or the name

of the nominee of) the Plaintiffs.

        32.       Prudential made the purchases described in Exhibit B. The purchases were all

made from New Jersey, and the decisions to purchase, including reliance on the Offering

Materials, also took place in New Jersey.

        The Defendants

        33.       All of the Defendants in this action are part of the same corporate family, and

acted together to control the entire process in the creation of the Certificates at issue here, from

loan origination, to mortgage pooling, to securities underwriting, to sale to Prudential. Thus, as

set forth below, all of the Defendants made, authorized, and/or caused the misrepresentations

alleged herein.

        34.       At all relevant times, Defendants committed the acts, caused or directed others to

commit the acts, or permitted others to commit the acts alleged in this Complaint. Any

allegations about acts of Defendants refer to acts that were committed through Defendants’

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

within the actual or implied scope of their authority.



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       35.     The Underwriter. Defendant Credit Suisse Securities (USA) LLC, formerly

known as Credit Suisse First Boston LLC, is a Delaware limited liability company with its

principal place of business in New York, New York. It is primarily engaged in the business of

investment banking and is a wholly-owned, indirect subsidiary of Credit Suisse Holdings (USA),

Inc. It, or its predecessor, was the underwriter for each of the Certificates as issue here.

       36.     As underwriter, Credit Suisse Securities (USA) LLC participated in structuring

the Securitizations, including participating in the drafting and dissemination of the Offering

Materials, including the prospectus supplements, pursuant to which the Certificates were sold to

Plaintiffs. The underwriter was also involved in marketing the Certificates to investors like

Prudential. The underwriter is prominently identified on the first page of the Prospectus

Supplements. The solicitation of Prudential was the result of the underwriter, depositor, and

seller/sponsor’s joint effort to market the Certificates through the creation and distribution of the

Offering Materials. Thus, Credit Suisse Securities (USA) LLC, as underwriter, made, authorized,

and caused the misrepresentations alleged herein.

       37.     The Sponsor/Seller. Defendant DLJ Mortgage Capital, Inc. (“DLJ Mortgage

Capital”) is a Delaware corporation with its principal place of business in New York, New York.

It is a wholly-owned, indirect subsidiary of Credit Suisse Holdings (USA), Inc., and it is

primarily engaged in the purchase of mortgage loans. DLJ Mortgage Capital acted as the seller

or sponsor (or both) for twenty-one of the Offerings at issue in this case. 2 It also originated

and/or acquired some of the underlying Mortgage Loans.



       2
         As described in the Exhibits, those twenty-one Securitizations are: ABSHE 2004-HE1,
ABSHE 2004-HE3, ABSHE 2005-HE1, ABSHE 2005-HE6, ABSHE 2005-HE8, ABSHE 2006-HE7,
ABSHE 2007-HE1, CSFB 2005-1, HEAT 2004-2, HEAT 2004-3, HEAT 2004-4, HEAT 2004-5, HEAT
2004-6, HEAT 2004-8, HEAT 2005-1, HEAT 2005-3, HEAT 2005-5, HEAT 2005-6, HEAT 2005-9,
HEAT 2006-1, and HEAT 2006-2.
                                                 12
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       38.     As sponsor/seller, DLJ Mortgage Capital structured the Securitizations at issue,

including transferring the underlying Mortgage Loans to the depositor and using and controlling

the depositor-defendants, in carrying out the transactions. The sponsor/seller, along with the

depositors and the underwriter, also participated in the preparation of the Offering Materials, and

is identified prominently on the front page of the Prospectus Supplements for each of the

Securitizations. Thus, DLJ Mortgage Capital, as sponsor/seller, made, authorized, or caused the

relevant misrepresentations alleged herein.

       39.     The Depositors. Defendant Credit Suisse First Boston Mortgage Securities Corp.

is a Delaware corporation with its principal place of business in New York, New York. For

fourteen of the Offerings in which Prudential invested, Credit Suisse First Boston Mortgage

Securities Corp. was the depositor, the Registrant for Registration Statements filed with the SEC,

and an issuer of the Certificates purchased by Prudential. 3 Credit Suisse First Boston Mortgage

Securities Corp. is a wholly-owned, indirect subsidiary of Credit Suisse Holdings (USA), Inc.

       40.     Defendant Asset Backed Securities Corporation is a Delaware corporation with its

principal place of business in New York, New York. For seven of the Offerings in which

Prudential invested, Asset Backed Securities Corporation was the depositor, the Registrant for

Registration Statements filed with the SEC, and a statutory issuer of the Certificates purchased

by Prudential. 4 Asset Backed Securities Corporation is a wholly-owned, indirect subsidiary of

Credit Suisse Holdings (USA), Inc.




       3
          As described in the Exhibits, those fourteen Offerings are: CSFB 2005-1, HEAT 2004-2,
HEAT 2004-3, HEAT 2004-4, HEAT 2004-5, HEAT 2004-6, HEAT 2004-8, HEAT 2005-1, HEAT
2005-3, HEAT 2005-5, HEAT 2005-6, HEAT 2005-9, HEAT 2006-1, and HEAT 2006-2.
        4
          As described in the Exhibits, those seven Offerings are: ABSHE 2004-HE1, ABSHE 2004-
HE3, ABSHE 2005-HE1, ABSHE 2005-HE6, ABSHE 2005-HE8, ABSHE 2006-HE7, and ABSHE
2007-HE1.
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       41.     The depositors are the statutory issuers of the Securitizations that are the subject

of this Complaint, and, in conjunction with the sponsor/seller and the underwriter, directly made

the misrepresentations alleged herein. The depositors are prominently identified on the front

page of the Prospectus Supplements for each of the Securitizations. Thus, the depositors made,

authorized, or caused the relevant misrepresentations alleged herein.

       Relevant Credit Suisse Non-Parties

       42.     Select Portfolio Servicing, Inc. (“SPS”) is a Utah corporation whose principal

place of business is Salt Lake City, Utah. It is an indirect, wholly-owned subsidiary of Credit

Suisse Holdings (USA), Inc. and is primarily engaged in the servicing of mortgage loans. SPS

acted as servicer for certain of the Mortgage Loans.

       43.     Credit Suisse Group AG is a Swiss company whose shares are publicly traded on

the Swiss Stock Exchange. It is the parent company of Credit Suisse Holdings (USA), Inc.

       44.     Credit Suisse Holdings (USA), Inc. is a Delaware corporation with its principal

place of business in New York, New York. It is the direct or indirect parent corporation of

Credit Suisse Securities (USA) LLC, , DLJ Mortgage Capital, Credit Suisse First Boston

Mortgage Securities Corp, Asset Backed Securities Corporation, and SPS.

       45.     Each Securitization acquired by Prudential from a Credit Suisse-affiliated entity

was issued by a Trust. The Trusts are identified in Exhibit A, along with other details regarding

Prudential’s purchases. The trustees for the Trusts are Wachovia Bank, N.A., U.S. Bank

National Association, Wells Fargo Bank, N.A., Wilmington Trust Company, Deutsche Bank

National Trust Company, JPMorgan Chase Bank, and HSBC Bank USA.




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                                 JURISDICTION AND VENUE

       46.     Pursuant to 28 U.S.C. § 1332, the Court has subject matter jurisdiction over this

action based upon diversity of citizenship among all plaintiffs and defendants and because the

amount in controversy exceeds $75,000.

       47.     Venue is proper in this Court pursuant to 28 U.S.C. § 1391(a) because this is a

civil action where jurisdiction is founded only on diversity of citizenship and this is a judicial

district in which a substantial part of the events or omissions giving rise to the claims occurred,

inasmuch as all of Prudential’s purchases of Certificates, and its decisions whether to purchase

the same, were made in this judicial district.

                                         BACKGROUND

       A.      The Mechanics of Mortgage Securitization

       48.     Mortgage pass-through securities, or certificates, represent interests in a pool of

mortgage loans. Although the structure and underlying collateral may vary by offering, the

basic principle of pass-through securities is that the cash flow from the pool of mortgages is

“passed through” to the certificateholders when payments are made by the underlying mortgage

borrowers.

       49.     The initial step in creating a mortgage pass-through security is the generation of

the loans by the initial originators. Loans are then pooled into groups by a “sponsor” or “seller.”

The sponsor is often an investment bank, like Defendants here. In order to ensure that Credit

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

Defendants and their affiliates 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.

       50.     After pooling the loans, the sponsor transfers them to the “depositor.” As here,

the depositor is typically a special-purpose affiliate of the sponsor, and exists solely to receive

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and 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. Here, the depositor defendants, Asset Backed

Securities Corporation and Credit Suisse First Boston Mortgage Securities Corp., are special-

purpose entities that are affiliates of the sponsors, established for the purpose of securitizing

mortgage assets and related activities.

       51.     Upon acquisition of the loans, the depositor transfers (or “deposits”) the acquired

loan pool to an “issuing trust.” The depositor then securitizes the loan pool 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

loans are generally applied in reverse order of seniority. As such, the most senior tranches of

pass-through securities receive the highest credit ratings. Junior tranches, being less insulated

from risk, typically obtain lower credit ratings.

       52.     Once the tranches are established, the issuing trust passes the certificates 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. Alternatively, the

underwriters sometimes make a “firm commitment” to purchase the securities, keeping any

proceeds they obtain by re-selling them to investors. Underwriters like Credit Suisse Securities

(USA) LLC typically collected substantial discounts, concessions, or commissions for serving as

an underwriter of an RMBS securitization.




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       53.     Because the cash flow from the underlying loans is the source of payments to

holders of the securities issued by the trust, the credit quality of the securities depends upon the

credit quality of the loans in the collateral pool. The most important information about the credit

quality of the loans is contained in the “loan files” that the mortgage originators develop while

assessing loan applications, and which securitizers review as part of their “due diligence” in

purchasing and securitizing the loans.

       54.     For residential mortgage loans, a loan file generally contains the borrower’s

application for the loan; documents relating to verification of the borrower’s 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 detailed notes of the underwriter setting forth the rationale for the making of

each loan.

       55.     Investors like Prudential were not given (and still do not have) access to these

loan files. Rather, investors must rely on representations Defendants made in the Offering

Materials about the quality and nature of the loans that form the security for their investments.

       56.     The collateral pool for each securitization usually includes thousands of loans.

The sponsor, depositor, and underwriter are 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.



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




       B.      Securitization of Mortgage Loans: The Traditional Model

       58.     Traditionally, loan originators financed their mortgage business through customer

deposits, retained ownership of the loans they originated, and directly received the mortgage

payment streams. When an originator held a mortgage through the term of the loan, it bore the

risk of loss if the borrower defaulted and if the value of the collateral was insufficient to repay

the loan. As a result, the originator had a strong economic incentive to verify the borrower’s

creditworthiness through prudent underwriting, and to obtain an accurate appraisal of the value

of the underlying property.

       59.     Mortgage loan securitization, however, shifted the traditional “originate to hold”

model to an “originate to distribute” model, in which originators sell residential mortgages and

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

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

trusts, which provide their securities to investors, the originators obtain the funds to make more

loans. Securitization also enables originators to earn most of their income from transaction and


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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, the “originate to

distribute” model gives originators an incentive to increase the number of mortgages they issue

regardless of credit quality. As Credit Suisse’s Head of Due Diligence described, as reported in

the New York Attorney General, “[A]s long as [the originator] can sell [the loan] and [the

borrower] makes [the] 1st 3 payments, it is ok.” However, contractual terms, adherence to solid

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

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

properties.

       60.     Most mortgage securitizations were traditionally conducted through the major

Government 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. These Agency securitizations had high credit

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

strict underwriting guidelines.

       61.     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 that period

generally made loans in accordance with their stated underwriting and appraisal standards and

provided accurate information about the loans, borrowers, and mortgaged properties to the Wall

Street banks that securitized the loans. Most non-Agency mortgage securitizations also had

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



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standards. In turn, the Wall Street banks generally provided accurate information about the loans,

borrowers, and properties to investors.

       C.      The Systemic Violation of Underwriting and Related Standards in the
               Mortgage Securitization Industry

       62.     Unbeknownst to investors, the game fundamentally changed in the early 2000s.

While both originators and Wall Street banks, through the 1990s, generally played by the rules

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

information to investors, this ceased to be the case in the following decade.

       63.     With historically low interest rates decreasing the profits of traditional lending

and securitization through Fannie Mae or Freddie Mac, Wall Street banks looked for new ways

to increase fees. Investment banks like Credit Suisse 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 higher fees than they would have paid on

conforming loans.

       64.     The shift towards non-traditional loans sparked a growing focus on the “originate

to distribute” model. Originators, underwriters, and others in the securitization chain were

incentivized to pump out as many loans as possible, as long as they could transfer the risk of

non-payment to investors. According to an April 2010 report by the Financial Crisis Inquiry

Commission (“FCIC”), loans that did not conform to Fannie Mae and Freddie Mac underwriting

guidelines grew from around $670 billion in 2004 to over $2 trillion in 2006. Originators and

securitizers, like Credit Suisse, were willing to abandon sound underwriting practices and to

misrepresent the loan collateral to ensure the securities’ marketability.

       65.     The history of this disastrous change in the market was investigated by the FCIC,

created by the Fraud Enforcement and Recovery Act of 2009, which “reviewed millions of pages


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of documents, interviewed more than 700 witnesses, and held 19 days of public hearings” that

resulted in a January 2011 report (the “FCIC Report”). The FCIC Report concluded that, as a

result of the practices of Defendants and other investment banks, “[t]rillions of dollars in risky

mortgages had become embedded throughout the financial system, as mortgage-related securities

were packed, repackaged, and sold to investors around the world.” (FCIC Report at xi, xvi.) As

the FCIC also 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.” (Id. at 125.)

       66.      The underwriters of the offerings and originators of the underlying mortgage

loans 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 securitization’s principal balance, and can amount to millions of

dollars in large transactions. From 2000 through 2008, Wall Street banks learned that they could

earn much more from arranging and selling RMBS than by selling mortgage loans to borrowers.

The securitization business was a gold mine for investment banks able to control significant

market share.

       67.      Underwriters of RMBS offerings like those at issue here typically would collect

between 0.2% to 1.5% in discounts, concessions, or commissions. These commissions would

have yielded Defendants millions of dollars in underwriting fees. By providing warehouse loans

and serving as a sponsor and depositor of the offerings, Defendants earned even more. The fees

Defendants were receiving for their promised underwriting, diligence, and oversight kept

Defendants in the business of acquiring mortgage loans from originators for securitization, even

while Defendants knew the loans did not comport with basic underwriting practices.



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        68.     Credit Suisse was a huge player in the RMBS market during its heyday. Credit

Suisse has reported that, from 2003 to 2005, it nearly doubled the value of residential mortgage

loans it securitized, from more than $27 billion to approximately $50 billion. Credit Suisse

RMBS securitization continued to explode thereafter. From January 2004 through late 2007,

Credit Suisse securitized (either itself or by selling mortgage loans to other sponsors)

approximately $128.5 billion in residential mortgage loans. As detailed herein, to accomplish

this tremendous volume growth, Credit Suisse abandoned sound underwriting practices and

knowingly securitized defective loans.

        69.     To accomplish this tremendous volume growth, Defendants misrepresented the

nature of the loans they securitized. Since the payment streams from borrowers ultimately fund

the return 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 Certificates’ market value has declined

substantially as the true risk profile of the underlying mortgage pool was revealed. Any

representation bearing on the riskiness of the underlying mortgage loans was thus highly material.

By misrepresenting the true risk profile of the underlying loan pools, Defendants defrauded

Prudential.

        70.     As more fully laid out below, Defendants: (i) knew of the systemic underwriting

failures of the Originators from which it acquired the Mortgage Loans; (ii) misrepresented the

Mortgage Loans’ adherence to standard underwriting practices; (iii) overstated how many of the

Mortgage Loans were owner-occupied (owner-occupied properties have lower risks); (iv)

understated the loan pools’ average LTV and CLTV ratios (suggesting the borrowers had more

of an equity “cushion” than they did); (v) fed garbage data to the credit rating agencies, which

resulted in ratings that did not accurately describe the true credit risk of the Certificates; (vi)



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failed to assign a substantial number of Mortgage Loans to the Trusts, contrary to representations

in the Offering Materials; and (vii) failed to inform Prudential and other investors 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 of these and

similar misrepresentations and omissions created an additional, hidden layer of risk well beyond

that known to be associated with an “adjustable rate mortgage” (“ARM”) or a “home equity loan”

(“HELOC”) in the abstract.

        D.       Credit Suisse Was a Vertically Integrated RMBS Operation Controlling
                 Every Aspect of the Securitization Process

        71.      Credit Suisse was a vertically integrated operation. Indeed, in most of the

Securitizations, Credit Suisse operated—and made huge profits—on multiple levels, acting as

originator, sponsor, depositor, and underwriter. Defendants’ vertical integration allowed them to

control the securitization machine, and provided them many direct windows into the lax practices

at issue here.

        72.      Credit Suisse’s Origination/Acquisition of Mortgage Loans. Certain of the

Mortgage Loans underlying the Certificates were originated by Defendant DLJ Mortgage Capital.

Many of the remaining Mortgage Loans were originated by mortgage lenders that received

substantial lines of credit from Credit Suisse (the so-called “warehouse lender”) to finance the

loan origination. Credit Suisse’s “warehouse lenders” included some of the entities now most

notorious for originating defective loans. For example, Credit Suisse had a $900 million

warehouse lending relationship with New Century Mortgage Corporation (“New Century”),

which originated Mortgage Loans underlying five of the Securitizations.

        73.      The “warehouse” loan that Credit Suisse provided to these originators was the

source of the money loaned to ultimate borrowers. These warehouse loans gave Credit Suisse


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the inside track on acquiring the mortgage loans generated using Credit Suisse’s funds. Before

providing warehouse funding, Credit Suisse became intimately familiar with the lending

practices of the mortgage lenders through extensive due diligence of their business operations.

       74.     Warehouse loans allowed Credit Suisse to control the origination practices of

third-party lenders and gave Credit Suisse an inside look into the true quality of the loans which

were originated. In exchange for extending the warehouse line of credit, Credit Suisse received

monthly and quarterly non-public information about the loan originators’ compliance with the

covenants of the credit agreement. Credit Suisse conducted due diligence and reviewed material,

non-public information about the originators’ loan origination practices, underwriting guidelines

and practices, appraisal standards and practices, loan performance, loan quality, reserve

methodologies, and financial performance. As a result of its close relationships with loan

originators, Credit Suisse knew in granular detail their origination practices, underwriting

guidelines, and the quality of the originated loans. As one publication explained, warehouse

lenders have “detailed knowledge of the lender’s operations.” (Kevin Connor, Wall Street and

the Making of the Subprime Disaster, November 2007, at 11.)

       75.     The process of implementing the warehouse loan also provided Credit Suisse with

detailed information about the loans and gave it the right to access loan files and other detailed

information about the underwriting process for the loans in question. Credit Suisse performed

diligence on the loans purportedly to ensure they conformed to the applicable underwriting

guidelines. Thus, Defendants were aware when they pooled the mortgage loans that, contrary to

their representations, the loans were widely defective.

       76.     DLJ Mortgage Capital’s Role as Sponsor/Seller. In addition to originating or

acquiring many of the Mortgage Loans directly, Defendant DLJ Mortgage Capital acted as the



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sponsor or seller (or both) for many of the securitizations at issue. DLJ Mortgage Capital thus

determined the structure of the securitizations, initiated them, originated and purchased the

mortgage loans to be securitized, determined distribution of principal and interest, and provided

data to the credit rating agencies to secure investment grade ratings for the Certificates.

       77.     For all of the Securitizations in which it acted as sponsor, DLJ Mortgage Capital

selected one of the two depositor defendants—Credit Suisse First Boston Mortgage Securities

Corp. or Asset Backed Securities Corporation—as the special purpose vehicle that would be used

to transfer the Mortgage Loans from DLJ Mortgage Capital to the relevant Trusts. For the

Securitizations in which it acted as sponsor, DLJ Mortgage Capital also selected Credit Suisse

Securities (USA) LLC as underwriter. In its role as sponsor, DLJ Mortgage Capital knew and

intended that the Mortgage Loans it purchased would be sold in connection with the

securitization process and that the Certificates representing such Mortgage Loans would be

issued by the relevant Trusts.

       78.     Credit Suisse First Boston Mortgage Securities Corp. and Asset Backed

Securities Corporation’s Roles as Depositor. Defendants Credit Suisse First Boston Mortgage

Securities Corp. and Asset Backed Securities Corporation were the depositors for all of the

Securitizations at issue. Each was a special purpose entity formed solely for the purpose of

purchasing Mortgage Loans, filing registration statements with the SEC, forming the Trusts,

assigning Mortgage Loans and all rights and interests therein to the trustee for the benefit of the

certificateholders, and depositing the underlying Mortgage Loans into the Trusts.

       79.     Each depositor purchased Mortgage Loans from DLJ Mortgage Capital (as

sponsor and/or seller) pursuant to a Pooling and Servicing Agreement (“PSA”) and then sold,

transferred, or otherwise conveyed the Mortgage Loans to a Trust for securitization. The



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depositors, along with the other Defendants, were also responsible for preparing and filing the

Registration Statements pursuant to which the Certificates were offered for sale. The Trusts, in

turn, held the Mortgage Loans for the certificateholders’ benefit, and issued the Certificates in

public offerings for sale to investors such as Prudential.

       80.     Credit Suisse Securities (USA) LLC’s Role as Underwriter. Credit Suisse

Securities (USA) LLC is an investment bank, and was, at all relevant times, a registered

broker/dealer and one of the leading underwriters of mortgage and other asset-backed securities

in the United States. Credit Suisse Securities (USA) LLC (or its predecessor Credit Suisse First

Boston LLC) was the sole underwriter in many of the Securitizations, and at least a co-

underwriter in all of the Securitizations.

       81.     Credit Suisse and the Originators used two methods to securitize mortgages for

sale to investors. The originators would either (i) sell the loans to an investment bank like Credit

Suisse, which would act as the sponsor and/or depositor and transfer the loans into a trust that

would issue securities backed by the loans (“principal securitization”), or (ii) directly deposit the

loans into a trust of its own creation that would issue securities backed by the loans, with an

investment bank like Credit Suisse acting as underwriter (“originator securitization”). Twenty

one of the Offerings at issue were securitized through principal securitization, and the remainder

were securitized through originator securitization. Even in originator securitizations, the

investment bank is the key drafter of the offering materials and typically has final authority over

many sections of the offering materials. The investment bank underwriter serves an essential

role as a “buffer” between the originators and public investors.

       82.     In both types of securitization, Credit Suisse Securities (USA) LLC, as

underwriter, was responsible for underwriting and managing the sale of the Certificates to



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Prudential and other investors, including screening the Mortgage Loans for compliance with

stated underwriting guidelines. Credit Suisse Securities (USA) LLC: (i) worked with the

depositor and sponsor affiliates to structure the transactions; (ii) took the lead in coordinating the

flow of documents and information among the rating agencies and parties to the transactions;

(iii) purchased the mortgage-backed securities issued in the transactions on a firm commitment

basis pursuant to written agreements with the depositor(s); and (iv) offered and sold certificates

to investors, such as Prudential. Credit Suisse Securities (USA) LLC also made decisions on the

volume of the securitizations to effectuate, and their executives made decisions regarding the due

diligence, quality control, and repurchase protocols to be followed by their other affiliates.

        83.       For some of the securitizations at issue in this Complaint, Credit Suisse acted as

the securitization’s underwriter but not the sponsor or depositor. In its role as underwriter,

Credit Suisse Securities (USA) LLC worked with the sponsors and depositors to issue RMBS,

and it was involved in every aspect of mortgage securitization and had access to a wealth of

information. Credit Suisse Securities (USA) LLC either knew that the representations it was

making to Prudential were patently untrue, or it conducted due diligence so recklessly in light of

obvious red flags that it failed to detect the falsity in its representations.

        84.       The United States Senate Permanent Subcommittee on Investigations (“SPSI”), in

its April 2011 report, “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse”

(the “SPSI Report”), explained the active role played by underwriters, and their obligations to

tell the truth:

        When securities are offered to the public for sale, they are typically underwritten
        by one or more investment banks, each of which is a broker-dealer registered with
        the Financial Industry Regulatory Authority (FINRA). An underwriter is
        typically hired by the issuer of the new securities to help the issuer register the
        securities with the SEC and conduct a public offering of the securities. The
        underwriter typically purchases the securities from the issuer, holds them on its

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       books, conducts the public offering, and bears the financial risk until the securities
       are sold to the public.

       85.     The SPSI report concludes that underwriters “have greater disclosure obligations

than [mere brokers], because in this role they are actively soliciting customers to buy new

securities they have helped an issuer bring to market.” The report explains the underwriters’

important role in conveying information to investors such as Prudential:

       Whether acting as an underwriter or placement agent, a major part of the
       investment bank’s responsibility is to solicit customers to buy the new securities
       being offered. Under the securities laws, an issuer selling new securities to
       potential investors has an affirmative duty to disclose material information that a
       reasonable investor would want to know. In addition, under securities law, a
       broker-dealer acting as an underwriter or placement agent is liable for any
       material misrepresentation or omission of material fact made in connection with a
       solicitation or sale of securities to an investor.

       86.     The FCIC report underscores Credit Suisse Securities (USA) LLC’s responsibility

to make accurate disclosures to investors such as Prudential:

       Unlike when a broker-dealer is acting as a market maker, a broker-dealer acting as
       an underwriter or placement agent has an obligation to disclose material
       information to every investor it solicits . . . . This duty arises from two sources:
       the duties of an underwriter specifically, and the duties of a broker-dealer
       generally, when making an investment recommendation to a customer.

       87.     As noted in the report, the First Circuit has observed that “[T]he relationship

between the underwriter and its customer implicitly involves a favorable recommendation of the

issued security . . . . Although the underwriter cannot be a guarantor of the soundness of any

issue, he may not give it his implied stamp of approval without having a reasonable basis for

concluding that the issue is sound.” SEC v. Tambone, 550 F.3d 106, 135 (1st Cir. 2008)

[citations omitted].

       88.     The FCIC report notes that with respect to a broker-dealer, the SEC has held:

“[W]hen a securities dealer recommends a stock to a customer, it is not only obligated to avoid



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affirmative misstatements, but also must disclose material adverse facts to which it is aware.

That includes disclosure of ‘adverse interests’ such as ‘economic self interest’ that could have

influenced its recommendation.” In the Matter of Richmark Cap. Corp., Securities Exchange

Act Rel. No. 48757 (Nov. 7, 2003) (citing Chasins v. Smith Barney & Co., Inc., 438 F.3d 1167,

1172 (2d Cir. 1970)). The SEC has also stated that, if a broker intends to sell a security from its

own inventory and recommends it to a customer, “the broker dealer must disclose all material

facts.” SEC Study on Investment Advisers and Broker-Dealers at 56 n.252.

       89.     Significance of Credit Suisse’s Vertical Integration. The Defendants, in their

relevant securitizations, exercised complete control over virtually every step of the securitization

process. This provided them with unique and intimate knowledge of the quality of the individual

mortgage loans underlying the pertinent Certificates, as well as the quality of the loan pools

supporting each Offering at issue.

       90.     Consistent with their representations and with industry practice, in their multiple

roles, Defendants were responsible for gathering, verifying, and presenting to Prudential accurate

and complete information about the credit quality and characteristics of the Mortgage Loans

deposited into the Trusts. To this end, Defendants ran purported due diligence or “fulfillment”

centers. One such center located in Chicago was internally owned and operated. Lydian Data

Services (“Lydian”), a third-party due diligence firm, ran another due diligence center for

Defendants in Boca Raton, Florida. Defendants also contracted with other third-party due

diligence firms, such as Clayton Holdings, Inc. (“Clayton”).

       91.     Credit Suisse Confidential Witness 1 (“CSCW1”), a Vice President Regional

Correspondent Account Executive at Credit Suisse from June 2005 to May 2006, who was

interviewed by Prudential’s counsel, confirmed that, before purchasing loans for securitizations,



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Credit Suisse received loan “tapes” that contained data on every loan in the loan pool for review

and assessment.

       92.     Credit Suisse Confidential Witness 2 (“CSCW2”), a former Managing Director of

DLJ and Credit Suisse from 2000 to 2004, who was interviewed by Prudential’s counsel,

explained that Credit Suisse dictated underwriting guidelines to originators for loans funded by

the warehouse lines of credit. Former employees of other third-party originators who originated

Mortgage Loans underlying the Certificates have confirmed that Credit Suisse and other

investment banks dictated the underwriting guidelines for the loans they purchased and

securitized.

       93.     Warehouse lenders sold the loans to Defendants shortly after origination in order

to repay to Defendants their lines of credit. Because of its financial arrangements with

warehouse lenders, Credit Suisse was essentially committed to buying the loans that secured its

warehouse lines regardless of their quality. Indeed, it was imperative to Credit Suisse that it

purchase loans from its warehouse lenders with little or no objection so as to keep the lenders

supplied with capital to pay fees and interest owed on the lines of credit. It was also important to

Credit Suisse that it protect its business relationships with warehouse lenders in order to ensure a

steady flow of loans for securitization. Credit Suisse was incentivized to allow defective

mortgages to remain in securitization pools because (i) mortgage originators would not maintain

a relationship with a bank that consistently kicked out large numbers of loans, and (ii) the pool

became smaller if loans were excluded, thus decreasing the underwriting and other fees.

       94.     As Credit Suisse became increasingly reliant upon the profits it collected from

RMBS offerings, the due diligence it performed on the loans purchased from its warehouse

lenders became increasingly cursory. Credit Suisse had little concern about the loans being



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defective because it was not keeping the loans on its balance sheet, but was instead securitizing

them and thus unloading them on investors like Prudential. Credit Suisse’s primary concern was

purchasing and securitizing as many loans as possible, regardless of merit, to boost its profits.

Even as Credit Suisse became affirmatively aware that it and its warehouse lenders were

flagrantly disregarding underwriting guidelines, and even originating fraudulent loans, it

continued to acquire these loans, while misrepresenting to investors that the loans complied with

specified underwriting guidelines.

                               SUBSTANTIVE ALLEGATIONS

I.     DEFENDANTS’ FALSE STATEMENTS OF MATERIAL FACT AND
       MATERIAL OMISSIONS

       95.     Below is just a sample of the misrepresentations Defendants made. The Offering

Materials all contain substantially similar, or identical, statements of material fact. Additional

example misrepresentations for each Certificate are detailed in the Exhibits. In addition to the

affirmative misrepresentations discussed herein, Defendants’ Offering Materials were replete

with fraudulent omissions relating to the same topics. For instance, it is misleading to provide

statistical information about the loan pool without simultaneously disclosing that there had been

a systemic abandonment of the underwriting standards, that loans were knowingly given based

on falsified information, and that the statistical descriptors themselves were baseless.

       A.      Defendants’ Misrepresentations Regarding Compliance with Stated
               Underwriting Guidelines

       96.     Prudential’s decision to invest in the Certificates was based, in substantial part, on

Credit Suisse’s role as a principal or underwriter, or both, in the securitization process. In most

of the Offerings at issue, Credit Suisse acted as the sponsor, depositor and underwriter, and

purchased Mortgage Loans from other loan originators. Credit Suisse then securitized those

Mortgage Loans into the Certificates purchased by Prudential. For these Securitizations, Credit

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Suisse represented to Prudential that it had conducted due diligence on the mortgage originators

and their loan underwriting guidelines before purchasing the Mortgage Loans for securitization.

       97.     For the Securitizations where Credit Suisse acted only as underwriter, Credit

Suisse similarly conducted due diligence on the Mortgage Loans that the sponsor and depositor

securitized. In both scenarios, Credit Suisse assured Prudential that: (i) the loans backing its

Certificates conformed to the stated underwriting standards employed by those Originators; (ii)

the appraisal values and other characteristics of the underlying Mortgages Loans were valid,

accurate, and not inflated; (iii) the Certificates were deserving of the triple-A and otherwise

investment credit grade ratings they had been assigned; and (iv) the quality of the RMBS as

represented in the Offering Materials matched Credit Suisse’s reputation as an issuer or

underwriter or both.

       98.     For all of the Securitizations at issue in this Complaint, defendant Credit Suisse

Securities (USA) LLC, as underwriter, had access to material, non-public information about: (i)

the loan selection and securitization practices of the sponsors; (ii) the origination and

underwriting practices of the loan originators; and (iii) the quality of the loan pools, including

credit and compliance due diligence results, detailed borrower information, and the underlying

loan files. With this unique and special knowledge, Credit Suisse reviewed the draft Offering

Materials for each of the Certificates at issue before the Offering Materials were distributed to

Prudential. The Offering Materials, relied on by Prudential, did not reflect what Credit Suisse

knew regarding the true characteristics of Prudential’s investments.

       99.     The underwriting process used to originate the pools of Mortgage Loans

underlying the Certificates was a critical factor in Prudential’s investment decision. The

underwriting process is designed to ensure loan quality; loan quality in turn determines the risk



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of the certificates backed by those loans. If the stated guidelines are not actually followed, then

the underlying loans will be of lesser quality than represented, increasing the probability of

defaults by borrowers and shortfalls in principal and interest payments to investors.

       100.    Defendants’ representations regarding their own and the Originators’

underwriting practices were false and misleading. The Mortgage Loans underlying Prudential’s

Certificates did not, in fact, comply with the underwriting standards described in the Offering

Materials, because those standards were systematically abandoned. Loans were offered with

virtually no regard for borrowers’ actual repayment ability or for the value and adequacy of

mortgaged property that was used as collateral. This is confirmed by Prudential’s loan-level

analysis of the specific Mortgage Loans at issue here, the collateral pools’ dismal performance,

and other facts set forth below.

               (1)     Defendants’ Misrepresentations Regarding Underwriting Standards

       101.    The Offering Materials associated with each of Prudential’s Certificates purport to

describe underwriting standards and guidelines employed by the lenders or underwriters to

evaluate the Mortgage Loans. The Offering Materials represented that the underwriting

standards are “applied by or on behalf of a lender to evaluate the borrower’s credit standing and

repayment ability, and the value and adequacy of the related Property as collateral.” (AABST

2004-4 Prospectus filed on August 31, 2004, at 24.) The Offering Materials also described how

the underwriting programs would operate to reach these goals. For example, the Offering

Materials for AABST 2004-4 stated:

       Once all applicable employment, credit and Property information is received, a
       determination is made as to whether the prospective borrower has sufficient
       monthly income available to meet their monthly obligations on the proposed
       mortgage loan and other expenses related to the home, including property taxes
       and hazard insurance, and their other financial obligations and monthly living
       expenses.


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(Id. at 23.)

          102.   The Offering Materials for each Offering confirm that the Mortgage Loans would

be generated in accordance with the described set of underwriting guidelines. This

representation was important to investors like Prudential, because it reflected Defendants’ own

verification of the loan-origination practices, which investors were not in a position to assess.

          103.   For example, as noted above, DLJ Mortgage Capital acquired a significant

number of Mortgage Loans underlying the Certificates from third-party Originators with whom

DLJ Mortgage Capital had a close relationship. Defendants represented that these third-party

Originators were institutions experienced in originating loans and satisfied other lending

institution criteria. The Offering Materials for ABSHE 2004-HE1, for example, state:

          each Unaffiliated Seller must be an institution experienced in originating
          conventional mortgage loans and/or FHA Loans or VA Loans in accordance with
          accepted practices and prudent guidelines, and must maintain satisfactory
          facilities to originate those loans. In addition, except as otherwise specified, the
          Depositor requires adequate financial stability and adequate servicing experience,
          where appropriate, as well as satisfaction of other criteria.

(ABSHE 2004-HE1 Prospectus Supplement dated December 22, 2003, at S-15.)

          104.   In turn, the Offering Materials purport to describe, often at length, the specific

underwriting guidelines that were supposedly employed. The Prospectus for ABSHE 2004-HE3

states:

          The Option One Guidelines require that mortgage loans be underwritten in a
          standardized procedure which complies with applicable federal and state laws and
          regulations and requires Option One’s underwriters to be satisfied that the value
          of the property being financed, as indicated by an appraisal and a review of the
          appraisal, currently supports the outstanding loan balance.

(ABSHE 2004-HE3 Prospectus Supplement filed June 1, 2004, at S-66.)

          105.   Then, after representing that Defendants had (i) investigated and were aware of

the practices of the loan originators, and (ii) verified that the specific loans in the loan pools were,


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in fact, originated in accordance with the designated underwriting guidelines, Defendants further

represented that any “exceptions” to those underwriting standards were made only on a case-by-

case basis only when the borrower was able to demonstrate the existence of “compensating

factors” that increased the quality of the loan application. (Id. at S-63)

       106.    As set forth below, Defendants’ representations regarding its own and the

Originators’ underwriting practices were false and misleading. The Mortgage Loans underlying

Prudential’s Certificates did not, in fact, comply with the underwriting standards described by

the Offering Materials. In truth, loans were offered with virtually no regard for borrowers’

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

collateral. This is confirmed by Prudential’s loan-level analysis of the specific Mortgage Loans

at issue here, information regarding Defendants’ knowledge of loan defects and “waiver” of

defective loans into the pools, the collateral pool’s dismal performance, independent forensic

reviews of thousands of Defendants’ loan files by their own insurers and other entities, internal

e-mails and documents reflecting Defendants’ discovery of borrower misrepresentations and

underwriting defects, and other facts set forth more fully herein.

               (2)     Defendants’ Omissions Regarding Due Diligence Results

       107.    Defendants’ representations were understood reasonably by Prudential to mean

that Defendants had taken appropriate measures to ensure that non-compliant loans would not be

included in the mortgage pools. Just the opposite was true.

       108.    Defendants concealed that: (i) they were manipulating their review processes not

to ensure quality, but to gain market share through increased volume, whether or not the

Mortgage Loans met underwriting standards; (ii) Defendants were informed by their quality

review process that a substantial percentage of Mortgage Loans were defective, but Defendants

“waived” the defects on a substantial percentage of these loans and allowed them to be
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securitized anyways; (iii) rather than excluding defective Mortgage Loans, Defendants kept these

loans in the Securitizations but used the knowledge to force a lower sales price, leaving

themselves a larger profit margin; and (iv) Defendants improperly failed to adjust their review

practices when their due diligence identified a high number of non-conforming Mortgage Loans

being issued by Originators.

       109.    That Defendants were not performing their represented due diligence

responsibilities and instead were knowingly including loans flagged as being defective has been

confirmed by the recent release of documents from the Defendants’ third-party underwriter,

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

       B.      Defendants’ Misrepresentations Regarding Owner-Occupancy Rates

       110.    Homeowners who reside in mortgaged properties pose less risk of default than

owners of investment properties or vacation homes. Therefore, owner-occupancy statistics were

material to Prudential because high owner-occupancy rates would make the Certificates safer

investments than those backed by second homes or investment properties.

       111.    The Offering Materials for each Securitization contain detailed statistics regarding

the owner-occupancy characteristics of the Mortgage Loans in the collateral pools. For example,

the Offering Materials for ABSHE 2005-HE6 claimed that, of the 8,176 Mortgage Loans

backing Prudential’s Certificates, 7,505 (or 91.79%) were secured by owner-occupied properties.

Likewise, the Offering Materials for HEAT 2004-8 represented that 5,092 out of the 5,609 loans

(or 90.78%) were secured by the borrower’s primary residence.

       112.    As set forth below, Prudential now knows (although it did not know, and could

not have known, at the time of purchase) that these representations were false and misleading. In

truth, a much lower percentage of the loans were owner-occupied. Occupancy was

misrepresented first to get the borrower approved for the loan, and then misrepresented to
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investors to sell the Certificates. Relatedly, Credit Suisse failed to disclose that the owner-

occupied statistics provided in the Offering Materials were inaccurate because of rampant

borrower and lender misrepresentation and that, in fact, a much lower percentage of the loans

were owner-occupied. It also failed to disclose that there was a substantial risk of borrowers

misrepresenting their residency for the Mortgage Loans Credit Suisse securitized. The falsity of

the Offering Materials’ representations is confirmed by Prudential’s loan-level analysis of the

specific Mortgage Loans at issue here and other facts set forth below. Forensic reviews of Credit

Suisse loan files by entities that (unlike Prudential) have access to such files also show that

Credit Suisse’s misrepresentations about owner-occupancy rates were egregious and pervasive.

       C.      Defendants’ Misrepresentations Regarding the Appraisal Process

       113.    Defendants represented that the properties being mortgaged would be subject to

particular appraisal practices. Such representations are material, because the reliability of the

process used to value the property bears directly on the reliability of the valuation itself.

       114.    For example, the Offering Materials for many of the Offerings represented that

the appraisal would conform to Uniform Standards of Professional Appraisal Practice and went

on to represent, for example, that appraisals would “[be] based upon a market data analysis of

recent sales of comparable properties and, when deemed applicable, an analysis based on income

generated from the property or a replacement cost analysis based on the current cost of

constructing or purchasing a similar property.” (HEAT 2004-2 Prospectus Supplement at S-38.)

       115.    Similarly, the Prospectus for ABSHE 2004-HE3 represented:

       The appraisal generally will be made by an appraiser who meets FNMA [Fannie
       Mae] requirements as an appraiser of one- to four-family residential properties.
       The appraiser is required to inspect the property and verify that it is in good
       condition and that, if new, construction has been completed. The appraisal
       generally will be based on the appraiser’s judgment of value, giving appropriate
       weight to both the market value of comparable homes and the cost of replacing
       the residence.
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(ABSHE 2004-HE3 Prospectus at 14.)

       116.     Defendants knew that the appraisals underlying the Mortgage Loans did not

follow the processes disclosed in the Offering Materials, which were therefore false and

misleading. Instead, the appraisals were designed merely to generate a value high enough to

justify loan approval. Credit Suisse failed to disclose that it knew the appraisal process was

being actively manipulated so that the Originators could keep churning out loans to borrowers

who could not afford them and that the reported appraisal values did not, in fact, reasonably

reflect the value of the mortgaged properties. This is confirmed by a loan-level analysis of the

specific Mortgage Loans at issue here, and other facts set forth below.

       D.      Defendants’ Misrepresentations Regarding LTV Ratios and CLTV Ratios

       117.    An LTV ratio is the ratio of the original principal balance of the mortgage loan to

the appraised value of the mortgaged property. The related CLTV ratio takes into account other

liens on the property (such as “second” mortgages and home equity loans). These ratios were

material to Prudential 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 a foreclosure will result in a loss for the

lender if the borrower fully leverages the property. Analysts and investors commonly use these

metrics to evaluate the price and risk of RMBS.

       118.    The Offering Materials contain detailed statistics regarding these ratios for the

Mortgage Loans in the collateral pool. For example, the Offering Materials for AABST 2004-4

represented that the weighted-average LTV ratio at origination of the aggregate loan pool

backing Prudential’s Certificates was 77.57%.

       119.    Similarly, the Offering Materials for all of the Certificates purchased by

Prudential represented that no loans had an LTV ratio greater than 100% (i.e., “underwater”
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loans). Loans with over 100% LTV afford the lender no equity cushion and leave the lender

with inadequate collateral from the outset of the loan. Credit Suisse’s representation that none of

the Mortgage Loans underlying the Certificates were underwater was false and misleading. In

truth, for each of the Securitizations, a large number of Mortgage Loans were underwater. For

instance, in the ABSHE 2005-HE6 Securitization, over 20% of the loans in the collateral pool

were in fact underwater.

        120.      Defendants, as well as the Originators and appraisers, knew that the appraisals

being used were inflated. They thus also knew the LTV and CLTV ratio statistics—derived from

and dependent on the (baseless) appraisal values—were false and misleading because they did

not reasonably relate to the true value of the underlying properties. The CLTV ratios also

omitted the effect of additional liens on the underlying properties, rendering them even further

from the truth.

        121.      Similarly, Credit Suisse failed to disclose that the reported LTV and CLTV ratios

in the Offering Materials were unreliable indicators of credit quality. That the LTV and CLTV

statistics were false and misleading—and that Credit Suisse failed to disclose that they were

inaccurate—is confirmed by a loan-level analysis of the specific Mortgage Loans at issue here.

The falsity is also shown by forensic re-underwriting performed by Defendants’ insurers and

other entities with access to Defendants’ loan files, by information about widespread appraisal

fraud by Credit Suisse’s Originators, and other facts set forth herein.

        E.        Defendants’ Misrepresentations Regarding Assignment to the Trusts

        122.      A fundamental step in the mortgage securitization process is the transfer of title to

the mortgage loans that collateralize each securitization. Title is transferred from the loan

originator, to the depositor, and then to the issuing trust for the securitization. This transfer is

necessary for the trust to be entitled to enforce the mortgage loans if a borrower defaults. Each
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of these transfers must be valid under applicable state law in order for the trust to have good title

to the mortgage loans.

       123.    Two documents relating to each mortgage loan must be validly transferred to the

trust as part of the securitization process—a promissory note and a security instrument (either a

mortgage or a deed of trust). Generally, state laws and PSAs, which are contracts that govern the

administration of RMBS trusts, require the promissory note and security instrument to be

transferred by endorsement, in the same way that a check can be transferred by endorsement, or

by sale. In addition, state laws generally require that the trustee have physical possession of the

original, manually signed note in order for the loan to be enforceable by the trustee against the

borrower in case of default.

       124.    Defendants represented that they would properly transfer title to the Mortgage

Loans to each Trust. For example, in the Offering Materials for ABSHE 2005-HE1, Defendants

represented that “[o]n the Closing Date, the Depositor will transfer to the Trust all of its right,

title and interest in and to each Mortgage Loan, the related mortgage note, mortgage, assignment

of mortgage in recordable form to the Trustee and other related documents (collectively, the

“Mortgage Loan Documents”), including all scheduled payments with respect to each such

Mortgage Loan due after the Cut-off Date.” (ABSHE 2005-HE1 Prospectus Supplement at S-

118.) The corresponding PSA likewise provided that:

       The Depositor, as of the date of this Agreement, does hereby establish the Trust, and,
       concurrently with the delivery of this Agreement, does hereby transfer, assign, set over
       and otherwise convey to the Trustee without recourse for the benefit of the
       Certificateholders all the right, title and interest of the Depositor, including any security
       interest therein for the benefit of the Depositor, in and to the Mortgage Loans identified
       on the Mortgage Loan Schedule, the rights of the Depositor under the Assignment and
       Assumption Agreement, each Mortgage Loan Purchase Agreement and each
       Reconstitution Agreement, and all other assets included or to be included in the Trust
       Fund.



