In Re: ) ) TMST, INC., F/K/A THORNBURG ) Case Nos

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IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MARYLAND (Baltimore Division) In re: ) ) TMST, INC., f/k/a THORNBURG ) Case Nos. 09-17787, 17790-17792 MORTGAGE, INC., et al. ) Chapter 11 ) (Jointly Administered Under Debtors. ) Case No. 09-17787-DWK) ) ) JOEL I. SHER in his capacity as ) Chapter 11 Trustee for ) TMST, INC., f/k/a THORNBURG ) MORTGAGE, INC., TMST HEDGING ) STRATEGIES, INC., f/k/a THORNBURG ) MORTGAGE HEDGING STRATEGIES, ) INC., AND TMST HOME LOANS, INC. ) f/k/a THORNBURG MORTGAGE HOME ) LOANS, INC. ) and ) OFFICIAL COMMITTEE OF UNSECURED ) CREDITORS OF TMST, INC., ) ) Plaintiffs and Proposed ) Plaintiff Intervenors ) ) v. ) Adversary Proceeding No. ______) JPMORGAN CHASE FUNDING INC. ) (AS SUCCESSOR TO BEAR STEARNS ) INVESTMENT PRODUCTS INC.), ) CITI GROUP GLOBAL MARKETS LIMITED, ) CITIGROUP GLOBAL MARKETS, INC., ) CREDIT SUISSE SECURITIES (USA) LLC, ) CREDIT SUISSE INTERNATIONAL, ) RBS SECURITIES INC. (f/k/a GREENWICH ) CAPITAL MARKETS INC.), ) GREENWICH CAPITAL DERIVATIVES INC., ) ROYAL BANK OF SCOTLAND PLC ) AND UBS AG (AS SUCCESSOR TO UBS ) SECURITIES LLC), ) ) Defendants. ) ______)

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COMPLAINT

Joel I. Sher, Chapter 11 Trustee (the “Trustee” or “Plaintiff”) for (i) TMST, Inc. f/k/a

Thornburg Mortgage, Inc. (“TMST”), (ii) TMST Home Loans, Inc. f/k/a Thornburg Mortgage

Home Loans, Inc. (“TMHL”), (iii) TMST Hedging Strategies, Inc. f/k/a Thornburg Mortgage

Hedging Strategies, Inc. (“TMHS”), (iv) TMST Acquisition Subsidiary, Inc. f/k/a Thornburg

Acquisition Subsidiary, Inc., (“TMAS”, and collectively with TMST, TMHL and TMHS, the

Debtors”), hereby files this Complaint against JPMorgan Chase Funding Inc. (as successor to

Bear Stearns Investment Products Inc.), Citigroup Global Markets Limited, Citigroup Global

Markets, Inc., Credit Suisse Securities (USA) LLC, Credit Suisse International, RBS Securities

Inc. (f/k/a Greenwich Capital Markets Inc.), Greenwich Capital Derivatives Inc., Royal Bank of

Scotland PLC, and UBS AG (as successor to UBS Securities LLC) (collectively, the

“Defendants”), stating as follows:

INTRODUCTION

The Trustee and Committee bring this action seeking redress for the conduct occasioned by five of America's largest money-center banks who used market disruption as a justification to initiate a collusive scheme to take control of the Debtors and eventually drive them into bankruptcy. The Defendants worked in unison to secure economic leverage and control over the Debtors and seize TMST‟s only lingering source of income, fully aware that their actions would throw the Debtors into financial distress and ultimately force their bankruptcy.

In March 2008, after Defendants issued a host of unjustified margin calls the parties negotiated the Override Agreement. Packaged as a reprieve from the Defendants‟ aggressive

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margin calls, the Override Agreement provided no relief. Instead, the Defendants collectively insisted upon (and received) more than $700 million of margin and interest payments under that agreement, for which the estates received no reasonably equivalent value (and no reprieve from the Defendants' predatory conduct). The Defendants‟ overreaching led to an even more onerous

Amended Override Agreement and forced releases.

In the final act of domination, the Defendants terminated their respective agreements with the estates, liquidated their collateral and left the Debtors to file a free-fall chapter 11 case to address their remaining creditors. This action seeks recovery of nearly $2 Billion in transfers under those agreements as avoidable fraudulent conveyances and transfers. While the Defendants will mechanically chant the tired mantra of "safe harbor" protection from the claims asserted in this complaint, those Bankruptcy Code provisions have no application to the contracts at issue and do not immunize the conduct and harm the Defendants perpetrated against the Debtors and on their estates.

JURISDICTION

1. This Court has jurisdiction over the subject matter of this Adversary Proceeding pursuant to 28 U.S.C.A. §§ 157 and 1334 and 11 U.S.C. §§ 105, 502, 542, 544, 548, 550.

2. Venue is proper in this Court pursuant to 28 U.S.C. § 1409.

3. This Adversary Proceeding constitutes a core proceeding pursuant to 28 U.S.C. §

157 (b)(2). The claims asserted seek, inter alia, a determination that Defendants‟ conduct violates provisions of the Bankruptcy Code and the recovery of fraudulent transfers and/or conveyances. In addition, resolution of the claims asserted will have a significant impact on the administration of the Debtors' chapter 11 cases, the value of their estates and any distributions to unsecured creditors.

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THE PARTIES

4. On May 1, 2009 (the “Petition Date”), each of the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq.

5. Plaintiff Joel I. Sher is the Court-appointed Chapter 11 Trustee for the Debtors pursuant to an Order of the Court entered on October 28, 2009.

6. Proposed Intervenor Plaintiff, the Official Committee of Unsecured Creditors of the Debtors, was appointed by the Office of United States Trustee on or about May 7, 2009, pursuant to Section 1102(a)(1) of the Bankruptcy Code.

7. TMST is a publicly-traded entity that was incorporated under the laws of the state of Maryland, with its principal place of business in Santa Fe, New Mexico. TMST conducted its operations as a real estate investment trust for income tax purposes. Until it was delisted in

December of 2008, the common stock of TMST traded on the New York Stock Exchange. The remaining Debtors are wholly-owned direct or indirect subsidiaries of TMST.

8. TMHL is a corporation that was incorporated under the laws of the state of

Delaware. TMHL is a taxable REIT subsidiary of TMST that engaged in the business of originating, acquiring, securitizing and servicing residential mortgage loans.

9. TMHS is a corporation that was incorporated under the laws of the state of

Delaware. TMHS, inter alia, entered into derivative auction swap transactions to support

TMHL‟s securitizations.

10. Defendant JPMorgan Chase Funding Inc. (“JPMorgan”), a subsidiary of

JPMorgan Chase & Co., is an investment banking and securities firm, incorporated under the laws of the state of Delaware with its principal place of business in New York, New York.

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JPMorgan, as successor to Bear Stearns Investment Products Inc. (“Bear Stearns”), is a party to that certain Master Repurchase Agreement with TMST dated on or about March 14, 2008.

11. Defendant Citigroup Global Markets Limited (“Citi Global Ltd”), a subsidiary of

Citi Global Markets Europe Limited, is an investment banking and securities firm, formed under foreign law, with its principal place of business in London, England that transacts business throughout the United States. Citi Global Ltd is a party to that certain Global Master Securities

Lending Agreement with TMST dated on or about September 20, 2007.

12. Defendant Citigroup Global Markets, Inc. (“Citigroup Global Inc.”), and collectively with Citi Global Ltd, “Citi”) is a corporation formed under the laws of the state of

New York with its principal place of business in New York, New York. Citigroup Global Inc. served as Citi Global Ltd‟s intermediary agent with respect to that certain Global Master

Securities Lending Agreement with TMST dated on or about September 20, 2007

13. Defendant Credit Suisse Securities (USA) LLC (“CSSU”) is an investment banking and securities firm, formed under the laws of the state of Delaware with its principal place of business in New York, New York. CSSU, as successor to Credit Suisse First Boston

Corp., is a party to that certain Master Repurchase Agreement with TMST, as successor to

Thornburg Mortgage Asset Corporation, dated on or about September 20, 1997, as supplemented and superseded by the terms of that certain Master Repurchase Agreement between Credit Suisse

First Boston (Hong Kong) Limited and TMST, as successor to Thornburg Mortgage Asset

Corporation, dated on or about September 20, 1998.

14. Defendant Credit Suisse International (“CSI”, collectively with CSSU, “Credit

Suisse”) is an investment company dealing in over-the-counter derivatives, formed under foreign law, with its principal place of business in London, England, that transacts business throughout

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the United States. CSI, as successor to Credit Suisse Financial Products, is a party to that certain

ISDA Master Agreement with TMST as successor to Thornburg Mortgage Asset Corporation, dated on or about September 22, 1993 and is a party to that certain ISDA Master Agreement with

TMHS dated on or about March 30, 2006.

15. Defendant RBS Securities, Inc. (“RBS Securities”) (f/k/a Greenwich Capital

Markets Inc.), a wholly owned subsidiary of RBS Holdings USA Inc., is an investment banking and securities firm, incorporated under the laws of the state of Delaware, with its principal place of business in Connecticut. RBS Securities, as successor to Greenwich Capital Markets Inc., is a party to that certain Master Repurchase Agreement with TMST dated on or about September 14,

2007.

16. Defendant Greenwich Capital Derivatives Inc. (“GCD”) is an investment banking firm dealing in over-the-counter derivatives, incorporated under the laws of the state of

Delaware, with its principal place of business in Connecticut. GCD, by Greenwich Capital

Markets, Inc. (n/k/a RBS Securities) as its agent, is a party to that certain ISDA Master

Agreement with TMST dated on or about June 26, 2002, which agreement was thereafter assigned to TMHS on or about December 31, 2007.

17. Defendant The Royal Bank of Scotland PLC (“RBS PLC”, and collectively with

RBS Securities (f/k/a Greenwich Capital Markets, Inc.) and GCD, “RBS”) is an investment banking and securities firm dealing in over-the-counter derivatives, formed under foreign law, with its headquarters in Edinburgh, Scotland and doing business in the United States through

RBS Securities Inc. (f/k/a Greenwich Capital Markets, Inc.). RBS, by Greenwich Capital

Markets, Inc. (n/k/a RBS Securities) as its agent, is a party to that certain Master Repurchase

Agreement with TMST dated on or about September 6, 2006. RBS, by Greenwich Capital

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Markets, Inc. (n/k/a RBS Securities) as its agent, is also a party to that certain ISDA Master

Agreement with TMHS dated on or about March 27, 2006.

18. Defendant UBS AG is an investment banking and securities firm, incorporated under foreign law, with its headquarters in Switzerland, that transacts business throughout the

United States. UBS Securities LLC (collectively, with UBS AG, “UBS”), an indirect wholly- owned subsidiary of UBS AG, is a party to that certain Master Repurchase Agreement with

TMST dated on or about September 18, 2007, which agreement UBS Securities LLC assigned to

UBS AG prior to the Petition Date.

THE DEBTORS’ BUSINESS

A. TMST

19. TMST focused principally on investing in high quality residential mortgage backed securities supported primarily by adjustable rate mortgages (i.e. “ARM Assets”). A mortgage backed security (“MBS”) is an asset-backed security that represents a claim on the cash flows from mortgage loans owned by the special purpose entity trust which issued such security, i.e. the holder of a MBS owns a payment obligation pursuant to a debt instrument

(similar to a bond), but does not own mortgage loans themselves. TMST sought to acquire interests in highly rated MBS with AAA or other investment grade credit ratings, including agency MBS (issued by government-sponsored entities, including Fannie Mae and Freddie Mac), prime securities (private-label securities comprised of prime jumbo mortgage loans), and Alt-A

MBS (private-label securities comprised of mortgages with incomplete or alternative documentation or high loan-to-value ratios but that were nonetheless rated AAA due to the level of subordination within the structure). Moreover, the MBS TMST purchased were generally senior in the capital structure, above subordinated indebtedness.

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20. TMST financed the acquisition of MBS primarily through financing agreements with investment banking and securities firms such as the Defendants. These transactions were generally in the form of repurchase agreements or reverse repurchase agreements governed primarily by, among other things, the terms of various Master Repurchase Agreements and

Global Master Securities Lending Agreements. Although the transactions were often stated in terms of a purchase and sale, they were, for all intents and purposes, secured loans, where the pledged MBS acted as collateral and the difference between the purchase and the repurchase price was the cost of financing. In a typical repurchase transaction TMST, designated as a repo

“Seller” (borrower) acquired and transferred a MBS to a repo “Buyer” (lender or creditor) and simultaneously agreed to repurchase the MBS assets at a later date. The repo Buyer (lender or creditor) would advance funds to TMST, which were used along with TMST‟s own capital to

“purchase” the MBS from a third party seller. A reverse repurchase agreement is simply the same repurchase agreement from the Buyer's viewpoint, rather than the Seller's.

21. The MBS underlying the repurchase transactions to which TMST was party, or the "collateral" pledged in connection with those financing agreements, was not what has become known colloquially as "subprime." To the contrary, the MBS were generally AAA rated.

22. In each repurchase agreement, the repo Buyer would establish a “price” for a

MBS and apply a “haircut” to that price. The haircut is the percentage discount applied to the market value or price of a security (such as an MBS) to determine how much will be loaned against that security. That is, when one pledges securities as collateral, the counterparty making the loan applies that haircut percentage against the value of the security to determine how much it will lend against that security. The haircut is generally a fixed percentage based on the credit

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rating given to that security by rating agencies such as Moody‟s Investment Services, Fitch or

Standard & Poor‟s. As a general rule, the higher the credit rating, the smaller the haircut. For example, a loan collateralized by a MBS with a AAA rating may have a haircut percentage of

5%, whereas a loan collateralized by a MBS having a lower rating, such as AA, may have a haircut percentage of 15%. Because TMST generally acquired AAA Prime, AAA or Alt-A MBS

(and engaged in repurchase transactions pledging AAA rated MBS), the haircuts ascribed to these transactions typically were small.

23. Even though TMST technically “sold” the financed MBS to a lender in a repurchase transaction, it retained the beneficial economic ownership of each individual MBS.

In these transactions, among other things, TMST was entitled to receive and retain 100% of the principal and interest collected on the mortgages underlying a particular MBS (and thereafter distributed to it by an indenture trustee administering the bond issuance). Thus, TMST received significant amounts of principal and interest (“P&I”) payments on the MBS it had acquired. For instance, during the months of January and February 2008, TMST received principal and interest payments in the respective approximate amounts of $237.2 Million and $202.2 Million.

Generally, TMST received P&I payments for agency securities on the 15th of the month, and P&I payments for the private label securities it held on the 25th of the month.

24. Another material component of the repurchase transactions that TMST engaged in was the reciprocal right of TMST and the lender to make margin calls upon each other. The price (value) to debt ratio on the financing (i.e. the ratio of the collateral value to the funds loaned against that security) of the MBS were to be kept in relative balance (i.e. “margin”), such that the lender could make a margin call upon TMST if the value of the MBS dropped below an

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agreed upon margin amount. Conversely, TMST could call upon a lender to pay TMST cash or securities if the value of the MBS increased above that required margin amount.

25. The repurchase agreements had short-term maturities. Upon maturity TMST could “roll” or renew it with the same or a different lender. If a loan was renewed, the lender would generally require additional collateral to cover the loan in an amount needed to cover both a change, if any, in (i) haircut due to a downgrade, (ii) any diminished price of the MBS and (iii) the diminution of the principal balance of the mortgage loans underlying the MBS. However, only at maturity of the loan (the “repurchase date”) would each of theses adjustments be allowed.

26. TMST‟s income was derived primarily from the net spread between the interest income it earned on the MBS serving as collateral and the associated cost of its borrowings against that collateral.

B. TMHL

27. Prior to the Petition Date, TMHL engaged in the business of originating, acquiring, securitizing and servicing residential mortgage loans. TMHL operated as a single family residential mortgage lender in all fifty (50) states. TMHL focused principally on the prime jumbo and super-jumbo segments of the hybrid and adjustable rate mortgage market, with features such as large loan balances, interest-only periods and modification options. TMHL acquired mortgage loans through its correspondent lending program and secondary market purchases, as well as originated mortgage loans via its retail/direct lending program.

