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New York County Clerk 07/13/2011 Index No FILED: NEW YORK COUNTY CLERK 07/13/2011 INDEX NO. 651918/2011 NYSCEF DOC. NO. 1 RECEIVED NYSCEF: 07/13/2011 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK DEXIA SA/NV; DEXIA HOLDINGS, INC.; FSA ASSET MANAGEMENT LLC; DEXIA CRÉDIT LOCAL SA, Index No. Plaintiffs, v. COMPLAINT DEUTSCHE BANK AG; DEUTSCHE BANK SECURITIES, INC.; DB STRUCTURED PRODUCTS INC.; ACE SECURITIES CORP.; JURY TRIAL DEMANDED AND DEUTSCHE ALT-A SECURITIES INC. Defendants. TABLE OF CONTENTS Page I. SUMMARY OF THE ACTION ..........................................................................................1 II. JURISDICTION AND VENUE ..........................................................................................8 III. THE PARTIES.....................................................................................................................8 A. Plaintiffs ...................................................................................................................8 B. Defendants ...............................................................................................................9 IV. FACTUAL BACKGROUND UNDERLYING DEXIA’S CLAIMS................................10 A. The Deutsche Bank RMBS Purchased By Dexia ..................................................10 B. Deutsche Bank’s Activities In The Subprime Mortgage Arena ............................15 C. Deutsche Bank’s Role Was To Ensure The Quality Of The Loans Backing The RMBS .............................................................................................................20 D. Factors Impacting The Quality Of The Deutsche Bank RMBS ............................24 V. THE OFFERING MATERIALS MISREPRESENTED THE UNDERWRITING AND QUALITY OF THE LOANS BACKING THE DEUTSCHE BANK RMBS .........29 A. The Deutsche Bank Sponsor And Originator Entities Violated Their Underwriting Guidelines ........................................................................................30 B. Fremont Violated Its Underwriting Guidelines .....................................................47 C. The American Home Entities Violated Their Underwriting Guidelines ...............52 D. IndyMac Violated Its Underwriting Guidelines ....................................................57 E. NovaStar Violated Its Underwriting Guidelines ....................................................63 F. Countrywide Violated Its Underwriting Guidelines ..............................................67 G. Option One Violated Its Underwriting Standards ..................................................72 H. New Century Violated Its Underwriting Guidelines .............................................77 I. WMC Mortgage Corporation Violated Its Underwriting Guidelines ....................84 J. GreenPoint Violated Its Underwriting Guidelines .................................................88 K. ResMAE’s Violated Its Underwriting Guidelines .................................................91 i L. Argent Violated Its Underwriting Guidelines ........................................................95 M. CIT Violated Its Underwriting Guidelines ............................................................99 VI. DEUTSCHE BANK KNEW THE LOANS IT WAS SECURITIZING WERE DESTINED TO FAIL ......................................................................................................102 A. Deutsche Bank’s Relationships With Key Loan Originators And Other Major Players In The Securitization Of Loans Backing The RMBS Sold To Dexia...............................................................................................................103 B. Deutsche Bank’s Due Diligence Identified Defects In The Loan Pools Deutsche Bank Purchased For Securitization ......................................................106 C. Deutsche Bank Gained Pointed Insight Into The True Quality Of The Loans Backing The Deutsche Bank RMBS Through Its Warehouse Lines Of Credit ..............................................................................................................112 D. Deutsche Bank Knew The DTI Ratios Of The Loans Backing The Deutsche Bank RMBS Were Materially Understated In The Offering Materials ..............................................................................................................114 E. Deutsche Bank Profited From Its Knowledge Of The Poor Quality Of The Loans It Securitized Through Its “CDO Machine”..............................................119 VII. DEUTSCHE BANK KNEW THE CREDIT RATINGS ASSIGNED TO THE DEUTSCHE BANK RMBS MATERIALLY MISREPRESENTED THE CREDIT QUALITY OF THE RMBS .............................................................................126 VIII. DEUTSCHE BANK MISREPRESENTED THAT TITLE TO THE UNDERLYING LOANS WAS EFFECTIVELY TRANSFERRED ..............................135 IX. DEFENDANTS’ FALSE AND MISLEADING MISSTATEMENTS AND OMISSIONS OF MATERIAL FACT IN THE OFFERING DOCUMENTS.................142 A. The Offering Materials Misrepresented The Originators’ And DBSP’s Underwriting Guidelines ......................................................................................143 B. The Offering Materials Misrepresented The Appraisals And LTV Ratios Of The Securitized Loans ....................................................................................146 C. The Offering Materials Misrepresented Deutsche Bank’s Due Diligence Into The Loan Sellers And The Mortgage Loans Backing The RMBS ...............148 D. Defendants Materially Misrepresented The Accuracy Of The Credit Ratings Assigned To The Certificates .................................................................149 ii E. Defendants Made False And Misleading Statements Of Material Fact Regarding The Transfer And Assignment Of Good Title Of The Mortgage Loans To The Issuing Trusts................................................................................151 F. Defendants’ Purported Warnings Regarding The Risks Of The RMBS Contained False And Misleading Statements And Omissions Of Material Fact .......................................................................................................................152 X. DEXIA’S INVESTMENT IN THE RMBS AND RELIANCE ON DEUTSCHE BANK’S MISREPRESENTATIONS .............................................................................155 XI. BECAUSE OF DEFENDANTS’ FRAUDULENT CONDUCT, DEXIA SUFFERED LOSSES ON ITS PURCHASES OF RMBS ..............................................159 FIRST CAUSE OF ACTION (Common Law Fraud Against Deutsche Bank AG, Deutsche Bank Securities, Inc., ACE Securities Corp., Deutsche Alt-A Securities, Inc. and DB Structured Products, Inc.) ............................................................................160 SECOND CAUSE OF ACTION (Fraudulent Inducement Against Deutsche Bank AG, Deutsche Bank Securities, Inc., ACE Securities Corp., Deutsche Alt-A Securities, Inc. and DB Structured Products, Inc.) ............................................................................161 THIRD CAUSE OF ACTION (Aiding And Abetting Fraud Against Deutsche Bank AG, Deutsche Bank Securities, Inc., ACE Securities Corp., Deutsche Alt-A Securities, Inc. and DB Structured Products, Inc.) ............................................................................162 FOURTH CAUSE OF ACTION (Negligent Misrepresentation Against Deutsche Bank AG, Deutsche Bank Securities, Inc., DB Structured Products, Inc., ACE Securities Corp. and Deutsche Alt-A Securities, Inc.) .....................................................164 PRAYER FOR RELIEF ..............................................................................................................168 iii Plaintiffs Dexia SA/NV, Dexia Holdings, Inc., FSA Asset Management LLC, Dexia Crédit Local SA (collectively, “Dexia” or “Plaintiffs”), by their attorneys Bernstein Litowitz Berger & Grossmann LLP, for their Complaint herein against Deutsche Bank AG, Deutsche Bank Securities, Inc., ACE Securities Corp., Deutsche Alt-A Securities, Inc. and DB Structured Products, Inc. (collectively, “Deutsche Bank” or “Defendants”), allege as follows: I. SUMMARY OF THE ACTION 1. This action involves a fraud perpetrated by Deutsche Bank against Dexia in connection with over $1 billion of residential mortgage-backed securities (“RMBS”) that Deutsche Bank sold to Dexia. Deutsche Bank originated, purchased, financed, and securitized exceptionally high-risk loans into these RMBS, all while internally disparaging the poor quality of these loans and the RMBS they backed as “pigs” and “crap.” Deutsche Bank’s singularly negative view of the loans and RMBS it sold to Dexia led it, starting as early as 2005, to bet against the U.S. housing market, ultimately developing a $10 billion “short” position that paid off when the same loans backing the RMBS it sold to Dexia and others failed. 2. Unaware that Deutsche Bank secretly viewed the RMBS it sold as “generally horrible” and was betting with its own capital that they would fail, Dexia invested in those Deutsche Bank RMBS in reliance on the central role that Deutsche Bank played in creating the RMBS, and on the representations Deutsche Bank provided in registration statements, term sheets, prospectuses, draft prospectus supplements, prospectus supplements and other materials and communications (the “Offering Materials”) attesting that the loans backing the RMBS had been prudently underwritten and were secured by adequate collateral in accordance with the underwriting guidelines of the companies that originated those mortgages, and that Deutsche Bank had verified the quality of the loans. Deutsche
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