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 (ABSHE 2005-HE1 PSA § 2.01.)

       125.    Defendants made detailed representations about the documents that would be

transferred to the trustees in connection with the transfer and assignment of the Mortgage Loans.

For example, in the HEAT 2004-6 Offering Materials, Defendants stated:

       In addition, in most cases the depositor will, as to each mortgage loan that is not a
       Cooperative Loan, deliver or cause to be delivered to the trustee, or to the
       custodian hereinafter referred to, the Mortgage Note endorsed to the order of the
       trustee or in blank, the mortgage with evidence of recording indicated thereon
       and, except in the case of a mortgage registered with MERS, an assignment of the
       mortgage in recordable form.

(HEAT 2004-6 Prospectus at 26.)

       126.    PSAs generally require the transfers of mortgage loans to the trust to be

completed within a strict time limit after formation of the trust in order to ensure that the trust is

properly formed. For example, the PSA for ABSHE 2004-HE3 represented that Defendants

would deliver the Mortgage Loans to the trustee “concurrently with the execution and delivery”

of the PSA. (ABSHE 2004-HE3 PSA § 2.01.)

       127.    Applicable state trust law generally requires strict compliance with the trust

documents, including the PSA, and failure to comply strictly with the timeliness, endorsement,

physical delivery and other requirements of the PSA with respect to the transfers of notes and

mortgages results in void transfers and lack of good title.

       128.    In the Offering Materials, Defendants also represented that each Mortgage Loan

represented a valid lien such that the Trust could foreclose upon the mortgage in the event of a

borrower’s default. For example, the Offering Materials for HEAT 2005-3 represented that

“each mortgage constituted a valid first lien, or, if applicable, a more junior lien, on the

mortgaged property.” (HEAT 2005-3 Prospectus at 12.)




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       129.    The Offering Materials noted that, in some cases, “assignments of mortgages for

any trust asset in the related trust will be registered electronically through Mortgage Electronic

Registration Systems, Inc., or ‘MERS ‘r’ System,’ rather than being assigned directly to the

trustee. (HEAT 2005-3 Prospectus at 26.) Nonetheless, Defendants assured investors that the

transfer of mortgages through the MERS system was sufficient to ensure that the Mortgage

Loans could be foreclosed upon in the event of a borrower’s default. For example, the Offering

Materials state that “for trust assets registered through the MERS ‘r’ System, MERS ‘r’ shall

serve as mortgagee of record solely as a nominee in an administrative capacity on behalf of the

trustee and shall not have any interest in any of those trust assets.” (Id.)

       130.    Defendants knew that the assignments of title of the underlying Mortgage Loans

did not follow the process disclosed in the Offering Materials. Many of the titles were never

assigned to either the Trusts or to MERS—and many of those that have been nominally so

assigned are defective, as the title chain is missing key intervening assignments. Because the

ownership of title is a fundamental part of the securitization process, this was a material omission.

But it also rendered affirmatively false many of Defendants’ representations above. For instance,

the assignments were often incomplete and did not result in the Trusts possessing “right, title and

interest . . . to the Mortgage Loans .” (ABSHE 2004-HE3 PSA § 2.01.) This is confirmed by a

loan-level analysis of the specific Mortgage Loans at issue here, as set forth below.

       F.      Defendants’ Misrepresentations Regarding Credit Ratings

       131.    Credit ratings are assigned to RMBS tranches by the credit rating agencies. Each

credit rating agency uses its own scale with letter designations to designate various levels of risk.

In general, AAA ratings (or Aaa rating from Fitch) are at the top of the credit rating scale and are

intended to designate the safest investments.



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       132.    Credit ratings have been one tool among many for investors, including Prudential,

to gauge risk. Almost every RMBS transaction requires, as a condition to issuance, that the

securitizations be rated in one of the four highest rating categories. Credit ratings were material

to Prudential because (i) they were necessary for its regulatory reserve requirements and (ii) they

provided greater comfort that Prudential would receive the expected interest and principal

payments.

       133.    Most of Prudential’s Certificates initially received the highest possible ratings—

S&P’s AAA rating or its equivalent from the other rating agencies. According to S&P’s website,

“An obligation rated ‘AAA’ has the highest rating assigned by Standard & Poor’s. The obligor’s

capacity to meet its financial commitment on the obligation is extremely strong.” Moody’s

similarly describes its highest rating, Aaa, as meaning that the investment is “judged to be of the

highest quality, with minimal credit risk.”

       134.    The Offering Materials represented that rating agencies supplied these ratings

based upon an assessment of the likelihood of delinquencies and defaults in the underlying

mortgage pools. For example, the HEAT 2005-5 Offering Materials represented:

       A securities rating addresses the likelihood of the receipt by a certificateholder of
       distributions on the mortgage loans. The rating takes into consideration the
       characteristics of the mortgage loans and the structural, legal and tax aspects associated
       with the certificates.

(HEAT 2005-5 Prospectus Supplement at S-99).

       135.    Each Certificate did in fact receive a rating, which is set forth further below.

These representations were false and misleading, and Defendants knew it. Defendants fed the

rating agencies the same false data regarding underwriting guidelines, debt-to-income ratios

(“DTI”), LTV ratios, owner-occupancy status, and home values that they provided in the

Offering Materials. The rating agencies then input this false data into their models to determine


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the ratings on the Securitizations. As a result, Defendants pre-determined the ratings by feeding

bad data into the ratings system. This not only rendered false and misleading Defendants’

representations that the ratings process would address the credit risk of these Certificates, but

also assured that the ratings themselves in no way reflected the actual risk underlying the

Certificates. Defendants knew the ratings did not reasonably relate to the Certificates delivered

to Prudential, and fraudulently omitted that the ratings process was being rigged with false data.

       136.     Similarly, Credit Suisse failed to disclose in the Offering Materials that it

regularly pressured rating agencies to provide the requisite credit ratings for its securitizations,

including by threatening to take its business to another rating agency if the “right” rating was not

awarded. It also failed to disclose in the Offering Materials that it knowingly provided the rating

agencies with inaccurate data upon which the ratings were based, such as inaccurate LTV, CLTV,

and owner-occupancy statistics.

II.    EVIDENCE THAT DEFENDANTS’ REPRESENTATIONS WERE FALSE AND
       MISLEADING

       A.      An Analysis of the Mortgage Loans and Certificates Directly at Issue

               (1)     A forensic analysis of the mortgaged properties’ true occupancy
                       status revealed a systematic misrepresentation problem

       137.    Although Prudential still does not have access to the loan files for the Mortgage

Loans, Prudential was recently able to test Defendants’ representations regarding the Certificates.

Using methodologies that were previously unavailable, Prudential examined 18,400 of the

underlying Mortgage Loans.

       138.    For each of the twenty-three Offerings that it tested, Prudential attempted to

analyze 400 defaulted loans and 400 randomly sampled loans. This sample size is more than

sufficient to provide statistically significant data to demonstrate the degree of Defendants’

misrepresentations.

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       139.    Statistical sampling is an accepted method of establishing reliable conclusions

about broader data sets, and is routinely used by courts, government agencies, scholars, and

private businesses. As the size of a sample increases, the reliability of its estimations of the total

population’s characteristics increases as well. Experts in RMBS cases have found a sample size

of just 400 loans can provide statistically significant data, regardless of the size of the actual loan

pool, because it is unlikely so large a sample would yield results vastly different from results for

the entire population.

       140.    Prudential’s loan-level analysis of the Mortgage Loans at issue here shows the

owner-occupancy statistics Defendants provided to investors were false. Across all twenty-three

Offerings that Prudential tested, Defendants significantly overstated the number of owner-

occupied properties, thus understating the true riskiness of the loans.

       141.    To determine whether a borrower actually occupied the property as claimed,

Prudential investigated tax information for the sampled Mortgage Loans. One would expect a

borrower residing at a property to have the tax bills sent to that address, and would take

applicable tax exemptions available to residents of that property. A borrower sending tax

records to another address is evidence that the borrower is not actually residing at the mortgaged

property. A borrower declining to make certain tax exemption elections that depend on living at

the property is also strong evidence the borrower is living elsewhere.

       142.    A review of credit records was also conducted. People generally have bills sent to

their primary address. If a borrower had creditors send bills to another address, even six months

after buying the property, such conduct is good evidence the borrower was living elsewhere.

       143.    Prudential also conducted a review of property records. It is less likely a

borrower lives in any one property if that borrower owns multiple properties. It is even less



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likely the borrower resides at the mortgaged property if a concurrently owned, separate property

did not have its own tax bills sent to the property included in the mortgage pool.

       144.    A review of other lien records was also conducted. A property being subject to

additional liens, but those materials being sent elsewhere, is good evidence a borrower is not

living at the mortgaged property. If the other lien involved a conflicting declaration of residency,

that, too, would be good evidence a borrower is not living in the subject property.

       145.    Although the methodologies that enable investors like Prudential to perform these

analyses on the large volume of data were not available until recently (see Section IV.A), these

tests draw from data largely contemporaneous with the transactions at issue. Thus, though

Prudential could not have run these tests at the time of its purchases (or any other time until

within the last few years), the results are thus evidence that a then-existing fact—owner-

occupancy—was misrepresented. Even though this recently available technique draws on

contemporaneous information, and provides a robust test of Defendants’ representations for

pleading purposes, it still does not contain the level of information that was uniquely in

Defendants’ control, such as the loan files. Prudential still does not have access to those files.

       146.    Failing more than one of the above tests is strong evidence the borrower did not in

fact reside at the mortgaged properties. These results provide compelling evidence that the

Offering Materials significantly overstated the percentage of borrowers who occupied the

mortgaged properties.

                                           Represented          Actual         Overstatement
                                           Percentage of     Percentage of      of Owner-
              Trust          Tranche(s)
                                          Owner-Occupied    Owner-Occupied       Occupied
                                            Properties        Properties        Properties
        AABST 2004-2           M1             94.52%             82.74%           11.78%
        AABST 2004-4           A2B            95.77%             81.91%           13.86%
        AABST 2005-2           M2             96.25%             84.02%           12.23%
        ABSHE 2004-HE1        M1, M2          93.13%             81.06%           12.07%
        ABSHE 2004-HE3         M1             91.92%             78.45%           13.47%


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                                          Represented          Actual         Overstatement
                                          Percentage of     Percentage of      of Owner-
               Trust        Tranche(s)
                                         Owner-Occupied    Owner-Occupied       Occupied
                                           Properties        Properties        Properties
        ABSHE 2005-HE1         M2             95.00%            82.69%            12.31%
        ABSHE 2005-HE6         M2             91.79%            80.77%            11.02%
        ABSHE 2005-HE8         M2             92.07%            81.20%            10.87%
        ABSHE 2006-HE7          A3            95.73%            86.90%             8.84%
        ABSHE 2007-HE1        A4, A5          94.18%            83.77%            10.41%
        HEAT 2004-2            M1             90.42%            78.70%            11.71%
        HEAT 2004-3            M1             90.57%            77.29%            13.28%
        HEAT 2004-4            M1             91.72%            80.07%            11.66%
        HEAT 2004-5            M1             90.53%            79.72%            10.80%
        HEAT 2004-6            M1             89.29%            80.13%             9.16%
        HEAT 2004-8            M2             90.70%            77.60%            13.10%
        HEAT 2005-1            M2             90.18%            79.16%            11.03%
        HEAT 2005-3            M2             91.52%            80.41%            11.12%
        HEAT 2005-5           M1, M2          89.61%            78.35%            11.26%
        HEAT 2005-6            M2             92.07%            80.03%            12.04%
        HEAT 2005-9            M2             92.85%            80.22%            12.63%
        HEAT 2006-1            2A4            94.46%            84.82%             9.64%
        HEAT 2006-1            M1             94.60%            83.94%            10.66%
        HEAT 2006-2            2A4            97.47%            85.85%            11.62%

       147.    The consistency of these results shows that the divergence between Defendants’

representations and reality was not due to phenomena such as borrowers changing their mind

about where to live. Instead, these results reflect the fact that Defendants and their Originators

knew borrowers were misrepresenting their intent to live at the property. Defendants and their

Originators allowed the falsification of these statistics in order to maneuver the loans through the

approval and securitization process. They knew, but fraudulently omitted to disclose, that the

statistics were baseless.

       148.    The consistency and size of these misrepresentations also confirms that the

abandonment of sound underwriting practices was systemic. Loans actually put through the

underwriting processes stated in the Offering Materials would not so consistently emerge on the

other end mis-described.

       149.    The facts alleged in this Complaint show that Defendants’ problems were

systemic, and such is confirmed by the consistency of the results set forth above—the results of

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reviewing 18,400 Mortgage Loans across twenty-three Offerings. The Offerings that Prudential

did not test involved many of the same affiliated parties, similar disclosures, and both the

underlying loans and the Certificates themselves were being generated around the same time and

purportedly according to the same processes. As such, on information and belief, the Offering

Materials for the Certificates that Prudential did not test also misrepresented the owner-

occupancy information at approximately the same, material rate as seen in the large sample of

Certificates and Mortgage Loans discussed above.

               (2)     A forensic analysis of the Mortgage Loans’ true LTV and CLTV
                       ratios revealed a systematic misrepresentation problem

       150.    Prudential’s loan-level analysis of the Mortgage Loans at issue here shows that

the Defendants’ representations regarding the loans’ LTV and CLTV ratios were also false and

misleading and were false and misleading in the same direction—again, across each tested

Offering, Defendants significantly understated the loans’ riskiness.

       151.    Prudential also had a sample of the Mortgage Loans valued by an industry-

standard AVM. AVMs are routinely used in the industry as a way of valuing properties during

prequalification, origination, portfolio review, and servicing. AVM use is specifically outlined

in regulatory guidance and discussed in the Dodd-Frank Act.

       152.    AVMs employ data similar to what appraisers use—primarily, county assessor

records, tax rolls, and data on comparable properties. AVMs produce independent, statistically

derived valuation estimates by applying modeling techniques to this data. The AVM Prudential

used incorporates a database of 500 million mortgage transactions covering zip codes

representing more than 97% of the homes, occupied by more than 99% of the population, in the

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

of all such models.


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       153.    The results of this analysis are set forth in the Exhibits. Applying the AVM to the

available data for the loans underlying these Certificates shows the appraisal values used by

Defendants were materially and consistently inflated. This caused the disclosed ratios to be

lower than they really were, i.e., Defendants represented that borrowers had more of an equity

“cushion” than really existed, and that prospects for recovery of funds upon a foreclosure were

much greater than accurate data supported.

       154.    As noted, although the methodologies that enable investors like Prudential to

gather the information and run these analyses did not exist until recently (see Section IV.A),

these analyses draw from data contemporaneous with the transactions at issue. These results

thus confirm that the LTV and CLTV ratios were misrepresented at the time the representations

were made. Further, as with the owner-occupancy data, though this recently available technique

draws on contemporaneous information, and provides a robust test of Defendants’

representations for pleading purposes, it still does not contain the level of information that was

uniquely in Defendants’ control, such as the loan files.

       155.    In certain of the Offerings, Defendants provided information regarding the

Mortgage Loans’ LTV ratios (that is, the ratios not taking into account any second liens).

Specifically, Defendants made representations about the percent of loans that had LTV ratios

above 80%. LTV ratios in excess of 80% provide the lender little value cushion to protect

against borrower default and loss upon foreclosure. Consequently, an accurate disclosure is

important to investors in assessing the security’s riskiness. But a much greater percentage than

what Defendants represented actually had LTVs higher than 80%:




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                                    Percentage of                      Understatement
                                                         Actual
                                       Loans                           of Percentage of
                                                      Percentage of
                                    Represented to                       Loans With
       Trust          Tranche(s)                       Loans With
                                    Have LTVs of                           LTVs of
                                                     LTVs of Greater
                                    Greater Than                        Greater Than
                                                       Than 80%
                                        80%                                  80%
AABST 2004-2            M1             47.30%             53.49%            6.19%
AABST 2004-4            A2B            40.78%             51.85%           11.07%
AABST 2005-2            M2             43.15%             56.83%           13.68%
ABSHE 2004-HE1         M1, M2          44.89%             60.49%           15.60%
ABSHE 2004-HE3          M1             31.86%             62.04%           30.18%
ABSHE 2005-HE1          M2             50.07%             50.37%            0.30%
ABSHE 2005-HE6          M2             32.38%             60.80%           28.42%
ABSHE 2005-HE8          M2             46.93%             62.60%           15.67%
ABSHE 2006-HE7           A3            36.82%             71.97%           35.15%
ABSHE 2007-HE1         A4, A5          48.97%             61.59%           12.62%
HEAT 2004-2             M1             33.27%             60.49%           27.22%
HEAT 2004-3             M1             36.44%             62.04%           25.60%
HEAT 2004-4             M1             37.76%             57.72%           19.96%
HEAT 2004-5             M1             42.28%             62.76%           20.48%
HEAT 2004-6             M1             42.80%             64.41%           21.61%
HEAT 2004-8             M2             35.14%             57.14%           22.00%
HEAT 2005-1             M2             38.06%             62.18%           24.12%
HEAT 2005-3             M2             42.58%             61.27%           18.69%
HEAT 2005-5            M1, M2          52.37%             63.55%           11.18%
HEAT 2005-6             M2             41.91%             59.21%           17.30%
HEAT 2005-9             M2             36.06%             63.22%           27.16%
HEAT 2006-1             2A4            43.05%             59.67%           16.62%
HEAT 2006-1             M1             44.63%             61.24%           16.61%
HEAT 2006-2             2A4            35.08%             55.71%           20.63%

       156.    The Offering Materials also misrepresented the number of the Mortgage Loans in

the subject loan pools that had LTV ratios greater than 90%. LTV ratios in excess of 90%

provide the lender even less cushion to protect against borrower default and loss upon

foreclosure.

                                    Percentage of                      Understatement
                                                         Actual
                                       Loans                           of Percentage of
                                                      Percentage of
                                    Represented to                       Loans With
       Trust          Tranche(s)                       Loans With
                                    Have LTVs of                           LTVs of
                                                     LTVs of Greater
                                    Greater Than                        Greater Than
                                                       Than 90%
                                         90%                                 90%
AABST 2004-2            M1             18.17%             32.17%           14.00%
AABST 2004-4            A2B            19.69%             30.74%           11.05%
AABST 2005-2            M2             25.64%             30.43%            4.79%
ABSHE 2004-HE1         M1, M2          14.52%             33.02%           18.50%
ABSHE 2004-HE3          M1              7.49%             29.94%           22.45%
ABSHE 2005-HE1          M2             28.42%             33.00%            4.58%
ABSHE 2005-HE6          M2             10.68%             42.19%           31.51%


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                                      Percentage of                      Understatement
                                                           Actual
                                         Loans                           of Percentage of
                                                        Percentage of
                                      Represented to                       Loans With
       Trust          Tranche(s)                         Loans With
                                      Have LTVs of                           LTVs of
                                                       LTVs of Greater
                                      Greater Than                        Greater Than
                                                         Than 90%
                                           90%                                 90%
ABSHE 2005-HE8           M2              18.50%             35.62%           17.12%
ABSHE 2006-HE7            A3              8.19%             43.93%           35.74%
ABSHE 2007-HE1          A4, A5           31.58%             40.52%            8.94%
HEAT 2004-2              M1              11.36%             33.02%           21.66%
HEAT 2004-3              M1              13.68%             29.94%           16.26%
HEAT 2004-4              M1              15.61%             31.88%           16.27%
HEAT 2004-5              M1              16.64%             39.64%           23.00%
HEAT 2004-6              M1              13.96%             37.94%           23.98%
HEAT 2004-8              M2              15.33%             32.57%           17.24%
HEAT 2005-1              M2              16.95%             30.09%           13.14%
HEAT 2005-3              M2              17.41%             34.48%           17.07%
HEAT 2005-5             M1, M2           23.67%             32.23%            8.56%
HEAT 2005-6              M2              20.43%             33.99%           13.56%
HEAT 2005-9              M2              15.49%             32.69%           17.20%
HEAT 2006-1              2A4             19.00%             34.57%           15.97%
HEAT 2006-1              M1              21.25%             37.08%           15.83%
HEAT 2006-2              2A4             19.45%             30.37%           10.92%

       157.     The Offering Materials also made representations about how many of the

Mortgage Loans were “underwater,” i.e., with LTV ratios greater than 100%. Loans that are

underwater are inherently very risky given that they afford the lender no equity cushion and

leave the lender with inadequate collateral from the outset of the loan. Defendants represented

that none of Mortgage Loans were underwater. In truth, however, a very high number of the

Mortgage Loans underlying each Securitization that Prudential tested had LTV ratios greater

than 100%.



                                           Percentage of                      Understatement
                                                                Actual
                                              Loans                           of Percentage of
                                                             Percentage of
                                           Represented to                       Loans With
              Trust        Tranche(s)                         Loans With
                                           Have LTVs of                           LTVs of
                                                            LTVs of Greater
                                           Greater Than                        Greater Than
                                                              Than 100%
                                               100%                                100%
    AABST 2004-2              M1                0%              17.05%            17.05%
    AABST 2004-4              A2B               0%              14.81%            14.81%
    AABST 2005-2              M2                0%              13.35%            13.35%
    ABSHE 2004-HE1           M1, M2             0%              12.65%            12.65%
    ABSHE 2004-HE3            M1                0%              15.43%            15.43%


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                                          Percentage of                       Understatement
                                                                Actual
                                             Loans                            of Percentage of
                                                             Percentage of
                                          Represented to                        Loans With
              Trust         Tranche(s)                        Loans With
                                          Have LTVs of                            LTVs of
                                                            LTVs of Greater
                                          Greater Than                         Greater Than
                                                              Than 100%
                                              100%                                 100%
     ABSHE 2005-HE1           M2               0%                17.62%           17.62%
     ABSHE 2005-HE6           M2               0%                20.93%           20.93%
     ABSHE 2005-HE8           M2               0%                17.56%           17.56%
     ABSHE 2006-HE7            A3              0%                20.50%           20.50%
     ABSHE 2007-HE1          A4, A5            0%                20.61%           20.61%
     HEAT 2004-2              M1               0%                12.65%           12.65%
     HEAT 2004-3              M1               0%                15.43%           15.43%
     HEAT 2004-4              M1               0%                15.10%           15.10%
     HEAT 2004-5              M1               0%                18.62%           18.62%
     HEAT 2004-6              M1               0%                16.76%           16.76%
     HEAT 2004-8              M2               0%                18.57%           18.57%
     HEAT 2005-1              M2               0%                14.90%           14.90%
     HEAT 2005-3              M2               0%                15.12%           15.12%
     HEAT 2005-5             M1, M2            0%                15.36%           15.36%
     HEAT 2005-6              M2               0%                17.56%           17.56%
     HEAT 2005-9              M2               0%                14.18%           14.18%
     HEAT 2006-1              2A4              0%                19.34%           19.34%
     HEAT 2006-1              M1               0%                19.62%           19.62%
     HEAT 2006-2              2A4              0%                14.16%           14.16%

       158.     The consistency and scale of these misrepresentations confirms that the

abandonment of sound underwriting practices was systematic. The consistency and size of these

misrepresentations also confirms that the appraisers, Originators, and Defendants knew the

appraisals being used were not reasonable indicators of the properties’ value, but were inflated

figures generated to shepherd the Mortgage Loans through the approval and securitization

process. These results (and other facts discussed herein) thus also demonstrate that the factual

representations relating to appraisal practices were false. Independent appraisers following the

stated practices would not consistently generate appraisals that deviate so significantly (and so

consistently upward) from the values found using an industry-standard AVM. Instead of

following the disclosed appraisal processes, the appraisers worked with Defendants and other

loan Originators to generate appraisal values that were not meant to approximate the actual value

of the property, but to justify issuance of the Mortgage Loan.


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       159.      The facts alleged in this Complaint show Defendants’ problems were systemic,

and the systemic nature of the problems is confirmed by the consistency of the results set forth

above—the results of reviewing 18,400 Mortgage Loans across twenty-three Offerings. The

Offerings that Prudential did not test involved many of the same affiliated parties, nearly

identical disclosures, and both the underlying Mortgage Loans and the Certificates themselves

were being generated around the same time and purportedly according to the same processes. As

such, on information and belief, the Offering Materials for the Certificates that Prudential did not

test also misrepresented the LTV ratio information at approximately the same, material rate as

seen in the large sample of Certificates and Mortgage Loans discussed above.

       160.      The consistency of Defendants’ misrepresentations also supports the conclusion

that Defendants knew the appraisals were being intentionally inflated. Such is confirmed by the

statements provided by former employees, as discussed below. It is also confirmed by

Congressional testimony and other statements made by those in the industry about the

widespread corruption in the appraisal processes during all times relevant to this Complaint.

                 (3)    A forensic analysis of the Mortgage Loans’ chain of title revealed a
                        systematic misrepresentation problem

       161.      Defendants’ representations about the valid transfer of title to the Mortgage Loans

to the Trusts were false. In many instances, the collateral did not properly secure the underlying

Mortgage Loans and the Trusts could not foreclose on delinquent borrowers because Defendants

lost, failed to timely create, or failed to timely deliver the paperwork necessary to prove title to

the mortgages.

       162.      Contrary to their representations, Defendants did not properly assign large

numbers of the Mortgage Loans to the Trusts. In their rush to securitize loans and thereby

offload risky collateral onto investors such as Prudential, Defendants did not comply with the


                                                  53
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strict rules governing assignment of mortgages and the transfer of promissory notes and loan

files. Defendants lost much of the paperwork relating to the Loans underlying the

Securitizations, or made no attempt to assign the Mortgage Loans and deliver the original

mortgage notes to the Trusts, as represented.

       163.    As part of its loan-level forensic analysis, Prudential also examined whether the

chain of mortgage assignments was complete with respect to the Mortgage Loans. The review

demonstrates that Defendants’ representations regarding the title for the Mortgage Loans were

false and misleading, and that Defendants fraudulently failed to disclose problems in the chain of

title for the Mortgage Loans.

       164.    As discussed above and in Section IV.A, this analysis could not have been

performed by investors before 2010, because investors were not able to identify the specific

properties at issue at the time. Nor was it industry practice for investors to do an independent

loan-level assessment of the accuracy of the representations made in the Offering Materials—

Prudential reasonably relied upon Defendants to represent the Mortgage Loans correctly in the

Offering Materials.

       165.    For the twenty-three Securitizations that Prudential tested, the forensic review

demonstrates (i) how many Mortgage Loans are currently held by the Trusts; (ii) how many are

held in the MERS electronic-recording system; (iii) how many are still held in the Originator’s

name; and (iv) how many were assigned to a third party. Loans that are still held by the

Originator, or were assigned to a third party other than the Trust or MERS, violate Defendants’

representations that the Mortgage Loans would be assigned to the Trust (or, in some cases,

would be held by MERS).




                                                54
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                                       Number of Loans      Number of Loans         Percentage of Sampled
                                        Assigned To a        Still Held in the    Loans Assigned to a Third
    Securitization     Tranche(s)
                                      Third Party (Other      Originator’s         Party or Still Held in the
                                        Than MERS)                 Name               Originator’s Name
 AABST 2004-2            M1                    7                    341                     70.16%
 AABST 2004-4            A2B                  36                     51                     16.86%
 AABST 2005-2            M2                   22                     21                      7.47%
 ABSHE 2004-HE1         M1, M2               112                    403                     68.12%
 ABSHE 2004-HE3          M1                  110                    394                     91.56%
 ABSHE 2005-HE1          M2                   18                    268                     41.09%
 ABSHE 2005-HE6          M2                   90                    310                     77.07%
 ABSHE 2005-HE8          M2                   36                    369                     56.02%
 ABSHE 2006-HE7           A3                  69                    292                     50.14%
 ABSHE 2007-HE1         A4, A5                29                     31                      9.40%
 HEAT 2004-2             M1                  112                    403                     83.06%
 HEAT 2004-3             M1                  110                    394                     81.29%
 HEAT 2004-4             M1                   72                    228                     44.44%
 HEAT 2004-5             M1                   72                    128                     37.95%
 HEAT 2004-6             M1                   55                    144                     33.50%
 HEAT 2004-8             M2                   25                     56                     13.68%
 HEAT 2005-1             M2                   24                     63                     13.90%
 HEAT 2005-3             M2                   16                     85                     16.69%
 HEAT 2005-5            M1, M2                20                     32                      9.74%
 HEAT 2005-6             M2                   30                     17                      8.95%
 HEAT 2005-9             M2                   18                     12                      5.08%
 HEAT 2006-1             2A4                  18                     68                     31.05%
 HEAT 2006-1             M1                   25                    120                     29.00%
 HEAT 2006-2             2A4                  23                     30                     10.45%

        166.    Even among Mortgage Loans that were assigned to the Trusts, a large number

were still missing intervening assignments:

                                    Number of Loans        Number of Loans             Percentage Loans
                                      Assigned To a     Assigned To a Trust But      Assigned To a Trust
   Securitization    Tranche(s)
                                        Trust (not        Missing Intervening       But Missing Intervening
                                    including MERS)          Assignments                 Assignments
 AABST 2004-2          M1                   47                     9                        19.15%
 AABST 2004-4          A2B                  58                     43                       74.14%
 AABST 2005-2          M2                  122                    111                       90.98%
 ABSHE 2004-HE1       M1, M2                67                     19                       28.36%
 ABSHE 2004-HE3        M1                   71                     22                       30.99%
 ABSHE 2005-HE1        M2                   91                     45                       49.45%
 ABSHE 2005-HE6        M2                  117                     71                       60.68%
 ABSHE 2005-HE8        M2                  307                     32                       10.42%
 ABSHE 2006-HE7        A3                  357                     7                         1.96%
 ABSHE 2007-HE1       A4, A5               204                    167                       81.86%
 HEAT 2004-2           M1                   67                     19                       28.36%
 HEAT 2004-3           M1                   71                     22                       30.99%
 HEAT 2004-4           M1                   98                     61                       62.24%
 HEAT 2004-5           M1                   90                     57                       63.33%
 HEAT 2004-6           M1                  106                     63                       59.43%
 HEAT 2004-8           M2                  112                     90                       80.36%

                                                   55
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                                  Number of Loans        Number of Loans           Percentage Loans
                                    Assigned To a     Assigned To a Trust But    Assigned To a Trust
   Securitization    Tranche(s)
                                      Trust (not        Missing Intervening     But Missing Intervening
                                  including MERS)          Assignments               Assignments
 HEAT 2005-1           M2                153                    125                     81.70%
 HEAT 2005-3           M2                145                    109                     75.17%
 HEAT 2005-5          M1, M2             199                    167                     83.92%
 HEAT 2005-6           M2                218                    191                     87.61%
 HEAT 2005-9           M2                211                    168                     79.62%
 HEAT 2006-1           2A4               120                     52                     43.33%
 HEAT 2006-1           M1                201                     85                     42.29%
 HEAT 2006-2           2A4               157                    116                     73.89%

        167.    In sum, among the 13,546 Loans for which sufficient data is available to conduct

this analysis, 1,041 loans were improperly assigned to a third party (other than MERS) and 4,136

were still held in the Originator’s name—a defect rate of over 38%. Further, of the loans that

were nominally assigned to the Trust, over 55% are missing necessary intervening assignments.

        168.    These facts show that Defendants’ problems were systemic, and the systemic

nature of the problems is confirmed by the consistency of the results set forth above—the results

of reviewing 18,400 Mortgage Loans across twenty-three Offerings. The Offerings that

Prudential did not test involved many of the same affiliated parties, nearly identical disclosures,

and both the underlying Mortgage Loans and the Certificates themselves were being generated

around the same time and purportedly according to the same processes. As such, upon

information and belief, the Offering Materials for the Certificates that Prudential did not test also

misrepresented the title-transfer information at approximately the same, material rate as seen in

the large sample of Certificates and Mortgage Loans discussed above.

        169.    Defendants also defrauded Prudential by stating that an assignment to MERS

ensured that each Trust could foreclose upon the underlying collateral were false. As multiple

courts have held, because the actual mortgage note is typically not transferred to MERS, MERS

is a nullity. See, e.g., Bank of N.Y. v. Silverberg, 86 A.D.3d 274 (N.Y. App. Div. 2d Dep’t 2011).

In February 2011, MERS instructed its lender members to stop foreclosing in the name of MERS

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in light of overwhelming authority that beneficial ownership of an underlying mortgage cannot

be transferred to MERS. Defendants’ representations in the Offering Materials that MERS

would be the “beneficial owner” of each Mortgage were false. As MERS Recommended

Foreclosure Procedure 8 provides, “MERS does not create or transfer beneficial interests in

mortgage loans or create electronic assignments of the mortgage.”

               (4)     The dismal performance of the Mortgage Loans and Certificates
                       confirms they were infected by Defendants’ and Originators’ systemic
                       underwriting problems

       170.    The extremely high default rates of the Mortgage Loans and the precipitous drop

in the credit ratings of the Certificates are themselves evidence that the investments at issue were

infected by a systemic underwriting problem.

       171.    Prudential’s Certificates were supposed to be long-term, stable investments; yet

they have already experienced payment problems significantly beyond what was expected for

loan pools that were properly underwritten and which contained loans that actually had the

characteristics Defendants’ Offering Materials claim. For example, in AABST 2005-2, ABSHE

2006-HE7, ABSHE 2007-HE1, FLT 2005-E, HEAT 2005-9, HEAT 2006-2, and RAMP 2006-

RZ4, over 25% of the relevant Mortgage Loans have had to be written off for a loss. And in

ABSHE 2006-HE7 and ABSHE 2007-HE1, an astounding 53.55% and 49.30%, respectively, of

the relevant Mortgage Loans have had to be written off for a loss or are currently delinquent.

Such performance problems are seen across all of the Certificates—and, given the similarly high

current delinquency rates, only promise to get worse:

                                                          Percent of       Percent of
                                                        Original Loans   Remaining Pool
                     Trust             Tranche(s)
                                                           Already         Currently
                                                         Written Off       Delinquent
              AABST 2004-2               M1                17.03%           30.39%
              AABST 2004-4               A2B               18.96%           31.07%
              AABST 2005-2               M2                33.13%           39.56%
              ABSHE 2004-HE1            M1, M2              9.48%           27.34%

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                                                           Percent of       Percent of
                                                         Original Loans   Remaining Pool
                      Trust            Tranche(s)
                                                            Already         Currently
                                                          Written Off       Delinquent
              ABSHE 2004-HE3                M1              12.08%           32.77%
              ABSHE 2005-HE1                M2              15.99%           31.85%
              ABSHE 2005-HE6                M2              23.31%           42.07%
              ABSHE 2005-HE8                M2              33.63%           38.56%
              ABSHE 2006-HE7                 A3             53.55%           40.70%
              ABSHE 2007-HE1               A4, A5           49.30%           36.28%
              ARSI 2004-W6                  AF               9.57%           17.17%
              CSFB 2005-1                   2A3             16.58%           30.26%
              FHLT 2004-B                   M1               6.48%           28.20%
              FHLT 2005-A                  M2, M4           13.61%           46.72%
              FHLT 2005-E                   M5              34.13%           49.34%
              HEAT 2004-2                   M1              12.07%           36.45%
              HEAT 2004-3                   M1              12.20%           34.06%
              HEAT 2004-4                   M1              14.92%           34.00%
              HEAT 2004-5                   M1              16.97%           35.14%
              HEAT 2004-6                   M1              15.96%           35.50%
              HEAT 2004-8                   M2              15.95%           34.49%
              HEAT 2005-1                   M2              20.96%           35.31%
              HEAT 2005-3                   M2              23.02%           40.36%
              HEAT 2005-5                  M1, M2           24.94%           35.83%
              HEAT 2005-6                   M2              30.94%           36.54%
              HEAT 2005-9                   M2              29.64%           42.97%
              HEAT 2006-1                   2A4             34.12%           37.86%
              HEAT 2006-1                   M1              32.15%           36.79%
              HEAT 2006-2                   2A4             45.43%           30.39%
              NCHET 2004-4                  M1              10.61%           36.59%
              RAMP 2004-RS10                MII2            20.61%           42.43%
              RAMP 2006-RZ4                  A3             38.80%           33.19%
              RFMSII 2005-HS1               AI5              8.99%            4.02%

       172.    Not only have the Certificates experienced extraordinary default rates, their

ratings have significantly deteriorated. Many initially received the highest possible rating, but a

substantial number have now been downgraded to “junk-bond,” i.e., non-investment-grade

ratings. Any instrument rated lower than BBB (or Baa for ratings provided by Moody’s) is

considered below investment-grade:

                                                Ratings at Issuance         Current Ratings
              Trust           Tranche(s)                                  (S&P/Moody’s/Fitch)
                                               (S&P/Moody’s/Fitch)
       AABST 2004-2              M1                AA/Aa2/AA                CCC/Baa2/AA*-
       AABST 2005-2              M2                AA/Aa2/AA                 - /B3(sf)/CCCsf
       ABSHE 2004-HE1            M2                 A(sf)/A2/A             BB+/Caa3(sf)/CCsf
       ABSHE 2004-HE3            M1               AA(sf)/Aa2/AA             - /Ba1(sf)/CCCsf
       ABSHE 2005-HE1            M2                AA/Aa2/AA              B-(sf)/Caa2(sf)/CCCsf
       ABSHE 2005-HE8            M2                AA/Aa2/AA              CCC(sf)/C(sf)/C*(sf)

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                                              Ratings at Issuance       Current Ratings
              Trust          Tranche(s)                               (S&P/Moody’s/Fitch)
                                             (S&P/Moody’s/Fitch)
       ABSHE 2006-HE7            A3             AAA/Aaa/AAA          CCC(sf)/Caa2(sf)/CCsf
       ABSHE 2007-HE1            A4             AAA/Aaa/AAA            CCC(sf)/Ca(sf)/Csf
       ABSHE 2007-HE1            A5             AAA/Aaa/AAA            CCC(sf)/Ca(sf)/Csf
       CSFB 2005-1              2A3              AAA/Aaa/NR           CCC(sf)/Caa1(sf)/NR
       FHLT 2005-A              M4                A+/A1/NR              B-*(sf)/C(sf)/NR
       FHLT 2005-E              M5                 A+/A2/A               D(sf)/C(sf)/Dsf
       HEAT 2004-3              M1              AA(sf)/Aa2/AA           - /Ba1(sf)/CCCsf
       HEAT 2004-8              M2              AA (sf)/Aa2/AA           - /B1(sf)/CCCsf
       HEAT 2005-5              M2               AA/Aa2/AA               - /B2(sf)/CCCsf
       HEAT 2005-6              M2              AA+/Aa2/AA+              - /B1(sf)/CCCsf
       HEAT 2005-9              M2              AA+/Aa2/AA+                C(sf)/Csf/Csf
       HEAT 2006-1              M1              AA+/Aa1/AA+          BBB-(sf)/B3(sf)/CCCsf
       HEAT 2006-2              2A4             AAA/Aaa/AAA            B-*(sf)/C(sf)/CCsf
       RAMP 2004-RS10           MII2               A/A2/NR            CCC(sf)/Caa3(sf)/NR
       RAMP 2006-RZ4             A3            AAA(sf)/Aaa/AAA        B-*(sf)/B2(sf)/CCCsf
       RFMSII 2005-HS1          AI5              AAA/Aaa/NR            CC(sf)/Caa1(sf)/NR

       173.    The economic downturn cannot explain the abnormally high percentage of

defaults, foreclosures, and delinquencies observed in the loan pools. Loan pools that were

properly underwritten and contained loans with the represented characteristics would have

experienced substantially fewer payment problems and substantially lower percentages of

defaults, foreclosures, and delinquencies.

       B.      Multiple Forensic Reviews of Thousands of Loan Files Reflect the Systematic
               Nature of Credit Suisse’s Misrepresentations Regarding Underwriting
               Guidelines

       174.    As noted above, Prudential, as an investor, was not given access to the loan files

underlying the Certificates and still does not have such access. In the past two years, however,

other entities that do have access to Defendants’ loan files have conducted forensic “re-

underwriting” analyses, using the loan file materials to assess compliance with the underwriting

guidelines Defendants presented in the Offering Materials. The results of the forensic loan-file

reviews by four separate entities—all related to RMBS offerings by Defendants during the same

period, and as a result of the same practices, as the Offerings at issue here—confirm that




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Defendants’ fraudulent abandonment of underwriting standards was systematic and pervaded

Defendants’ RMBS practices.

        175.   The independent forensic reviews of MBIA, Ambac Assurance Corporation

(“Ambac”), Assured Guaranty Municipal Corporation (“Assured”), and the Federal Housing

Finance Agency (“FHFA”), collectively involved an examination of the individual loan files for

over 12,000 loans Defendants packaged into securitizations from October 2005 through August

2007.

        176.   These forensic reviews found that between 67% and 93% of the loans Credit

Suisse securitized in related offerings during this period failed to comply with the specified

underwriting guidelines. As detailed below, evidence discovered in the loan files underlying

certificates like those purchased by Prudential fully corroborates the results of Prudential’s own

loan-level forensic analysis of the Offerings at issue here.

        177.   Nor is Credit Suisse the only link between the tens of thousands of loan files

reviewed by MBIA, Assured, Ambac, and FHFA and Prudential’s Offerings. Those plaintiffs re-

underwrote loans originated by two Originators, New Century and Aegis Mortgage Corporation

(“Aegis”), which also originated many of the Mortgage Loans backing the Offerings here. The

significance of this connection is obvious but well worth emphasizing. At the same time those

Originators were issuing loans that MBIA, Assured, Ambac, and FHFA found to be rife with

underwriting error and misrepresentation they were busy churning out the defective Mortgage

Loans collateralizing Prudential’s Certificates here. The same, or substantially similar,

underwriting guidelines would have been applied (rather, purportedly applied but in fact

abandoned) to both those plaintiffs’ loans and Prudential’s Mortgage Loans.




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       178.    MBIA, Ambac, and Assured provided financial guaranty insurance on certain of

Defendants’ securitizations. In their roles as guaranty insurers, MBIA, Ambac, and Assured

(collectively, “the Guaranty Insurers”), each obtained access to the actual loan files for the

securitizations they insured—including files from several of the same series of Offerings at issue

here (the HEMT, TBW, and CSMC shelves).

       179.    The Guaranty Insurers each undertook their own re-underwriting of loan files in

response to concerns regarding the remarkable default rates of the underlying mortgage loans.

The Guaranty Insurers’ findings demonstrate that the essential characteristics of the loans

underlying the certificates insured by the Guaranty Insurers were misrepresented and that the

problems with the underwriting practices used to originate the loans were systemic

               (1)     FHFA Re-Underwriting

       180.    FHFA serves as conservator of Fannie Mae and Freddie Mac, which invested in

RMBS issued by Credit Suisse. In its role as conservator, FHFA subpoenaed the loan files for

the securitizations in which Fannie Mae and Freddie Mac invested. Like Prudential, Fannie Mae

and Freddie Mac did not have access to the loan files at the time they purchased their certificates.

       181.    Like the Guaranty Insurers, FHFA re-underwrote the loan files it obtained to

assess whether the underlying loans conformed to Credit Suisse’s represented underwriting

guidelines. FHFA found pervasive misrepresentations in Credit Suisse’s offering materials of

many material loan characteristics. FHFA’s analysis revealed widespread failures to (i)

scrutinize stated incomes that were patently unreasonable, (ii) investigate borrowers’ intention to

occupy the subject properties when red flags surfaced in the origination process, (iii) calculate

properly borrowers’ outstanding debt, and (iv) properly investigate red flags on borrowers’ credit

reports.



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       182.    Overall, FHFA’s re-underwriting analysis examined 9,880 loan files underlying

nine Credit Suisse securitizations.5 The results of this re-underwriting revealed a “pervasive

failure to adhere to underwriting guidelines.” FHFA determined that “approximately 74% to 99%

of the reviewed loans per Securitization were not underwritten in accordance with the

underwriting guidelines or otherwise breached representations contained in the transaction

documents.”

       183.    Fannie Mae and Freddie Mac invested in many of Credit Suisse’s offerings,

including five of the Offerings that Prudential invested in: ABSHE 2006-HE7, ABSHE 2007-

HE1, HEAT 2005-9, HEAT 2006-1 and FHLT 2005-E. Critically, FHFA examined the loan

files for the Mortgage Loans underlying one of Prudential’s Offerings, ABSHE 2006-HE7.

Prudential would perform the same analysis in discovery to prove its claims. FHFA found that

many of the loans in the ABSHE 2006-HE7 Offering violated stated underwriting guidelines for

the loans’ originators, Ameriquest Mortgage Company and Argent Mortgage Company.

       184.    For example, FHFA found that:

           (1) Borrowers’ Stated Incomes Were Not Reasonable:

           •   A loan that closed in August 2006, with a principal value of $201,400, was
               originated by Argent as a stated income loan and included in ABSHE 2006-HE7.
               The loan application stated that the borrower was employed as a security guard
               earning $7,275 per month. However, based on the Bureau of Labor Statistics for
               the borrower’s occupation, geographic region, and time period of the loan
               application, the 75th percentile of income was only $2,081 per month. Moreover,
               in a Statement of Financial Affairs filed by the borrower as part of a March 2008
               Chapter 7 bankruptcy proceeding, the borrower stated that his 2006 income was
               actually $2,643 per month. There is no evidence in the file that the underwriter
               tested the reasonableness of the stated income. Had the underwriter done so, the
               misrepresentation of income would have been discovered. A recalculation of the
               DTI based on the borrower’s verified income yields an increase in DTI from
               38.80 percent to 105.58 percent, which exceeds the lender’s guideline maximum


       5
         ABSHE 2006-HE7, CSMC 2007-NC1, HEAT 2006-5, HEAT 2006-6, HEAT 2006-7, HEAT
2006-8, HEAT 2007-1, HEAT 2007-2, and HEAT 2007-3.
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                 of 50 percent. The subject loan defaulted, resulted in a loss of $14,510, which is
                 over 7 percent of the original loan amount. 6

            (2) Borrowers’ Misrepresented Their Occupancy Status:

             •   A loan that closed in September 2006, with a principal value of $90,900, was
                 originated under Argent’s full-documentation loan program and included in
                 ABSHE 2006-HE7. The loan was a cash-out refinance of an owner-occupied
                 residence. The underwriting guidelines for the loan required that the borrower
                 occupy the subject property. The subject property was located in Ohio. However,
                 the borrower was employed by the State of Florida at the time of origination.
                 Further, the origination credit report, a letter dated August 2006 confirming that
                 the borrower paid a collection, and a tax report dated prior to origination also
                 reflected current addresses for the borrower in Florida. Moreover, post-closing
                 documentation was provided in the loan file, including an October 2008 Chapter 7
                 Bankruptcy filing. The bankruptcy petition reflected that the borrower’s address
                 at the time of filing and for the 3 years preceding the bankruptcy filing, which
                 included the subject’s closing year of 2006, was not the subject property. No
                 evidence in the loan file indicates that the loan underwriter addressed or
                 challenged the borrower’s claim that he intended to reside at the new location.
                 The loan defaulted, resulting in a loss of $89,527, which is close to 100 percent of
                 the original loan amount.