28. TMHL financed certain of its origination and acquisition activities, inter alia, through various warehouse lending facilities including: (i) that certain Master Repurchase

Agreement with Credit Suisse First Boston Mortgage Capital LLC (“CSM”) dated as of

December 23, 2005, including certain amendments and agreements related thereto; and (ii) that

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certain Master Repurchase Agreement with Greenwich Capital Financial Products, Inc.

(“GCFP”) dated as of January 27, 2006.

29. When TMHL had amassed a threshold amount of mortgage loans, TMHL, as sponsor, initiated a securitization by transferring such mortgage loans (either directly or indirectly through a non-debtor affiliate) to a special purpose entity acting as depositor, which in turn transferred those mortgage loans to a Thornburg mortgage securities trust (a “Trust”) specifically created for the securitization transaction. Thereafter, the Trust would issue several classes of MBS with varying characteristics for public offering, pursuant to the terms of an indenture, pooling and servicing agreement or other securitization agreements, as applicable.

30. TMHL was the sponsor of (29) such Trusts. Generally, the high quality tranches of such securitizations (the Class A notes, which normally initially carried AAA credit ratings from Moody‟s, Fitch and/or S&P) were offered for sale to third party investors by the securitization underwriter, while TMST acquired and maintained interests in the subordinate

MBS and equity tranches (e.g. Class B notes and interest-only strips). TMST would generally finance its acquisition/retention of those subordinate MBS and equity tranches through repurchase agreements and/or equity

31. Although the securitization trusts typically had thirty and sometimes forty year maturity dates, certain of the publicly-offered notes issued by the Trusts were subject to a mandatory auction (typically within three to five years of issuance), at which time the purchasers/owners of the notes were guaranteed to receive the full par amount of outstanding principal, either from the auction proceeds or, if such proceeds were not sufficient, from an auction swap counterparty.

C. TMHS

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32. TMHS, inter alia, entered into derivative auction swap transactions with CSI,

GCD and RBS PLC (collectively, the “Swap Counterparties”) to support TMHL‟s securitizations. In each instance, one of the Swap Counterparties entered into an auction swap with the auction administrator under the applicable securitization (referred to as a “Front-End

Auction Swap”). At the same time, TMHS would often enter into a back-to-back auction swap

(referred to as a “Back-End Auction Swap”) with the Swap Counterparty, whereby TMHS would guarantee the Front-End Auction Swap obligations of the Swap Counterparty. TMST guaranteed

TMHS‟ auction swap obligations.

33. Margin calls could also be made on the Back-End Auction Swaps, based on the theoretical or implied cost associated with the Swap Counterparties‟ future obligation to provide holders with a par price on the auction date.

Margin Call Rights

34. As a general rule, the repurchase transactions were governed by the September

1996 version of the form Master Repurchase Agreement (the “MRA”) published by the Bond

Market Association (n/k/a the Securities Industry & Financial Markets Association).

35. Pursuant to Paragraph 4 of the MRA, either party could “at any time” make a margin call on the other party if the market value of the collateral became less than or exceeded the margin amount. The lenders could issue a margin call if the Buyer‟s Margin Amount was greater than the Market Value of the Purchased Securities; that is if the market value (also referred to as “price”) of the pledged MBS diminished beyond a certain agreed-to level (i.e., there was a “Margin Deficit”). Similarly, TMST could issue a reverse margin call in the event that the Market Value of the pledged MBS increased beyond a certain agreed-to level (i.e., there was a “Margin Excess”).

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36. The form MRA published by the Bond Market Association provided that the subject repurchase transaction would be governed by its terms and any supplemental terms or conditions set forth in an Annex thereto.

37. The procedure by which the parties would calculate the Market Value of a MBS was set forth in the definition of Market Value in paragraph 4 of the MRA as follows:

.. with respect to any Securities as of any date, the price for such Securities on such date obtained from a generally recognized source agreed to by the parties or the most recent closing bid quotation from such a source, plus accrued Income to the extent not included therein (other than any Income credited or transferred, or applied to the obligations of Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to market practice for such Securities). (Emphasis added)

38. Telerate, Reuters and Bloomberg were among a number of companies that monitored the trading in securities such as MBS, and provided comprehensive daily analytical pricing of those securities. Additionally, Bear Stearns maintained an equally comprehensive pricing service through its subsidiary, Bear Stearns Pricing Direct.

39. Defendant RBS PLC agreed with TMST in their MRA to the default definition of

Market Value. On the other hand, Defendants CSSU, RBS Securities, UBS, Citi and JP Morgan agreed with TMST in the Annexes to their respective MRAs to modify the definition of the

“generally recognized source” for obtaining the price of a MBS (its Market Value) as follows:

A. CSSU: the parties agreed that the pricing source was Telerate, Reuters, or Bloomberg, or, if a price was not available from such pricing sources, CSSU or one of its affiliates could be the pricing source;

B. UBS: the parties agreed that if they did not agree on a generally recognized pricing source, UBS could determine the price;

C. JPMorgan, as successor to Bear Stearns: the parties modified the definition of Market Value by stating that Market Value would be the price determined by Bear Stearns in its sole discretion;

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D. RBS Securities (f/k/a Greenwich Capital Markets, Inc.): the parties modified the definition of Market Value by stating, that with respect to MBS for which there was no generally recognized pricing source, the Market Value shall be determined by the Buyer (i.e. RBS Securities) in the exercise of its good-faith reasonable discretion; and

E. Citi: the Global Master Securities Lending Agreement (for the purpose of this action also an “MRA”) executed by the parties provided that the price of an MBS would be derived from a reputable pricing information service chosen in good faith by “Lender” (i.e. Citi”) and if such a source was unavailable the price would be derived from prices or rates bid by a reputable dealer chosen in good faith by “Lender.”

40. Either party could meet a valid margin call by transferring either cash or collateral to the demanding party. Thus, in the event of a Margin Deficit and a valid margin call, TMST could meet or satisfy the call by transferring, at TMST‟s option, either “cash or additional securities reasonably acceptable to the transaction counterparty”. Conversely, in the event of a

Margin Excess and a reverse margin call by TMST, the transaction counterparty could satisfy or meet the call by transferring to TMST, at its option, either cash or securities pledged as collateral.

41. Pursuant to Paragraph 11 of the MRA, if a party failed to timely meet a valid margin call under the terms of the MRA, the party issuing that call could declare an Event of

Default. At that time, if the non-defaulting party was the lender, the lender was required to either

(a) immediately sell in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the lender may reasonably deem satisfactory for the collateral subject to its repurchase transactions, or (b) take the pledged securities into its own inventory and give the borrower credit for the price of the collateral obtained from a generally recognized source or the most recent closing bid quotation from such source. At all times the lender was required to act in good faith and in a commercially reasonable manner.

Events Leading To The Override Transaction 14

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42. During February 2008, TMST began receiving a number of significant margin calls relating to repurchase transactions and Back-End Auction Swaps. TMST‟s 8-K filed on

March 19, 2008 reported that from December 31, 2007 through March 6, 2008, TMST received approximately $1.8 Billion in margin calls, of which approximately $907 Million occurred between February 14, 2008 and March 6, 2008.

43. As of the close of business on February 27, 2008, TMST reported that it had satisfied all outstanding margin calls as of that date.

44. On the morning of February 28, 2008, TMST issued its 2007 10-K before the markets opened. In that 10-K, TMST revealed that since February 14, 2008 it had met margin calls in excess of $300 Million, but that “in the short term, the sudden decline in the valuation of these securities has left us with reduced readily available liquidity to meet future margin calls…”

45. These revelations sparked overreaching conduct and a collateral grab by various counterparties. By 9:22 a.m. MTN that morning, the Debtors received additional margin calls in excess of $150 Million. These and subsequent margin calls reflected an unjustified motivation by institutional investors to reduce their exposure to MBS and associated derivatives by making aggressive or sometimes improper margin calls.

46. Thereafter, through March 6, 2008, TMST received margin calls from counterparties (including the Defendants) to various repurchase transactions and auction swap transactions in the aggregate approximate amount of $610 Million. The Debtors lacked sufficient liquidity to satisfy in full these margin calls. However, the margin calls during that period were improperly inflated.

47. Of the approximately $610 Million in unsatisfied margin calls as of March 6,

2008, the approximate amount of unsatisfied margin calls of the Defendants were as follows: (i)

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Bear Stearns (as predecessor to JPMorgan) - $133 Million, (ii) Citi - $83 Million (representing total margin calls of approximately $96 Million, less a margin payment of approximately $14

Million made by TMST on March 6, 2008), (iii) CSSU - $53 Million (based upon a later recalculation this was reduced to approximately $25 Million, (iv) CSI - $80 Million and (v)

RBS-$14 Million (for repurchase transaction), (vi) GCD - $51 Million and (viii) UBS - $65.3

Million.

48. When the Defendants made their margin calls, they represented that the aggregate price of the MBS they financed was approximately $6.61 Billion, net of haircuts. Against that value, the Defendants asserted repurchase price obligations (loan balances) of approximately

$6.98 Billion. However, when the Defendants‟ prices for their respectively financed MBS were compared to prices that were reported by reputable generally recognized pricing sources (such as

Bear Stearns Pricing Direct and Reuters) the Defendants would not have been able to make margin calls. Indeed, in several instances TMST would have been able to make reverse margin calls.

49. One of the more egregious examples of the Defendants‟ improper pricing was the prices Bear Stearns attributed to its financed MBS. At a time when its own pricing subsidiary,

Bear Stearns Pricing Direct, priced 417 of the 443 MBS it financed at $860 million, net of haircuts, Bear Stearns made margin calls based on a claim that those same MBS had an aggregate price of $790 Million - a gross undervaluation of $70 Million.

50. Given the breadth and scope of these improper margin calls, TMST was unable to satisfy them in full. Likely recognizing that there were more ways to extract value from TMST if it did not file for bankruptcy, none of the Defendants called an Event of Default under their respective MRAs or accelerated the repurchase date for the MBS loans.

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The Override Transaction

51. Facing a deluge of margin calls and recognizing that current market conditions made it untenable for TMST to contest every margin call, TMST spent the second week of

March 2008 engaging the Defendants in a strained attempt to restructure its debts with them.

52. On March 17, 2008, those negotiations led to the execution by TMST, TMHS (but not TMHL) and the Defendants of an agreement to override and extend the repurchase dates under their respective repurchase agreements, referred to as the “Override Agreement”. The end result of these collective negotiations was that TMST and TMHL essentially ceased acquiring

MBS and originating and securitizing loans, and instead served only to preserve the Defendants‟ collateral and satisfy their claims.

53. The Override Agreement provided that during the Override Period, the existing terms of each of the Financing Agreements would remain in full force and effect, except as

“overridden, suspended or superseded” by the terms of the Override Agreement. “Financing

Agreements” was defined to be the respective MRAs and certain auction swap transactions under

ISDA Master Agreements with the Swap Counterparties. The Override Period was set as 364 days from the March 17, 2008 execution date of the Override Agreement.

54. One key term of the “Financing Agreements” that was modified by the Override

Agreement related to the respective maturity or repurchase dates. As of March 6, 2008, before the parties executed the Override Agreement, the repurchase dates for all of the MBS subject to the Defendants‟ respective repurchase agreements remained as originally scheduled. The

Override Agreement provided that the applicable repurchase date, settlement date or maturity date of the Financing Agreements was “deemed to be March 16, 2009.” This added 364 days to existing maturity or repurchase dates of the open repurchase transactions, none of which had

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been subject to a notice of default and/or accelerated as of the date of the Override Agreement.

Thus, by operation of the Override Agreement (and simple math), each repurchase transaction now had a maturity or repurchase date that was later than one year after such transfer of the MBS to the Defendants pursuant to the repurchase transactions.

55. Another key term of the Financing Agreements that was removed by the Override

Agreement was the ability of TMST to make reverse margin calls when the value of the MBS increased - an important and material characteristic of a repurchase transaction. By, among other things, extending the maturity or repurchase date and prohibiting reverse margin calls, the

Defendants converted the repurchase transactions to long-term secured financings.

56. The Override Agreement itself did not provide for the transfer, purchase, sale or loan of mortgage securities or for entry into new swap agreements, and thus is not a security agreement, repurchase agreement, swap agreement or credit enhancement related to repurchase agreements, swap agreements or securities contract. Nor would the Override Agreement be recognized as a swap agreement in the securities industry. The Override Agreement also modified the existing terms of the MRAs and ISDA Master Agreements to the detriment of

TMST and TMHS by stripping TMST‟s and TMHS‟ substantial economic benefits under those agreements.

57. Critically, the Override Agreement also provided for a margin call standstill for the Override Period. The Defendants agreed that they would not invoke margin calls (except for haircuts occasioned by rating agency downgrades) or otherwise exercise remedies under non- bankruptcy law during the Override Period. The Override Agreement also set the haircut amount for the MBS collateral underlying the repurchase transactions and provided that if any MBS was downgraded, the applicable haircut could be reset to levels specified in the Override Agreement.

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The Defendants agreed that they could only demand additional collateral or cash to cover the new haircut percentage upon a downgrade, and only by applying that new percentage to the price on the MBS that TMST and the Defendants used to establish the amount of unsatisfied margin calls under the Override Agreement.

58. For example, if a MBS was initially rated as AAA (and was subject to an agreed upon 5% haircut) and thereafter downgraded to AA (and therefore subject to an agreed upon

15% haircut), TMST would be required to send the lender financing that MBS additional cash or collateral equal to 10% of the value of the MBS established in the Override Agreement as of

March 5, 2008.

59. Under the Override Agreement, TMST and TMHS were required to raise at least

$1 Billion of new capital within seven business days of its execution. The net proceeds of the capital raise were to be used in part to:

…pay (i) all unmet margin calls on the Collateral that were outstanding as of March 5, 2008, after giving effect to the haircuts specified pursuant to Section 2(d), in the amounts specified in Schedule II and (ii) $470 million less the amount paid pursuant to clause (i) of this subsection to the Counterparties on account of the Payment Obligations, pro rata;

60. The Debtors were also required to fund and maintain a “Liquidity Fund” having a market value of $350 Million. The Override Agreement did not place any express restrictions on the use of the Liquidity Fund, but it did provide that it could be used to fund obligations that might be incurred if an MBS was downgraded during the Override Period. In addition, TMST was obligated within eight business days to reduce TMST‟s obligations to Citi by at least $500

Million, “but in no event at a cost to TMA [TMST and TMHS] of more than $10 Million during the Override Period”.

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61. Thus, in entering into the Override Agreement, the Debtors believed that they had obtained (i) a one-year respite from margin calls (except for agreed-upon haircut resets upon a downgrade) and (ii) an agreement by the Defendants that they would not exercise any remedies, except upon an “Override Termination Event”. In consideration of these material terms, TMST and TMHS committed to immediately raise at least $1 Billion of new capital; pay the Defendants‟ margin calls outstanding as of March 5, 2008; establish the Liquidity Fund; grant the Defendants a security interest in certain portions of TMST‟s mortgage servicing rights; allow the Defendants to retain one hundred percent (100%) of the monthly principal and twenty percent (20%) of the monthly interest received from pledged MBS; not enter into any new financing agreements; and issue the Defendants certain “penny warrants.”

62. By its express terms, the Override Agreement converted the existing repurchase transactions to secured borrowing transactions and, among other things, denied TMST its beneficial economic interests in the MBS pledged under the repurchase transactions with the

Defendants.

63. Under the Override Agreement, the Defendants were allowed to retain 100% of principal and 20% of interest received on the MBS pledged under the repurchase transactions.

Nonetheless, the Defendants agreed that they would remit the remaining 80% of interest collected on the next business day (an agreement they soon breached). Thus, by virtue of the modification of the terms of the Financing Agreements under the Override Agreement, the transactions lost all material terms and indicia of, and ceased being, “repo” or repurchase agreements. Indeed, upon information and belief, at least one of the Defendants recognized that these transactions no longer enjoyed repurchase transaction protections and reclassified them as secured loans for their internal accounting.

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64. The cash flow from the interest the Defendants were not grabbing was vital to

TMST‟s liquidity and was intended, among other things, to pay the interest expense that would be due to the investors providing the $1 Billion capital injection, as well as other obligations of

TMST.

65. The Override Agreement precluded TMST from entering into new MBS transactions under existing or new repurchase agreements and capped at $700 Million the amount that the Debtors could have outstanding under their warehouse lending agreements.

