Case 1:07-cv-00815-JB -WDS Document 361 Filed 06/14/11 Page 1 of 179 UNITED STATES DISTRICT COURT DISTRICT OF NEW MEXICO IN RE THORNBURG MORTGAGE, INC Case No. 07-815 JB/WDS SECURITIES LITIGATION CONSOLIDATED AMENDED CLASS ACTION COMPLAINT Case 1:07-cv-00815-JB -WDS Document 361 Filed 06/14/11 Page 2 of 179 TABLE OF CONTENTS Page NATURE OF THE ACTION 1 I. The Exchange Act Action 2 II. The Securities Act Action 13 JURISDICTION AND VENUE 16 PARTIES 17 I. Plaintiffs 17 II. Defendants 19 III. Control Person/Group Published Information Allegations 20 SUBSTANTIVE ALLEGATIONS 37 I. Background 37 II. The Company Generates Revenue Based Upon the Small Spread Between its Investments and the Cost of Borrowing 38 III. The Company Relied Extensively on and Touted the Benefits of Leveraging its Assets to Grow its Business 41 IV. TMI and the Mortgage Market Meltdown 43 A. The Implosion of Heavily Leveraged Subprime Backed Hedge Funds Due to Lender Margin Calls 45 B. High Risk Alt-A Loans Contribute to Mortgage Market Failures 46 C. Agency Ratings Begin To Lose Market Credibility In Early 2007 48 D. TMI and the Individual Defendants Repeatedly Tout the Invincibility of the Company’s MBS Asset Portfolio While at the Same Time Concealing That It Held Billions in Assets Backed by Risky Alt-A Loans 49 E. TMI’s Significant Involvement With Originated and Purchased Alt-A Loans 52 F. Unbeknownst to Shareholders, the ABCP Market Dries Up, Leaving TMI Forced Asset Sales as Only Viable Liquidity Option 55 i Case 1:07-cv-00815-JB -WDS Document 361 Filed 06/14/11 Page 3 of 179 G. TMI Commences an Undisclosed Discount Sale of Its Highest-Rated Assets While Informing the Market It Was Only “Exploring” Such Sales. 57 H. TMI Fails to Disclose That It Still Holds Billions in Illiquid MBS Backed by Risky Alt-A Collateral 58 I. Asset Sales Do Not Fully Absolve the Company of Liquidity Issues 59 J. Adjustments to Loss Estimates Trigger SEC Inquiry 59 K. Effects of the Liquidity Crisis Continued to Plague TMI throughout the Fall of 2007 and Into 2008 61 L. Company Touts 4Q07 Return to Profitability 62 M. February 2008 Announcement of Alt-A Portfolio and Margin Calls Stuns the Market 64 N. Company Faces Additional Margin Calls 66 O. KPMG Demands that TMI Restate its FY 2006 and 2007 Financial Statements 67 P. TMI Delays Disclosure of the NYSE Investigation 69 Q. Company Finally Announces That It Must Restate 69 R. Lender Bailout Comes at Heavy Price 71 SUMMARY OF SCIENTER ALLEGATIONS 73 I. TMI and the Individual Defendants Knew and/or Recklessly Disregarded the Falsity of Their Class Period Statements and Omissions 74 II. Defendants Were Motivated to Commit Fraud 75 A. TMI’s “Manager” Is Paid To Grow the Company’s Balance Sheet Without Regard For Market Conditions 75 B. The Individual Defendants were Motivated to Conceal the Entire Truth From Investors Due to the Imminent Threat of Bankruptcy 77 C. TMI and the Individual Defendants Were Motivated to Conceal the Truth to Raise Cash Through Public Offerings 78 D. TMI and the Individual Defendants were Motivated to Conceal the Truth to Complete Securitization Transactions to Fund Loan Originations When Borrowings Were Increasingly Difficult to Obtain 79 ii Case 1:07-cv-00815-JB -WDS Document 361 Filed 06/14/11 Page 4 of 179 III. Additional Indicia Of Scienter 80 A. The Magnitude of the Funds Required to Meet Margin Calls Also Raises an Inference of Scienter 80 B. The Timing and Magnitude of the Company’s Restatement Raises a Strong Inference of Scienter 80 DEFENDANTS’ GAAP VIOLATIONS 80 I. Subsequent Events 84 II. TMI and the Individual Defendants Failed to Disclose Adverse Facts and Events During the Class Period in Violation of GAAP and SEC Regulation S-K 86 III. Violations of SEC Regulation S-K and S-X 89 IV. The 2008 Restatement 90 MATERIALLY FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD 93 I. April 2007 Misrepresentations and Omissions 93 A. TMI and the Individual Defendants Tout TMI’s Credit Quality and Asset Liquidity Due to TMI’s Purported Focus on “Prime” Mortgages, While Concealing Billions of Dollars in Alt-A Mortgage Backed Assets 93 II. May 2007 Misrepresentations and Omissions 95 A. TMI and the Individual Defendants Disseminate Materially False and Misleading Offering Documents to Raise $121.7 Million in Capital and Fuel Liquidity 95 B. TMI’s First Quarter 2007 Form 10-Q 97 III. June 2007 Misrepresentations and Omissions 99 A. TMI and Defendant Goldstone Tout “Prime” Originations But Continue To Conceal Alt-A Origination Activity And Exposure 99 B. TMI and the Individual Defendants Disseminate Materially False and Misleading Offering Documents in Order to Raise $68.8 Million in Capital to Fuel Liquidity 100 IV. July 2007 Misrepresentations and Omissions 103 iii Case 