            (3) Borrowers Misrepresented Their Debt:

             •   A loan that closed in August 2006, with a principal value of $308,000, was
                 originated under Argent’s full documentation loan program and included in
                 ABSHE 2006-HE7. The credit report in the loan origination file dated prior to
                 closing shows 12 credit inquiries, including eight mortgage-related credit
                 inquiries within the previous 90 days. There is no evidence in the file that the
                 underwriter took this additional debt obligation into account in originating the
                 loan. Moreover, the borrower obtained two other undisclosed mortgages in July
                 2006, which resulted in additional monthly payments of $4,717. A recalculation
                 of the DTI that includes the borrower’s undisclosed debt results in an increase
                 from 44 percent to 109.06 percent, which exceeds the lender’s guideline
                 maximum allowable DTI of 50 percent. The subject loan defaulted, resulting in a
                 loss of $238,049, which is over 77 percent of the original loan amount.

        185.     Beyond the ABSHE 2006-HE7 securitization, specific instances of mortgage

loans being made on the basis of “stated incomes” that were patently unreasonable include: (i)


        6
           This finding is consistent with the observation of Credit Suisse’s Head of Due Diligence, who found,
based on his own review, that “most of the stated income loans” had “income that is overstated.” In 2007, he further
acknowledged the problem or “sensitivity” with “stated income loans,” stating: “We have looked at hundreds of
non-performing loans over the part few months and 95% of them are stated income.”

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closing a $366,300 mortgage loan to a borrower who claimed to be a manager for an auto repair

business earning $7,840 monthly despite tax forms obtained after closing setting the borrower’s

actual income at $4,120 per month; (ii) closing a $303,600 mortgage loan to a borrower who

claimed to be making $7,900 per month as a forklift driver despite tax forms obtained after

closing setting the borrower’s actual income at $3,172; (iii) closing a $348,000 mortgage loan to

a borrower who claimed to be making $7,955 per month as a restaurant manager when a

reasonable estimate of the income in this profession in the same geographic region was $5,395;

and (iv) closing a $175,900 mortgage loan to a borrower who claimed to be making $3,500 per

month as a cashier when a more reasonable estimate of the income in this profession in the same

geographic region was $2,060 and the borrower’s subsequent bankruptcy filings revealed her

income to be $2,278. In each of these instances, using the accurate (or reasonable estimate)

figure yields a DTI ratio ranging from 70.75 to 125.08%, consistently and significantly higher

than the guideline maximum ratio of 50%.

       186.    FHFA’s re-underwriting analysis also uncovered additional occupancy

misrepresentations. In one such instance, a cash-out refinance loan closed in the principal

amount of $385,000, and was originated under a full documentation loan program. Although the

property was represented to be owner occupied, various income and asset documentation and

rental income reflect an address other than the subject property as the current address. The

origination credit report also associated the borrower to a property other than the subject property.

The borrower provided an electric bill prior to closing to support occupancy; however, the

electric usage was a minimal bill and did not support occupancy. No evidence in the loan file

indicates that the underwriting process addressed these inconsistencies. The loan defaulted and

the property was subject to a foreclosure sale.



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       187.    In addition, the original underwriting process often failed to incorporate all of a

borrower’s monthly obligations. This is a glaring error, because it prevents a lender from

properly evaluating the borrower’s ability to repay the loan. FHFA discovered numerous

instances of such failures. In one instance, a loan closed in the principal amount of $244,500,

and was originated under a full documentation loan program. The origination credit report

revealed a first mortgage in the amount of $165,600 and a second mortgage of $41,400, neither

of which had been taken into account in calculating the borrower’s DTI ratio. The re-

underwriting confirmed the borrower purchased the property prior to the closing of the subject

loan. Recalculating the borrower’s DTI ratio based on the undisclosed monthly payments of

$1,505 increased the DTI from 49.30% to 70.83%, a figure that exceeds the 55% guideline

maximum. The loan has since defaulted and the property was liquidated, resulting in a loss.

       188.    Finally, FHFA’s re-underwriting revealed numerous instances where the

borrowers’ credit reports indicated multiple credit inquiries that should have put the loan

underwriters on notice for potential misrepresentations of debt obligations to be included in the

borrowers’ DTI ratio. Yet, there was no evidence in the relevant loan files that the underwriter

researched these credit inquiries or took any action to verify that such inquiries were not

indicative of undisclosed debt. In one instance, a loan that closed in November 2006, in the

principal amount of $84,000, was originated under a full documentation loan program. There

was no evidence in the loan file that the originator requested or obtained an explanation from the

borrower for the eight inquiries the borrower made from September 11, 2006, through November

7, 2006.

       189.    A search of public records revealed three undisclosed mortgages securing two

properties and obtained in the month prior to the subject transaction. On October 12, 2006, an



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unidentified lender closed a loan for the borrower in the amount of $71,250. In addition, on

October 27, 2006, the borrower obtained two mortgages totaling $173,000. The recalculated

DTI is 79.02%, instead of 40.85%, and exceeds the guideline maximum of 50%. The loan

defaulted, and the property was liquidated in a foreclosure sale, resulting in a loss of $82,466.62,

which is over 98% of the original loan amount.

       190.    The cumulative import of these findings, like those of MBIA, Ambac, and

Assured, is reinforced by and consistent with, among other evidence, governmental

investigations into the originators’ underwriting guidelines; findings from the FCIC that Credit

Suisse routinely acquired and included in securitizations loans that did not meet underwriting

standards; investigations by other entities who have sued Defendants for making

misrepresentations in connection with other, similar securitizations; the collapse in the

Certificates’ credit ratings; and the surge in delinquency and default in the Mortgage Loans

underlying the Securitizations. As the foregoing demonstrates, all of the analyses performed by

those entities with access to loan files provide extensive confirmatory evidence that Defendants’

abandonment of underwriting guidelines was systematic and pervaded Defendants’ RMBS

practices.

       191.    Even those offerings purchased by Fannie Mae and Freddie Mac not included in

this Complaint share many similar features with the Securitizations in which Prudential invested.

The HEAT securitizations purchased by the Agencies 7, for example, are from the same shelf of

offerings as the thirteen HEAT Offerings in which Prudential invested, and not surprisingly

feature the same exact parties, structure, timing, and disclosures. These FHFA HEAT offerings

also included DLJ Mortgage Capital and Credit Suisse Securities (USA) LLC as the

       7
          These included HEAT 2005-7, HEAT 2005-8, HEAT 2005-9, HEAT 2006-1, HEAT 2006-3,
HEAT 2006-4, HEAT 2006-5, HEAT 2006-6, HEAT 2006-7, HEAT 2006-8, HEAT 2007-1, HEAT
2007-2, and HEAT 2007-3.
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sponsor/seller and underwriter, respectively, as did each of the CSFB and ABSHE Offerings that

Prudential purchased.

        192.    Above all, Aegis, one of the largest originators for HEAT 2007-1, originated all

of the mortgage loans backing at least three of Prudential’s Securitizations—AABST 2004-2,

AABST 2004-4, and AABST 2005-2—and an unspecified number of the loans backing one

other Securitization, ABSHE 2007-HE1. Thus, FHFA’s findings apply equally to the

Certificates at issue here.

                (2)     Re-Underwriting by MBIA and Ambac

        193.    MBIA and Ambac wrote insurance on HEMT 2007-2 and HEMT 2007-1,

respectively. These offerings share many similar features with the Offerings that Prudential

purchased. HEMT 2007-2 and HEMT 2007-1 included the exact same parties—DLJ Mortgage

Capital as the sponsor/seller and entity that originated or acquired the mortgage loans, Credit

Suisse First Boston Mortgage Securities Corp. as depositor, and Credit Suisse Securities (USA)

LLC as underwriter—as each of the thirteen HEAT Offerings that Prudential purchased. DLJ

Mortgage Capital and Credit Suisse Securities (USA) LLC also served as the sponsor/seller and

underwriter, respectively, in each of the CSFB and ABSHE Offerings that Prudential purchased.

        194.    The structure, timing and disclosures of HEMT 2007-2 and HEMT 2007-1 also

significantly overlapped with—if they were not identical to—those in many of the Offerings that

Prudential purchased. For example, the Offering Materials for HEMT 2007-2 and HEMT 2007-

1 contained many of the exact same disclosures regarding applicable underwriting guidelines as

did many of the HEAT Offerings that Prudential purchased. Perhaps most significantly, New

Century, one of the primary originators for the HEMT 2007-2, originated all of the mortgage

loans backing three of Prudential’s Certificates—ABSHE 2004-HE1, ABSHE 2005-HE8, and

NCHET 2004-4—and unspecified amounts of at least two others—ABSHE 2005-HE1 and
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ABSHE 2007-HE1. Thus, the findings of MBIA and Ambac, made upon a review of the

Defendants’ own loan files, apply equally to the Certificates at issue here.

       195.    MBIA reviewed the loan files for 1,798 loans underlying HEMT 2007-2, of which

477 were selected at random. In its review, MBIA found that 85% of the loans contained

breaches of DLJ Mortgage Capital’s representations and warranties that the loans had been

originated in compliance with underwriting guidelines.

       196.    MBIA’s analysis revealed evidence of “a complete abandonment of applicable

guidelines and prudent practices such that the loans were (i) made to numerous borrowers who

were not eligible for the reduced documentation loan programs through which their loans were

made, and (ii) originated in a manner that systematically ignored the borrowers’ inability to

repay the loans.” Moreover, “the rampant and obvious nature of the breaches confirms that

Credit Suisse made intentional misrepresentations concerning its mortgage loans and the due

diligence that Credit Suisse purported to perform regarding the quality of those loans.”

       197.    MBIA’s re-underwriting analysis exposed, inter alia, the following problems that

would have been obvious to Defendants given their roles in the offering:

           •   pervasive violations of the originators’ actual underwriting standards, and prudent
               and customary origination and underwriting practices, including (i) qualifying
               borrowers under reduced documentation programs who were ineligible for those
               programs; (ii) systemic failure to conduct the required income-reasonableness
               analysis for stated income loans, resulting in the rampant origination of loans to
               borrowers who made unreasonable claims as to their income; and (iii) lending to
               borrowers with debt-to-income and LTV ratios above the allowed maximums;

           •   rampant fraud, primarily involving misrepresentation of the borrowers’ income,
               assets, employment, or intent to occupy the property as the borrowers’ residence
               (rather than as an investment), and subsequent failure to so occupy the property;
               and

           •   failure by the borrower to accurately disclose his or her liabilities including
               multiple other mortgage loans taken out to purchase additional investment
               property.


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       198.    MBIA has also uncovered internal Credit Suisse e-mails indicating that, at least

by February 2006, Credit Suisse was aware the mortgage loans that it was pooling for

securitizations had been originated in violation of the applicable underwriting guidelines. When

faced with alarming early payment default (“EPD”) rates on loans that it planned to securitize,

Credit Suisse employees sought to obtain “quality control” reports. Those reports showed that

substantial percentages of the delinquencies had been caused by substandard underwriting,

misstated incomes, and undisclosed debts. As discussed below (see Section II.D.(1), infra),

MBIA has also uncovered evidence indicating that Credit Suisse devised a plan to directly profit

from its knowledge that it was securitizing defective loans and selling them to investors.

       199.    Ambac reviewed the loan files of 1,134 loans underlying HEMT 2007-1, of which

390 were randomly selected. In its review, Ambac found that 80% of the loans breached DLJ

Mortgage Capital’s representations and warranties that the loans had been originated in

compliance with underwriting guidelines.

       200.    Ambac’s findings of the pervasive nature of the abandonment of designated

underwriting guidelines are similar to those of MBIA: “The number and nature of the defects

identified by Ambac’s review indicate clearly that the [Home Equity Lines of Credit] included in

the Transaction [between Ambac and DLJ Mortgage Capital and Credit Suisse Securities (USA)

LLC] were systematically originated with virtually no regard for the borrowers’ ability or

willingness to repay their obligations.”

               (3)     Re-Underwriting by Assured

       201.    Assured also provided guaranty insurance to Credit Suisse on certain

securitizations and has recently filed suit based, in part, on the findings of its re-underwriting

analysis. Assured wrote insurance on six offerings, including CSMC 2007-3 and TBW 2007-2.

These offerings share many similar features with Prudential’s Offerings. CSMC 2007-3 and
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TBW 2007-2 both included DLJ Mortgage Capital as the sponsor and/or seller, Credit Suisse

First Boston Mortgage Securities Corp. as depositor, and Credit Suisse Securities (USA) LLC as

underwriter—as did the thirteen HEAT Offerings in which Prudential invested. And DLJ

Mortgage Capital and Credit Suisse Securities (USA) LLC were the sponsor/seller and

underwriter, respectively, in each of the CSFB and ABSHE Offerings that Prudential invested in.

The structure, timing and disclosures of CSMC 2007-3 and TBW 2007-2 also significantly

overlapped with—if they were not identical to—those in many of the Offerings in which

Prudential purchased Certificates. Thus, Assured’s findings, made upon a review of the

Defendants’ own loan files, apply equally to the Certificates at issue here.

       202.    Assured’s re-underwriting analysis similarly identifies “repeated” and “pervasive”

breaches of Defendants’ representations. A staggering 93% of mortgage loans (7,338 of 7,918)

that Assured reviewed in its re-underwriting analysis are defective with respect to the relevant

representations. In particular, Assured’s analysis revealed a 90% underwriting guideline breach

rate for certificates purchased from the CSMC 2007-3 offering. Assured’s investigation also

revealed that as of August 2011, 30.5% of the remaining loans in the mortgage pools had either

defaulted or become delinquent for at least sixty days. Assured’s review revealed that the

mortgage loans were issued with widespread disregard for borrower income, employment

verification, other debt obligations, relevant LTV and CLTV ratio limits, and other

documentation and underwriting requirements.

       203.    Assured’s re-underwriting analysis uncovered repeated, pervasive, and obvious

breaches of the relevant underwriting guidelines. For instance, DLJ Mortgage Capital

securitized: (i) a $479,000 mortgage loan for a borrower who claimed to be an owner of a

maintenance and painting business with annual income of $358,800, but the re-underwriting



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revealed an actual income of $46,959; (ii) a $318,750 mortgage loan for a borrower who claimed

to be a server at a restaurant and a cook at another restaurant with a total annual income of

$96,000, but the re-underwriting revealed an actual income of $17,998; (iii) a $101,500

mortgage loan for a borrower who claimed to be a “tech manager” with annual income of

$222,000, but the re-underwriting revealed an actual income of $67,524; (iv) a $348,000

mortgage loan for a borrower who claimed to be a “pattern maker” with annual income of

$90,000, but the re-underwriting revealed an actual income of $20,352; (v) a $412,000 mortgage

loan for a borrower who claimed to be a restaurant owner with annual income of $234,000, but

the re-underwriting revealed an actual income of $56,000; and (vi) a $196,200 mortgage loan for

a borrower who claimed to be self-employed in the “concrete business” with annual income of

$144,000, but the re-underwriting revealed an actual income of $19,932.

       204.    Breaches of represented underwriting practices also took the form of widespread

(and blatant) failures to verify applicants’ employment. For instance, DLJ Mortgage Capital

securitized a $172,000 mortgage loan for a borrower who claimed to be an office manager

despite the fact that a written verification of employment was completed by a person with the

same title the borrower claimed to have, rather than by the person contacted by the lender for

verification. DLJ also securitized a $396,000 mortgage loan for a borrower who claimed to be a

manager of a courier company and for whom the lender simply did not obtain employment

verification. In both of these instances, the re-underwriting revealed the borrower was not

employed in the manner reported in the loan application and in both instances the loan is now in

default.

       205.    In another illustrative failure to verify employment properly, Assured discovered

the securitization of a $196,350 mortgage loan made to a borrower who claimed to be a paralegal



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despite the fact that the employment verification did not include the full name or title of the

person providing the verification, and tax records and pay stubs submitted by the borrower were

not issued by the asserted employer; the re-underwriting revealed the borrower had never been

an employee of the asserted employer.

        206.   In another example of this disregard for salary verification, DLJ Mortgage Capital

securitized a $248,000 mortgage loan for a borrower who claimed to be a manager but whose

employment verification did not include any information on the person providing the verification

as required and was not timely; the re-underwriting revealed the borrower was a forklift driver

who is now in default.

        207.   Assured’s forensic review also exposed obvious failures to investigate debt

obligations, a practice which results in the issuance (and securitization) of loans to borrowers

whose DTI ratios vastly exceeding the maximum allowable ratios set forth in the underwriting

guidelines. For instance, as a result of not investigating the thirteen credit inquiries on a

borrower’s origination credit report, DLJ Mortgage Capital securitized a $296,500 mortgage loan

for a borrower who, re-underwriting revealed, had opened six mortgages totaling $1,701,000

within thirty days of the subject mortgage’s closing date. Because of failure to investigate the

three credit inquiries on a borrower’s origination credit report, DLJ Mortgage Capital also

securitized a $448,000 mortgage loan for a borrower who, re-underwriting revealed, had opened

four mortgages and an auto mortgage totaling $1,106,390 before the subject mortgage’s closing

date.

        208.   This same oversight of twenty-two credit inquiries on another borrower’s

origination credit report allowed DLJ Mortgage Capital to securitize a $102,400 mortgage loan

for a borrower who, re-underwriting revealed, had opened seven mortgages totaling $772,600



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before or on the same day as the subject mortgage loan’s closing date. DLJ Mortgage Capital

similarly securitized a $440,000 mortgage loan for a borrower despite the existence of three

credit inquiries on the credit report. Re-underwriting revealed the borrower had opened two

blanket mortgages totaling $959,000 before the subject mortgage’s closing date.

       209.    DLJ Mortgage Capital also securitized mortgage loans with blatant disregard for

the maximum LTV ratios set forth in the applicable underwriting guidelines. For example, it: (i)

securitized a $240,000 mortgage loan incorrectly using the appraised value instead of the original

sales price; the re-underwriting calculation using the proper figure yielded a LTV ratio of

396.96%, far in excess of the applicable maximum LTV ratio of 85%; (ii) securitized a

$197,798 mortgage loan at an LTV ratio of 100% when the subject property had a second lien

and the applicable guidelines set a maximum LTV ratio of 80% and specifically prohibited

second liens; and (iii) securitized a $252,000 mortgage loan with a 124.75% CLTV ratio, which

exceeded the applicable maximum CLTV ratio of 100%.

       210.    Even beyond these pervasive instances of disregarding incomplete, implausible,

or suspicious documentation, Assured’s re-underwriting also uncovered numerous instances in

which documentation was blatantly absent. Examples include DLJ Mortgage Capital having

securitized a $100,000 mortgage loan in the absence of any evidence that the lender investigated

or obtained an explanation from the borrower for forty inquiries listed on the origination credit

report, and a $228,400 mortgage loan despite the borrower having no suitable active credit

references or any alternative credit sources.

       C.      Credit Suisse’s Representations Regarding Credit Ratings Were False and
               Misleading

       211.    In order to falsely market the Offerings as safe, Defendants fed the same

misrepresentations found in the Offering Materials to the credit ratings agencies. This not only


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rendered false Defendants’ representations about how the rating process really functioned, but

also assured that the ratings themselves failed to reflect the actual risk underlying the Certificates.

       212.    Because the Offerings’ ratings were based primarily on information provided by

Defendants, it was critical that Defendants provide truthful and accurate information. The SPSI,

in its April 2011 report, noted:

       For RMBS, the “arranger”—typically an investment bank—initiated the rating
       process by sending to the credit rating agency information about a prospective
       RMBS and data about the mortgage loans included in the prospective pool. The
       data typically identified the characteristics of each mortgage in the pool including:
       the principal amount, geographic location of the property, FICO score, loan to
       value ratio of the property, and type of loan . . . .

(SPSI Report at 251.)

       213.    Susan Barnes, the North American Practice Leader for RMBS at S&P from 2005

to 2008, confirmed that the rating agencies relied upon investment banks like Credit Suisse to

provide accurate information about the loan pools:

       The securitization process relies on the quality of the data generated about the
       loans going into the securitizations. S&P relies on the data produced by others
       and reported to both S&P and investors about those loans . . . . S&P does not
       receive the original loan files for the loans in the pool. Those files are reviewed
       by the arranger or sponsor of the transaction, who is also responsible for reporting
       accurate information about the loans in the deal documents and offering
       documents to potential investors.

(SPSI Hearing Testimony, Apr. 23, 2010 (emphasis added).)

       214.    As the SPSI found, Defendants and other banks used “financial engineering” of

credit ratings to give high risk assets the veneer of safety and low risk. (SPSI Report at 30.)

This “engineering” came in numerous forms, including pressuring the rating agencies for

favorable ratings and playing the rating agencies off one another with the threat of withholding

future business if the sponsoring bank was not given favorable treatment (i.e., “ratings

shopping”). As detailed in the SPSI report:


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        At the same time Moody’s and S&P were pressuring their RMBS and CDO
        analysts to increase market share and revenues, the investment banks responsible
        for bringing RMBS and CDO business to the firms were pressuring those same
        analysts to ease rating standards. Former Moody’s and S&P analysts and
        managers interviewed by the Subcommittee described, for example, how
        investment bankers pressured them to get their deals done quickly, increase the
        size of the tranches that received AAA ratings, and reduce the credit
        enhancements protecting the AAA tranches from loss. They also pressed the
        CRA analysts and managers to ignore a host of factors that could be seen as
        increasing credit risk. Sometimes described as “ratings shopping,” the analysts
        described how some investment bankers threatened to take their business to
        another credit rating agency if they did not get the favorable treatment they
        wanted. The evidence collected by the Subcommittee indicates that the pressure
        exerted by investment banks frequently impacted the ratings process, enabling the
        banks to obtain more favorable treatment than they otherwise would have
        received.

(Id. at 278.)

        215.    As one S&P director put it in an August 8, 2006 e-mail (that has only recently

been made publicly available): “[Our RMBS friends have] become so beholden to their top

issuers for revenue [that] they have all developed a kind of Stockholm syndrome which they

mistakenly tag as Customer Value creation.” Ratings analysts who complained about the

pressure, or did not do as they were told, were replaced on deals or terminated.

        216.    Summarizing the intense pressure investment banks put on ratings analysts to

provide favorable ratings, Richard Michalek, a former Moody’s VP and Senior Credit Officer,

testified before the SPSI that:

        The willingness to decline to rate, or to ‘just say no,’ to proposed transactions,
        steadily diminished over time. That unwillingness to say no grew in parallel with
        the company share price and the proportion of total firm revenues represented by
        structured finance transactions . . . coincident with the steady drive toward
        commoditization of the instruments we were rating . . . . The threat of losing
        business . . . even if not realized, absolutely tilted the balance away from
        independent arbiter of risk towards captive facilitator of risk transfer. . . . The
        message from management was, ‘must say yes.’

See also Written Statement of Eric Kolchinsky, Managing Director, Moody’s Derivatives Group

(“Managers of rating groups were expected by their supervisors and ultimately the Board of
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Directors . . . to build, or at least maintain, market shares. It was an unspoken understanding that

loss of market share would cause a manager to lose his or her job. . . . [L]owering credit

standards . . . was one easy way for a managing director to regain market share.”).

       217.    The SPSI Report specifically identifies Credit Suisse as having engaged in such

misconduct. Credit Suisse actively pressured ratings agencies to make exceptions for certain

offerings, in the form of relaxed analytical standards, and would then use those exceptions as a

precedent for further relaxation of future standards. In one e-mail, Mr. Michalek relayed his

concern of such conduct: “I am worried that we are not able to give these complicated deals the

attention they really deserve, and that they [Credit Suisse] are taking advantage of the ‘light’

review and the growing sense of ‘precedent.’” (SPSI Report at 305.)

       218.    The SPSI Report also discusses how rating analysts who requested detailed

information about transactions became unpopular with Wall Street banks, which then pressured

the analysts’ managers to bar them from rating their deals. Mr. Michalek testified that while he

worked at Moody’s, he was prohibited from working on RMBS transactions for certain banks,

including Credit Suisse, because he scrutinized deals too closely: “During my tenure at Moody’s,

I was explicitly told that I was ‘not welcome’ on deals structured by certain banks . . . I was told

by my then-current managing director that I was ‘asked to be replaced’ on future deals by . . .

CSFB [Credit Suisse First Boston] . . . .” (Id. at 286.) This testimony was confirmed by Mr.

Michalek’s superior at the time.

       219.    Credit Suisse’s willful and improper pressure upon the rating agencies to provide

undeserved ratings rendered misleading Defendants’ promises that the various tranches within a

particular offering would obtain a certain rating and that those ratings would reflect the actual

credit quality of the Certificate. Credit Suisse failed to disclose that it, like other investment



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banks, routinely trampled upon the agencies’ independence and provided the agencies with false

and misleading data. As Defendants knew, the rating agencies relied on this data, and the ratings

based on this data would not reflect the true credit risk associated with each tranche and Offering.

According to a May 13, 2010, Reuters news article, the New York Attorney General is

conducting “an investigation into whether eight banks, including [Credit Suisse], misled rating

agencies with regard to mortgage-derivative deals.”

       D.      Evidence from Analyses Conducted by Defendants’ Third-Party Due
               Diligence Firms

       220.    In connection with their purchase of the Mortgage Loans from the Originators,

and consistent with industry practice, Defendants performed due diligence to assess loan quality.

Defendants reaped tremendous fees from this purported diligence.

       221.    As noted above, in conducting their due diligence, Defendants relied on centers—

operated both internally and by third parties—tasked with analyzing whether the Mortgage

Loans met Defendants’ standards. Defendants employed and engaged underwriters who

reviewed a sample of the Mortgage Loans purportedly to confirm that they both conformed to

the representations made by the Originators and complied with Defendants’ own credit policies.

       222.    As Defendants’ appetite for origination volume increased and their ties to

warehouse lenders grew stronger, Defendants’ pre-securitization due diligence process became

increasingly lax. Even when Defendants’ own due diligence revealed that a significant

percentage of loans failed to meet the applicable underwriting standards, Defendants acquired

the loans and included in them in securitization pools anyway.

       223.    Clayton was one of Defendants’ primary third-party due diligence firms. As the

FCIC found: “Because of the volume of loans examined by Clayton during the housing boom,




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the firm had a unique inside view of the underwriting standards that originators were actually

applying—and that securitizers were willing to accept.” (FCIC Report at 166.)

       224.    For each loan pool it was hired to review, Clayton checked for: (i) adherence to

seller credit underwriting guidelines and client risk tolerances; (ii) compliance with federal, state

and local regulatory laws; and (iii) the integrity of electronic loan data provided by the seller to

the prospective buyer. This review was commonly referred to as a “credit and compliance

review.” Contract underwriters reviewed the loan files, compared tape data with hard copy or

scanned file data to verify loan information, identified discrepancies in key data points, and

graded loans based on seller guidelines and client tolerances. Critically, this also analyzed

whether, to the extent a loan was deficient, there were any “compensating factors.”

       225.    Each day, Clayton generated reports that summarized its findings, including

summaries of the loan files that suffered from exceptions to the relevant underwriting standards.

This included giving loans three grades—Grade 3 loans “failed to meet guidelines and were not

approved,” while Grade 1 loans “met guidelines.” Importantly, these Grade 3 loans did not

contain any “compensating factors.” Once Clayton identified such problems, the seller had the

option of attempting to cure them by providing missing documentation or otherwise explaining

to Clayton why a loan complied with the underwriting standards. If additional information was

provided, Clayton re-graded the loan. Once this process was complete, Clayton provided the

underwriters and sponsors with final reports. Tellingly, only 54% of the nearly one-million loans

reviewed by Clayton Holdings “met guidelines,” a number that its former president admitted

reflected “a quality control issue in the factory” for RMBS. (Id. at 165-66.)

       226.    Clayton’s Keith Johnson explained to the FCIC that the practice of waiving in

rejected loans was prevalent among Walls Street banks, such as Credit Suisse, that extended



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warehouse lines of credit. Johnson told the FCIC that “I think our data would show that, you

know, we saw bigger exceptions to any client that had warehouse lines.” Johnson explained that

securitizers like Credit Suisse had a conflict of interest. Either the securitizer could reject the

loan and force the loan originator to take it back—resulting in a loss because the rejection would

be financed with the warehouse line of credit extended by the securitizer—or the securitizer

could waive the loan into the pool and pass the loss on to the firm’s investor-clients who

purchased certificates that were backed by a faulty loan. As Johnson explained:

       [I]f Bob was originating for me as the client and I had a warehouse line to you, I
       think what happened is a conflict of interest. That if I put back loans to you, Bob
       and you don’t have the financial capability to honor those, then I’m kind of
       caught; right? […] I’m going to take a loss on the warehouse line . . . .

       227.    Recently released internal Clayton documents show that, contrary to Defendants’

representations in the Offering Materials, a startlingly high percentage of loans reviewed by

Clayton for Defendants were defective, but were nonetheless included in loan pools sold to

Prudential and other investors. According to an internal Clayton “Trending Report” made public

by the government in conjunction with testimony given in September 2010, and which covered

loans handled by Clayton from the beginning of 2006 through the middle of 2007, Defendants

were informed that 32% of the 56,300 loans Clayton reviewed for Credit Suisse received the

worst possible grade, “failed to meet guidelines,” and lacked any compensating features. Yet,

rather than doing anything to address these facially troubling rates, Defendants “waived in” to its

pools one-third of those toxic loans.

       228.    Clayton and other third-party due diligence firms identified these high

percentages of problem loans even though underwriters were pressing them to provide reports in

a very short time frame, with only limited re-verification of data, and to approve as many loans




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as possible. The percent of loans that were truly problematic therefore was likely much higher

than the astounding rates Clayton’s reports indicate these firms managed to discover.

       229.    This high rejection and “waiver” rate—occurring at the same time the Certificates

at issue here were being assembled and sold—further confirms that the Mortgage Loans did not

comport with represented underwriting guidelines, and that defective loans were included in the

securitization pools without any purported “compensating factors.” The hidden “waiver” of

rejected loans that were not subject to any compensating factors was a fraudulent omission and

contradicted Defendants’ representations regarding their underwriting and securitization

processes.

       230.    As the FCIC report concluded:

       [M]any prospectuses indicated that the loans in the pool either met guidelines
       outright or had compensating factors, even though Clayton’s records show that
       only a portion of the loans were sampled, and that of those that were sampled, a
       substantial percentage of Grade 3 Event loans were waived in.
       ....
       [O]ne could reasonably expect [the untested loans] to have many of the same
       deficiencies, and at the same rate, as the sampled loans. Prospectuses for the
       ultimate investors in the mortgage-backed securities did not contain this
       information, or information on how few of the loans were reviewed, raising the
       question of whether the disclosures were materially misleading, in violation of
       the securities laws.

(Id. at 167, 170 (emphasis added).)

       E.      Evidence of Defendants’ Loan Originators’ Misrepresentations Regarding
               Their Underwriting

       231.    Many of the Mortgage Loans underlying Defendants’ Offerings at issue here were

originated or acquired by Defendant DLJ Mortgage Capital. Other Mortgage Loans were

originated by third-party lenders with whom Defendants had close financial arrangements,

including, in particular, Aegis, Ameriquest Mortgage Company, Argent Mortgage Co., Decision

One Mortgage, Fremont Investment & Loan, GreenPoint Mortgage Funding, New Century,

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Option One Mortgage Corp., Residential Funding LLC, Washington Mutual Bank, and WMC

Mortgage Corp. 8 It is now evident that the originators that Credit Suisse allied itself with were

some of the worst offenders of the mortgage crisis.

        232.    As summarized below, many of the Mortgage Loans underlying the Offerings at

issue here were originated by Defendants, or acquired from Originators with whom Defendants

had close relationships.

                                                                        % of
                   Trust                   Originator(s)
                                                                     Origination
            AABST 2004-2            Aegis Mortgage Corporation         100%
            AABST 2004-4            Aegis Mortgage Corporation         100%
            AABST 2005-2            Aegis Mortgage Corporation         100%
            ABSHE 2004-HE1            New Century Mortgage             100%
                                            Corporation
            ABSHE 2004-HE3             Option One Mortgage              100%
                                            Corporation
            ABSHE 2005-HE1            New Century Mortgage           unspecified
                                            Corporation
                                    WMC Mortgage Corporation         unspecified
            ABSHE 2005-HE6             Option One Mortgage             100%
                                            Corporation
            ABSHE 2005-HE8            New Century Mortgage              100%
                                            Corporation
            ABSHE 2006-HE7             Ameriquest Mortgage           unspecified
                                             Company
                                    Argent Mortgage Company,         unspecified
                                                LLC
            ABSHE 2007-HE1         Residential Funding Company,      unspecified
                                                LLC
                                      New Century Mortgage           unspecified
                                            Corporation
                                    People’s Choice Home Loan,       unspecified
                                                Inc.
                                    Aegis Mortgage Corporation       unspecified
                                     EFC Holdings Corporation        unspecified
            ARSI 2004-W6            Argent Mortgage Company,         unspecified
                                                LLC
                                   Olympus Mortgage Company          unspecified
            CSFB 2005-1             DLJ Mortgage Capital, Inc.       unspecified
                                   GreenPoint Mortgage Funding,      unspecified

        8
           It is worth noting that pursuant to Item 1110 of Regulation AB, Defendants were obligated to
disclose the identity of only those originators that contributed to 10% or more of a loan pool. Defendants
often avoided this disclosure requirement, however, by keeping originator contributions below 10%. Due
to Defendants’ own manipulation, then, the above list of originators is under-inclusive; other bad
originators contributed loans to the Offerings at issue here.
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                                              Inc.
                                  Washington Mutual Mortgage      unspecified
                                        Securities Corp.
           FHLT 2004-B            Fremont Investment & Loan          100%
           FHLT 2005-A            Fremont Investment & Loan          100%
           FHLT 2005-E            Fremont Investment & Loan          100%
           HEAT 2004-2                     unspecified
           HEAT 2004-3                     unspecified
           HEAT 2004-4                     unspecified
           HEAT 2004-5                     unspecified
           HEAT 2004-6                     unspecified
           HEAT 2004-8                     unspecified
           HEAT 2005-1                     unspecified
           HEAT 2005-3              loans purchased by DLJ
                                   Mortgage Capital, Inc. from
                                       various originators
           HEAT 2005-5              loans purchased by DLJ
                                   Mortgage Capital, Inc. from
                                       various originators
           HEAT 2005-6              loans purchased by DLJ
                                   Mortgage Capital, Inc. from
                                       various originators
           HEAT 2005-9              loans purchased by DLJ
                                   Mortgage Capital, Inc. from
                                       various originators
           HEAT 2006-1              loans purchased by DLJ
                                   Mortgage Capital, Inc. from
                                       various originators
           HEAT 2006-1              loans purchased by DLJ
                                   Mortgage Capital, Inc. from
                                       various originators
           HEAT 2006-2                     unspecified
           NCHET 2004-4           New Century Mortgage Corp.         100%
           RAMP 2004-RS10                  unspecified
           RAMP 2006-RZ4            Decision One Mortgage            49%
                                         Company LLC
                                    HomeComings Financial           17.5%
                                         Network, Inc.
           RFMSII 2005-HS1                 unspecified

       233.    The Office of the Comptroller of the Currency (the “OCC”), a federal regulator of

national banks, issued in November of 2008 the “Worst Ten in the Worst Ten” list to show the

ten metropolitan areas that had the highest rates of foreclosure in the first half of 2008 for sub-

prime and Alt-A mortgages originated from 2005 through 2007, and the “worst ten” originators

for each of those metropolitan areas (also measured by foreclosure rates). Aegis, Ameriquest

Mortgage Company, Argent Mortgage Co., Decision One Mortgage, Fremont Investment &


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Loan, GreenPoint Mortgage Funding, New Century, Option One Mortgage Corp., and WMC

Mortgage Corp. all were on the list. (See “ Press Release, Office of the Comptroller of the

Currency, Worst Ten in the Worst Ten (Nov. 13, 2008).)

       234.    The systemic breakdown of Defendants’ own processes outlined above, showing

a breakdown in the quality-control processes that should have prevented the securitization of

defective loans, supports the conclusion that, in fact, Defendants routinely securitized defective

loans, regardless of originator. That the Mortgage Loans originated by the third-party

Originators were not generated in accordance with the stated underwriting guidelines (including

because they lacked any purported “compensating features”) is also supported by Prudential’s

loan-level forensic analysis of the Mortgage Loans’ misrepresented features and their recent

dismal performance. But the defective nature of the third-party originated Mortgage Loans is

further confirmed by recent revelations about the Originators themselves. It has recently come to

light that the third-party Originators had themselves systematically abandoned the stated

underwriting guidelines. A sample of the governmental, documentary, and testimonial evidence

of the third-party Originator’s abandonment is summarized below.

       235.    Defendants had the opportunity to—and did—review the loan files of the third-

party Originators as part of their due diligence and their obligations in the securitization process.

This review revealed or should have revealed that the Originators’ actual underwriting practices

were vastly inconsistent with the representations in the Offering Materials regarding the high

standards of the Originators and Defendants.

               (1)     Third-party originator New Century systematically abandoned its
                       underwriting guidelines

       236.    Once one of the nation’s largest mortgage origination companies, New Century,

collapsed and filed for bankruptcy on April 2, 2007. Formed in 1996, New Century grew rapidly


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to become one of the country’s largest subprime lenders, reporting $56.1 billion in mortgage

loans in 2005.

       237.      According to Mortgage Banking, a publication dedicated to news and analysis

about real estate finance, New Century failed to investigate when “red flags” began to appear

concerning the quality of its loans. As with many originators, New Century’s loan production

department was far more concerned with originating large quantities of loans than with ensuring

their quality. When New Century’s audit committee began identifying potential problems with

its risk management systems, New Century’s senior management failed to respond. (New

Century Financial: Lessons Learned, Mortgage Banking, October 2008.)

       238.      New Century was known “for issuing poor quality loans,” according to the SPSI

Report (at 392). In order to maintain high origination volumes, New Century ignored problems

with borrower credit risk and collateral value and looked the other way while mortgage brokers

overstated borrower income and appraised values. Almost 50% of the loans it originated used a

stated income or no income verification approach, which allowed borrowers to inflate their

income and qualify for loans that they had little ability to pay. New Century also pressured

appraisers to inflate the appraisal value of many properties regardless of actual value so that

loans would be approved and funded.

       239.      On February 29, 2008, after reviewing extensive documentary evidence and

conducting over 100 interviews, court-appointed Bankruptcy Examiner Michael J. Missal issued

a detailed report on the various deficiencies at New Century. New Century’s bankruptcy

examiner report found “serious loan quality issues at [New Century] beginning as early as 2004”

and numerous “red flags” relating to loan quality. The Bankruptcy Examiner also reported that




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New Century had a “brazen obsession with increasing loan originations, without due regard to

the risks associated with that business strategy.”

       240.    These deficiencies included lax mortgage standards and a failure to follow its own

underwriting guidelines:

           •   Certain senior managers at New Century in 2004 were told by a New Century
               employee that when underwriting stated income loans, “we are unable to actually
               determine the borrowers’ ability to afford a loan.”

           •   In early 2006, one senior manager at New Century described the performance of a
               certain loan product as “horrendous.”

           •   In 2004, the number and severity of the exceptions to underwriting standards
               employed by New Century to originate greater volume was described by one
               Senior Officer as the “number one issue” facing New Century.

           •   By 2004, New Century Senior Management became aware of spiking increases in
               EPD rates—where a borrower fails to make even the first several payments on a
               loan—suggesting that the loan should never have been originated in the first
               place. In every month following March 2006, the EPD rate exceeded 10%,
               reaching to as high as 14.95% by year end.

           •   Up until 2005 New Century used a DOS-based underwriting system which,
               according to a New Century manager interviewed by the Bankruptcy Examiner,
               enabled employees to “finagle anything.”

           •   New Century . . . layered the risks of loan products upon the risks of loose
               underwriting standards in its loan originations to high risk borrowers.

(Final Report of Michael J. Missal, Bankruptcy Examiner, In re New Century TRS Holdings,

Inc., No. 07-10416 (KJC) (Bankr. Del. Feb. 29, 2008).)

       241.    The Bankruptcy Examiner’s investigation revealed that New Century’s primary

standard for loan quality was, contrary to Defendants’ representations, whether the loan could be

sold in the secondary market to investors like Prudential, not whether a borrower could meet the

obligations under the terms of the loan.

       242.    As described in the Bankruptcy Examiner’s Report, in New Century’s wholesale

division––which accounted for the vast majority (approximately 85%) of New Century’s loan

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originations––the regional managers who had lending authority could override the internal

appraiser’s decisions. Moreover, the regional managers’ compensation was not tied to loan

quality, but was rather based on the volume of loans originated, providing incentive to inflate

appraisal values in order to increase origination of New Century loans.

        243.    A 2005 internal audit disclosed in the Bankruptcy Examiner’s Report revealed

that 23% of the loans reviewed at one New Century Sacramento fulfillment center had

“exceptions with either the appraisal conducted or the review of the appraisal submitted with

broker-provided loans or the review appraisal conducted by New Century’s Appraisal

Department.” The results of the audit were not an anomaly. According to the Bankruptcy

Examiner, the results of New Century’s own loan quality audits of underwriting procedures,

account manager review/approval, appraisals and funding “were dismal.” As reported by the

Bankruptcy Examiner, of nine branches audited by New Century in 2005, none were rated

satisfactory.

        244.    The Bankruptcy Examiner’s Report determined that New Century’s

representations that it “designed its underwriting standards and quality assurance standards to

make sure that loan quality was consistent and met its guidelines” were “not supportable.”

Indeed, New Century’s statements regarding its “improved underwriting controls and appraisal

review process” have been held to be false or misleading statements of material fact. See In re

New Century, 588 F. Supp. 2d 1206, 1225 (C.D. Cal. Dec. 3, 2008) (“The pleadings adequately

support a finding that these statements were false and misleading when made. . . . Plaintiffs’

Complaint alleges sufficient facts that the statements were material misrepresentations of New

Century’s loan quality and underwriting practices.”). 9


        9
          See also N.J. Carpenters Health Fund v. DLJ Mortg. Capital, Inc., No. 08-cv-5653, 2010 WL
1473288, at *2, *6 (S.D.N.Y. March 29, 2010) (upholding claims against dealer, issuer, and underwriter
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       245.    New Century’s Loan Production Department was the dominant force within the

company and mortgage brokers were trained to originate loans in the department, which came to

be known as “Closemore University.” Loan originations rose dramatically at New Century, from

approximately $14 billion in 2002 to approximately $60 billion in 2006. According to the

Bankruptcy Examiner’s Report, New Century’s Chief Credit Officer said that in 2004 New

Century had “no standard for loan quality.”

       246.    The Bankruptcy Examiner highlighted the severity of New Century’s improper

conduct:

       The Examiner recognizes that the subprime mortgage market collapsed with great
       speed and unprecedented severity, resulting in all of the largest subprime lenders
       either ceasing operations or being absorbed by larger financial institutions.
       Taking these events into consideration and attempting to avoid inappropriate
       hindsight, the Examiner concludes that New Century engaged in a number of
       significant improper and imprudent practices related to its loan originations,
       operations, accounting and financial reporting processes.

These included “‘increasing loan originations, without due regard to the risks associated with

that business strategy’; risk layering in which it issued high risk loans to high risk borrowers,

including originating in excess of 40% of its loans on a stated income basis; allowing multiple

exceptions to underwriting standards; and utilizing poor risk management practices that relied on

the company’s selling or securitizing its high risk mortgages rather than retaining them.” (SPSI

Report at 236.)

       247.    In December 2009, the SEC charged three of New Century’s top officers with

violations of federal securities laws. The SEC’s complaint details how New Century’s

representations regarding its underwriting guidelines were false, including its purported

adherence to high origination standards in order to sell its loan products in the secondary market


of RMBS containing collateral loans underwritten by New Century, alleging that New Century failed to
comply with represented underwriting guidelines).
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and practice of only approving subprime loan applications that evidence a borrower’s ability to

repay the loan. Complaint For Violation of the Federal Securities Laws SEC v. Morrice, No. 09-

cv-01426 (C.D. Cal. Dec. 7, 2009), available at

http://www.sec.gov/litigation/complaints/2009/comp21327.pdf

       248.    Patricia Lindsay, a former Vice President of Corporate Risk at New Century,

testified before the FCIC in April 2010 that, beginning in 2004, underwriting guidelines had been

all but abandoned at New Century. Lindsay further testified that New Century systematically

approved loans with 100 percent financing to borrowers with extremely low credit scores and no

supporting proof of income. According to Lindsay, appraisers “fear[ed]” for their “livelihoods”

if they failed to provide New Century with a lofty valuation of their collateralized properties. As

a result, New Century’s appraisers “would find properties that would help support the needed

value rather than finding the best comparables to come up with the most accurate value.”

