UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE

FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstFIRST HORIZON NATIONAL CORPORATION, FIRST TENNESSEE BANK NATIONAL ASSOCIATION, FTN FINANCIAL SECURITIES CORPORATION, FIRST HORIZON ASSET SECURITIES, INC., UBS SECURITIES, LLC, J.P. MORGAN SECURITIES LLC, CREDIT SUISSE SECURITIES (USA) LLC (f/k/a CREDIT SUISSE FIRST BOSTON LLC), MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., GERALD L. BAKER, PETER F. MAKOWIECKI, CHARLES G. BURKETT, AND THOMAS J. WAGEMAN, Defendants.

___ CIV. ___ (___)

COMPLAINT JURY TRIAL DEMANDED

TABLE OF CONTENTS NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................5 The Plaintiff and the GSEs...................................................................................................5 The Defendants ....................................................................................................................6 JURISDICTION AND VENUE ....................................................................................................10 FACTUAL ALLEGATIONS ........................................................................................................11 I. THE SECURITIZATIONS................................................................................................11 A. B. C. Residential Mortgage-Backed Securitizations in General .....................................11 The Securitizations at Issue in this Case ................................................................12 The Securitization Process .....................................................................................13 1. 2. II. First Horizon Home Loan Groups Mortgage Loans in SpecialPurpose Trusts ............................................................................................13 The Trusts Issue Securities Backed By the Loans .....................................15

THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................17 A. The Role of Each Defendant ..................................................................................17 1. 2. 3. 4. 5. B. First Horizon Home Loan (now First Tennessee)......................................17 First Horizon Asset Securities ...................................................................18 First Horizon National ...............................................................................19 Underwriter Defendants .............................................................................20 Individual Defendants ................................................................................21

The Defendants Failure to Conduct Proper Due Diligence ..................................22 1. 2. 3. UBS ............................................................................................................24 Bear Stearns (now JP Morgan Securities) .................................................25 Credit Suisse ..............................................................................................27 i

4. C. III.

Merrill Lynch .............................................................................................29

Additional Allegations Regarding the Liability of JP Morgan Securities as Successor to Bear Stearns ......................................................................................31

THE REGISTRATION STATEMENT AND THE PROSPECTUS SUPPLEMENTS................................................................................................................33 A. B. C. D. Compliance With Underwriting Guidelines ..........................................................33 Statements Regarding the Occupancy Status of Borrowers ..................................35 Statements Regarding Loan-to-Value Ratios.........................................................37 Statements Regarding Credit Ratings ....................................................................39

IV.

THE FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENT AND PROSPECTUS SUPPLEMENTS ............................................................................41 A. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ....................................41 1. 2. B. Owner-Occupancy Data Was Materially False..........................................41 Loan-to-Value Data Was Materially False ................................................43

The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................46 1. 2. First Horizon Home Loan Failed to Adhere to Its Underwriting Guidelines ..................................................................................................46 The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines .................................................................48 The Surge in Mortgage Delinquencies and Defaults Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................50

3.

V.

FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES .................................................51

FIRST CAUSE OF ACTION ........................................................................................................53 SECOND CAUSE OF ACTION ...................................................................................................55 THIRD CAUSE OF ACTION .......................................................................................................59 ii

FOURTH CAUSE OF ACTION ...................................................................................................64 FIFTH CAUSE OF ACTION ........................................................................................................68 SIXTH CAUSE OF ACTION .......................................................................................................72 PRAYER FOR RELIEF ................................................................................................................77 JURY TRIAL DEMANDED .........................................................................................................77

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Plaintiff Federal Housing Finance Agency (FHFA), as conservator of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against First Horizon National Corporation (First Horizon National), First Tennessee Bank National Association (First Tennessee) (successor to First Horizon Home Loan Corporation (First Horizon Home Loan)), FTN Financial Securities Corporation (FTN), First Horizon Asset Securities, Inc. (First Horizon Asset Securities) (collectively, First Horizon); UBS Securities, LLC (UBS); J.P. Morgan Securities LLC (JP Morgan Securities) (as successor to Bear, Stearns & Co. Inc. (Bear Stearns)); Credit Suisse Securities (USA) LLC (Credit Suisse) (f/k/a Credit Suisse First Boston LLC); Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch); and Gerald L. Baker, Peter F. Makowiecki, Charles G. Burkett, and Thomas J. Wageman (the Individual Defendants) (all together, the Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of the Defendants actionable conduct in connection with

the offer and sale of certain residential mortgage-backed securities to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or GSEs). These securities were sold pursuant to a registration statement, including prospectuses and prospectus supplements that formed part of that registration statement, which contained materially false or misleading statements and omissions. Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans. These representations were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., Sections 311

5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and constitutes commonlaw negligent misrepresentation. 2. Between September 30, 2005, and April 30, 2007, Fannie Mae and Freddie Mac

purchased $883 million in residential mortgage-backed securities (the GSE Certificates) issued in connection with five First Horizon-sponsored and First Horizon-underwritten securitizations.1 The GSE Certificates purchased by Freddie Mac, along with the date and amount of the purchases, are listed infra in Table 10. The GSE Certificates purchased by Fannie Mae, along with the date and amount of the purchases, are listed infra in Table 11. The five securitizations at issue are: (i) (ii) (iii) (iv) (v) First Horizon Alternative Mortgage Securities Trust 2005-AA9 (FHAMS 2005-AA9); First Horizon Alternative Mortgage Securities Trust 2005-AA10 (FHAMS 2005-AA10); First Horizon Alternative Mortgage Securities Trust 2005-AA11 (FHAMS 2005-AA11); First Horizon Alternative Mortgage Securities Trust 2005-AA12 (FHAMS 2005-AA12); and First Horizon Alternative Mortgage Securities Trust 2006-AA1 (FHAMS 2006-AA1)

(collectively, the Securitizations). 3. The Certificates were offered for sale pursuant to a shelf registration statement

(the Shelf Registration Statement) filed with the Securities and Exchange Commission (the SEC). Defendant First Horizon Asset Securities filed the Shelf Registration Statement on May 23, 2005 that pertained to the five Securitizations at issue in this action. An amendment was For purposes of this Complaint, the securities issued under the Registration Statement (as defined in note 2, infra) are referred to as Certificates, while the particular Certificates that Fannie Mae and Freddie Mac purchased are referred to as the GSE Certificates. Holders of Certificates are referred to as Certificateholders. 2
1

filed on July 29, 2005. The Shelf Registration Statement and amendment were signed by or on behalf of the Individual Defendants. With respect to all of the Securitizations, FTN was an underwriter, and, with respect to one of the Securitizations, FTN was also the lead underwriter and the underwriter who sold the GSE Certificates to Freddie Mac. 4. For each Securitization, a prospectus (Prospectus) and prospectus supplement

(Prospectus Supplement) were filed with the SEC as part of the Registration Statement2 for that Securitization. The GSE Certificates were marketed and sold to Fannie Mae and Freddie Mac pursuant to the Registration Statement, including the Shelf Registration Statement and the corresponding Prospectuses and Prospectus Supplements. 5. The Registration Statement contained statements about the characteristics and

credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers of those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investors decision to invest in mortgage-backed securities by purchasing the Certificates. Unbeknownst to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices, and had materially poorer credit quality than what was represented in the Registration Statement. 6. The Registration Statement also contained statistical summaries of the groups of

mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and the percentage of the loan groups aggregate principal balance with

The term Registration Statement as used herein incorporates the Shelf Registration Statement, the Prospectus and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated. 3

loan-to-value ratios within specified ranges. This information was also material to reasonable investors. However, a loan-level analysis of a sample of loans for each Securitizationa review that encompassed thousands of mortgages across all of the Securitizationshas revealed that these statistics were also false and omitted material facts due to inflated property values and misrepresentations of other key characteristics of the mortgage loans. 7. For example, the percentage of owner-occupied properties is a material risk factor

to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan-level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans. 8. Defendants First Horizon Asset Securities (the depositor) and the Individual

Defendants (as signatories) are directly responsible for the misstatements and omissions of material fact contained in the Registration Statement because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. Defendants FTN, UBS, JP Morgan Securities (as successor-in-interest to Bear Stearns), Credit Suisse, and Merrill Lynch (collectively, the Underwriter Defendants) are also directly responsible for the misstatements and omissions of material fact contained in the Registration Statement for the Securitizations on which they were underwriters (as reflected in Table 1, infra) because they prepared and/or used the Registration Statement to market and sell the Certificates to Fannie Mae and Freddie Mac.

9.

Defendants First Tennessee (as successor-in-interest to First Horizon Home Loan)

and First Horizon National are also responsible for the misstatements and omissions of material fact contained in the Registration Statement by virtue of their direction and control over Defendants First Horizon Asset Securities and FTN. First Tennessee and First Horizon National directly participated in and exercised dominion and control over the business operations of Defendants First Horizon Asset Securities and FTN. 10. Fannie Mae and Freddie Mac purchased $883 million of the Certificates pursuant

to the Registration Statement filed with the SEC. The Registration Statement contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate such loans. As a result of Defendants misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 11. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against

Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o, violations of Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for common-law negligent misrepresentation. PARTIES The Plaintiff and the GSEs 12. The Federal Housing Finance Agency is a federal agency located at 1700 G

Street, NW in Washington, D.C. FHFA was created on July 30, 2008, pursuant to the Housing and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. 4617), to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA 5

has the authority to exercise all rights and remedies of the GSEs, including, but not limited to, the authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. 12 U.S.C. 4617(b)(2). 13. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by

Congress with a mission to provide liquidity, stability, and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. The Defendants 14. Defendant First Horizon National is a national financial services institution and

one of the largest bank holding companies in the United States. It is the parent company of Defendant First Tennessee; was the ultimate parent company of First Horizon Home Loan when First Horizon Home Loan had a separate corporate existence; and is the ultimate corporate parent of First Horizon Asset Securities and FTN. First Horizon Nationals principal office in the United States is located at 165 Madison Way, Memphis, Tennessee. 15. Defendant First Tennessee is engaged in a variety of capital markets-related

activities, including purchases and sales of loan portfolios, sales of assets for inclusion in securitizations, and origination and acquisition of loans. First Tennessee is a national banking association organized and existing under the laws of the United States with its principal place of business at 165 Madison Way, Memphis, Tennessee. 16. Defendant First Tennessee is the successor-in-interest to First Horizon Home

Loan, and thus all allegations herein against First Horizon Home Loan are made against First Tennessee. First Horizon Home Loan acted as the sponsor, seller, and master servicer of the Securitizations and was, at all relevant times, a wholly owned subsidiary of First Tennessee. 6

First Horizon Home Loan was the direct parent and controlling entity of the depositor First Horizon Asset Securities. It was pursuant to a merger effective May 31, 2007 that First Horizon Home Loan was merged into its parent, First Tennessee. Though it ceased to exist as a separate legal entity, First Horizon Home Loan continues to operate as a division of First Tennessee. In First Horizon Nationals Annual Report for 2007, First Horizon Home Loan is referenced as a division of First Tennessee Bank National Association. An affidavit filed by an employee of First Tennessee further confirms that First Horizon Home Loan is a division of First Tennessee Bank National Association[,] successor in interest by merger to First Horizon Home Loan Corporation. See Affidavit of Peggy M. Mullins, Read v. Teton Springs Golf & Casting Club, LLC, No. 4:08-CV-00099 (D. Idaho Mar. 31, 2010) (Docket No. 434). 17. Defendant FTN is an SEC-registered broker-dealer and, at all relevant times, was

an underwriter of mortgage and asset-backed securities in the United States. FTN is incorporated in Tennessee with its principal place of business at 845 Crossover Lane, Memphis, Tennessee. It maintains an office at 444 Madison Avenue, New York, New York. FTN is an indirect, wholly owned subsidiary of First Horizon National, and operates as a subsidiary of Defendant First Tennessee. FTN was the lead underwriter for the FHAMS 2005-AA10 Securitization, and also acted as underwriter for each of the offerings at issue in this action. As such, FTN was intimately involved in all the offerings. 18. Defendant First Horizon Asset Securities is incorporated in Delaware and has its

principal place of business at 4000 Horizon Way, Irving, Texas. First Horizon Asset Securities was, at all relevant times, a wholly owned subsidiary of First Horizon Home Loan. As a result of the merger of First Horizon Home Loan into First Tennessee, First Horizon Asset Securities is now a wholly owned subsidiary of First Tennessee. First Horizon Asset Securities was the

depositor for the Securitizations and, as depositor, was responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 19. Defendant UBS is an SEC-registered broker-dealer and, at all relevant times, was

one of the leading underwriters of mortgage and asset-backed securities in the United States. UBS is a limited liability company incorporated in Delaware with its principal place of business at 677 Washington Boulevard, Stamford, Connecticut. It also maintains an office at 299 Park Avenue in New York, New York. UBS was the lead underwriter for FHAMS 2005-AA11 and was intimately involved in that offering. 20. Defendant JP Morgan Securities is an SEC-registered broker-dealer and the

successor-in-interest to Bear Stearns, and thus all allegations herein against Bear Stearns are made against JP Morgan Securities. Bear Stearns was a Delaware corporation with its principal place of business in New York, New York. It acted as the lead underwriter for FHAMS 2005AA12 and was intimately involved in that offering. Pursuant to a Merger Agreement effective May 30, 2008, Bear Stearns parent company, The Bear Stearns Companies Inc., merged with Bear Stearns Merger Corporation, a wholly owned subsidiary of JPMorgan Chase & Co. (JPMorgan Chase), making Bear Stearns a wholly owned indirect subsidiary of JPMorgan Chase. Following the merger, on or about October 1, 2008, Bear Stearns merged with a subsidiary of JPMorgan Chase, J.P. Morgan Securities Inc., which subsequently changed its name to J.P. Morgan Securities LLC. Thus, Bear Stearns is now doing business as Defendant JP Morgan Securities. Defendant JP Morgan Securities is a Delaware corporation with its principal place of business at 277 Park Avenue, New York, New York. 21. Defendant Credit Suisse (f/k/a Credit Suisse First Boston LLC) is a SEC-

registered broker-dealer primarily engaged in the business of investment banking. It is a

Delaware limited liability company with its principal place of business at 11 Madison Avenue, New York, New York. Defendant Credit Suisse acted as the lead underwriter for FHAMS 2006AA1 and was intimately involved in that offering. 22. Defendant Merrill Lynch is an SEC-registered broker-dealer and a Delaware

corporation with its principal place of business at 250 Vesey Street, New York, New York. It acted as the lead underwriter for FHAMS 2005-AA9 and was intimately involved in that offering. 23. Defendant Gerald L. Baker is an individual residing in Memphis, Tennessee. At

the time of the Securitizations, Mr. Baker was: (a) the Chief Executive Officer, President, and a Director of Defendant First Horizon Asset Securities; (b) the Chief Executive Officer and President of Defendant First Tennessee; and (c) the President and Chief Executive Officer of Defendant First Horizon National. Mr. Baker signed the Shelf Registration Statement and the amendment thereto. 24. Defendant Peter F. Makowiecki is an individual residing in Texas. At the time of

the Securitizations, Mr. Makowiecki was: (a) the Chief Financial Officer and Treasurer of Defendant First Horizon Asset Securities; and (b) the President and Chief Executive Officer of Defendant First Horizon Home Loan beginning in January 2006, after previously serving as its Chief Financial Officer. Mr. Makowiecki signed the Shelf Registration Statement and the amendment thereto. 25. Defendant Charles G. Burkett is an individual residing in Memphis, Tennessee.

