FILED: NEW YORK COUNTY CLERK 07/17/2015 10:55 PM INDEX NO. 652382/2014 NYSCEF DOC. NO. 472Case 1:14-cv-09366-SAS Document 1 Filed 11/24/14 PageRECEIVED 1 of 176 NYSCEF: 07/17/2015 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK l"I BLACKROCK BALANCED CAPITAL i. PORTFOLIO (Fl); BLACKROCK CORE ACTIVE LIBOR FUND B; BLACKROCK CORE BOND TRUST; BLACKROCK VERIFIED DERIVATIVE COREALPHA BOND FUND E; COMPLAINT AND ALTERNATIVE BLACKROCK COREALPHA BOND CLASS ACTION AGAINST HSBC MASTER PORTFOLIO; BLACKROCK BANK USA, NATIONAL COREPLUS BOND FUND B; ASSOCIATION FOR BREACH OF BLACKROCK DYNAMIC HIGH CONTRACT; VIOLATION OF THE INCOME - STRUCTURED CREDIT TRUST INDENTURE ACT OF 1939; PORTFOLIO; BLACKROCK FIXED BREACH OF FIDUCIARY DUTY; INCOME GLOBALALPHA MASTER BREACH OF DUTY OF FUND LTD.; BLACKROCK FUNDS II, INDEPENDENCE; AND INFLATION PROTECTED BOND NEGLIGENCE PORTFOLIO; BLACKROCK INCOME TRUST, INC.; BLACKROCK LONG DURATION ALPHAPLUS BOND FUND; JURY DEMAND BLACKROCK MASTER TOTAL rwrm r RETURN PORTFOLIO OF MASTER BOND LLC; BLACKROCK MULTI- LI\f NOV24ZOlT ASSET INCOME - NON-AGENCY MBS PORTFOLIO; BLACKROCK MULTI- U.S.D.C. S.D. N.Y. SECTOR INCOME TRUST; CASHIERS BLACKROCK STRATEGIC INCOME OPPORTUNITIES PORTFOLIO; BLACKROCK TOTAL RETURN PORTFOLIO (INS - SERIES); BLACKROCK US MORTGAGE; AST PIMCO TOTAL RETURN BOND PORTFOLIO; FIXED INCOME SHARES (SERIES R); FIXED INCOME SHARES: SERIES C; FIXED INCOME SHARES: SERIES M; LVS I LLC; LVS I SPE XIV 1') LLC; LVS II LLC; PACIFIC BAY CDO, LTD.; PACIFIC SHORES CDO, LTD.; -i PCM FUND, INC.; PIMCO ABSOLUTE RETURN STRATEGY 3D OFFSHORE FUND LTD.; PIMCO ABSOLUTE RETURN STRATEGY II MASTER FUND LDC; PIMCO ABSOLUTE RETURN STRATEGY III MASTER FUND LDC; PIMCO ABSOLUTE RETURN STRATEGY IV IDF LLC PIMCO Case 1:14-cv-09366-SAS Document 1 Filed 11/24/14 Page 9 of 176 TABLE OF CONTENTS Pace I, NATURE AND SUMMARY OF THE ACTION .............................................................. 1 II . PARTIES ............................................................................................................................ 8 A . Plaintiffs .............................................................................. .................................... 8 1 . AEGON....................................................................................................... 9 2 . BlackRock Funds........................................................................................ 9 3 . Brookfield................................................................................................. 11 4 . Charles Schwab......................................................................................... 11 5 . DZ Bank .................................................................................................... 11 6 . Kore........................................................................................................... 11 7 . PIMCO...................................................................................................... 12 8 . Prudential.................................................................................................. 24 9 . Sealink ............................ ....................................... .................................... 26 10 , TIAA......................................................................................................... 26 B . Defendants ............................................................................................................ 28 1. HSBC ......................................... ............................................................... 28 2. The Nominal Defendant Trusts................................................................. 29 III. OVERVIEW OF THE TRUSTS ...................................................................................... 29 IV. JURISDICTION AND VENUE....................................................................................... 30 V. COMPLIANCE WITH THE NO ACTION CLAUSE IS EXCUSED............................. 30 VI. DERIVATIVE AND DEMAND EXCUSED ALLEGATIONS...................................... 32 VII. BACKGROUND - THE TRUSTEE'S ROLE AS GATEKEEPER IN THE SECURITIZATIONPROCESS ....................................................................................... 34 VIII. HSBC'S CONTRACTUAL OBLIGATIONS.................................................................. 37 A. The Mortgage Loan Purchase And Sale Agreement............................................. 38 B. The Pooling And Servicing Agreements .............................................................. 40 Case 1:14cv-09366-SAS Document 1 Filed 11/24/14 Page 10 of 176 1. HSBC's Duties And Obligations Under The PSAs.................................. 40 a) Duty To Provide Notice Of Breaches And To Enforce Putback Rights............................................................ 