       249.    In 2010, the OCC identified New Century as the worst subprime lender in the

country based on the delinquency rates of the mortgage loans it originated in the ten metropolitan

areas between 2005 and 2007 with the highest rates of delinquency. (See Press Release, Office

of the Comptroller of Currency, Worst Ten in the Worst Ten: Update (Mar. 22, 2010).) The

FCIC’s report summarizes:

       New Century—once the nation’s second-largest subprime lender—ignored early
       warnings that its own loan quality was deteriorating and stripped power from two
       risk-control departments that had noted the evidence. In a June 2004 presentation,
       the Quality Assurance staff reported they had found severe underwriting errors,
       including evidence of predatory lending, federal and state violations, and credit
       issues, in 25% of the loans they audited in November and December 2003. In
       2004, Chief Operating Officer and later CEO Brad Morrice recommended these
       results be removed from the statistical tools used to track loan performance, and
       in 2005, the department was dissolved and its personnel terminated. The same
       year, the Internal Audit department identified numerous deficiencies in loan files;
       out of nine reviews it conducted in 2005, it gave the company’s loan production
       department ‘unsatisfactory’ ratings seven times. Patrick Flanagan, president of

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       New Century’s mortgage-originating subsidiary, cut the department’s budget,
       saying in a memo that the ‘group was out of control and tries to dictate business
       practices instead of audit.’

       250.    On June 16, 2012, the FHFA made public a forensic review of more than one

hundred loans originated by New Century. The FHFA forensic review revealed that 77% of the

New Century loans were not underwritten in accordance with New Century’s underwriting

guidelines or otherwise breached the representations contained in the transaction documents. In

particular, and by way of example, the review showed instances where there was no evidence

that New Century tested the reasonableness of the borrower’s stated income for the employment

listed on the application as required by the applicable underwriting guidelines. In addition, the

review demonstrated that the borrower, in fact, misrepresented his or her income on the

application. Had the loan underwriter performed a reasonableness test as required by the

applicable underwriting guidelines, the unreasonableness of the borrower’s stated income would

have been evident.

       251.    For example:

           •   A loan that closed in May 2006 with a principal balance of $310,250 was
               originated by New Century as a stated income loan. The loan application stated
               that the borrower was employed as a construction worker earning $6,800 per
               month. The borrower’s stated income exceeded the Bureau of Labor Statistic’s
               90th percentile salary for a construction worker in the same geographic region,
               which should have been a red flag to the underwriter that the income was
               overstated. Moreover, in the Statement of Financial Affairs filed by the borrower
               as part of a 2007 Chapter 13 Bankruptcy, the borrower reported total income of
               $17,170 for 2006, resulting in a monthly income $1,431. There was no evidence
               in the file that the underwriter tested the reasonableness of the stated income. A
               recalculation of DTI based on the borrower’s verified income yielded a DTI of
               212.61 percent, which exceeds the guideline maximum allowable DTI of 50
               percent. The loan defaulted and the property was liquidated in a foreclosure sale,
               resulting in a loss of $273,719, which is over 88 percent of the original loan
               amount.

           •    A loan that closed in May 2006 with a principal balance of $216,000 was
               originated by New Century as a stated income loan. The loan application stated

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               that the borrower was self-employed as a realtor earning $14,000 per month. The
               borrower’s stated income exceeded CBSalary.com’s 90th percentile salary for a
               small business owner, the most analogous occupation, in the same geographic
               region, which should have been a red flag to the underwriter that the borrower’s
               income was overstated. Moreover, the loan file contained post-closing loan
               modification documents, including the Borrower’s 2006 tax return for the same
               employer at the time of loan origination, which reflected earnings for the
               borrower of $1,864 per month. There was no evidence in the file that the
               underwriter tested the reasonableness of the stated income. A recalculation of
               DTI based on all evidence uncovered by the forensic review, yielded a DTI of
               364.08 percent, which exceeds the guideline maximum allowable DTI of 50
               percent. The loan defaulted and the property was liquidated in a foreclosure sale,
               resulting in a loss of 121,937, which is over 56 percent of the original loan
               amount.

       252.    Similarly, the FHFA review revealed that New Century failed to incorporate all of

a borrower’s monthly obligations into its evaluations, precluding it from properly assessing the

borrower’s ability to repay the loan. The following are examples where New Century’s

underwriting process either failed to incorporate all of the borrower’s debt or the monthly debt

obligations were incorrectly calculated. Properly calculated, the borrower’s actual DTI ratio

exceeded the limits established by New Century’s guidelines. For example:

           •    A loan that closed in March 2006 with a principal balance of $442,000 was
               originated by New Century as a stated income loan. The forensic review revealed
               that the underwriter improperly excluded the monthly mortgage insurance
               payment of $118 along with two mortgage loans with total monthly payments of
               $2,206, and the underwriter improperly calculated the borrower’s hazard
               insurance and taxes. A recalculation of the DTI based on all evidence uncovered
               by the forensic review resulted in an increase from 49.84 percent to 215.79
               percent, which exceeds the guideline maximum of 50 percent. The loan defaulted
               and the property was liquidated in a foreclosure sale, resulting in a loss of
               $248,501, which is over 56 percent of the original loan amount.

           •   A loan that closed in March 2006 with a principal balance of $130,500 was
               originated by New Century as a stated income loan. The forensic review revealed
               that the borrower obtained a mortgage prior to the closing of the subject loan,
               which resulted in an additional monthly payment of $2,747. Although this loan
               was not listed on the application for the subject loan, there were eight credit
               inquiries listed on the origination credit report for the previous 90 days. There is
               no evidence in the file that the underwriter investigated the credit inquiries or took
               the additional debt obligations into account in originating the loan. Moreover, the

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               borrower failed to include the monthly mortgage insurance of $57 per month. A
               recalculation of the DTI that includes the borrower’s undisclosed debt and
               monthly mortgage insurance resulted in an increase from 46.68 percent to 181.06
               percent, which exceeds the guideline maximum of 50 percent. The loan defaulted
               and the property was liquidated in a foreclosure sale, resulting in a loss of
               $134,223, which is over 102 percent of the original loan amount.

       253.    Relatedly, FHFA’s review showed the following examples where the borrower’s

credit report contained numerous credit inquiries which should have put New Century on notice

for potential misrepresentations of debt obligations, and the resulting impact on the DTI ratio.

Had New Century properly addressed these irregularities, the undisclosed liabilities would have

been discovered. Failure to investigate these issues prevented the loan underwriting process

from appropriately qualifying the loan and evaluating the borrower’s ability to repay. For

example:

           •   A loan that closed in May 2006 with a principal balance of $156,478 was
               originated by New Century as a stated income loan. A credit report included in
               the origination file dated prior to closing shows eight credit inquiries within the
               previous 90 days, including numerous inquiries from mortgage lenders and
               servicers. There was no evidence in the origination file that the loan underwriter
               researched these credit inquiries or took any action to verify that such inquiries
               were not indicative of undisclosed liabilities of the borrower. Moreover, the
               borrower obtained another mortgage prior to the closing of the subject loan,
               which resulted in an additional monthly payment of $1,509. A recalculation of
               the DTI based on all evidence uncovered in the forensic review resulted in an
               increase in DTI from 48.25 percent to 76.77 percent, which exceeds the guideline
               maximum of 50 percent. The loan defaulted and the property was liquidated in a
               foreclosure sale, resulting in a loss of $1,815.

           •   A loan that closed in May 2006 with a principal balance of $100,251 was
               originated by New Century as a stated income loan. A credit report included in
               the origination file dated prior to closing shows nine credit inquiries within the
               previous 90 days, including numerous inquiries from mortgage lenders and
               servicers. There was no evidence in the origination file that the loan underwriter
               researched these credit inquiries or took any action to verify that such inquiries
               were not indicative of undisclosed liabilities of the borrower. Moreover, the
               borrower obtained another mortgage prior to the closing of the subject loan,
               which resulted in an additional monthly payment of $1,688. The additional
               mortgage was not listed on the application for the subject loan. A recalculation of
               the DTI based on all evidence uncovered in the forensic review resulted in an

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               increase from 38.93 percent to 80.17 percent, which exceeds the guideline
               maximum of 50 percent. The loan defaulted and the property was liquidated in a
               foreclosure sale, resulting in a loss of $74,295, which is over 74 percent of the
               original loan amount.

               (2)    Third-party originator Option One Mortgage Corporation
                      systematically abandoned its underwriting guidelines

       254.    Option One Mortgage Corporation (“Option One”) was a national mortgage

lender formerly owned by H&R Block, Inc., until its assets were sold to American Home

Mortgage Servicing, Inc. in April 2008. According to the OCC’s “Worst Ten in the Worst Ten”

list, Option One was ranked as the sixth-worst mortgage originator by number of foreclosures as

of March 22, 2010.

       255.    Option One Confidential Witness 1 (“OOCW1”) was the post-closing team lead

at Option One from December 2002 until 2007, when Option One shut down. OOCW1 stated

that during the appraisal process, loan underwriters at Option One would call their “appraiser

friends” and communicate to the appraiser the requisite appraisal value for approval of the

mortgage loan being underwritten.

       256.    Option One Confidential Witness 2 (“OOCW2”) was a national credit

underwriting manager at Option One from 2001 to 2005. According to OOCW2, the institutions

that purchased loans from Option One “didn’t care” about underwriting guidelines and only

cared about the FICO scores of the borrowers. OOCW2 often saw that loans he refused to

underwrite were subsequently underwritten by his co-workers.

       257.    Option One Confidential Witness 3 (“OOCW3”) was a loan underwriter at Option

One from 2004 to 2006. OOCW3 stated that the sales force of Option One was primarily paid

on commission, so volume of mortgage loans was critical to them. According to OOCW3, there

was no consequence, either to account executives or underwriters, if a borrower defaulted on his

or her first mortgage payment.
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       258.    According to OOCW3, stated income loans were difficult and at times impossible

to verify. Loans that met the guidelines, but looked dubious, such as a cosmetologist or

landscaper making an annual income of over $100,000, were made every day. In spite of the fact

that OOCW3 felt that the cosmetologist likely was not earning the income stated on the

application, OOCW3 did not have discretion to reject the loan because the application nominally

fell within Option One’s guidelines. According to OOCW3, numerous loans with such

misrepresentations were approved on a daily basis.

       259.    Option One Confidential Witness 4 (“OOCW4”) was an Underwriting Project

Lead at Clayton, who oversaw third-party due diligence of sample pools of loans, including those

originated by Option One. OOCW4 discovered that Option One loans were exceptionally “bad

loans . . . about as bad as could be.” According to OOCW4, Option One employed a practice

known as “rugging.” This meant attributing purported “compensating factors” to loan applicants

that bore no logical relationship to a lower credit risk. Consequently, borrowers would be

upgraded into products they could not afford based on what OOCW4 stated could, at best, be

considered “wishful thinking.” OOCW4 also noted that Option One made loans with DTIs as

high as 60% and relied on appraisals that were “real goofy.” In addition, according to OOCW4,

Option One frequently refinanced loans that were six to eight months old, a practice that

produces loans that are inherently presumed to be high risk.

       260.    On June 3, 2008, the Attorney General for the Commonwealth of Massachusetts

filed an action against Option One, and its past and present parent companies, for their unfair and

deceptive origination and servicing of mortgage loans. According to the Attorney General, since

2004 Option One had

       increasingly disregarded underwriting standards, created incentives for loan
       officers and brokers to disregard the interests of the borrowers and steer them into

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       high-cost loans, and originated thousands of loans that [Option One] knew or
       should have known the borrowers would be unable to pay, all in an effort to
       increase loan origination volume so as to profit from the practice of packaging
       and selling the vast majority of [Option One’s] residential subprime loans to the
       secondary market.

       261.      The Attorney General maintained that Option One’s agents and brokers

“frequently overstated an applicant’s income and/or ability to pay, and inflated the appraised

value of the applicant’s home,” and that Option One “avoided implementing reasonable

measures that would have prevented or limited these fraudulent practices.” Option One’s

“origination policies . . . employed from 2004 through 2007 have resulted in an explosion of

foreclosures.”

       262.      On August 9, 2011, the Massachusetts Attorney General announced that H&R

Block, Inc., Option One’s parent company, had agreed to settle the suit for approximately $125

million. (Press Release, Massachusetts Attorney General, H&R Block Mortgage Company Will

Provide $125 Million in Loan Modifications and Restitutions (Aug. 9, 2011).) Media reports

noted that the suit was being settled amidst ongoing discussions among multiple states’ attorneys

general, federal authorities, and five major mortgage servicers, aimed at resolving investigations

of the lenders’ foreclosure and mortgage-servicing practices. The Massachusetts Attorney

General released a statement saying that no settlement should include a release for conduct

relating to the lenders’ packaging of mortgages into securitizations. (See, e.g., Bloomberg.com,

H&R Block, Massachusetts Reach $125 Million Accord in State Mortgage Suit (Aug. 9, 2011).)

       263.      Further, Former Option One employees have reported that:

           •     If an underwriter denied a loan and an account executive complained, the loan
                 was escalated to the branch manager, who then got in touch with the underwriter.
                 With account executives, “the biggest screamer and shaker of trees gets the most
                 fruit.” For a “top-producing” account executive, whatever red flags there were
                 would be “overlooked,” and invariably the loan would be pushed through. It is
                 estimated that at least 50% of the total loan volume in Option One’s Atlanta

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              branch was approved in this manner, and also stated that a loan applicant could
              tell “a straight up lie” about his income, but the untrue information would be
              overlooked and the loan would be approved, despite initial rejection of the
              application.

          •   Option One approved stated income loans “knowing good and well that those
              people did not make that much money in the position they were in.”

          •   “The overwhelming majority of stated income loans were crafted,” meaning that
              the borrowers were not making “anywhere near” what they claimed. However,
              employees felt pressured to push loans through because every loan generated
              income and “[i]f you applied any level of rational thought, you were frowned
              upon.”

          •   With respect to artificially inflated appraisals, an employee admitted that “[o]f
              course they inflated values.” If an underwriter questioned the appraisal value, the
              account executive and branch manager would override the underwriter’s
              objection, as with any other red flag in a loan file.

          •   Option One’s appraisals “were all bad,” and borderline fraudulent, not merely
              incompetent. However, underwriters were unable to prevent loans based on the
              flawed appraisals.

          •   When employees objected to loans because of flawed appraisals, the loan officer
              would complain to the branch manager, who would complain to the Appraisals
              Department at headquarters in Irvine, California, and on up the chain until
              someone high enough in the Underwriting and Sales Department said to go
              forward with the loan.

          •   Option One was motivated to violate its underwriting and appraisal standards in
              order to increase the volume of loans it could sell to Wall Street banks to be
              securitized. An Assistant Vice President of Option One from 2005 to 2007, who
              worked in the Correspondent Lending department, which purchased loans from
              small mortgage companies, stated that Option One purchased loans that raised
              concerns under the stated guidelines and that when he raised such concerns he
              was essentially told, “Shut up, Wall Street will buy it; don’t worry about it.”

          •   “If [a borrower] had a FICO and a pulse, they could get a loan” from Option One.

          •   There were instances where employees “caught blatant fraud, and the [account
              executive] would still fight for it. [The account executives and managers] would
              fight me because they didn’t care. They knew they were going to sell it on the
              secondary market, and they didn’t care because it wasn’t their money. They were
              going to get paid regardless. . . . At Option One they didn’t have a portfolio; they
              sold everything, so they didn’t care. . . . [Option One] didn’t have to worry about
              it, because once they’re done with these crappy loans, they’d sell them off. They
              were the investors’ problem.”

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                (3)     Third-party originator Washington Mutual Bank systematically
                        abandoned its underwriting guidelines

        264.    Washington Mutual Bank (“WaMu”) pervasively violated its stated underwriting

 and appraisal standards, even in its purportedly prime mortgage business. In order to generate a

 greater volume of risky loan products, WaMu financially rewarded loan origination personnel for

 closing higher-risk loans and instituted minimum loan sales quotas. Accordingly, WaMu’s

 employees targeted more and more borrowers who were less able to afford the loan payments

 they would have to make, many of whom had no realistic ability to make loan payments.

        265.    Third-party due diligence providers such as Clayton and Bohan found that

 significant percentages of loans WaMu originated did not adhere to underwriting guidelines. For

 example, Clayton stated that in the period from the first quarter of 2006 to the second quarter of

 2007, 27% of the mortgage loans that WaMu Bank submitted to Clayton to review were rejected

 by Clayton for falling outside the applicable underwriting guidelines.

        266.    On April 13, 2010, the SPSI held a hearing that focused on the role high-risk

 loans played in the financial crisis, using WaMu as a case history. It showed how WaMu

 originated and sold hundreds of billions of dollars in high-risk loans to Wall Street banks in

 return for big fees, polluting the financial system with toxic mortgages.

        267.    The SPSI reached the following findings of fact following the April 13, 2010

 hearing:

            •   High Risk Lending Strategy. Washington Mutual (“WaMu”) executives
                embarked upon a high risk lending strategy and increased sales of high risk home
                loans to Wall Street, because they projected that high risk home loans, which
                generally charged higher rates of interest, would be more profitable for the bank
                than low risk home loans.

            •   Shoddy Lending Practices. WaMu and its affiliate, Long Beach Mortgage
                Company (“Long Beach”), used shoddy lending practices riddled with credit,
                compliance, and operational deficiencies to make tens of thousands of high risk


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                home loans that too often contained excessive risk, fraudulent information, or
                errors.

            •   Steering Borrowers to High Risk Loans. WaMu and Long Beach too often
                steered borrowers into home loans they could not afford, allowing and
                encouraging them to make low initial payments that would be followed by much
                higher payments, and presumed that rising home prices would enable those
                borrowers to refinance their loans or sell their homes before the payments shot up.

            •   Polluting the Financial System. WaMu and Long Beach securitized over $77
                billion in subprime home loans and billions more in other high risk home loans,
                used Wall Street firms to sell the securities to investors worldwide, and polluted
                the financial system with mortgage-backed securities which later incurred high
                rates of delinquency and loss.

            •   Securitizing Delinquency-Prone and Fraudulent Loans. At times, WaMu selected
                and securitized loans that it had identified as likely to go delinquent, without
                disclosing its analysis to investors who bought the securities, and also securitized
                loans tainted by fraudulent information, without notifying purchasers of the fraud
                that was discovered.

            •   Destructive Compensation. WaMu’s compensation system rewarded loan officers
                and loan processors for originating large volumes of high risk loans, paid extra to
                loan officers who overcharged borrowers or added stiff prepayment penalties, and
                gave executives millions of dollars even when its high risk lending strategy placed
                the bank in financial jeopardy.

        268.    James G. Vanasek, WaMu’s Chief Risk Officer until 2005, acknowledged to the

 SPSI that exceptions to underwriting guidelines were “a continual problem at Washington

 Mutual where line managers particularly in the mortgage area not only authorized but

 encouraged policy exceptions.” (SPSI Hearing Testimony, Apr. 13, 2010.) The Office of Thrift

 Supervision (“OTS”) issued a Report of Examination to WaMu in August 2005, stating that it

 “remain[ed] concerned with the number of underwriting exceptions and with issues that evidence

 lack of compliance with bank policy.” The OTS followed up with a May 2006 Findings

 Memorandum, stating that the loans it reviewed did not have exceptions and “probably should

 not have been made.” (SPSI Report at 180.)




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        269.    In a 2005 internal memorandum, Mr. Vanasek described WaMu’s own loan sales

 team as “infectious and dangerous,” “aggressive, and often times abusive” in response to his

 attempts to enforce a “more disciplined underwriting approach.” (Id. at 143.) Mr. Vanasek

 further testified to the SPSI that if an underwriter rejected a loan application, “the loans were

 always escalated up, so if they declined a loan, it was escalated to a higher level, a marketing

 officer who would ultimately approve.” (SPSI Hearing Testimony, Apr. 13, 2010.)

        270.    In a November 2, 2008 New York Times article entitled “Was There a Loan It

 Didn’t Like?,” former WaMu Senior Mortgage Underwriter Keysha Cooper, who started at

 WaMu in 2003 and left in 2007, explained that “[a]t WaMu it wasn’t about the quality of the

 loans; it was about the numbers . . . . They didn’t care if we were giving loans to people that

 didn’t qualify. Instead, it was how many loans did you guys close and fund?” According to the

 article, “[i]n February 2007, . . . the pressure became intense. WaMu executives told employees

 they were not making enough loans and had to get their numbers up . . . .” Ms. Cooper

 concluded, “I swear 60 percent of the loans I approved I was made to. . . . If I could get

 everyone’s name, I would write them apology letters.”

        271.    Clear signs of fraud in stated income applications were ignored by WaMu

 employees. For instance, John D. Parsons, a WaMu mortgage processing supervisor, reported

 that he “was accustomed to seeing baby sitters claiming salaries worthy of college presidents,

 and schoolteachers with incomes rivaling stockbrokers,” but he rarely questioned them. Because

 of the “real estate frenzy” that was occurring, WaMu “was all about saying yes.” In one instance,

 a borrower claimed a six-figure income as a mariachi singer. Mr. Parsons could not verify the

 singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit.




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 The photo went into his WaMu file and the loan was approved. (Peter S. Goodman & Gretchen

 Morgenson, Saying Yes N.Y. Times, Dec. 27, 2008.)

         272.    A Senate hearing exhibit details admissions by several WaMu employees

 regarding falsification of loan documentation in order to approve more loans. (SPSI Hearing, Ex.

 30.) A Westlake Village loan office sales associate stated that sales team members would “cut

 and paste the current borrower’s name and address” onto the old bank statements. (SPSI Hearing,

 Ex. 31.)

         273.    An internal WaMu presentation on Option ARM loans shows that WaMu focused

 on unsophisticated borrowers for this high-risk loan product. The internal WaMu presentation

 states that appropriate “Option ARM Candidates” were people such as “savvy investors” and

 “high income earners.” In stark contrast, the next page of the same presentation further

 explained that WaMu’s target borrowers were of “all ages,” “any social status,” and “all

 economic levels.” In other words, WaMu pushed its Option ARM loans on borrowers regardless

 of their sophistication, income level, or financial stability.

         274.    WaMu financially incentivized its loan underwriters, who supposedly served as

 WaMu’s “gatekeepers” of credit quality, to focus exclusively on volume. For example, loan

 underwriters received commissions based upon the volume of loans underwritten and closed,

 with no consideration given to quality. Not only were sales associates encouraged to increase

 volume, but they were also compensated more for closing the riskiest types of loans, including

 Option ARMs and loans with prepayment penalties. This strategy was explicitly stated in the

 2007 Retail Loan Consultant Incentive Plan, which said that WaMu must “maintain a

 compensation structure that supports the high margin product strategy.” A $300,000 Option




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 ARM, for example, would earn a $1,200 commission, versus $960 for a fixed-rate loan of the

 same amount.

        275.     Underwriters were also required to underwrite a minimum of nine loans a day,

 and any loans underwritten in excess of that number provided for bonus payments that could

 exceed $100,000 per year. Moreover, WaMu refused to provide loan delinquency data to its

 underwriters.

        276.     Highly experienced loan underwriters were shocked by how lenient WaMu was in

 its lending. WaMu’s supposedly “A paper” (i.e., prime loans) consisted of loans made to

 borrowers with credit scores in the 500s, high LTV ratios, and Option ARM loans. Frequently

 underwriters did not think that the borrower could ever actually repay the loan that WaMu had

 sold. Underwriting guidelines at WaMu “changed every minute. . . . You would literally be

 getting an e-mail every second that the guidelines changed or would have a pissed off account

 executive at your desk asking why the loan can’t go through.”

        277.     WaMu’s loans could be automatically underwritten through a computer program,

 modeled after Fannie Mae’s “Desktop Underwriter” (“DU”) program. Loans that could be

 underwritten using the DU system could be approved by a loan processor without any

 involvement from an underwriter. However, if a loan was rejected by the computer, the loan

 consultant would repeatedly re-enter the loan’s information, changing the information a little

 each time, “tweak[ing] the system.”

        278.     Notwithstanding the fact that, according to regulatory agencies including the

 Federal Deposit Insurance Corporation (“FDIC”) and the OTS, “prime” loans should have been

 available only to borrowers with FICO scores of 660 or above, WaMu regularly made loans to

 borrowers with FICO scores well below this standard. A WaMu training document for subprime



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 loan production employees, entitled “Specialty Lending UW [Underwriter] HLCA [Home Loans

 Credit Authority] Training,” revised September 26, 2007, makes clear that, regardless of a

 borrower’s credit history or actual potential to repay a loan, if the borrower WaMu targeted for

 one of its “prime” loans had a FICO score over 619, that borrower was considered a “prime”

 borrower.

        279.    WaMu falsely overstated appraisals in order to secure low LTV ratios for

 mortgage loans. WaMu utilized two appraisal management companies, eAppraiseIT and

 Lender’s Service, Inc. (“LSI”), to oversee the appraisals of its loans. Documents produced in the

 New York Attorney General’s suit against eAppraiseIT and its parent, First American, reveals

 that WaMu selected individual appraisers who were willing to produce false, inflated appraisals

 and refused to hire appraisers who maintained their independence. New York v. First American

 Corp & First American eAppraiseIT, No. 07-406796 (NY. Sup. Ct. 2007). WaMu rebuked any

 sign of independence in its appraisers, returning appraisals it deemed too low to eAppraiseIT for

 “reconsideration” and shifting its business to a competitor of eAppraiseIT when one regional

 office refused to compromise its independence.

        280.    eAppraiseIT’s management was initially resistant to this pressure from WaMu but

 was eventually pressured into sacrificing its independence to meet WaMu’s demands.

 eAppraiseIT’s President complained in an August 9, 2006 e-mail to WaMu that “[t]he Wamu

 internal staff . . . admonish us to be certain we solve the [requests for reconsideration of appraisal]

 issue quickly or we will all be in for some pretty rough seas.” An August 15, 2006 e-mail to

 eAppraiseIT’s president reflects an eAppraiseIT Executive Vice President complaining because

 WaMu’s loan officers demanded that eAppraiseIT’s appraisers “tell them specifically what they

 needed.” However, on September 14, 2006, that same executive VP wrote that eAppraiseIT was



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 “studying allowing [the manager’s] group a little flexibility to raise the value 5% with a cap of

 $50k if it is fully justified.” Eventually, all independence would be lost, as confirmed by the

 eAppraiseIT’s Chief Appraiser, Peter Gailitis, who stated in an August 10, 2010 sworn affidavit

 that “the pressure from WaMu sales staff to ‘hit value’ continued throughout the time I was with

 [eAppraiseIT] . . . Requests from WaMu loan officers to increase values would come in various

 forms . . . to the effect of ‘we need X value’ or ‘we need to hit’ a certain value in order to make

 the deal go through.”

        281.    WaMu exploited the influence and leverage of its continued business to turn

 eAppraiseIT into virtually a captive appraiser. eAppraiseIT hired over 60 former WaMu

 appraisal office employees as staff appraisers and Appraisal Business Managers (“ABM”),

 reflecting eAppraiseIT’s recognition that hiring former WaMu employees was “instrumental in

 [eAppraiseIT’s] relational and operational success with [WaMu’s] sales force.” WaMu directed

 that its former employees, now comprising a third of eAppraiseIT’s staff, would deal with any

 requests by WaMu for reconsideration of appraisals. When eAppraiseIT’s office in Northern

 California refused to comply with WaMu’s requests, WaMu moved all its Northern California

 business to a competitor, LSI.

        282.    WaMu further compromised the independence of appraisers and the quality of

 appraisal values by requiring eAppraiseIT and LSI to use WaMu’s own selected list of appraisers.

 WaMu knew that these appraisers would deliver the inflated values they required to make the

 mortgage loans look attractive to potential investors. eAppraiseIT’s President recapped WaMu’s

 strategy in a February 22, 2007 e-mail to senior executives at eAppraiseIT’s parent company,

 First American. He wrote: “We had a joint call with Wamu and LSI today. The attached

 document outlines the new appraiser assigning process. In short, we will now assign all Wamu’s



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 work to Wamu’s ‘Proven Appraisers.’ . . . We will pay their appraisers whatever they demand.

 Performance ratings to retain position as a Wamu Proven Appraiser will be based on how many

 come in on value.”

        283.    LSI received the same treatment from WaMu. If LSI wanted to use an appraiser

 that was not on WaMu’s Proven Appraiser List, LSI had to provide a justification. A 2007

 Memorandum by eAppraiseIT Executive Vice President attached to an April 17, 2007 e-mail

 drafted by eAppraiseIT’s President and sent to First American Corp executives stated that “[W]e

 need a short sentence in the message log so that we can monitor . . . why you didn’t assign to a

 PAL service provider. Not using a PAL appraiser will be an issue so we need to ensure we’ve

 covered our bases as to why they’re not utilized.”

        284.    According to the New York Attorney General’s complaint, when one appraiser

 refused to reconsider the values of five appraisals he was removed from the proven appraiser list

 by WaMu. He was told by a WaMu employee that “many appraisers who had previously been

 removed from WaMu’s list of active appraisers for conducting fraudulent appraisals were being

 reinstated on WaMu’s Proven List in order to help ensure that appraisals would come in at

 sufficiently high value to permit the loans to close.” See Complaint, New York v. First American

 & eAppraiseIT, No. 07-406796, 2007 WL 6420430 (N.Y. Sup. Ct. Nov. 1, 2007).

        285.    eAppraiseIT recognized WaMu’s practices for what they were: In an e-mail dated

 September 13, 2006, eAppraiseIT’s President, Anthony Merlo, wrote to WaMu’s executives that

 “[t]he issue is getting outrageously unethical and now border line [sic] dangerous. Please

 respond what you will do to have this stopped within the Wamu organization.” eAppraiseIT’s

 President then forwarded the e-mail to First American executives, noting: “I need to clamp down,

 especially since we warrant appraisals. It’s pure pressure to commit fraud.” In spite of these



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 concerns, eAppraiseIT continued its work for WaMu, conducting over 260,000 appraisals for

 WaMu, until the fall of 2007 when the New York Attorney General brought its action.

        286.    On September 28, 2012, it was reported that the New York Attorney General

 settled its claims with First American and eAppraiseIT for millions of dollars.

        287.    Upon information and belief, former employees of WaMu will testify as follows:

            •   With regard to WaMu’s loans, “[t]he more you slammed out, the more you
                made.”

            •   Sometimes mortgage originators were surprised by the loans they could get
                approved. However, as a loan officer, if the employee could personally earn
                $2,000 to $3,000 by closing a loan, then the employee’s only concern was getting
                the loan approved. According to such an employee: “Once you get paid, you
                don’t care what happens.”

            •   WaMu employees were “greedy” and the borrowers suffered as a result.
                Consequently, such employees concluded, “[w]e could never figure it out why
                people came to us [for loans].”

            •   The primary factor driving WaMu’s mortgage lending practices was to produce as
                much volume as possible, and WaMu’s priority regarding loans was “always
                quantity rather than quality.”

            •   There was a companywide culture that required WaMu employees to do
                “whatever it took to get loans closed.” WaMu managers would constantly press
                WaMu underwriters and salespeople to “push, push, push” to close loans.

            •   “WaMu’s top priority was to get as many loans closed as quickly as they could
                close and not worry—they just wanted the volume, and it didn’t seem to matter
                how they got it . . . . Everybody just wanted their chunk of the money.” Not only
                did loan coordinators receive bonuses for loans they closed, but also such
                employees understood that if loan officers did not meet their quotas, WaMu fired
                them.

            •   At WaMu “[i]t’s not about what’s best for the client; it’s about what’s best for the
                Company.”

            •   WaMu managers also received increases in their bonuses if their group closed a
                certain percentage of Option ARM loans.




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                   (4)    Third-party originator WMC systematically abandoned its
                          underwriting guidelines

          288.     WMC employed reckless underwriting standards and practices, as described more

 fully below, that resulted in a huge amount of foreclosures, ranking WMC fourth in the report

 presented to the FCIC in April 2010 identifying the “Worst Ten” mortgage originators in the

 “Worst Ten” metropolitan areas. General Electric, which had purchased WMC in 2004, closed

 down operations at WMC in late 2007 and took a $1.4 billion charge in the third quarter of that

 year. (Diane Brady, Adventures of a Subprime Survivor, Bloomberg Businessweek, Oct. 29,

 2007.)

          289.     In June 2008, the Washington State Department of Financial Institutions, Division

 of Consumer Services filed a Statement of Charges and Notice of Intention to Enter an Order to

 Revoke License, Prohibit From Industry, Impose Fine, Order Restitution and Collect

 Investigation Fees against WMC Mortgage and its principal owners individually.

          290.     The Statement of Charges described a review of 86 loan files, which revealed that

 at least 76 of those loans were defective or otherwise in violation of Washington state law.

 Among other things, the investigation uncovered that WMC had originated loans with unlicensed

 or unregistered mortgage brokers, understated amounts of finance charges on loans, understated

 amounts of payments made to escrow companies, understated annual percentage rates to

 borrowers and committed many other violations of Washington State deceptive and unfair

 practices laws.

          291.     A review by an RMBS trustee holding WMC loans—and thus, by someone who,

 unlike Prudential, has access to WMC’s actual loan files—also found that many of the loans

 were defective. The trustee found that WMC’s representations that no fraud had taken place, and




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 that the loans complied with WMC’s underwriting guidelines, “were false when made.” A

 review of 200 loan files found a 75% error rate.

        292.    For example, the trustee’s re-underwriting found that a mortgage loan originated

 by WMC was plagued with misrepresentations of the borrower’s income, debt liabilities and

 occupancy status. In particular, whereas the borrower stated on his loan application that he

 earned $14,782 per month performing “account analysis,” the borrower’s income tax returns for

 the 2005 and 2006 years made it unambiguously clear that he was a taxi driver with a monthly

 income of only $1,548. Further, the borrower’s credit report disclosed two additional mortgages

 in the amount of $435,000, or an additional monthly liability of $3,094, which the borrower

 failed to disclose on his loan application. Finally, contrary to the borrower’s representations, the

 property he sought to purchase with the loan in question was not the borrower’s primary

 residence, and as a result, the rental obligations of the borrower’s actual primary residence added

 another $2,200 of monthly debt liabilities. In sum, if the borrower’s characteristics were viewed

 in a true and accurate light, the borrower’s DTI rose from an acceptable 34.9% to an incredible

 761.7%.

        293.    According to the trustee’s review of the related loan file and other information,

 another mortgage loan originated by WMC likewise contained numerous misrepresentations of

 the borrower’s income, the co-borrower’s income, and the borrower’s undisclosed debt liabilities.

 Specifically, instead of her stated $9,200 monthly income as a billing manager, the borrower

 actually worked as an optometric technician, making $2,405 per month. Similarly, the co-

 borrower misrepresented his income and occupation to be $8,800, earned as a grade check, rather

 than the actual $2,843, earned as a laborer. Moreover, in the same month the borrower closed

 this loan, she had also refinanced another, unrelated property, which increased her debt liabilities



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 by over $100,000. The borrower’s loan application did not reflect the refinancing and the

 associated DTI increase. Even without the additional debt obligation resulting from the

 refinancing, the borrower’s actual DTI increased from a reasonable 31.7% percent to an

 impermissible 108.8%.

        294.    Based on the trustee’s re-underwriting of a large sample of loans—the same type

 of loans, generated by the same originator, at roughly the same time as at issue in this case—the

 trustee had “compelling reason to believe that the vast majority” of the WMC loans held by the

 trust were infected with similar frauds. The consistency of the trustee’s findings with

 Prudential’s loan-level forensic analysis of the WMC Mortgage Loans at issue in this case and

 with the findings of the Washington State Department of Financial Institutions, confirms that

 WMC’s underwriting problems were systemic.

        295.    On January 20, 2012, the Los Angeles Times reported that the FBI and Justice

 Department have been investigating possible fraud at WMC. According to the Los Angeles

 Times, “the government is asking whether WMC used falsified paperwork, overstated income

 and other tactics to push through questionable loans”; “the FBI’s San Francisco office . . . has

 been looking into WMC’s business practices for nearly two years”; and “the bureau has

 examined individual WMC loan files and has begun contacting former employees about how the

 lender handled the sales of mortgages to investors.” (Michael Hudson & E. Scott Reckard, GE

 Lending Unit Said to be Target of U.S. Probe, L.A. Times, January 20, 2012.)

        296.    Former WMC employees have also come forward—in interviews with iWatch

 News, which acts as an online publication dedicated to investigative and accountability reporting

 for the Center for Public Integrity, one of the oldest and largest non-partisan, non-profit

 investigative news organizations—and provided overwhelming, first-hand evidence that WMC



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 not only abandoned its underwriting standards and practices, but that WMC and its employees

 engaged in out-and-out fraud to increase profits and commissions. Dave Riedel, a former

 compliance manager at WMC who supervised a quality-control team of a dozen or more people

 in Southern California, told iWatch News that WMC “sales reps intent on putting up big numbers

 used falsified paperwork, bogus income documentation and other tricks to get loans approved

 and sold off to Wall Street investors.” (Michael Hudson, Fraud and folly: The untold story of

 General Electric’s subprime debacle, iWatch News, January 6, 2012, last updated January 23,

 2012.)

          297.   Riedel and his team uncovered numerous examples of fraud committed by WMC

 employees. “These included faking proofs of loan applicants’ employment and faking

 verifications that would-be home buyers had been faithfully paying rent for years rather than, say,

 living with their parents. Some employees also fabricated borrowers’ incomes by creating bogus

 W-2 tax forms . . . .” A recent, 2012 report indicated that in 2005, Riedel and his team became

 particularly concerned about a sales manager who oversaw the funding of hundreds of loans each

 month. Riedel told iWatch News that “[a]n audit of those loans . . . found that many of the deals

 showed evidence of fraud or other defects such as missing documents.” Riedel brought these

 concerns to WMC’s management, which took no disciplinary action against the sales manager.

 Later, Riedel informed a visiting GE compliance official of the audit and of WMC’s failure to

 respond. As apparent payback for alerting management to the fraud he uncovered, Riedel lost

 his office and staff and was demoted.

          298.   According to the 2012 report, in May 2006, Riedel presented GE officials with

 results of an internal audit of loans that investors had asked WMC to repurchase, which indicated

 that “78 percent of them had been fraudulent” and “nearly four out of the five loan applications



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 backing these mortgages had contained misrepresentations about borrower’s incomes or

 employment.” Upon information and belief, WMC made no changes to its origination practices,

 procedures, or internal control in response to Riedel’s presentation.

        299.    Gail Roman, a former loan auditor at WMC’s regional offices in Orangeburg,

 New York informed iWatch News that she “dug up persuasive evidence of inflated borrower

 incomes and other deceptions on loan applications,” but “[m]anagement ignored [her] reports

 and approved the loans anyway.” As reported in 2012, Roman reported that WMC “didn’t want

 to hear what you found . . . . [e]ven if you had enough documentation to show that there was

 fraud or questionable activity.”

        300.    Victor Argueta, a former risk analyst at WMC, told iWatch News that “one top

 sales staffer escaped punishment even though it was common knowledge he was using his

 computer to create fake documents to bolster applicants’ chances of getting approved.” These

 documents included bank statements, W-2s and “[a]nything to make the loan look better than

 what was the real story.” In another instance, Argueta reported to management that certain

 salespeople “were putting down fake jobs on borrowers’ loan applications” and “listing their

 own cell phone numbers so they could pose as the borrowers’ supervisors and ‘confirm’ that the

 borrowers were working at the made-up employers.” Despite’s Argueta’s report, WMC’s

 management took no action against the offending salespeople.

                (5)     Third-party originator Fremont Investment & Loan systematically
                        abandoned its underwriting guidelines

        301.    According to the SPSI:

        Fremont Investment & Loan (“Fremont”) was once the fifth largest subprime
        lender in the United States. At its peak in 2006, it had $13 billion in assets, 3,500
        employees, and nearly two dozen offices. Fremont was neither a bank nor a thrift,
        but an ‘industrial loan company’ that issued loans and held insured deposits. . . . .
        In June 2008, Fremont General Corporation declared bankruptcy under Chapter
        11 . . . .
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 (SPSI Report at 237-38.)

        302.   Fremont was shuttered by the FDIC in March 2007. In 2009, it was reported that

 the FDIC’s move against Fremont, at the direction of Chairperson Sheila Bair, was the first

 government action against a subprime lender. As reported in the New Yorker:

        Fremont was among the worst of the subprime offenders, using all the now
        familiar practices: targeting people with bad credit, ignoring traditional standards
        for underwriting home loans, paying third-party brokers handsomely to bring in
        gullible customers, and then infecting the larger financial system by selling off the
        hazardous loans. ‘We ordered them out of the business,’ she said. ‘And they
        weren’t happy about it.’

 (Ryan Lizza, The Contrarian: Sheila Bair and the White House financial debate, New Yorker,

 July 6, 2009.) On June 18, 2008, Fremont filed for bankruptcy.

        303.   The FDIC, in its Order to Cease and Desist in the action styled In the Matter of

 Fremont Investment & Loan, Brea, California, Docket No. FDIC-07-035b, concluded that

 Fremont had been, among other things:

        engaging in unsatisfactory lending practices, . . . marketing and extending [ARM]
        products to subprime borrowers in an unsafe and unsound manner, . . . approving
        borrowers without considering appropriate documentation and/or verification of
        their income, . . . approving loans or ‘piggyback’ loan arrangements with loan-to-
        value ratios approaching or exceeding 100 percent of the collateral . . . [and]
        making mortgage loans without adequately considering the borrower’s ability to
        repay the mortgage according to its terms.

        304.   On December 9, 2008, the Supreme Judicial Court of Massachusetts affirmed a

 preliminary injunction that prevented Fremont from foreclosing on thousands of loans issued to

 Massachusetts residents. As a basis for its unanimous ruling, the Supreme Judicial Court found

 that the record supported the conclusion that “Fremont made no effort to determine whether

 borrowers could ‘make the scheduled payments under the terms of the loan,’” and that “Fremont

 knew or should have known that [its lending practices and loan terms] would operate in concert



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 essentially to guarantee that the borrower would be unable to pay and default would follow.”

 (Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548, 556 (Mass. 2008).) The terms of the

 preliminary injunction were made permanent by the June 9, 2009 settlement.

        305.    On June 9, 2009, Massachusetts Attorney General Martha Coakley announced a

 $10 million settlement with Fremont that resolved charges “that the company was selling risky

 loan products that it knew was designed to fail, such as 100% financing loans and ‘no

 documentation loans.’” As alleged in the Attorney General’s complaint:

        Fremont issued thousands of subprime loans, with multiple layers of risk, through
        mortgage brokers who regularly provided Fremont with false information that
        Fremont intentionally, recklessly or negligently failed to verify or audit . . . .
        Fremont knew or should have known substantial numbers of its subprime loans,
        especially absent prompt refinancing, would foreseeably fail and result in
        foreclosure, but nonetheless made the loans to promptly package and sell to the
        secondary market.

 (Complaint ¶ 2, Massachusetts v. Fremont Inv. & Loan, No. SUCV 2007-4373, (Mass.

 Super. Ct. October 16, 2007).)

        306.    Roger Ehrnman, Fremont’s former regulatory compliance and risk manager,

 substantiated the findings of the Massachusetts Attorney General and the FDIC when he told the

 FCIC that Fremont repeatedly attempted to place rejected mortgage loans into the loan pools that

 were to be sold to investors and “had a policy of putting loans into subsequent pools until they

 were kicked out three times.” (FCIC Report at 168.)

        307.    Fremont was singled out by Senator Carl Levin in his opening remarks to the

 SPSI’s hearing on Wall Street and the financial crisis, noting they are “known for loans with

 high rates of delinquency.” In her testimony to the FCIC, Vicki Beal, Senior Vice President of

 the due-diligence firm Clayton, was asked whether there were “some loan originators who just

 weren’t as good as [the] others.” She identified, among others, Fremont.



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        308.    Fremont Confidential Witness 1 (“FCW1”) was a Senior Loan Processor at

 Fremont from 2001 through May 2007. FCW1’s job was to gather the documents necessary to

 satisfy the “stipulations” required by Fremont’s underwriters (such as paystubs, tax returns, and

 appraisals). FCW1 felt a sense of urgency and a pressure to close loans, and to possibly

 compromise lending standards, because of the “Catch-22” created by the fact that underwriters

 and loan processors were only given bonuses on how many loans were closed—not how many

 were reviewed. In gathering documents, FCW1 had suspicions about incomes being claimed,

 such as “a waitress [that] was making an obscene amount of money.” Nonetheless, “we had to

 accept it.” The high claims of income, according to FCW1, became a joke amongst personnel in

 the lending center. According to FCW1, another “joke” amongst Fremont’s lending center

 personnel was inflated appraisals. It was “obvious” that many appraisers were “not impartial”

 and engaged in “a lot of shady stuff.”

        309.    Fremont Confidential Witness 2 (“FCW2”) was a loan processor at Fremont from

 2002 to 2004, and a Senior Account Manager for Fremont in 2006. FCW2’s duties included

 ensuring that the needed documents were included in the loan file. There was not only a quota of

 loans that the underwriters had to hit, but they were paid for every extra loan, and the entire team

 got paid even more if they collectively closed a given number of loans. According to FCW2,

 there were “some dubious loans” at the time, and underwriters would be “persuaded” to approve

 loans they were unsure about. Appraisals could “get a little sticky,” and FCW2 had heard of

 instances where comparable sales were left off because they did not assist the needed appraisal.

        310.    Fremont Confidential Witness 3 (“FCW3”) was a Compliance Analyst at Fremont

 in 2005 and 2006 that was responsible for investigating suspicious activity. FCW3 noted that

 Fremont had very high loan production goals for its lending centers, but its compliance staffing



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 was “very low.” FCW3 formed the conclusion that management’s understanding and interest in

 risk and compliance matters was “fairly low.” Overall, the percentage of files FCW3 examined

 that had compliance-related shortcomings was “pretty high,” suggesting a “structural process

 problem.” He could not help but notice that many large loans were being granted to borrowers

 claiming assets in the form of automobiles and jewelry—yet, suspiciously, little cash in the bank.

        311.    On information and belief, former Fremont employees will testify that:

            •   Fremont’s Regulatory Risk Management group submitted numerous, repeated
                adverse written findings to senior Fremont executives in 2005 and 2006, which
                highlighted, among other things, unfair and deceptive acts, poor underwriting, and
                problematic incentive compensation.

            •   Fremont filed repeated Suspicious Activity Reports (“SARs”) regarding broker
                fraud, but Fremont executives would not end its relationships with the identified
                brokers.

            •   Fremont underwriters were instructed that Fremont’s underwriting policies were
                merely a “guide,” and broad use of exceptions to the policies was promoted in
                order to drive loan quantity. Indeed, between 2005 and 2007, an estimated 30%
                of Fremont’s loans had some sort of exception, partly because anyone from an
                assistant manager on up had the authority to approve exceptions.