At the time of the Securitizations, Mr. Burkett was: (a) a Director of First Horizon Asset Securities; (b) the President of Banking of Defendant First Tennessee; and (c) the President of

Banking of Defendant First Horizon National. Mr. Burkett signed the Shelf Registration Statement and the amendment thereto. 26. Defendant Thomas J. Wageman is an individual residing in Texas. At the time of

the Securitizations, Mr. Wageman was a Director of Defendant First Horizon Asset Securities. Mr. Wageman signed the Shelf Registration Statement and the amendment thereto. JURISDICTION AND VENUE 27. Jurisdiction of this Court is founded upon 28 U.S.C. 1345, which gives federal

courts original jurisdiction over claims brought by the FHFA in its capacity as conservator of Fannie Mae and Freddie Mac. 28. Jurisdiction of this Court is also founded upon 28 U.S.C. 1331 because the

Securities Act claims asserted herein arise under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o. This Court further has jurisdiction over the Securities Act claims subject matter of this action pursuant to Section 22 of the Securities Act of 1933, 15 U.S.C. 77v. 29. This Court has jurisdiction over the statutory claims of violations of Sections 31-

5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). This Court also has jurisdiction over the common-law claim of negligent misrepresentation pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). 30. Venue is proper in this district pursuant to Section 22 of the Securities Act of

1933, 15 U.S.C. 77v and 28 U.S.C. 1391(b). Several Underwriter Defendants are principally located in this district, several of the other Defendants can be found or transact business in this district, and many of the acts and transactions alleged herein occurred in substantial part within this district. Defendants are also subject to personal jurisdiction in this district. 10

FACTUAL ALLEGATIONS I. THE SECURITIZATIONS A. 31. Residential Mortgage-Backed Securitizations in General Asset-backed securitization distributes risk by pooling cash-producing financial

assets and issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans. 32. The most common form of securitization of mortgage loans involves a sponsor

the entity that acquires or originates the mortgage loans and initiates the securitizationand the creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage loans. The trust is established pursuant to a Pooling and Servicing Agreement entered into by, among others, the depositor for that securitization. In many instances, the transfer of assets to a trust is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor . . . and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions. Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 33. Residential mortgage-backed securities are backed by the underlying mortgage

loans. Some residential mortgage-backed securitizations are created from more than one pool of loans called collateral groups, in which case the trust issues securities backed by different groups. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. Within this framework, the purchasers of the securities acquire rights to the

11

cashflows from the designated mortgage group, such as homeowners payments of principal and interest on the mortgage loans held by the related trust. 34. Residential mortgage-backed securities are issued pursuant to registration

statements filed with the SEC. These registration statements include prospectuses, which explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the mortgage groups underlying the certificates. Certificates are issued by the trust pursuant to the registration statement and the prospectus and prospectus supplement. Underwriters sell the certificates to investors. 35. A mortgage servicer is necessary to manage the collection of proceeds from the

mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 36. The Securitizations at Issue in this Case This case involves the five Securitizations listed in paragraph 2 supra, which were

sponsored and structured by First Horizon Home Loan and underwritten by FTN and others. For each Securitization, Table 1 identifies the: (1) sponsor; (2) depositor; (3) underwriters; (4) principal amount issued for the tranches3 purchased by the GSEs; (5) date of issuance; and (6)

A tranche is one of a series of certificates or interests created and issued as part of the same transaction. 12

loan group backing the GSE Certificates for that Securitization (referred to as the Supporting Loan Group). Table 1
Principal Amount Issued ($) 214,030,000 Date of Issuance Sept. 30, 2005 Supporting Loan Group Group 2

Transaction FHAMS 2005-AA9 FHAMS 2005-AA10 FHAMS 2005-AA11 FHAMS 2005-AA12

Tranche II-A-1

Sponsor First Horizon Home Loan First Horizon Home Loan First Horizon Home Loan First Horizon Home Loan

Depositor First Horizon Asset Securities First Horizon Asset Securities First Horizon Asset Securities First Horizon Asset Securities

Underwriters Merrill Lynch, Citigroup, FTN FTN, Goldman Sachs UBS, Lehman Brothers, FTN Bear Stearns (now JP Morgan Securities), FTN Credit Suisse, FTN

I-A-1

140,430,000

Oct. 28, 2005

Group 1

I-A-1

128,755,000

Nov. 30, 2005

Group 1

II-A-1

213,133,000

Dec. 29, 2005

Group 2

FHAMS 2006-AA1

I-A-1

First Horizon Home Loan

First Horizon Asset Securities

230,020,000

Feb. 28, 2006

Group 1

C.

The Securitization Process 1. First Horizon Home Loan Groups Mortgage Loans in SpecialPurpose Trusts

37.

As the sponsor for the Securitizations, First Horizon Home Loan originated or

purchased the mortgage loans after they were originated, either directly from the originators or through affiliates of the originators. 38. Pursuant to a Mortgage Loan Purchase Agreement, First Horizon Home Loan

then sold the mortgage loans to the depositor, which was its affiliate, Defendant First Horizon Asset Securities. (In FHAMS 2005-AA10, the loans were passed first to Defendant First Tennessee under a FTBNA Purchase Agreement, then to the depositor pursuant to a Depositor Purchase Agreement.) The Mortgage Loan Purchase Agreement and the FTBNA

13

Purchase Agreement contained representations and warranties regarding the characteristics of the mortgage loans. The Depositor Purchase Agreement in FHAMS 2005-AA10 assigned the rights to the representations and warranties in the FTBNA Purchase Agreement to the depositor. 39. Defendant FTN was either the lead or an additional underwriter for each of the

Securitizations, and it was the selling underwriter for FHAMS 2005-AA10. 40. First Horizon Asset Securities was First Horizon Home Loans wholly owned,

limited-purpose financial subsidiary. The sole purpose of First Horizon Asset Securities as depositor was to act as a conduit through which loans originated or acquired by the sponsor First Horizon Home Loan could be securitized and sold to investors. 41. As depositor for the Securitizations, First Horizon Asset Securities transferred the

relevant mortgage loans to the trusts, pursuant to a Pooling and Servicing Agreement (PSA) that contained various representations and warranties regarding the mortgage loans for the Securitizations, and/or assigned the rights to the representations and warranties in the Mortgage Loan Purchase Agreement (or, in the case of FHAMS 2005-AA10, in the FTBNA Purchase Agreement) to the trusts. 42. As part of each of the five Securitizations, the trustee, on behalf of the

Certificateholders, executed a PSA with First Horizon Home Loan and First Horizon Asset Securities, the parties responsible for monitoring and servicing the mortgage loans in the Securitizations. The trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued Certificates, including the GSE Certificates backed by such loans. The GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust, including the mortgage loans.

14

2. 43.

The Trusts Issue Securities Backed By the Loans

Once the mortgage loans were transferred to the trusts in accordance with the

PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cash flows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates was a function of the capital structure of the related transaction and the credit quality of the underlying mortgages. 44. The Certificates were issued pursuant to a Shelf Registration Statement filed with

the SEC on a Form S-3. The Shelf Registration Statement was amended by a Form S-3/A filed with the SEC (the Amendment). Each Individual Defendant signed the Shelf Registration Statement that was filed by First Horizon Asset Securities. Defendant Baker signed the Amendment in his capacity as President and Chief Executive Officer of First Horizon Asset Securities, and on behalf of Defendants Makowiecki, Burkett, and Wageman, as their attorneyin-fact, pursuant to a power of attorney duly executed by each and previously filed. 45. The SEC filing number, registrant, signatories, and filing dates of the Shelf

Registration Statement and Amendment, as well as the Certificates covered, are reflected in Table 2 below. Table 2
Date Registration Statement Filed May 23, 2005 Date Amended Registration Statement Filed July 29, 2005 Signatories of Registration Statement and Amendment Gerald Baker Peter Makowiecki Charles Burkett Thomas Wageman

SEC File No. 333125158

Registrant

Covered Certificates

First Horizon Asset Securities

FHAMS 2005-AA9 FHAMS 2005-AA10 FHAMS 2005-AA11 FHAMS 2005-AA12 FHAMS 2006-AA1

15

46.

The Prospectus Supplement for each Securitization describes the underwriting

guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debtto-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes, information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property, and information concerning whether the loans were delinquent. 47. The Prospectus Supplement associated with each Securitization was filed with the

SEC as part of the Shelf Registration Statement. The Form 8-K attaching the PSA for FHAMS 2006-AA1 was also filed with the SEC. The date on which the Prospectus Supplement and that Form 8-K, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below. Table 3
Transaction FHAMS 2005-AA9 FHAMS 2005-AA10 FHAMS 2005-AA11 FHAMS 2005-AA12 FHAMS 2006-AA1 Date Prospectus Supplement Filed Sept. 28, 2005 Oct. 26, 2005 Nov. 29, 2005 Dec. 23, 2005 Mar. 1, 2006 Date Form 8-K Attaching PSA Filed N/A N/A N/A N/A Mar. 14, 2006 Filing No. of Related Registration Statement 333-125158 333-125158 333-125158 333-125158 333-125158

48.

The Certificates were issued pursuant to the PSAs, and Defendant First Horizon

Asset Securities and the Underwriter Defendants offered and sold the GSE Certificates to Fannie

16

Mae or Freddie Mac pursuant to the Registration Statement, which, as noted previously, included the Prospectuses and Prospectus Supplements. II. THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS A. 49. The Role of Each Defendant Each Defendant, including the Individual Defendants, had a role in the

securitization process and the marketing for at least one of the Certificates, which included either originating or purchasing the mortgage loans from the originators, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 50. With respect to each Securitization, the depositor, the underwriter, and the

Individual Defendants who signed the Registration Statement, as well as the Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance, and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 51. First Horizon Home Loan (now First Tennessee)

First Horizon Home Loan (now First Tennessee) was, at all relevant times, in the

business of originating, purchasing, selling, and servicing mortgage loans. As of June 30, 2005, First Horizon Home Loan provided servicing for mortgage loans with an aggregate principal balance of approximately $90.73 billion.

17

52.

First Horizon Home Loan was the sponsor of the Securitizations. In that capacity,

First Horizon Home Loan determined the structure of the Securitizations, initiated the Securitizations, originated or purchased the mortgage loans to be securitized, and determined the distribution of principal and interest. First Horizon Home Loan also selected First Horizon Asset Securities as the special-purpose vehicle that would be used to transfer the mortgage loans from First Horizon Home Loan to the trusts, and selected FTN and the other Underwriter Defendants as underwriters for the Securitizations. In its role as sponsor, First Horizon Home Loan knew and intended that the mortgage loans it originated and purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 53. As sponsor of the Securitizations, First Horizon Home Loan also conveyed the

mortgage loans to First Horizon Asset Securities, as depositor, pursuant to Mortgage Loan Purchase Agreements. In these agreements, First Horizon Home Loan made certain representations and warranties to First Horizon Asset Securities regarding the groups of loans collateralizing the Certificates. These representations and warranties were assigned by First Horizon Asset Securities to the trustees for the benefit of the Certificateholders. 2. 54. First Horizon Asset Securities

Defendant First Horizon Asset Securities is a wholly owned limited purpose

finance subsidiary of First Tennessee. It is a special-purpose vehicle formed solely for the purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts.

18

55.

Defendant First Horizon Asset Securities was the depositor for the

Securitizations. In its capacity as depositor, First Horizon Asset Securities purchased the mortgage loans from First Horizon Home Loan (as sponsor) pursuant to the Mortgage Loan Purchase Agreements.4 First Horizon Asset Securities then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. First Horizon Asset Securities, together with the other Defendants, was also responsible for preparing and filing the Registration Statement pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 3. 56. First Horizon National

Defendant First Horizon National employed its wholly owned subsidiaries in the

key steps of the securitization process. Unlike typical arms-length transactions, the Securitizations here involved various First Horizon National subsidiaries and affiliates at virtually every step in the process. The sponsor for the Securitizations was First Horizon Home Loan, the depositor was First Horizon Asset Securities, and one of the underwritersthe lead underwriter in the case of FHAMS 2005-AA10was FTN. 57. First Horizon National profited substantially from this vertically integrated

approach to mortgage-backed securitization. First Horizon Home Loan, First Horizon Asset Securities, and FTN are all included in First Horizon Nationals 2005 annual report as its principal corporate subsidiaries. Further, First Horizon National shares and, on information and belief, shared, overlapping management with the other First Horizon Defendants. For instance, Defendant Baker was (a) the Chief Executive Officer, President, and a Director of In some of the Securitizations, First Horizon Asset Securities actually purchased the loans from First Tennessee, to which First Horizon Home Loan had previously sold the loans. 19
4

Defendant First Horizon Asset Securities; (b) the Chief Executive Officer and President of Defendant First Tennessee; and (c) the President and Chief Executive Officer of Defendant First Horizon National. 58. As the corporate parent of First Horizon Asset Securities and FTN, and the former

corporate parent of First Horizon Home Loan, First Horizon National had the practical ability to direct and control the actions of First Horizon Home Loan, First Horizon Asset Securities, and FTN related to the Securitizations, and in fact exercised such direction and control over the activities of these entities related to the issuance and sale of the Certificates. 4. 59. Underwriter Defendants

FTN, UBS, Bear Stearns (now JP Morgan Securities), Credit Suisse, and Merrill

Lynch were, at all relevant times, registered broker/dealers, and were all among the leading underwriters of mortgage and other asset-backed securities in the United States. 60. Defendant FTN was the lead underwriter for the FHAMS 2005-AA10

Securitization, and it acted as an additional underwriter for the remaining four Securitizations. In these roles, FTN was responsible for underwriting the offer of the Certificates issued in all of the Securitizations, as well as for managing the sale of the Certificates issued in the FHAMS 2005AA10 Securitization to Fannie Mae, Freddie Mac, and other investors. 61. Defendant UBS was the lead underwriter for the FHAMS 2005-AA11