These warehouse lending agreements were the financing method by which TMHL (a non- signatory to the Override Agreement) originated and/or acquired new mortgage loans to be used for securitizations or general business purposes. Without the ability to enter into new MBS transactions and with the warehouse lines capped at $700 Million, the Debtors ceased being able to invest in new MBS and acquire new mortgage loans. In many respects, this shut off the engine that drove the Debtors‟ business and ensured that the Debtors would serve only the parochial interests of the Defendants.

66. The Override Agreement put the Debtors into a financial coma and transformed

TMST‟s corporate purpose into slavishly serving the interests of the Defendants. TMST could no longer enter into new repurchase transactions to invest in new MBS (its primary business function up to that date), TMST had to suspend its common stock dividend (except as legally required to maintain its REIT status), TMST lost the use of the majority of the principal and interest on MBS that had been used to fund its operations, TMHL could no longer originate or acquire new mortgage loans or MBS (the basic economic engine of the Debtors‟ business) and

TMST could no longer make reverse margin calls on the Defendants (depriving it of potentially locked up funds).

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67. The Debtors, with the help of the investment banking firm of Friedman Billings and Ramsey (“FBR”), began their efforts to raise the $1 Billion of new capital required by the

Override Agreement. Potential investors were provided pro forma cash flows demonstrating that

TMST would have sufficient liquidity (with access limited to only 80% of collected interest and the availability of the Liquidity Fund) to meet debt service under the proposed offering, as well as its other normal course obligations.

68. By March 24, 2008, Matlin Patterson Global Opportunities Partners III L.P.

(“MP”) and TMST executed a Term Sheet pursuant to which MP agreed to be the lead investor in the capital raise. In presentations to prospective investors, investors were offered, among other things, 18% interest payable semi-annually in arrears (which would reduce to 12% upon certain conditions), with the first interest payment due on September 30, 2008. The Term Sheet and pro forma cash flows were provided to the Defendants. The basic terms of the Term Sheet were later memorialized by a Senior Subordinated Indenture issued in conjunction with the funding of the capital raise. Thus, the Defendants understood that TMST and its investors believed that a full standstill had been agreed to and that interest payments would be made to them on a timely basis.

69. Once the Override Agreement was executed, the Defendants began discussing the amounts of their respective margin calls and how they would be adjusted if TMST was successful in its capital raise. This „truing up” was required in part because the Override

Agreement contemplated revising the margin calls based upon common haircut amounts. It was also required because each Defendant understood that the margin calls of the other Defendants may have been based upon faulty pricing. Their collusive conduct was motivated by the fear that one of the Defendants might realize an unfair advantage over the others.

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70. Almost immediately after the Override Agreement was executed, Citi, began engaging in especially egregious conduct. Citi began aggressively pressing TMST to unwind certain Structured Repo transactions in order to reduce Citi‟s exposure to those types of MBS and their associated derivative positions. In order to comply with Citi‟s demands, on March 24 and 25, 2008, TMST sold two MBS that it had purchased from CSSU in June 2007 (at a combined price of approximately $749 Million) and immediately thereafter had put on

Structured Repo with Citi. These two MBS were sold for a combined sale price of approximately

$440 Million - a staggering loss of approximately $260 Million. After application of the sale proceeds, Citi told TMST that it was entitled to unwinding fees in the aggregate approximate amount of $40.6 Million and a repurchase price deficiency of approximately $79.3Million (an aggregate claim of approximately $119.9 Million). On March 25, 2008, Citi demanded that it immediately be paid the $119.9 Million outside of the Override Agreement, even though these were, at best, “Payment Obligations” under the Override Agreement, the payment of which was capped and subject to the Override Agreement‟s payment terms. After TMST advised Citi that payment of these amounts depended on the capital raise and had to be paid under the Override

Agreement, on March 26, 2008, Citi sent an “URGENT” email to TMST and FBR threatening to

“begin the Termination Process”

71. In lieu of following through on its liquidation threat, on March 27, 2008, Citi sent a Notice of Override Termination Event (which it rescinded later that same day) because the $1

Billion capital raise had not yet funded. Citi thereafter extracted additional warrants (beyond its entitlement under the Override Agreement) to waive the March 26, 2008 funding deadline.

72. Days later on March 31, 2008, TMST and Citi terminated a pending purchase transaction. Several months earlier TMST had agreed to buy a particular MBS from Citi with a

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face amount of $150 Million. This transaction was to close on March 31, 2008. Because Citi was no longer willing to finance TMST, on March 31, 2008, the parties terminated the purchase transaction at which time Citi assigned a value of $132.0 Million to this MBS. Citi thereafter asserted a deficiency claim against TMST of approximately $17.9 Million for that same MBS that TMST never owned.

73. On March 31, 2008, TMST timely and successfully raised $1.15 Billion of new capital (with a provision to increase the capital raise to $1.35 Billion) through the issuance of certain Senior Subordinated Notes, with MP as lead investor.

74. $874 Million of the proceeds of the capital raise were immediately siphoned off to the Defendants to make payment to them totaling $524.5 Million and to create the Liquidity

Fund in the amount of $350 Million. Additionally, TMST paid $31.2 Million in deficiency claims to counterparties not signatories to the Override Agreement and approximately $58.0

Million in underwriting fees and other expenses related to the transaction.

75. Of the $524.5 Million paid to the Defendants, Citi received the lions‟ share, approximately $164 Million. However, only $18 Million of this payment was based upon Citi‟s margin calls; the balance of approximately $145 Million represented pair-off fees, termination fees (the $40.6 Million referred to above) and deficiency claims asserted by Citi based upon

TMST‟s sales of the individual MBS pledged to Citi. The remaining Defendants received the following sums: (i) UBS - $19.149 Million, (ii) Credit Suisse (CSSU/CSI) - $107.586 Million,

(iii) JP Morgan - $88.0 Million, and (iv) RBS (RBS Securities/ GCD/RBS PLC) - $146.08

Million.

76. The Defendants eagerly accepted their respective portions of the $524.5 Million paid from the $1 Billion capital raise. They did so with full knowledge that MP and others

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invested their funds (and the Debtors solicited and accepted those funds) in reliance upon the

Defendants‟ promise in the Override Agreement that (i) there would be a one year standstill from margin calls and enforcement activity, (ii) that a Liquidity Fund would be available for TMST‟s corporate purposes (including payments on the Senior Subordinated Notes), (iii) that the Debtors would have access to 80% of interest paid and distributed on its MBS and (iv) that there was no prohibition from use of the Liquidity Fund for general corporate purposes.

77. On April 1, 2008, after the capital raise and the Defendants received their payments, Larry Goldstone (then President of TMST) received an email from one of the

Defendants thanking him for his efforts and referring to their respective businesses as partners in the future. The email reflected that from and after the execution of the Override Agreement,

TMST served only to satisfy the Defendants‟ claims.

Breaches of the Override Agreement: Downgrades

78. Under the Override Agreement, the Defendants covenant that they:

will not invoke any margin maintenance requirement, credit support requirement or capital call (or any process of like import, including calls with respect to the Action Swaps, a “Margin Call”) or otherwise exercise remedies under applicable non-bankruptcy law during the Override Period with respect to “Purchased Securities” or “Collateral” (or any term of like meaning, including margin collateral with respect to Auction Swaps) that is rated the equivalent of Standard & Poors “AAA”, “AA”, “A”, “BBB”, “BB”, or “B” or is unrated as of the date hereof or is a mortgage-backed security subject to a Financing Agreement ...

79. Between August 4, 2009 and August 8, 2009, Fitch (but not other rating agencies) downgraded a number of individual MBS pledged to the Defendants and subject to the Override

Agreement. Later, a handful of other pledged MBS were downgraded by either Moody‟s or

S&P.

80. This was known as a “split-rating.” But, a split rating did not threaten the

Defendants‟ collateral position and should not have triggered any margin call. One of the 25

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Defendants even admitted that the downgrades did not impact prices at that time because the market was trading MBS based upon structure and performance, not ratings category.

81. By August 12, 2008, approximately 50 individual MBS financed by the

Defendants had been downgraded. With the exception of 2 individual MBS that had been downgraded from AAA to AA, all of the MBS had been downgraded to ratings of either A,

BBB, BB, B or CCC. Upon downgrade, such MBS transferred to the Defendants pursuant to the

MRAs were not “mortgage related securities” under Section 101(47) of the Bankruptcy Code as defined in Section 3 of the Securities Exchange Act (15 U.S.C. § 78c(41)). A “mortgage related security” is a “security that is rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization”, e.g. S&P rating categories “AAA” and

“AA” and Moody‟s rating categories “Aaa” and “Aa”, and meets certain other criteria.

82. RBS immediately made a margin call for a MBS it financed which had been downgraded by Fitch from AAA to A, even though it had not been downgraded by other rating agencies. Shortly thereafter, other Defendants began making margin calls seeking additional cash or collateral to cover not only the agreed upon reduction in haircut, but also, any decreases in the prices of individual MBS since the March 5, 2008 valuation date. TMST began disputing the Defendants‟ right to seek both haircut and price margin calls.

83. TMST did not have sufficient cash or collateral to pay both haircut and improper price margin calls and still meet all of its other obligations. This was exactly the scenario that the Debtors, MP and the other investors believed they were insulated from when they executed the Override Agreement and completed the $1 Billion capital raise.

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84. The one exception to this margin maintenance prohibition in the Override

Agreement provided that if a MBS was downgraded, the applicable haircut would be reset to the level set forth on a schedule attached to the Override Agreement.

85. The Override Agreement contained no affirmative covenant requiring TMST to pay any margin calls during the Override Period, or that such failure to pay would constitute grounds to terminate the Override Agreement (an “Override Termination Event”). Rather, the

Override Agreement limited an Override Termination Event to the following circumstances: (i) failure to allow the Defendants to collect and apply 100% of the principal and 20% of the interest

(increasing to 30% under certain circumstances), (ii) failure to pay the pre-existing margin calls outstanding on March 5, 2008 and (iii) failure to make certain earmarked payments with respect to the auction swaps and repurchase agreements.

86. Importantly, TMST was allowed, but not required, to satisfy these new margin calls using the Liquidity Fund. The Defendants‟ only remedy if TMST did not pay these margin calls was to increase the amount of interest withheld (and applied to payment obligations) from

20% to 30% if the outstanding balance of the payment obligations exceeded a threshold amount.

87. The haircut only limitation was not dependent on the market value (or “price”) of a MBS at the time of its downgrade. Instead, under the Override Agreement the only amount that the Defendants could claim due was an amount equal to the difference between the original and re-set haircut percentage, times the original price at the time of the Override Agreement. The difference between seeking a margin call payment for Haircut only, as opposed to seeking a margin call for both Haircut and price, could be significant. By way of example, on August 28,

2008, JPMorgan made a margin call of $9.7 Million, of which only $1.9 Million was for haircut.

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88. Citi, who as early as August 5, 2008 was considering the steps it could take to position itself to terminate the Override Agreement, used the downgrade of several of its financed MBS to its strategic advantage. On August 8, 2009, Citi sent TMST a margin call for

$161.2 Million for haircut and price (using purportedly contemporaneous prices, as opposed to the March 5, 2008 prices).

89. At the same time that TMST was being besieged by the Defendants‟ haircut and price margin calls, CSM (an affiliate of CSSU) and GCFP (an affiliate of RBS Securities) began making aggressive margin calls on their respective whole loan mortgage warehouse lines. For instance, between August 5, 2008 and August 8, 2008, TMHL received margins calls from CSM and GCFP aggregating $28.3 Million. This further sharply eroded the Debtors‟ working capital.

90. TMST also provided the Defendants with a liquidity cash flow report that demonstrated that the only way it could meet its ordinary course obligations (including the

September 2008 interest payment to the Senior Subordinated Noteholders (“SSN”)) was to continue receiving (i) 80% of the MBS interest, (ii) the net proceeds from TMHL‟s whole loan sales and (iii) ordinary course collections. The report also indicated that the only possible source to satisfy haircut payments was the Liquidity Fund (as was intended under the Override

Agreement).

91. Thus, the resolution of the dispute over TMST‟s obligation to make haircut only payments or haircut and price margin call payments had significant consequences for the

Debtors. The Debtors were receiving margin calls on their warehouse lines from CSM and

GCFP, the Liquidity Fund could not support both haircut and price margin call payments and the

Debtors‟ cash flows alone did not support making even haircut only payments.

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92. In response to the Defendants‟ demands for price and haircut payments, the

Debtors proposed that the Override Agreement be clarified to permit haircut only payments for a downgraded MBS (in short, that the Defendants comply with the intent of the Override

Agreement) and that once the Liquidity Fund was exhausted, there would be no further haircut payments required.

93. In an attempt to bootstrap upon their breach of the Override Agreement, the

Defendants advised TMST that they would require that the entire Liquidity Fund be paid to them as part of any resolution of their manufactured dispute. This “hold-up” was in contravention of the Override Agreement.

94. Over the next several weeks, the Debtors engaged in protracted negotiations with the Defendants, individually and collectively, during which time the Debtors were subject to threats of liquidation, and whipsawed by the Defendants‟ initially inconsistent positions and the uncertainty that caused. So, in addition ultimately to being subject to the collusive acts of the

Defendants, TMST was also held hostage while the Defendants sorted out their internal issues and arrived at a collusive position.

95. For instance, on August 14, 2008, the parties reviewed a spreadsheet TMST prepared which detailed the aggregate amount of haircut only payment that would be payable to each Defendant (based upon the recent split rating downgrades, despite the fact that the Override

Agreement did not contemplate split ratings as actionable by the Defendants) at approximately

$219 Million. The same day, and notwithstanding that it had just provided its own analysis of haircut only amounts (which differed only slightly from TMST‟s analysis), Citi forwarded

TMST and TMHS a draft two week forbearance agreement applicable only to Citi, which was conditioned upon Citi receiving a $130.1 Million margin call payment by August 15, 2008 (Citi

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later acknowledged that its haircut only claim was $97.5 Million). Without waiting the three days required to obtain the monies from the Liquidity Fund, Citi threatened that if it was not paid by August 15, 2008, it would begin liquidating its positions. However, in the interim, on August

14, 2008, RBS sent TMST a letter demanding that TMST not draw any funds from the Liquidity

Fund to make haircut only payments to the Defendants, “until either all Parties are in agreement on the methodology of this payment or a judicial determination as to their respective rights has been made.”

96. Notwithstanding their dubious right to demand that they receive haircut only payments or they would liquidate their positions, the Defendants again advised TMST that they would require that the entire Liquidity Fund be paid to them in order to voluntarily forbear from exercising remedies. Recognizing their complete control over the Debtors, the Defendants spent the next week negotiating among themselves how they would allocate the entire Liquidity Fund to themselves.

97. Ironically, a credit officer who helped negotiate the Override Agreement informed

TMST that he agreed with TMST‟s position that downgrades only triggered haircut changes, that the Liquidity Fund could be used to make those payments and that the Defendants were not entitled to a pay out of the entire Liquidity Fund. However, even if TMST had wanted to pay haircut only payments, it was prohibited from doing so by the internal disputes among the

Defendants and the uncertainty of what actions one or more Defendants would take against it.

98. On or about August 18, 2008, TMST was informed that the Defendants had reached agreement on their allocation of the entire $350 Million Liquidity Fund and that they would be willing to enter into a forbearance agreement with TMST and TMHS. However, two days later Citi and JPMorgan made haircut and price margin calls in the aggregate amount of

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$74.9 million (JPMorgan) and $203 Million (Citi), and indicated to TMST that they might seize their respective collateral if the funds were not wired to them. The amount Citi demanded was far in excess of the amount it had agreed with the other Defendants would be its allocable share of the Liquidity Fund.

99. The Defendants then put forth a proposal for a forbearance agreement under which they agreed to forbear from taking any action until September 2, 2008 and during that time they would negotiate in good faith to reach an agreement on the terms of an amendment to the Override Agreement. That proposal was conditioned on, among other things, the Defendants receiving the entire Liquidity Fund.

100. Based upon the Defendants‟ representation that they would negotiate in good faith if TMST paid them haircut only payments, on August 21, 2008, TMST paid the Defendants approximately $219 Million from the Liquidity Fund, which was allocated as follows: (i) Citi-

$97.6 Million, (ii) Credit Suisse - $24.6 Million, (iii) RBS (RBS Securities/GCD/RBS PLC)-

$44.1 Million, (iv) JPMorgan - $34.3 Million and (v) UBS - $18.47 Million.