            •   Fremont would convert borrowers who were rejected under full documentation
                loan applications to “stated income” loans—with a higher reported income than
                previously documented—so that the loans were ultimately approved.

            •   Fremont underwriters would ignore obviously fraudulent documents when
                approving loans, and when information could not be falsified—such as pay
                stubs—Fremont underwriters would simply remove it from the loan files.

            •   Fremont underwriters would call appraisers and directly request that they inflate
                their appraisal values in order to close a deal.

        312.    Fremont engaged in rampant appraisal fraud, funding loans in instances where the

 appraisal was incomplete, did not match the address of the subject property, or described a home

 as owner-occupied, when it was rented.




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               (6)     Third-party originator GreenPoint Mortgage Funding, Inc.
                       systematically abandoned its underwriting guidelines

        313.   From 2003 to 2006, when many of Prudential’s Offerings were securitized,

 GreenPoint Mortgage Funding, Inc. (“GreenPoint”) saw a dramatic increase in the volume of its

 loan originations. GreenPoint was acquired by North Fork Bank (“North Fork”) in early 2004,

 and North Fork executives significantly expanded GreenPoint’s origination and loan-selling

 business. In the first year following the acquisition, GreenPoint experienced a greater than 41%

 increase in total dollar volume of its production for Alt-A and HELOC loans.

        314.   In November 2008, Businessweek Magazine reported that GreenPoint’s

 employees and independent mortgage brokers targeted borrowers who were less able to afford

 the loan payments they were required to make, and many had no realistic ability to pay back the

 loans. GreenPoint Mortgage Funding, Inc.’s parent corporation, Capital One Financial Corp.,

 eventually liquidated GreenPoint in December 2008, taking an $850 million write-down due to

 mortgage-related losses associated with GreenPoint’s origination business.

        315.   GreenPoint’s pervasive disregard of underwriting standards resulted in its

 inclusion among the worst ten originators in the 2008 “Worst Ten in the Worst Ten” Report.

 GreenPoint was identified 7th worst in Stockton, California, and 9th worst in both Sacramento,

 California, and Las Vegas, Nevada. In the 2009 “Worst Ten in the Worst Ten” Report,

 GreenPoint was listed as 3rd worst in Modesto, California, 4th worst in Stockton, Merced, and

 Vallejo-Fairfield-Napa, California, 6th worst in Las Vegas, Nevada; and 9th worst in Reno,

 Nevada.

        316.   GreenPoint is now a defendant in numerous lawsuits alleging misrepresentations

 regarding the quality of the loans GreenPoint underwrote and originated. Such actions include a

 “whistleblower” action filed in June 2008 by a former senior underwriter, who alleged, among


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 other things, that GreenPoint had engaged in fraudulent and other unlawful activities by forcing

 the approval of loan applications containing fraudulent information or by approving applications

 after the underwriter had either denied such applications or made approval contingent upon

 obtaining additional borrower documentation. Steinmetz v. GreenPoint Mortg. Funding, Inc., No.

 08-cv-5367 (S.D.N.Y. June 11, 2008).

        317.    Multiple individual borrowers and a class of borrowers have also sued GreenPoint

 within the past several years, alleging, among other things, discriminatory and predatory lending

 practices, fraudulent origination practices based on misstated or overstated income and/or

 employment status, violations of the Truth in Lending Act, violations of federal anti-kickback

 laws and elder abuse. See, e.g., Ferguson v. GreenPoint Mortg. Funding, Inc., No. 08-cv-60854

 (S.D. Fla. June 5, 2008). GreenPoint paid $1 million in July 2008 to settle charges brought by

 the New York Attorney General based on discriminatory lending practices. All of these lawsuits

 and investigations underscore GreenPoint’s pattern of fraudulent and otherwise improper lending

 practices.

        318.    In U.S. Bank National Association v. GreenPoint Mortgage Funding, Inc., No.

 09-600352 (N.Y. Sup. Ct. Apr. 22, 2009), a consultant’s investigation concluded that 93% of

 1,030 loans that GreenPoint sold contained errors, omissions, misrepresentations, and negligence

 related to origination and underwriting. A second, follow-up investigation of a random and

 statistically representative sample of loans backing the same two GreenPoint securitization trusts

 found that 86% of them breached the same origination and underwriting requirements. This

 random-sample analysis had a 95% rate of confidence that breaches in GreenPoint’s

 representations and warranties existed in a comparable percentage of loans across the trusts’




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 entire loan pools. The investigations found that GreenPoint loans suffered from serious defects

 including:

              •   Pervasive misrepresentations and/or negligence with respect to the income, assets
                  or employment of the borrower.

              •   Violations of GreenPoint’s own underwriting guidelines and prudent mortgage
                  lending practices, including loans made to borrowers (i) who made unreasonable
                  claims as to their income, (ii) with multiple, unverified social security numbers,
                  (iii) with credit scores below the required minimum, (iv) with DTI and/or LTV
                  ratios above the allowed maximum or (v) with relationships to GreenPoint or
                  other non-arm’s-length relationships.

              •   Misrepresentations of the borrower’s intent to occupy the property.

              •   Inflated appraisal values.

        319.      On March 3, 2010, the court denied GreenPoint’s motion to dismiss this claim,

 holding that discovery would be required to determine whether GreenPoint would be required

 under the parties’ contract to repurchase all 30,000 loans based on the deficiencies in individual

 loans identified by U.S. Bank.

                  (7)    Third-party originator Aegis Mortgage Corporation systematically
                         abandoned its underwriting guidelines

        320.      Aegis was founded in 1993 with a $500,000 investment. Initially, Aegis was a

 privately held mortgage banking company owned by three individuals. By 1998, the company

 was generating $1 billion in annual loan volume. In 1998 and 1999, Cerberus Capital

 Management, LP made a $45 million investment in Aegis, enabling the company to increase its

 subprime business.

        321.      With this substantial cash injection, Aegis acquired two extremely distressed

 mortgage production operations—UC Lending and New America. These and subsequent

 acquisitions enabled Aegis to grow from 150 employees in nine locations in 1999 to 3,800

 employees in over 100 locations in 2005. By 2006, Aegis was ranked as the 13th-largest


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 subprime lender in the country, generating close to $20 billion in annual originations. In eight

 years, the company’s subprime originations grew by 1,750%.

        322.    High-fee, high-risk mortgage loans fueled Aegis’ astronomic growth. As Aegis’

 demand for volume increased, loan underwriting standards were loosened to the point of

 abandonment by 2006. A large portion of the loans Aegis originated during this time were

 purchased from unlicensed mortgage brokers. Because investment banks purchased Aegis’ loans,

 underwriting standards were disregarded and quantity became more important than quality.

 Aegis’ Divisional head of underwriting, Helen Spavile, bullied the understaffed East Coast

 underwriting department in Jacksonville, Florida, to approve whatever loans they reviewed ,

 resulting in the underwriting guidelines being ignored and the loans approved. On August 13,

 2007, the company was forced to file for bankruptcy protection.

                (8)     Third-party originator Argent Mortgage systematically abandoned its
                        underwriting guidelines

        323.    According to a December 7, 2008 article in the Miami Herald, employees of

 Argent Mortgage (“Argent”) had a practice of actively assisting brokers to falsify information on

 loan applications. They would “tutor[] . . . mortgage brokers in the art of fraud.” Employees

 “taught [brokers] how to doctor credit reports, coached them to inflate [borrower] income on

 loan applications, and helped them invent phantom jobs for borrowers” so that loans could be

 approved. (Jack Dolan, et al., Borrowers Betrayed, Part 4, Miami Herald, Dec. 7, 2008.)

        324.    Orson Benn, a former Argent Vice President who went to prison for his role in

 facilitating mortgage fraud, has stated that at Argent “the accuracy of loan applications was not a

 priority.” Mr. Benn was the head of a crime ring that fabricated loan applications in order to

 pocket the loan fees; Mr. Benn himself pocketed a $3,000 kickback for each loan he helped

 secure. (FCIC Report at 164.) Of the 18 defendants charged in the Argent ring, sixteen have


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 been convicted or pled guilty, (id.) including Mr. Benn, who was sentenced to 18 years in prison.

 (Ex-Argent Mortgage VP Sentenced For Fraud, North Country Gazette, Sept. 5, 2008.)

        325.    Other jurisdictions have also investigated Argent for its mortgage origination

 practices. On June 22, 2011, a grand jury in Cuyahoga County, Ohio, indicted nine employees

 of Argent for their suspected roles in approving fraudulent loans. The case, investigated by the

 Cuyahoga County Mortgage Fraud Task Force, alleges that the employees helped coach

 mortgage brokers about how to falsify loan documents to misstate the source or existence of

 down payments, as well as a borrower’s income and assets. Argent was Cleveland’s number one

 lender in 2004, and originated over 10,000 loans from 2002 to 2005. This was the first time in

 Ohio, and one of few instances nationwide, that a mortgage fraud investigation has led to

 criminal charges against employees of a subprime lender. (Mark Gillespie, Former employees of

 subprime mortgage lender indicted by Cuyahoga County grand jury, Cleveland Plain Dealer,

 June 23, 2011.)

        326.    Also indicted were two appraisers who worked with Argent to falsify the

 appraised values for the subject properties. (Press Release, Cuyahoga County Prosecutor, Nine

 Former Argent Mortgage Company Account Managers, Supervisors and Underwriters Indicted

 (June 22, 2011).) In November 2011, Angela Pasternak, one of the indicted Argent account

 managers, was subsequently indicted a second time for “approv[ing] exceptions knowing that

 loan applications contained false income information and bogus credit scores.” (Id.)

        327.    Jacquelyn Fishwick, who worked for more than two years at an Argent loan

 processing center near Chicago as an underwriter and account manager, noted that “some Argent

 employees played fast and loose with the rules.” She “personally saw some stuff [she] didn’t

 agree with,” such as “[Argent] account managers remove documents from files and create



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 documents by cutting and pasting them.” (Mark Gillispie, The Subprime House of Cards,

 Cleveland Plain Dealer, May 11, 2008.)

        328.    Similarly, Argent was also not diligent about confirming accurate appraisals for

 the properties for which it was issuing mortgage loans. Steve Jernigan, a fraud investigator at

 Argent, said that he once went to check on a subdivision for which Argent had made loans. The

 address on the loans turned out to be in the middle of a cornfield; the appraisals had all been

 fabricated. The same fake picture had been included in each file. (Michael W. Hudson,

 Silencing the Whistle-blowers, The Investigative Fund, May 10, 2010.)

        329.    In 2007, Citigroup acquired Argent from its parent ACC Capital Holdings Corp.

 This acquisition is notable because Richard Bowen, who was a Chief Underwriter within

 Citigroup’s Consumer Lending Group was given the opportunity to review Argent before

 Citigroup acquired it. He reported that “large numbers” of Argent’s loans were “not

 underwritten according to the representations that were there.” (FCIC Hearing Transcript at 239

 (Apr. 7, 2010).)

                (9)     Third-party originator Ameriquest systematically abandoned its
                        underwriting guidelines

        330.    Ameriquest was frequently referred to as “one of the nation’s worst subprime

 sharks.” (Michael Hudson, Data shows Deutsche Bank was key patron of questionable mortgage

 lenders, iWatch News, Apr. 18, 2011, available at

 http://www.iwatchnews.org/2011/04/18/4173/data-shows-deutsche-bank-was-key-patron-

 questionable-mortgage-lenders.)

        331.    In her January 14, 2010 testimony before the FCIC, Illinois Attorney General Lisa

 Madigan testified that Ameriquest had:

        engaged in the kinds of fraudulent practices that other predatory lenders
        subsequently emulated on a wide scale: inflating home appraisals; increasing the
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        interest rates on borrowers’ loans or switching their loans from fixed to adjustable
        interest rates at closing; and promising borrowers that they could refinance their
        costly loans into loans with better terms in just a few months or a year, even when
        borrowers had no equity to absorb another refinance.

(FCIC Report at 12 n.51.)

        332.    Ed Parker, the former head of Ameriquest’s Mortgage Fraud Investigations

 Department, also testified before the FCIC. Mr. Parker informed the Commission that he had

 detected fraud at the company within one month of starting his job there in January 2003, but

 that senior management had done nothing with his reports. Mr. Parker testified that he had heard

 that other departments were complaining that he “looked too much” into the loans. (Id. at 12.)

 In November 2005, Mr. Parker was downgraded from “manager” to “supervisor,” and he was

 laid off in May 2006.

        333.    Ameriquest has been sued by borrowers who blame the lender’s lax underwriting

 standards for their loan delinquency. In one lawsuit against Ameriquest, the plaintiff alleges that

 loan officers at a Brooklyn, New York, branch of Ameriquest coerced her into signing a loan.

 Unbeknownst to the plaintiff, Ameriquest created fake tax returns, employment records, and a

 401(k) to make it appear that the loan was affordable. Other court filings allege that Ameriquest

 doctored loan documents or overstated borrowers’ income in connection with the loans of forty

 borrowers.

        334.    Institutional investors have also entered the fray, accusing Ameriquest of

 violating its own underwriting standards in originating loans that it later sold. For instance,

 Wachovia Bank, N.A., filed a lawsuit against Ameriquest, alleging that Ameriquest had not

 complied with repurchase requests on loans with fraudulent files. According to Wachovia’s

 complaint, the 135 nonperforming loans sold to Wachovia on December 29, 2005, contained




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 incorrect credit scores, incorrect employment status, and misstatements regarding the type of

 home that was being financed.

        335.    In addition, the complaint alleges that the loans were not underwritten pursuant to

 the underwriting procedures that Ameriquest agreed to apply. The widespread nature of such

 practices was confirmed by former Ameriquest employees in a National Public Radio broadcast.

 A former Ameriquest loan officer in Tampa, Florida, recalled that in order to sell a loan “at any

 cost,” managers (i) encouraged loan officers to conceal the actual cost and interest rates on loans

 and (ii) would white out numbers on W-2s and bank statements and fill in bigger amounts

 basically to qualify people for loans that they couldn’t afford, a practice called “taking the loan

 to the art department.” According to the National Public Radio broadcast, these practices were

 not isolated, were confirmed by former employees from Ameriquest offices around the country,

 and were widespread as early as 2003.

                (10)    Third-party originator Decision One Mortgage Company, LLC
                        systematically abandoned its underwriting guidelines

        336.    Decision One Mortgage Company, LLC (“Decision One”) was a North Carolina-

 based subsidiary of HSBC Finance Corporation that was closed in late 2007 after losing

 hundreds of millions of dollars on defaulted subprime loans. The closing of Decision One cost

 HSBC an estimated $945 million. In total, 94.4% of all loans issued by Decision One were

 subprime. Immediately prior to the closure of Decision One, provisions for bad loans shot up an

 unexpectedly high 63% in the first six months of 2007, to $6.4 billion.

        337.    Decision One, which relied on independent brokers (whom it could not control) as

 the source for its loans, employed reckless underwriting standards and practices that resulted in a

 huge amount of foreclosures. According to the OCC’s “Ten Worst in the Ten Worst” list,

 Decision One was one of the country’s “Worst Subprime Originators.”


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                (11)   Third-party originator People’s Choice Home Loan, Inc.
                       systematically abandoned its underwriting guidelines

        338.    There have been numerous reports indicating failures by People’s Choice to

 adhere to its underwriting practices, including: (i) a lack of quality control which led mortgage

 brokers to manipulate documents and allowed borrowers to get away with lying on their loan

 applications; (ii) borrowers missing one or more of their first three payments, indicating poor

 underwriting done by People’s Choice; and (iii) approving borrowers with insufficient income

 required by People’s Choice’s own guidelines to afford the required mortgage loan payments,

 because mortgage brokers forged borrower’s bank statements, signatures, and income. For

 instance, an investigation by NBC in 2009 revealed that borrowers included a massage therapist

 who claimed an income of $180,000 a year and a manicurist who claimed an income of over

 $200,000 a year. (See Richard Greenberg and Chris Hanson, If You Had A Pulse, We Gave You

 A Loan, Dateline NBC (Mar. 22, 2009), available at

 http://www.msnbc.msn.com/id/29827248/ns/dateline_nbcthe_hansen_files_with_chris_hansen/t/

 if-you-had-pulse-we-gave-you-loan/.)

        339.    Former People’s Choice COO James LaLiberte has stated that he tried to

 implement more controls over the loan origination process, but ran into resistance. According to

 NBC’s investigation, other former People’s Choice employees have stated that underwriters felt

 pressured by sales staff to approve questionable applications. Moreover, underwriters would

 challenge some loans—in one case, as many as one-third of all loans—but would be overruled

 by company executives the vast majority of the time. Ultimately, “there was a lot of ‘keep your

 mouth shut’ going on, meaning you just didn’t ask questions about things you knew were

 wrong.” (See id.)




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                (12)    Third-party originator Residential Funding Company, Inc.
                        systematically abandoned its underwriting guidelines

        340.    According to news reports from early January 2009, Residential Funding tripled

 the number of lawsuits it had filed against unaffiliated originators, alleging that they had

 wrongfully refused to buy back non-compliant loans that they had sold Residential Funding for

 use in its securitizations. These suits are based on alleged breaches by the originators of

 contracts in which they agreed to abide by the terms of their seller agreements and represented

 that the loans they had originated were prudently underwritten and that all loan documents were

 complete and accurate.

        341.    These are necessarily admissions that Residential Funding was acquiring loans

 that were based on insufficient documentation and not in compliance with Residential Funding’s

 underwriting guidelines, including around the same time that loans Residential Funding was

 acquiring were being shuffled into securitizations such as those at issue here.

        342.    Residential Funding’s willingness to include knowingly defective loans in

 securitization pools is confirmed by the testimony of a confidential witness who testified that

 half of all applications that were flagged as falling meaningfully short of underwriting guidelines

 were funding through underwriting “exceptions.” It is also confirmed by the testimony of a

 second witness who, as above, described systemic, senior-level-approved manipulation of the

 data entered into the automated underwriting system.

        343.    MBIA Insurance Corporation is a monoline insurer that wrote insurance on

 certain Residential Funding securitizations. MBIA conducted an investigation into certain loan

 files after it was asked to make payments on its insurance policies. The deals that MBIA

 analyzed are probative of problems underlying Prudential’s Certificates because the Defendants’

 problems were systemic, and because the collateral pools for the securitizations that MBIA


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 investigated were composed of the same type of collateral backing some of Prudential’s

 Certificates. MBIA’s analyses—the first part of which was only made public in December

 2008—provides additional, strong evidence that essential characteristics of the Mortgage Loans

 underlying the Certificates were misrepresented, and that the problems with the Defendants’

 underwriting practices were systemic.

        344.    In carrying out its review of the approximately 12,000 Residential Funding loan

 files, MBIA found that 88% of the defaulted or delinquent loans in those securitizations

 contained material deviations from the stated underwriting guidelines. MBIA’s report showed

 that a material number of mortgage loans included in the loan pools underlying the

 securitizations were made to borrowers who could not reasonably have expected to be able to

 repay the mortgage loans, and the risks inherent in the pools were significantly higher than

 represented. Indeed, MBIA claims that Residential Funding admitted to it that it knew the loan

 pools failed to comply with Residential Funding’s underwriting guidelines.

        345.    MBIA also found that “there were fundamental, material, and consistent

 violations of [Residential Funding’s] underwriting guidelines and policies in connection with the

 underwriting of the mortgage loans . . . . The undisclosed and misrepresented risks were

 pervasive throughout the mortgage loan portfolios for the securitization transactions.”

        346.    MBIA gave examples of individual loans that diverged from the stated

 underwriting guidelines. Here are three of many examples:

            •   On November 12, 2006, a loan with a principal balance of $135,000.00 was made
                to a borrower in Scottsdale, Arizona on a property with an original appraisal value
                of $540,000.00 and a senior loan balance of $405,000.00. The borrower stated
                income of $11,000 per month as a sales manager at a concrete company, but the
                borrower could only demonstrate assets of $11,491. The stated income was
                unreasonable based on the borrower’s employment and not substantiated by the
                borrower’s credit/asset profile. Notably, the borrower filed for bankruptcy in
                2008 in connection with which the borrower claimed to have actually earned only

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                $43,523 for 2006 and $20,401 for 2007. Additionally, the bank account used to
                verify the borrower’s reserves is actually held in the name of the loan officer that
                issued the loan. (Loan # 11165457 – [RFMSII] 2007-HSA3).

            •   On January 23, 2007, a loan with a principal balance of $100,000 was made to a
                borrower in Yuma, Arizona on a property with an original appraisal value of
                $298,000 and a senior loan balance of $129,035. The borrowers claimed on their
                loan application that their combined income was $113,520 per year. However, on
                May 12, 2009, the borrowers jointly filed for bankruptcy under Chapter 7, and
                their court filings indicated that they earned only $13,085 in 2007 and $17,650 in
                2008. Moreover, no record of the borrower’s claimed employer can be located on
                websites commonly used to verify the existence of a business: manta.com or
                yellowpages.com. The loan has been charged-off. (Loan # 8254730412 –
                [GMAC] 2007 Transaction.)

            •   On April 20, 2007, a loan in the amount of $40,000 was made to co-borrowers in
                Vernon, New Jersey on a property with an original appraisal value of $305,000
                and a senior loan balance of $244,000. The loan file is incomplete and lacks,
                among other documents, verbal verification of either borrower’s employment,
                evidence of sufficient closing funds and reserves, an appraisal, a copy of the note
                from the senior lien, and the borrowers’ credit reports. Further, the loan was
                approved even though the income stated by each borrower was unreasonable.
                One claimed to earn $4,583 per month as a counter manager at a discount tire
                store though, for example, salary.com, a website which maintains a national
                salary database based on job title and zip code, reports that the income at the 90th
                percentile for such a position is only $2,801 per month. The second borrower
                claimed to earn $59,592 annually as a sales associate at a home improvement
                store, but an income verification database showed that the borrower earned only
                $28,092 in 2006 and $32,977 in 2007. The loan has been charged-off. (Loan #
                1000117685 – [GMAC] 2006 Transaction.)

        347.    In its review of Residential Funding loan files, Residential Funding’s own insurer

 found, among other things, that:

            •   A significant number of mortgage loans have DTI ratios far in excess of RFC’s
                Underwriting Guidelines, have CLTV ratios far in excess of RFC’s Underwriting
                Guidelines and were made on the basis of ‘stated incomes’ that were grossly
                unreasonable.

            •   Contrary to RFC’s Underwriting Guidelines, RFC failed, with respect to a
                significant number of mortgage loans, to verify employment for mortgage loan
                borrowers where required to do so, failed to verify prior rental or mortgage
                payment history, approved mortgage loans with ineligible collateral, approved
                mortgage loans to borrowers with credit scores that are ineligible under the
                Underwriting Guidelines and closed mortgage loans without verifying that the


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                borrower had sufficient funds or reserves as required by the Underwriting
                Guidelines.

            •   Numerous mortgage loan files are missing necessary mortgage loan documents
                and are missing certain disclosures, such as disclosures relating to loan transfers,
                which are necessary under applicable law.

        348.    MBIA found that the non-compliant nature of many of the loans it reviewed was

 due to RFC’s systemic abuse of underwriting “exceptions.” According to MBIA, a “significant

 number” of the “exception” loan files MBIA reviewed did not even identify which supposed

 exception was being relied upon, let alone contain sufficient documentation to justify the use of

 such an exception. In addition, MBIA found that a “significant number” of the loans it reviewed

 were approved based on the secret abuse of three practices that resulted in large numbers of non-

 compliant loans being contributed into securitization programs.

        349.    According to MBIA, Residential Funding improperly abused “negotiated

 commitments,” where it agreed to buy future loans from the originator that failed to comply with

 Residential Funding’s underwriting guidelines. Second, it improperly abused a “bulk purchase

 program” where it agreed to purchase a large amount of pre-existing loans that Residential

 Funding would not then confirm had been originated in compliance with Residential Funding’s

 underwriting guidelines. Finally, Residential Funding underwrote or purchased loans using an

 automated system, Assetwise, which did not in fact analyze the proposed mortgage loans in

 accordance with Residential Fundings’s underwriting guidelines. According to MBIA, these

 practices all helped contribute to the “substantial and material” number of non-compliant loans

 that were found in the reviewed securitization pools.

        350.    The results of MBIA’s study are corroborated by the testimony of Residential

 Funding Confidential Witness 1 (“RFCW1”), a former Senior Underwriter at GMAC. In 2004

 and 2005, according to RFCW1, Residential Funding dictated that its affiliated originator


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 Homecomings produce no more than 50% of its loans through fully-documented processes.

 According to RFCW1, it did this because it felt other products were more profitable, and wanted

 the alternative products for use in its securitizations. RFCW1 said that even though the

 automated underwriting system was being manipulated, and even though low-doc loans could be

 manipulated even more, the system was still rejecting too many loans. The resulting delay in

 approval by having to manually approve the rejected loans caused the company to lose business.

 Thus, according to RFCW1, it turned to “bulk buy” procedures.

        351.    According to RFCW1, Residential Funding would buy hundreds of millions of

 fully-funded loans at a time. The loans were not put through the automated system until

 Residential Funding won the “bid.” Only then did Residential Funding conduct due diligence.

 However, it would not perform due diligence on all the files, but only a small sample. The

 sample would decrease with each successive purchase from that seller—eventually such that no

 testing was done. According to RFCW1, this allowed Residential Funding to pursue fewer and

 fewer repurchase demands from the bulk-sellers. “It makes for a better relationship if you’re not

 kicking back a lot of loans.”

        352.    According to RFCW1, the share of “stated income” loans went up in the 2004-

 2007 time frame. RFCW1 “hated” these, which “drove [RFCW1] insane,” because RFCW1

 “had to accept” whatever income was given. RFCW1 gave an example of a city bus driver that

 provided a stated income of $9,000 per month. According to RFCW1, only a human could really

 judge the facial reasonableness of a “stated income” amount as against the claimed occupation.

 Nonetheless, according to RFCW1, GMAC relied on its automated systems to underwrite stated-

 income loans, and there was no system in place for otherwise evaluating the reasonableness of




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 the income claims. When RFCW1 raised such concerns, RFCW1’s supervisor responded that

 ‘this is what we pay you to do.’ RFCW1 felt that “short of walking out, we didn’t have a choice.”

        353.    A loan-level forensic analysis conducted by another RMBS investor, Allstate

 Insurance Company, found systemic misrepresentation of LTV, CLTV, and owner-occupancy

 data for over 30,000 loans underlying its Residential Funding offerings. For example, 37% of

 the loans sampled had recalculated LTV ratios understated by more than 10%, and 12% of the

 loans sampled had LTV ratios understated by more than 25%. Allstate also found that the

 percentage of owner-occupied properties was overstated in the complaint by up to 14%.

        354.    In addition, Allstate reported that the default rate on the mortgage loans

 underlying certain Residential Funding offerings was drastically high. For RALI 2007-QH6, 55%

 of the loans from the original pool had already been written off at a loss or were currently

 delinquent, as of the time Allstate reported its findings. Similarly, for RAMP 2006-RS3, RAMP

 2006-RZ3, RFMSII 2007-HSA2, and RFMSII 2007-HSA3, over 40% of the loans from each

 deal’s original pool were either already written off at a loss or currently delinquent. Overall,

 approximately 24% of the original mortgage loans were already written off at a loss, and of the

 remaining loans, approximately 25% were currently delinquent.

 III.   DEFENDANTS KNEW THEIR REPRESENTATIONS WERE FALSE AND
        MISLEADING

        A.      Overview

        355.    This is not a typical securities fraud case where the misrepresentations were

 contained in single offering document or concerned a single event. This was a massive, multi-

 year scheme covering Defendants’ entire securitization operation. Prudential’s lawsuit concerns

 thirty-one Offerings. However, Prudential’s suit is just the tip of the iceberg. Other investors (as




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 well as monoline insurers) have brought fraud suits against Credit Suisse covering many more

 offerings with a collective value in the tens of billions.

        356.    Pre-suit investigations by these plaintiffs, governmental investigations, and post-

 filing discovery in other lawsuits have unearthed facts that demonstrate beyond a shadow of a

 doubt that Defendants engaged in a deliberately illegal scheme over many years in which they

 sold billions in RMBS based on false representations that the underlying mortgage loans met

 underwriting guidelines. All the while, Defendants knew facts and had access to information

 from both internal and paid due diligence proving their statements about adherence to

 underwriting guidelines to have been false and misleading. Not only did Defendants in fact

 perform due diligence; they tried to cover up the evidence for fear that they would be caught.

 The motive was simple: greed. Defendants made hundreds of millions of dollars they could not

 have made but for their false and misleading statements.

        357.    As an insurance company, Prudential typically invested in only the most risk-free

 securities. Indeed, all the Securitizations at issue in this lawsuit were originally given

 investment-grade ratings. In making its purchase decisions nothing was more important to

 Prudential than the low-risk nature of the Securitizations. And since the sole source of the

 payments on these Securitizations was the underlying Mortgage Loans, Defendants’

 representations concerning the risk factors on these mortgages was critical.

        358.    Defendants’ verification that the Mortgage Loans complied with published

 underwriting guidelines was the primary purpose of the extensive due diligence Defendants

 undertook during the securitization process. This due diligence, discussed below, gave

 Defendants all the information they needed to discover the systemic departure from underwriting

 guidelines. The evidence, discussed below, demonstrates that Defendants had actual knowledge



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 of the falsity of their representations. At a minimum Defendants were recklessly indifferent to

 the truth of the statements they made to Prudential.

        359.    As discussed below, Defendants’ knowledge is confirmed by, among other facts:

 (i) the consistency and breadth of problems with the loans; (ii) Credit Suisse’s direct window

 into the fraudulent origination practices of the Originators with whom it had “warehouse lending”

 relationships; (iii) evidence from “reunderwriting” Credit Suisse’s loan files, including the files

 underlying one of the Securitizations at issue here, which has shown fraud on the face of the

 documents themselves; and (iv) Clayton’s “Trending Report,” which shows that due diligence of

 the type Defendants performed here identified numerous defective loans, but Defendants

 “waived in” defective loans anyway.

        360.    Defendants’ knowledge is also confirmed by (v) confidential witness testimony

 from Credit Suisse employees, confirming that the bank acted knowingly; (vi) confidential

 witness testimony showing, in many other ways, that Defendants’ due diligence processes were

 catching errors of the type at issue here on a daily basis—even though the underwriters were

 understaffed, undertrained, and pressured to “look the other way” as often as possible; (vii)

 Credit Suisse’s double profit scheme, in which the bank profited not only by unloading toxic

 mortgage loans onto investors like Prudential, but also by using its knowledge to settle

 repurchase demands with originators without passing the proceeds on to the RMBS trusts or

 buying back the defective loans; and (viii) the fact that Credit Suisse tried to cover up the

 evidence from this scheme, which demonstrated that many mortgage loans did not comply with

 underwriting guidelines.

        361.    Similarly, the evidence shows that Defendants knew that the specific appraisal,

 LTV, and CLTV representations contained in the underlying Offering Materials were false.



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 Multiple confidential witnesses demonstrate that Credit Suisse itself abused the appraisal process.

 Many other witnesses confirm that appraisal defects were often apparent on the face of

 Defendants’ loan files, and that such defects were caught and flagged for Defendants on a daily

 basis by their due-diligence underwriters.

        362.    The facts also show that Defendants’ due diligence process gave them actual,

 daily knowledge of problems with the owner-occupancy representations in the Offering

 Materials. For instance, confidential witnesses confirm that many loan files revealed on their

 face that the occupancy claims were false—for instance, because the loan file showed that the

 borrower worked a long distance from where the mortgaged property was, or because the

 borrower had obtained insurance to protect its role as a landlord on the property. Those

 witnesses also confirm that such problems were included in the due-diligence reports provided to

 Defendants.

        363.    In short, this is not a case where Defendants should have asked more questions or

 should have been more skeptical of the data they were given. Credit Suisse was handed evidence

 of problems with the Mortgage Loans on a silver platter. It is implausible to believe that

 Defendants ignored all the data to which they had access. The loan files on their face revealed to

 Defendants all they needed to know to determine the loans did not match the descriptions being

 given to them. Credit Suisse’s industry practices and numerous confidential witnesses confirm

 that those loan files were in fact reviewed by Defendants. Clayton’s “Trending Report,” and

 common sense, confirms that those reviews did in fact catch many loan defects—but Defendants

 deliberately chose to give the defect loans a free-pass to increase their own profits.




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        B.      Facts Showing Defendants’ Knowledge of General Underwriting
                Abandonment by Originators

                (1)     The consistency of the loans’ errors

        364.    The same evidence discussed above demonstrating the consistent and pervasive

 falsity of Defendants’ representations also supports the conclusion Defendants knew their

 Offering Materials were false. This did not happen with isolated offerings. Rather, the

 misrepresentations were consistent across a wide spectrum of securitizations. For instance,

 Prudential’s forensic analysis found not just that the characteristics of the Mortgage Loans were

 misrepresented—but they were consistently misrepresented from offering to offering.

 Occupancy rates were misrepresented in the Offerings, by as much as 13.86%. The number of

 loans with LTV ratios above 100% was misrepresented across the Offerings, by as much as

 20.93%. Improperly assigned loans account for over 38% of the Mortgage Loans at issue. In

 short, this was a massive scheme and the misrepresentations were pervasive.

        365.    The departures from represented underwriting guidelines resulted in Mortgage

 Loans being included in the pools which posed high credit risks. This was manifested in

 skyrocketing default rates—overall, up to half of the Mortgage Loans in each Securitization

 have already been written off for a loss. While all of the Certificates were initially rated

 “investment grade,” many are now rated “junk.” The problems are only going to get worse.

 Over 33% of the remaining Mortgage Loans are currently delinquent. History teaches us that a

 significant percentage of these loans will also default in the future.

        366.    Evidence exists that these problems infected even more of Defendants’

 securitizations, beyond the Offerings that Prudential analyzed. As described above, loan-file

 reviews performed by MBIA, Ambac, Assured, and FHFA show that Defendants systematically,

 as a matter of practice, knowingly acquired and securitized loans that had been originated with


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 virtually no regard for the borrowers’ ability to repay their obligations. Assured found that a

 staggering 93% of the 7,918 loans that it re-underwrote did not meet the stated underwriting

 guidelines. MBIA found a defect rate of 85% (out of 1,798 loans), Ambac found a defect rate of

 80% (out of 1,134 loans), and FHFA found defect rates of 67% and 73% (out of 1,924 loans).

 These results confirm that Defendants’ fraudulent practices pervaded their RMBS business

 during this period. Indeed, as outlined below, MBIA has discovered evidence that Defendants

 devised a scheme to profit directly from, while simultaneously covering up, their own knowledge

 of the inclusion of defective loans in the loan pools.

        367.    This scheme is described in detail in a recently-announced settlement between

 Credit Suisse and the SEC. As described below, Credit Suisse has agreed to pay $120 million to

 settle claims that it collected cash payments from originators arising from faulty loans, without

 sharing those proceeds with investors who owned the loans through RMBS trusts.

        368.    Logic dictates that Defendants could not have purchased, pooled, and securitized

 so many defective mortgage loans without knowing that the loans had vastly different

 characteristics than what Defendants represented. Courts have repeatedly recognized that a

 consistent pattern of large misstatements can itself be strong evidence of scienter. See generally,

 e.g., EP Medsystems, Inc. v. EchoCath, Inc., 235 F.3d 865, 881 (3d Cir. 2000) (“[W]e believe

 that when multiple promised events fail to occur, there is a point where a strong inference of

 fraud can be made.”).

                (2)      Defendants’ extensive due diligence processes made them aware that
                         the Mortgage Loans did not conform to represented underwriting
                         guidelines

        369.    That Defendants could not securitize so many Mortgage Loans without knowing

 that the loans did not have the represented risk profile is confirmed by the multiple rounds of

 due diligence that Defendants themselves conducted, the vertically integrated nature of
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 Defendants’ operations, and their prominence and experience in this marketplace. Defendants’

 unique position in the market gave them a direct window into the gross departure from the

 underwriting practices they represented were being followed.

           370.   Defendants possessed in house origination capacity and had knowledge that even

 their own mortgage loans failed to meet underwriting guidelines. In April 2007, Defendants

 acquired Lime Financial Services (“Lime”), a nonprime residential lender. Defendants touted

 this move as “consistent with our plan to expand the residential mortgage securities business at

 Credit Suisse.” Defendants were well aware, however, that Lime originated defective loans. A

 former colleague congratulated one of Defendants’ Senior RMBS trader on the acquisition, and

 suggested that the trader could now “teach those blockheads . . . how to write some decent

 guidelines.” The trader, however, said he was “not sure if wolves [were] willing to learn eating

 veggie.” In other words, the trader recognized that a bad originator was likely stuck in its ways.

 The trader was right. In the summer of 2007, Credit Suisse’s Head of Due Diligence examined

 Lime loans and concluded that “[o]verall,” Lime’s problems were “poor underwriting,

 uncompensated exceptions, unsupported values and high ltvs . . .”

           371.   Consistent with industry practice, Credit Suisse also participated in loan auctions,

 in which it purchased loans in bulk from third-party originators with which it had “warehouse

 lending” relationships. Credit Suisse had warehouse lending commitments to subprime lenders

 totaling billions of dollars, such as the $1.3 billion of credit that Credit Suisse provided to New

 Century, which originated Mortgage Loans underlying five of the Securitizations at issue here.

 Indeed, some of the worst originators, according to Defendants’ own internal tracking systems—

 including, among others, Aegis, ACT, ResMae, amd Meridias—had warehouse lines with Credit

 Suisse.



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        372.    Under these “warehouse” relationships, Credit Suisse provided money to

 originators, who in turn used the money to fund mortgage loans. The originators then sold the

 loans back to Credit Suisse, essentially paying the warehouse loan back by delivering the loans

 to Credit Suisse for securitization. Entering into such relationships helped Credit Suisse secure a

 pipeline of loans for its securitization machine. Warehouse loans also gave Credit Suisse the

 ability to monitor the practices of the originator, and gave it an insider’s look at the true quality

 of that originator’s operations. As one industry publication explained, warehouse lenders have

 “detailed knowledge of the lender’s operations.” (Kevin Connor, Wall Street and the Making of

 the Subprime Disaster, November 2007 at 11.)

        373.    Warehouse lending relationships also pervert the lender’s due-diligence incentives.

 If Credit Suisse refused to buy the proffered loans, it could leave the originator unable to pay the

 warehouse loan and Credit Suisse holding the bag. Accordingly, Defendants were even more

 willing to accept bad loans from originators to which they extended warehouse lines. After

 learning that only 10% of a loan pool offered by Alliance, a warehouse client, had passed

 Clayton’s due diligence review, one of Defendants’ senior subprime traders wrote in an August

 2007 e-mail: “This is the problem with the warehouse line—it’s garbage we get.”

        374.    Prior to an auction, originators provided bid sheets to Credit Suisse that specified,

 among other things, the percentage of loans on which Credit Suisse would be permitted to

 conduct due diligence. The originators also provided a loan tape that described characteristics of

 the mortgage loans in the loan pool. Credit Suisse then performed tests and checks on this

 information, and prepared its bids.

        375.    If it submitted the winning bid, Credit Suisse then had the right to commence due

 diligence and quality control on the loans. Rejecting loans, however, would leave a smaller pool



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 to securitize—meaning smaller fees for Defendants’ securitization efforts. And rejecting too

 many loans could even convince originators to stop selling loans to Defendants, cutting off their

 pipeline entirely. As one of Credit Suisse’s RMBS traders described it, Defendants “didn’t want

 to necessarily ruffle feathers with their originators, so they had somewhat [of] an incentive not to

 be as aggressive as we at the [trading] desk wanted them to be.” Another senior RMBS trader

 stated that originators “push[ed] back” on the amount of “due diligence.” In fact, as Credit

 Suisse’s Head of Due Diligence noted with respect to one originator, “1 loan [was] denied and

 [the originator] threatened to pull their business.”

         376.    In order to maintain good relationships with originators and keep their

 securitization pipeline flowing, Defendants allowed defective loans into their collateral pools.

 As one Credit Suisse trader put it, the bank “relax[ed] [its] underwriting criteria . . . to encourage

 loyalty . . . from originators.”

         377.    So great was Credit Suisse’s demand for loans that—notwithstanding its

 knowledge of poor loan quality—it became determined to outprice its competitors by paying

 more for the loans. According to one RMBS trader, Defendants’ main concern was “what can be

 done to try to increase volumes,” and this discussion “generally . . . revolved around how can we

 pay more for loans.”

         378.    Consistent with this goal, Defendants also pushed to increase loan volume by

 establishing “incentives” for certain originators to persuade them to sell loans to Credit Suisse

 rather than other banks. These incentives included, among other things, larger payments if

 certain volume thresholds were met. As one Credit Suisse RMBS trader noted, however, the

 “incentives” did nothing to encourage quality loans, since they were “purely volume based, and

 not tied to performance.” Indeed, an originator that traders believed produced “complete



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 garbage . . . [u]tter complete garbage” and “should be cut off” instead received a significant

 incentive. According to another trader, “all their loan[s] perform badly, even beyond the EPD

 period. And we still have price concessions with them.” Once Credit Suisse “awarded” these

 incentives, “they bec[a]me almost life tenure and [were] seldom reviewed,” “no matter how

 [expletive] the originators’ production.”

        379.    With hundreds of millions of profits riding on the RMBS pipeline, Credit Suisse

 was economically incentivized to turn a blind eye toward the pervasive fraud in the origination

 process which in turn led to pervasive fraud in Credit Suisse’s RMBS program. However—as

 will be seen below—Credit Suisse came up with another scheme to profit from the fraud. It

 secured the right to “put back” or sell back to the originators non-complying mortgage loans.

 And, it knew there were plenty of them. As will also be seen below, Credit Suisse tried to cover

 up data with respect to this program to control litigation risk.

        380.    . In addition to testing loans as part of the securitization process, Defendants kept

 track of loan performance over time through “seller scorecards” and “watch lists” and by

 monitoring loans that experienced EPDs. Accordingly, Defendants were well aware of the

 serious and pervasive defects in the loans they acquired. Defendants nonetheless continued to

 purchase loans from originators that consistently failed in terms of adherence to underwriting

 guidelines and loan performance. Many such originators originated Mortgage Loans backing the

 Offerings at issue here: Aegis, Ameriquest, Fremont, New Century, and Option One.

        381.    For example, as early as 2005 Defendants acknowledged that loans originated by

 New Century—among the largest contributors of loans to the Offerings that Prudential invested

 in—were problematic. One of Defendants’ senior RMBS traders noted in an August 2005 e-mail

 the “low qual[ity]” of second-lien loans in one New Century loan pool. When another of



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 Defendants’ RMBS traders learned in March 2007 that New Century was seeking a bid from

 Defendants on one of its loan pools, the trader resisted, noting that New Century “currently [had]

 outstanding EPDs” that he wanted to “see . . . clear[ed].” In fact, Credit Suisse had a pending

 repurchase demand with New Century involving 650 EPD loans with a principal balance of over

 $40 million, in addition to the outstanding $1.3 billion warehouse line of credit. Defendants,

 however, continued to include New Century loans in their securitizations through the end of

 2007, well after New Century’s bankruptcy filing.

        382.    Defendants also routinely engaged third-party due diligence firms, such as

 Clayton or Bohan, to conduct some of the due diligence steps discussed above. As described in

 the FCIC Report (at 166), such due diligence firm reviews:

        [F]ell into three general areas: credit, compliance, and valuation. Did the loans
        meet the underwriting guidelines (generally the originator’s standards, sometimes
        with overlays or additional guidelines provided by the financial institutions
        purchasing the loans)? Did the loans comply with federal and state laws, notably
        predatory-lending laws and truth-in-lending requirements? Were the reported
        property values accurate? And, critically: to the degree that a loan was deficient,
        did it have any “compensating factors” that offset these deficiencies? For
        example, if a loan had a higher loan-to-value ratio than guidelines called for, did
        another characteristic such as the borrower’s higher income mitigate that
        weakness? The due diligence firm would then grade the loan sample and forward
        the data to its client.

        383.     Clayton prepared a wide range of reports for Credit Suisse, over a period of years.

 These reports generally took the form of: (i) daily reports, which contain a variety of

 information regarding the characteristics of a particular mortgage loan on a daily basis; (ii) final

 reports, which reflect all of the information contained in the daily reports for a mortgage loan,

 including any grade changes, waivers, and comments; and (iii) trending reports, which track the

 performance and treatment of a mortgage loan over time.




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        384.    In addition to receiving these daily reports, Credit Suisse often had onsite

 representatives present for the due diligence review. These onsite representatives had full access

 to the data entered into the Clayton Loan Analysis System, which was the program reviewers

 used to keep track of their progress as they went through a file (checking off boxes to indicate,

 for instance, that proper supporting documentation had been found in the file). The program

 reviewers also used the system to record narrative descriptions in a “notes” field (explaining why

 loans did not deserve a fully passing grade). Such notes to the file were made for Credit Suisse’s

 benefit, explaining whether the loan’s failing grade was because of non-compliance with

 underwriting guidelines, faulty appraisals, “red flags” as to the accuracy of the occupancy

 representations, or anything else problematic in the loan files. Thus, Credit Suisse

 representatives on-site were able to see this entire process unfold in real time, giving Credit

 Suisse even more direct access to information regarding why each loan failed.

        385.    The information contained in the daily, final, and trending reports includes, but is

 not limited to, information regarding: (i) whether a loan complied with the applicable

 underwriting guidelines; (ii) whether a loan was eligible for an exception to the applicable

 underwriting guidelines, including whether any compensating factors applied, and any comments;

 (iii) whether the appraisals were inflated and whether the correct appraisal processes were

 followed; (iv) the borrower’s assets; (v) documentation missing from the loan application; (vi)

 the status and condition of the underlying property; (vii) the disposition of the loan, including

 any transfers or foreclosure; and (viii) whether the loan complied with applicable laws and

 regulations. Clayton made each of these types of reports, as well as any other loan-specific

 information, available at the request of Defendants.




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         386.    Clayton’s clients were generally only given read access to Clayton’s reports, but

 an exception was made for waivers. Clients such as Credit Suisse were given passwords to

 access Clayton’s reports in order to waive into securitizations loans that did not meet the

 applicable underwriting standards. If a client made a waiver call, the date and time on which it

 was made would be reflected in Clayton’s reports.