Securitization. In that role, UBS was responsible for underwriting the offer of the Certificates issued in that Securitization, as well as for managing the sale of the Certificates to Fannie Mae, Freddie Mac, and other investors. 62. Bear Stearns, now Defendant JP Morgan Securities, was the lead underwriter for

the FHAMS 2005-AA12 Securitization. In that role, Bear Stearns was responsible for

20

underwriting the offer of the Certificates issued in that Securitization, as well as for managing the sale of the Certificates to Fannie Mae, Freddie Mac, and other investors. 63. Defendant Credit Suisse was the lead underwriter for the FHAMS 2006-AA1

Securitization. In that role, Credit Suisse was responsible for underwriting the offer of the Certificates issued in that Securitization, as well as for managing the sale of the Certificates to Fannie Mae, Freddie Mac, and other investors. 64. Defendant Merrill Lynch was the lead underwriter for the FHAMS 2005-AA9

Securitization. In that role, Merrill Lynch was responsible for underwriting the offer of the Certificates issued in that Securitization, as well as for managing the sale of the Certificates to Fannie Mae, Freddie Mac, and other investors. 65. Each of the Underwriter Defendants was obligated to conduct meaningful due

diligence to ensure that the Registration Statement for the Securitizations they underwrote did not contain any material misstatements or omissions, including the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 5. 66. Individual Defendants

At the time of the Securitizations, Defendant Gerald L. Baker was (a) the Chief

Executive Officer, President, and a Director of Defendant First Horizon Asset Securities; (b) the Chief Executive Officer and President of Defendant First Tennessee; and (c) the President and Chief Executive Officer of Defendant First Horizon National. Mr. Baker signed the Shelf Registration Statement and the amendment thereto. 67. At the time of the Securitizations, Defendant Peter F. Makowiecki was (a) the

Chief Financial Officer and Treasurer of Defendant First Horizon Asset Securities; and (b) the President and Chief Executive Officer of Defendant First Horizon Home Loan beginning in

21

January 2006, after previously serving as its Chief Financial Officer. Mr. Makowiecki signed the Shelf Registration Statement and the amendment thereto. 68. At the time of the Securitizations, Defendant Charles G. Burkett was (a) a

Director of First Horizon Asset Securities; (b) the President of Banking of Defendant First Tennessee, and (c) the President of Banking of Defendant First Horizon National. Mr. Burkett signed the Shelf Registration Statement and the amendment thereto. 69. At the time of the Securitizations, Defendant Thomas J. Wageman was a Director

of Defendant First Horizon Asset Securities. Mr. Wageman signed the Shelf Registration Statement and the amendment thereto. B. 70. The Defendants Failure to Conduct Proper Due Diligence The Defendants failed to conduct adequate and sufficient due diligence to ensure

that the mortgage loans underlying the Securitizations complied with the representations in the Registration Statement. 71. During the time period in which the Certificates were issuedapproximately

2005 through 2006First Horizon was well-established in the mortgage-backed securitization market. In an effort to increase revenue and profits in an rapidly expanding market, First Horizon National increased the volume of mortgages it securitized through its subsidiaries First Tennessee and First Horizon Home Loan. In 2005, First Horizon securitized $892.66 million of mortgage loans. In 2006, that figure nearly doubled, to $1.74 billion. 72. Defendants had enormous financial incentives to complete as many offerings as

quickly as possible, without regard to ensuring the accuracy or completeness of the Registration Statement or conducting adequate and reasonable due diligence. First Horizon Asset Securities, as the depositor, was paid a percentage of the total dollar amount of the offerings upon

22

completion of the Securitizations and the Underwriter Defendants were paid commissions based on the amount they received from the sale of the Certificates to the public. 73. The push to securitize large volumes of mortgage loans contributed to the absence

of controls needed to prevent the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statement. In particular, Defendants failed to conduct adequate due diligence or to otherwise ensure the accuracy of the statements in the Registration Statement pertaining to the Securitizations. 74. For instance, the Underwriter Defendants routinely retained third parties,

including Clayton Holdings, Inc. (Clayton), to analyze the loans they were considering placing in their securitizations, but waived a significant number of loans into securitizations that these firms had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines or had compensating factors that excused the loans non-compliance with those guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations, and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. The Underwriter Defendants were negligent in allowing into their securitizations a substantial number of mortgage loans that, as reported to them by third-party due diligence firms, did not conform to the underwriting standards stated in the registration statements pursuant to

23

which they made offerings, including the prospectuses and prospectus supplements that formed part of those registration statements. 75. As set forth in detail below, numerous other facts confirm that the Underwriter

Defendants failed to perform adequate due diligence when underwriting securitizations of mortgage-backed securities, because each was engaged in a push to expand its role in the mortgage-backed securities market. 1. 76. UBS

UBS was negligent in allowing into its securitizations a substantial number of

mortgage loans that, as reported to it by third-party due diligence firms, did not conform to the underwriting standards stated in the registration statements pursuant to which it made offerings, including the prospectuses and prospectus supplements that formed part of those registration statements. Claytons trending reports revealed that, in the period from the first quarter of 2006 to the second quarter of 2007, 20 percent of the mortgage loans UBS submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 33 percent of the loans were subsequently waived in by UBS without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/the-impact-of-the-financial-crisissacramento#documents. 77. According to news reports, on December 24, 2007, Swiss regulators announced

that the Swiss banking department charged with oversight of Swiss investment banks would be initiating a full investigation into how UBS AG, the ultimate corporate parent of UBS, incurred

24

massive losses in connection with the subprime markets in the United States, resulting in it taking a $10 billion write-down in its mortgage backed investments.5 78. On January 30, 2008, UBS AG pre-announced its fourth-quarter 2007 and full-

year 2007 results, disclosing an additional $4 billion in write-downs in positions related to the U.S. residential mortgage market. See UBS Pre-Announcement (Jan. 30, 2008), available at http://www.ubs.com/1/e/about/news.html?newsId=135568. 79. In April 2008, UBS AG presented Swiss banking regulators with a report

detailing the reasons for its massive losses related to the U.S. subprime mortgage market. In that report, UBS AG admitted that its losses in the U.S. subprime mortgage market were due to a litany of errors, including inadequate risk management and a focus on revenue growth, which contributed to the weaknesses in its substantial subprime portfolio. The report is available at http://www.ubs.com/1/e/investors/releases?newsIs Archive=Yes. 2. 80. Bear Stearns (now JP Morgan Securities)

Bear Stearns was negligent in allowing into its securitizations a substantial

number of mortgage loans that, as reported to it by third-party due diligence firms, did not conform to the underwriting standards stated in the registration statements pursuant to which it made offerings, including the prospectuses and prospectus supplements that formed part of those registration statements. Claytons trending reports revealed that, in the period from the first quarter of 2006 to the second quarter of 2007, 16 percent of the mortgage loans Bear Stearns submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that

See, e.g., Paul Verschuur, Swiss Regulator to See What Caused Subprime Loss (Dec. 24, 2007), Bloomberg News, available at http://www.bloomberg.com/apps/news?pid= newsarchive&sid=aD6AJy16qjgg. 25

Clayton found defective, 42 percent of the loans were subsequently waived in by Bear Stearns without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/theimpact-of-the-financial-crisis-sacramento#documents. 81. In connection with a civil case brought against Bear Stearns affiliate EMC

Mortgage Corporation, certain previously internal documents were made public in 2010. Internal Bear Stearns communications demonstrate that the third-party due diligence process was failing. Jeffrey Verschleiser, who at the time was a Senior Managing Director at Bear Stearns, in e-mails to another Senior Managing Director, stated in 2006 that [w]e are wasting too much money on Bad Due Diligence and that [w]e are just burning money hiring [third-party due diligence firms]. 82. Similarly, starting in April 2005, the former head of Bear Stearns due diligence

department, John Mongelluzzo, repeatedly implored the co-heads of the mortgage finance department, Mary Haggerty and Baron Silverstein, to revise the due diligence protocols of Bear Stearns affiliate, EMC Mortgage Corp. Recognizing that the existing protocols allowed for the purchase and securitization of defective loans, Mr. Mongelluzzo proposed to rank loans slotted for due diligence by risk criteria, and apply incremental resources to the review of each successive gradation of loan. But Ms. Haggerty and Mr. Silverstein rejected this proposal. 83. Other documents recently made public in the EMC Mortgage litigation revealed

that, around May 2005, Ms. Haggerty and Mr. Silverstein had also rejected Mr. Mongelluzzos proposal to track loans that are overridden by our due diligence managers and track the performance of those loans.

26

84.

Further demonstrating problems within Bear Stearns due diligence processes is

the recent revelation that, by 2006, the accrued number of non-compliant loans purchased by the Bear Stearns affiliate EMC Mortgage Corp. was so high that its quality control and claims departments were overwhelmed by the sheer volume of repurchase claims that needed to be processed. A recently publicized February 28, 2006 internal audit report identified a significant backlog for collecting from and submitting 9,000 outstanding repurchase claims to sellers, worth over $720 million. The report went on to conclude that the procedures in place were insufficient to process, resolve, and monitor so many claims. 85. Other internal communications further confirm that the Bear Stearns enterprise

was securitizing large numbers of defective loans amid a breakdown in its due diligence processes. In a March 2006 email only recently made public, Bear Stearns Vice President Robert Durden admitted: I agree the flow loans were not flagged appropriately and we securitized many of them which are still to this day not cleared. I think the ball was dropped big time on the flow processes involved in the post close [due diligence], from start to finish. 3. 86. Credit Suisse

Credit Suisse touted that, by 2007, it had become a major arranger and marketer

of residential mortgage-backed securities. It prominently displays on its website an award by Tradeweb, naming Credit Suisse the #1 MBS Dealer overall for 2007, 2008, 2009, and 2010. See https://www.credit-suisse.com/investment_banking/fixed_income/en/structured_ products.jsp. Credit Suisse further stated in its 2009 Annual Report (at 27) that it was [r]anked number one by Tradeweb in RMBS pass-through trading, with 19% market share for 2009. The report is available at https://www.credit-suisse.com/investors/doc/ar09/csg_ar_2009_en.pdf. 87. When the securitization machine stopped, Credit Suisse was forced to take

massive write-downs on its books. On February 19, 2008, Credit Suisse announced write-downs 27

of $2.8 billion in positions related to mortgage-backed securities and collateralized debt obligations. The announcement is available at https://www.credit-suisse.com/investors/doc/ 2007_4q_supplement_ upd_feb19.pdf. 88. According to news reports, the SEC has subpoenaed Credit Suisse Group AG,

seeking documents relating to securitized home loans. See, e.g., Jody Shenn and Shannon D. Harrington, SEC Subpoenas Credit Suisse Over Mortgages, MBIA Says (May 5, 2011), at http://www.bloomberg.com/news/2011-05-05/sec-subpoenas-credit-suisse-over-mortgagesmbia-says-in-n-y-court-filing.html. 89. MBIA Insurance Corp. (MBIA), which provided insurance coverage for some

of Credit Suisses securitizations, has filed suit alleging that Credit Suisse, in seeking financial guaranty insurance for its securitizations, misrepresented the quality of the underlying mortgage loans. See MBIA v. Credit Suisse Sec., No. 603751/09 (N.Y. Sup. Ct. Dec. 14, 2009). MBIA, which gained access to the loan origination files, found that over 80 percent of the loans in the pools underlying securitizations sponsored and underwritten by Credit Suisse entities were not originated in compliance with the applicable underwriting guidelines. In a suit brought by another monoline insurer against Credit Suisse, Ambac v. DLJ Mortgage Capital et al., No. 600070/2010 (N.Y. Sup. Ct. Jan. 22, 2010), Credit Suisse has produced documents demonstrating that when faced with alarming early payment default rates on loans that it planned to securitize, Credit Suisse employees sought quality control reports. Those reports showed that substantial percentages of the delinquencies had been caused by substandard underwriting, misstated incomes, and undisclosed debts. 90. Credit Suisse was negligent in allowing into its securitizations a substantial

number of mortgage loans that, as reported to it by third-party due diligence firms, did not

28

conform to the underwriting standards stated in the registration statements pursuant to which it made offerings, including the prospectuses and prospectus supplements that formed part of those registration statements. Claytons trending reports revealed that, in the period from the first quarter of 2006 to the second quarter of 2007, 32 percent of the mortgage loans Credit Suisse submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 33 percent of the loans were subsequently waived in by Credit Suisse without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports, available at http://fcic.law.stanford. edu/hearings/testimony/theimpact-of-the-financial-crisis-sacramento#documents. 4. 91. Merrill Lynch

From approximately 2004, Merrill Lynch made it its mission to increase its share

of the mortgage-backed securities market. In his book, David Faber describes Merrill Lynchs focus on mortgage-backed securities in the heyday of this business: As Merrill headed into 2007, it had . . . a mission to get even bigger in the one area that had been so instrumental to all its success: mortgages. It wanted to originate more mortgages, buy more mortgages, package more mortgages into securities, and package more of those securities into [collateralized debt obligations]. And of course, it wanted to sell those securities and CDOs as fast as it possibly could, because thats where the money was . . . . David Faber, And Then The Roof Caved In: How Wall Streets Greed and Stupidity Brought Capitalism to its Knees 131 (Wiley 2009). 92. In its quest to increase its market share, Merrill Lynch faced fierce competition

from an increasing number of market players. The push to securitize large volumes of mortgage loans contributed to the absence of controls needed to ensure that the loans conformed to its 29

representations. In particular, Merrill Lynch was negligent in allowing into its securitizations a substantial number of mortgage loans that, as reported to it by third-party due diligence firms, did not conform to the underwriting standards stated in the registration statements pursuant to which it made offerings, including the prospectuses and prospectus supplements that formed part of those registration statements. Claytons trending reports revealed that, in the period from the first quarter of 2006 to the second quarter of 2007, 23 percent of the mortgage loans Merrill Lynch submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 32 percent of the loans were subsequently waived in by Merrill Lynch without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/theimpact-of-the-financial-crisis-sacramento#documents. 93. Within only a few short years, Merrill was one of the top underwriters of

mortgage-backed securities. As Faber explains, Merrill Lynchs Chief Executive Officer, Stanley ONeal, had increased profitability by having Merrill Lynch take on more and more risk. The company dove headlong into a mortgage market that was poised to collapse. And Then the Roof Caved In, at 133. This level of risk gave Merrill Lynch a huge incentive to securitize mortgage loans and offload mortgage-backed securities as quickly as it could, without conducting adequate due diligence. 94. Merrill Lynchs underwriting and due diligence practices with respect to

mortgage-backed securities are currently being investigated by the SEC. In October 2007, the SEC launched an informal investigation into Merrill Lynchs underwriting of mortgage-backed

30

securities. See, e.g., Associated Press, Merrill Lynch Acknowledges SEC Investigation (Nov. 7, 2007), at http://www.msnbc.msn.com/id/21680312/ns/business-us_business/t/merrill-lynchacknowledges-sec-investigation/#.TkDMnmEniSo. That investigation was upgraded to a formal inquiry in early 2008. See, e.g., Amir Efrati, Susan Pulliam, Kara Scannel and Craig Karmin, Prosecutors Widen Probes Into SubprimeU.S. Attorneys Office Seeks Merrill Material; SEC Upgrades Inquiry, Wall St. J., Feb. 8, 2008. C. 95. Additional Allegations Regarding the Liability of JP Morgan Securities as Successor to Bear Stearns On March 16, 2008, Bear Stearns parent company, The Bear Stearns Companies

Inc., entered into an Agreement and Plan of Merger with JPMorgan Chase for the purpose of consummating a strategic business combination transaction between the two entities. 96. It was pursuant to this Agreement that, as described supra at paragraph 20, The

Bear Stearns Companies Inc. merged with Bear Stearns Merger Corporation, a wholly owned subsidiary of JPMorgan Chase, making The Bear Stearns Companies Inc. a wholly owned subsidiary of JPMorgan Chase. As such, upon the May 30, 2008 effective date of the merger, JPMorgan Chase became the ultimate corporate parent of The Bear Stearns Companies Inc.s subsidiaries, including Bear Stearns. 97. According to The New York Times in an article published on April 6, 2008,

JPMorgan took immediate control of The Bear Stearns Companies Inc.s business and personnel decisions. The article cited an internal JPMorgan memo, revealing that JPMorgan Chase, which is taking over the rival investment bank Bear Stearns, will dominate the management ranks of the combined investment banking and trading businesses. It was planned that of the 26 executive positions in the newly merged investment banking and trading division, only five would be drawn from Bear Stearns. 31

98.