101. When the Defendants made these representations about their intent to negotiate in good faith, they were already in receipt of 100% of P&I payments from TMST‟s agency securities and knew that they would be receiving the balance of the P&I payments in several days.

102. Just one day after receiving the $219 Million the Defendants, during a conference call, advised TMST that they wanted a commitment that TMST would not use the remaining funds in the Liquidity Fund for any purpose without their explicit permission, and that the SSN should not be paid their upcoming interest payments. The Defendants‟ demand that the SSN not be paid from the Liquidity Fund was inconceivable considering that TMST lacked any other

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source to make the payment and the Defendants had already taken over $740 Million funded by the SSN‟s capital contribution. Further evidencing the Defendants‟ belief that they could make up the rules as they went along (and that they were above any contractual obligation), they advised TMST that the $219 Million was only a partial payment toward the haircut only amount they claimed due, because they did not split the money among themselves based on their respective haircut only claims.

103. Thereafter, by joint letter dated August 25, 2008, the Defendants collectively reiterated their purported willingness to negotiate in good faith to reach agreement on the terms of an amended Override Agreement. However, they went on to warn that any withdrawal or disposition of cash or other assets from the Liquidity Fund for any purpose other than to pay the

Defendants‟ margin calls (including for TMST‟s general corporate purposes), was a breach of

TMST‟s and TMHS‟ agreements with the Defendants. The Defendants had no basis for this proposition, other than their willingness to threaten the Debtors with liquidation if they did not get their way.

104. The Debtors‟ liquidity problems were further exacerbated when, on August 25,

2008, GCFP, acting through RBS Securities, made a margin call of $7.8 Million with respect to whole mortgage loans financed under its warehouse lending agreement with TMHL. TMHL disputed that margin call and advised GCFP that there was actually a $2.8 Million reverse margin call right in its favor. Shortly thereafter GCFP began withholding all excess cash generated from THML‟s sale of whole loans, even after the loans underlying the specific whole loans being sold were satisfied.

Breach of Override: Failure to Remit Interest Payments

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105. P&I payments were forwarded by each securitization trustee to the Depository

Trust Company (“DTC”), who in turn paid those amounts to the Defendants. Under the Override

Agreement, TMST was to receive its allocable share (80%) of the interest component within one business day after receipt of any P&I payment by each Defendant. As required by the Override

Agreement:

The Counterparties shall collect all principal and interest payments with respect to Collateral. Each Counterparty shall apply 100% of any payments of principal (including prepayments) received by such Counterparty from Collateral and 20% of any payments of interest received by such Counterparty with respect to Collateral against the “Repurchase Price” or other applicable outstanding payment, margin, and mark-to-market deficiencies and other payment obligations under the corresponding Financing Agreements (collectively, the “Payment Obligations”). So long as no Override Termination Event has occurred and is continuing, each Counterparty shall remit to TMA [TMST and TMHS] on the business day following the receipt of such amount all payments with respect to Collateral received by such Counterparty that it did not apply to the Payment Obligations as provided in the preceding sentence.

106. Only in the event of an Override Termination Event could a Defendant exercise remedies and retain one hundred percent (100%) of the interest collected. However, the failure to pay an increased haircut amount or a failure to pay a price margin call was not a basis to declare an Override Termination Event. Furthermore, in order for there to be an Override

Termination Event, the Defendant terminating the Override Agreement was required to provide a written notice of termination to TMST, TMHS and all other Defendants. No Override

Termination Event existed and no Defendant ever provided a notice of an Override Termination

Event.

107. During the month of April 2008, the combined amount of P&I that would normally have been received by TMST (prior to the Override Agreement) was approximately

$120.5 Million. TMST received only $33.5 Million of that amount, representing its 80% share of the interest portion. The balance of $87 Million was retained by the Defendants based upon 33

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amounts allocable to the respective bonds they financed. Through July of 2008, this pattern was repeated every month. As a result, between April 2008 and July 2008, TMST received approximately $157.6 of its allocable share of interest, while the Defendants received approximately $361.2 Million of their allocable share of P&I.

108. Notwithstanding the absence of an Override Termination Event, the Defendants‟ fresh promise to negotiate in good faith, TMST‟s justifiable reliance on that representation in releasing the $219 million on August 21, 2008, and the Defendants‟ receipt of over $740 Million in override funds, CSSU, RBS and Citi each failed to remit any interest they collected during

August 2008, notwithstanding their obligation to immediately remit to TMST 80% of the interest they received. When TMST demanded that these Defendants remit the withheld interest to it, they failed to provide any justification for their actions.

109. The Defendants, having been provided the Debtors‟ pro forma cash flows, understood that their unlawful seizure of interest would effectively put the Debtors out of business. Thus, when the Defendants represented they would negotiate in good faith, they had actual knowledge they had not turned over 80% of the agency securities interest they were in receipt of, that they would not be turning over 80% of the balance of interest they were about to collect and that they had not declared an Override Termination Event. In view of those facts the

Defendants‟ representation to negotiate in good faith was made with reckless and/or intentional disregard for the falsity of that promise.

110. The aggregate amount of interest that should have been remitted to TMST by the three Defendants for August collections was approximately $22.2 Million. In September,

JPMorgan joined along with CSSU, RBS and Citi and each failed to remit $33.3 Million to

TMST, representing TMST‟s 80% share of interest they received. During October and

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November 2008, all of the Defendants refused to remit any of the interest they received. As a result, between August and November 2008, the Defendants unlawfully withheld approximately

$121.8 Million (representing TMST‟s 80% share) of interest they were contractually obligated to remit to TMST; as follows: (i) JPMorgan - $35.7 Million, (ii) Credit Suisse (CSSU/CSI) - $18.9

Million, (iii) UBS - $5.0 Million, (iv) RBS (RBS Securities/GCD/RBS PLC) - $35.1 Million and

(v) Citi - $27.1 Million.

111. In addition to unlawfully failing to remit 80% of interest collected, the Defendants failed to apply the amounts they did withhold to their respective loan amounts, thereby increasing the monthly interest expense charged to TMST.

112. Having breached their contractual obligation to remit interest, thereby depriving

TMST of the last vestiges of any beneficial interest in the pledged MBS, the underlying financing agreements with the Defendants ceased being repurchase transactions (if they had not already ceased being repurchase transactions as of March 17, 2008). In light of this transformation, at least one the Defendants was required to change its repo codes at DTC from

“open repo” to “outright” (owned).

113. The Defendants acted with complete indifference to their actual knowledge that by seizing 100% of all P&I, they were causing real and immediate harm, as the Debtors experienced an extreme cash flow and liquidity crunch. Among other things, as a result of the

Defendants‟ willful breaches, TMST was unable to make the interest payments to the SSN when they came due. Moreover, the Defendants‟ actions endangered a pending Exchange Offer designed to restructure TMST equity, which would have resulted in a significant reduction in

TMST‟s debt service obligations to the SSN. The Defendants denied TMST‟s request that it be allowed to make that interest payment from the Liquidity Fund or fund the Exchange Offer,

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notwithstanding that (i) the Defendants had already received over $740 Million from the capital invested into TMST by the SSN and (ii) the Defendants knew that when the SSN invested their money it was with the expectation that their interest would be paid timely and that a one year standstill was in place.

114. The Defendants continued withholding all of the 80% of interest they previously contracted to turn over to TMST. From December 2008 through March 31, 2009, the

Defendants collectively withheld approximately $161.3 Million of interest (representing TMST‟s

80% share) they were contractually obligated to remit as follows: (i) JPMorgan - $49.9 Million,

(ii) Credit Suisse (CSSU/CSI) - $19.7 Million, (iii) UBS - $9.9 Million, (iv) RBS (RBS

Securities/GCD/RBS PLC - $55.0 Million and (v) Citi - $26.6 Million.

Continued Domination and Control Over the Debtors

115. At all time relevant hereto, the Defendants effectively exerted control over the

Debtors‟ business decisions, as evidenced, by among other things, (i) compelling the $1 Billion capital raise used to satisfy margin calls made in breach of repurchase agreement and using $524

Million thereof to satisfy those margin calls, (ii) taking TMST‟s P&I, (iii) extracting $219

Million and thereafter $72 Million from the Liquidity Fund, (iv) preventing the payment of interest to the SSN and the consummation of a consensual restructuring, leaving the Debtors no choice but to commence a freefall bankruptcy after the Defendants liquidated their collateral, and

(v) extracting onerous releases.

116. By the end of August 2008, the Defendants‟ methodical strangulation of the

Debtors left the Debtors with barely enough working capital to survive. First, the Defendants made improper price margin calls. Second, the Defendants used more than $524 Million from the capital raise to satisfy questionable margin calls. Third, the Defendants compelled the

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payment of $219 Million from the Liquidity Fund, even though they were in breach of the

Override Agreement. Fourth, Defendants took principal and interest payments to which they were not entitled.

117. The Debtors, who had ceased origination operations, instead had became dependent on the monthly interest payments misappropriated by the Defendants. However, without access to the Liquidity Fund, the Defendants‟ cash flow was not sufficient to satisfy their operating expenses.

118. The Defendants also prevented TMST from accessing the Liquidity Fund to make the first interest payment due to the SSN. The SSN understood they were now powerless to demand payment from TMST, and instead in late September they were forced to accept $102

Million in additional promissory notes (“PIK Notes”) in lieu of the cash payment they were entitled to. This further drove up TMST‟s interests costs and lessened any chance of restructuring its business.

119. The Defendants acted in concert to take the Debtors‟ liquidity and cash flow causing the Debtors further uncertainty about their survival. For instance, in late September

2008, Citi demanded to review 23 separate categories of books and records of TMST, including those related to transactions with the other Defendants. When Credit Suisse and RBS learned of this demand, they advised TMST that they did not consent to TMST sharing any documents concerning its agreements with them.

120. Not to be outdone by its own antics, Citi put TMST on notice of TMST‟s alleged failure to maintain the Liquidity Fund at the required $350 Million level because it had paid out

$219 Million to the Defendants, notwithstanding their agreement in the Override Agreement that

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Liquidity Account funds used to satisfy haircut adjustments would be deemed to remain in the account for the purpose of satisfying the minimum required amount of the Liquidity Fund.

121. In order to keep up its unrelenting pressure, Citi, in mid-October made a new margin call upon TMST in the amount of $106.3 Million for haircut and price, even though they were fully aware that TMST lacked the ability to make that payment and could not access the remaining amounts in the Liquidity Fund solely for Citi.

122. Against this continuing uncertainty and pressure, and the spoken and unspoken threat by the Defendants to liquidate their positions, the Debtors renewed their discussions with the Defendants. In these discussions the balance of power was entirely one sided, in favor of the

Defendants.

123. The Debtors knew full well by October 2008 that their only hope of avoiding annihilation in their weakened state at the hand of the Defendants (and as a result of the

Defendant‟s actions) was, at a minimum, to surrender and yield to the Defendants unlawful retention and seizure of the monthly interest collections and to turn over the remaining amounts in the Liquidity Fund, which as of October 1, 2008 was approximately $113.5 Million.

124. Thus, with no other choice but to capitulate, in mid-October, TMST could no longer refuse to allow the Defendants to keep 100% of the P&I and the remainder of the

Liquidity Fund, even though the Defendants were not entitled to those funds under the Override

Agreement or otherwise. Paradoxically, (i) TMST was not in default under any of the repurchase transactions as amended by the Override Agreement, (ii) no event of Override

Termination Event existed, (iii) the Defendants were withholding all interest in violation of the

Override Agreement and (iv) the Defendants still kept the threat of liquidation over the head of the Debtors. The Debtors, however, had no other choice.

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125. Over the next few weeks, with JPMorgan leading the negotiations on behalf of the

Defendants, TMST provided the Defendants with detailed forecasts of the cash the Debtors required to keep alive. At this point, the Defendants, as they had seized complete control over the Debtors‟ only sources of cash (i.e. the Liquidity Fund and the P&I). The Defendants formally and overtly acknowledged their control over the Debtors by demanding that “the company should be operating on a bare bones basis.” Finally, to appease the Defendants, TMST agreed to reduce its proposed cash request by approximately one-half - to the bare bones minimum needed to survive until March 2009. TMST understood that the proposed budget would make it difficult to function, but as TMST‟s President advised the Defendant‟s counsel, he would live with that tight budget in return for being able to operate “without the daily threat of liquidation.”

126. During the period, TMST once again became concerned about the upcoming interest payment due to the holders of certain 8% Senior Secured Notes previously issued by

TMST. The Senior Notes were secured by all assets of the Debtors that had not been pledged to the Defendants under the Override Agreement. TMST did not have sufficient liquidity (outside of the Liquidity Fund) to make the approximately $12 Million in interest payments due to the

Senior Notes holders on November 15, 2008. TMST was alarmed that a failure to timely make this interest payment would constitute an event of default, which in turn could trigger cross- defaults of other obligations. This would further erode any remaining hope that TMST had to survive. Thus, TMST was desperate to cut any deal with the Defendants and free up cash from the Liquidity Fund to make this interest payment, something that the Defendants were fully aware of.

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127. In their discussions with the Debtors, the Defendants recognized that their willful breaches and other wrongful conduct were actionable and left them exposed to litigation. Thus, using their economic leverage against the weakened Debtors, the Defendants required a general release of claims before they would stand down and agree to amend the Override Agreement.

128. During the third week of November 2008 (three days after the Senior Note interest payment was due, but before a thirty day default grace period expired), the Defendants crafted a proposed draft of an amended Override Agreement. The Defendants‟ proposal modified the Override Agreement in several material ways, including (i) allowing the

Defendants to retain 100% of all P&I collected, (ii) requiring that the Defendants immediately receive aggregate payments of approximately $72.3 Million from the Liquidity Fund, (iii) allowing that the remaining $41.1 Million in the Liquidity Fund could be used to pay the Senior

Note interest payment and the Debtors‟ operating expenses, provided however, the Debtors could not withdraw in any month more than was needed to fund its operating expenses pursuant to a fixed budget as previously approved by the Defendants and (iv) granting the Defendants a release of claims. In return for these conditions, the Defendants agreed they would provide a three month standstill from further margin calls.

129. During the next several weeks the parties continued to discuss the final terms of the amended Override Agreement. The final sign off on the amended Override Agreement was delayed while several Defendants extracted final concessions from the Debtors (e.g. CSI required that TMST and TMHS agree to an auction swap termination agreement). During that time,

TMST reminded counsel for the Defendants that the default clock was „ticking” on the Senior

Note grace period.

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130. Finally on December 12, 2008, TMST, TMHL, TMHS and the Defendants executed an Amended and Restated Override Agreement (the “AOA”). The Defendants‟ unlawful and wrongful acts and threats coupled with the financial distress and pressure caused by the Defendants precluded the Debtors from acting in furtherance of their own interests and exercising free will in deciding whether to enter into the AOA, including granting certain releases. As a result of the Defendants‟ acts and threats, the Debtors involuntarily acceded to the

Defendants‟ demand to enter into the AOA and grant the releases therein.

131. Under the AOA, the maturity or repurchase date of the repurchase agreements remained March 16, 2009. However as noted above, the AOA (i) provided for a complete standstill of margin calls, (ii) authorized the Defendants to retain 100% of all P&I collection, (iii) authorized the Defendants to immediately receive aggregate payments of approximately $72.3

Million from the Liquidity Fund, (iv) allowed the Liquidity Fund to be used to pay the Senior

Note interest payment and (v) doled out the balance of the Liquidity Fund over time to meet

TMST‟s bare bones operating expenses.

132. As with the Override Agreement, the AOA provided that the terms of the respective Financing Agreements remain in full force and effect, except as “overridden, suspended or superseded hereby”. Thus, the repurchase date of each repurchase agreement continued to be later than one year after such transfer of the MBS to the Defendants pursuant to the repurchase transactions.

133. The AOA modified the existing terms of the MRAs and ISDA Master

Agreements to the detriment of TMST, TMHS and TMHL by stripping all of their remaining economic benefits under those agreements. The AOA did not provide for entry into any new repurchase transactions, securities sale or lending transactions, or swap transactions. Nor would

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the AOA be recognized as a swap agreement in the securities industry. The AOA did not possess a proximate, temporal nexus to any repurchase transactions, swap transactions or securities transactions, and thus the AOA is not a security agreement or credit enhancement related to a repurchase agreement, swap agreement or securities contract.