         387.    In sum, Defendants received daily reports indicating exactly how many loans

 failed to meet the guidelines—and which loans lacked any purported “compensating

 factors.” That Defendants were receiving daily reports regarding how many loans were

 defective—on top of their already-extensive due diligence processes—confirms they acted

 knowingly in securitizing the defective Mortgage Loans at issue here. This is on top of their in-

 house reviews, their real-time data streams coming from the Clayton Loan Analysis System, and

 the fact that Defendants often had representatives on-site as these loan files were being reviewed

 and flagged as having problems.

                 (3)      The federal government and other parties have found that
                          Defendants’ due diligence process proved they had knowledge of the
                          massive fraud

         388.    Government data shows that Defendants were consistently able to uncover loan

 defects—but just as consistently, Defendants securitized the defective loans anyway. The FCIC

 found that over 32% of the loans reviewed by Clayton for Credit Suisse both failed to meet the

 stated underwriting guidelines, and were not subject to any “compensating factors” justifying the

 use of an “exception.” 10 Defendants nonetheless securitized over 33% of these flagged loans.

 Based on the systemic nature of the problems that have been uncovered, the overlap in time with

         10
            To be clear, Prudential is not alleging that the Clayton report produced by the FCIC itself gave
 Defendants knowledge, as that report post-dated the transactions at issue. Rather, Prudential alleges that
 that summary document merely revealed publicly, in summary form, the contents of the daily,
 contemporaneous reports Defendants received as part of their real-time due diligence prior to
 securitization.
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 the Securitizations at issue, and Prudential’s loan-level forensic analysis of the Mortgage Loans,

 it must be evident that Defendants’ internal and third-party due diligence processes here

 similarly caught high numbers of defective loans—and yet Defendants fraudulently “waived”

 them into the Securitizations at issue here anyway.

        389.    Credit Suisse has been sued by the federal government, the New York Attorney

 General, and many plaintiffs for related wrongdoing arising from its RMBS business. These

 lawsuits further confirm that Credit Suisse’s misrepresentations were not mere isolated or

 innocent mistakes that harmed Prudential, but rather the result of the company’s reckless or

 intentional misconduct.

        390.    On November 20, 2012, the New York Attorney General filed suit against Credit

 Suisse, alleging that the bank misrepresented the quality of loans underlying its securitizations,

 leading to $11.2 billion in investor losses. Citing a number of internal e-mails, the complaint

 alleges that Defendants pressured originators to deliver them “crap” in order to increase loan

 volume. The e-mails—including several by Credit Suisse’s Head of Due Diligence—reflect

 widespread knowledge within the bank that it was purchasing and securitizing defective loans,

 and that this problem was “systemic.”

        391.    On Friday, November 16, 2012, the SEC announced that Credit Suisse would pay

 $120 million to settle claims that Credit Suisse misled investors while selling billions of dollars

 of RMBS. The SEC alleged that Credit Suisse failed to disclose its practice of collecting cash

 settlements from loan originators for defective loans without passing on the proceeds to investors

 to whom it had sold RMBS backed by the loans. Credit Suisse kept the proceeds for itself rather

 than distributing them to investors. Credit Suisse was supposed to buy back home loans that




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 defaulted early or were defective, but it chose instead to settle with originators and keep the

 money for itself.

        392.     According to the SEC’s order against Credit Suisse, Credit Suisse also made

 misstatements in SEC filings regarding when it would repurchase mortgage loans from trusts if

 borrowers missed the first payment due. Credit Suisse made $55.7 million in profits from its

 clandestine settlements with originators.

        393.     In addition to the SEC investigation, Reuters reported in October 2012 that the

 Justice Department is investigating Credit Suisse regarding RMBS that was packaged and sold

 by the bank, according to anonymous sources. The SEC also subpoenaed mortgage-related

 documents from Credit Suisse, according to a May 2011 court filing by MBIA.

        394.     FHFA, as Conservator for Fannie Mae and Freddie Mac, sued Credit Suisse in

 September 2011 for selling over $14.1 billion in RMBS pursuant to prospectuses and other

 offering materials that contained misrepresentations. As described by the government, Credit

 Suisse “falsely represented that the underlying mortgage loans complied with certain

 underwriting guidelines and standards, including representations that significantly overstated the

 ability of the borrowers to repay their mortgage loans.” The FHFA complaint cites the results of

 a re-underwriting of nearly 2,000 loan files, for loans similar to those underlying the Certificates

 at issue here. FHFA found a “pervasive failure to adhere to underwriting guidelines” among the

 tested loans.

        395.     The National Credit Union Administration sued Credit Suisse in October 2012,

 alleging that Credit Suisse sold faulty securities to Central Federal Credit Union in Lenexa,

 Kansas, Western Corporate Federal Credit Union in San Dimas, California, and Southwest

 Corporate Federal Credit Union, in Plano, Texas, leading to their collapse. The complaint



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 describes a systematic breakdown of underwriting practices by certain originators, including two

 originators at issue in this case, Decision One and People’s Choice. “If the credit unions had

 known about the originators’ pervasive disregard of underwriting standards—contrary to the

 representations in the offering documents—the credit unions would not have purchased the

 certificates,” the suit stated. The complaint also describes in detail how Credit Suisse inflated

 the quality of the loans it was securitizing by misrepresenting LTV and CLTV ratios, owner-

 occupancy status, borrowers’ repayment ability, underwriting standards, and appraisal processes.

        396.    Credit Suisse has also been sued by the Federal Home Loan Bank of San

 Francisco, Federal Home Loan Bank of Seattle, Allstate Insurance Company, MBIA, Ambac,

 Assured, Massachusetts Mutual Life Insurance Company, Bankers Life Insurance Company,

 Union Central Life Insurance Company, IKB Deutsche Industriebank AG, and First Bank

 Richmond, N.A. for wrongdoing related to RMBS. The allegations in those complaints are

 consistent with the information herein, and the multiplicity of similar allegations from many

 plaintiffs, including the federal and state government, corroborate the allegation herein that

 Credit Suisse routinely acquired and included in securitizations loans that did not meet

 underwriting standards and other representations made to Prudential and other investors.

        397.    The offerings at issue in the other complaints, and the plaintiffs’ analysis of those

 offerings, overlaps to some extent with Prudential’s certificates. The IKB Deutsche

 Industriebank AG complaint, for example, includes four Offerings that are also named in this

 Complaint: HEAT 2005-5, HEAT 2005-9, HEAT 2006-1, and HEAT 2006-2. IKB performed a

 loan-level analysis of the loans underlying these specific Offerings, and found material

 discrepancies between the description of the loans in Credit Suisse’s offering materials and their

 actual characteristics. For example, IKB found that, among the loans they sampled, 21.95%,



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 10.69%, and 34.57% of the loans underlying the HEAT 2005-5, HEAT 2005-9, and HEAT

 2006-1 offerings were assigned to a party other than the trust, contrary to Credit Suisse’s

 representations.

        398.    Like Prudential, IKB also found that the HEAT 2005-5, HEAT 2005-9, and

 HEAT 2006-1 offering materials misrepresented the LTV and owner-occupancy characteristics

 of the underlying loans. IKB found that, among the loans it sampled, 21.97%, 15.24%, and

 24.37% of the mortgage loans underlying the HEAT 2005-5, HEAT 2005-9, and HEAT 2006-1

 offerings, respectively, had LTV ratios greater than 100%. Those percentages are similar to the

 results of Prudential’s own loan-level analysis, which found that 15.36%, 14.18%, and 19.62%

 of the underlying loans had LTV ratios greater than 100%.

        399.    Similarly, IKB found that, among the loans it sampled, 13.47%, 15.24%, 16.05%,

 and 17.2% of the mortgage loans underlying the HEAT 2005-5, HEAT 2005-9, and HEAT 2006-

 1 offerings, respectively, were falsely represented as corresponding to owner-occupied properties.

 Those percentages are similar to the results of Prudential’s own loan-level analysis, which found

 that 11.26%, 12.63%, and 10.6% of the underlying loans were falsely represented as

 corresponding to owner-occupied properties. (The slight discrepancy in numbers is due to the

 plaintiffs’ difference in loans sampled). The IKB analysis thus further corroborates Prudential’s

 analysis.

        400.    The National Credit Union Administration Board complaint also presents a loan-

 level analysis of HEAT 2005-9, one of the Offerings in which Prudential invested. Like

 Prudential, the Board found that the Offering Materials had substantially overstated the LTV

 ratios and owner-occupancy rates of the underlying Mortgage Loans. The Board’s analysis

 revealed that the weighted average LTV ratios for loans in Loan Groups 1 and Group 2 of HEAT



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 2005-9 were 85.99% and 88.53%, respectively. These figures were 8.99% and 10.11% higher

 than those presented in the Offering Materials, and showed that the underlying Mortgage Loans

 were far riskier than represented.

        401.    The Board’s loan-level analysis found owner-occupancy rates of 79.56% and

 82.22% for loans in Loan Groups 1 and 2 of HEAT 2005-9, respectively. These results were

 13.05% and 14.51% lower than those presented in the Offering Materials, and show that the

 loans backing the Certificates purchased by Prudential were substantially more prone to default

 than Credit Suisse had represented.

        402.    Other suits against Credit Suisse illustrate the systematic upward bias in

 appraisals that overstated the quality of the mortgage loans. For example, the Federal Home

 Loan Bank of Seattle complaint explains that 11,000 appraisers signed a petition addressed to the

 Appraisal Subcommittee of the Federal Financial Institutions Examination Council, in which

 they described how “on a daily basis” they faced intense pressure from originators “to hit or

 exceed a predetermined value.” They concluded that “individuals have been adversely affected

 by the purchase of homes which have been over-valued.” The complaint also cites a 2006

 survey of 1,200 appraisers in which “96% of respondents felt that appraisers in their market,

 when pressured to restate/adjust/change values, did modify property values.” Data presented by

 the Federal Home Loan Bank of Seattle illustrate how markedly actual appraisal processes

 departed from Credit Suisse’s representations.

        403.    The multiplicity of similar allegations from many plaintiffs, including the federal

 and state government, corroborate the allegation herein that Credit Suisse routinely acquired and

 included in securitizations loans that did not meet underwriting standards and other

 representations to Prudential and other investors.



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                (4)     Confidential witnesses confirm that the due diligence process was
                        well-equipped to catch the errors at issue here, but was directed to
                        “look the other way”

        404.    The fact that Credit Suisse consistently securitized loans that it knew were

 defective is confirmed by Defendants’ own due diligence practices. In connection with their

 purchase of the Mortgage Loans from the non-affiliated originators, and consistent with industry

 practice, Defendants themselves had due diligence procedures in place to determine the quality

 of the loans they were originating, purchasing, and securitizing. Instead of focusing on loan

 quality, however, Credit Suisse subordinated quality to their goal of originating and securitizing

 as many loans as possible in order to maximize their fees and profits. Defendants purposefully

 relaxed their pre-securitization diligence, knowing that this would mean that more and more

 defective loans would be acquired and securitized, in order to meet their volume targets.

        405.    According to a Credit Suisse manager, Defendants’ unyielding drive for loan

 volume transformed what should have been a careful review to assess loan quality into a

 mechanical process that was to be completed as quickly as possible. As described by the

 manager, the mentality was “Credit Suisse was going to acquire the loans one way or another, so

 we should just get the job done.” The same manager testified that Defendants had acquired and

 later sold loans that her review team had identified as ineligible for purchase, a fact that she

 learned when Defendants subsequently asked her team to review the same loans against put-back

 demands from the buyers of those loans. She also testified that Defendants attempted to push

 defective loans through by manipulating the due diligence process. For example, Defendants

 would shift bad loans from a channel where every loan was subject to testing (e.g., the loan-by-

 loan channel) to a channel where only a sample of loans was reviewed (e.g., the mini-bulk

 channel. In this way, Defendants made it less likely that problem loans would be flagged.



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        406.    Credit Suisse Confidential Witness 1 (“CSCW1”) indicated that for loans

 purchased on a “bulk” basis, Credit Suisse’s due diligence process was to examine the quality of

 loans and the contents of loan files, but not until after Defendants had completed their purchase

 of the loans. One would think that when Defendants found these loans to be defective, they

 would be incentivized to sell them back to the originators and get them off their balance sheet.

 Not so. They passed on the credit risk in another way—the RMBS securitization process.

 According to CSCW1, originators were obligated to repurchase loans found to be noncompliant

 or non-performing. However, because the loans were already likely pooled into securities, it was

 cumbersome and problematic to remove the defective loans from the pools and to force the

 originators to buy them back. Indeed, the originators likely did not have the cash on hand to buy

 the loans back. This explains why, as discussed below, Credit Suisse instead opted to use its

 knowledge of loan defects to negotiate a lower price for itself rather than to enforce originators’

 repurchase obligations.

        407.    CSCW1 confirmed that for loans purchased on a “flow” basis, originators

 provided Credit Suisse with loan files. The files were submitted directly to fulfillment centers

 (such as Lydian and Ocwen) for review. CSCW1 recalled that the fulfillment centers conducted

 a compliance review of the loan files, including a review of appraisals. By agreement, Lydian

 had just 24 hours to review the loan files, and had to notify Credit Suisse if its review would take

 more than 48 hours, indicative of the pressure Credit Suisse placed on underwriters to push loans

 through, regardless of obvious defects. Similar to bulk purchases, once flow loans were closed

 and funded, Credit Suisse was unlikely to return defective loans to an originator and demand

 repurchase.




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        408.    Credit Suisse Confidential Witness 2 (“CSCW2”) said that investors like

 Prudential assumed that Credit Suisse and other securitizers were conducting certain quality

 reviews, in accordance with their representations, and managing the securitization process

 diligently. That was not the case.

        409.    Credit Suisse Confidential Witness 3 (“CSCW3”), a former Underwriting

 Manager at Lydian/Credit Suisse Financial, who was interviewed by Prudential’s counsel,

 confirmed that Defendants’ pre-securitization due diligence was outright fraudulent. CSCW3

 explained that Credit Suisse Account Executives would actively pressure Lydian underwriters to

 approve loans and that there were instances when Lydian underwriters wanted to deny loans due

 to blatant fraud, but would be instructed by Credit Suisse personnel to approve the loans.

        410.    Defendants thus knew that, contrary to their representations, loans were routinely

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

 “compensating factors” justifying a lending or underwriting exception. Similarly, Credit Suisse

 failed to disclose that many “exceptions” were made without any “compensating factors” present

 at all. This is evidenced by, among other things, the high percentage of Credit Suisse loans

 identified by Clayton 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.

        411.    Credit Suisse Confidential Witness 4 (“CSCW4”), an underwriter employed by

 Credit Suisse from 2001 to 2005, similarly indicated that Defendants turned a blind eye to blatant

 originator fraud. For example, CSCW4 remembered being concerned about one particular

 originator that was unable to produce originals of loan documents or readable copies, an obvious




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 red flag for fraudulent loans. According to CSCW4, Credit Suisse knew about these issues, but

 nonetheless continued to purchase loans from the troublesome originator.

        412.    Credit Suisse’s use of Clayton as a third-party due diligence firm further confirms

 that Defendants sold RMBS to investors like Prudential backed by loans they knew to be

 defective. Indeed, the “waiver” rate revealed by the FCIC’s investigation understates the number

 of defective loans allowed into the Securitizations. As the RMBS market reached its crescendo

 in 2006 and 2007, Credit Suisse put firms such as Clayton under extreme pressure to give as

 many loans as possible a pass, and conducted increasingly cursory reviews. Thus, Credit Suisse

 knew the true rates of defects were actually much higher, and that it was allowing in even more

 defective loans than Clayton’s data have since revealed. This knowledge—as well as the fact

 that the due diligence processes were well-equipped to capture the type of errors at issue here—

 is confirmed by the testimony of numerous confidential witnesses.

        413.    Clayton Confidential Witness 1 (“CCW1”) was an Underwriting Project Lead at

 Clayton from 2003 until October 2006. According to CCW1, the task of a Project Lead included

 direct dealings with clients such as Defendants. CCW1 specifically recalled working on projects

 for Credit Suisse and problems with noncompliant loans. Despite CCW1’s findings that loans

 failed to adhere to underwriting guidelines, Credit Suisse was nonetheless “eating up those loans.”

        414.    At various times, CCW1 also worked as a QC Underwriter, reviewing the work

 conducted by other underwriters. CCW1 confirmed that Clayton was put under pressure to cut

 corners, yet still managed to provide Defendants with daily updates as to why scores of loans did

 not meet the stated underwriting guidelines.

        415.    In CCW1’s view, the quality and experience of Clayton’s underwriters decreased

 as Clayton hired more and more underwriters during the real estate boom. Many underwriters



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 were in their 20s, and some even in their late teens, without much, if any, underwriting

 experience. According to CCW1, this did not mean that the underwriters were flagging too

 many things—quite the opposite. Not knowing what else to do, on certain projects, Team Leads

 would tell the inexperienced underwriters to simply copy and paste into Clayton’s systems the

 same exact data that appeared on the loan tape. This confirms that when loans were graded “3”

 for Credit Suisse, they must have been really bad loans that fortuitously were reviewed by one of

 the more experienced underwriters, making the high number of “3s” flagged for Defendants—

 yet later waived in by them—all the more astonishing.

        416.    According to CCW1, the review process typically began with receipt of a “loan

 tape,” which contained data on what the loans features were supposed to be, i.e., whether they

 were owner-occupied or not, what their LTV ratios were, the documentation process used to

 grant the loan, etc. The purpose of Clayton’s diligence, in CCW1’s view, was to ensure that the

 actual loan files supported the descriptions of the loans contained in the “loan tapes,” and to

 evaluate the loans to ensure that the loan fell within the underwriter’s guidelines. Loans graded

 as “3s” were to be kicked from the loan pools.

        417.    CCW1 provided Prudential with a document titled “UNDERWRITING RED

 FLAGS” that lists over 100 items, across each of the documents contained in the loan file, that

 indicated to Clayton reviewers that a loan was defective. Each of these “red flags” would “need

 to be addressed by explanation, documentation or resolution, and should be addressed before

 submission of [the] file to [the] underwriter.” Red flags found in the loan application included,

 among many others: “down payment other th[a]n cash,” “high-income borrower has little or no

 personal property,” “new housing expenses significantly exceed current housing expenses,”

 “inadequate salary with respect to amount of loan,” “invalid social security number,” “significant



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 or contradictory changes from handwritten to typed loan application,” “young borrower with

 large accumulation of unsubstantiated assets,” “borrower pays no rent at current residence (other

 than parents or relatives,” and “borrower’s age is inconsistent with the date of employment,

 opening dates of verified bank accounts, and dates of oldest line of trade account shown on credit

 report.”

        418.    Red flags present in the borrower’s credit report included “nicknames or a.k.a.

 having no relation to real name,” a “recent flurry [o]f inquiries from mortgage lenders and

 others,” “high-income borrower with no credit cards,” “multiple social security numbers or

 names,” “all trade lines opened at same time, with no apparent reason,” and “pattern of

 delinquencies inconsistent with credit letter of explanation.” And red flags found in the

 verification of depositor included “cash in bank will not cover closing costs,” “handwriting or

 type styles differ,” “borrower has no bank account (doesn’t believe in banks),” “illegible bank

 employee signature with no further identification,” “evidence of white out or other alteration,”

 “high-income borrower with little or no cash,” and “low income borrower with recent large

 accumulation of cash.” The document lists dozens more red flags found in borrower bank

 statements, verifications of employment, IRS W-2s, IRS tax returns, and sales contracts.

        419.    During CCW1’s tenure at Clayton, “a lot of 3s were changed to 2s and 1s.”

 Loans that were missing documentation that was later supplied by the lender or the client could

 be re-graded during a “stip clearing” process—but sometimes this new documentation appeared

 as if by “miracle.” According to CCW1, others were simply waived in. Even when

 “compensating” factors were purportedly found to justify a “2” grade, rather than a “3” grade,

 CCW1 characterized many of these factors as “almost wishful thinking” and “pretty weak.”

 CCW1 estimates that 80% of loans initially graded “3” were ultimately re-graded. This is on top



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 of CCW1’s estimation that “at least 20% - 25%” of the loans graded EV2 and EV1 out of the

 gates were likely really deserving of a failing grade.

        420.    CCW1 understood that Clayton was not supposed to assign too many failing

 grades to loans so as not to “upset” the client (such as Defendants) and the lender that was selling

 the loans, which could lead to business being taken to Clayton’s competitors. This was

 conveyed to Clayton by the clients (including, on information and belief, by Defendants), the

 lenders which had originated the loans, and even by other Project Leads. This point was made

 explicitly by one client, which told CCW1 to “get this [expletive] guy out of here,” after a

 Clayton underwriter who was an expert on appraisals was kicking out too many loans based on

 problems with the appraisals.

        421.    From CCW1’s perspective, Defendants’ representatives saw Clayton as irrelevant,

 given the larger objective of securitizing the loans. As such, they were not interested in the real

 quality of the loans being reviewed. In fact, one client representative colorfully admitted that he

 did not “give a flying [expletive] about DTI” and other characteristics of the loans. Another

 client similarly told Clayton to “get this [expletive] done and get out of here, and don’t make a

 big deal” about any issues, even though CCW1 had found problems such as inflated appraisals

 and missing documents.

        422.    CCW1 told of instances where many loans failed because the truth-in-lending

 disclosures did not actually match the loans’ terms, a defect apparent on the face of the loan file.

 These represented, according to CCW1, “pretty serious” legal violations. After CCW1 failed

 many such loans, CCW1 was told that CCW1 would not obtain a bonus for completing the

 project because the client had been unhappy with the number of failures. Project leads had been

 told to “make everyone happy.”



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        423.    While at Clayton, CCW1 typically reviewed eight to ten loans a day. Later,

 CCW1 was pressured to increase that to twenty-one loans per day. CCW1 protested that this

 afforded an insufficient amount of time to review each loan. CCW1 was further instructed to

 simply “get the deal done.” This made CCW1 feel that the due diligence reviews were “just

 going through the motions,” performing only a cursory review of loans. CCW1 admitted that

 Clayton “did a bad job on stated incomes,” as borrowers with “average jobs” were approved

 based on claims of making $300,000 to $400,000 per year. CCW1 also admitted that many of

 the appraisals suffered from “bad comps.”

        424.    CCW1 singled out a borrower’s debt profile as something that was only given a

 cursory review. For instance, when it came to detailing a borrower’s history of late payments,

 Clayton personnel were told to just “ballpark it.” And aspects of a borrower’s debt—such as car

 payments—were simply ignored based on assumptions about the borrower’s behavior.

        425.    Clayton Confidential Witness 2 (“CCW2”), who worked at Clayton reviewing

 loans from 2003 to 2006 (i.e., the same period Clayton was providing many of the services at

 issue here for Credit Suisse), has stated that reviewers were not given much time to review loan

 files—as little as half an hour for home equity loans and only 40 to 60 minutes for standard

 mortgages. Further limiting CCW2’s review (and thus making the high rejection rates all the

 more astounding) was the fact that CCW2 was not authorized to conduct any independent

 outside confirmation, but only to mechanically check to see that the appraisals contained, for

 example, a list of three other properties. According to CCW2, Clayton’s analysis was further

 handicapped by the fact that reviewers were expected to know how to apply different

 underwriting guidelines depending on the client. In addition, a loan file had to have four




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 deviations from the applicable guidelines before it was even considered for rejection. Even then,

 the loan was not immediately rejected, but rather simply elevated for further review.

        426.    In other words, CCW2, like CCW1, confirms that the staggering “reject” rates

 seen in the third-party due diligence reports provided to Defendants likely understate the

 problems with the underlying mortgage loans—and by a vast margin.

        427.    Clayton Confidential Witness 3 (“CCW3”) was a Contract Underwriter at

 Clayton from 2003 to 2004, and a Transaction Specialist there from 2005 to 2007. CCW3’s

 team would underwrite loans, including by visiting a client’s offices to conduct the review.

 CCW3 confirmed that reports were run daily that would provide notes on the reasons for low

 grades, and that these reports were usually sent to the client. According to CCW3, clients

 sometimes would call to discuss low grades given to certain loans. If the client still wanted to

 buy the loan, the grade would sometimes be changed, sometimes based on the receipt of

 additional documents that supposedly cured the deficiency, but also sometimes merely by

 agreement.

        428.    Clayton Confidential Witness 4 (“CCW4”) worked for Clayton as a Contract

 Underwriter. Like CCW2, CCW4 stated that reviewers were only given forty-five minutes to an

 hour to approve or reject a loan file. Also like CCW2, CCW4 recalled a lot of pressure to

 approve loans. According to CCW4, Clayton’s team leaders had the ability to “fix” CCW4’s

 findings, and CCW4 was told to keep CCW4’s mouth shut rather than raise questions.

        429.    Clayton Confidential Witness 5 (“CCW5”), further confirmed that the review

 process at Clayton included the regular approval—at the clients’ direction—of defective loans.

 Based on the high “waiver” rates discussed above, among other things, such improper approval

 occurred with respect to Defendants’ due diligence here, too.



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        430.    CCW5 worked as a Senior Underwriter directly responsible for reviewing loans

 for Clayton, as well as a QC Auditor. The QC Auditor’s function included reviewing loans that

 had been “kicked” by the underwriter assigned to that loan. Like the other witnesses, CCW5

 confirmed that the primary objective of Clayton’s review was to ensure the loans adhered to the

 lender’s underwriting guidelines. This included reviewing the loan files to determine that they

 were complete. Also like the other witnesses, CCW5 explained that clients often “waived” in

 loans that did not meet underwriting guidelines.

        431.    CCW5 complained that the loans were even worse than the guideline failures

 suggested. For instance, employees of the fast-food restaurant McDonald’s would claim to earn

 $10,000 a month, far more than employees would actually be paid. Such loans would be “kicked”

 by CCW5, but CCW5 believed such loans were nonetheless taken by the clients as part of the

 “stip clearing” process. Other lending violations were apparent on the face of the files, such as

 truth-in-lending violations, and missing documents.

        432.    CCW5 said that loans originated by Ameriquest stood out, in terms of dubious

 characteristics. Ameriquest originated loans that were included in certain Offerings at issue in

 this Complaint.

        433.    Clayton Confidential Witness 6 (“CCW6”) was a Senior Project Lead at Clayton

 from 2004 to 2009. In this role, CCW6 oversaw teams of underwriters assigned to review

 samples of loan pools being considered for purchase. CCW6 not only worked at Clayton at the

 time it provided due diligence services for Defendants, but CCW6 could specifically recall

 working on projects involving loans originated by, among others, Fremont—which originated

 some of the Mortgage Loans at issue here.




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        434.    CCW6’s teams ranged from a dozen or so employees to over a hundred,

 depending on the number of loans to be reviewed. Confirming Defendants’ process was well-

 equipped to catch errors, according to CCW6 this included quality-control personnel whose job it

 was to double-check and review the work done by the underwriters. According to CCW6, these

 reviews were sometimes even conducted on the premises of the lender itself. Wherever the

 review was conducted, according to CCW6, Clayton was given access to the loan files, and a set

 of the lender’s underwriting guidelines.

        435.    CCW6 again confirmed that Defendants received daily reports on the progress of

 reviews, as well as a final report summarizing the total results at the end of a project. CCW6

 even stated that clients could access the reports in real-time using Clayton’s software application.

 The reports reflected the results of CCW6’s teams’ review of the loans as against the

 underwriting guidelines they were given to apply. These reports also provided Defendants with

 supporting documentation for each and every grade given to the loans. CCW6 also confirmed

 that Clayton was asked to review only a sample of the loans—and often the client dictated what

 loans made up that “sample.”

        436.    According to CCW6, at the end of a review, a “stipulation clearing” process was

 undertaken in which loans were re-reviewed to see if grade “3s” could be promoted to grade “2s”

 or grade “1s.” In this process, waivers were given and loans re-graded. According to CCW6,

 there was often “no rhyme or reason” offered by the client as to why the waivers were being

 provided. Rather, underwriters would simply make the grade change in the system.

        437.    Sometimes Clayton received pre-instructions to give loans “2s” rather than “3s,”

 despite the underwriting guidelines, based on decisions as to what criteria would be “let go.”




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 These situations were not uncommon or infrequent, and the change instructions would come both

 in e-mails and in phone calls to Clayton personnel.

           438.   CCW6 harbored doubts about whether the borrowers could and would repay the

 loans. CCW6 stated that loans were approved by way of accepting clearly unreasonable income

 claims.

           439.   CCW6 indicated that the amount of defects flagged for Defendants was also likely

 higher because the underwriters were bound to accept loans’ representations for certain products,

 such as stated-income loans, even if facially unreasonable. “It was not for [CCW6] to question”

 whether claims such as someone making $6,000 a month working at Wal-Mart meant the loan

 should be rejected.

           440.   Clayton Confidential Witness 7 (“CCW7”) was the Director of Client Service

 Management at Clayton from October 2001 until December 2005, and a Vice President of

 Business Development from December 2005 until October 2007. In these roles, CCW7 oversaw

 due diligence on both conduit and bulk loan pools that Clayton reviewed, including at the time

 Clayton provided work for Defendants on the Mortgage Loans at issue here.

           441.   A typical Clayton engagement may involve twenty underwriters working at the

 premises of the lender. The reviewers were “checking the boxes,” in the sense that if a borrower

 was claiming a certain income, they would check the loan file to ensure that the appropriate

 paystubs and bank statements were included. If so, they would “check a box” to indicate the

 borrower did in fact meet the guideline requirements for income.

           442.   CCW7 confirmed that daily reports from Team Leads were created for

 Defendants, including an indication of what grades were given to what loans that day, and how

 many loans had already undergone a second quality-control review. These reports were either



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 forwarded by CCW7 to Defendants, or given directly to their representatives by the Team Lead

 if the project involved a Defendant representative on-site.

        443.    According to CCW7, in addition to the “waivers” discussed elsewhere, Clayton

 was also told what it was not to evaluate—i.e., Clayton was told to “disregard certain items.”

 Even more loans were given a passing grade outside of formal instructions, according to CCW7,

 because underwriters would give loans a “2” grade even if it was technically a “3” loan, only

 because the underwriter though that was what the client wanted.

        444.    In addition, CCW7 recalled several instances in which loan originators would

 progressively apply pressure up the hierarchy until either Clayton or the banks yielded and

 accepted loans that had been graded as non-compliant. According to CCW7, if the originator

 could not persuade the Clayton Team Lead to re-grade a defective loan, the originator would

 contact CCW7. If CCW7 resisted, the originator would contact the bank’s asset manager, who

 would apply pressure on CCW7 to re-grade the rejected loan. Frequently, the pressure to accept

 a rejected loan would come directly from a bank’s trading desk, which needed a certain number

 of loans to complete a deal it had structured. If Clayton refused to re-grade the loan, the bank’s

 traders would “flip their lid.” On numerous occasions, CCW7 was directly contacted by asset

 managers and traders from banks who would “pound” on him until he re-graded a loan.

        445.    While noting that pressure from the originator or bank representative often caused

 Clayton to re-grade a rejected loan, CCW7 explained that even loans that received the highest

 grade were suspect because the lender’s or bank’s guidelines were extremely loose. As such,

 borrowers with credit scores as low as 560 met the guidelines, despite no verifiable source of

 income. According to CCW7, the banks were “buying [expletive] loans because the guidelines

 allowed [expletive] loans.”



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        446.    Clayton Confidential Witness 8 (“CCW8”) worked as a Due Diligence

 Underwriter at Clayton from August 2004 to July 2005, evaluating loans for credit and

 compliance issues. CCW8 confirmed that Clayton’s role in Defendants’ due diligence process

 was to audit loans for compliance with underwriting guidelines and legal requirements. This

 included, for example, reviewing the file to ensure the appropriate truth-in-lending and HUD

 forms were included. CCW8 also confirmed that at the outset, the due diligence process would

 include instructions to ignore problems if they fell within a given range, such as LTV ratios

 being within 5% of the underwriting guidelines.

        447.    The last screen on the underwriter’s computer program asked for a grade to be

 given. Loans graded “2” or “3” required a “Credit Narrative” to be provided, explaining for the

 Defendants’ benefit why the loan received that grade. Once the underwriter hit “enter,” the data

 was transferred to a version of the loan tape held by Clayton, known as the Clayton Loan

 Analysis System. That tape reflected the review results, and was delivered to the client.

        448.    Even though CCW8 only gave “3” grades to “really, really” bad loans, 99% of the

 time the grades were eventually changed to a “2.” Rather than rejecting the loans, CCW8

 understood that instead Clayton’s clients would negotiate a lower purchase price from the

 originators.

        449.    Clayton Confidential Witness 9 (“CCW9”) was a Due Diligence Underwriter at

 Clayton from 2003 to 2007. CCW9 noted that it was easy to get a job at Clayton; the company

 was even hiring truck drivers to do loan re-underwriting because investors put the company

 under so much pressure to churn through so many loans. About half the people on larger jobs

 had “no clue what they were doing,” and thus would take short-cuts like copying and pasting

 information to make it appear as though the loan met the guidelines. This, despite the fact that



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 the point of the review was to double-check information, such as by verifying that the loan file

 had the correct supporting documentation for the income reported on the loan tape.

           450.   CCW9 also confirmed that Clayton’s review for Defendants would under-report

 the number of loans that failed the underwriting guidelines because whereas the real guidelines

 had a series of “if/then” relationships (such as that a loan with high LTV ratio was okay if it had

 a concomitantly lower borrower DTI), the Clayton matrix would only report the maximum

 values, regardless of their inter-relationships. According to CCW9, the changing of loans from

 3s to 2s was going on “across the board.”

           451.   Clayton Confidential Witness 10 (“CCW10”) worked as a Supervisory

 Lead/Quality Control Underwriter for Clayton from August 2004 to February 2008, i.e., during

 the entire period Defendants were using Clayton as part of their due diligence process. CCW10

 confirmed that Clayton was using a lot of inexperienced people that “had no idea what they were

 doing.”

           452.   According to CCW10, part of Clayton’s job was to review the loan files to make

 sure the data provided accurately described the backup documentation. It also involved an

 overall review of the file to see if the borrower had the ability to repay the loan.

           453.   CCW10 agreed with the “textbook” explanation of the 3-grade system described

 above (with a “2” meaning the loan fell outside the underwriting guidelines, but was apparently

 subject to an exception). But “in practice,” according to CCW10, a “2” was used merely to hold

 loans that Defendants thought were of acceptable risk, even if Clayton did not agree with the

 designation, and even if there was no evidence in the file of any “compensating factors.” In

 other words, “[q]uite often, the investor had you make it a 2 without any compensating factors in

 the file.” This included Clayton receiving instructions from clients to not grade loans “3” even if



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 they did not comply with the stated guidelines, merely because the clients grew tired of ordering

 re-grades at the back end, and to disregard facially unreasonable income claims. CCW10 asked

 for his sarcasm to be excused after he jadedly asked “What? Investors asking us to change the

 loan scores?”

        454.     Clayton Confidential Witness 11(“CCW11”) was a Team Lead at Clayton, who

 began work there in 1999 and continued with the firm until 2008. CCW11 specifically recalled

 working on projects for Credit Suisse. As with the other Clayton employees, CCW11 confirmed

 that Defendants received daily reports that not only informed them of how many loans had failed,

 but also provided narrative descriptions for why the loans failed. According to CCW11,

 Clayton’s analysts would send the Client Service Managers in the Shelton, CT headquarters a zip

 file of the data results of each due diligence review, which the Client Service Managers would

 then use to create a report for the client. CCW11 also confirmed that clients often had

 representatives on-site. CCW11 recalled that when he met a particular client representative, the

 first words out of the representative’s mouth were “I don’t want any [expletive] 3s.”

        455.     CCW11 also recalled that on-site managers would sometimes receive the actual

 loan files for the “3” loans, for their personal review. This practice, of requesting and reviewing

 the files for certain loans that Clayton flagged as problematic, was common among Clayton’s

 clients. For example, CCW1 provided Prudential with a document that detailed the parameters of

 the due diligence Clayton performed for one of its clients. The document stated that if certain

 factors existed—for example, if a loan had a FICO score below 550—then the loan was to be

 flagged so that the client could review the loan itself.

        456.     CCW11 described the relevant time period as a “feeding frenzy,” and likened

 New Century, an originator of Mortgage Loans at issue here, to a “loan mill.” CCW11 said that



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 he might “kick” up to 80% of the loans he reviewed on a particular project because he “just

 wanted it to be accurate.” CCW11 thought that he should “just be honest” because he knew that

 clients like Credit Suisse would purchase all of the loans reviewed anyway, and just seek a lower

 price for those that did not meet the guidelines.

        457.    Bohan Confidential Witness 1 (“BCW1”) worked as a Contract Underwriter at

 another third-party due diligence firm, the Bohan Group (“Bohan”), from 2004 until 2006.

 Defendants also used Bohan in connection with their due diligence process. Confidential witness

 testimony from Bohan employees like BCW1 further confirm that Defendants’ due diligence

 process—no matter who it was conducted by—was well equipped to catch the errors at issue

 here, merely by reviewing the loan files Defendants had in their possession.

        458.    BCW1 described a similar fast-pace review process as discussed above with

 Clayton. Specifically, underwriters were expected to review ten to twelve loans per day, which

 meant that the reviewers “didn’t get into the meat of the loan.” Indeed, the time constraints often

 meant that the review was limited to “data entry” because the reviewers had to take everything at

 “face value.” BCW1 said that Team Leads instructed reviewers not to look closely at appraisals,

 credit reports, asset or income documents, or at the reasonableness of stated income or assets.

        459.    BCW1 said reviewers “were told to overlook things . . . that should not have been

 overlooked.” Reviewing the loan files, the income claims would “jump out at you” as being

 clearly unreasonable and unrealistic, but many clients did not care. If the client did not care, the

 loan would be given a passing grade.

        460.    According to BCW1, Bohan Team Leads and Quality Control Underwriters could

 change loan scores without the underwriter’s knowledge. When BCW1 would bring

 discrepancies to a Team Lead’s attention, BCW1 would sometimes be told “not to worry”



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 because the “loans were pretty much purchased” already, and thus the reviewers “just need[ed]

 to get the audit done.” The most common problems BCW1 could recall were FICO scores that

 were lower than guidelines required, DTI and LTV ratios higher than the guidelines allowed,

 suspect income calculations, and truth-in-lending violations. The loans looked like “garbage” to

 BCW1.

        461.    While at Bohan, BCW1 reviewed loans that had been originated by Fremont and

 WaMu, among other originators. BCW1 described the WaMu loans as “a joke.” Both

 originators contributed loans to Offerings at issue in this Complaint.

        462.    Bohan Confidential Witness 2 (“BCW2”) worked as a Deal Manager at Bohan

 during the 1990s and into 2006, and specifically recalled working for Credit Suisse. BCW2

 explained that a typical review might include ten to twenty underwriters, plus one or two quality-

 control supervisors. BCW2 communicated with clients to help determine how to configure the

 Bohan Risk Analysis Information Network (“BRAIN”) (which was fed the loan “tape”

 descriptions of the loans in the pool) to reflect the underwriting parameters the client wanted

 tested, and would communicate with the underwriters on how to run those tests.

        463.    According to BCW2, the due diligence process did not give loans a “3” grade

 unless the error was outside a margin of error, which would have been set by Defendants. (For

 instance, the client might have given pre-instructions to accept errors in DTI or LTV ratios by 5

 percent, such that a loan with a DTI of 57 percent would be given a passing grade even if the

 guidelines only allowed for 52 percent DTI).

        464.    BCW2 would e-mail results to the client nightly. The BRAIN system even

 allowed Defendants to request customized reports as to the grades that had been given, for

 instance highlighting only certain types of loans or grades. Most clients would respond to the



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 nightly reports the next morning. This often involved challenging the failing grades. According

 to BCW2, clients would change grade “3” loans to grade “2” loans “constantly.” An example

 that BCW2 had “no doubt” happened, or certainly something similar, was that a housekeeper

 might claim an income of $100,000 and Bohan would grade the loan “3” because of the

 income’s unreasonableness. Nonetheless, the client would change it to a “2.” A review with 40

 percent grade “3” loans was not abnormal, according to BCW2. The reasons why a loan was

 given a “3” grade were to be noted in the reports, so that the client could see why a given loan

 failed. Indeed, Bohan stressed that everyone involved in the review should make it very clear in

 the file why a loan was given a particular grade.

        465.    According to BCW2, Credit Suisse was very “hands on” during the review

 process, meaning it reviewed some loan files itself and gave feedback on the review’s findings.

 Credit Suisse occasionally had representatives on-site at Bohan, and participated in telephone

 conversations where it learned of deficient loans and persistent problems, including high

 numbers of loans with questionable borrower income or altered documentation.

        466.    Bohan Confidential Witness 3 (“BCW3”) worked as an underwriter at Bohan

 from 2003 to 2007. BCW3 worked on projects for Credit Suisse and confirmed that the

 company’s reviews did include credit, compliance, and collateral analyses. However, the due

 diligence began with instructions from Defendants, including criteria they “did not care” about.

 After a review, a “clean-up meeting” was held with the Team Lead, which involved “re-

 underwriting” the loans. Team Leads could overturn failing grades, but it was not possible to

 delete the narrative entry from the file, meaning that data would always be visible to Defendants

 even after a grade had been changed. BCW3 stated that investors would use such information to

 negotiate a lower price with the originators.



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        467.     Bohan Confidential Witness 4 (“BCW4”) worked as a Contract Underwriter at

 Bohan from roughly 2004 to 2007. The work involved reviewing mortgage pools offered for

 sale over the course of one to two weeks for each project, either at the lender’s offices or at a

 rented space.

        468.     BCW4’s teams, performing work at the same time that Clayton was providing due

 diligence services for Defendants, consisted of between ten and fifteen underwriters, supervised

 by a Team Lead, and at least one Quality Control Underwriter (often more, for larger jobs).

 Each underwriter would review ten and twelve loans per day, checking the loan’s feature against

 the given guidelines for such parameters as FICO scores, LTV ratios, DTI, property values, and

 documentation. Because of time constraints, the reviews did not often “get into the meat of the

 loan,” such that the checks provided were largely “data entry.”

        469.     BCW4 stated that Team Leads and Quality Control Underwriters could change

 the final scores without the underwriter’s knowledge. Team Leads were “nonchalant” about

 quality because their goal was to “hit numbers, make money, more than anything.” The constant

 message was to “get the job done quickly.” Further, the entire process was “completely client-

 driven,” so if a client wanted a “2” grade, it got a “2” grade.

        470.     According to BCW4, the most common discrepancies included FICO scores

 actually being far below the guidelines, DTI and LTV ratios being higher than guidelines;

 suspect income calculations (including claims about income from rental properties, cash tips, and

 part-time side jobs); and truth-in-lending violations. In addition, discrepancies in the value of the

 collateral were common, such as square footage failing to comply with specifications for the type

 of property purportedly being purchased (such as underwriting guidelines limiting loans for

 condos only to large properties, but in fact the property being mortgaged was too small). Though



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 instructed not to look carefully at borrower income claims, much of the claims looked like

 “garbage” to BCW4.

        471.    In sum, despite the many limitations and pressures on the due diligence process,

 and the opportunities to cure or otherwise change the grades from fail to pass, the third-party

 reports still showed high numbers of loans that were identified by the due diligence firms as

 failing the given underwriting guidelines. These numbers show that Defendants regularly

 securitized large numbers of defective loans, including in all of Defendants’ Offerings at issue

 here, contrary to Defendants’ representations.

        472.    The proper response to Clayton’s conclusions would have been to refuse to buy

 the defective loans, or to use the findings of the due diligence firm to probe the loans’ quality

 more deeply. Instead, Defendants used the deficiencies in the loan pool to increase their own

 profit margins on the securitizations. According to the September 2010 testimony before the

 FCIC by Clayton’s former president, D. Keith Johnson, the investment banks, like Defendants,

 would use the exception reports to force a lower price. In other words, rather than reject

 defective loans or cease doing business with consistently bad originators, Defendants would

 instead use the Clayton data to insist on a lower price from the originators, increasing their

 profits and securitizing loans despite express adverse findings. This is confirmed by many of the

 witnesses above.

        473.    Defendants’ hidden “waiver” of rejected loans into the securitizations was a

 fraudulent omission and rendered Defendants’ disclosures even more misleading. As the FCIC

 report concluded:

        [M]any prospectuses indicated that the loans in the pool either met guidelines
        outright or had compensating factors, even though Clayton’s records show that
        only a portion of the loans were sampled, and that of those that were sampled, a
        substantial percentage of Grade 3 loans were waived in.

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         ...

         [O]ne could reasonably expect [the untested loans] to have many of the same
         deficiencies, at the same rate, as the sampled loans. Prospectuses for the ultimate
         investors in the mortgage-backed securities did not contain this information, or
         information on how few of the loans were reviewed, raising the question of
         whether the disclosures were materially misleading, in violation of the securities
         laws.

         (FCIC Report at 167, 170 (emphasis added).)

                   (5)    Loan-file reviews conducted by others confirm that errors like this
                          would have been caught by a review of the loan files

         474.       Prudential still does not have access to the loan files. As seen above, however,

 the loan files themselves often revealed fundamental problems with the loans. Indeed, even

 Credit Suisse’s Head of Due Diligence noted the “obvious concerns” with one loan pool that the

 bank purchased from a problem originator—“poor credit, limited credit, questionable income,

 payment shock, 0$ into the purchase . . .etc.” That Defendants’ knew the Offering Materials

 were false and misleading, through their possession of the loan files, is further confirmed by the

 fact that other parties who have since obtained such files have discovered widespread errors in

 the files.

         475.      FHFA, for instance, examined the loan files for the loans in one of Prudential’s

 Offerings, ABSHE 2006-HE7. FHFA found that many loans contained obvious

 misrepresentations. For example:

               •   A loan that closed in September 2006, with a principal value of $90,900, was
                   originated under Argent’s full-documentation loan program and included in
                   ABSHE 2006-HE7. The loan was a cash-out refinance of an owner-occupied
                   residence. The underwriting guidelines for the loan required that the borrower
                   occupy the subject property. The subject property was located in Ohio. However,
                   the borrower was employed by the State of Florida at the time of origination.
                   Further, the origination credit report, a letter dated August 2006 confirming that
                   the borrower paid a collection, and a tax report dated prior to origination also
                   reflected current addresses for the borrower in Florida. No evidence in the loan
                   file indicates that the loan underwriter addressed or challenged the borrower’s


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                claim that he intended to reside at the new location. The loan defaulted, resulting
                in a loss of $89,527, which is close to 100 percent of the original loan amount.