In a June 30, 2008 press release describing internal restructuring to be undertaken

pursuant to the merger, JPMorgan stated its intent to assume Bear Stearns and its debts, liabilities, and obligations as follows: Following completion of this transaction, Bear Stearns plans to transfer its brokerdealer subsidiary Bear, Stearns & Co. Inc. to JPMorgan Chase, resulting in a transfer of substantially all of Bear Stearns assets to JPMorgan Chase. In connection with such transfer, JPMorgan Chase will assume (1) all of Bear Stearns then-outstanding registered U.S. debt securities; (2) Bear Stearns obligations relating to trust preferred securities; (3) Bear Stearns thenoutstanding foreign debt securities; and (4) Bear Stearns guarantees of thenoutstanding foreign debt securities issued by subsidiaries of Bear Stearns, in each case, in accordance with the agreements and indentures governing these securities. 99. Bear Stearns & Co., Inc. subsequently merged with J.P. Morgan Securities Inc.

and is now doing business as J.P. Morgan Securities Inc. JPMorgans 2008 Annual Report described the transaction as a merger, stating that [o]n October 1, 2008, J.P. Morgan Securities Inc. merged with and into Bear, Stearns & Co. Inc., and the surviving entity changed its name to J.P. Morgan Securities Inc. 100. Further, the former Bear Stearns website, www.bearstearns.com, redirects Bear

Stearns visitors to J.P. Morgan Securities Inc.s website. 101. J.P. Morgan Securities Inc. was fully aware of the pending and potential claims

against Bear Stearns when it consummated the merger. J.P. Morgan Securities Inc. has further evinced its intent to assume Bear Stearns liabilities by paying to defend and settle lawsuits brought against Bear Stearns. 102. J.P. Morgan Securities Inc. later announced its intention to convert to a limited

liability company, effective September 1, 2010, as part of which it changed its name to J.P. Morgan Securities LLC.

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103.

As a result of the merger, Defendant JP Morgan Securities is the successor-in-

interest to Bear Stearns, and is jointly and severally liable for the misstatements and omissions of material fact alleged herein of Bear Stearns & Co., Inc. This action is brought against JP Morgan Securities as successor to Bear Stearns. III. THE REGISTRATION STATEMENT AND THE PROSPECTUS SUPPLEMENTS A. 104. Compliance With Underwriting Guidelines The Prospectus and Prospectus Supplement for each Securitization describe the

mortgage loan underwriting guidelines pursuant to which the mortgage loans underlying the related Securitizations were to have been originated. These guidelines were intended to assess the creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 105. The statements made in the Prospectus and Prospectus Supplements, which, as

discussed, formed part of the Registration Statement for each Securitization, were material to a reasonable investors decision to purchase and invest in the Certificates because the failure to originate a mortgage loan in accordance with the applicable guidelines creates a higher risk of delinquency and default by the borrower, as well as a risk that losses upon liquidation will be higher, thus resulting in a greater economic risk to an investor. 106. The Prospectuses and Prospectus Supplements for the Securitizations contained

several key statements with respect to the underwriting standards of First Horizon Home Loan, which originated or acquired the loans in the Securitizations. For example, the Prospectus Supplements represented that the underlying mortgage loans were underwritten in accordance with First Horizon Home Loans Super Expanded Underwriting Guidelines (the Guidelines). Though those Guidelines were less restrictive than First Horizon Home Loans standard guidelines, the Prospectusesto which the Prospectus Supplements referredconfirmed that 33

they generally include a set of specific criteria pursuant to which the underwriting evaluation is made, and which are intended to evaluate the prospective mortgagors credit standing and repayment ability, and the value and adequacy of the proposed property as collateral. 107. Likewise, the Prospectuses provided that exceptions could be made to the

Guidelines on a case-by-case basis, only where compensating factors exist and if the mortgage loan was in substantial compliance with the underwriting standards: [A] mortgage loan will be considered to be originated in accordance with a given set of underwriting standards if, based on an overall qualitative evaluation, the loan substantially complies with the underwriting standards. For example, a mortgage loan may be considered to comply with a set of underwriting standards, even if one or more specific criteria included in the underwriting standards were not satisfied, if other factors compensated for the criteria that were not satisfied or if the mortgage loan is considered to be in substantial compliance with the underwriting standards. (Emphasis added). 108. With respect to the information evaluated by First Horizon Home Loan in

deciding whether to give a loan, each Prospectus represented that: In the loan application process, prospective mortgagors will be required to provide information regarding such factors as their assets, liabilities[,] income, credit history, employment history, and other related items. Each prospective mortgagor will also provide an authorization to apply for a credit report which summarizes the mortgagors credit history. 109. Additionally, each Prospectus claimed that, [i]n determining the adequacy of the

property as collateral, an independent appraisal is made of each property considered for financing. It further represented that [t]he value of the Property being financed, as indicated by the appraisal, must be such that it currently supports, and is anticipated to support in the future, the outstanding loan balance.

34

110.

The Prospectuses also stated that, even when the loans were not originated by

First Horizon, a review may have been conducted by First Horizon itselfdepending on factors relating to the experience of the seller, characteristics of the specific mortgage loan, including the principal loan balance, the Loan-to-Value Ratio, the loan type or loan program, and the applicable credit score of the related mortgagor used in connection with the origination of the mortgage loan, as determined based on a credit scoring model acceptable to First Horizon. 111. As discussed infra at paragraphs 129 to 152, in fact the originators of the

mortgage loans in the Supporting Loan Groups for the Securitizations did not adhere to the stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 112. Further, the Prospectuses described additional representations and warranties

concerning the mortgage loans backing the Securitizations that were made by the seller, including that all of the mortgage loans in the mortgage pool complied in all material respects with all applicable local, state and federal laws at the time of origination. 113. The inclusion of this representation in the Prospectuses had the purpose and effect

of providing additional assurance to investors regarding the quality of the mortgage collateral underlying the Securitizations. This representation was material to a reasonable investors decision to purchase the Certificates. B. 114. Statements Regarding the Occupancy Status of Borrowers The Prospectus Supplements contained collateral group-level information about

the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplement for each Securitization presented this information in tabular form in a table entitled Occupancy Types 35

for the Mortgage Loans. This table divided all the loans in the collateral group into categories reflecting occupancy status: (i) Primary Residence, (ii) Second Residence, and (iii) Investor Property. 115. For each category, the table stated the number of loans in that category.

Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:6 Table 4
Transaction FHAMS 2005-AA9 FHAMS 2005-AA10 FHAMS 2005-AA11 FHAMS 2005-AA12 FHAMS 2006-AA1 Supporting Loan Group Group 2 Group 1 Group 1 Group 2 Group 1 Primary Residence (%) 53.69 49.94 51.50 60.88 46.25 Second Residence (%) 7.70 9.11 6.15 5.28 7.89 Investor Property (%) 38.60 40.95 42.35 33.84 45.86

116.

As Table 4 makes clear, the Prospectus Supplement for each Securitization

reported that a significant percentage of the mortgage loans in the Supporting Loan Groups were owner occupied. Indeed, in three of the Securitizations, the Prospectus Supplement represented that the majority of loans in the Supporting Loan Groups were owner occupied. 117. The statements about occupancy status were material to a reasonable investors

decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan, and therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are more likely to care for their primary residence and less likely to default than borrowers who purchase homes as second homes or investments and live elsewhere, the percentage of loans in the collateral group Each Prospectus Supplement provides the total number of loans and the number of loans in each category. These numbers have been converted into percentages. 36
6

of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 118. All other things being equal, the higher the percentage of loans not secured by

owner-occupied residences, the greater the risk of loss to the certificateholders. Even small differences in the percentages of owner-occupied, second home, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to a reasonable investors decision as to whether to purchase any such certificate. As discussed infra at paragraphs 130 to 133, the Registration Statement for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups that were owner occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 119. Statements Regarding Loan-to-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the

balance of the mortgage loan to the value of the mortgaged property when the loan is made. 120. The denominator in the LTV ratio is the value of the mortgaged property, and is

generally the lower of the purchase price or the appraised value of the property. In a refinancing or home-equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risk associated with a given loan by artificially lowering the LTV ratio. 121. The Prospectus Supplement for each Securitization also contained group-level

information about the LTV ratio for the underlying group of loans as a whole. The percentage of

37

loans with an LTV ratio at or less than 80 percent, and the percentage of loans with an LTV ratio greater than 95 percent, as reported in the Prospectus Supplements for the Supporting Loan Groups, are reflected in Table 5 below. Table 5
Percentage of Loans, By Aggregate Principal Balance, With LTV Ratios Less than or Equal to 80% 97.76 97.22 98.27 98.26 97.64 Percentage of Loans, By Aggregate Principal Balance, With LTV Ratios Greater than 95% 0.00 0.00 0.00 0.00 0.00

Transaction

Supporting Loan Group

FHAMS 2005-AA9 FHAMS 2005-AA10 FHAMS 2005-AA11 FHAMS 2005-AA12 FHAMS 2006-AA1

Group 2 Group 1 Group 1 Group 2 Group 1

122.

As Table 5 makes clear, the Prospectus Supplement for each Securitization

reported that the vast majority of the mortgage loans in the Supporting Loan Groups had LTV ratios of 80 percent or less, and zero mortgage loans in the Supporting Loan Groups had LTV ratios over 95 percent. 123. The LTV ratio is among the most important measures of the risk of a mortgage

loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV ratio, the greater the equity cushion, so the greater the likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 124. Thus, a reasonable investor considers LTV ratios material to the decision of

whether to purchase a certificate in a mortgage-backed securitization. Even small differences in

38

the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders. As discussed at paragraphs 134 to 139 infra, the Registration Statement for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 95 percent, thereby misrepresenting the degree of risk of the GSE Certificates. D. 125. Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of mortgage-backed securitizations by

the credit rating agencies, including Moodys Investors Service, Standard & Poors, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time the GSEs purchased the GSE Certificates, investments with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, securities with credit ratings between AAA or its equivalent through BBB- or its equivalent were generally referred to as investment grade. 126. Rating agencies determine the credit rating for each tranche of a mortgage-backed

securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cashflows based on the quality of the underlying mortgages by using sponsor-provided loan-level data. Credit enhancements, such as subordination, represent the 39

amount of cushion or protection from loss incorporated into a given securitization.7 This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificateholders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating. 127. Credit ratings have been an important tool to gauge risk when making investment

decisions. For almost a hundred years, investors like pension funds, municipalities, insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Maes and Freddie Macs respective internal policies limited their purchases of private label residential mortgage-backed securities to those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their equivalent). 128. Each tranche of the Securitizations received a credit rating upon issuance, which

purported to describe the riskiness of that tranche. Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the GSE Certificates was AAA or its equivalent. The accuracy of these ratings was material to a reasonable investors decision to purchase the GSE Certificates. As set forth in Table 8, infra, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect

Subordination refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are subordinate to the senior certificates in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate certificates thus provide a degree of protection to the senior certificates from losses on the underlying loans. 40

data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates as AAA (or its equivalent) when, in fact, they were not. IV. THE FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENT AND PROSPECTUS SUPPLEMENTS A. 129. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False A review of loan-level data was conducted in order to assess whether the

statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, a sample of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group, was reviewed. The sample data confirms, on a statistically significant basis, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data review demonstrates that the data concerning owner occupancy and LTV ratios was materially false and misleading. 1. 130. Owner-Occupancy Data Was Materially False

The data review has revealed that the owner-occupancy statistics reported in the

Prospectus Supplements were materially false and inflated. In fact, significantly fewer underlying properties were occupied by their owners than disclosed in the Prospectus Supplements, and correspondingly, more were held as second homes or investment properties. 131. To determine whether a given borrower actually occupied the property as

claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrowers tax bill was being mailed to the property or to a different address; whether the borrower had claimed a tax exemption on the property; and whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing 41

two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it much more likely that a borrower will not repay the loan. A significant number of the loans failed two or more of these tests, indicating that the owner-occupancy statistics provided to investors, like Fannie Mae and Freddie Mac, were materially false and misleading. 132. For example, for the FHAMS 2005-AA10 Securitization, for which First Horizon

Home Loan was the sponsor and FTN was the lead underwriter, the Prospectus Supplement stated that 50.06 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied. But the data review revealed that 13.87 percent of the properties represented as owner-occupied in the sample showed strong indications that their owners in fact lived elsewhere, suggesting that the true percentage of non-owner-occupied properties was 56.99 percent, a significantly higher percentage than was reported in the Prospectus Supplement.8 133. The data review revealed that, for each Securitization, the Prospectus Supplement

misrepresented the percentage of non-owner-occupied properties. The true percentage of nonowner-occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplements for each Securitization, is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for each Securitization understated the percentage of non-owner-occupied properties by at least 6 percent, and for two of the Securitizations, by 7.5 percent or more.

