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Robert C. Daniels, Et Al. V. Indymac Bancorp, Inc., Et Al. 08-CV-03812

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Robert C. Daniels, Et Al. V. Indymac Bancorp, Inc., Et Al. 08-CV-03812 Case 2:08-cv-03812-GW -VBK Document 186-1 Filed 05/27/11 Page 1 of 50 Page ID #:9469 r MARC M. SELTZER (54534) FILED 1 mseltzer(u^susmangodfrey.com cte^h u s ^iSrr^Irr conRr RYAN C. KIRKPATRICK (243824) 2 rkirkpatrick((cc susmanggodfrey.com MAY 2 11 SUSMAN UDFREY L.L.P. 3 1901 Avenue of the Stars, Suite 950 g^NTRAL D1S7R1CT OF CALIFORNIA Los Angeles, CA 90067 DEPUTY 4 Tel: (310) 789-3100 Fax: (310) 789-3150 5 SHERRIE R. SAVETT 6 (Admitted Pro Hac Vice) ssavett bm.net 7 ART R STOCK (Admitted Pro Hac Vice) 8 astock(a^bm.net PHYLLIS M. PARKER 9 (Admitted Pro Hac Vice) pparker((aa^^bm.net 10 BERGER & MONTAGUE, P.C. 1622 Locust Street 11 Philadelphia, PA 19103 Tel: (215) 875-3000 12 Fax: (215) 875-4604 13 Attorneys for Lead Plaintiff and the Class 14 (See Signature Page for Name and Address of Additional Counsel for Plaintiff) 15 UNITED STATES DISTRICT COURT 16 CENTRAL DISTRICT OF CALIFORNIA 17 WESTERN DIVISION 18 ROBERT C. DANIELS, on Behalf of 19 Himself and All Others Similarly Case No. CV 08-03812 GW(VBKx) Situated, 20 Plaintiff, CLASS ACTION 21 22 vs. FIFTH AMENDED CONSOLIDATED CLASS 23 MICHAEL W. PERRY, A. SCOTT ACTION COMPLAINT FOR KEYS, and ERNST & YOUNG LLP, VIOLATION OF FEDERAL 24 SECURITIES LAWS Defendants. 25 JURY TRIAL DEMANDED 26 27 28 1565686v1/010900 Case 2:08-cv-03812-GW -VBK Document 186-1 Filed 05/27/11 Page 2 of 50 Page ID #:9470 1 TABLE OF CONTENTS pale 2 I. INTRODUCTION 1 3 II. OVERVIEW OF THE CASE 2 4 5 A. The Treasury Report 3 6 B. The Trustee Complaint 4 7 C. The FDIC Complaint 6 8 D. The SEC Complaints 8 9 1. The Undisclosed Change in IndyMac's Capital Ratio 10 Calculation 11 11 2. IndyMac's Fraudulent DSPP Sales 12 12 3. Perry Authorizes IndyMac's Backdated Capital 13 Contribution 13 14 E. Defendants' False and Misleading Statements 14 15 III. THE PARTIES AND CRITICAL PLAYERS 21 16 A. Plaintiff 21 17 18 B. The Holding Company and the Bank 22 19 C. Defendants 23 20 1. Officers 23 21 2. Ernst & Young LLP 30 22 IV. JURISDICTION AND VENUE 31 23 V. CLASS ACTION ALLEGATIONS 32 24 25 VI. FACTUAL BACKGROUND REGARDING INDYMAC AND ITS CORE LENDING BUSINESS 34 26 27 A. General Background 34 28 1565686vl/010900 i Case 2:08-cv-03812-GW -VBK Document 186-1 Filed 05/27/11 Page 3 of 50 Page ID #:9471 1 B. IndyMac's Underwriting, Risk Management, and Appraisal Practices Were Grossly Deficient Prior to and During the Class 2 Period 39 3 C. Internal Audits, Outside Audits, and OTS Examinations 4 Repeatedly Identified Underwriting, Appraisal and Internal Control Deficiencies at IndyMac 64 5 VII. DEFENDANTS MISLEAD AND DEFRAUD INVESTORS 69 6 7 A. Defendant Perry Misleads Investors Regarding IndyMac's Risk 8 Management, Underwriting, and Appraisal Practices 69 9 1. False and Misleading Statements Related to Underwriting, Risk Management, and Appraisals 69 10 2. Defendant Perry Acted With Scienter 72 11 12 B. Ernst's Unqualified Opinions Regarding IndyMac's Internal Controls Over Financial Reporting Were Materially Misstated 13 When Made 76 14 1. Applicable Accounting Standards, the Definition of 15 "Material Weaknesses" in Internal Controls, and Ernst's Duty to Independently Assess Internal Controls 77 16 17 2. IndyMac's Internal Controls Were Not Effective and Ernst Did Not Perform its Audits in Accordance with the 18 Standards of the PCAOB and GAAS 82 19 3. Ernst Acted with Scienter when it Certified that Internal 20 Controls Were Effective in the 2006 10-K Signed on 86 21 February 26, 2007 22 4. Ernst Acted with Scienter when it Certified that Internal Controls Were Effective in the 2007 10-K Signed on 23 February 28, 2008 89 24 C. On February 12, 2008, Defendants Perry and Keys Mislead 25 Investors Regarding IndyMac's Dealings With the Office of 26 Thrift Supervision and the Soundness of the Company 91 27 28 1565686v 1 /010900 11 Case 2:08-cv-03812-GW -VBK Document 186-1 Filed 05/27/11 Page 4 of 50 Page ID #:9472 1 1. OTS Initiates Its Review of IndyMac Four Months Early and Issues an Initial Ratings Downgrade on January 17, 2 2008 91 3 2. Perry, Keys, and other IndyMac Officials Internally 4 Discuss the Dire Financial Condition of IndyMac 95 5 3. Perry and Keys Make False and Misleading Statements 6 Regarding IndyMac's Dealings with OTS and IndyMac's Financial Condition Following the Commencement of the 7 January 2008 Emergency Examination. 95 8 4. Perry and Keys Made the Foregoing Statements With 9 Scienter 98 10 D. Defendants Perry and Keys Make Misleading Statements About 11 IndyMac's Liquidity During the Class Period 99 12 1. False Statements on Liquidity 99 13 2. The Truth About IndyMac's Grave and Incurable 14 Liquidity Crisis 101 15 3. Defendants Perry's and Keys' False Statements About IndyMac's Liquidity Were Made With Scienter 103 16 17 E. Defendant Ernst Misleads Investors by Failing to Include a "Going Concern" Reservation in Its 2007 Audit Opinion 107 18 1. Ernst Violated the Auditing Standards Governing the 19 Issuance of a "Going Concern" Reservation 107 20 2. Ernst Acted with Scienter in Failing to Provide a Going 21 Concern Reservation in Its 2007 Audit Opinion 111 22 F. Defendant Perry Misleads Investors Regarding IndyMac's 23 Dramatic Over-Reliance on Brokered Deposits 117 24 1. During the Class Period, IndyMac Relied Excessively on 25 Brokered Deposits to Maintain Its Reported Solvency, and Later Admitted That Those Brokered Deposits Were 26 Used from an "Expediency Perspective" Only 117 271 28 1565686v 1/010900 ili Case 2:08-cv-03812-GW -VBK Document 186-1 Filed 05/27/11 Page 5 of 50 Page ID #:9473 1 2. False and Misleading Statements Relating to Brokered Deposits 120 2 3. Defendant Perry Acted With Scienter 123 3 4 G. All Defendants Misrepresent IndyMac's Assets, Liabilities and Earnings in Financial Statements 124 5 1. Defendants Perry and Keys Authored Materially 6 Misleading Financial Statements 126 7 2. Ernst's False and Misleading Statements Opining That 8 IndyMac's 2006 and 2007 Financials Conformed with 9 GAAP and GAAS 127 10 3. The Facts Demonstrating the Inadequacy of IndyMac's Allowances for Loan Losses Were Known to Each 11 Defendant 129 12 4. Defendants Knew of and Ignored Numerous Red Flags 13 Demonstrating that the Allowance for Loan Losses in 14 2006 and 2007 Were Insufficient. 