            •   A loan that closed in August 2006, with a principal value of $308,000, was
                originated under Argent’s full documentation loan program and included in
                ABSHE 2006-HE7. The credit report in the loan origination file dated prior to
                closing shows 12 credit inquiries, including eight mortgage-related credit
                inquiries within the previous 90 days. There is no evidence in the file that the
                underwriter took this additional debt obligation into account in originating the
                loan. Moreover, the borrower obtained two other undisclosed mortgages in July
                2006, which resulted in additional monthly payments of $4,717. A recalculation
                of the DTI that includes the borrower’s undisclosed debt results in an increase
                from 44 percent to 109.06 percent, which exceeds the lender’s guideline
                maximum allowable DTI of 50 percent. The subject loan defaulted, resulting in a
                loss of $238,049, which is over 77 percent of the original loan amount.

            •   A cash-out refinance loan closed in the principal amount of $385,000, and was
                originated under a full documentation loan program. Although the property was
                represented to be owner occupied, various income and asset documentation and
                rental income reflect an address other than the subject property as the current
                address. The origination credit report also associated the borrower to a property
                other than the subject property. The borrower provided an electric bill prior to
                closing to support occupancy; however, the electric usage was a minimal bill and
                did not support occupancy. No evidence in the file indicates that the underwriting
                process addressed these inconsistencies. The loan defaulted and the property was
                subject to a foreclosure sale.

            •   A $303,600 mortgage loan to a borrower who claimed to be making $7,900 per
                month as a forklift driver despite tax forms obtained after closing setting the
                borrower’s actual income at $3,172.

            •   A loan closed in the principal amount of $244,500, and was originated under a
                full documentation loan program. The origination credit report revealed a first
                mortgage in the amount of $165,600 and a second mortgage of $41,400, neither of
                which had been taken into account in calculating the borrower’s DTI ratio. The
                re-underwriting confirmed the borrower purchased the property prior to the
                closing of the subject loan. Recalculating the borrower’s DTI ratio based on the
                undisclosed monthly payments of $1,505 increased the DTI from 49.30% to
                70.83%, a figure that exceeds the 55% guideline maximum. The loan has since
                defaulted and the property was liquidated, resulting in a loss.

        476.    Assured’s re-underwriting analysis similarly uncovered widespread and blatant

 misrepresentations. For instance:



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          •   A $172,000 mortgage loan for a borrower who claimed to be an office manager
              despite the fact that a written verification of employment was completed by a
              person with the same title the borrower claimed to have, rather than by the person
              contacted by the lender for verification.

          •   A $196,350 mortgage loan made to a borrower who claimed to be a paralegal
              despite the fact that the employment verification did not include the full name or
              title of the person providing the verification, and tax records and pay stubs
              submitted by the borrower were not issued by the asserted employer; the re-
              underwriting revealed the borrower had never been an employee of the asserted
              employer.

          •   A $248,000 mortgage loan for a borrower who claimed to be a manager but
              whose employment verification did not include any information on the person
              providing the verification as required and was not timely; the re-underwriting
              revealed the borrower was a forklift driver who is now in default.

       477.   Other loan file reviews have caught errors as those below:

          •   Improperly using gross receipts rather than taxable income to calculate DTI.

          •   Improperly including in income calculations “rental” income from properties the
              loan files showed were sold years before.

          •   Inconsistent claimed income levels in multiple loan applications, which the files
              revealed was shifted to lower-documentation loan programs after getting rejected
              based on the prior (lower, documented) income.

          •   Credit reports that revealed debts that were not disclosed on the loan application,
              or included in the reported DTI.

          •   Incorrect treatment of student debt, such as excluding it from DTI without proper
              documentation that repayment obligations had been deferred.

          •   Loan files containing conflicting appraisal reports from the same appraiser, dated
              the same day.

          •   Loan files lacking the required verifications for purportedly self-employed
              borrowers.

          •   Loan files lacking the requisite supporting documents (such as bank statements,
              pay stubs, tax returns, etc.) that were often supposed to be included as support for
              the income, debt, asset, and other datapoints used in the underwriting process.

          •   Rental amounts used in DTI calculations conflicting with the figures provided in
              the Verification of Rent forms.


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        478.    The “UNDERWRITING RED FLAGS” document provided by CCW1 lists

 dozens more “red flags” that Clayton and others with access to loan files have caught. For

 example, borrower verifications of employment contained “red flags” where “property seller has

 same address as employer,” “pay stubs from large employer are handwritten,” “business entity

 not registered or in good standing with the applicable regulatory,” and “date of hire is a weekend

 or a holiday.” This is just a small sample of the ways in which falsities in underwriting and other

 problems were revealed on the face of the loan files themselves. Of course, proper underwriting

 would have required even more data to be gathered in the face of these problems—not, simply,

 the provision of a reflexive “waiver,” as happened all too often during Defendants’ due diligence

 process.

        479.    That such problems have been found on the face of the loan files confirms that

 Defendants here—who had access to the loan files, and who gave their in-house and third-party

 due diligence teams access to those loan files—had all the information they needed to know the

 loans here were being misrepresented. Based on what limited data Prudential has been able to

 uncover, the high instances of defects (and defect waivers) that Clayton identified for Credit

 Suisse, and all the other facts set forth above, a review of Defendants’ loan files in discovery

 should similarly show that the loans’ misrepresentations would be apparent to anyone who

 opened the files. The ease with which Credit Suisse learned of the consistent problems at issue

 here, especially when combined with what is known about Defendants’ extensive due diligence

 processes, confirms they acted with scienter.

                (6)     Credit Suisse engaged in a scheme to clandestinely profit on defective
                        loans, to the detriment of investors, and then tried to cover up
                        evidence of non-compliance to reduce litigation risk

        480.    Not only were Defendants aware that their due diligence process allowed

 defective loans to be securitized, but evidence has emerged that they devised a scheme to profit
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 on those loans twice. First, Defendants profited by securitizing defective loans and selling the

 securitizations to investors like Prudential. Second, Defendants profited by making repurchase

 demands to loan originators (or, similarly, by settling the repurchase demands by retroactively

 “repricing” the loans), after the securities had been sold to investors, on the grounds that the

 defects breached the originators’ representations and warranties. Then, Defendants pocketed the

 proceeds instead of passing them on to the securitization trusts or repurchasing the defective

 loans from the trusts. This practice has been confirmed by internal e-mails: Defendants took

 “the funds and appl[ied]” them “to the respective trading ledger . . .basically [as] a profit.”

 According to the New York Attorney General’s complaint, Defendants’ own calculation

 indicates that this scheme yielded approximately $30 million in settlement proceeds relating to

 almost 2,000 loans with an aggregate principal balance of over $250 million.

        481.    Defendants’ mortgage purchase agreements with originators typically required

 originators to warrant that their loans were underwritten according to standard guidelines and

 conformed to certain characteristics, including the accuracy of the mortgage loan schedule, the

 absence of fraud by the originator or mortgagor, and compliance with federal and state laws. If a

 representation was breached, Defendants (as sponsor) could demand that the originator

 repurchase the defective loans as required by the mortgage purchase agreement.

        482.    When Defendants securitized loans, they likewise made representations and

 warranties to the RMBS trustees. These representations and warranties are contained in the

 PSAs, which transferred the loans to the trusts, and are similar to those made by originators to

 Defendants. For example, DLJ Mortgage Capital (as seller) represented that that the loans were

 underwritten according to standard guidelines and conformed to certain characteristics, including

 the accuracy of the mortgage loan schedule, and complied with federal, state, and local laws.



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 (See, e.g., HEMT 2005-5 PSA dated December 1, 2005, at Schedule IV.) Breaches of these

 representations and warranties obligate the sponsor/seller to repurchase the defective loans. As

 such, loans that were eligible for repurchase by originators at Defendants’ demand were,

 presumably, also subject to repurchase by Defendants at the trust’s demand.

        483.    But according to the SEC’s November 16, 2012 settlement with Credit Suisse, the

 company frequently negotiated private settlements with loan originators instead of putting back

 defective loans. If Credit Suisse had properly put-back defective loans to the trusts, payments

 would have flowed to investors rather than Credit Suisse. The SEC alleged that Credit Suisse

 misled investors in 75 different RMBS offerings. From 2005 to 2010, Credit Suisse kept the

 settlement proceeds for itself and failed to disclose its practice to the RMBS investors, who

 owned the loans that Credit Suisse settled on.

        484.    In nine of the 75 RMBS trusts at issue, Credit Suisse also failed to comply with

 offering document provisions that required it to repurchase certain early defaulting loans. Credit

 Suisse also applied different quality review procedures for loans that it sought to put back to

 originators, instituted a practice of not repurchasing such loans from trusts unless the originators

 had agreed to repurchase them, and failed to disclose its settlement practice when answering

 investor questions about early payment defaults.

        485.    The SEC alleged that Credit Suisse made a number of misleading statements and

 omissions in the offering documents for the 75 RMBS trusts at issue. Credit Suisse did not

 disclose that it might exercise rights against originators by entering into settlements without

 repurchasing the loans from the trusts. Credit Suisse also did not disclose that, despite its

 transfer and the relinquishment of control over the loans, Credit Suisse enforced rights against

 originators for loans owned by the trusts, without repurchasing them.



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        486.    Credit Suisse also failed to make required disclosures designed to inform

 investors about potential conflicts of interest. Government regulations require disclosure of

 relationships, involving or relating to the pool assets, between the sponsor and originators of

 more than 10% of the pool assets. By virtue of its practice of making claims against originators

 on trust-owned assets, Credit Suisse maintained a relationship with originators relating to the

 pool assets. To the extent that Credit Suisse had such a relationship with originators of 10% or

 more of the trust assets, that relationship was required to be disclosed, but Credit Suisse failed to

 make the required disclosures.

        487.    Regulations also require disclosure of “information or factors related to the

 sponsor that may be material to an analysis of the origination or performance of the pool assets.”

 Credit Suisse’s settlements with originators were relevant to the origination of loans because

 Credit Suisse collected additional funds on early defaulting loans sold to RMBS trusts. But the

 SEC alleged that Credit Suisse did not disclose this practice.

        488.    The SEC’s order also found that Credit Suisse made misleading statements about

 a key investor protection known as the First Payment Default (“FPD”) provision in two RMBS

 offerings. The FPD provision required the mortgage loan originator to repurchase or substitute

 loans that missed payments shortly before or after they were securitized. Credit Suisse misled

 investors by falsely claiming that “all First Payment Default Risk” was removed from its RMBS,

 and at the same time limiting the number of FPD loans that were put back to the originator.

        489.    One of Plaintiffs’ confidential witnesses confirms the SEC’s allegations that

 Credit Suisse did not distribute repurchase payments to investors. According to CSCW2, rather

 than demanding that the originators repurchase defective loans, Defendants settled their

 repurchase claims by “repricing” the loans. That is, Defendants retroactively negotiated a lower



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 price for the loans they had purchased, with the originators paying Defendants the difference.

 Defendants then kept the proceeds even though Defendants no longer owned the loans.

         490.     This egregious misconduct—which reflects Defendants’ knowledge of, and

 willingness to exploit, the fraud they were perpetrating on investors—is also confirmed by

 numerous Credit Suisse documents produced in and recently revealed by the MBIA litigation.

 For example, one e-mail describes 350 loans where Defendants “rec’d a check from the

 originator based on CTO [repricing] but we did not repurchase the loan from the deal or pass the

 $ to the trust.” In another e-mail cited in the New York Attorney General’s complaint, a senior

 executive in Credit Suisse’s Transaction Management Group confirmed the obvious, that

 Defendants’ practice of receiving settlement “$ from originators for [delinquent] loans” without

 repurchasing the loans or “pass[ing] the $ to the deals” “would be a surpise and concern to

 [investors] . . . .”

         491.     Recently-revealed internal Credit Suisse e-mails and documents confirm that

 Defendants scaled back their pre-securitization due diligence in a deliberate effort to avoid

 creating a record of defective loans at that time, so they could obtain the volume of loans they

 desired and avoid legal exposure to their own repurchase obligations.

         492.     Only after securitizing loans would Defendants closely examine loan quality in

 order to identify and exploit opportunities to “put back” loans to originators. Defendants

 maintained a “Put Back System” database (“PBS”), which evaluated loans after securitization for

 this very purpose. In Defendants’ own words, “PBS is primarily used to keep track of loans

 which have gone delinquent or have some other violation . . . . [L]oans are analyzed and those

 identified as ‘not good’ [are] put back for reselling to sellers and brokers.” Of course, this begs




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 the question of why Credit Suisse would not have used a similar system pre-purchase to keep

 these risky loans out of the loan pools.

        493.    Defendants tailored their review process to detect EPDs—a warranty that

 Defendants did not specifically provide to the trustees for the benefit of investors—while

 purposefully avoiding creating a record of more fundamental problems with the loans, although

 Defendants knew such fundamental problems existed. Defendants’ goal was to “avoid the

 previous approach by which a lot of loans were QC’d regardless of opportunity for put-back and

 a lot of negative results were e-mailed to [the Credit Suisse put-back group] but not widely seen,

 creating a record of possible rep/warrant breaches in deals.” Another e-mail stated that “the QC

 needs to be specifically tailored” and the sample size limited “so that it generates meaningful

 feedback but avoids generating inordinate correspondence re potential loan defects that we may

 not repurchase from securitizations.”

        494.    Through their review process, Defendants identified large volumes of EPDs,

 which they used to get payments from originators. An EPD occurs when a borrower fails to

 make a payment within the first few months of the loan term. It is highly irregular for a properly

 underwritten loan to default so soon after origination. Defendants knew that the significant

 volume of EPDs they were observing reflected high levels of fraud in loan origination. As

 Credit Suisse’s own Head of Conduit recognized, “[a] loan that misses its first pay is almost

 always fraud.” Another Credit Suisse employee likewise stated in an e-mail that: “I[t] is my

 experience that FPD [first payment default] loans are generally fraud . . . .” Indeed, based on a

 quality review evidenced in an internal e-mail, Defendants themselves found that 60% of EPD

 loans did not meet underwriting guidelines.




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        495.    As noted, however, Defendants manipulated their due diligence process to hide

 these obvious red flags of originator misconduct in order to minimize their own liability. For

 example, in one e-mail, Defendants put back loans for EPD that a Credit Suisse employee

 described as “fishy all the way”—the loans failed to meet underwriting guidelines, were missing

 documentation, and were based on inflated appraisals. In another e-mail, one Credit Suisse

 employee instructed another to “hold off” on reviewing loans that “tanked” for fraud but did not

 qualify as EPDs. The EPDs that Defendants used to make buyback demands of, or to enter into

 settlements with, originators were plainly indicative of violations of the represented underwriting

 guidelines, violations that Defendants willfully ignored pre-securitization and sale. That

 Defendants tailored their due diligence to EPDs and cashed in on such telling occurrences is

 strong evidence that Defendants intentionally exploited their awareness of the systematic

 abandonment of represented underwriting guidelines.

        496.    Despite Defendants’ efforts to conceal breaches of representations and warranties

 for which they could be held accountable, Defendants’ own repurchase demands are further

 evidence that Defendants knew of the same flagrant underwriting violations that plague the

 Mortgage Loans underlying the Certificates. When Defendants did issue repurchase demands to,

 instead of entering into settlements with, originators, they did so on the basis of violations of

 underwriting guidelines such as:

            •   Missing documentation: The loan was not documented according to the applicable
                underwriting guidelines. . . . The lack of cancelled checks to support prior housing
                payment history is critical in evaluating the ability/willingness to repay at
                originations, especially given that our subject transaction is Stated Income, 100%
                CLTV, First Time Home Buyer.

            •   Owner occupancy: The borrower purchased several properties at the same time
                and is using a PO Box as a mailing address per the QC credit report. A search on
                Lexis Nexis does not show subject property in the Borrower’s address history . . .



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             •   Undisclosed debt: QC Credit report shows a mortgage with Citimortgage Inc. for
                 $67,600/$670 per month and three mortgages with Countrywide for
                 $683,400/$5,085 per month opened the same month as the subject’s closing
                 which were not disclosed by the borrower on the final 1003 [loan application
                 form].

        497.     The defects identified by Defendants in their post-securitization reviews were

 severe and led to significant price adjustments. One internal e-mail reflects a transaction in

 which the adjusted price of seven loans was just 16% of the original price. Defendants knew

 these severe defects meant that defective loans were being included in the loan pools underlying

 the securitizations being unloaded on investors. But Defendants did nothing to stop that from

 happening, choosing instead to use that knowledge to pad their profits on the back end.

        498.     As noted above, and as evidenced in Defendants’ own e-mails, Defendants

 continued to purchase and securitize loans from the same offending originators to whom they

 were simultaneously putting back defective loans. Not only did Defendants know that loans they

 had securitized were defective, but they also knew that they were actively securitizing and

 selling toxic loans rife with misrepresentations. Defendants did all of this because of the

 tremendous profits they were making at every stage of the process.

        C.       Facts Showing Defendants’ Knowledge of Appraisal Misrepresentations

        499.     Credit Suisse’s extensive due diligence processes, described above, also revealed

 the systemic appraisal problems found by Prudential’s loan-level analysis here. In addition to

 the internal e-mails identified above, evidence of appraisal problems is supported by the

 consistency of the wide disparities between reported and actual LTV and CLTV data for

 Prudential’s Certificates, discovered through the use of loan-level, contemporaneous information.

 As summarized above, the number of loans with LTV ratios above 100% was misrepresented

 across every Offering, by as much as 20.93%. Credit Suisse’s knowledge of appraisal

 misrepresentations is also supported by evidence of the other systemic problems at issue here,

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 testimony and investigations relating to the Originators, confidential witness testimony detailed

 above, and other testimony that has been provided by industry insiders.

        500.    Defendants used an AVM to assess the reasonability of the values given, as

 confirmed by CCW10, who worked at Clayton. According to CCW10, many loan purchasers

 used their own AVMs to test the reasonability of the appraised values. According to CCW10,

 many guidelines included the use of AVMs and broker-price opinion letters. Where those

 criteria were part of the applicable underwriting guidelines, Clayton consulted such papers for

 Defendants as part of their due-diligence review.

        501.    Credit Suisse’s use of an AVM gave it direct knowledge of the LTV and CLTV

 misrepresentations at issue here. As discussed above, the Offering Materials ascribed property

 values to mortgaged properties far in excess of prices which an industry-standard AVM, given

 the same contemporaneous sales and similar data Defendants’ AVM would have used,

 determined the properties to be truly worth.

        502.    Because the AVM used by Prudential as part of its pre-complaint forensic review

 is industry-standard, and used the same data that Credit Suisse’s AVM would have used as part

 of its due diligence at the time of the deals, Credit Suisse must have been aware of all of the

 appraisal-related problems at issue here. For example, as illustrated in the table set forth in

 Section II.A.(2) above, the AVM revealed—for Prudential recently, but for Credit Suisse at the

 time of the Securitizations—that substantial percentages of loans in each deal had LTV ratios

 greater than 100% (i.e. they were “underwater”), contrary to Defendants’ representations.

        503.    The AVM figures in fact understate the number of appraisal problems of which

 Defendants were made aware. Defendants had many other, non-AVM-based ways of flagging

 appraisals. From access to the loan files, Credit Suisse could see the appraisal report itself which



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 often showed, for example, that the appraisals were subject to too many “adjustments.” The loan

 files also often included photographs of the subject property that belied the valuation given.

        504.    In addition, as described above, Defendants’ due-diligence process included the

 use of third-party due diligence firms, such as Clayton. Clayton gave Credit Suisse real-time

 updates about what loans had been flagged as defective, including narrative reports for each loan

 as to why that loan was given a failing grade. The Clayton reviewers inputted into the “notes”

 section of their systems details on why the loans were given failing grades, including

 descriptions of problems seen in the appraisal reports. This system, as above, was used to

 generate daily reports for Credit Suisse. Credit Suisse could also see the data in real time, both

 using remote software access given to clients or through Credit Suisse’s on-site

 representatives. In other words, Defendants were receiving, on a daily basis, information about

 problems with appraisals.

        505.    For instance, CCW1 confirmed that the underwriters at Clayton who reviewed

 loans for Defendants looked at the actual loan files to determine whether the data included in the

 file supported the LTV and similar data represented in the loan tape. This common-sense check

 involved tasks such as reviewing the appraisal report to see whether the “comparable” properties

 were actually close in value to the mortgaged property, and whether the comparable properties

 actually had the same or similar features (such as the number of bedrooms and bathrooms).

 CCW1 also confirmed that the reports that were generated for Defendants from the Clayton Loan

 Analysis System included the narrative descriptions of why loans with unreliable appraisals were

 being given a “3” grade. In fact, CCW1 provided Prudential with several actual reports that were

 prepared for Clayton clients. The reports contained a specific line item for “Appraisal Quality,”




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 and also included summary appraisal-related statistics such as the range of appraised values,

 average appraised values, and other appraisal-related metrics

        506.    CCW1 also said that some loan files contained AVM reports and/or broker-price

 opinion reports, as well. Such data alerted Credit Suisse to the presence of unreliable appraisal

 reports forming the basis for the false and misleading descriptions given to Prudential.

        507.    The list of “UNDERWRITING RED FLAGS” provided by CCW1 includes a

 variety of warnings to Clayton reviewers that appraisals were unreliable. For example, sales

 contracts contained the following warning signs with regard to appraisals: “appraisal ordered by

 a party to the transaction (seller, buyer, broker etc),” “comparables not verified as recorded or

 submitted by potentially biased party (seller, real estate broker),” “appraiser uses Fannie Mae

 number as sole credential (dicontinued program), “market approach substantially exceeds

 replacement cost approach,” and “Dollar for Dollar upgrades credited to value on the appraisal.”

        508.     Similarly, according to BCW1, the review Bohan provided for Credit Suisse

 involved such simple steps as reviewing the photographs in the appraisal file, which would show

 obvious problems like a house missing stairs. The appraisal review also involved asking for

 clarification on the “comps” used to calculate the value. Alternatively, a loan might be flagged

 as having an appraisal too high in relation to the same property’s prior sales (such as an appraisal

 for $350,000 on a house that sold for $200,000 two years earlier).

        509.    CCW8 also confirmed many of the loans graded “3s” were due to bad appraisals.

 The problems with the appraisals were apparent in the loan files. For instance, often too many

 line-adjustments were used to increase the value above and beyond what the “comps” supported.

 An adjustment could be made, for example, if the comparable had one bedroom less than the

 mortgaged property. But the guidelines limited how large any one adjustment could be, and



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 limited the total number of adjustments that could be made. Too many “adjustments,” of course,

 suggests the property was not really “comparable” at all.

        510.    According to CCW8, Defendants’ due diligence reviewers also checked whether

 the comps were actually comparable—such as where the loan was for a two-story property but

 the “comp” was a single-story dwelling. CCW8 also confirmed that the photos included in the

 appraisal were reviewed by Clayton, as were the written descriptions by the appraiser for why

 the “comps” were chosen.

        511.    According to CCW10, Clayton reviewed the reasonability of the appraisals based

 on factors such as whether it just “made sense,” such as by looking at whether the “comparables”

 were close enough geographically, whether they had similar features to the mortgaged property,

 and whether they had been subject to a reasonable number of “adjustments.” Notes about why

 the underwriter did not believe the appraisal supported the reported value (and thus, did not

 support the reported LTV guideline requirements) were inputted into the narrative section of the

 Clayton Loan Analysis System, which, as discussed above, generated reports for Credit Suisse

 on a daily basis.

        512.    According to CCW10, Clayton’s review for Credit Suisse would have caught

 even more fundamental problems with the appraisal-related representations, such as the wrong

 formulas being used (i.e., LTVs being calculated based on the purchase price rather than the

 appraised value, in violation of the stated guidelines). This review was on top of the more

 substantive review of the documents in the loan file that Clayton performed for Defendants, such

 as looking not just at the difference in value between the mortgaged property and the “comps,”

 but also whether there was any geographic divider (such as a freeway, or railroad tracks) that

 may also have rendered the two properties too different to be compared. In addition, according



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 to CCW10, some Clayton clients did “drive-bys” of the mortgaged properties to further assure

 themselves of the accuracy of the appraisal reports.

        513.    CCW11 further confirmed that Clayton reviewed whether appraisals were

 reasonable based on the comparable properties provided. For example, for a property in an

 urban area, the comparable property was supposed to be no more than half a mile away from the

 subject property. Clayton also evaluated whether the comparable property had the same “curb

 appeal” as the subject property, and whether the subject property and the comparable were

 physically similar, such as whether both were detached homes. CCW11 recalls “kicking” loans

 for such appraisal problems, and made sure that client representatives were informed of loans

 with questionable appraisals. CCW11 said that New Century—one of the originators at issue in

 this case—has frequent appraisal issues with its loans.

        514.    These failure rates identified by Defendants’ due diligence processes likely

 understated the number of appraisal problems in the loans by a wide margin, because of the

 pressure Defendants’ due diligence providers were under to “pass” as many loans as possible.

 Confidential witness testimony confirms this pressure extended to appraisal issues. For instance,

 according to CCW1, a client told Clayton to “get this [expletive] done and get out of here, and

 don’t make a big deal” about any issues, even though CCW1 had found problems such as

 inflated appraisals and missing documents.

        515.    CCW5, who had previously worked as an appraiser earlier in his career, also

 stated that he encountered many loan files that he believed to contain inflated appraisals. Thus,

 when he reviewed a loan with a particularly high LTV ratio, he “always kicked it.” Invariably,

 however, the Project Lead at Clayton informed him that the high LTV ratio was fine and

 instructed him not to reject the loan.



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          516.   CCW10 also discussed how the due diligence process included reviewing the

 reasonability of the appraisals—even though certain clients began instructing Clayton to grade

 loans with unreasonable appraisals “2s” rather than “3s,” because they were tired of having to re-

 grade the loans at the back end.Again, investors like Prudential were not given access to the loan

 files.

          517.   Prudential still does not have access to those files. As seen above, however, the

 loan files themselves often revealed fundamental problems with the loans, including with respect

 to the appraisal-related representations. Defendants’ possession of the loan files gave them all

 the information they needed to know the Offering Materials were false and misleading, which is

 confirmed by the fact that other parties that have since obtained and analyzed those files have

 found errors on their face. For instance, such loan file reviews have found that files contained

 conflicting appraisal reports from the same appraiser, dated the same day, yet the loan was

 approved based on the higher of the two appraisals, without explanation.

          518.   Such glaring problems with the loan files (on top of the similar examples

 provided by confidential witnesses, and other facts set forth above), confirm that Defendants—

 which had access to the loan files, and which gave its in-house and third-party due diligence

 teams access to those files—had all the information they needed to know the appraisal-related

 representations were false and misleading. Based on what limited data Prudential has been able

 to uncover, the high instances of defects (and defect-waivers) Clayton identified for Credit

 Suisse, and all the other facts set forth above, a review of Defendants’ loan files in discovery

 should likewise reveal the self-evident falsity of the loans’ represented characteristics. The ease

 with which the Defendants could have (and did) learn of the consistent problems at issue here,




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 especially when combined with what is known about Defendants’ extensive due diligence

 processes, confirms they acted with scienter.

        519.    Internal e-mails reveal other severe appraisal problems with loans acquired and

 securitized by Defendants and sold to investors like Prudential. For example, one e-mail chain

 between Credit Suisse employees references a loan securitized by Defendants in which the

 appraiser was paid “to look at the wrong house.” The property was sold at a foreclosure sale for

 $437,500 and eighteen days later secured first- and second-lien mortgages for $645,000.

 Neighbors verified that, at the time of the loan, the property was “gutted, no plum[b]ing, walls,

 floors, windows, or electrical.”

        520.    In another e-mail, a Credit Suisse employee similarly complains of a faulty

 appraisal performed in connection with a loan securitized by Defendants:

        I don’t feel this report was prepared according to USPAP [the Uniform Standards
        of Professional Appraisal Practice], which requires the appraiser to report and
        conduct transaction analysis to support substantial increased in value. . . . I feel
        the subject . . . is less than desirable and not deserving of the value given. The
        appraisal provided did not tell me what occurred to justify a $310K increase in 14
        months. . . . I don’t feel the appraiser did an adequate job of supporting the
        $615K value given.

        521.    In other e-mails, Credit Suisse employees admitted that delinquencies were

 caused by bad underwriting, misstated incomes, and mortgage originators who “coached”

 borrowers to obtain loans.

        522.    Congressional testimony and other statements, which have recently come to light,

 confirm there was widespread corruption in the appraisal processes during the period relevant to

 this Amended Complaint. For instance, Richard Bitner, a former executive of a subprime lender

 for fifteen years, testified in April 2010 that “the appraisal process [was] highly susceptible to

 manipulation,” and the rise in property values was in part due to “the subprime industry’s



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 acceptance of overvalued appraisals.” Similarly, Patricia Lindsay, a former wholesale lender,

 testified in April 2010 that in her experience appraisers were “often times pressured into coming

 in ‘at value,’” i.e., at least the amount needed for the loan to be approved. The appraisers

 “fearing” their “future business and their livelihoods” would choose properties “that would help

 support the needed value rather than finding the best comparables to come up with the most

 accurate value.”

        523.    Jim Amorin, President of the Appraisal Institute, testified in April 2009 that “in

 many cases, appraisers are ordered or severely pressured to doctor their reports to convey a

 particular, higher value for a property, or else never see work from those parties again . . . [T]oo

 often state licensed and certified appraisers are forced into making a ‘Hobson’s Choice.’”

        524.    The FCIC’s January 2011 report recounts the similar testimony of Dennis J. Black,

 an appraiser with twenty-four years of experience who held continuing education services across

 the country:

        He heard complaints from the appraisers that they had been pressured to ignore
        missing kitchens, damaged walls, and inoperable mechanical systems. Black told
        the FCIC, ‘The story I have heard most often is the client saying he could not use
        the appraisal because the value was [not] what they needed.’ The client would
        hire somebody else.

 (FCIC Report at 91.)

        525.    Defendants knew appraisal fraud was occurring specifically with regard to the

 lending practices of their own Originators. As detailed above, these appraisal issues were

 common amongst the Originators at issue here. In short, Defendants, their Originators, and their

 appraisers did not genuinely believe in the appraised values underlying the Mortgage Loans.




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        D.      Facts Showing Defendants’ Knowledge as to Owner-Occupancy
                Representations

        526.    Defendants’ extensive due diligence processes, described above, also caught the

 systemic owner-occupancy problems found by Prudential’s loan-level forensic analysis. As

 summarized above, occupancy rates were misrepresented across every Offering by as much as

 13.86%.

        527.    As described above, Credit Suisse engaged in an extensive due diligence process.

 That process gave Defendants real-time updates as to what loans had been flagged as defective,

 including narrative reports explaining why those loans were given failing grades. The Clayton

 reviewers, for example, entered details into the “notes” section of the Clayton Loan Analysis

 System on why certain loans had failed, including any occupancy-related “red flags.” This

 system was used to generate daily reports for Credit Suisse. This, in addition to the fact that

 Credit Suisse could see the data in real time both by way of the remote software access given to

 it or by way of Credit Suisse’s on-site representatives.

        528.    Defendants thus received information on a daily basis about problems seen in the

 loan files in terms of false occupancy claims. CCW10 confirmed that owner-occupancy

 representations were reviewed as part of Defendants’ due-diligence process. Indeed, according

 to CCW10, “the three things any due diligence underwriter worth his salt always verifies is

 owner occupancy, LTV, and debt ratio.” CCW1 also confirmed that Clayton’s underwriters

 could and did spot problems in the loan files indicating that occupancy representations were false.

        529.    Defendants’ due diligence reviewers were instructed to spot occupancy problems

 in a variety of ways. CCW10 gave a litany of examples, such as: (i) the place of employment

 being unreasonably far from the purported residence; (ii) inconsistencies in the addresses listed

 in the supporting documents in the file (such as W-2s and bank statements); (iii) the mortgaged


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 property also being relied on as a source of rental income; (iv) borrowers with long histories of

 rental income; (v) mortgaged properties worth more than the “second” properties (as most people

 live in the more-valuable property, as compared to their income-earning or vacation properties);

 (vi) addresses and rental information contained in the credit reports indicating that mail was

 being sent elsewhere, while rental income was being claimed; (vii) landlord hazard policies

 being included in the loan files; and (viii) inconsistent data between the loan tape and the loan

 file.

         530.   According to CCW10, notes made on unreasonable occupancy claims were

 entered into the Clayton Loan Analysis System, which, as discussed above, generated reports for

 clients on a regular basis. In addition, CCW10 knows that investors on their own would

 sometimes hire investigators to visit the properties, to do a visual check as to whether the

 property appeared owner-occupied.

         531.   Similarly, CCW1 personally flagged problems in the loan files with regard to the

 owner-occupancy claims, including because he understood that vacation or investment properties

 have “significantly higher risk” than primary residences. This meant loans that were flagged for

 having misrepresented occupancy features were given a “3,” with a note in the Clayton Loan

 Analysis System (which, as discussed above, generated daily reports for Defendants) explaining

 exactly what information in the file called into serious question the occupancy claim.

         532.   As with CCW10, CCW1 gave examples of how the credit file gave the

 underwriters that worked for Defendants actual knowledge, such as discrepancies in the claimed

 address and those that appear on the credit report.

         533.   And the list of “UNDERWRITING RED FLAGS” provided by CCW1 includes a

 variety of warning signs to Clayton reviewers that a property’s occupancy was misrepresented.



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 For example, loan applications contained the following indications that a property was not

 actually owner-occupied: “significant increase of unrealistic change in commuting distance,”

 “new housing is too small to accommodate all occupants,” and “buyer is moving from larger to

 smaller home without apparent reason.” Similarly, IRS tax returns contained a red flag if

 “address and/or profession do not agree with other information submitted on the loan application”

 or “no interest paid when borrower shows ownership of property (or vice versa).” And the sales

 contract indicated that a property was not actually owner-occupied if there was a “for sale sign

 on the photo of the subject property (in refinance loans).”

        534.    CCW11 further confirmed that Clayton regularly evaluated owner-occupancy, for

 example reviewing the borrower’s credit report for indicators about his or her current residential

 address, and checking the borrower’s pay stubs in the loan file to see what address was on them.

 If evidence in the loan file indicated that a property was not actually owner-occupied, Clayton

 underwriters would treat the loan as one for a second home or rental property, which had slightly

 different underwriting guidelines.

        535.    Defendants’ due diligence used common-sense factors to call into question

 whether in fact an occupancy claim was accurate, such as addresses not matching the credit

 reports. It is those types of inter-relationships and common-sense conclusions that drove

 Prudential’s loan-level analysis here. Thus, Defendants gained knowledge as to at least the

 percentages of errors set forth in the table in Section II.A.(1) above.

        536.    The figures in fact understate the number of occupancy problems of which

 Defendants were made aware. Unlike Prudential, Defendants had many other ways to flag

 occupancy claims, such as by seeing the borrower’s bank statements and utility bills in the loan

 file, and seeing notes made in appraisal reports about whether the property was vacant.



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        537.    Prudential was not given access to the loan files, which often revealed

 fundamental problems with the loans, including with respect to the occupancy claims. That

 Defendants’ possession of the loan files gave them all the information they needed to know the

 Offering Materials were false and misleading is confirmed by the fact that those parties who

 have since obtained the loan files have found that they contain errors on their face.

        538.    FHFA, for instance, examined the loan files for the loans in one of Prudential’s

 Offerings, ABSHE 2006-HE7. FHFA found that many of the loans in the ABSHE 2006-HE7

 Offering contained obvious occupancy misrepresentations. For example:

            •   A loan that closed in September 2006, with a principal value of $90,900, was
                originated under Argent’s full-documentation loan program and included in
                ABSHE 2006-HE7. The loan was a cash-out refinance of an owner-occupied
                residence. The underwriting guidelines for the loan required that the borrower
                occupy the subject property. The subject property was located in Ohio. However,
                the borrower was employed by the State of Florida at the time of origination.
                Further, the origination credit report, a letter dated August 2006 confirming that
                the borrower paid a collection, and a tax report dated prior to origination also
                reflected current addresses for the borrower in Florida. No evidence in the loan
                file indicates that the loan underwriter addressed or challenged the borrower’s
                claim that he intended to reside at the new location. The loan defaulted, resulting
                in a loss of $89,527, which is close to 100 percent of the original loan amount.

 Beyond ABSHE 2006-HE7, FHFA uncovered:

            •   A cash-out refinance loan closed in the principal amount of $385,000, and was
                originated under a full documentation loan program. Although the property was
                represented to be owner occupied, various income and asset documentation and
                rental income reflect an address other than the subject property as the current
                address. The origination credit report also associated the borrower to a property
                other than the subject property. The borrower provided an electric bill prior to
                closing to support occupancy; however, the electric usage was a minimal bill and
                did not support occupancy. No evidence in the file indicates that the underwriting
                process addressed these inconsistencies. The loan defaulted and the property was
                subject to a foreclosure sale.

        539.    In reviewing the loan files for the HEMT 2007-2 offering, MBIA’s re-

 underwriting analysis exposed, inter alia, rampant fraud, primarily involving misrepresentation


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 of the borrowers’ income, assets, employment, or intent to occupy the property as the borrowers’

 residence (rather than as an investment), and subsequent failure to so occupy the property.

        540.     Other loan file reviews have caught errors such as those below:

             •   Occupancy claims conflicting with addresses on bank reports included in the loan
                 file.

             •   Occupancy claims conflicting with identification materials (i.e., drivers’ licenses)
                 included in the loan file.

             •   Occupancy claims conflicting with other documents in the loan file, such as
                 employer materials indicating the borrower had been relocated elsewhere.

             •   Occupancy claims conflicting with appraisal reports, which showed that the
                 property was vacated at the time of the review.

             •   Occupancy claims conflicting with the inclusion of insurance documents in the
                 file that indicated the borrower had obtained landlord hazard coverage.

        541.     That such problems have been found on the face of the loan files confirms that

 Defendants—who had access to the loan files, and who gave their in-house and third-party due

 diligence teams access to those loan files—had all the information they needed to know the

 owner-occupancy claims were misrepresented for the Mortgage Loans at issue.

        E.       Facts Showing Defendants’ Knowledge as to the Title-Transfer
                 Representations

        542.     As discussed above, Defendants’ title-transfer misrepresentations were consistent,

 and reflect huge discrepancies between the Offering Materials’ representations and reality. For

 all the reasons above that securitizers could not have consistently misrepresented underwriting

 guidelines without knowing they were false, so too could Defendants not have operated such a

 massive RMBS business without gaining knowledge that the vast majority of the “mortgage-

 backed securities” were not in fact backed by mortgages at all.




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           F.     Facts Showing Defendants’ Knowledge as to the Credit Rating
                  Representations

           543.   As discussed above, the credit ratings were a garbage-in, garbage-out process. In

 addition, even before mortgage loans were purchased for securitization, securitizers knew what

 types of loan features loan pools had to have in order to receive the desired credit ratings from

 the rating agencies. For instance, prior to bidding in an auction, Defendants would often submit

 the purported loan features (contained on a loan tape) to the credit rating agencies. The agencies

 would then run the loan-level information (e.g., LTV ratio, CLTV ratio, occupancy status)

 through their quantitative models in order to estimate the number of loans that were likely to

 default. By combining predictions of the number of underlying loan defaults with the proposed

 “waterfall” structure of the various RMBS tranches, a rating could be assigned in accordance

 with the predicted likelihood that holders of that tranche would receive full payment on their

 securitizations.

           544.   Securitizers knew what loan features would result in which credit ratings in other

 ways. For example, the agencies often made key features of their ratings model available to their

 customers, making it possible to see what a rating would likely be based on a given set of loan

 features, even without yet directly involving the agencies themselves. As such, Defendants had

 intimate knowledge of the process by which ratings were produced.

           545.   The loan information was also often given to the agencies in advance of the

 finalization of the transaction to procure “shadow” ratings, the ratings that the securitizations

 would receive if no insurance coverage were provided. Through these and other methods, by the

 time a final, for-publication rating was issued it had already been a fait accompli as the

 securitizers knew what (false) data was going to be given in exchange for what resulting credit

 rating.


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        546.      Whether part of the initial purchase, the “shadow ratings,” internal analysis, or the

 final for-publication ratings, the rating is always based on the output from the agencies’

 quantitative models. Those models use loan tape data—the same type of loan tapes used to

 create the Offering Materials, and sometimes even provided to investors by way of free-writing

 prospectuses—to mathematically predict how many loans in the pool would likely default under

 certain assumed scenarios. But the model’s prediction of loan defaults, and thus the resulting

 rating, was substantively meaningless given that, as detailed above, the underlying loan data fed

 to the rating agencies was materially and substantially false.

        547.      The fact that the ratings were only as good as the data given to the agencies via

 the same loan tapes used to create the Offering Materials for investors has been confirmed by

 testimony given in connection with the government’s investigation into the mortgage meltdown.

 Indeed, as discussed above, Susan Barnes, an S&P employee, testified before the SPSI that the

 rating agencies rely on the “quality of the data generated about the loans going into the

 securitizations” and that this data is “produced by others”—namely, the securitizer, who is

 “responsible for reporting accurate information about the loans in the deal documents and

 offering documents to potential investors.” (SPSI Hearing Testimony, Apr. 23, 2010 (emphasis

 added). ) The problem was, as confirmed by CSCW2, that while the rating agencies assumed

 investment banks like Defendants were performing a meaningful quality review, this was far

 from the case.

        548.      Indeed, the data analyzed by the rating agencies included, without limitation, the

 amount of equity that borrowers had in their homes, LTV and CLTV ratios, occupancy status,

 and the amount of documentation provided by borrowers to verify their assets and income

 levels—in short, the very types of data shown to be false by Prudential’s loan-level forensic



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 analysis, the re-underwriting analyses performed by entities that have (unlike Prudential)

 procured the actual loan files, and confidential witness testimony.

        549.    These governmental reports and testimony confirm that the credit ratings were a

 garbage-in, garbage-out process controlled by the securitizers. Given Credit Suisse’s vertically

 integrated structure, in which it controlled all aspects of securitization, as well as its knowledge

 of the ratings process, Defendants knew not only that the LTV, CLTV, and owner-occupancy

 data was being misrepresented to investors, but that the same data, when fed to the rating

 agencies, would produce credit ratings that were utterly baseless. Accordingly, Credit Suisse

 knew the credit ratings did not reasonably address the “likelihood of the receipt by a

 certificateholder of distributions on the mortgage loans” and, indeed, did not genuinely believe in

 the credit ratings themselves.

        550.    Finally, as set forth above, Defendants did not merely manipulate the ratings

 process by feeding false information to the ratings agencies. Defendants took the further step of

 actively engaging in manipulation designed to secure unwarranted ratings, including “ratings

 shopping,” pressuring the agencies not to perform adequate scrutiny of its deals, and having

 analysts who did their job properly replaced on future deals. Defendants’ use of such tactics

 reflects their knowledge that the Mortgage Loans, if accurately assessed, would not warrant the

 AAA and other ratings Defendants desired and presented to investors.

 IV.    PRUDENTIAL’S DETRIMENTAL RELIANCE AND DAMAGES

        A.      Prudential’s Reasonable Reliance

        551.    Prudential typically purchased senior or highly rated mezzanine classes of

 mortgage-backed securities. Prudential purchased the Certificates to generate income and total

 return through safe investments. Prudential also purchased these securities with the expectation



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 that the investments could be—and indeed some were—purchased and sold on the secondary

 market.

        552.    Prudential invested in the Certificates as part of a broader plan to invest in a

 diverse array of carefully underwritten mortgage-backed securities. Its purchase decisions were

 based on due diligence done on multiple levels. For instance, Prudential’s investment manager

 has credit research analysts specifically tasked with analyzing potential risks. The research

 analysts’ recommendations have never been overridden with respect to RMBS.

        553.    In making the investments, Prudential relied upon Defendants’ representations

 and assurances regarding the quality of the mortgage collateral underlying the Certificates,

 including the quality of the underwriting processes related to the underlying Mortgage Loans.

 Prudential received, reviewed, and relied upon the Offering Materials, which described in detail

 the Mortgage Loans underlying each Offering. Offering Materials containing the representations

 outlined above and in the Exhibits (or materially similar counterparts thereto) were obtained,

 reviewed, and relied upon in making the purchases. Prudential also received and relied on other

 marketing materials that Defendants provided at industry conferences, as described above, which

 described Defendants’ RMBS business.

        554.    As part of its business practice, Prudential reviewed draft Offering Materials and

 term sheets as well as the final Offering Materials. Prudential also reviewed other materials such

 as the related PSAs, and any documents related to insurance-based credit enhancements on the

 Securitizations. Such materials (or materially similar counterparts thereto) were made available

 prior to purchase. That practice was carried out with respect to the Offering Materials at issue in

 this Complaint.




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          555.   Specifically, but without limitation, prior to purchasing mortgage-backed

 securities Prudential reviewed and considered the underwriting guidelines of the originators or

 conduits involved. Prudential gained an understanding of the purported processes in the Offering

 Materials at issue here, and also understood them from its review of similar offering materials

 issued by and about Defendants and the Originators over the course of the many years Prudential

 has been purchasing RMBS. For instance, representations such as that the underwriting

 guidelines would be followed, that the guidelines were intended to in some reasonable way

 assess the borrower’s capacity for repayment, and that “exceptions” would only be made when

 “compensating factors” exist are common to many of Defendants’ securitizations, including

 those at issue here. The consistency of these core representations reinforces the reasonableness

 of Prudential’s actual reliance on the Offering Materials at issue here, as well as the fraudulent

 nature of Defendants’ key omission of facts regarding their systemic underwriting abandonment.

          556.   Prudential would also review, prior to purchase, the specific representations made

 about the Mortgage Loans—such as whether the loans were backed by owner-occupied

 properties, and the loan’s LTV and CLTV ratios. At no point did Defendants disclose to

 Prudential that these statistics were misrepresented, and indeed, baseless.

          557.   Prudential fully explored all information made available to investors before

 purchasing RMBS. Indeed, Prudential also often visited originators’ offices on-site. Prudential

 regularly attended industry conferences and met with originators and underwriters who attended.