This conclusion is arrived at by summing (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 50.06) and (b) the product of (i) the stated owner-occupied percentage (here, 49.94) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 13.87 percent). 42

Table 6
Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-OwnerOccupancy9 12.50 13.87 14.64 14.18 13.43

Transaction

Supporting Loan Group

Reported Percentage of Non-OwnerOccupied Properties

Actual Percentage of Non-OwnerOccupied Properties

Prospectus Percentage Understatement of Non-OwnerOccupied Properties 6.71 6.93 7.54 8.63 6.21

FHAMS 2005-AA9 FHAMS 2005-AA10 FHAMS 2005-AA11 FHAMS 2005-AA12 FHAMS 2006-AA1

Group 2 Group 1 Group 1 Group 2 Group 1

46.31 50.06 48.50 39.12 53.75

53.02 56.99 56.04 47.75 59.96

2. 134.

Loan-to-Value Data Was Materially False

The data review has revealed further that the LTV ratios disclosed in the

Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry-standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review and servicing. AVMs rely upon similar data as appraisersprimarily, county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically derived valuation estimates by applying modeling techniques to this data. 135. Applying the AVM to the available data for the properties securing the sampled

loans shows that the appraised values given to such properties were significantly higher than their actual values. The result of this overstatement of property values is a material
9

Strong indication is defined for purposes of this Complaint as failing two or more owner-occupancy tests, as explained supra. 43

understatement of LTV ratios. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. 136. For example, for the FHAMS 2005-AA10 Securitization, which was sponsored by

First Horizon Home Loan and underwritten by FTN, the Prospectus Supplement stated that no mortgage loan had an LTV ratio above 95 percent. In fact, 10.69 percent of the sample of loans included in the data review, based on total principal balance, had LTV ratios above 95 percent. In addition, the Prospectus Supplement stated that 97.76 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 60.44 percent of the loans had LTV ratios at or below 80 percent. 137. The data review revealed that for each Securitization, the Prospectus Supplement

misrepresented the percentage of loans with an LTV ratio that were above 95 percent, as well the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 95 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregated principal balance.

44

Table 7
PROSPECTUS Percentage of Loans Reported to Have LTV Ratios At or Less than 80% 97.76 97.22 98.27 98.26 97.64 DATA REVIEW True Percentage of Loans With LTV Ratios At or Less than 80% 60.44 60.62 61.85 62.10 66.27 PROSPECTUS Percentage of Loans Reported to Have LTV Ratios Over 95% 0.00 0.00 0.00 0.00 0.00 DATA REVIEW Percentage of Loans With LTV Ratios Over 95% 7.29 10.69 8.54 7.87 9.93

Transaction

Supporting Loan Group

FHAMS 2005-AA9 FHAMS 2005-AA10 FHAMS 2005-AA11 FHAMS 2005-AA12 FHAMS 2006-AA1

Group 2 Group 1 Group 1 Group 2 Group 1

138.

As Table 7 demonstrates, the Prospectus Supplements for the Securitizations

reported that none of the mortgage loans in the Supporting Loan Groups had LTV ratios over 95 percent. In contrast, the data review revealed that at least seven percent of the mortgage loans for each Securitization had LTV ratios over 95 percent. 139. These inaccuracies with respect to reported LTV ratios also indicate that the

representations in the Registration Statement relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the Financial Crisis Inquiry Commission (FCIC), which identified inflated appraisals as a pervasive problem during the period of the

45

Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See FCIC, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (January 2011). B. 140. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statement contained material misstatements and omissions

regarding compliance with underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their underwriting guidelines in order to increase production and profits derived from their respective mortgage lending businesses. This is confirmed by the systematically misreported owner-occupancy and LTV statistics, discussed above, and by (1) admissions of First Horizon and allegations made in other suits that have revealed First Horizons widespread abandonment of reported underwriting guidelines during the relevant period; (2) the collapse of the Certificates credit ratings; and (3) the surge in delinquencies and defaults in the mortgage loans in the Supporting Loan Groups. 1. 141. First Horizon Home Loan Failed to Adhere to Its Underwriting Guidelines

First Horizons abandonment of underwriting guidelines is confirmed by reports,

lawsuits, and other sources that have described rampant underwriting failures by First Horizon throughout the period of the Securitizations. 142. On May 9, 2008, a group of plaintiffs filed a class action suit against First

Horizon National, First Tennessee, and Individual Defendants Baker, Makowiecki and Burkett, among others, for ERISA violations based on their investment of employee retirement plans in First Horizon Nationals own stock. See Sims v. First Horizon Natl Corp., No. 08-cv-2293 (W.D. Tenn. May 9, 2008). The plaintiffs claimed that First Horizon required plan participants 46

to invest in the companys stock, which was imprudent because First Horizon was lowering its underwriting standards, and increasing its use of off-balance sheet transactions. In their Third Amended Complaint, the plaintiffs alleged: First Horizons national expansion strategy consisted primarily of opening offices around the country, while failing to create an appropriate credit review structure, audit and accounting infrastructure to provide adequate oversight for the greatly increased production. First Horizon placed insufficient emphasis on such functions as internal audit and accounting and governmental compliance, while pouring resources into production. As of the beginning of 2006, First Horizons real estate valuation processes did not comply with regulatory guidance. While this significant problem was the subject of numerous regulatory examinations and communications, the flaws in First Horizons processes were so serious that the company failed to attain compliance with applicable regulatory guidance during 2006 into 2007. Internal reporting cited the fact that First Horizon did not have accurate locations recorded for all real estate collateral, and was unable to keep up with the identification of problem assets in the residential commercial real estate portfolio, which delayed timely recognition of losses and appropriate provisioning. The appraisal processes also had serious flaws which caused significant problems in the valuation of real estate. First Horizons compensation practices and staffing favored short-term product growth over proper risk management. As of January 1, 2006, compensation was not aligned with the prudent management of the institution and its risks. Product sales staff were hired without regard to whether First Horizon had sufficient management to oversee, account, and reserve for the risks of such sales. Once First Horizon began to use more appropriate methodologies and data analytics in internal auditing, audit reporting described significant problems and issued unsatisfactory ratings, including in the processes, procedures and controls used in consumer appraisal ordering, compliance with loan collateral requirements, and customer/credit risk due diligence for certain products, among other matters. On September 30, 2009, the District Court for the Western District of Tennessee

143.

denied in part the defendants motions to dismiss the plaintiffs claims, holding that the plaintiffs had adequately pleaded that the defendants breached their fiduciary duties to the plaintiffs by investing in First Horizon stock when it was no longer prudent to do so. See generally Sims v. First Horizon Natl Corp., No. 08-cv-2293, 2009 WL 3241689 (W.D. Tenn. Sept. 30, 2009). On 47

October 10, 2010, the Court confirmed that order, denying the defendants request for reconsideration. 144. First Horizons poor origination practices eventually caught up to the company,

and many entities that purchased loans from First Horizon forced the company to buy them back. As stated in its 2008 Annual Report (available at http://ir.fhnc.com/annuals.cfm): In addition to the negative aspects of asset quality on FHNs loan portfolio, increased repurchase and makewhole claims from agency and private purchasers of loans originated and subsequently sold by FHN hampered earnings as FHN recorded $148.5 million in charges for its obligations related to these assets. In First Horizons 2010 Annual Report (available at http://ir.fhnc.com/ annuals.cfm), First Horizon admitted that it had observed loss severities ranging between 50 percent and 60 percent of the principal balance of the repurchased loans and rescission rates between 30 and 40 percent of the repurchase and make-whole requests. 145. Additionally, in June 2010, shareholders filed a derivative suit against Defendant

First Horizon National and Individual Defendant Baker, alleging that First Horizon National engaged in unlawful origination activities, failed to disclose the true risks and losses as a result of such unlawful origination activities, and failed to implement and follow controls designed to minimize risk and loss. See Reid v. First Horizon Natl, et al., No. 10-cv-02413 (W.D. Tenn. 2010). Though the complaint was dismissed on statute of limitations grounds, its allegations corroborate FHFAs claim here that First Horizon systematically failed to adhere to its underwriting guidelines. 2. The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines

146.

The total collapse of the credit ratings of the GSE Certificates, from AAA or its

equivalent to non-investment speculative grade, is further evidence of the originators systematic 48

disregard of underwriting guidelines, amplifying that the GSE Certificates were impaired from the start. 147. The GSE Certificates that Fannie Mae and Freddie Mac purchased were originally

assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statement. These ratings were artificially inflated, however, as a result of the very same misrepresentations that Defendants made to investors in the Prospectus Supplements. 148. Defendants provided or caused to be provided loan-level information to the rating

agencies that they relied upon in order to calculate the Certificates assigned ratings, including the borrowers LTV ratio, owner-occupancy status, and other loan-level information described in aggregation reports in the Prospectus Supplements. Because the information that Defendants provided or caused to be provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA (or its equivalent) certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported AAA (or its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and carried inadequate credit enhancement. 149. Since the issuance of the Certificates, the ratings agencies have dramatically

downgraded their ratings to reflect the revelations regarding the true underwriting practices used to originate the mortgage loans, and the true value and credit quality of the mortgage loans. Table 8 details the extent of the downgrades.10

Applicable ratings are shown in sequential order separated by forward slashes: Moodys/S&P/Fitch. Hyphens indicate that the relevant agency did not provide a rating at issuance. 49

10

Table 8
Transaction FHAMS 2005-AA9 FHAMS 2005-AA10 FHAMS 2005-AA11 FHAMS 2005-AA12 FHAMS 2006-AA1 Tranche II-A-1 I-A-1 I-A-1 II-A-1 I-A-1 Rating at Issuance (Moodys/S&P/Fitch) Aaa/--/AAA Aaa/AAA/-Aaa/--/AAA Aaa/AAA/-Aaa/--/AAA Rating at July 31, 2011 (Moodys/S&P/Fitch) Caa3/--/D Caa3/D/-Caa3/--/D Caa3/D/-Ca/--/D

3.

The Surge in Mortgage Delinquencies and Defaults Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines

150.

Even though the Certificates purchased by Fannie Mae and Freddie Mac were

supposed to represent long-term, stable investments, a significant percentage of the mortgage loans backing the Certificates have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is further evidence of and a direct consequence of the fact that they were not underwritten in accordance with applicable underwriting guidelines as represented in the Registration Statement. 151. Loan groups that were properly underwritten and contained loans with the

characteristics represented in the Registration Statement would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011.

50

Table 9
Percentage of Delinquent/Defaulted/Foreclosed Loans 23.46 26.02 24.52 27.05 30.70

Transaction FHAMS 2005-AA9 FHAMS 2005-AA10 FHAMS 2005-AA11 FHAMS 2005-AA12 FHAMS 2006-AA1

Supporting Loan Group Group 2 Group 1 Group 1 Group 2 Group 1

152.

The confirmed misstatements concerning owner occupancy and LTV ratios; the

confirmed systemic underwriting failures by First Horizon; and the extraordinary drop in credit ratings and rise in delinquencies across the Securitizations, all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statement, were not originated in accordance with the stated underwriting guidelines. V. FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES 153. In total, between September 30, 2005, and April 30, 2007, Fannie Mae and

Freddie Mac purchased $883 million in residential mortgage-backed securities issued in connection with the Securitizations. Table 10 reflects each of Freddie Macs purchases of the Certificates.11 Table 10
Settlement Date of Purchase By Freddie Mac Sept. 30, 2005 Oct. 28, 2005 Initial Unpaid Principal Balance $191,439,000 $22,591,000 Purchase Price (% of Par) 101.482 100.805 Seller to Freddie Mac Merrill Lynch Merrill Lynch

Transaction FHAMS 2005AA9

Tranche II-A-1 II-A-1

CUSIP 32051GXE0 32051GXE0

Purchased securities in Tables 10 and 11 are stated in terms of unpaid principal balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par. 51

11

Transaction FHAMS 2005AA10 FHAMS 2005AA11

Tranche I-A-1 I-A-1

CUSIP 32051GA54 32051GH40

Settlement Date of Purchase By Freddie Mac Oct. 31, 2005 Nov. 30, 2005

Initial Unpaid Principal Balance $140,430,000 $128,755,000

Purchase Price (% of Par) 100.945 100.467

Seller to Freddie Mac FTN UBS

154.

Table 11 reflects each of Fannie Maes purchases of the Certificates:

Table 11
Settlement Date of Purchase By Fannie Mae Apr. 30, 2007 Initial Unpaid Principal Balance $160,535,700 Purchase Price (% of Par) 100.8281 Seller to Fannie Mae Bear Stearns (now JPM Securities) Credit Suisse

Transaction FHAMS 2005AA12 FHAMS 2006AA1

Tranche II-A-1

CUSIP 32051GQ81

I-A-1

32051GV28

Feb. 28, 2006

$230,020,000

101.2578

155.

The statements and assurances in the Registration Statement regarding the credit

quality and characteristics of the mortgage loans underlying the GSE Certificates, and the origination and underwriting practices pursuant to which the mortgage loans were originated, which were summarized in such documents, were material to a reasonable investors decision to purchase the GSE Certificates. 156. The false statements of material facts and omissions of material facts in the

Registration Statement, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer hundreds of millions of dollars in damages. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statement, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statement. 52

157.

Fannie Maes and Freddie Macs losses have been much greater than they would

have been if the mortgage loans had the credit quality represented in the Registration Statement. 158. Defendants misstatements and omissions in the Registration Statement regarding

the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchases of the GSE Certificates. Based upon sales of the Certificates or similar certificates in the secondary market, Defendants proximately caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against the Underwriter Defendants) 159. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. 160. This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act of

1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statement for the Securitizations listed in paragraph 2. 161. This claim is predicated upon the strict liability of the Underwriter Defendants

FTN, UBS, JP Morgan Securities (as successor-in-interest to Bear Stearns), Credit Suisse, and Merrill Lynch for making false and materially misleading statements in the Registration Statement, as applicable to one or more Securitizations and for omitting facts necessary to make the facts stated therein not misleading. 162. FTN, UBS, JP Morgan Securities (as successor-in-interest to Bear Stearns), Credit

Suisse, and Merrill Lynch served as underwriters for one or more Securitizations (as specified in

53

Table 1, supra at paragraph 36), within the meaning of Section 2(a)(11) of the Securities Act, 15 U.S.C. 77b(a)(11). and as such, are liable for the misstatements and omissions in the Registration Statement under Section 11 of the Securities Act. As discussed supra at paragraphs 95 to 103, JP Morgan Securities is the successor-in-interest to Bear Stearns liabilities. 163. At the time it became effective, the Registration Statement contained material

misstatements of fact and omitted information necessary to make the facts stated therein not misleading, as set forth above. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and specifically to Fannie Mae and Freddie Mac. 164. The untrue statements of material facts and omissions of material fact in the

Registration Statement are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 165. Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE

Certificates pursuant to the materially false, misleading, and incomplete Registration Statement. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know, and in the exercise of reasonable diligence could not have known, of the facts concerning the false and misleading statements and omissions alleged herein, and if the GSEs had known those facts, they would not have purchased the GSE Certificates. 166. The Underwriter Defendants FTN, UBS, JP Morgan Securities (as successor-in-

interest to Bear Stearns), Credit Suisse, and Merrill Lynch owed to Fannie Mae, Freddie Mac, and other investors a duty to make a reasonable and diligent investigation of the statements contained in the applicable Registration Statement at the time it became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading.