134. By entering into the AOA, which provided that the Defendants could retain all

P&I from the MBS which otherwise should have been paid to TMST, the Defendants divested the transactions under the MRAs of the remaining key indicia of a repurchase agreement.

135. Additionally, under the AOA, the Defendants were granted a release (“AOA

Release”) of certain claims by the Debtors. Using boiler plate language similar to the language of the Override Agreement, the AOA also purported to affirm and ratify all obligations and liabilities to the Defendants (the “AOA Ratification”). By its express terms, the AOA

Ratification did not waive any claims the Debtors had against the Defendants for their actions, including their repeated breach of the Override Agreement.

136. The $72.3 Million from the Liquidity Fund was distributed as follows: (i)

JPMorgan - $7.6 Million, (ii) Credit Suisse (CSSU/CSI - $6.9 Million, (iii) UBS - $6.8 Million,

(iv) RBS (RBS Securities/GCD/RBS PLC) - $11.0Million and (v) Citi - $39.9 Million.

137. Obtaining the AOA Release was nothing less than an act of larceny perpetrated by the Defendants and was accomplished by means of flagrant economic control, coercive conduct and threats, leaving the Debtors with no choice but to consent to the Defendants‟ wishes.

138. Under the AOA, the Defendants (i) continued keeping 100% of all P&I (including

80% of interest) that they were not entitled to take in the first place and (ii) received $72.3

Million from the Liquidity Fund (leaving the Debtors only the remaining portion to live on), which was the Debtors‟ property in the first instance. Thus, over the three month life of the

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AOA, the Defendants were to receive over $233 Million in additional funds (plus the release of valuable claims against the Defendants).

139. The Debtors did not receive reasonably equivalent value in exchange for granting the AOA Release and AOA Ratification (collectively, the “First Release”).

140. The First Release was not granted in the MRAs or ISDA Master Agreements themselves. The First Release itself did not provide for entry into any new repurchase transactions, securities sale or lending transactions, or swap transactions. The First Release is separate from, does not provide for and does not constitute a part of any repurchase transactions, securities transactions, or swap transactions or any legitimate credit support for such transactions, and thus the First Release is not a security agreement or credit enhancement related to a repurchase agreement, swap agreement or securities contract. Additionally, the First Release is not a payment or monetary transfer made in connection with a securities contract, repurchase agreement or swap agreement; nor is the First Release a margin payment or settlement payment used within the industry to settle legitimate trading obligations.

141. At the time the Debtors entered into the AOA, the Defendants were in a position to dominate or control the Debtors‟ disposition of their property. The Defendants caused the

Debtors to enter into the AOA and grant the First Release for the benefit of the Defendants with the actual intent to hinder, delay, or defraud the Debtors‟ creditors, to the detriment and harm of such creditors.

Events Leading Up To the Debtors’ Bankruptcy Filings

142. After the execution of the AOA, the Debtors were forced to subsist primarily on the meager amounts that TMST could withdraw from the Liquidity Fund and the servicing income that TMHL still received.

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143. In early February, the Debtors and the Defendants began discussing proposals to deal with the fast approaching March 16, 2009 termination of the AOA and the maturity dates of the repurchase agreements and other transactions governed by it. The Debtors provided the

Defendants with their long term restructuring plan which involved, among other things, the transfer of the financed MBS and TMHL‟s servicing business into a federally chartered bank that

TMST would acquire or form de novo, a restructuring of the Debtors‟ capital structure and the refinancing of portions of the MBS by the FHLB. The Debtors also requested that the maturity date of the AOA be extended 90 days, until June 15, 2009, to allow the Debtors sufficient time to accomplish their restructuring plans, as well as further pay down the Defendants based upon their continued collection of P&I.

144. In conjunction with that proposal, the Debtors began discussions with representatives of the Junior and Senior Subordinated Noteholders concerning a conversion of their respective debt obligations to equity. Those two creditor bodies responded with a willingness to convert their respective debt obligations to equity.

145. During the first week of March, the Debtors and MP engaged the Defendants in face to face meetings during which the Debtors provided the Defendants with an update on the progress of their restructuring plans. During those meetings the Debtors once again asked for an extension of the maturity date of the AOA.

146. Notwithstanding the progress the Debtors had made toward implementing a global restructuring plan that preserved substantial value and contemplated full recoveries, not only for the Defendants, but over $1.6 billion in other creditor claims, on March 6, 2009, Citi sent the Debtors a letter stating that it did not intend to extend the maturity date of its loans past

March 16, 2009 and that it would exercise its rights and remedies upon termination of the AOA.

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Citi further indicated that it would sell its collateral in the open market and thereafter pursue its deficiency claims.

147. At about the same time, UBS also informed the Debtors that they would not extend the maturity date of its loans past March 16, 2009. Rather, UBS stated that it wanted to retain the MBS it financed and sell the MBS into a Swiss government financing facility by the end of March 2009.

148. The Debtors were also concerned that an exercise of remedies by Citi (or any of the Defendants) would constitute an Event of Default under, among other things, the Senior

Notes, finally scuttling any hope that remained for a consensual reorganization they still thought possible.

149. On March 10, 2009, the Debtors presented Citi and UBS with proposed forbearance agreements calling for a standstill from the exercise of certain remedies until June

30, 2009. Those proposed agreements were also conditioned upon the execution of forbearance agreements with the other Defendants. Both Citi and UBS understood the leverage they now held, because in the absence of an acceptable forbearance agreement with either of them, the remaining Defendants would not forbear from liquidating their respective collateral. Similarly the other Defendants understood the leverage they held. Over the next several days the Debtors conducted negotiations with each of the Defendants in order to finalize forbearance agreements with them.

150. UBS, fully understanding its ability to demand TMST‟s compliance with its wishes, told TMST that it would not agree to a complete forbearance; rather TMST could either agree to “consensually” allow UBS to retain its collateralized MBS for an agreed upon credit of

$405 million (leaving TMST with an $86.6 million deficiency) or it would sieze the

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collateralized MBS in accordance with its MRA at a potentially much lower price (thereby leaving TMST with an even greater deficiency). To emphasize its dominion and control over

TMST, one of UBS‟s senior officers stated in an email:

..UBS will either conclude a consensual unwind with Thornburg or it will have the market value established in accordance with the provisions of the MRA as early as Tuesday March 17 but in any case sometime during the coming week. If a consensual agreement cannot be reached in a timely manner, UBS will exercise its remedies by setting the value of the securities in accordance with the terms of the MRA. To be clear, we are not asserting that our offer of $405 million is market value, but rather a level at which we would terminate the transactions by mutual consent. The default market established under the MRA may be more or less than that, depending on the result of the auction. We would like to continue discussions with your concerning a possible consensual unwind, but on the basis of the foregoing...

151. In internal discussions, representatives of TMST remarked that the price UBS established was $100 million below TMST‟s “mark” (i.e. price) for the MBS that UBS was financing.

152. With no choice but to capitulate and acknowledging that $405 Million price was not negotiable, on March 16, 2009, TMST entered into an agreement with UBS that UBS styled as a “Termination and Purchase Agreement” (the “TPA”). Under the TPA, TMST purportedly sold the MBS that UBS financed to UBS for $405 million and agreed to a deficiency claim of

$86.6 million. However, the TPA was, in substance, an unwind of the UBS financing transaction. Knowing that a bankruptcy filing by TMST was likely, the reference to a sale in the

TPA was an illusion UBS created in an attempt to insulate their wrongful conduct with the “safe harbor” protections of the Bankruptcy Code. In fact, if the UBS financing agreement with

TMST was a repurchase agreement, they already owned the MBS and TMST had nothing to sell.

Conversely, if TMST owned the MBS, the transactions were not repurchase agreements, but

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normal financing transactions (as at least one Defendant had already concluded), and they were not entitled to rely upon the Bankruptcy Code‟s “safe harbor” provisions.

153. Contained within the TPA was a limited release by TMST of claims against

UBS. UBS and TMST simultaneously entered into a forbearance agreement under which UBS agreed that TMST had until March 31, 2009 to pay the $86.6 million deficiency.

154. Citi was also able to use its leverage and control over the Debtors to extract a forbearance agreement that gave it everything it wanted and provided the Debtors with nothing in return. After Citi announced its intention to exercise remedies, MP (with TMST‟s knowledge) contacted Citi to discuss the possibility of MP buying the Citi financed MBS and thereafter financing that purchase through a separate repurchase transaction with CSSU.

155. The discussions with MP did not culminate in a consensual transaction. Rather,

Citi advised TMST that it would forbear from pursuing a full exercise of its remedies (e.g. demand a foreclosure on those portions of TMHL‟s servicing rights pledged under the Override

Agreement), if TMST “consensually” agreed to an unwind transaction. The consensual deal that

Citi required meant that TMST would have to agree to a price of $626.4 Million for the MBS

(that Citi would retain) leaving TMST with a deficiency of approximately $376 Million. In response, on March 15, 2009, TMST advised Citi that its prices were 50% of the December marks for the same MBS. Internally, TMST‟s officers categorized Citi‟s pricing as “poor to ridiculous.” In fact several days earlier TMST determined that the value of the MBS that Citi financed was approximately $1.0 Billion as of the end February 2009. Furthermore the MBS were throwing off P&I of between $22 and $29 Million a month.

156. TMST advised Citi that it preferred that the MBS be sold the next day through a

“BWIC” (bid while in competition) with reserves. Under the BWIC approach the true market

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value of the MBS would have been determined and the deficiency claim against TMST would have been significantly lower, if not eliminated. However, TMST also knew that it had no leverage with Citi and that if it did not obtain a forbearance from Citi that day, the Debtors would likely be put out of business by the close of business the next day.

157. Citi ignored TMST‟s proposal. Rather it chose a predatory path where it could retain the MBS for its own inventory (and its ongoing cash flow) at a “poor to ridiculous” price and still assert a large deficiency claim against TMST. With no choice but to agree to Citi‟s proposal, on March 16, 2009, TMST, TMHL, TMHS and Citi entered into the Citi dictated forbearance agreement. In the forbearance agreement, Citi ignored the BWIC proposal and instead recited that the most reasonable way to obtain market values for the MBS “in light of existing market conditions is by mutual consent.”

158. Under Citi‟s forbearance agreement, TMST, TMHL and TMHS agreed that they were indebted to Citi for $1.02 billion and that Citi could retain the MBS it financed for a credit of $626.4 million (leaving a deficiency in the approximate amount of $394 million). Citi also required that TMST, TMHL and TMHS grant it a release of claims. The price Citi chose for the

MBS was not based on a value derived from a reputable pricing information service and was substantially lower with respect to those MBS for which it provided indicative pricing to MP just days earlier.

159. On March 16, 2009, TMST, TMHL and TMHS also entered into a joint forbearance agreement with RBS, Credit Suisse, and JPMorgan (collectively, the UBS

Termination and Purchase Agreement, the Citi Forbearance Agreement and the joint RBS, Credit

Suisse and JPMorgan Forbearance Agreement, the “March Forbearance Agreements”).

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160. The Debtors continued to labor under the same duress caused by the Defendants from the Override Agreement period forward because the Defendants‟ wrongful acts and threats continued to starve the Debtors of all liquidity, threatened the Debtors with extinction and effectively forced the Debtors to wind down their operation solely under the domination of and subject to the direction and control of the Defendants.

161. Faced with this continuing scenario, the Debtors involuntarily acceded to each of the Defendants‟ demands to enter into the March Forbearance Agreements.

162. The March Forbearance Agreements did not provide for entry into any new repurchase transactions, securities sale or lending transactions, or swap transactions. The March

Forbearance Agreements did not possess a proximate, temporal nexus to any repurchase transactions, swap transactions or securities transactions, and thus the March Forbearance

Agreements are not a security agreement or credit enhancement related to a repurchase agreement, swap agreement or securities contract.

163. By entering into their joint Forbearance Agreement, RBS, Credit Suisse, and

JPMorgan extended the applicable repurchase date, settlement date, maturity date or any specified date of like meaning for repurchase transactions subject to the MRAs by an additional

15 days (for a total of 379 days), to a date later than one year after such transfer of the specific

MBS to the Defendants.

164. In Section 12 of the joint Forbearance Agreement with RBS, Credit Suisse and

JPMorgan, TMST, TMHL and TMHS granted releases of certain claims in favor of RBS, Credit

Suisse, JPMorgan and their affiliates and subsidiaries.

165. In Section 14 of the Forbearance Agreement with Citi, TMST, TMHL and TMHS granted releases of certain claims in favor of Citi and its affiliates and subsidiaries. In Section 2

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of the TPA with UBS, TMST [but not others] granted releases of certain claims (the releases referred to herein are collectively referred to as “Second Releases”).

166. The Second Releases were not granted in the MRAs or ISDA Master Agreements themselves. The Second Releases did not provide for entry into any new repurchase transactions, securities sale or lending transactions, or swap transactions. The Second Releases were separate from, did not provide for and did not constitute a part of any repurchase transactions, securities transactions, or swap transactions or any legitimate credit support for such transactions, and thus the Second Releases are not a security agreement or credit enhancement related to a repurchase agreement, swap agreement or securities contract.

Additionally, the Second Releases were not a payment or monetary transfer made in connection with a securities contract, repurchase agreement or swap agreement; nor are the Second Releases a margin payment or settlement payment used within the industry to settle legitimate trading obligations.

167. No later than the last week of March, 2009, Credit Suisse, JPMorgan and RBS each advised the Debtors that they wanted to terminate their repurchase and other financing agreements with the Debtors and exercise their respective remedies with respect to the collateral pledged to them thereunder. As a result the Debtors formally determined that they would be filing Chapter 11 bankruptcy cases, and in conjunction with that decision the Debtors made a public disclosure of that decision.

168. On March 31, 2009, RBS, Credit Suisse, and JPMorgan and TMST, TMHS and

TMHL entered into a joint Amendment No. 1 to Forbearance Agreement (the “Joint Amended

Forbearance Agreement”). Under the terms of the Joint Amended Forbearance Agreement, RBS,

Credit Suisse, and JPMorgan agreed not to assert any deficiency claims against TMST, TMHS

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and TMHL until April 30, 2009, although they were granted the right to otherwise exercise their contractual remedies with respect to collateral pledged by TMST.

169. The Joint Amended Forbearance Agreement further provides that in lieu of selling the MBS and other pledged collateral, RBS, Credit Suisse, and JPMorgan could retain such MBS and other pledged collateral. In such event, RBS Credit Suisse, and JPMorgan were required to follow the collateral liquidation provisions of Section 11 of their respective MRAs, but the value they credited back to the Debtors had to be based upon the highest bid they received for such

MBS and other pledged collateral.

170. On March 31, 2009, TMST, TMHS and TMHL also entered into agreements with

Citi and UBS extending the dates of their respective forbearance agreements. Those agreements primarily provided that Citi and UBS would not seek to enforce deficiency claims against the

Debtors until April 30, 2009.

Liquidation by the Defendants

171. JPMorgan, Citi, UBS and RBS PLC (c/o RBS Securities) filed Proofs of Claim in the bankruptcy case against TMST for deficiency amounts allegedly due under their respective

MRAs following liquidation, as follows: (i) JPMorgan - $386,089,684.00; (ii) Citi -

$395,379,870.29; (iii) UBS - $86,652,501.00; (iv) RBS PLC - $295,425,649.63. In addition,

CSSU filed Proofs of Claim in the bankruptcy case against TMST, TMHL and TMHS for deficiency amounts allegedly due under its respective MRA following liquidation in the amount of $117,472,485.47. RBS Securities (f/k/a Greenwich Capital Markets Inc.) did not file a proof of claim with respect to its MRA. The total amount of MRA deficiency claims exceeds $1.279

Billion.

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172. RBS PLC (c/o RBS Securities) and GCD (c/o RBS Securities) have filed Proofs of Claim in the bankruptcy case against TMHS and TMST for amounts allegedly due and owing for the Back-End Auction Swaps, as follows: (i) RBS PLC - $372,256,546.36 (for Trusts 2006-1 and 2007-3); and (ii) GCD - $161,313,467.63 (for Trust 2005-4). CSI has filed Proofs of Claim in the bankruptcy case against TMHS, TMST and TMHL for amounts allegedly due for the

Back-End Auction Swaps in the gross amount of $1,094,903,690, minus application of

$314,602,437 of cash collateral and $6,463,383 of credit for residual whole loans seized from the

CSM warehouse facility, for a net claim of $773,837,870.00 (for Trusts 2006-2, 2006-3, Zuni

2006-OA1, 2006-4, 2006-5, 2006-6, 2007-1, and 2007-2). The total amount of the Back-End

Auction Swap claims exceeds $1.306 Billion.

