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Case 1:11-Cv-04209-BSJ-JCF Document 23 Filed 06/01/12 Page 1 of 72 Case 1:11-cv-04209-BSJ-JCF Document 23 Filed 06/01/12 Page 1 of 72 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK x IBEW LOCAL 90 PENSION FUND, On Civil Action No. 1 1-cv-04209-BSJ-JCF Behalf of Itself and All Others Similarly Situated, CLASS ACTION Plaintiff, • LEAD PLAINTIFFS' AMENDED • COMPLAINT FOR VIOLATION OF THE IY1! FEDERAL SECURITIES LAWS DEUTSCHE BANK AG, et al., DEMAND FOR JURY TRIAL Defendants. x 683198_i Case 1:11-cv-04209-BSJ-JCF Document 23 Filed 06/01/12 Page 2 of 72 TABLE OF CONTENTS Page I. INTRODUCTION ............................................................................................................... 1 II. JURISDICTION AND VENUE..........................................................................................4 III. THE PARTIES..................................................................................................................... 5 IV. FRAUDULENT SCHEME AND COURSE OF BUSINESS .............................................6 V. MISCONDUCT REVEALED BY THE LEVIN-COBURN SUBCOMMITTEE..............................................................................................................7 VI. MISCONDUCT REVEALED BY THE DEPARTMENT OF JUSTICE INVESTIGATION............................................................................................28 VII. MISCONDUCT REVEALED BY THE FEDERAL HOUSING FINANCE AGENCY INVESTIGATION AND ALLEGATIONS .................................. 45 VIII. DEFENDANTS' FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD .......................................................................48 IX. LOSS CAUSATION/ECONOMIC LOSS ........................................................................62 X. CLASS ACTION ALLEGATIONS ..................................................................................65 XI. PRAYER FOR RELIEF ....................................................................................................66 XII. JURY DEMAND...............................................................................................................67 -1- 683198_i Case 1:11-cv-04209-BSJ-JCF Document 23 Filed 06/01/12 Page 3 of 72 I. INTRODUCTION 1. This is a securities class action on behalf of all persons who purchased or otherwise acquired the ordinary shares of Deutsche Bank AG ("Deutsche Bank" or the "Company") between January 3, 2007 and January 16, 2009, inclusive (the "Class Period"), against Deutsche Bank and certain of its officers and/or directors for violations of the Securities Exchange Act of 1934 ("1934 Act"). On December 5, 2011, Building Trades United Pension Trust Fund, the Steward Global Equity Income Fund and the Steward International Enhanced Index Fund were appointed lead plaintiffs in this action pursuant to the Private Securities Litigation Reform Act of 1995 ("PSLRA"). 2. Deutsche Bank is a global investment bank based in Frankfurt, Germany, with branch offices in the United States and around the globe. The Company's shares are listed on the New York Stock Exchange ("NYSE"). 3. During the Class Period, executives and officers at Deutsche Bank and its subsidiaries oversaw a scheme to maximize profits by originating and acquiring fraudulent and misrepresented residential mortgages and bundling those mortgages into pools of mortgages called residential mortgage-backed securities ("RMBS"). An RMBS is a type of bond in which investors acquire an interest in the principal and interest payments generated by the underlying pool of residential mortgages. Each RIVIBS, moreover, is subdivided into a series of securities enjoying different levels of seniority, with the most senior securities being the least risky because they are paid first, and the most junior securities being the most risky since they are the first not to be paid if the underlying residential mortgages default. The most risky portions or interests in the various RMBS were re- bundled into yet another security called a Collateralized Debt Obligation ("CDO"), and then resold to other investors, generating even more profits for Deutsche Bank from the poor quality and fraudulent residential mortgages. -1- 683 198_i Case 1:11-cv-04209-BSJ-JCF Document 23 Filed 06/01/12 Page 4 of 72 4. Because substantial profits could be made by packaging and selling the RMBS and CDOs, defendants were willing to ignore the concealed risks associated with the poor quality of the underlying mortgages. Indeed, in order to expand its access to residential mortgages, Deutsche Bank acquired MortgagelT Holdings, Inc. ("MortgagelT"), an aggressive residential mortgage lender, on January 3, 2007. MortgagelT lent hundreds of millions of dollars of loans to financially unqualified borrowers who ultimately defaulted on their loans. Deutsche Bank eventually incurred billions of dollars of losses due to poor quality and improperly underwritten mortgages originated by MortgagelT and acquired from other sources, including residential mortgages pooled into RMBS and CDO structures. 