134 15 5. Defendants' Certification of Insufficient ALL in the Face of Rising Delinquencies, Declining Property Values, 16 Riskier Loan Portfolios, and Numerous Adverse Audit 17 Findings and Internal Control Problems, Violated GAAP 138 18 6. Defendants' Approval of Decreasing ALL for 2006 19 Violated Applicable Regulatory Guidance on Directional Consistency and Rendered the 2006 Financial Statements 20 Materially False and Misleading 143 21 7. Defendant Ernst Deliberately Disregarded Guidance 22 Regarding ALL Provided in the 2006 AICPA Audit and Accounting Guide 147 23 24 8. The Standards of GRAS, and Contemporaneous AICPA Audit Risk Alerts, Required Ernst to Ensure that it Had a 25 Thorough Understanding of IndyMac's Business, Internal 26 Controls and Awareness of Growing Risks Facing the Banking Industry 150 27 28 15656860/010900 iv Case 2:08-cv-03812-GW -VBK Document 186-1 Filed 05/27/11 Page 6 of 50 Page ID #:9474 1 9. Ernst Ignored the AICPA Audit Risk Alert for 2007/2008 Which Identified Specific Risk Factors Relating to 2 IndyMac 154 3 10. The Falsity of IndyMac's ALL Is Confirmed by The 4 Astonishing Degree to Which IndyMac's Reserves Proved Inadequate 155 5 6 11. Post-Class Period Improprieties and GAAP Violations Confirm that Defendants' Manipulation of IndyMac's 7 Financial Statements was Deliberate. 157 8 H. Perry And Keys Make Additional False and Misleading 9 Statements Regarding IndyMac's Credit and Loan Loss Reserves and the Financial Soundness of the Bank 161 10 VIII. DEFENDANTS' FALSE AND MISLEADING STATEMENTS 11 PROXIMATELY CAUSED ECONOMIC LOSS TO INDYMAC'S INVESTORS 165 12 13 A. Defendants' First Partial Disclosure 169 14 B. Defendants' Second Partial Disclosure, Which Was 15 Accompanied by Multiple False and Misleading Statements 176 16 C. The Class Period Ends 180 17 D. IndyMac's Losses Were Not the Result of General Market 18 Conditions and Were Instead the Result of the Concealed Practices 186 19 IX. THE COLLAPSE OF INDYMAC AND OTHER POST-CLASS PERIOD 20 DEVELOPMENTS 187 21 X. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON- 22 THE-MARKET DOCTRINE 188 23 XI. NO STATUTORY SAFE HARBOR 189 24 XII. PRAYER 196 25 26 27 28 1565686vl/010900 v Case 2:08-cv-03812-GW -VBK Document 186-1 Filed 05/27/11 Page 7 of 50 Page ID #:9475 I. INTRODUCTION 1 Lead Plaintiff Robert C. Daniels, individually and on behalf of all other 2 persons or entities who purchased the common stock of IndyMac Bancorp, Inc. 3 ("IndyMac" or the "Company") between March 1, 2007 and May 12, 2008, 4 inclusive (the "Class Period"), alleges the following based upon information and 5 belief, except as to those allegations concerning himself, which are based upon 6 personal knowledge. Plaintiff's information and belief allegations are based upon, 7 among other things: (a) the investigation conducted by and through his attorneys, 8 9 including interviews with numerous former employees of IndyMac's banking 10 subsidiary, some of whom conditioned their cooperation on a promise of 11 anonymity; (b) review and analysis of filings made by IndyMac with the United 12 States Securities and Exchange Commission ("SEC"); (c) review and analysis of data submitted by IndyMac's banking subsidiary to the United States Department 13 of the Treasury's Office of Thrift Supervision ("OTS"); (d) review and analysis of 14 data contained in the
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