SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK AMERICAN INTERNATIONAL GROUP, INC., AIG SECURITIES LENDING Index No. ___________ CORPORATION, AMERICAN GENERAL ASSURANCE COMPANY, COMPLAINT AMERICAN GENERAL LIFE AND ACCIDENT INSURANCE COMPANY, AMERICAN GENERAL LIFE INSURANCE COMPANY, AMERICAN GENERAL LIFE INSURANCE COMPANY OF DELAWARE, AMERICAN HOME ASSURANCE COMPANY, AMERICAN INTERNATIONAL GROUP RETIREMENT PLAN, CHARTIS PROPERTY CASUALTY COMPANY, CHARTIS SELECT INSURANCE COMPANY, CHARTIS SPECIALTY INSURANCE COMPANY, COMMERCE AND INDUSTRY INSURANCE COMPANY, FIRST SUNAMERICA LIFE INSURANCE COMPANY, LEXINGTON INSURANCE COMPANY, NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, NEW HAMPSHIRE INSURANCE COMPANY, SUNAMERICA ANNUITY AND LIFE ASSURANCE COMPANY, SUNAMERICA LIFE INSURANCE COMPANY, THE INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA, THE UNITED STATES LIFE INSURANCE COMPANY IN THE CITY OF NEW YORK, THE VARIABLE ANNUITY LIFE INSURANCE COMPANY, and WESTERN NATIONAL LIFE INSURANCE COMPANY, Plaintiffs, ‐against- BANK OF AMERICA CORPORATION, BANC OF AMERICA SECURITIES LLC, BANK OF AMERICA, NATIONAL ASSOCIATION, BANC OF AMERICA FUNDING CORPORATION, BANC OF AMERICA MORTGAGE SECURITIES, INC., ASSET BACKED FUNDING CORPORATION, NB HOLDINGS CORPORATION, MERRILL LYNCH & CO., INC., MERRILL LYNCH MORTGAGE LENDING, INC., FIRST FRANKLIN FINANCIAL CORPORATION, MERRILL LYNCH MORTGAGE CAPITAL INC., MERRILL LYNCH CREDIT CORPORATION, MERRILL LYNCH, PIERCE, FENNER & SMITH INC., MERRILL LYNCH MORTGAGE INVESTORS, INC., COUNTRYWIDE FINANCIAL CORPORATION, COUNTRYWIDE CAPITAL MARKETS LLC, COUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE SECURITIES CORPORATION, CWABS, INC., CWALT, INC., CWHEQ, INC., and CWMBS, INC., Defendants. TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................2 PARTIES .......................................................................................................................................14 JURISDICTION AND VENUE ....................................................................................................26 BACKGROUND ...........................................................................................................................26 I. THE MECHANICS OF MORTGAGE SECURITIZATION ...........................................26 II. THE RAPID EXPANSION OF MORTGAGE SECURITIZATION TRANSFORMS THE INDUSTRY ...................................................................................29 III. DEFENDANTS OPERATED ON EVERY LEVEL OF THE SECURITIZATION PROCESS ..........................................................................................................................31 ALLEGATIONS ............................................................................................................................34 IV. DEFENDANTS’ MATERIAL MISREPRESENTATIONS .............................................34 A. Defendants’ Offering Materials .............................................................................34 B. Defendants’ Misrepresentations Regarding Loan Underwriting Standards and Practices ..........................................................................................................37 C. Defendants’ Misrepresentations Regarding Loan-to-Value and Combined Loan-to-Value Ratios .............................................................................................40 D. Defendants’ Misrepresentations Regarding Owner-Occupancy ............................43 E. Defendants’ Misrepresentations Regarding Credit Ratings ...................................44 V. DEFENDANTS’ REPRESENTATIONS TO AIG WERE FALSE ..................................45 A. Loan-to-Value Ratios Represented by Defendants Were False .............................47 B. Combined Loan-to-Value Ratios Represented by Defendants Were False ...........53 C. Owner-Occupancy Levels Represented by Defendants Were False ......................55 D. Defendants Engineered Inflated Credit Ratings ....................................................58 (1) All Deals Have Suffered Significant Credit Rating Downgrades ..............63 i E. Defendants Ignored Stated Underwriting Guidelines ............................................64 (1) Countrywide Ignored Its Underwriting Guidelines ...................................65 (a) Countrywide Schemes to Increase Its Market Share But Pledges Continued Rigorous Underwriting ...................................67 (b) Countrywide Cedes Its Underwriting Policy to the Market’s Lowest Common Denominator Through Its “Matching” Mandate..........................................................................................71 (c) Countrywide’s Use of “Exceptions” Guaranteed that Virtually Every Loan Would Be