UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK NEW JERSEY CARPENTERS HEALTH FUND Case No.: 08-CV-8093 (LTS) and BOILKERIVIAKER BLACKSMITH NATIONAL PENSION TRUST, on Behalf of Themselves and All Others Similarly Situated, FIRST CONSOLIDATED AMENDED SECURITIES CLASS Plaintiffs, ACTION COMPLAINT v. ECF CASE STRUCTURED ASSET MORTGAGE INVESTMENTS II, INC., BEAR STEARNS ASSET BACKED SECURITIES I, LLC, JEFFREY L. VERSCHLEISER, MICHAEL B. NIERENBERG, JEFFREY MAYER, THOMAS F. \\\'1/4\ Nil "Ill MARANO, MATTHEW E. PERKINS, SAMUEL i41143. L. MOLINAR.0, JR., KIM LUTTHANS, ITO) iSt.5 • KATHERINE GARNIEWSKI, JOSEPH T. JURKOWSKI, JR., EMC MORTGAGE CORPORATION, JPMORGAN CHASE, INC. as successor-in-interest to BEAR STEARNS & COMPANY, INC, MOODY'S INVESTORS SERVICE, INC. and THE MCGRAW-HILL COMPANIES, INC., Defendants. TABLE OF CONTENTS I. SUMMARY OF THE ACTION 1 II. JURISDICTION AND VENUE 11 III. PARTIES AND RELEVANT NON-PARTIES 11 IV. BACKGROUND 22 A. Bear Stearns Emerges As a Major Issuer and Underwriter of Mortgage-Backed Securities 22 B. Bear Stearns’ Securitization and Underwriting Operations 26 1. Bear Stearns’ Bulk-Loan Purchases from Third-Party Originators 26 2. The Ratings Agencies’ Roles in Bear Stearns’ Bid on Loans Purchased at Auction 27 3. Bear Stearns’ Loan File “Due Diligence” Between Acceptance of Bid at Auction and Settlement Date 29 4. Flow Loans from Bear Stearns Subsidiary and Correspondent Lenders 30 5. Bear Stearns Securitizes MBS into Separate “Shelves”: BSABS, BSMF and SAMI 31 C. Bear Stearns’ “Ratings Shopping” Practices 32 V. DEFENDANTS’ OMISSIONS OF MATERIAL FACT FROM THE OFFERING DOCUMENTS UNDER THE SECURITIES ACT 33 A. Exponential Increases in Borrower Delinquencies Shortly After Certificate Issuances Reflect Defective Collateral and Faulty Origination 33 B. The Collapse of the Certificates’ Ratings Shortly After Issuances Reflects Defective Loan Collateral and Faulty Origination 35 C. Investigations and Disclosures Subsequent to Issuance Evidence EMC, BSRM and Encore Disregarded Stated Mortgage Loan Underwriting Guidelines 36 1. EMC And BSRM Systematically Disregarded Stated Mortgage Loan Underwriting Guidelines 36 i 2. Encore Systematically Disregarded Stated Mortgage Loan Underwriting Guidelines 42 D. Subsequent Disclosures Evidence That Third-Party Originators Disregarded Stated Mortgage Loan Underwriting Guidelines 44 1. Countrywide Systematically Disregarded Stated Mortgage Loan Underwriting Guidelines 44 2. American Home Systematically Disregarded Stated Mortgage Loan Underwriting Guidelines 50 3. Ameriquest Loan Sellers Systematically Disregarded Stated Mortgage Loan Underwriting Guidelines 53 4. GreenPoint Systematically Disregarded Stated Mortgage Loan Underwriting Guidelines 58 5. Aegis Systematically Disregarded Stated Mortgage Loan Underwriting Guidelines 61 6. FMC Systematically Disregarded Stated Mortgage Loan Underwriting Guidelines 62 E. The FTC Action Reveals that EMC and Bear Stearns Engaged in Systemic Improper Mortgage Collection and Servicing Practices 64 F. Bear Stearns’ Inadequate Due Diligence with Respect to Compliance with Stated Underwriting Guidelines and EMC Servicing Activities 68 G. The Offering Documents Failed to Disclose that Bear Stearns Relied on S&P’s and Moody’s Outdated Models to Determine Levels of Credit Enhancement And Ratings 72 H. The Ratings Agencies Relaxed the Ratings Criteria Which Led to Artificially Inflated Ratings for the Certificates 77 I. The Prospectus Supplements Did Not Reflect the True Risk of the Certificates 79 J. The Offering Documents Failed to Disclose Bear Stearns’ Ratings Shopping Practices 81 K. The Offering Documents Failed to Disclose the True Roles of Ratings Agencies in Forming and Structuring the Certificates for Sale as Primarily AAA Securities 82 ii L. The Offering Documents Failed to Disclose Material Financial Conflicts of Interest Between Bear Stearns and the Ratings Agencies 84 M. Federal District Court Rules Non-Independence of Moody’s in MBS and CDO Ratings Is a Material Misrepresentation in Moody’s Securities Fraud Case 87 VI. MATERIAL MISSTATEMENTS AND OMISSIONS IN THE OFFERING DOCUMENTS 89 A. Material Misstatements and Omissions Regarding Mortgage Loan Underwriting Guidelines 89 1. The Registration Statements 89 2. The Prospectus Supplements 92 i. EMC’s Mortgage Loan Underwriting Guidelines 92 ii. BSRM’s Mortgage Loan Underwriting Guidelines 95 iii. Countrywide’s Mortgage Loan Underwriting Guidelines 98 iv. American Home’s Mortgage Loan Underwriting Guidelines 102 v. Ameriquest Loan Sellers’ Mortgage Loan Underwriting Guidelines 105 vi. GreenPoint’s Mortgage Loan Underwriting Guidelines 108 vii. Aegis’ Mortgage Loan Underwriting Guidelines 112 viii. FMC’s Mortgage Loan Underwriting Guidelines 114 