Stichting Pensioenfonds ABP v. JPMorgan Chase & Co. et al / 850 Securities/Commodities

INTRODUCTION
Plaintiff Stichting Pensioenfonds ABP (“ABP”), by its attorneys, Grant & Eisenhofer
P.A., brings this action pursuant to Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the
“Securities Act”), 15 U.S.C. §§77k, 771(a)(2), and 77o; and the common law. This action is
brought against Defendants JPMorgan Chase & Co. (“JPMorgan Chase”); J.P. Morgan Chase
Bank, N.A. (“JPMorgan Bank”); J.P. Morgan Mortgage Acquisition Corp. (“JPMM
Acquisition”); J.P. Morgan Securities, LLC (“JPMS”); J.P. Morgan Acceptance Corporation I
(“JPM Acceptance”); EMC Mortgage LLC (“EMC”); Bear Stearns & Co. Inc (“Bear Stearns”);
Bear Stearns Asset Backed Securities I LLC (“BSABS”); Structured Asset Mortgage
Investments II Inc. (“SAMI”); WaMu Asset Acceptance Corp. (“WAAC”); Washington Mutual
Mortgage Securities Corp. (“WMMSC”); WaMu Capital Corp. (“WaMu Capital”); Long Beach
Securities Corp. (“LBSC”); Banc of America Securities LLC (“Banc of America”); Credit Suisse
Securities (USA) LLC “(“Credit Suisse”); David Beck; Brian Bernard; Richard Careaga;
Thomas W. Casey; Christine E. Cole; David M. Duzyk; Stephen Fortunato; Michael J.
Giampaolo; Rolland Jurgens; William A. King; Edwin F. McMichael; Louis Schioppo, Jr.;
Katherine Garniewski; Thomas Green; Joseph T. Jurkowski, Jr.; Thomas Lehmann; Kim
Lutthans; Thomas F. Marano; Jeffrey Mayer; Samuel L. Molinaro, Jr.; Michael B. Nierenberg;
Diane Novack; Matthew E. Perkins; John F. Robinson; Jeffrey Verschleiser; Donald Wilhelm;
and David H. Zielke (collectively, the “Defendants”).
Plaintiff makes the allegations in this Complaint based upon personal knowledge as to
matters concerning Plaintiff and its own acts, and upon information and belief as to all other
matters. This information is derived from the investigation by Plaintiff’s counsel, which has
included a review and analysis of annual reports and publicly filed documents, reports of
governmental investigations by the United States Securities and Exchange Commission (the “SEC”), the Financial Crisis Inquiry Commission (the “FCIC”), the United States Department of
Justice (the “DOJ”), the United States Senate Permanent Subcommittee on Investigations (the
“PSI”), and numerous investigations by other federal and state governmental units, as well as
press releases, news articles, analysts’ statements, conference call transcripts and presentations,
and transcripts from speeches and remarks given by Defendants. In addition, Plaintiff’s counsel
conferred with counsel for other plaintiffs who have filed other complaints against these
Defendants based on the same or similar activities. Based on the foregoing, Plaintiff believes
that substantial additional evidentiary support exists for the allegations herein, which Plaintiff
will find after a reasonable opportunity for discovery.