Approved ...................................74 (d) Through Countrywide’s Matching Program and Its Use of Exceptions, “Saleability” Became the Sole Criteria Used to Approve a Loan..............................................................................80 (e) Countrywide Abused the No-Documentation Loan Process and Falsified Loan Applications ....................................................81 (f) Countrywide Ignored Its Internal Risk Department Who Warned That Underwriting Standards Had Been Abandoned .....................................................................................87 (g) Countrywide’s Inflated Appraisals Skewed Loan-to-Value Figures Reported to Investors Like AIG ........................................90 (h) Countrywide Encouraged Staff Through Compensation and Other Incentives To Put Borrowers Into Higher Risk Loans More Profitable to Countrywide ....................................................95 (i) Countrywide Developed Toxic “Exotic” Loan Products With Extreme Risk .........................................................................97 (j) Countrywide Admits to Using Adverse Selection in Pooling Loans, Keeping the Best Loans For Itself ........................98 (k) Third-Party Due Diligence Firms Conclude that Countrywide Loans Are Defective ................................................99 (l) Analysis by Parties With Access to Actual Loan Files Shows that Countrywide Abandoned Its Underwriting Guidelines ....................................................................................102 (2) Merrill Ignored Its Underwriting Guidelines ...........................................106 (a) Merrill Seeks To Increase Its Market Share ................................106 ii (b) Merrill Instructed Subprime Originators to Increase Their Origination Volumes and Originate Riskier Loans .....................109 (c) Merrill Waived Loans That Failed To Meet Underwriting Guidelines ....................................................................................116 (3) Bank of America Ignored Its Underwriting Guidelines ...........................120 (a) Former Employees Confirm That Bank Of America Abandoned Its Underwriting Guidelines .....................................123 (b) AIG’s Limited Access to Loan Files Confirms Bank of America Abandoned Its Underwriting Guidelines ......................127 F. The Economic Downturn Cannot Explain the High Default Rates, Foreclosures, and Delinquencies in the Collateral Pools .....................................129 VI. THE DEFENDANTS KNEW THEIR REPRESENTATIONS WERE FALSE .............131 A. Countrywide Knew Its Representations Were False ...........................................131 B. Merrill Knew Its Representations Were False .....................................................137 C. Bank of America Knew Its Representations Were False .....................................140 VII. AIG’S DETRIMENTAL RELIANCE AND RESULTING DAMAGES .......................142 VIII. OTHER MATTERS.........................................................................................................148 A. Bank of America’s Liability as a Successor-in-Interest to Countrywide ............148 (1) The Structure of the Transaction ..............................................................148 (2) The Actual Consolidation of Bank of America and Countrywide ...........152 (3) Bank of America is Countrywide’s Successor-in-Interest .......................162 B. Tolling of the Securities Act of 1933 Claims ......................................................163 (1) Tolling of 1933 Act Claims Against Countrywide ..................................163 (2) Tolling of 1933 Act Claims Against Merrill ............................................165 C. Liability of Countrywide Financial, Countrywide Capital Markets, and Merrill Lynch & Co., Inc. as Control Persons .....................................................166 (1) Countrywide Financial and Countrywide Capital Markets .....................166 (2) Merrill Lynch & Co., Inc. ........................................................................170 iii FIRST CAUSE OF ACTION ......................................................................................................173 SECOND CAUSE OF ACTION .................................................................................................174 THIRD CAUSE OF ACTION .....................................................................................................175 FOURTH CAUSE OF ACTION .................................................................................................178 FIFTH CAUSE OF ACTION ......................................................................................................182 SIXTH