C. The Registration Statements Included Material Misstatements and Omissions Regarding Credit Support 115 D. The Prospectus Supplements Misstated the True Loan-to- Value Ratios Associated with the Underlying Mortgages 118 E. The Prospectus Supplements Misstated the Certificates’ True Investment Rating 121 F. Misstatements and Omissions in the Registration Statements Regarding EMC Servicing Practices 123 iii G. Misstatements and Omissions in the Prospectus Supplements Regarding EMC Servicing Practices 125 VII. CLASS ACTION ALLEGATIONS 126 VIII. PRAYER FOR RELIEF 135 iv I. SUMMARY OF THE ACTION 1. This Amended Complaint (the “Complaint”) is alleged upon personal knowledge with respect to Plaintiffs, and upon information and belief with respect to all other matters. This action is brought pursuant to the Securities Act of 1933 (the “Securities Act”) by (i) Court- Appointed Lead Plaintiff New Jersey Carpenters Health Fund (“Carpenters Health Fund” or “Lead Plaintiff”) and (ii) Plaintiff Boilermaker Blacksmith National Pension Trust (“Boilermaker Pension Trust;” with the Carpenters Health Fund, collectively referred to herein as “Plaintiffs”), on their own behalf and as a class action on behalf of all persons and entities who purchased or otherwise acquired interests in the Issuing Trusts (as set forth in ¶¶ 43-33, infra) (the “Issuing Trusts”) pursuant or traceable to two (2) separate Registration Statements and accompanying Prospectuses filed with the Securities and Exchange Commission (the “SEC”) by (i) Structured Asset Mortgage Investments II, Inc. (“SAMI”) on March 10, 2006 (No. 333-132232) (the “SAMI Registration Statement”) and (ii) Bear Stearns Asset Backed Securities I, LLC (“BSABSI”) on March 31, 2006 (No. 333-131374) (the “BSABSI Registration Statement;” with the SAMI1 Registration Statement, collectively referred to herein as the “Registration Statements”)(the “Class”). 2. Pursuant to the Registration Statements and Prospectus Supplements incorporated therein (collectively, the “Offering Documents”), Bear Stearns & Company, Inc. (“BSC”) and its subsidiaries underwrote and sold $31.61 billion of mortgage backed securities (“MBS”), designated as Mortgage Pass-Through Certificates (“MPTC”) and Asset-Backed Certificates (“ABS”) (collectively, the “Certificates”) to Plaintiffs and the Class. The Certificates were sold 1 SAMI and BSABSI were entities formed and controlled by Bear Stearns & Company, Inc. for the purpose of issuing mortgage backed securities. 1 in forty-four (44) Offerings completed in just sixteen months between May 23, 2006 and September 18, 2007 (collectively, the “Offerings”). 3. As set forth below, the Offering Documents contained material misstatements and omitted material information in violation of Sections 11, 12 and 15 of the Securities Act, 15 U.S.C. §§ 77k, 77l(a)(2) and 77o. Defendants are strictly or negligently liable for the material misstatements and omissions under the Securities Act. The Complaint asserts no allegations or claims sounding in fraud. 4. Plaintiffs seek redress against Defendants SAMI and BSABSI, who prepared and filed the Registration Statements; Defendants Jeffrey L. Verschleiser (“Verschleiser”), Michael B. Nierenberg (“Nierenberg”), Jeffrey Mayer (“Mayer”), Thomas F. Marano (“Marano”), Mathew E. Perkins (“Perkins”), Samuel L. Molinaro, Jr. (“Molinaro”), Kim Lutthans (“Lutthans”), Katherine Garniewski (“Garniewski”) and Joseph T. Jurkowski, Jr. (“Jurkowski”) (collectively, the “Individual Defendants”) who individually signed the Registration Statements; Defendant EMC Mortgage Corporation (“EMC”), who was the Sponsor and Seller on each Offering responsible for acquiring the underlying mortgage loan collateral as well as a Servicer responsible for collection of the mortgage debt and distributions to Certificate investors according to the terms of the Offerings; Defendant BSC, who was the sole underwriter of the Offerings;2 and Defendant Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Ratings Services (“S&P), a division of Defendant the McGraw-Hill Companies, Inc. (S&P and Moody’s are collectively referred to herein as the “Ratings Agencies,” “Ratings Agency Defendants” or the “Ratings Agency Underwriters”) who, with BSC, structured the Certificates for sale to investors as primarily the highest investment grade securities (“AAA”). (BSABSI, 2 JPMorgan Chase, Inc. (“JPM”) is named as a Defendant in the within action as BSC’s successor-in-interest. JPM purchased BSC on March 16, 2008 for $236 million, or $2 per share in a “fire-sale” acquisition orchestrated by the Federal Reserve and Treasury Department. (¶¶ 43-44, infra). 2 SAMI, EMC and BSC along with their affiliates, subsidiaries and successors-in-interest are referred to collectively herein as “Bear