173. The $86,652,501.00 deficiency amount that UBS asserts in its Proof of Claim is expressly based upon the TPA that it extracted from TMST. As UBS acknowledged when it pressured TMST to enter into the TPA, the price it credited TMST for the MBS it retained was not intended to be, nor was it, the market value for such MBS. In violation of its MRA with

TMST, the price UBS set for the MBS was not obtained from a sale of the MBS in a commercially reasonable manner, nor was it based on a price obtained from a generally recognized source or the most recent closing bid quotation from such source. Furthermore, as described above, TMST believed that the price UBS established was $100 million below

TMST‟s “mark” for the MBS. Accordingly, UBS did not liquidate the MBS it financed in a commercially reasonable manner, did not give TMST credit for the MBS in an amount equal to the price thereof, did not comply with industry standards with respect to the sale of MBS and otherwise did not comply with its MRA.

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174. Citi‟s deficiency claim of $395,379,870.29 was based upon its March 16, 2009

Forbearance Agreement. When TMST agreed to the price that Citi dictated for the MBS it financed and retained, TMST, TMHL and TMHS were still laboring under the dominion and control that Citi was exerting and were unable to freely negotiate a price that was indicative of true market value. Indeed, TMST‟s own pricing at that time was approximately $370 Million higher than the price it was forced to “consensually” agree to. Accordingly, Citi did not liquidate the MBS it financed in a commercially reasonable manner, did not give TMST credit for the

MBS in an amount equal to the best available offer thereof, did not give credit for such MBS at market value, did not comply with industry standards with respect to the sale of MBS, and otherwise did not comply with its repurchase agreement.

175. By letter dated April 24, 2009, CSSU stated that it set April 6, 2009 as the

“Repurchase Date” of its repurchase agreements under the terms of the Joint Amended

Forbearance Agreement. By subsequent letter dated June 5, 2009, CSSU stated the “total proceeds of sale and credit amount” for the MBS it financed and liquidated was

$416,712,904.16. Therefore, as set forth in its Proof of Claim, it asserts a deficiency claim of

$117,472,485.47. The CSSU letters provide no detail as to which individual MBS it retained or sold to third parties. Thus, on the face of the letters and Proof of Claim, it cannot be determined if CSSU (i) sold any individual MBS to an unaffiliated third party in a recognized market or otherwise in a commercially reasonable manner, (ii) gave the Debtors credit for the MBS it retained based upon the highest bid it obtained for such MBS, or (iii) otherwise complied with the terms of its MRA and the Amended Forbearance Agreement. However, TMST‟s own pricing indicated that the value of all of the MBS financed and liquidated by CSSU was approximately $535.9 million at or about the Repurchase Date. Thus, it appears that the amount

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CSSU credited to TMST was understated by at least $119 million. Accordingly, any deficiency claim of CSSU must be reduced by at least $119 million.

176. By letter dated April 28, 2009, JPMorgan stated that it had exercised it remedies under its MRA with TMST. In its Proof of Claim, JPMorgan stated that it set April 1, 2009 as the “Repurchase Date” of its repurchase agreements under the terms of the Joint Amended

Forbearance Agreement. The April 28, 2009 letter further states that the “MV” (presumably market value) of the MBS it financed and liquidated as of April 1, 2009 was in the aggregate amount of $520.6 Million, which together with other securities it liquidated and excess cash resulted in an aggregate credit of $546.3 Million; thereby leaving a deficiency claim against

TMST of $386.1 Million. On the face of the April 28, 2009 letter and the JPMorgan Proof of

Claim, it cannot be determined if JPMorgan (i) sold any individual MBS to an unaffiliated third party in a recognized market or otherwise in a commercially reasonable manner, (ii) gave the

Debtors credit for the MBS it retained based upon the highest bid it obtained for such MBS, or

(iii) otherwise complied with the terms of its MRA and the Amended Forbearance Agreement.

However, TMST‟s own pricing indicated that the value of all of the MBS financed and liquidated by JPMorgan was approximately $720.4 million at or about the Repurchase Date.

Thus, it appears that the amount JPMorgan credited to TMST was understated by at least $199.8 million. Accordingly, any deficiency claim of JPMorgan must be reduced by at least $199.8

Million.

177. By email dated April 28, 2009, RBS indicated to TMST that on three dates in

April 2009, it engaged in “sales of securities” from which it obtained sale proceeds in the approximate aggregate amount of $789.8 Million. In its subsequent Proof of Claim, RBS asserted a deficiency of $295,350,118.23. Neither the email or the Proof of Claim provides any

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further detail as to whether RBS (i) sold any individual MBS to an unaffiliated third party in a recognized market or otherwise in a commercially reasonable manner, (ii) gave the Debtors credit for the MBS it retained based upon the highest bid it obtained for such MBS, or (iii) otherwise complied with the terms of its MRA and the Amended Forbearance Agreement.

However, based upon information that TMST obtained from reputable pricing information services, the value of all of the MBS financed and liquidated by RBS was approximately $1.04

Billion at or about the Repurchase Date. Thus, it appears that the amount RBS credited to TMST was understated by at least $247.7 Million. Accordingly, any deficiency claim of RBS must be reduced by at least $247.7 Million.

Count 1 Avoidance of the Override Agreement as Constructively Fraudulent Under Section 548 of the Bankruptcy Code

178. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

179. Within two (2) years of the Petition Date, TMST and TMHS entered into the

Override Agreement (and two amendments thereto prior to the AOA) with the Defendants.

180. Entry into the Override Agreement was an obligation incurred by TMST and

TMHS to or for the benefit of the Defendants.

181. The Debtors received less than reasonably equivalent value in exchange for their entry into the Override Agreement.

182. When TMST and TMHS entered into the Override Agreement, the Debtors were insolvent or became insolvent as a result of the incurrence of obligations; were engaged in business or transactions or were about to engage in business or transactions for which their

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remaining property was unreasonably small capital; and/or intended to incur, or believed that they would incur, debts that would be beyond their ability to pay as such debts matured.

183. The Override Agreement between TMST and TMHS and the Defendants is not a

“repurchase agreement”, “swap agreement” or “securities contract” under Sections 101(47),

101(53B) and 741(7) of the Bankruptcy Code.

184. The safe harbor provisions of the Bankruptcy Code, including, but not limited to

Section 546 of the Bankruptcy Code, do not apply to the Override Agreement.

185. At the time the Debtors entered into the Override Agreement, the Debtors were insolvent as that term is defined in Section 101(32) of the Bankruptcy Code.

186. The Override Agreement is avoidable under Section 548(a)(1)(B) of the

Bankruptcy Code.

Count 2 Avoidance of the Transfers Made Under the Override Agreement as Constructively Fraudulent Under Sections 548 and 550 of the Bankruptcy Code

187. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

188. Within two (2) years of the Petition Date, TMST and TMHS entered into the

Override Agreement (and two amendments thereto prior to the AOA) with the Defendants and made various transfers to Defendants under that agreement, as follows:

transfer totaling $524.5 million made on March 31, 2008 to the Defendants as follows: (i) UBS-$19.149 Million, (ii) Credit Suisse (CSSU/CSI)--$107.586 Million, (iii) JP Morgan-$88.0 Million, (iv) RBS (RBS Securities/ GCD/RBS PLC)-$146.08 Million and (v) Citi-$163.7 Million.

P&I payments in the aggregate amount of $815.4 Million made to the Defendants as follows: (i) UBS - $109.9 Million, (ii) Credit Suisse (CSSU/CSI) - $110.8 Million, (iii) JP Morgan - $167.6 Million, (iv) RBS (RBS Securities/ GCD/RBS PLC) - $186.7 Million and (v) Citi - $240.4 Million.

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Transfers paid to the Defendants for purported haircuts in the aggregate approximate amount of $219 Million from the Liquidity Fund, as follows: (i) Citi-$97.59 Million, (ii) Credit Suisse-$24.6 Million, (iii) RBS (RBS Securities/GCD/RBS PLC)-$44.1 Million, (iv) JPMorgan-$34.3 Million and (v) UBS-418.47 Million. (collectively, the "Override Agreement Transfers")

189. The Override Agreement Transfers were made by the Debtors for the benefit of the Defendants.

190. The Debtors received less than reasonably equivalent value in exchange for the

Override Agreement Transfers.

191. When the Debtors made the Override Agreement Transfers, the Debtors were insolvent or became insolvent as a result of the transfers and/or incurrence of obligations; were engaged in business or transactions or were about to engage in business or transactions for which their remaining property was unreasonably small capital; and/or intended to incur, or believed that they would incur, debts that would be beyond their ability to pay as such debts matured.

192. The Override Agreement between TMST and TMHS and the Defendants, or transfers made under the Override Agreement, are not “repurchase agreements”, “swap agreements” or “securities contracts” under Sections 101(47), 101(53B) and 741(7) of the

Bankruptcy Code.

193. The safe harbor provisions of the Bankruptcy Code, including, but not limited to

Section 546 of the Bankruptcy Code, do not apply to the Override Agreement, or to the Override

Agreement Transfers.

194. The Override Agreement Transfers constituted a transfer of interests in property of the Debtors.

195. The Override Agreement Transfers are avoidable under Sections 548(a)(1)(B) and

550 of the Bankruptcy Code. 57

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Count 3 Avoidance of the Override Agreement as Constructively Fraudulent Under Section 544 And Applicable State Law

196. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

197. Pursuant to Section 544(b) of the Bankruptcy Code, the Trustee has the rights of an existing unsecured creditor. Section 544(b) permits the Trustee to assert claims and causes of action that such a creditor could assert under applicable state law.

198. Prior to the Petition Date, TMST and TMHS entered into the Override Agreement

(and two amendments thereto prior to the AOA) with the Defendants.

199. Entry into the Override Agreement was an obligation incurred by the Debtors to or for the benefit of the Defendants.

200. The Debtors received less than reasonably equivalent value, fair consideration or a fair equivalent in exchange for their entry into the Override Agreement.

201. When TMST and TMHS entered into Override Agreement, the Debtors were insolvent or became insolvent as a result of the transfers and/or incurrence of obligations; were engaged in business or transactions or were about to engage in business or transactions for which their remaining property was unreasonably small capital; and/or intended to incur, or believed that they would incur, debts that would be beyond their ability to pay as such debts matured.

202. The Override Agreement between TMST and TMHS and the Defendants is not a

“repurchase agreement”, “swap agreement” or “securities contract” under Sections 101(47),

101(53B) and 741(7) of the Bankruptcy Code.

203. The safe harbor provisions of the Bankruptcy Code, including but not limited to

Section 546 of the Bankruptcy Code, do not apply to the Override Agreement.

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204. A creditor of the Debtors exists that could avoid the Override Agreement under applicable non-bankruptcy law.

205. The Override Agreement is avoidable under Section 544 of the Bankruptcy Code and applicable state law.

Count 4 Avoidance of the Transfers under Override Agreement as Constructively Fraudulent Under Sections 544 and 550 and Applicable State Law

206. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

207. Pursuant to Section 544(b) of the Bankruptcy Code, the Trustee has the rights of an existing unsecured creditor. Section 544(b) permits the Trustee to assert claims and causes of action that such a creditor could assert under applicable state law.

208. Before the Petition Date, TMST and TMHS entered into the Override Agreement

(and two amendments thereto prior to the AOA) with the Defendants and made the Override

Agreement Transfers.

209. The Debtors received less than reasonably equivalent value, fair consideration or a fair equivalent in exchange for the Override Agreement Transfers.

210. When the Debtors made the Override Agreement Transfers, the Debtors were insolvent or became insolvent as a result of the transfers and/or incurrence of obligations; were engaged in business or transactions or were about to engage in business or transactions for which their remaining property was unreasonably small capital; and/or intended to incur, or believed that they would incur, debts that would be beyond their ability to pay as such debts matured.

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211. The Override Agreement between the Debtor and the Defendants, or transfers made under the Override Agreement, are not “repurchase agreements”, “swap agreements” or

“securities contracts” under Sections 101(47), 101(53B) and 741(7) of the Bankruptcy Code.

212. The safe harbor provisions of the Bankruptcy Code, including but not limited to

Section 546 of the Bankruptcy Code, do not apply to the Override Agreement, or the Override

Agreement Transfers.

213. A creditor of the Debtors exists that could avoid the Override Agreement

Transfers under applicable non-bankruptcy law.

214. The Override Agreement Transfers constituted a transfer of interests in property of the Debtors.

215. The Override Agreement Transfers are avoidable as fraudulent transfers under sections 544(b) and 550 of the Bankruptcy Code and applicable state law.

Count 5 Breach of the Override Agreement (Failure to Remit Interest)

216. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

217. TMST, TMHS and the Defendants are parties to the Override Agreement.

218. At all relevant times, TMST and TMHS performed their obligations under the

Override Agreement.

219. The Override Agreement required that Defendants act in all instances in good faith in accordance with the implied covenant of good faith and fair dealing.

220. Pursuant to the Override Agreement, the Defendants agreed that they would remit to TMST, within one business day of receipt, 80% of any payments of interest received by the

Defendants with respect to the MBS they financed. The Defendants only had the right to retain 60

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20% of the interest payments with respect to the MBS (increasing to a maximum amount of 30% in certain circumstances) and did not have any legal claim to the remaining 80% of interest payments, which TMST was entitled to, except in the event that a Defendant gave notice of an

Override Termination Event. No notice of an Override Termination Event was ever issued by the Defendants.

221. Beginning in August 2008, Credit Suisse, RBS and Citi intentionally failed to remit any interest payments with respect to the MBS, notwithstanding their promise to negotiate in good faith with TMST to reach the terms of an amendment to the Override Agreement and the fact that under the Override Agreement the Defendants were only entitled to retain 20% of any interest payments.

222. In September 2008, Credit Suisse, RBS, Citi and JPMorgan intentionally failed to remit any interest payments with respect to the MBS, notwithstanding their promise to negotiate in good faith with TMST to reach the terms of an amendment to the Override Agreement and the fact that under the Override Agreement the Defendants were only entitled to retain 20% of any interest payments.

223. During October 2008 and November 2008, all Defendants intentionally failed to remit any interest payments with respect to the MBS, notwithstanding their promise to negotiate in good faith with TMST to reach the terms of an amendment to the Override Agreement and the fact that under the Override Agreement the Defendants were only entitled to retain 20% of any interest payments.

224. For the months of August 2008 through November 2008, the Defendants failed to remit and withheld from TMST 80% of the interest payments received with respect to the MBS in the collective approximate amount of $121.8 Million (representing TMST‟s 80% share) of

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interest they were contractually obligated to remit to TMST; as follows: (i) JPMorgan-

$35.7Million, (ii) Credit Suisse (CSSU/CSI)-$18.7Million, (iii) UBS-$5.0Million, (iv) RBS

(RBS Securities/GCD/RBS PLC)-$35.1Million and (v) Citi-$27.1Million.

225. At the time Defendants improperly withheld these interest payments, they had actual knowledge that TMST and TMHS entered into the Override Agreement expecting to receive, and were dependent upon their receipt of, 80% of the interest payments received with respect to the MBS. Defendants therefore intentionally acted to destroy or injure TMST and

TMHS‟ rights to enjoy and receive the benefits of the Override Agreement, and thereby breached the covenant of good faith and fair dealing underling the Override Agreement.

226. At the time Defendants improperly withheld these interest payments, they also knew that TMST was relying on the remittance of the 80% of interest payments to, among other things, its debt service to the SSN issued under the March 2008 capital raise and to finance day- to-day operations and (ii) by seizing 100% of all P&I they were extinguishing the Debtors‟ liquidity and cash flow and effectively putting the Debtors out of business. Defendants nonetheless improperly withheld interest payments.

227. As a result of the foregoing, the Defendants materially breached the Override

Agreement and caused damage to TMST and TMHS by failing to remit all interest payments to which TMST was entitled in the aggregate amount of $121.8 Million, as set forth herein, plus costs and attorneys‟ fees.