1:07-cv-00815-JB -WDS Document 361 Filed 06/14/11 Page 5 of 179 A. TMI and the Individual Defendants Report 2Q EPS and that Dividend Will be Maintained, But Continue to Conceal Alt-A Holdings and Problems in the ABCP Market 103 V. August 2007 Misstatements and Omissions – TMI and the Individual Defendants Begin A Campaign of Selective Disclosure 104 A. TMI Files 2Q07 10-Q Concealing Asset Illiquidity and Billions in Alt-A Exposure 104 B. TMI and the Individual Defendants Disseminate Materially False and Misleading Offering Documents in Order to Raise $500 Million in Necessary Capital to Keep Company Afloat Following Liquidity Crisis 108 VI. Misrepresentations and Omissions in TMI’s 3Q07 Form 10-Q 111 VII. January 2008 Misrepresentations and Omissions 112 A. January 2008 Offering 112 VIII. February 2008 Misrepresentations and Omissions 114 A. The Undisclosed JP Morgan Default, Cross-Defaults, and First Disclosure of ARM Assets Backed by Alt-A Loans 114 IX. March 2008 Misstatements and Omissions 117 A. TMI and the Individual Defendants Reveal Company’s Inability to Meet $270 Million in Margin Calls Would Have a “Material” Impact on its Borrowing Position 117 B. TMI and the Individual Defendants Admit that the JP Morgan Default Triggered Cross-Default Provisions with All Other RPA Lenders 120 C. TMI and the Individual Defendants Finally Reveal Existence of KPMG Letter and Requirement to Restate 121 D. Company Issues Restated Financial Results and Reports Greater Loss than Estimated Just Two Days Prior 123 E. Company Continues to Default on Repurchase Agreements 125 F. Company Announces Lender Bailout 126 POST CLASS-PERIOD DISCLOSURES/EVENTS 128 LOSS CAUSATION/ECONOMIC LOSS 131 FRAUD-ON-THE-MARKET PRESUMPTION OF RELIANCE 136 iv Case 1:07-cv-00815-JB -WDS Document 361 Filed 06/14/11 Page 6 of 179 NO SAFE HARBOR 137 CLASS ACTION ALLEGATIONS 138 FIRST CLAIM FOR RELIEF 141 For Violation of Section 10(b) of the Exchange Act and Rule 1 0b-5 Against TMI and the Individual Defendants 141 SECOND CLAIM FOR RELIEF 144 For Violation of Section 20(a) of the Exchange Act Against the Individual Defendants 144 ALLEGATIONS SPECIFIC TO THE SECURITIES ACT ACTION 146 I. Additional Securities Act Parties 147 A. The Underwriter Defendants 147 B. The Director Defendants 150 C. Duty to Conduct a Reasonable and Diligent Investigation 151 II. The Offerings 151 A. The May 2007 Offering 151 B. The June 2007 Offering 152 C. The September 2007 Offering 152 D. The January 2008 Offerings 153 III. The Revelation of Alt-A Exposure in the Company’s Portfolio and of Misstated FY2006 Financial Results 154 IV. Materially False Statements in And Omissions From the Offering Documents 156 A. The Shelf Registration Statement 156 B. The May 2007 Offering Documents Were Materially False or Misleading 157 C. The June 2007 Offering Documents Were Materially False or Misleading 159 D. The September 2007 Offering Documents Were Materially False or Misleading 162 v Case 1:07-cv-00815-JB -WDS Document 361 Filed 06/14/11 Page 7 of 179 E. The January 2008 Offering Documents Were Materially False or Misleading 164 THIRD CLAIM FOR RELIEF 167 For Violation of Section 11 of the Securities Act Against TMI, the Individual Defendants, the Director Defendants, and the Underwriter Defendants 167 FOURTH CLAIM FOR RELIEF 170 For Violation of Section 15 of the Securities Act Against the Individual Defendants... 170 PRAYER FOR RELIEF 170 JURY DEMAND 172 vi Case 1:07-cv-00815-JB -WDS Document 361 Filed 06/14/11 Page 8 of 179 Lead Plaintiffs, W. Allen Gage, individually and on behalf of J. David Wrather, Harry Rhodes, FFF Investments, LLC, Robert Ippolito, individually and as Trustee for the Family Limited Partnership Trust, and Nicholas F. Aldrich, Sr., individually and behalf of the Aldrich Family, Plaintiff Betty L. Manning, Plaintiff John Learch and Plaintiff Boilermakers Lodge 154 Retirement Plan (collectively, “Plaintiffs”), individually, and on behalf of all others similarly situated, allege the following based upon Lead Plaintiffs’ individual and personal knowledge and Lead Plaintiffs’ own acts, and upon the investigation of Lead Plaintiffs’ counsel as to all other matters, which includes, inter alia, a review of public documents published or disseminated by or on behalf of, or concerning Thornburg Mortgage, Inc. (“TMI” or the “Company”) and/or any of its competitors or peers, and any of the individual defendants named herein, including, inter alia, United States Securities and Exchange Commission (“SEC”) filings, wire and press releases and other announcements, transcripts or wire broadcasts of conference calls, securities analysts’ reports and advisories, and information readily available on the Internet. Lead Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.