5. According to an August 17, 2010 report by Compass Point Research & Trading, LLC, entitled "Mortgage Repurchases Part II: Private Label RMBS Investors Take Aim - Quantifying the Risks," Deutsche Bank Securities Inc. underwrote $5.6 billion of subprime RMBS in 2005, $4.3 billion in 2006, and $10.1 billion in 2007. According to Deutsche Bank's 2006 Annual Report to investors, the "expan[sion into] residential mortgage-backed securities" helped Deutsche Bank generate "record revenues." Unfortunately, Deutsche Bank's involvement in the origination and sale of RMBS was characterized by rapid growth and improper mortgage underwriting. 6. In fact, Deutsche Bank structured and marketed mortgage-backed securities that were internally described as "crap" and "pigs," and then transferred many of these assets to unknowing third parties. Defendants misrepresented Deutsche Bank's risk management practices and concealed the Company's failure to write down impaired securities containing mortgage-related debt. Deutsche Bank and its mortgage origination subsidiary intentionally disregarded findings that residential mortgage loans did not comply with underwriting guidelines. As a result of defendants' -2- 683198_i Case 1:11-cv-04209-BSJ-JCF Document 23 Filed 06/01/12 Page 5 of 72 false statements, Deutsche Bank shares traded at artificially inflated prices during the Class Period, reaching a high of $159.59 per share in May 2007. 7. Eventually, Deutsche Bank's shares declined after it reported billions of dollars in losses directly or indirectly related to mortgage-backed securities. After the losses were announced, and following the Class Period, three government entities - the U.S. Senate Permanent Subcommittee on Investigations ("Levin-Coburn Subcommittee"), the U.S. Department of Justice ("DOJ") and the Federal Housing Finance Agency ("FHFA") - initiated investigations or litigation as a result of Deutsche Bank's misconduct. 8. On April 13, 2011, the Levin-Coburn Subcommittee issued a report entitled "Wall Street and the Financial Crisis: Anatomy of a Financial Collapse" (the "Levin-Coburn Report"). The report relies on internal Deutsche Bank records and employee interviews, documents numerous occasions where the residential mortgages and related securities were described as "generally horrible," having "a real chance of massively blowing up," and a Ponzi scheme. Indeed, Deutsche Bank's top RMBS trader stated that he wanted to "try and dupe" an investor into buying an RMBS. The report demonstrates Deutsche Bank's internal awareness of the poor quality of residential mortgages and the associated securities that Deutsche Bank was marketing. 9. On May 3, 2011, the DOJ sued Deutsche Bank for misrepresenting its mortgage loans and default review procedures. The suit sought as much as $1 billion from Deutsche Bank. A May 4, 2011, The Wall Street Journal headline blared: U.S. Says Deutsche Bank Lied Suit Accuses Lender ofMisrepresenting Quality ofLoans Made by Mortgage Unit 10. The DOJ accused Deutsche Bank of lying about the quality of loans. On May 10, 2012, Deutsche Bank entered into a Stipulation and Order of Settlement and Dismissal agreeing to -3- 683198_i Case 1:11-cv-04209-BSJ-JCF Document 23 Filed 06/01/12 Page 6 of 72 pay compensation of $202.3 million and accepting responsibility for failing to comply with federal regulations controlling the U.S. Department of Housing and Urban Development ("HUD") - Federal Housing Administration ("FHA") mortgage certification. 11. On September 2, 2011, the FHFA, as Conservator for the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), sued Deutsche Bank and MortgagelT Securities Corporation in the United States District Court for the Southern District of New York for falsely representing that RMBS sold by Fannie Mae and Freddie Mac complied with underwriting requirements and standards and alleging that the defendants had significantly overstated the value of the collateralized property and the ability of mortgage borrowers to repay their loans. Throughout the Class Period, however, defendants assured shareholders and analysts that they were "comfortable" with their mortgage exposure and that adequate loss provisions had been taken. 12. As a result of defendants' false statements, Deutsche Bank shares traded at inflated prices during the Class Period. However, after the above revelations seeped into the market, and Deutsche Bank absorbed billions of dollars of residential mortgage-related losses, the Company's
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