Count 6 Avoidance of the Amended Override Agreement as Actually Fraudulent Under Section 548 of the Bankruptcy Code

228. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

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229. Within two (2) years of the Petition Date, TMST, TMHS and TMHL entered into the AOA with the Defendants.

230. Entry into the AOA was an obligation incurred by the Debtors to or for the benefit of the Defendants.

231. Entry into the AOA was made with an actual intent to hinder, delay and/or defraud Debtors‟ creditors, to the detriment and harm of such creditors. Such intent can be inferred from the traditional badges of fraud surrounding TMST‟s, TMHS‟ and TMHL‟s entry into the AOA. At the time the Defendants forced TMST, TMHS and TMHL to enter into the

AOA, the Defendants were in a position to dominate or control the Debtors‟ disposition of their property solely for the benefit of the Defendants and to the detriment and harm of the Debtors‟ creditors, the Defendants were aware of the substantial claims of the Debtors‟ creditors and the

Debtors inability to pay such claims as a result of the Defendants‟ actions, Debtors were insolvent and/or undercapitalized, the relevant markets were undergoing a temporary dislocation,

Defendants made improper margin calls on the Debtors in breach of the repurchase agreements and Override Agreement, Defendants improperly withheld interest under the Override

Agreement, the Defendants improperly barred the Debtors from accessing the Liquidity Fund to pay the interest due on the SSN and to fund ordinary business expenses and the Debtors received inadequate consideration in exchange for the obligations they incurred under the Override

Agreement or AOA.

232. As a result of Debtors‟ entry into the AOA, Debtors and their creditors have been harmed.

233. A creditor of the Debtors exists that could avoid the AOA under applicable non- bankruptcy law.

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234. The AOA is avoidable under Section 548(a)(1)(A) of the Bankruptcy Code.

Count 7 Avoidance of the Amended Override Agreement as Constructively Fraudulent Under Section 548 of the Bankruptcy Code

235. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

236. Within two (2) years of the Petition Date, TMST, TMHS and TMHL entered into the AOA with the Defendants.

237. Entry into the AOA was an obligation incurred by TMST, TMHS and TMHL to or for the benefit of the Defendants.

238. The Debtors received less than reasonably equivalent value in exchange for

TMST‟s, TMHS‟s and TMHL‟s entry into the AOA.

239. When TMST, TMHS and TMHL entered into the AOA, the Debtors were insolvent or became insolvent as a result of the transfers and/or incurrence of obligations; were engaged in business or transactions or were about to engage in business or transactions for which their remaining property was unreasonably small capital; and/or intended to incur, or believed that they would incur, debts that would be beyond their ability to pay as such debts matured.

240. The AOA between the Debtors and the Defendants is not a “repurchase agreement”, “swap agreement” or “securities contract” under Sections 101(47), 101(53B) and

741(7) of the Bankruptcy Code.

241. The AOA did not provide for entry into any new repurchase transactions, securities sale or lending transactions, or swap transactions. The AOA did not possess a proximate, temporal nexus to any repurchase transactions, swap transactions or securities

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transactions, and thus the AOA is not a security agreement or credit enhancement related to a repurchase agreement, swap agreement or securities contract.

242. The safe harbor provisions of the Bankruptcy Code, including but not limited to Section 546 of the Bankruptcy Code, do not apply to the AOA.

243. At the time the Debtors entered into the AOA, the Debtors were insolvent as that term is defined in Section 101(32) of the Bankruptcy Code.

244. The AOA is avoidable under Section 548(a)(1)(B) of the Bankruptcy Code.

Count 8 Avoidance of the AOA Releases and other Transfers under the AOA as Actually Fraudulent Under Sections 548 and 550 of the Bankruptcy Code

245. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

246. Within two (2) years of the Petition Date, TMST, TMHS and TMHL entered into the AOA with the Defendants, granted the AOA Releases and made various transfers to

Defendants under that agreement, including the (i) December-March P&I payments and (ii) the payment of $72.3 Million from the Liquidity Fund as follows:

$72.3 Million from the Liquidity Fund was distributed to the Defendants as follows: (i) JPMorgan-$7.6 Million, (ii) Credit Suisse (CSSU/CSI- $6.9 Million, (iii) UBS-$6.8 Million, (iv) RBS (RBS Securities/GCD/RBS PLC)- $11.0 Million and (v) Citi-$39.9 Million;

$375.3Million of P&I Payments distributed to the Defendants between December 2008 and March 2009 as follows: (i) JPMorgan - $93.3 Million, (ii) Credit Suisse (CSSU/CSI) - $45.9 Million, (iii) UBS-$37.3 Million, (iv) RBS (RBS Securities/GCD/RBS PLC -$103.9 Million and (v) Citi - $94.9 Million.. (Collectively with the AOA Releases, the “AOA Transfers”)

247. The AOA Transfers granted and other transfers made under the AOA were made by the Debtors for the benefit of the Defendants.

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248. The AOA Transfers made under the AOA were made with an actual intent to hinder, delay and/or defraud Debtors‟ creditors, to the detriment and harm of such creditors.

Such intent can be inferred from the traditional badges of fraud surrounding Debtors‟ entry into the AOA. At the time the Defendants caused TMST, TMHS and TMHL to enter into the AOA, the Defendants were in a position to dominate or control the Debtors‟ disposition of their property solely for the benefit of the Defendants and to the detriment and harm of the Debtors‟ creditors, the Defendants were aware of the substantial claims of the Debtors‟ creditors and the

Debtors‟ inability to pay such claims as a result of the Defendants‟ actions, Debtors were insolvent and/or undercapitalized, the relevant markets were undergoing a temporary dislocation,

Defendants made improper margin calls on the Debtors in breach of the repurchase agreements and Override Agreement, Defendants improperly withheld interest under the Override

249. As a result of the AOA Transfers made under the AOA, Debtors and their creditors have been harmed.

250. The AOA Transfers constituted a transfer of interests in property of the Debtors.

251. A creditor of the Debtors exists that could avoid the AOA Transfers under applicable non-bankruptcy law.

252. The AOA Transfers made under the AOA are avoidable under Sections

548(a)(1)(A) and 550 of the Bankruptcy Code.

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Count 9 Avoidance of the AOA Releases and other Transfers under the AOA as Constructively Fraudulent Under Sections 548 and 550 of the Bankruptcy Code

253. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

254. Within two (2) years of the Petition Date, the Debtors made the AOA Transfers to the Defendants.

255. The AOA Transfers were made by the Debtors for the benefit of the Defendants.

256. The Debtors received less than reasonably equivalent value in exchange for the

AOA Transfers.

257. When the Debtors made the AOA Transfers, the Debtors were insolvent or became insolvent as a result of the transfers and/or incurrence of obligations; were engaged in business or transactions or were about to engage in business or transactions for which their remaining property was unreasonably small capital; and/or intended to incur, or believed that they would incur, debts that would be beyond their ability to pay as such debts matured.

258. The AOA is not “repurchase agreements”, “swap agreements” or “securities contracts” under Sections 101(47), 101(53B) and 741(7) of the Bankruptcy Code.

259. The AOA Transfers were not, and were not made in connection with, “repurchase agreements”, “swap agreements” or “securities contracts” under Sections 101(47), 101(53B) and

741(7) of the Bankruptcy Code.

260. The AOA Transfers did not provide for entry into any new repurchase transactions, securities sale or lending transactions, or swap transactions. The AOA Transfers did not possess a proximate, temporal nexus to any repurchase transactions, swap transactions or

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securities transactions, and thus the AOA Transfers are not a security agreement or credit enhancement related to a repurchase agreement, swap agreement or securities contract.

261. The safe harbor provisions of the Bankruptcy Code, including but not limited to

Section 546 of the Bankruptcy Code do not apply to the AOA Transfers.

262. At the time the Debtors made the AOA Transfers, the Debtors were insolvent as that term is defined in Section 101(32) of the Bankruptcy Code.

263. The AOA Transfers constitute a transfer of an interest in property of the Debtors to the Defendants.

264. The AOA Transfers are avoidable under Sections 548(a)(1)(B) and 550 of the

Bankruptcy Code.

Count 10 Avoidance of the AOA as Constructively Fraudulent Under Section 544 of the Bankruptcy Code and Applicable State Law

265. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

266. Pursuant to Section 544(b) of the Bankruptcy Code, the Trustee has the rights of an existing unsecured creditor. Section 544(b) permits the Trustee to assert claims and causes of action that such a creditor could assert under applicable state law.

267. Prior to the Petition Date, TMST, TMHS and TMHL entered into the AOA with the Defendants.

268. Entry into the AOA was an obligation incurred by the Debtors to or for the benefit of the Defendants.

269. The Debtors received less than reasonably equivalent value, fair consideration or a fair equivalent in exchange for their entry into the AOA

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270. When TMST, TMHS and TMHL entered into AOA, the Debtors were insolvent or became insolvent as a result of the transfers and/or incurrence of obligations; were engaged in business or transactions or were about to engage in business or transactions for which their remaining property was unreasonably small capital; and/or intended to incur, or believed that they would incur, debts that would be beyond their ability to pay as such debts matured.

271. The AOA between the Debtors and the Defendants is not a “repurchase agreement”, “swap agreement” or “securities contract” under Sections 101(47), 101(53B) and

741(7) of the Bankruptcy Code.

272. The AOA did not provide for entry into any new repurchase transactions, securities sale or lending transactions, or swap transactions. The AOA did not possess a proximate, temporal nexus to any repurchase transactions, swap transactions or securities transactions, and thus the AOA is not a security agreement or credit enhancement related to a repurchase agreement, swap agreement or securities contract.

273. The safe harbor provisions of the Bankruptcy Code, including but not limited to

Section 546 of the Bankruptcy Code do not apply to the AOA.

274. A creditor of the Debtors exists that could avoid the AOA under applicable non- bankruptcy law.

275. The AOA is avoidable under Section 544 of the Bankruptcy Code and applicable law.

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Count 11 Avoidance of the AOA Releases and Other Transfers Under the AOA as Constructively Fraudulent Under Sections 544 and 550 of the Bankruptcy Code and Applicable State Law

276. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

277. Pursuant to Section 544(b) of the Bankruptcy Code, the Trustee has the rights of an existing unsecured creditor. Section 544(b) permits the Trustee to assert claims and causes of action that such a creditor could assert under applicable state law.

278. Before the Petition Date, TMST, TMHS and TMHL entered into the AOA and made the AOA Transfers to the Defendants.

279. The Debtors received less than reasonably equivalent value, fair consideration or a fair equivalent in exchange for the AOA Transfers made under the AOA.

280. When the Debtors made the AOA Transfers, the Debtors were insolvent or became insolvent as a result of the transfers and/or incurrence of obligations; were engaged in business or transactions or were about to engage in business or transactions for which their remaining property was unreasonably small capital; and/or intended to incur, or believed that they would incur, debts that would be beyond their ability to pay as such debts matured.

281. The AOA and the AOA Transfers, are not “repurchase agreements”, “swap agreements” or “securities contracts” under Sections 101(47), 101(53B) and 741(7) of the

Bankruptcy Code or made in connection with the same.

282. The AOA Transfers did not provide for entry into any new repurchase transactions, securities sale or lending transactions, or swap transactions. The AOA Transfers did not possess a proximate, temporal nexus to any repurchase transactions, swap transactions or

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securities transactions, and thus the AOA Transfers are not a security agreement or credit enhancement related to a repurchase agreement, swap agreement or securities contract.

283. The safe harbor provisions of the Bankruptcy Code, including Section 546 of the

Bankruptcy Code do not apply to the AOA or the AOA Transfers.

284. The AOA Transfers constitute a transfer of an interest in property of the Debtors to the Defendants.

285. At the time the Debtors made the AOA Transfers, the Debtors were insolvent as that term is defined in Section 101(32) of the Bankruptcy Code.

286. The AOA Transfers are avoidable as fraudulent transfers under Sections 544(b) and 550 of the Bankruptcy Code and applicable state law.

Count 12 Avoidance of the March Forbearance Agreements as Actually Fraudulent Under Section 548 of the Bankruptcy Code

287. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

288. Within two (2) years of the Petition Date, TMST, TMHS and TMHL entered into

March Forbearance Agreements and Joint Amended Forbearance Agreement with the

Defendants.

289. Entry into the March Forbearance Agreements and Joint Amended Forbearance

Agreement was an obligation incurred by the Debtors to or for the benefit of the Defendants.

290. Entry into the March Forbearance Agreements and Joint Amended Forbearance

Agreement was made with an actual intent to hinder, delay and/or defraud Debtors‟ creditors, to the detriment and harm of such creditors. Such intent can be inferred from the traditional badges of fraud surrounding Debtors entry into the March Forbearance Agreements and Joint Amended

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Forbearance Agreement. At the time the Defendants caused TMST, TMHS and TMHL to enter into the March Forbearance Agreements and Joint Amended Forbearance Agreement, the

Defendants were in a position to dominate or control the Debtors‟ disposition of their property solely for the benefit of the Defendants and to the detriment and harm of the Debtors‟ creditors, the Defendants were aware of the substantial claims of the Debtors creditors and the Debtors inability to pay such claims as a result of the Defendants‟ actions, Debtors were insolvent and/or undercapitalized, the relevant markets were undergoing a temporary dislocation, Defendants made improper margin calls on the Debtors in breach of the repurchase agreements and Override

Agreement, Defendants caused the Debtors to pay over to the Defendants all P&I payments with respect to the MBS, the Defendants caused the Debtors to pay over to the Defendants all of the remaining funds in the Liquidity Fund except for amounts necessary to fund the Debtors on a bare-bones basis and the Debtors received inadequate consideration in exchange for the obligations they incurred under the Override Agreement, the AOA, the March Forbearance

Agreements and the Joint Amended Forbearance Agreement.

291. As a result of Debtors‟ entry into the March Forbearance Agreements and the

Joint Amended Forbearance Agreement, Debtors and their creditors have been harmed.

292. A creditor of the Debtors exists that could avoid the March Forbearance

Agreements and the Joint Amended Forbearance Agreement under applicable non-bankruptcy law.

293. The March Forbearance Agreements and the Joint Amended Forbearance

Agreement are avoidable under Section 548(a)(1)(A) of the Bankruptcy Code.

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Count 13 Avoidance of the March Forbearance Agreements as Constructively Fraudulent Under Section 548 of the Bankruptcy Code

294. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

295. Within two (2) years of the Petition Date, TMST, TMHS and TMHL entered into

March Forbearance Agreements and Joint Amended Forbearance Agreement with the

Defendants

296. Entry into the March Forbearance Agreements and Joint Amended Forbearance

Agreement was an obligation incurred by the Debtors to or for the benefit of the Defendants.

297. The Debtors received less than reasonably equivalent value in exchange for their entry into the March Forbearance Agreements and Joint Amended Forbearance Agreement.

298. When TMST, TMHS and TMHL entered into the March Forbearance Agreements and Joint Amended Forbearance Agreement, the Debtors were insolvent or became insolvent as a result of the transfers and/or incurrence of obligations; were engaged in business or transactions or were about to engage in business or transactions for which their remaining property was unreasonably small capital; and/or intended to incur, or believed that they would incur, debts that would be beyond their ability to pay as such debts matured.

299. The March Forbearance Agreements and Joint Amended Forbearance Agreement between the Debtors and the Defendants are not “repurchase agreements”, “swap agreements” or

“securities contracts” under Sections 101(47), 101(53B) and 741(7) of the Bankruptcy Code.

300. The March Forbearance Agreements and Joint Amended Forbearance Agreement did not provide for entry into any new repurchase transactions, securities sale or lending transactions, or swap transactions. The March Forbearance Agreements and Joint Amended

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Forbearance Agreement did not possess a proximate, temporal nexus to any repurchase transactions, swap transactions or securities transactions, and thus the March Forbearance

Agreements and Joint Amended Forbearance Agreement are not a security agreement or credit enhancement related to a repurchase agreement, swap agreement or securities contract.

301. The safe harbor provisions of the Bankruptcy Code, including Section 546 of the

Bankruptcy Code do not apply to the March Forbearance Agreements and Joint Amended

Forbearance Agreement.

302. At the time TMST, TMHS and TMHL entered into the March Forbearance

Agreements and Joint Amended Forbearance Agreement, the Debtors were insolvent as that term is defined in Section 101(32) of the Bankruptcy Code.

303. The March Forbearance Agreements and Joint Amended Forbearance Agreement are avoidable under Section 548(a)(1)(B) of the Bankruptcy Code.