 Prudential received marketing materials from Defendants at such conferences, as described

 above.

          558.   Prudential continued to monitor its investments after purchase, including with

 respect to the Certificates here. However, Prudential did not and could not have uncovered the



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 misrepresentations at issue here prior to purchase—and, indeed, did not know of the wrongdoing

 alleged herein until recently. For similar reasons, Prudential did not and could not have

 discovered the losses caused by the misrepresentations—i.e., its injuries—at issue here until well

 after the purchases were made. Indeed, as noted below, most of the Certificates held their

 investment grade ratings for some time after the purchases were made, and Prudential did not

 begin taking write-downs on these investments for some time, either.

        559.    As discussed above, the Offering Materials contained certain information

 purporting to describe the Mortgage Loans. More detailed information was contained in “loan

 tapes,” but these loan tapes were often not made available to investors. Even if they were, such

 tapes would still not provide investors with the information necessary to discover the fraud. The

 loan tapes are simply rows of numerical data—data that, as alleged above, was itself false. Thus,

 without the loan files containing the backup materials standing behind those numerical

 descriptions—documents that were never made available to investors, and which could not have

 been given to Prudential without violating rules regarding the selective dissemination of material,

 non-public information—even having the loan tapes full of (false) data would not have revealed

 the fraud.

        560.    Still without access to the loan files, investors such as Prudential have only

 recently been able to test representations about the risk attributes of the underlying loans. For

 instance, investors might be provided a table claiming that one property was owner-occupied and

 had an LTV ratio of 75%, and claiming that the borrower had a debt-to-income ratio of 30%.

 Simply seeing that loan-by-loan breakdown, however, in no way informed investors that the

 originators had disregarded their guidelines or were making underwriting “exceptions” (such as

 those for high-LTV loans) without regard to whether there were “compensating factors.”



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        561.    Investors like Prudential were not given loan files containing full documentation

 that would have shed light on whether Defendants’ representations had a reasonable basis in fact.

 Indeed, the offering materials provided to investors often did not even include the specific

 property addresses, nor did it identify the consumers tied to the loans. There was thus no

 practical way, until recently, for investors to “look behind” the tables of numbers in order to

 assess whether those numbers were actually reflective of the mortgage loans being securitized.

 Thus, prior to May 2009, as explained below, the only information investors could obtain on the

 nature of the Mortgage Loans was what they were told in the Offering Materials.

        562.    As noted above, using currently available technology, Prudential has used a loan-

 level forensic analysis for the purposes of this Complaint that tests the representations at issue.

 However, it was not until well after the purchases at issue here that investors were offered the

 ability to access proprietary databases, developed by a data vendor over the course of many years

 and at a significant cost, that would allow them to determine the accuracy of the loan-level

 information provided in the Offering Materials. It was only through such databases that enough

 data could be linked together, through the use of proprietary algorithms, that investors could

 even identify the specific loans underlying offerings. Without knowing a property’s address,

 investors obviously could not know anything about the property’s actual value other than what

 they were told in the Offering Materials. Thus, prior to the development of these informational

 services, there was no publicly available means of consistently identifying the specific loans

 underlying RMBS, and thus no way of verifying the representations made to investors about the

 features of those loans.

        563.    In May 2009, an early form of informational service, called TrueLTV, was first

 made public. It allowed investors, for the first time (but even then, at a significant cost) to



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 determine what specific properties were actually being included in a collateral pool. For instance,

 the database compares the property zip code, loan amount, and date of origination (high-level

 information provided in the Offering Materials) and compares those points across other

 databases to see if there is a “match” in the same zip code. This is a simplified explanation; the

 actual algorithm used is proprietary. But the point is that it typically takes an enormous database

 to even identify the property included in the collateral pool.

        564.    Investors like Prudential would need the specific property address in order to

 verify representations made in the Offering Materials, such as the LTV ratios. Prudential is not

 aware of any other similar service or process that could have reasonably provided this

 information prior to May 2009. Though the identification of the property addresses was

 available in May 2009 through the TrueLTV service, that service did not have the data elements

 necessary to evaluate owner occupancy claims. The data sets necessary to test occupancy claims

 were added in 2010 and included in a new service called Reps and Warranties. Only through the

 Reps and Warranties service, released in 2010, was it possible to compare the property addresses

 against other borrower information to validate the occupancy claims made in the Offering

 Materials. Prudential is not aware of any other similar service or process that could have

 reasonably provided this information prior to 2010.

        565.    In purchasing the Certificates, Prudential justifiably relied on Defendants’

 misrepresentations and omissions of material facts detailed above, including the misstatements

 and omissions in the Offering Materials. These representations materially altered the total mix

 of information upon which Prudential made its purchasing decisions. But for the

 misrepresentations and omissions in the Offering Materials, Prudential would not have purchased




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 or acquired the Certificates as it ultimately did, because those representations and omissions

 were material to its decision to acquire the Certificates.

        B.      Prudential’s Damages

        566.    The false and misleading statements of, and omissions of, material facts in the

 Offering Materials directly caused Prudential damage, because the Certificates were in fact far

 riskier than Defendants had described them to be. The Mortgage Loans underlying the

 Certificates experienced defaults and delinquencies at very high rates due to Defendants’

 abandonment of the disclosed underwriting guidelines. Again, however, it was not until much

 later that Prudential could have known it was injured, and not until much later that it could have

 known it was caused by Defendants’ misrepresentations. The poor collateral performance

 resulted in downgrades to the Certificates’ ratings, which made them unmarketable at anywhere

 near the prices Prudential paid, thus confirming that Prudential paid far more for the Certificates

 than the value it actually received.

        567.    Even in the context of the housing downturn, the Certificates would have held

 much higher value had they been as represented in the Offering Materials, because their

 mortgage pools would not have defaulted at such a high rate. This decreased value is evidenced

 collectively by, but need not be measured solely by: (i) the high rates of default and delinquency

 of the Mortgage Loans; (ii) the Certificates’ plummeting ratings; (iii) lower-than-expected past

 and projected cash flow; and (iv) lower market value.

        568.    Prudential has incurred substantial losses due to the poor quality of the collateral

 underlying the Certificates and Defendants’ failure to properly transfer title to the Mortgage

 Loans. Because of the declining collateral base, it is likely that Prudential will not realize the

 full payments it expected. This is reflected in the significantly diminished market value for these



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 securities, which, again, is a strong indicator that the true value of the Certificates was far less

 than what Prudential paid.

        569.    The disclosure of irregularities in the underwriting practices actually used with

 respect to the Mortgage Loans, the increased risk regarding future cash flow, and problems with

 transfer of title, have further fed the substantial decline in market value of the Certificates.

 Prudential purchased the Certificates not only for their income stream, but also with an

 expectation of possibly reselling the Certificates on the secondary market. Prudential thus

 viewed market value as a critical aspect of the Certificates it purchased. Prudential incurred

 substantial losses on the Certificates due to a drastic decline in market value attributable to the

 misrepresentations which, when disclosed, revealed that the Mortgage Loans had a substantially

 higher risk profile than investors (including Prudential) were led to believe. Prudential has

 already incurred substantial losses on Certificates it has sold on the secondary market.

        570.    The loans underlying the Certificates have experienced default and delinquency at

 extraordinarily high rates due to the abandonment of the disclosed underwriting guidelines.

 These rates of default are much higher than what a pool of loans that had the features Defendants

 described would have experienced in the same economic conditions—and thus, Prudential’s

 losses have been much greater than they would have been if the Certificates and the loans

 underlying them were as Defendants described them to be. For example, the fact that the loans

 were not backed by owner-occupied properties at their claimed rate made them more prone to

 default, thus making the Certificates poorer investments, accelerating their decline in value.

        571.    Further, higher default rates have eaten into the safety “buffer” such features as

 overcollateralization were supposed to provide, meaning the prospects for full receipt of the

 payments once expected have dropped significantly. The diminished prospect of continued cash



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 flows dictates that the Certificates are less valuable than they would have been but for the

 misrepresentations. Prudential is seeking recovery for past and current damages either through a

 damage award or rescission.

        572.    Prudential’s damages can be quantified using secondary-market pricing. Though

 the secondary market may have temporarily “seized up” during the height of the financial crisis,

 today there is a functioning, liquid, secondary market for mortgage-backed securities such as the

 Certificates. Numerous brokers are active in, and have trading desks specifically dedicated to,

 the secondary market for RMBS, including without limitation Barclays, Bank of America,

 Citigroup, Deutsche Bank, Goldman Sachs, Royal Bank of Scotland, JPMorgan, Nomura, and

 Morgan Stanley.

        573.    In April 2011, the Wall Street Journal reported that “AIG Bonds are in Demand,”

 finding that the Federal Reserve Bank of New York’s “much anticipated” auction of $1.5 billion

 in subprime bonds was “deemed successful by industry participants.” (Anusha Shrivastava, AIG

 Bonds Are in Demand, Investors Line Up for Fed’s First Auction of Subprime Debt, Wall St. J.,

 Apr. 7, 2011.) “Industry participants said dealers saw solid interest from investors.” According

 to a CEO quoted by the article, “[t]he overwhelming majority of the list [of bonds] traded at

 more than the estimated price, indicating healthy demand by dealers and investors.”

        574.    The liquidity of the market has continued since then, with the Wall Street Journal

 reporting in March 2012 that investors were “[b]ullish” on subprime mortgage bonds. According

 to the report, in the first two months of 2012, “investors bought $42.4 billion and sold more than

 $50 billion [of RMBS] through dealers.” (Al Yoon, Investors Bullish On Subprime, Nonagency

 Mortgage Bonds, Survey, Wall St. J. Smart Money, Mar. 30, 2012.) Those numbers continued

 in March 2012, when “[i]nvestors bought $21.3 billion in subprime and other risky residential



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 mortgage bonds through Wall Street dealers . . . , exceeding the $20.4 billion they sold.” This

 data was released by the Financial Industry Regulatory Authority, or FINRA, which began

 reporting data on the volume of RMBS trades in mid-2011.

        575.    According to data provided to the FCIC, between May 2007 and November 2008,

 when the RMBS market was less liquid than it is now, Goldman Sachs alone bought and sold

 $17 billion worth of RMBS cash securities, and $32 billion worth of credit default swaps linked

 to RMBS securities, representing a total of 7,000 trades. These figures demonstrate the liquidity

 in the secondary market for RMBS. Prudential has already sold some of the Certificates on the

 secondary market, at a significant loss.

        576.    Prudential viewed market value as a critical aspect of the Certificates it purchased.

 Prudential has lost much of the market value in its Securitizations—much more than it would

 have lost if the Certificates had been backed by loans of the quality Defendants represented.

        577.    In short, defaults were much higher than they would have been if the Mortgage

 Loans had been properly underwritten; this revealed that the true value of the Certificates was a

 significant discount to what Prudential paid. This is evidenced by the drop in market value of the

 Certificates. Loans which were properly underwritten would have withstood the same economic

 conditions much better than those Defendants offloaded onto Prudential. Securitizations backed

 by loans with the features Defendants described would currently have a much higher value than

 Prudential’s Certificates, and thus Prudential was damaged by Defendants’ wrongdoing. That

 this loss in the Certificates’ value represents an actionable injury caused by Defendants’

 misrepresentations, however, could not have been discovered by Prudential until relatively

 recently.




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        578.    Prudential’s damages here are separate and severable from any losses Prudential

 may have sustained by the economic downturn, and such could be measured through the

 discovery process. For instance, but without limitation, upon discovery of the full extent of

 Defendants’ misrepresentations, expert testimony may compare the performance of the

 Certificates and/or loan pools at issue in this Complaint with the performance of other

 securitizations and/or loan pools that had the features described in the Offering Materials, as one

 potential measure of Prudential’s damages. However, it is well beyond Prudential’s pleading

 burden to perform such analysis here, and in any event the full extent of Defendants’

 misrepresentations is unknown.

 V.     DEFENDANTS CONCEALED THEIR MISCONDUCT.

        579.    As set forth herein, and to the extent it is relevant, Defendants concealed their

 wrongful and fraudulent conduct when it occurred and affirmatively misrepresented their

 practices in order to deceive investors like Prudential. Prudential, accordingly, was not aware of

 Defendants’ unlawful acts giving rise to the claims asserted in this matter when they occurred or

 during the period that followed; nor was Prudential aware of facts that, in the exercise of

 reasonable diligence, would have led to such actual knowledge at any point before, at the earliest,

 mid-2009.

        580.    The key information cited and relied upon herein did not generally become

 available to Prudential until, at the earliest, mid-2009, and often later. This key information

 includes, for example: the FCIC report (January 2011), information associated with the FCIC

 Report, such as documents and testimony relating to Clayton (September 2010-January 2011),

 re-underwriting analyses by MBIA, Ambac, Assured, and FHFA (2009-2011), and key e-mails

 from the MBIA litigation (2011).



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        581.    In addition, Prudential’s loan-level analysis, which provides evidence of

 Defendants’ misrepresentations regarding the specific Mortgage Loans at issue here, was not,

 and could not have been, performed until 2010, because, for the one thing, the large amounts of

 loan-specific data and the complex methodologies for testing Defendants’ representations on a

 loan-level basis were not available to investors until that time. As the Attorney General for the

 State of Massachusetts explained, there are “two related information asymmetries that arise from

 the RMBS structure”:

        First, investment banks, through their diligence process, may discover that loans
        have poorer quantifiable criteria than present on the loan tape (for example, if the
        bank’s review calls into question the quality of the appraisals underlying the
        calculation of the loan-to-value ratios). Second, investment banks may discover
        concentrations of otherwise unquantifiable risks like fraud.

        582.    Nor was there a reason to suspect problems in these particular Certificates until at

 least late-2008. As discussed above, a substantial number of Prudential’s Certificates were

 downgraded to non-investment grade by multiple rating agencies. It was not until April 2012,

 however, that all of these downgraded Certificates had been deemed non-investment grade

 securities by at least one rating agency. The following chart summarizes the dates of downgrade

 to below investment grade:

                                                          Date of Non-investment
                          Trust           Tranche(s)            Downgrade
                    AABST 2004-2             M1               3/22/11 – Fitch

                    AABST 2004-4             A2B                     N/A
                    AABST 2005-2             M2               4/18/2008 – Fitch
                                                            7/18/2011 – Moody’s
                    ABSHE 2004-HE1           M1             3/11/2011 – Moody’s
                                                              3/22/2011 – Fitch
                    ABSHE 2004-HE1           M2                7/2/2009 – Fitch
                                                            3/11/2011 – Moody’s
                                                              9/28/2012 – S&P
                    ABSHE 2004 -HE3          M1               5/14/2010 – Fitch
                                                            4/12/2012 – Moody’s
                    ABSHE 2005-HE1           M2               6/12/2009 – Fitch
                                                            7/12/2012 – Moody’s
                                                              9/26/2012 – S&P

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                                               Date of Non-investment
                     Trust       Tranche(s)          Downgrade
                ABSHE 2005-HE6      M2              3/12/2012 – Fitch
                ABSHE 2005-HE8      M2             12/18/2009 – Fitch
                                                 3/13/2009 – Moody’s
                                                     8/4/2009 – S&P
                ABSHE 2006-HE7      A3              6/12/2009 – Fitch
                                                 3/13/2009 – Moody’s
                                                    8/11/2011 – S&P
                ABSHE 2007-HE1      A4             11/20/2008 – Fitch
                                                 3/13/2009 – Moody’s
                                                    7/18/2011 – S&P
                ABSHE 2007-HE1      A5             11/20/2009 – Fitch
                                                10/29/2008 – Moody’s
                                                    7/18/2011 – S&P
                ARSI 2004-W6        AF                     N/A
                CSFB 2005-1         2A3           1/3/2011 – Moody’s
                                                    5/24/2010 – S&P
                FHLT 2004-B         M1           4/18/2012 – Moody’s
                FHLT 2005-A         M2           4/29/2010 – Moody’s
                FHLT 2005-A         M4           3/17/2009 – Moody’s
                                                     3/2/2010 – S&P
                FHLT 2005-E         M5              4/11/2008 – Fitch
                                                10/16/2008 – Moody’s
                                                    7/23/2008 – S&P
                HEAT 2004-2         M1           3/15/2011 – Moody’s
                                                    3/12/2012 – Fitch
                HEAT 2004-3         M1            4/9/2012 – Moody’s
                                                    3/22/2011 – Fitch
                HEAT 2004-4         M1              3/12/2012 – Fitch
                HEAT 2004-5         M1                     N/A
                HEAT 2004-6         M1              3/12/2012 – Fitch
                HEAT 2004-8         M2              3/22/2011 – Fitch
                                                 3/15/2011 – Moody’s
                HEAT 2005-1         M2                     N/A
                HEAT 2005-3         M2                     N/A
                HEAT 2005-5         M1              3/12/2012 – Fitch
                HEAT 2005-5         M2              6/12/2009 – Fitch
                                                 3/19/2009 – Moody’s
                HEAT 2005-6         M2              6/12/2009 – Fitch
                                                 3/19/2009 – Moody’s
                HEAT 2005-9         M2             11/25/2008 – Fitch
                                                 3/19/2009 – Moody’s
                                                     8/4/2009 – S&P
                HEAT 2006-1         2A4             6/12/2009 – Fitch
                HEAT 2006-1         M1              6/12/2009 – Fitch
                                                  5/5/2012 – Moody’s
                HEAT 2006-2         2A4             6/12/2009 – Fitch
                                                 3/19/2009 – Moody’s
                                                   10/21/2011 – S&P
                NCHET 2004-4       M1            3/18/2011 – Moody’s
                RAMP 2004-RS10     MII2          3/30/2011 - Moody’s
                                                     9/4/2009 – S&P
                RAMP 2006-RZ4       A3              6/12/2009 – Fitch


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                                                           Date of Non-investment
                          Trust            Tranche(s)            Downgrade
                                                            4/30/2009 – Moody’s
                                                              1/19/2012 – S&P
                    RFMSII 2005-HS1           AI5           6/15/2009 – Moody’s
                                                               4/2/2010 – S&P

        583.    As this chart reflects, many of Prudential’s Certificates retained their investment-

 grade ratings until 2011, and several continued to receive investment-grade ratings even into

 2012. Consistent with this ratings’ downgrade data, Prudential’s writedowns began only recently.

        584.    Thus, information that either put Prudential on actual notice of the legal violations

 at issue here, or was sufficient to lead to such actual knowledge in the exercise of reasonable

 diligence, was affirmatively concealed by Defendants and did not even begin to emerge publicly

 at any point before 2009, and in fact remained hidden much longer.

                                   FIRST CAUSE OF ACTION
            (Common-Law Fraud/Fraudulent Inducement Against All Defendants)

        585.    Prudential realleges each allegation above as if fully set forth herein.

        586.    This count is against all Defendants. It is against each Defendant only for those

 transactions in which it played a role, as set forth above and in Exhibit A.

        587.    Each Defendant made, authorized or caused the representations at issue, which

 are identified and summarized in Section I above and further identified in the Exhibits.

        588.    The material representations set forth above were fraudulent, and Defendants’

 representations fraudulently omitted material statements of fact.

        589.    Each of the Defendants knew their representations and omissions were false

 and/or misleading at the time they were made. Each made the misleading statements with an

 intent to defraud Prudential.




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         590.     Defendants had reason to expect that Prudential was among the class of persons

 who would receive and rely on such representations, and intended that their misleading

 statements would induce Prudential to purchase the Certificates.

         591.     Prudential justifiably relied on Defendants’ false representations and misleading

 omissions.

         592.     Had Prudential known the true facts regarding the Defendants’ underwriting

 practices and quality of the loans making up the securitizations, it would not have purchased the

 Certificates as it ultimately did.

         593.     As a result of the foregoing, Prudential has suffered damages according to proof.

 In the alternative, Prudential hereby demands rescission and makes any necessary tender of the

 Certificates.

                                      SECOND CAUSE OF ACTION
                 (Aiding and Abetting Common Law Fraud Against All Defendants)

         594.     Prudential realleges each allegation above as if fully set forth herein.

         595.     This is a claim for aiding and abetting brought against all Defendants arising from

 the intentional and substantial assistance each rendered to the others to advance the fraud on

 Prudential. It is against each Defendant only for those transactions in which it played a role, as

 set forth above and in Exhibit A.

         596.     Each of the Defendants knew of the fraud perpetrated by the other Defendants.

 Each knew of the representations and omissions made by the others. Each also knew that the

 representations and omissions made by each of the other Defendants were false and/or

 misleading at the time they were made.

         597.     As discussed above, Defendants were all highly interdependent businesses with

 overlapping management and a constant flow of information among Defendants. All of the

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 Defendants had actual knowledge of, and substantially assisted in, the fraudulent scheme to

 securitize each of the Trusts at issue and to market and sell the Certificates to investors,

 including Prudential, without disclosing the truth about those investments.

        598.    All of the Defendants, through their employees and representatives, substantially

 assisted in, among other things: (i) acquiring the Mortgage Loans; (ii) packaging those loans

 into pools which were transferred to the depositor and then the Trusts; (iii) waiving into the

 collateral pools of the Trusts loans previously rejected by Clayton, despite the lack of

 compensating factors; (iv) creating and structuring the Trusts whose Certificates would be sold

 to investors including Prudential; and (v) preparing the Offering Materials which would be used

 to market the Certificates to investors like Prudential. Through overlapping personnel, strategies

 and intertwined business operations, and the fluid transfer of information among the Defendants,

 each of the Defendants knew of the fraud perpetrated on Prudential. Each acted in concert to

 defraud Prudential.

        599.    Each of the Defendants provided each of the others with substantial assistance in

 making the fraudulent representations and omissions. Specifically, but without limitation, the

 sponsor/seller acquired the Mortgage Loans and sponsored their securitization, assisted in

 preparation of the Offering Materials, transferred the loans to the depositor, and made

 representations regarding the quality of the loans. Specifically, but without limitation, the

 depositors issued the Certificates, entered into agreements with the relevant Trusts, filed and

 signed the registration statements, and assisted in the preparation of the Offering Materials.

 Specifically, but without limitation, the underwriter assisted in the preparation of the Offering

 Materials, and acted as broker-dealer with regard to the issuance and underwriting of the

 Certificates, including in marketing and selling the Certificates to Prudential.



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        600.    Each of the Defendants made representations regarding the characteristics of the

 Mortgage Loans, including applicable underwriting guidelines, due diligence results, owner-

 occupancy rates, LTV and/or CLTV statistics, credit ratings, title-transfer process, and/or

 underwriting exceptions.

        601.    Defendants could not have perpetrated their fraud without the substantial

 assistance of each other Defendant, and they all provided financial, strategic, and marketing

 assistance for their scheme. Defendants are highly intertwined and interdependent businesses

 and each benefited from the success of the scheme. Through the fraudulent sale of the

 Certificates to Prudential, Defendants were able to materially improve their financial condition

 by reducing their exposure to declining subprime-related assets and garnering thousands of

 dollars in fees from the structuring and sale of the Certificates.

        602.    As a direct, proximate, and foreseeable result of the Defendants’ actions,

 Prudential has suffered damages according to proof.

                                   THIRD CAUSE OF ACTION
                            (Equitable Fraud Against All Defendants)

        603.    Prudential realleges each allegation above as if fully set forth herein.

        604.    This is a claim for equitable fraud against all Defendants.

        605.    The Defendants made, authorized or caused the representations and/or omissions

 set forth above and further detailed in the Exhibits.

        606.    Those representations and omissions were material.

        607.    Each Defendant’s representations were false and/or misleading, and their

 omissions were material and rendered their representations misleading, at the time they were

 made or omitted.



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        608.      Prudential reasonably and justifiably relied on such misrepresentations and

 omissions. Prudential would not have purchased the Certificates had it known the true facts

 regarding, inter alia, the Defendants’ and originators’ underwriting violations, the credit ratings

 assigned to the Certificates, transfer of title, and the defects in the Mortgage Loans making up

 the Securitizations.

        609.      Prudential has suffered injury for which there is not, or may not be, an adequate

 remedy at law.

        610.      As a result of the foregoing, Prudential has suffered damages according to

 proof. In the alternative, Prudential hereby demands rescission and makes any necessary tender

 of the Certificates

                                   FOURTH CAUSE OF ACTION
                        (Negligent Misrepresentation Against All Defendants)

        611.      Prudential realleges each allegation above as if fully set forth herein.

        612.      This count is against all Defendants. It is against each Defendant only for those

 transactions in which it played a role, as set forth above and in Exhibit A.

        613.      Because Defendants arranged the Securitizations, and originated or acquired,

 underwrote, and serviced most of the underlying Mortgage Loans, they had unique and special

 knowledge about the loans in the Offerings. In particular, they had unique and special

 knowledge and expertise regarding the quality of the underwriting of those loans, as well as the

 servicing practices employed as to such loans.

        614.      Because Prudential could not evaluate the loan files for the Mortgage Loans

 underlying its Certificates, and because Prudential could not examine the underwriting quality or

 servicing practices for the Mortgage Loans in the Offerings on a loan-by-loan basis, it was

 heavily reliant on Defendants’ unique, special, and superior knowledge regarding the Mortgage

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 Loans when determining whether to make each investment in the Certificates. Prudential was

 entirely reliant on Defendants to provide accurate information regarding the loans in engaging in

 that analysis. Accordingly, Defendants were uniquely situated to evaluate the economics of each

 Offering.

         615.    Going back over many years covering the many purchases at issue in this

 Complaint, Prudential relied on Defendants’ unique, special, and superior knowledge regarding

 the quality of the underlying Mortgage Loans and their underwriting when determining whether

 to invest in the Certificates at issue in this action. Prudential’s longstanding relationship with

 Defendants, coupled with Defendants’ unique and special knowledge about the underlying loans,

 created a special relationship of trust, confidence, and dependence between Defendants and

 Prudential.

         616.    Defendants were in the business of providing information for use by others,

 including Prudential. Specifically, but without limitation, Defendants were in the business of

 providing information by way of the Offering Materials so that investors could rely on them in

 deciding whether to invest in the Offerings. This information was for the use of a small class of

 large, institutional investors.

         617.    Defendants were aware that Prudential relied on their unique, special, and

 superior knowledge, expertise, and experience and depended upon them for accurate and truthful

 information in making the decision to invest in each of the Certificates. Defendants were also

 aware that the representations regarding the underwriting standards, as well as those regarding

 the characteristics of the Mortgage Loans, would be used for the particular purpose of deciding

 whether to invest in those Certificates. Defendants also knew that the facts regarding their

 compliance with their underwriting standards were exclusively within their knowledge.



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        618.    Based on their expertise, superior knowledge, and relationship with Defendants,

 Defendants owed a duty to Prudential to provide complete, accurate, and timely information

 regarding the Mortgage Loans and the Offerings. Defendants breached their duty to provide

 such information to Defendants.

        619.    Defendants breached their duty to provide such information to Prudential by

 making misrepresentations that induced Prudential’s investment in the Offerings. The

 misrepresentations are set forth in Section I above and in the Exhibits. At the time Defendants

 made these misrepresentations, they were, at a minimum, negligent in their due diligence and/or

 understanding of the extent to which the Mortgage Loans underlying the Certificates complied

 with the underwriting guidelines and had the characteristics represented in the Offering Materials.

 Thus, Defendants were at the very least negligent in making statements that were false,

 misleading, and incorrect. Such information was known or reasonably should have been known

 by Defendants, and was not known or readily knowable by Prudential. In addition, Defendants

 knew that Prudential was acting in reliance on that information.

        620.    Prudential reasonably relied on the information Defendants did provide and was

 damaged as a result of these misrepresentations. Had Prudential known the true facts regarding

 Defendants’ underwriting practices and the quality of the loans making up the Offerings, it

 would not have purchased the Certificates as it ultimately did.

        621.    As a result of the foregoing, Prudential has suffered damages according to proof.

                                   FIFTH CAUSE OF ACTION
          (New Jersey Civil RICO, N.J.S.A. 2C:41-1 et seq., Against All Defendants)

        622.    Prudential realleges each allegation above as if fully set forth herein.

        623.    For the purposes of this Count Five, Prudential alleges that Defendants acted with

 the knowledge and intent required to violate the statutes identified as racketeering activity below

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 and/or were willfully blind to or deliberately ignorant of the falsity of the information they

 conveyed to Prudential.

        624.    Defendants violated the New Jersey Civil RICO statute by committing or

 conspiring amongst themselves and others to commit a pattern of racketeering activity in

 violation of N.J.S.A. 2C:41-2(c) and -2(d).

                                            The Enterprise

        625.    Defendants have committed a pattern of racketeering activity through their

 agreement to participate in and actual participation in an association-in-fact enterprise comprised

 of the persons and entities that acquired thousands of residential mortgage loans and then

 processed the underlying loans into mortgaged-backed securities so that the Defendants could

 sell certificates at inflated values to investors such as Prudential on the basis of false and

 fraudulent Offering Materials (the “Enterprise”).

        626.    The Enterprise included at least the following persons, businesses, or other legal

 entities that played the following discrete and well-defined roles in Defendants’ carefully

 planned, highly organized scheme:

                (a)     DLJ Mortgage Capital, which originated or acquired the Mortgage Loans

        underlying the Certificates for twenty-one of the Securitizations ultimately purchased by

        Prudential, and also acted as the Sponsor and Seller of those twenty-one Securitizations;

                (b)     Credit Suisse First Boston Mortgage Securities Corp., which acted as the

        Depositor of fourteen of the Securitizations at issue;

                (c)     Asset Backed Securities Corporation, which acted as the Depositor of

        seven of the Securitizations at issue;




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                (d)     Credit Suisse Securities (USA), LLC, which sold Prudential and other

        unsuspecting investors various mortgaged-backed securities, including Certificates in the

        Securitizations, on the basis of false and fraudulent misrepresentations of fact; and

                (e)     Non-party Credit Suisse Holdings (USA), Inc., which formed the other

        Enterprise entities to perform specific tasks required to originate or acquire mortgages,

        securitize those mortgages, and then sell securities to Prudential and other investors in

        order to maximize corporate profits. Credit Suisse Holdings also had the ability to direct

        and did in fact direct, purposefully engage in, assist, and/or further the Enterprise, as it

        funded the activities of other members of the Enterprise, managed and supervised the

        operations of the Enterprise; set the methods for the Enterprise (including the intentional

        increase in the sale of RMBS and deliberate indifference to, or circumvention of, stated

        underwriting guidelines); directed the goals of the Enterprise, which included the

        maximization of short-term profits and fees from the sale of RMBS through the use of

        false and fraudulent Offering Materials; and received and consolidated the funds

        generated by the Enterprise’s activities.

        627.    The members of the Enterprise played specific and well-defined roles in the

 process of originating and then securitizing loans into RMBS, as described in above, and,

 without limitation, in Section D of the “Background” section further above.

        628.    The members of the Enterprise shared the common purpose of obtaining

 pecuniary gain, including money, in connection with the fraudulent sale of inflated mortgaged-

 backed securities to investors, including Prudential.




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          629.   At all relevant times, the Enterprise was and remains engaged in trade or

 commerce in activities affecting trade or commerce in connection with the sale and purchase of

 securities in the State of New Jersey.

          630.   The Enterprise is an enterprise within the meaning of N.J.S.A. 2C:41-1(c).

                                The Pattern of Racketeering Activity

          631.   Defendants, along with the other members of the Enterprise, engaged in a pattern

 of racketeering activity consisting of two or more separate and distinct acts of racketeering

 activity. Defendants committed this pattern of racketeering activity during 2004 to 2008 and

 beyond, and in connection with but not limited to the Securitizations in which Prudential

 purchased Certificates. The acts of racketeering include, but are not limited to, those set forth

 below:

                        (i)     Violations of the New Jersey Uniform Securities Act
                                (N.J.S.A. 49:3-47 et seq.)

          632.   Under N.J.S.A. 49:3-52(b), it is “unlawful for any person, in connection with the

 offer, sale, or purchase of any security, directly or indirectly [t]o make any untrue statement of a

 material fact or to omit to state a material fact necessary in order to make the statements made, in

 the light of the circumstances under which they are made, not misleading.”

          633.   Similarly, under N.J.S.A. 49:3-52(a) and -52(c), it is unlawful for any person to

 offer, sell or purchase a security by employing “any device, scheme, or artifice to defraud” or by

 engaging “in any act, practice or course of business which operates or would operate as a fraud

 or deceit upon any person.”

          634.   Defendants are “persons” within the meaning of N.J.S.A. 49:3-49(i).

          635.   The Certificates purchased by Prudential are “securities” within the meaning of

 N.J.S.A. 49:3-49(m).


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         636.    DLJ Mortgage Capital, Credit Suisse First Boston Mortgage Securities Corp.,

 Asset Backed Securities Corporation, Credit Suisse Securities (USA) LLC, and the Trusts

 (although not named as Defendants) qualify as offerors or sellers of the Certificates in the

 Securitizations because they issued, marketed, and/or sold the Certificates to Prudential and other

 members of the public for their own financial benefit within the meaning of N.J.S.A. 49:3-

 49(j)(1)-(2).

         637.    DLJ Mortgage Capital, Credit Suisse First Boston Mortgage Securities Corp.,

 Asset Backed Securities Corporation, Credit Suisse Securities (USA) LLC, and the Trusts

 offered and sold the Certificates in the Securitizations to Prudential in the State of New Jersey

 within the meaning of N.J.S.A. 2C:1-3.

         638.    As identified above in Sections I and II, and in the Exhibits, on two or more

 occasions, in violation of N.J.S.A. 49:52(a), (b), and (c), DLJ Mortgage Capital, Credit Suisse

 First Boston Mortgage Securities Corp., Asset Backed Securities Corporation, Credit Suisse

 Securities (USA) LLC made numerous material misstatements in the Offering Materials used to

 sell Prudential the Certificates in the Securitizations. In addition, these Defendants made

 numerous omissions of fact that made the Offering Materials false and misleading.

         639.    As alleged in detail above in Sections I and II, and in the Exhibits, the Offering

 Materials in the Securitizations created and utilized by DLJ Mortgage Capital, Credit Suisse First

 Boston Mortgage Securities Corp., Asset Backed Securities Corporation, Credit Suisse Securities

 (USA) LLC, and the Trusts were materially false and misleading because, among other things,

 they misrepresented the underwriting standards applicable to the Mortgage Loans backing the

 Certificates, misrepresented the owner-occupancy information for the loans, misrepresented the




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 LTV and CLTV ratios and appraisal information for the loans, and misrepresented information

 relevant to the credit ratings process for the Certificates.

         640.    DLJ Mortgage Capital, Credit Suisse First Boston Mortgage Securities Corp.,

 Asset Backed Securities Corporation, Credit Suisse Securities (USA) LLC knew that the

 Offering Materials included untrue statements of material fact and misleading omissions.

         641.    In the alternative, DLJ Mortgage Capital, Credit Suisse First Boston Mortgage

 Securities Corp., Asset Backed Securities Corporation, Credit Suisse Securities (USA) LLC

 recklessly and consciously disregarded a substantial and unjustifiable risk that the Offering

 Materials in the Securitizations included untrue statements of material fact and misleading

 omissions. Given the nature of this risk, these Defendants’ access to the loan files for the

 Mortgage Loans underlying the Certificates, and the central role each entity played in the

 securitization process, the disregard by these Defendants of the risk that the Offering Materials

 were materially misleading or fraudulent constituted a gross deviation from the standard of

 conduct that a reasonable person would observe in the same situation.

         642.    DLJ Mortgage Capital, Credit Suisse First Boston Mortgage Securities Corp.,

 Asset Backed Securities Corporation, Credit Suisse Securities (USA) LLC made these

 misrepresentations and omissions with the purpose and intent of convincing Prudential to

 purchase the Certificates in the Securitizations.

         643.    Prudential did not know, and in the exercise of due diligence could not have

 known, of the untruths and omissions.

         644.    DLJ Mortgage Capital is not only liable as a primary violator, it is also jointly and

 severally liable because it controlled one or more of the primary violators, including with respect

 to the Securitizations at issue.



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        645.    Credit Suisse First Boston Mortgage Securities Corp. and Asset Backed Securities

 Corporation are not only liable as primary violators, they also are jointly and severally liable

 because they controlled one or more of the primary violators, including with respect to the

 Securitizations at issue.

        646.    Defendants’ violations of N.J.S.A. 49:3-52(a), -(b), and -(c), as well as 49:3-70(a)

 and -(b), constitute racketeering activity pursuant to N.J.S.A. 2C:41-1(a)(p).

                        (ii)    Deceptive Business Practices (N.J.S.A. 2C:21-7i)

        647.    On two or more occasions, Defendants committed, attempted to commit, solicited

 another to commit, conspired to commit, or engaged in intentional acts involving deceptive

 business practices.

        648.    As alleged in detail above in Sections I and II, and in the Exhibits, Defendants in

 the course of their business made false or misleading statements in the Offering Materials

 connected with the offer and sale of Certificates in the Securitizations, or omitted material

 information required by law to be disclosed therein.

        649.    Defendants knew that the Offering Materials included those untrue statements of

 fact or material omissions.

        650.    The Certificates offered by Defendants and purchased by Prudential on the basis

 of Defendants’ false and misleading Offering Materials are “securities” within the meaning of

 N.J.S.A. 2C:21-7i.

        651.    Defendants made these misrepresentations and omissions for the purpose of

 promoting the sale of securities to Prudential and other investors at inflated values for their own

 pecuniary gain.

        652.    Defendants’ violations of N.J.S.A. 2C:21-7i constitute racketeering activity

 pursuant to N.J.S.A. 2C:41-1(a)(o).
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                        (iii)   Theft By Deception (N.J.S.A. 2C:20-4)

        653.    On two or more occasions, Defendants purposefully committed, attempted to

 commit, solicited another to commit, conspired to commit, or engaged in acts involving theft by

 deception by obtaining the property of another by deceitful means and artful practices with the

 intention of depriving Prudential and other investors of their property.

        654.    As alleged in detail above in Sections I and II, and in the Exhibits, Defendants

 repeatedly used false and misleading Offering Materials in the Securitizations to induce

 Prudential to purchase the identified Certificates. By this conduct, Defendants created or

 reinforced Prudential’s false impression of existing facts, including facts relating and directly

 relevant to the value of the Certificates, which Defendants knew or believed to be false, in

 violation of N.J.S.A. 2C:20-4(a).

        655.    Defendants also prevented Prudential from acquiring information pertinent to the

 disposition of its funds, including information that would have contradicted the false

 representations of fact in the Offering Materials in the Securitizations, in violation of N.J.S.A.

 2C:20-4(b).

        656.    By failing to amend the materially false and misleading Offering Materials and/or

 notify Prudential of the true underwriting standards, owner-occupancy statistics, LTV and CLTV

 ratios, and credit ratings process relevant to the Securitizations, Defendants also failed to correct

 a false impression, which allowed Defendants to hide their enterprise from discovery by

 Prudential and other investors. Defendants’ failure to correct the false impression they created or

 reinforced in the Offering Materials was in violation of N.J.S.A. 2C:20-4(c).

        657.    Defendants’ repeated and related violations of N.J.S.A. 2C:20-4(a), -4(b), and -

 4(c) constitute racketeering activity pursuant to N.J.S.A. 2C:41-1(a)(n).

                        (iv)    Falsifying Records (N.J.S.A. 2C:21-4(a))
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        658.    On two or more occasions, Defendants committed, attempted to commit, solicited

 another to commit, conspired to commit, or engaged in acts involving falsifying or tampering

 with records with the intention of deceiving or injuring Prudential and other investors.

        659.    As alleged in detail above in Sections I and II, and in the Exhibits, Defendants

 repeatedly used false and misleading Offering Materials in the Securitizations to knowingly

 falsify, remove, or conceal material facts relevant to the value of the securities they sold to

 investors such as Prudential, including but not limited to the pertinent underwriting guidelines,

 owner-occupancy statistics, LTV and CLTV ratios, due diligence process, and credit ratings

 connected with the Certificates purchased by Prudential.

        660.    The Offering Materials created and utilized by Defendants constitute a “writing or

 record” within the meaning of N.J.S.A. 2C:21-4(a).

        661.    Defendants’ violations of N.J.S.A. 2C:21-4(a) constitute racketeering activity

 pursuant to N.J.S.A. 2C:41-1(a)(o).

                          Relatedness of the Acts of Racketeering Activity

        662.    The incidents of racketeering activity committed by the Defendants/members of

 the Enterprise had, among other things, the same or similar intents, results, victims, and methods

 of commission.

        663.    The acts of racketeering activity committed by Defendants relating to the

 Securitizations involve transactions or purported transactions with or affecting Prudential.

        664.    The acts of racketeering activity committed by Defendants relating to the

 Securitizations have the same or similar intents in that they sought to obtain property, including

 but not limited to Prudential’s money, through illegal means.




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        665.    The acts of racketeering activity committed by Defendants relating to the

 Securitizations have the same or similar results, in that Defendants actually obtained personal

 property, including but not limited to Prudential’s money, through illegal means.

        666.    The acts of racketeering activity committed by Defendants relating to the

 Securitizations have the same or similar victims: investors (including Prudential) in Defendants’

 RMBS, including the Certificates.

        667.    The methods by which Defendants committed the incidents of racketeering

 activity relating to the Securitizations were the same or similar, including by way of example and

 not limitation, inducing Prudential to pay Defendants hundreds of millions of dollars to purchase

 RMBS on the basis of materially false and misleading Offering Materials.

        668.    The acts of racketeering committed by Defendants are interrelated by

 distinguishing characteristics and are not isolated incidents. The acts involve the same or similar

 methods of commission, the same or similar types of misrepresentations or omissions, the same

 or similar benefits to Defendants, the same or similar injuries to Prudential, and the same or

 similar efforts by Defendants to conceal their misconduct.

                      Defendants’ Violations of the New Jersey RICO Statute

        669.    Defendants violated N.J.S.A. 2C:41-2(c) by associating with an enterprise and

 conducting or participating, directly or indirectly, in that enterprise through a pattern of

 racketeering activity.

        670.    Defendants also violated N.J.S.A. 2C:41-2(d) by conspiring with others, including

 but not limited to the other members of the Enterprise, to violate N.J.S.A. 2C:41-2(c). In

 furtherance of that conspiracy, Defendants committed overt acts that include but are not limited

 to the racketeering activity alleged above.



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                            Proximate Cause of Injury to Prudential by
                             Defendants’ New Jersey RICO Violations

         671.   Defendants’ behavior directly targeted Prudential, which purchased the

 Certificates in the Securitizations based on the false and fraudulent representations in the

 Offering Materials. As a result, Prudential purchased securities at falsely inflated values that

 have experienced significant downgrades, defaults, and delinquencies. Defendants’

 misrepresentations and omissions have adversely affected both the value of the securities

 purchased by Prudential and the income flow therefrom. As a result, Prudential’s injuries flow

 directly from acts of racketeering activity committed by Defendants that constitute part of the

 pattern of racketeering activity.

         672.   Prudential has been injured by reason of these violations of N.J.S.A. 2C:41-2 and

 is entitled to recover three times the actual damages it has sustained pursuant to N.J.S.A. 2C:41-

 4(c).

         673.   Pursuant to N.J.S.A. 2C:41-4(c), Prudential is also entitled to recover its attorneys’

 fees in the trial and appellate courts, and its costs of investigation and litigation reasonably

 incurred.

         674.   Pursuant to N.J.S.A. 2C:41-4(a), Prudential is also entitled to such other and

 further relief that this Court may deem just and proper, including but not limited to the

 dissolution or reorganization of Defendants’ RICO enterprise; the denial, suspension, or

 revocation of Defendants’ licenses to do business in the State of New Jersey; and any and all

 appropriate cease and desist orders necessary to discontinue Defendants’ acts or conduct.

                                      PRAYER FOR RELIEF

         WHEREFORE Prudential prays for relief as follows:




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         An award in favor of Prudential against Defendants, jointly and severally, for all damages

 sustained as a result of Defendants’ wrongdoing, in an amount to be proven at trial, but including

 at a minimum:

         a.      Prudential’s monetary losses, including loss of market value and loss of principal

 and interest payments;

         b.      Treble damages;

         c.      Rescission and recovery of the consideration paid for the Certificates, with

 interest thereon. Prudential is prepared to tender the Certificates in the even the Court grants

 such relief;

         d.      Punitive damages;

         e.      Attorneys’ fees and costs;

         f.      Prejudgment interest at the maximum legal rate; and

         g.      Such other and further relief as the Court may deem just and proper.




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                                         JURY DEMAND

        Prudential hereby demands a trial by jury on all issues triable by jury.

 DATED:     November 21, 2012                      NUKK-FREEMAN & CERRA, P.C.



                                                   By:    s/ Robin H. Rome
                                                         ROBIN H. ROME
                                                         KIRSTEN MCCAW GROSSMAN
                                                         636 Morris Turnpike, Suite 2F
                                                         Short Hills, NJ 07078
                                                         Telephone: (973) 564-9100
                                                         Fax: (973) 564-9112
                                                         rrome@nfclegal.com
                                                         kgrossman@nfclegal.com
                                                         Attorneys for The Prudential Insurance
                                                         Company of America, Commerce Street
                                                         Investments, LLC, Pru Alpha Fixed Income
                                                         Opportunity Master Fund I, L.P., Pruco
                                                         Life Insurance Company, Pruco Life
                                                         Insurance Company of New Jersey,
                                                         Prudential Investment Portfolios 2, The
                                                         Prudential Life Insurance Company, Ltd.,
                                                         Prudential Retirement Insurance and
                                                         Annuity Company, and Prudential Trust
                                                         Company

 QUINN EMANUEL URQUHART & SULLIVAN, LLP
 Daniel L. Brockett (pro hac vice application forthcoming)
 David D. Burnett (pro hac vice application forthcoming)
 51 Madison Avenue, 22nd Floor
 New York, New York 10010-1601
 Telephone: (212) 849-7000
 Fax: (212) 849-7100
 danbrockett@quinnemanuel.com
 davidburnett@quinnemanuel.com

 Jeremy D. Andersen (pro hac vice application forthcoming)
 Chris Barker (pro hac vice application forthcoming)
 865 South Figueroa Street, 10th Floor
 Los Angeles, California 90017
 Telephone: (213) 443-3000
 Fax: (213) 443-3100
 jeremyandersen@quinnemanuel.com
 chrisbarker@quinnemanuel.com
                                                224

								
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