54

167.

The Underwriter Defendants did not exercise such due diligence and failed to

conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statement, as set forth herein. 168. Fannie Mae and Freddie Mac sustained substantial damages as a result of the

misstatements and omissions in the Registration Statement, for which they are entitled to compensation. 169. This action is brought within three years of the date that the FHFA was appointed

as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). In addition, the time period from July 29, 2011 through August 29, 2011 has been tolled for statute of limitation purposes as against Credit Suisse by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, and Credit Suisse (USA) Inc. 170. By reason of the conduct herein alleged the Underwriter Defendants are jointly

and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against First Horizon Asset Securities, FTN, UBS, Credit Suisse, and Merrill Lynch) 171. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. 172. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities

Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statement in the Securitizations listed in paragraph 2.

55

173.

This claim is predicated upon the negligence of Underwriter Defendants FTN,

UBS, Credit Suisse, and Merrill Lynch (the Section 12 Underwriter Defendants) for making false and materially misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for one or more Securitizations. This cause of action is asserted against each Section 12 Underwriter Defendant only for the Securitizations in which that underwriter is listed as the seller to Fannie Mae or Freddie Mac in Tables 10 and 11, supra at paragraphs 153 to 154. This cause of action is asserted against Defendant First Horizon Asset Securities for all of the Securitizations except FHAMS 2005-AA12, for negligence in making false and materially misleading statements in those securitizations Prospectuses. 174. Each of the Section 12 Underwriter Defendants is prominently identified in the

Prospectuses, the primary documents they used to sell the GSE Certificates. The Section 12 Underwriter Defendants offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac their GSE Certificates, as set forth in the Method of Distribution sections of the Prospectuses. 175. The Section 12 Underwriter Defendants offered and sold the GSE Certificates to

Fannie Mae and Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. The Section 12 Underwriter Defendants reviewed and participated in drafting the Prospectuses. 176. The Section 12 Underwriter Defendants successfully solicited Fannie Maes and

Freddie Macs purchases of the GSE Certificates. As underwriters, the Section 12 Underwriter

56

Defendants obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 177. The Section 12 Underwriter Defendants offered the GSE Certificates for sale, sold

them, and distributed them by the use of means or instruments of transportation and communication in interstate commerce 178. First Horizon Asset Securities is prominently identified in the Prospectuses for all

of the Securitizations. These prospectuses were the primary documents used to sell the GSE Certificates. First Horizon Asset Securities offered the Certificates publicly and actively solicited their sale, including to Fannie Mae and Freddie Mac. First Horizon Asset Securities was paid a percentage of the total dollar amount of the offering upon completion of the Securitizations effected pursuant to the Shelf Registration Statement. 179. First Horizon Asset Securities offered and sold the GSE Certificates to Fannie

Mae and Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. First Horizon Asset Securities reviewed and participated in drafting the Prospectuses. 180. First Horizon Asset Securities offered the GSE Certificates for sale by the use of

means or instruments of transportation and communication in interstate commerce. 181. Each of the Section 12 Underwriter Defendants and First Horizon Asset Securities

actively participated in the solicitation of the GSEs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statement, filing the Registration Statement, and assisting in marketing the GSE Certificates.

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182.

Each of the Prospectuses contained material misstatements of fact and omitted

facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and specifically to Fannie Mae and Freddie Mac. 183. The untrue statements of material facts and omissions of material fact in the

Registration Statement, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 184. The Section 12 Underwriter Defendants and Defendant First Horizon Asset

Securities offered and sold the GSE Certificates directly to Fannie Mae and Freddie Mac pursuant to the false and misleading Prospectuses. 185. The Section 12 Underwriter Defendants and Defendant First Horizon Asset

Securities owed to Fannie Mae and Freddie Mac, as well as to other investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. 186. The Section 12 Underwriter Defendants and Defendant First Horizon Asset

Securities failed to exercise such reasonable care. These Defendants, in the exercise of reasonable care, should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above.

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187.

In contrast, Fannie Mae and Freddie Mac did not know, and in the exercise of

reasonable diligence could not have known, of the untruths and omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If the GSEs had known of those untruths and omissions, they would not have purchased the GSE Certificates. 188. Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market

pursuant to the Prospectuses. 189. Fannie Mae and Freddie Mac sustained substantial damages in connection with

their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 190. This action is brought within three years of the date that the FHFA was appointed

as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). In addition, the time period from July 29, 2011 through August 29, 2011 has been tolled for statute of limitation purposes as against Credit Suisse by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, and Credit Suisse (USA) Inc. THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against First Horizon National, First Tennessee, and the Individual Defendants) 191. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. 192. This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.

77o (Section 15), against First Horizon National, First Tennessee, and the Individual Defendants for controlling-person liability with regard to the Section 12(a)(2) cause of action set forth above. This claim is also against First Horizon National, First Tennessee, Defendant

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Gerald L. Baker, and Defendant Charles G. Burkett with regard to the Section 11 cause of action set forth above. 193. The Individual Defendants at all relevant times participated in the operation and

management of First Horizon Asset Securities, and conducted and participated, either directly or indirectly, in the conduct of First Horizon Asset Securities business affairs. Further, Defendants Gerald L. Baker and Charles G. Burkett at all relevant times participated in the operation and management of FTN, and conducted and participated, either directly or indirectly, in the conduct of FTNs business affairs. 194. At the time of the Securitizations, Individual Defendant Gerald L. Baker was: (a)

the Chief Executive Officer, President, and a Director of Defendant First Horizon Asset Securities; (b) the Chief Executive Officer and President of Defendant First Tennessee; and (c) the President and Chief Executive Officer of Defendant First Horizon National. 195. At the time of the Securitizations, Individual Defendant Peter F. Makowiecki was:

(a) the Chief Financial Officer and Treasurer of Defendant First Horizon Asset Securities; and (b) the President and Chief Executive Officer of Defendant First Horizon Home Loan beginning in January 2006, after previously serving as its Chief Financial Officer. 196. At the time of the Securitizations, Individual Defendant Charles G. Burkett was:

(a) a Director of First Horizon Asset Securities; (b) the President of Banking of Defendant First Tennessee, and (c) the President of Banking of Defendant First Horizon National. 197. At the time of the Securitizations, Individual Defendant Thomas J. Wageman was

a Director of Defendant First Horizon Asset Securities. 198. Because of their positions of authority and control as senior officers and directors,

the Individual Defendants were able to, and in fact did, control the contents of the Shelf

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Registration Statement, including the related Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 199. First Horizon Home Loan (now Defendant First Tennessee) was the sponsor of

the Securitizations carried out under the Registration Statement and culpably participated in the violations of Sections 11 and 12(a)(2) set forth above by initiating the Securitizations, originating or purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the depositor First Horizon Asset Securities as the special-purpose vehicle, and selecting the underwriters. In its role as sponsor, First Horizon Home Loan knew and intended that the mortgage loans it originated or purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 200. First Horizon Home Loan (now Defendant First Tennessee) also acted as the

seller of the mortgage loans for the Securitizations in that it conveyed such mortgage loans to Defendant First Horizon Asset Securities, its wholly owned subsidiary, pursuant to a Mortgage Loan Purchase Agreement. 201. First Horizon Home Loan (now Defendant First Tennessee) also controlled all

aspects of the business of First Horizon Asset Securities because First Horizon Asset Securities was merely a special-purpose vehicle that was created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, the officers and directors of First Horizon Home Loan, as well as its former parent companies First Tennessee and First Horizon National, overlapped with the officers and directors of First Horizon Asset Securities. In addition, because of its position as sponsor, First Horizon Home Loan was able to, and did in fact, control the contents of the Registration Statement filed by First Horizon Asset Securities,

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including the Prospectuses and Prospectus Supplements, which pertained to each of the Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 202. Defendant First Tennessee is also liable for the control it exercised at the time of

the Securitizations. It was the custodian of the loan files in all of the Securitizations, and even passed title to the loans in the FHAMS 2005 AA10 transaction. Further, as the direct parent and controlling entity of First Horizon Home Loan and the parent of Defendant FTN, First Tennessee had the practical ability to direct and control the actions of First Horizon Asset Securities and FTN in issuing, selling, and underwriting the Certificates, and in fact exercised such direction and control over the activities of First Horizon Asset Securities and FTN in connection with the issuance and sale of the Certificates. 203. Thus, in addition to its liability as successor to First Horizon Home Loan, First

Tennessee culpably participated in the violations of Section 11 and 12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statement and establish special-purpose financial entities such as First Horizon Asset Securities and the issuing trusts to serve as conduits for the mortgage loans. 204. Defendant First Horizon National controlled the business operations of First

Horizon Asset Securities and FTN. As the sole owner and ultimate corporate parent of First Horizon Asset Securities and FTN, First Horizon National had the practical ability to direct and control the actions of First Horizon Asset Securities and FTN in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of First Horizon Asset Securities and FTN in connection with the issuance and sale of the Certificates.

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205.

First Horizon National expanded its share of the residential mortgage-backed

securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statement. 206. First Horizon National culpably participated in the violations of Section 11 and

12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statement and establish special-purpose financial entities such as First Horizon Asset Securities and the issuing trusts to serve as conduits for the mortgage loans. 207. First Horizon National, First Tennessee (including as successor to First Horizon

Home Loan), and the Individual Defendants are controlling persons within the meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of First Horizon Asset Securities, First Horizon Home Loan, and FTN at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statement. 208. Fannie Mae and Freddie Mac purchased in the primary market Certificates issued

pursuant to the Registration Statement, including the Prospectuses and Prospectus Supplements, which, at the time it became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statement, and specifically to Fannie Mae and Freddie Mac. 209. Fannie Mae and Freddie Mac did not know, and in the exercise of reasonable

diligence could not have known, of the misstatements and omissions in the Registration

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Statement; had the GSEs known of those misstatements and omissions, they would not have purchased the GSE Certificates. 210. Fannie Mae and Freddie Mac have sustained substantial damages as a result of the

misstatements and omissions in the Registration Statement, for which they are entitled to compensation. 211. This action is brought within three years of the date that the FHFA was appointed

as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). FOURTH CAUSE OF ACTION Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against First Horizon Asset Securities, JP Morgan Securities, and Credit Suisse) 212. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. 213. This claim is brought by Plaintiff pursuant to Section 31-5606.05(a)(1)(B) of the

District of Columbia Code and is asserted on behalf of Fannie Mae. This cause of action is asserted against Defendant JP Morgan Securities (as successor-in-interest to Bear Stearns) only with respect to the FHAMS 2005-AA12 Securitization, against Defendant Credit Suisse only with respect to the FHAMS 2006-AA1 Securitization, and against Defendant First Horizon Asset Securities with respect to both of these Securitizations. 214. This claim is predicated upon the negligence of Underwriter Defendants JP

Morgan Securities (as successor-in-interest to Bear Stearns) and Credit Suisse for making false and materially misleading statements in the Prospectuses for one of these Securitizations. Bear Stearns and Credit Suisse negligently made false and materially misleading statements in the

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Prospectuses for the Securitizations. As discussed supra at paragraphs 95 to 103, JP Morgan Securities is the successor-in-interest to Bear Stearns liabilities. Defendant First Horizon Asset Securities was also negligent in making false and materially misleading statements in the Prospectuses applicable to these two Securitizations. 215. Bear Stearns (now JP Morgan Securities) and Credit Suisse are prominently

identified in the Prospectuses, the primary documents they used to sell the GSE Certificates. Bear Stearns and Credit Suisse offered the Certificates publicly, including selling to Fannie Mae their GSE Certificates, as set forth in the Method of Distribution sections of the Prospectuses. 216. Bear Stearns (now JP Morgan Securities) and Credit Suisse offered and sold the

GSE Certificates to Fannie Mae by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Bear Stearns and Credit Suisse reviewed and participated in drafting the Prospectuses. 217. Bear Stearns (now JP Morgan Securities) and Credit Suisse successfully solicited

Fannie Maes purchases of the GSE Certificates. As underwriters, Bear Stearns and Credit Suisse obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 218. Bear Stearns (now JP Morgan Securities) and Credit Suisse offered the GSE

Certificates for sale, sold them, and distributed them to Fannie Mae in the District of Columbia. 219. First Horizon Asset Securities is prominently identified in the Prospectuses for

FHAMS 2005-AA12 and FHAMS 2006-AA1. These Prospectuses were the primary documents used to sell the GSE Certificates to Fannie Mae. First Horizon Asset Securities offered the Certificates publicly and actively solicited their sale, including to Fannie Mae. First Horizon

65

Asset Securities was paid a percentage of the total dollar amount of the offering upon completion of the Securitizations effected pursuant to the Shelf Registration Statement. 220. First Horizon Asset Securities offered and sold the GSE Certificates to Fannie

Mae by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. First Horizon Asset Securities reviewed and participated in drafting the Prospectuses. 221. Each of Bear Stearns, Credit Suisse, and First Horizon Asset Securities actively

participated in the solicitation of the Fannie Maes purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statement, filing the Registration Statement, and assisting in marketing the GSE Certificates. 222. Each of the Prospectuses contained material misstatements of fact and omitted

facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and specifically to Fannie Mae. 223. The untrue statements of material facts and omissions of material fact in the

Registration Statement, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 224. Bear Stearns (now JP Morgan Securities), Credit Suisse, and First Horizon Asset

Securities offered and sold the GSE Certificates directly to Fannie Mae pursuant to the false and misleading Prospectuses.

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225.

Bear Stearns (now JP Morgan Securities), Credit Suisse, and First Horizon Asset

Securities owed to Fannie Mae, as well as to other investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. 226. Bear Stearns (now JP Morgan Securities), Credit Suisse, and First Horizon Asset

Securities failed to exercise such reasonable care. These Defendants, in the exercise of reasonable care, should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 227. In contrast, Fannie Mae did not know, and in the exercise of reasonable diligence

could not have known, of the untruths and omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If Fannie Mae had known of those untruths and omissions, it would not have purchased the GSE Certificates. 228. Fannie Mae sustained substantial damages in connection with their investments in

the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 229. This action is brought within three years of the date that the FHFA was appointed

as Conservator of Fannie Mae, and is thus timely under 12 U.S.C. 4617(b)(12). In addition, the time period from July 29, 2011 through August 29, 2011 has been tolled for statute of limitation purposes as against Credit Suisse by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, and Credit Suisse (USA) Inc.