Count 14 Avoidance of the Second Releases as Actually Fraudulent Under Sections 548 and 550 of the Bankruptcy Code

304. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

305. Within two (2) years of the Petition Date, the Debtors granted the Second

Releases to the Defendants.

306. The Second Releases were made by the Debtors for the benefit of the Defendants.

307. The Second Releases made under the Forbearance Agreements were made with an actual intent to hinder, delay and/or defraud Debtors‟ creditors, to the detriment and harm of such creditors. Such intent can be inferred from the traditional badges of fraud surrounding

Debtors entry into the Forbearance Agreements. At the time the Defendants caused TMST,

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TMHS and TMHL to grants the Second Releases, the Defendants were in a position to dominate or control the Debtors‟ disposition of their property solely for the benefit of the Defendants and to the detriment and harm of the Debtors‟ creditors, the Defendants were aware of the substantial claims of the Debtors‟ creditors and the Debtors‟ inability to pay such claims as a result of the

Defendants‟ actions, Debtors were insolvent and/or undercapitalized, the relevant markets were undergoing a temporary dislocation, Defendants made improper margin calls on the Debtors in breach of the repurchase agreements and Override Agreement, Defendants caused the Debtors to pay over to the Defendants all P&I payments with respect to the MBS, the Defendants caused the

Debtors to pay over to the Defendants all of the remaining funds in the Liquidity Fund except for amounts necessary to fund the Debtors on a bare-bones basis and the Debtors received inadequate consideration in exchange for the transfers they made under the Override Agreement, the AOA, the March Forbearance Agreements and the Joint Amended Forbearance Agreement.

308. As a result of the Second Releases made under Forbearance Agreements, Debtors and their creditors have been harmed.

309. The Second Releases were a transfer of an interest in property of the Debtors to the Defendants.

310. A creditor of the Debtors exists that could avoid the Second Releases under applicable non-bankruptcy law.

311. The Second Releases are avoidable under Sections 548(a)(1)(A) and 550 of the

Bankruptcy Code.

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Count 15 Avoidance of the Second Releases as Constructively Fraudulent Under Sections 548 and 550 of the Bankruptcy Code

312. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

313. Within two (2) years of the Petition Date, TMST, TMHS and TMHL granted the

Second Releases to the Defendants.

314. The Second Releases were made by the Debtors for the benefit of the Defendants.

315. The Debtors received less than reasonably equivalent value in exchange for the

Second Releases.

316. When the Debtors granted the Second Releases they were insolvent as that term is defined in Section 101(32) of the Bankruptcy Code.

317. When the Debtors granted the Second Releases, the Debtors were insolvent or became insolvent as a result of the transfers and/or incurrence of obligations; were engaged in business or transactions or were about to engage in business or transactions for which their remaining property was unreasonably small capital; and/or intended to incur, or believed that they would incur, debts that would be beyond their ability to pay as such debts matured.

318. The Forbearance Agreements between the Debtors and the Defendants, or transfers made under the Forbearance Agreements, including the grant of the Second Releases, are not “repurchase agreements”, “swap agreements” or “securities contracts” under Sections

101(47), 101(53B) and 741(7) of the Bankruptcy Code.

319. The Second Releases did not provide for entry into any new repurchase transactions, securities sale or lending transactions, or swap transactions. The Second Releases did not possess a proximate, temporal nexus to any repurchase transactions, swap transactions or

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securities transactions, and thus the Second Releases are not a security agreement or credit enhancement related to a repurchase agreement, swap agreement or securities contract.

320. The safe harbor provisions of the Bankruptcy Code, including Section 546 of the

Bankruptcy Code do not apply to the Second Releases.

321. The Second Releases are avoidable under Sections 548(a)(1)(B) and 550 of the

Bankruptcy Code.

Count 16 Avoidance of the Second Releases as Constructively Fraudulent Under Sections 544 and 550 of the Bankruptcy Code and Applicable State Law

322. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

323. Pursuant to Section 544(b) of the Bankruptcy Code, the Trustee has the rights of an existing unsecured creditor. Section 544(b) permits the Trustee to assert claims and causes of action that such a creditor could assert under applicable state law.

324. Before the Petition Date, the Debtors granted the Second Releases to the

Defendants.

325. The Debtors received less than reasonably equivalent value, fair consideration or a fair equivalent in exchange for the Second Releases.

326. When the Debtors granted the Second Release, the Debtors were insolvent or became insolvent as a result of the transfers and/or incurrence of obligations; were engaged in business or transactions or were about to engage in business or transactions for which their remaining property was unreasonably small capital; and/or intended to incur, or believed that they would incur, debts that would be beyond their ability to pay as such debts matured.

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327. The Second Releases, are not “repurchase agreements”, “swap agreements” or

“securities contracts” under Sections 101(47), 101(53B) and 741(7) of the Bankruptcy Code or transactions in connection with the same.

328. The Second Releases did not provide for entry into any new repurchase transactions, securities sale or lending transactions, or swap transactions. The AOA Transfers did not possess a proximate, temporal nexus to any repurchase transactions, swap transactions or securities transactions, and thus the Second Releases are not a security agreement or credit enhancement related to a repurchase agreement, swap agreement or securities contract.

329. The safe harbor provisions of the Bankruptcy Code, including Section 546 of the

Bankruptcy Code do not apply to the Second Releases.

330. The Second Releases constitute a transfer of an interest in property of the Debtors to the Defendants.

331. At the time the Debtors granted the Second Releases, the Debtors were insolvent as that term is defined in Section 101(32) of the Bankruptcy Code.

332. The Second Releases are avoidable as fraudulent transfers under Sections 544(b) and 550 of the Bankruptcy Code and applicable state law.

Count 17 Breach of the Repurchase Agreements (Improper Liquidation)

333. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

334. TMST, TMHL were parties to various repurchase agreements governed by the

September 1996 version of the form Master Repurchase Agreement published by the Bond

Market Association (n/k/a the Securities Industry & Financial Markets Association) or the

Global Master Securities Lending Agreements. 78

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335. At all relevant times, TMST and TMHL performed their obligations under the repurchase agreements.

336. The repurchase agreements required that Defendants act in all instances in good faith in accordance with the implied covenant of good faith and fair dealing.

337. Under the color of their respective repurchase agreements and March Forbearance

Agreements, Defendants liquidated or gave themselves a credit based on the purported value the collateral they held under the repurchase agreements as of the respective Repurchase Dates.

338. In so doing, Defendants calculated the valuation of their collateral in violation of their respective repurchase agreements, March Forbearance Agreements, industry standards, or otherwise failed to act in a commercially reasonable manner or give the Debtors proper credit for the value of said collateral.

339. To the extent the value of the MBS liquidated by Defendants exceeds the repurchase price under the respective repurchase agreement, then the excess value is property of the Debtors' estates, under the terms of the repurchase agreements, Section 559 of the

Bankruptcy Code, Section 562 of the Bankruptcy Code or otherwise.

340. To the extent Defendants claim, individually or collectively, that they used their own determinations in making valuations, the improper nature of the valuations demonstrates that the Defendants failed to satisfy their respective obligation to act in good faith, without conflicts of interest, and in a commercially reasonable manner in calculating the liquidation valuations. These improper valuations deprived Debtors of the true value of the collateral under the repurchase agreements.

341. Defendants‟ actions constitute a material breach of the repurchase agreements and

March Forbearance Agreements, including, without limitation, a material breach of the implied

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covenant of good faith and fair dealing with respect to the repurchase agreements, and a breach of all modicums of good faith, fair dealing, and commercial reasonableness.

342. Defendants‟ breaches of the repurchase agreements in the liquidation of TMST‟s

MBS have damaged Debtors in an amount not less than $900 Million due to Defendants‟ improper valuations, plus costs and attorneys‟ fees.

Count 18 Coercion and/or Duress

343. The allegations set forth in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

344. Prior to the entry of the Override Agreement, the AOA and the March

Forbearance Agreements, Defendants, among other things fully set forth herein made (i) improper margin calls in breach of the underlying repurchase agreements, (ii) made improper margin calls in violation of the Override Agreement, (iii) unlawfully seized the P&I, (iv) prevented the Debtors‟ access to the Liquidity Fund for ordinary corporate purposes, (iv) compelled the turnover of funds in the Liquidity Fund to themselves, when they were not so entitled, (v) misled the Defendants of their true intentions concerning good faith negotiations and

(vi), all of which occurred at times when they knew that the Debtors faced severe liquidity cash flow problems and that any unnecessary (and improper) drains on the Debtors‟ resources threatened to cause the financial collapse of the Debtors. Defendants nonetheless engaged in the conduct set forth herein, in an effort to siphon off whatever Debtor resources they could.

345. The Defendants‟ unlawful and wrongful acts and threats, when coupled with the financial distress and pressure caused by the Defendants, precluded the Debtors from acting in furtherance of their own interests and exercising free will in deciding whether to enter into the

Override Agreement, the AOA and the March Forbearance Agreements. 80

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346. At those times time, there was no other financial alternative but for the Debtors to accede to the Defendants‟ demands.

347. As a result of the Defendants‟ acts and threats, the Debtors involuntarily acceded to the Defendants‟ demand to enter into the Override Agreement, the AOA and the March

Forbearance Agreements.

348. The Defendants exerted unlawful and wrongful acts and threats upon the Debtors by: threatening to breach and breaching the Override Agreement by, among other things, making improper margin calls, by barring the Debtors from accessing the Liquidity Fund and by improperly withholding interest payments due to the Debtors under the Override agreement, thereby irreparably harming the Debtors and effectively putting the Debtors out of business.

349. The Debtors continued to labor under the same duress caused by the Defendants after the execution of the AOA because the Defendants‟ wrongful acts and threats continued to starve the Debtors of all liquidity and effectively forced the Debtors to wind down their operation solely under the domination of and subject to the direction of the Defendants.

350. Faced with this continuing scenario, the Debtors involuntarily acceded to the

Defendants‟ demands to enter into the March Forbearance Agreements (as amended), including granting the Second Releases therein, and other demands prior to the Debtors‟ petition for bankruptcy.

351. As a result of the above, the Override Agreement, AOA, AOA Releases, March

Forbearance Agreements, Second Releases, and the obligations and transfers related thereto, are otherwise invalid and unenforceable because they are the product of coercion and/or duress.

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Count 19 Equitable Subordination of Claims Under Sections 105(a), 502(b) and 510(c) of the Bankruptcy Code

352. The allegations in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

353. Defendants engaged in and benefitted from inequitable conduct that resulted in injury to the Debtors' creditors and conferred an unfair advantage on the Defendants. This inequitable conduct has resulted in harm to the Debtors and its creditors because general unsecured creditors are less likely to recover the full amounts due to them.

354. Defendants' conduct was inequitable, egregious, unconscionable and/or outrageous and has harmed the Debtors and their creditors. In equity and good conscience, any claim or interest of Defendants in respect of the Debtors' estates should be equitably subordinated pursuant to Section 510(c) of the Bankruptcy Code to the fullest extent permitted by law. Equitable subordination as requested herein is consistent with the provisions and purposes of the Bankruptcy Code.

355. Any and all claims asserted by the Defendants against the Debtors' estates should be equitably subordinated for purposes of distribution pursuant to Section 510(c) of the

Bankruptcy Code, and the Defendants should not be permitted to receive any distributions on any claims asserted or to be asserted by Defendants until payment in full with interest is made to all non-defendant, unsecured creditors of the Debtors.

Count 20 Equitable Disallowance of Claims Under Sections 105(a), 502(b) and 510(c) of Bankruptcy Code

356. The allegations in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

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357. Defendants engaged in and benefitted from inequitable conduct that resulted in injury to the Debtors' creditors and conferred an unfair advantage on the Defendants. This inequitable conduct has resulted in harm to the Debtors and its creditors because general unsecured creditors are less likely to recover the full amounts due to them.

358. Defendants' conduct was inequitable, egregious, unconscionable and/or outrageous and has harmed the Debtors and their creditors. In equity and good conscience, any claim or interest of Defendants in respect of the Debtors' estates should be disallowed to the fullest extent permitted by law. Equitable disallowance as requested herein is consistent with the provisions and purposes of the Bankruptcy Code.

Count 21 Disallowance of Claims Under Sections 105(a) and 502(d) of Bankruptcy Code

359. The allegations in paragraphs 1 through 177 are incorporated by reference as though fully set forth below.

360. To the extent the Defendants assert any claim against the Debtors' estates, those claims should be disallowed pursuant to Section 502(d) of the Bankruptcy Code.

361. Any and all claims Defendants assert against the Debtors' estates are subject to disallowance under Section 502(d) of the Bankruptcy Code unless and until Defendants have turned over to the Debtors all property transferred, or paid to the Debtors against the estates, for which Defendants are liable under Sections 544, 548, or 550 of the Bankruptcy Code.

362. In the event that (a) property is recoverable from Defendants under Sections 544,

548 or 550 of the Bankruptcy Code or (b) any transfers made to Defendants are avoidable under

Sections 544, 548 or 550 of the Bankruptcy Code, then the claims of Defendants against the

Debtors' estates should be disallowed unless and until Defendants have turned over to the

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Debtors all property transferred, or paid to the Debtors the value of such property, for which it is liable under Sections 544, 548 or 550 of the Bankruptcy Code.

363. To the extent a lien secures the disallowed claims, those liens similarly are avoidable pursuant to Section 506(d) of the Bankruptcy Code.

WHEREFORE, for the foregoing reasons, Plaintiff Joel I. Sher, Chapter 11 Trustee and the Official Committee Of Unsecured Creditors respectfully request the following relief:

a) Judgment in favor of the Debtors on all claims set forth herein;

b) Avoiding and invalidating the Amended Override Agreement and the March Forbearance Agreements under Sections 544, 548 and 550 of the Bankruptcy Code and applicable non-bankruptcy law;

c) Avoiding and recovering for the benefit of the estates, transfers made under or in connection with the Override Agreement and the Amended Override Agreement and the March Forbearance Agreements under Sections 544, 548, 550 and 551 of the Bankruptcy Code and applicable non-bankruptcy law, including, without limitation, the

(i) Override Agreement Transfers (totaling not less than $1.5 Billion

(ii) AOA Transfers (totaling not less than $447.6 Million and including the First Release and

(iii) AOA Releases;

d) In the alternative, decreeing the Defendants breached the Override Agreement and awarding the Debtors damages in an amount of not less than $121 Million;

e) Finding that Defendants breached their respective repurchase agreements with respect to their improper liquidations and awarding damages under Sections 559 and 562 or the applicable agreements and applicable law, in an amount not less than the amount by which the value of the MBS exceeds the repurchase price;

f) Equitably subordinating and/or disallowing Defendants' claims and interests in respect of the Debtors' estates;

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g) Disallowing, under Section 502(d) of the Bankruptcy Code, the claims of the Defendants against the Debtors' estates unless and until the Defendants have turned over to the Debtors the value of such transferred property for which the Defendants are liable under Sections 544, 548 and 550 of the Bankruptcy Code;

h) Preserving all transfers avoided for the benefit of the Debtors' estates under Section 551 of the Bankruptcy Code;

i) Judgment awarding the estates‟ costs and disbursements of this action and attorneys' fees; and

j) Such other and further relief the Court deems just and appropriate.

Dated: April 30, 2011 Respectfully submitted,

/s/ Joel I. Sher /s/ James C. Tecce Joel I. Sher, Bar No. 00719 James C. Tecce, admitted pro hac vice Richard M. Goldberg, Bar No. 00794 Sascha N. Rand, admitted pro hac vice Daniel J. Zeller, Bar No. 28107 QUINN EMANUEL URQUART OLIVER SHAPIRO SHER GUINOT & SANDER & HEDGES 36 South Charles Street, 20th Floor 51 Madison Avenue, 22nd Floor Baltimore, Maryland 21201 New York, New York 10010 (410) 385-0202 (212) 849-7199 [email protected] [email protected] [email protected] [email protected] [email protected]

/s/ Alan M. Grochal Attorneys for Joel I. Sher, Alan M. Grochal, Bar No. 01447 Chapter 11 Trustee TYDINGS & ROSENBERG LLP 100 East Pratt Street, 26th Floor Baltimore, Maryland 21202 (410) 752-9715 [email protected]

Attorneys for Official Committee of Unsecured Creditors