41 b) HSBC's Duties Regarding The Servicers...................................... 42 C) Duties Upon Knowledge Of An Event Of Default............................................................................................ 43 2. The Servicers' Duties And Obligations Under The PSAs........................ 44 a) Duty To Provide Notice Of Breaches And To Enforce Putback Rights............................................................ 44 b) Duty To Perform Prudent And Customary ServicingPractices......................................................................... 45 C) Duty To Perform Prudent Foreclosure Practices......................................................................................... 46 d) Duty To Perform Prudent Servicing Advances........................................................................................ 46 C. The Indentures And Sale Servicing Agreements.................................................. 48 IX. THE TRUSTS SUFFERED FROM PERVASIVE BREACHES OF REPRESENTATIONS AND WARRANTIES BY THE SELLERS ............................... 50 A. High Default Rates Of The Mortgage Loans And Plummeting Credit Ratings Are Indicative Of Massive Seller Breaches.................................. 51 B. The Systemic Disregard Of Underwriting Standards Was Pervasive DuringThe Relevant Period ................................................................................. 52 C. There Is Evidence Of Widespread Breaches Of Representations And Warranties By The Specific Originators That Sold Loans To TheTrusts ............................................................................................................. 55 1 . Wells Fargo............................................................................................... 55 2 , Fremont..................................................................................................... 57 3 . GreenPoint ................................................................................................ 60 4 . Countrywide.............................................................................................. 61 5 . Option One................................................................................................ 65 6 . New Century ... .......................................................................................... 66 7 . WMC......................................................................................................... 69 -11- Case 1:14-cv-09366-SAS Document 1 Filed 11/24/14 Page 11 of 176 8. American Home........................................................................................ 72 9. IndyMac.................................................................................................... 74 D. The Systemic Disregard Of Prudent Securitization Standards Was Pervasive During The Relevant Period................................................................. 76 E. There Is Evidence Of Widespread Breaches Of Representations And Warranties By The Specific Sponsors Of The Trusts................................... 77 1. Wells Fargo Bank, N.A ............................................................................. 77 2. Deutsche Bank.......................................................................................... 80 3. Lehman ..................................................................................................... 83 4. Nomura ..................................................................................................... 85 5. Merrill Lynch............................................................................................ 87 HSBC KNEW THAT THE TRUSTS WERE FILLED WITH DEFECTIVELOANS ...................................................................................................... 90 A. The Trusts' Poor Performance.............................................................................. 91 B. Credit Rating Downgrades Of The Certificates Further Support TheSellers' Problems........................................................................................... 93 C. HSBC Discovered Widespread Seller Breaches Of Representations And Warranties In Its Capacity As Servicer......................................................... 94 D. HSBC Was Named In RMBS Litigation Involving Common Loan Sellers' Systemic Abandonment Of Underwriting Guidelines............................. 95 E. HSBC Received Written Notice Of Pervasive And Systemic Seller Breaches From Financial Guaranty Insurers......................................................... 97 F. HSBC And Its Responsible Officers Received Written Notice From Certificateholders Of Pervasive And Systemic Seller Breaches . ..............................................................................................................