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FIFTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against First Horizon National, First Tennessee, and the Individual Defendants) 230. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes from this cause of action any allegation that could be construed as alleging fraudulent or intentional or reckless conduct. 231. This claim is brought under Section 31-5606.05(c) of the District of Columbia

Code and is asserted on behalf of Fannie Mae, which purchased the FHAMS 2005-AA12 and FHAMS 2006-AA1 GSE Certificates. This claim is brought against First Horizon National, First Tennessee, and the Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action set forth above. 232. The Individual Defendants at all relevant times participated in the operation and

management of First Horizon Asset Securities, and conducted and participated, either directly or indirectly, in the conduct of First Horizon Asset Securities business affairs. 233. At the time of the Securitizations, Individual Defendant Gerald L. Baker was: (a)

the Chief Executive Officer, President, and a Director of Defendant First Horizon Asset Securities; (b) the Chief Executive Officer and President of Defendant First Tennessee; and (c) the President and Chief Executive Officer of Defendant First Horizon National. 234. At the time of the Securitizations, Individual Defendant Peter F. Makowiecki was:

(a) the Chief Financial Officer and Treasurer of Defendant First Horizon Asset Securities; and (b) the President and Chief Executive Officer of Defendant First Horizon Home Loan beginning in January 2006, after previously serving as its Chief Financial Officer.

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235.

At the time of the Securitizations, Individual Defendant Charles G. Burkett was:

(a) a Director of First Horizon Asset Securities; (b) the President of Banking of Defendant First Tennessee, and (c) the President of Banking of Defendant First Horizon National. 236. At the time of the Securitizations, Individual Defendant Thomas J. Wageman was

a Director of Defendant First Horizon Asset Securities. 237. Because of their positions of authority and control as senior officers and directors,

the Individual Defendants were able to, and in fact did, control the contents of the Shelf Registration Statement, including the related Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 238. First Horizon Home Loan (now Defendant First Tennessee) was the sponsor of

the Securitizations carried out under the Registration Statement and culpably participated in the violations of Section 31-5606.05(a)(1)(B) set forth above by initiating the Securitizations, originating or purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the depositor First Horizon Asset Securities as the special-purpose vehicle, and selecting Bear Stearns (now JP Morgan Securities) and Credit Suisse as underwriters. In its role as sponsor, First Horizon Home Loan knew and intended that the mortgage loans it originated or purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 239. First Horizon Home Loan (now Defendant First Tennessee) also acted as the

seller of the mortgage loans for the Securitizations in that it conveyed such mortgage loans to Defendant First Horizon Asset Securities, its wholly owned subsidiary, pursuant to a Mortgage Loan Purchase Agreement.

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240.

First Horizon Home Loan (now Defendant First Tennessee) also controlled all

aspects of the business of First Horizon Asset Securities because First Horizon Asset Securities was merely a special-purpose vehicle that was created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, the officers and directors of First Horizon Home Loan, as well as its former parent companies First Tennessee and First Horizon National, overlapped with the officers and directors of First Horizon Asset Securities. In addition, because of its position as sponsor, First Horizon Home Loan was able to, and did in fact, control the contents of the Registration Statement filed by First Horizon Asset Securities, including the Prospectuses and Prospectus Supplements, which pertained to each of the Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 241. Defendant First Tennessee is also liable for the control it exercised at the time of

the Securitizations. It was the custodian of the loan files. Further, as the direct parent and controlling entity of First Horizon Home Loan, First Tennessee had the practical ability to direct and control the actions of First Horizon Asset Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of First Horizon Asset Securities in connection with the issuance and sale of the Certificates. 242. Thus, in addition to its liability as successor to First Horizon Home Loan, First

Tennessee culpably participated in the violations of Section 31-5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statement and establish special-purpose financial entities such as First Horizon Asset Securities and the issuing trusts to serve as conduits for the mortgage loans.

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243.

Defendant First Horizon National controlled the business operations of First

Horizon Asset Securities. As the sole owner and ultimate corporate parent of First Horizon Asset Securities, First Horizon National had the practical ability to direct and control the actions of First Horizon Asset Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of First Horizon Asset Securities in connection with the issuance and sale of the Certificates. 244. First Horizon National expanded its share of the residential mortgage-backed

securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statement. 245. First Horizon National culpably participated in the violations of Section 31-

5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statement and establish special-purpose financial entities such as First Horizon Asset Securities and the issuing trusts to serve as conduits for the mortgage loans. 246. First Horizon National, First Tennessee (including as successor to First Horizon

Home Loan), and the Individual Defendants are controlling persons within the meaning of Section 31-5606.05(c) of the District of Columbia Code by virtue of their actual power over, control of, ownership of, and/or directorship of First Horizon Asset Securities and First Horizon Home Loan at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statement. 247. Fannie Mae purchased the GSE Certificates, which were issued pursuant to the

Registration Statement, including the Prospectuses and Prospectus Supplements, which, at the

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time it became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statement, and specifically to Fannie Mae. 248. Fannie Mae did not know, and in the exercise of reasonable diligence could not

have known, of the misstatements and omissions in the Registration Statement; had it known of those misstatements and omissions, it would not have purchased the GSE Certificates. 249. Fannie Mae has sustained substantial damages as a result of the misstatements and

omissions in the Registration Statement, for which it is entitled to compensation. 250. This action is brought within three years of the date that the FHFA was appointed

as Conservator of Fannie Mae, and is thus timely under 12 U.S.C. 4617(b)(12). SIXTH CAUSE OF ACTION Common-Law Negligent Misrepresentation (Against First Horizon Asset Securities and the Underwriter Defendants) 251. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 252. This is a claim for common-law negligent misrepresentation against Defendant

First Horizon Asset Securities and the Underwriter Defendants. This cause of action is asserted against each Underwriter Defendant only for the Securitizations in which that underwriter is listed as the seller to Fannie Mae or Freddie Mac in Tables 10 and 11, supra at paragraphs 153 to 154. As discussed supra at paragraphs 95 to 103, JP Morgan Securities is the successor-ininterest to Bear Stearns liabilities. 253. Between September 30, 2005 and April 30, 2007, First Horizon Asset Securities

and the Underwriter Defendants sold the GSE Certificates to the GSEs as described above. Because First Horizon Asset Securities owned and then conveyed the underlying mortgage loans

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that collateralized the Securitizations, it had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through its possession of the loan files and other documentation. 254. Likewise, because the Underwriter Defendants acted as underwriters for the

Securitizations they underwrote, under the Securities Act they were obligatedand had the opportunityto perform sufficient due diligence to ensure that the Registration Statement for the transaction on which they served as underwriter, including without limitation the corresponding Prospectus Supplement, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as underwriterwhich gave them access to loan file information and obligated them to perform adequate due diligence to ensure the accuracy of the Registration Statementthe Underwriter Defendants had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 255. The GSEs, like other investors, had no access to borrower loan files prior to the

closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on First Horizon Asset Securities and the Underwriter Defendants knowledge and their express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans. 256. First Horizon Asset Securities and the Underwriter Defendants were aware that

the GSEs reasonably relied on their reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the

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Securitizations, and that the GSEs depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. In purchasing the GSE Certificates from First Horizon Asset Securities and the Underwriter Defendants, the GSEs relied on their special relationship with those Defendants, and the purchases were made, in part, in reliance on that special relationship. 257. Based upon their unique, exclusive, and special knowledge and expertise about

the loans held by the trusts in the Securitizations, First Horizon Asset Securities and the Underwriter Defendants had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. First Horizon Asset Securities and the Underwriter Defendants negligently breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. 258. In addition, having made actual representations about the underlying collateral in

the Securitizations and the facts bearing on the riskiness of the Certificates, First Horizon Asset Securities and the Underwriter Defendants had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon First

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Horizon Asset Securities and the Underwriter Defendants representations about the Securitizations, and these Defendants failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans. 259. Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the

Underwriter Defendants representations, as underwriters (including lead and selling underwriters), as applicable to one or more of the Securitizations. For instance, the GSEs received term sheets containing critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner occupancy statistics, which term sheets were delivered, upon information and belief, by the Underwriter Defendants. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 260. The GSEs relied upon the accuracy of the data transmitted to them and

subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by First Horizon. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were AAA quality (or its equivalent)meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 261. Detailed information about the underlying collateral and structure of each

Securitization was provided or caused to be provided by, upon information and belief, First Horizon. The credit rating agencies based their ratings on this information, and the agencies

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ratings of the Certificates were dependent on the accuracy of that information. The GSEs relied on the accuracy of the credit ratings and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the representations in the term sheets and Prospectus Supplements. 262. In addition, the GSEs relied on the fact that the originators of the mortgage loans

in the Securitizations had acted in conformity with their underwriting guidelines, which were described in the Prospectus Supplements. Compliance with underwriting guidelines was a precondition to the GSEs purchase of the GSE Certificates in that the GSEs decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards. 263. In purchasing the GSE Certificates, the GSEs justifiably relied on First Horizon

Asset Securities and the Underwriter Defendants false representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. 264. But for the above misrepresentations and omissions, the GSEs would not have

purchased or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decision to acquire the GSE Certificates, as described above. 265. The GSEs were damaged in an amount to be determined at trial as a direct,

proximate, and foreseeable result of First Horizon Asset Securities and the Underwriter Defendants misrepresentations, including any half truths. 266. This action is brought within three years of the date that the FHFA was appointed

as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). In addition, the time period from July 29, 2011 through August 29, 2011 has been

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tolled for statute of limitation purposes as against Credit Suisse by virtue of a tolling agreement entered into between FHFA, Fannie Mae, Freddie Mac, and Credit Suisse (USA) Inc. PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: 267. An award in favor of Plaintiff against all Defendants, jointly and severally, for all

damages sustained as a result of Defendants wrongdoing, in an amount to be proven at trial, but including: a. Rescission and recovery of the consideration paid for the GSE Certificates, with

interest thereon; b. Each GSEs monetary losses, including any diminution in value of the GSE

Certificates, as well as lost principal and lost interest payments thereon; c. d. e. Attorneys fees and costs; Prejudgment interest at the maximum legal rate; and Such other and further relief as the Court may deem just and proper. JURY TRIAL DEMANDED 268. Pursuant to Federal Rule of Civil Procedure 38(b), Plaintiff hereby demands a

trial by jury on all issues triable by jury.

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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstNOMURA HOLDING AMERICA INC., NOMURA ASSET ACCEPTANCE CORPORATION, NOMURA HOME EQUITY LOAN, INC., NOMURA CREDIT & CAPITAL, INC., NOMURA SECURITIES INTERNATIONAL, INC., RBS SECURITIES INC. (f/k/a GREENWICH CAPITAL MARKETS, INC.), DAVID FINDLAY, JOHN MCCARTHY, JOHN P. GRAHAM, NATHAN GORIN, and N. DANTE LAROCCA, Defendants.

___ CIV. ___ (___)

COMPLAINT JURY TRIAL DEMANDED

TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................5 The Plaintiff and the GSEs ..................................................................................................5 The Defendants ....................................................................................................................6 The Non-Party Originators ..................................................................................................9 JURISDICTION AND VENUE ......................................................................................................9 FACTUAL ALLEGATIONS ........................................................................................................10 I. The Securitizations.............................................................................................................10 A. B. C. Residential Mortgage-Backed Securitizations In General .....................................10 The Securitizations At Issue In This Case .............................................................11 The Securitization Process .....................................................................................12 1. 2. II. Nomura Credit Groups Mortgage Loans in Special Purpose Trusts..........12 The Trusts Issue Securities Backed by the Loans ......................................13

Defendants Participation in the Securitization Process ....................................................16 A. The Role of Each of the Defendants ......................................................................16 1. 2. 3. 4. 5. 6. 7. B. Nomura Credit ...........................................................................................16 NAA ...........................................................................................................17 NHELI........................................................................................................18 Nomura Securities ......................................................................................18 RBS Securities ...........................................................................................19 Nomura Holding ........................................................................................20 The Individual Defendants .........................................................................20

Defendants Failure To Conduct Proper Due Diligence ........................................21

III.

The Registration Statements and the Prospectus Supplements..........................................24 A. B. C. D. Compliance With Underwriting Guidelines ..........................................................24 Statements Regarding Occupancy Status of Borrower ..........................................27 Statements Regarding Loan-to-Value Ratios.........................................................29 Statements Regarding Credit Ratings ....................................................................31

IV.

Falsity of Statements in the Registration Statements and Prospectus Supplements ..........33 A. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ....................................33 1. 2. B. Owner-Occupancy Data Was Materially False..........................................33 Loan-to-Value Data Was Materially False ................................................35

The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................38 1. Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines............................................................................38 The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines .................................................................43 The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................45

2.

3.

V.

Fannie Maes and Freddie Macs Purchases of the GSE Certificates and the Resulting Damages ............................................................................................................46

FIRST CAUSE OF ACTION ........................................................................................................48 SECOND CAUSE OF ACTION ...................................................................................................51 THIRD CAUSE OF ACTION .......................................................................................................55 FOURTH CAUSE OF ACTION ...................................................................................................58 FIFTH CAUSE OF ACTION ........................................................................................................61 SIXTH CAUSE OF ACTION .......................................................................................................64

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SEVENTH CAUSE OF ACTION .................................................................................................67 EIGHTH CAUSE OF ACTION ....................................................................................................70 PRAYER FOR RELIEF ................................................................................................................74 JURY TRIAL DEMANDED .........................................................................................................75

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Plaintiff Federal Housing Finance Agency (FHFA), as conservator of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against Nomura Holding America Inc. (Nomura Holding), Nomura Asset Acceptance Corporation (NAA), Nomura Home Equity Loan, Inc. (NHELI), Nomura Credit & Capital, Inc. (Nomura Credit), Nomura Securities International, Inc. (Nomura Securities) (collectively, Nomura), RBS Securities Inc. (f/k/a Greenwich Capital Markets, Inc.) (RBS Securities), and David Findlay, John McCarthy, John P. Graham, Nathan Gorin, and N. Dante Larocca (the Individual Defendants) (together with Nomura and RBS Securities, Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the

offer and sale of certain residential mortgage-backed securities to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or GSEs). These securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans. These representations were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, and constitutes common law negligent misrepresentation.

2.