SUMMARY OF ALLEGATIONS

1. This action arises out of ABP’s purchases of certain residential mortgage-backed
securities (“RMBS”), as evidenced in the form of “Certificates”, in reliance on the false and
misleading statements that were made by Defendants. Based on these material
misrepresentations and omissions, ABP purchased securities that were far riskier than had been
represented, backed by mortgage loans worth significantly less than had been represented, and
that had been made to borrowers who were much less creditworthy than had been represented.
2. The securities purchased by ABP were collateralized against mortgages originated
and/or acquired by Defendants JPMorgan Bank, EMC, and non-defendants such as Bear Stearns
Residential Mortgage Corporation (“BSRMC”); Performance Credit Corp. (“Performance”) f/k/a
Encore Credit Corp. (“Encore”); Long Beach Mortgage (“Long Beach”); and Washington
Mutual Bank (“WaMu Bank”), as well as various other third-party originators defined in ¶ 71
below (collectively the “Originators”).
3. These Originators did not, however, hold the mortgage loans they originated
and/or acquired. Rather, taking advantage of an unprecedented boom in the securitization industry, these Originators flipped their mortgage loans to investment banks, which then
repackaged the loans and sold the loans as RMBS to investors seeking safe investments, such as
Plaintiff ABP. In the case of the loans underlying ABP’s Certificates, the entities that sold the
RMBS were JPMorgan Chase, Bear Stearns, WaMu and Long Beach. Specifically, each of these
entities pooled the mortgage loans made by the Originators; deposited the loans into special
purpose entities or “trusts”; and then repackaged the loans for sale to investors in the form of
RMBS. Underwriters, in most cases, affiliates of JPMorgan Chase, Bear Stearns and WaMu,
sold the RMBS to investors such as ABP.
4. The Certificates entitled investors to receive monthly distributions of interest and
principal on cash flows from the mortgages held by the trusts. The Certificates issued by each
trust were divided into several classes (or “tranches”) that had different seniority, priorities of
payment, exposure to default, and interest payment provisions. Rating agencies, such as
Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s Corporation (“S&P”), DBRS,
Inc. (“DBRS”) and/or Fitch, Inc. (“Fitch”),1
rated the investment quality of all tranches of
Certificates based upon information provided by the Defendants about the quality of the
mortgages in each mortgage pool and the seniority of the Certificate among the various
Certificates issued by each trust. These ratings, in part, determined the price at which these
Certificates were offered to investors.
5. In selling the Certificates, the Defendants prepared and filed with the SEC certain
registration statements (the “Registration Statements”), prospectuses (the “Prospectuses”),
prospectus supplements (the “Prospectus Supplements”, and free writing prospectuses (the “Free Writing Prospectuses”, and together with the Registration Statements, Prospectuses, and
Prospectus Supplements, the “Offering Documents”). In these Offering Documents, Defendants
repeatedly touted the strength of the Originators’ underwriting guidelines and standards; the fact
that the underwriting guidelines and standards were designed to ensure the ability of the
borrowers to repay the principal and interest on the underlying loans and the adequacy of the
collateral; and that the mortgages underlying the Certificates were originated in accordance with
those stated underwriting guidelines and standards. In addition, in the Offering Documents,
Defendants repeatedly assured investors as to the soundness of the appraisals used to arrive at the
value of the underlying properties and, specifically, that the real estate collateralizing the loans
had been subjected to objective and independent real estate appraisals that complied with the
Uniform Standards of Professional Appraisal Practice (“USPAP”) and, in some cases, that they
met the even more rigorous appraisal requirements of the Federal National Mortgage Association
(“Fannie Mae) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Defendants
emphasized their quality control procedures such as re-underwriting of a random selection of
mortgage loans, conducting post-funding audits of origination files, and/or re-verifying
information to assure asset quality.
6. Defendants JPMorgan, Bear Stearns, WaMu, and Long Beach were obligated to
perform due diligence on the mortgage loans they acquired from third parties. Defendants
represented in the Offering Documents, which Plaintiff relied on, that they performed such due
diligence and undertook certain quality control measures to ensure that shoddily underwritten
mortgages were not included in the Certificates they underwrote and sold. See, e.g., Prospectus
Supplement for WaMu Series 2007-HE2 Trust (Form 424B5), at S-32 (Apr. 6, 2007): “As part
of its quality control system, the sponsor re-verifies information that has been provided by the mortgage brokerage company prior to funding a loan and the sponsor conducts a post-funding
audit of every origination file.”
7. As set forth below, the Offering Documents contained material misstatements and
omitted material information. Contrary to Defendants’ assurances, the Originators of the
underlying loans had not followed their touted underwriting guidelines and standards when
originating and/or acquiring the mortgage loans. To the contrary, the Originators had engaged in
a wholesale and systematic abandonment of their underwriting guidelines, thereby granting
mortgage loans to borrowers who did not satisfy the eligibility criteria as described in the
Offering Documents. In addition, the mortgages underlying the Certificates had been extended
based on collateral appraisals that were not performed in accordance with USPAP or Fannie Mae
or Freddie Mac, so that the value of the underlying properties had been overstated, thereby
exposing investors such as ABP to additional losses in the event of foreclosure. Defendants did
not apply rigorous quality control procedures to uncover these lapses, and when they learned of
such lapses, they deliberately overlooked them.
8. The practices of financial institutions such as JPMorgan, Bear Stearns, WaMu,
and Long Beach and their role in inflating the housing bubble have been and continue to be the
subject of intense regulatory scrutiny. As recently as May 21, 2011, the WALL STREET JOURNAL
reported that New York State Attorney General Eric Schneiderman had requested informal
meetings with executives from several financial firms, including JPMorgan, as part of an
investigation by his office into mortgage practices and the packaging and sale of loans to
investors.
9. Defendants’ conduct with respect to mortgage-backed securities has also been
detailed in both the January 27, 2011, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (the “FCIC Report”) and the April 13,
2011, report issued by the PSI, chaired by Senator Carl Levin, entitled WALL STREET AND THE
FINANCIAL CRISIS: ANATOMY OF A FINANCIAL COLLAPSE (the “Levin Report”). Both reports and
their supporting testimony and exhibits have shed significant light on the extent to which
Defendants intentionally securitized bad mortgage loans and sold them to investors like Plaintiff
ABP. Numerous other investigations have been launched by the DOJ, the SEC, and various state
Attorneys General.
10. As a result of the untrue statements and omissions in the Offering Documents,
Plaintiff purchased Certificates that were far riskier than represented and that were not equivalent
to other investments with the same credit ratings. The rating agencies have now significantly
downgraded the Certificates purchased by Plaintiff, all of which were represented in the Offering
Documents to be rated Aaa, the highest possible rating on the Moody’s scale, or AAA, the
highest possible rating on the S&P scale, at the time of purchase The Certificates, therefore, are
no longer marketable at anywhere near the purchase prices paid by Plaintiff. As a consequence,
Plaintiff has suffered losses on its purchases of the Certificates.
11. Defendants JPMorgan, Bear Stearns, WaMu, and Long Beach knew about the
poor quality of the loans they securitized and sold to investors like Plaintiff ABP, because in
order to continue to keep their scheme running, they completely vertically integrated their RMBS
operations by having affiliated entities at every stage of the process.