Between November 30, 2005 and April 30, 2007, Fannie Mae and Freddie Mac

purchased over $2 billion in residential mortgage-backed securities (the GSE Certificates) issued in connection with seven Nomura-sponsored securitizations.1 The GSE Certificates purchased by Freddie Mac, along with date and amount of the purchases, are listed below in Table 10. The GSE Certificates purchased by Fannie Mae, along with date and amount of the purchases, are listed below in Table 11. The securitizations at issue are: i. Nomura Asset Acceptance Corporation, Mortgage Pass-Through Certificates, Series 2005-AR6 (NAA 2005-AR6); Nomura Home Equity Loan, Inc., Asset-Backed Certificates, Series 2006-FM1 (NHELI 2006-FM1); Nomura Home Equity Loan, Inc., Asset-Backed Certificates, Series 2006-FM2 (NHELI 2006-FM2); Nomura Home Equity Loan, Inc., Asset-Backed Certificates, Series 2006-HE3 (NHELI 2006-HE3); Nomura Home Equity Loan, Inc., Asset-Backed Certificates, Series 2007-1 (NHELI 2007-1); Nomura Home Equity Loan, Inc., Asset-Backed Certificates, Series 2007-2 (NHELI 2007-2); and Nomura Home Equity Loan, Inc., Asset-Backed Certificates, Series 2007-3 (NHELI 2007-3);

ii.

iii.

iv.

v.

vi.

vii.

(collectively, the Securitizations). 3. The Certificates were offered for sale pursuant to one of three shelf registration

statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC). Defendant NAA filed one Shelf Registration Statement that pertained

For purposes of this Complaint, the securities issued under the Registration Statements (as defined in note 2, below) are referred to as Certificates, while the particular Certificates that Fannie Mae and Freddie Mac purchased are referred to as the GSE Certificates. Holders of Certificates are referred to as Certificateholders.

to one Securitization at issue in this action. Defendant NHELI filed two Shelf Registration Statements that pertained to the remaining six Securitizations at issue in this action. The Individual Defendants signed one or more of the Shelf Registration Statements and the amendments thereto. 4. For each Securitization, a prospectus (Prospectus) and prospectus supplement

(Prospectus Supplement) were filed with the SEC as part of the Registration Statement.2 The GSE Certificates were marketed and sold to Fannie Mae and Freddie Mac pursuant to the Registration Statements, including the Shelf Registration Statements and the corresponding Prospectuses and Prospectus Supplements. 5. The Registration Statements contained statements about the characteristics and

credit quality of the mortgage loans underlying the Securitizations, and the origination and underwriting practices used to make and approve the loans. These statements were material to a reasonable investors decision to invest in mortgage-backed securities by purchasing the Certificates, and specifically to Fannie Maes and Freddie Macs investment decisions. Unbeknownst to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices, and had materially poorer credit quality than what was represented in the Registration Statements. 6. The Registration Statements also contained statistical summaries of the groups of

mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and the percentage of the loan groups aggregate principal balance with

The term Registration Statement as used herein incorporates the Shelf Registration Statement, the Prospectus and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated.

loan-to-value ratios within specified ranges. This information also was material to reasonable investors. However, a loan-level analysis of a sample of loans for each Securitizationa review that encompassed thousands of mortgages across all of the Securitizationshas revealed that these statistics also were false and omitted material facts due to inflated property values and misstatements of other key characteristics of the mortgage loans. 7. For example, the percentage of owner-occupied properties is a material risk factor

to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan-level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans. 8. Defendants Nomura Securities (which was the lead underwriter and sold some of

the GSE Certificates to the GSEs), RBS Securities (which was the lead underwriter and sold some of the GSE Certificates to Freddie Mac), NAA (which acted as the depositor in one of the Securitizations), NHELI (which acted as the depositor in six of the Securitizations), and the Individual Defendants (who signed the Registration Statements) are directly responsible for the misstatements and omissions of material fact contained in the Registration Statements because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. 9. Defendants Nomura Holding and Nomura Credit also are responsible for the

misstatements and omissions of material fact contained in the Registration Statements by virtue

of their direction and control over Defendants Nomura Securities, NAA, and NHELI. Nomura Holding directly participated in and exercised dominion and control over the business operations of its wholly owned subsidiaries, Defendants Nomura Securities, NAA, and NHELI. Nomura Credit (the seller or sponsor) directly participated in and exercised dominion and control over the business operations of the depositors, Defendants NAA and NHELI. 10. Fannie Mae and Freddie Mac purchased over $2 billion of the Certificates

pursuant to the Registration Statements filed with the SEC. The Registration Statements contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, and the practices used to originate and underwrite such loans. As a result of Defendants misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 11. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against

Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for common law negligent misrepresentation. PARTIES The Plaintiff and the GSEs 12. The Federal Housing Finance Agency is a federal agency located at 1700 G

Street, NW in Washington, D.C. FHFA was created on July 30, 2008 pursuant to the Housing and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. 4617), to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA

has the authority to exercise all rights and remedies of the GSEs, including but not limited to, the authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. 12 U.S.C. 4617(b)(12). 13. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by

Congress with a mission to provide liquidity, stability, and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. The Defendants 14. Defendant Nomura Holding is a Delaware corporation with its principal place of

business at 2 World Financial Center, New York, New York 10281. Nomura Holding is the American branch of the Japanese investment banking and securities firm Nomura Securities Co., Ltd. Nomura Holdings wholly owned subsidiaries include Defendants Nomura Credit, NAA, NHELI, and Nomura Securities. 15. Defendant Nomura Credit is a Delaware corporation with its principal place of

business at 2 World Financial Center, New York, New York 10281. Nomura Credit is a wholly owned subsidiary of Nomura Holding. Nomura Credit acted as the seller/sponsor for all seven Securitizations. 16. Defendant NAA is a Delaware corporation with its principal place of business at 2

World Financial Center, New York, New York 10281. NAA is a wholly owned subsidiary of Nomura Holding and an affiliate of Nomura Credit. NAA was the depositor for one Securitization. As depositor, NAA was responsible for preparing and filing reports required under the Securities Exchange Act of 1934.

17.

Defendant NHELI is a Delaware corporation with its principal place of business

at 2 World Financial Center, New York, New York 10281. NHELI is a wholly owned subsidiary of Nomura Holding and an affiliate of Nomura Credit. NHELI was the depositor for the remaining six Securitizations. As depositor, NHELI was responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 18. Defendant Nomura Securities is a New York corporation with its principal place

of business at 2 World Financial Center, New York, New York 10281. It is registered with the SEC as a broker-dealer. Nomura Securities is a wholly owned subsidiary of Nomura Holding and an affiliate of NAA and NHELI. Nomura Securities was the lead or co-lead underwriter for three Securitizations (NAA 2005-AR6, NHELI 2006-FM1, and NHELI 2006-FM2), and was intimately involved in the offerings. Fannie Mae and Freddie Mac purchased the GSE Certificates from Nomura Securities in its capacity as underwriter for two Securitizations. 19. Defendant RBS Securities is a Delaware corporation with its principal place of

business at 600 Washington Boulevard, Stanford, Connecticut 06901. It is registered with the SEC as a broker-dealer. Prior to April 2009, RBS Securities was known as Greenwich Capital Markets, Inc. (Greenwich). Operating as Greenwich, RBS Securities was the lead or co-lead underwriter for four Securitizations (NHELI 2006-FM2, NHELI 2006-HE3, NHELI 2007-1, and NHELI 2007-2), and was intimately involved in the offerings. Freddie Mac purchased the GSE Certificates from Greenwich (now RBS Securities) in its capacity as underwriter for these four Securitizations. 20. Defendant N. Dante Larocca is an individual residing in Manhasset, New York.

From 2001 to 2008, he was a Managing Director at Nomura Securities. Mr. Larocca also was President and Chief Executive Officer of NHELI. Mr. Larocca signed two Shelf Registration

Statements (applicable to six Securitizations) and the amendments thereto, and, upon information and belief, did so in New York. 21. Defendant David Findlay is an individual residing in Greenwich, Connecticut and

working in New York, New York. Mr. Findlay was a Senior Managing Director and the Chief Legal Officer of Nomura Holding and Nomura Securities. Mr. Findlay served as a Director of both NAA and NHELI. He signed or authorized another to sign on his behalf all three Shelf Registration Statements and the amendments thereto, and, upon information and belief, did so in New York. 22. Defendant Nathan Gorin is an individual residing in Syosset, New York and

working in New York, New York. Mr. Gorin was Controller and Chief Financial Officer of Nomura Securities from 2004 to 2009. He also was the Controller and Chief Financial Officer of both NAA and NHELI. Mr. Gorin signed or authorized another to sign on his behalf all three Shelf Registration Statements and the amendments thereto, and, upon information and belief, did so in New York. 23. Defendant John P. Graham is an individual residing and working in New York,

New York. Mr. Graham was a Managing Director at Nomura Credit. Mr. Graham also was the President and Chief Executive Officer of NAA. Mr. Graham signed or authorized another to sign on his behalf one Shelf Registration Statement (applicable to one Securitization) and the amendment thereto, and, upon information and belief, did so in New York. 24. Defendant John McCarthy was a Director of both NAA and NHELI. Mr.

McCarthy signed or authorized another to sign on his behalf all three Shelf Registration Statements and the amendments thereto, and, upon information and belief, did so in New York.

The Non-Party Originators 25. For each Securitization, the loans underlying the Certificates were acquired by

Nomura Credit (the sponsor) from non-party mortgage originators. The non-party originators principally responsible for the loans underlying the Certificates include Fremont Investment & Loan (Fremont), Ownit Mortgage Solutions, Inc. (Ownit), ResMAE Mortgage Corp. (ResMAE), Peoples Choice Home Loan, Inc. (Peoples Choice), and Silver State Mortgage and Silver State Financial Services (d/b/a Silver State Mortgage) (Silver State). JURISDICTION AND VENUE 26. Jurisdiction of this Court is founded upon 28 U.S.C. 1345, which gives federal

courts original jurisdiction over claims brought by FHFA in its capacity as conservator of Fannie Mae and Freddie Mac. 27. Jurisdiction of this Court also is founded upon 28 U.S.C. 1331 because the

Securities Act claims asserted herein arise under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o. This Court further has jurisdiction over the Securities Act claims pursuant to Section 22 of the Securities Act of 1933, 15 U.S.C. 77v. 28. This Court has jurisdiction over the statutory claims of violations of Sections

13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). This Court also has jurisdiction over the common law claim of negligent misrepresentation pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). 29. Venue is proper in this district pursuant to Section 22 of the Securities Act of

1933, 15 U.S.C. 77v, and 28 U.S.C. 1391(b). The Nomura Defendants are all located in this district, most of the Individual Defendants reside and/or work in this district, and many of the

acts and transactions alleged herein, including the preparation and dissemination of the Registration Statements, occurred in substantial part within this district. Additionally, the GSE Certificates were actively marketed and sold from this district. Defendants also are subject to personal jurisdiction in this district. FACTUAL ALLEGATIONS I. The Securitizations A. 30. Residential Mortgage-Backed Securitizations In General Asset-backed securitization distributes risk by pooling cash-producing financial

assets and issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans. 31. The most common form of securitization of mortgage loans involves a sponsor

the entity that acquires or originates the mortgage loans and initiates the securitization and the creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage loans. The trust is established pursuant to a Pooling and Servicing Agreement entered into by, among others, the depositor for that securitization. In many instances, the transfer of assets to a trust is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor . . . and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions. Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 32. Residential mortgage-backed securities are backed by the underlying mortgage

loans. Some residential mortgage-backed securitizations are created from more than one cohort of loans called collateral groups, in which case the trust issues securities backed by different groups. For example, a securitization may involve two groups of mortgages, with some

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securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. Within this framework, the purchasers of the securities acquire rights to the cashflows from the designated mortgage group, such as homeowners payments of principal and interest on the mortgage loans, held by the related trust. 33. Residential mortgage-backed securities are issued pursuant to registration

statements filed with the SEC. These registration statements include prospectuses, which explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the mortgage groups underlying the certificates. Certificates are issued by the trust pursuant to the registration statement and the prospectus and prospectus supplement. Underwriters sell the certificates to investors. 34. A mortgage servicer is necessary to manage the collection of proceeds from the

mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 35. The Securitizations At Issue In This Case This case involves the seven Securitizations listed in Table 1 below. Nomura

served as the depositor and therefore the issuer and offeror of the Certificates for the seven Securitizations. Nomura also served as the sponsor for the seven Securitizations. In two of the Securitizations, Nomura served as the lead underwriter and sold the GSE Certificates to the

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GSEs. For each GSE Certificate, Table 1 identifies: (1) the sponsor; (2) the depositor; (3) the lead underwriter; (4) the principal amount issued for the tranches3 purchased by the GSEs; (5) the date of issuance; and (6) the loan group backing the GSE Certificate for that Securitization (referred to as the Supporting Loan Groups). Table 1
Transaction
NAA 2005AR6 NHELI 2006FM1 NHELI 2006FM2 NHELI 2006HE3

Tranche
IIIA1 IA IA1

Sponsor
Nomura Credit Nomura Credit Nomura Credit Nomura Credit Nomura Credit Nomura Credit Nomura Credit

Depositor
NAA NHELI. NHELI

Lead Underwriter
Nomura Securities Nomura Securities Greenwich (now RBS Securities) Greenwich (now RBS Securities), Nomura Securities Greenwich (now RBS Securities) Greenwich (now RBS Securities) Lehman Brothers Inc.

Principal Amount Issued ($)

$64,943,000 $309,550,000 $525,197,000

Date of Issuance
11/30/2005 1/30/2006 10/31/2006

Supporting Loan Group

Group III Group I Group I

IA1

NHELI

$441,739,000

8/31/2006

Group I

NHELI 2007-1

II1A

NHELI

$100,548,000

1/31/2007

Group II-1

NHELI 2007-2 NHELI 2007-3

IA1 IA1

NHELI NHELI

$358,847,000 $245,105,000

1/31/2007 4/30/2007

Group I Group I

C.

The Securitization Process 1. Nomura Credit Groups Mortgage Loans in Special Purpose Trusts

36.

As the sponsor for the Securitizations, Nomura Credit purchased the mortgage

loans underlying the Certificates after the loans were originated, either directly from the originators or through affiliates of the originators. 37. Nomura Credit then sold the mortgage loans to one of two depositors, both of

which are Nomura-affiliated entities: NAA and NHELI.

A tranche is one of a series of certificates or interests created and issued as part of the same transaction.

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38.

NAA and NHELI were wholly owned, limited-purpose, indirect subsidiaries of

Nomura Holding, and affiliates of Nomura Credit. The sole purpose of NAA and NHELI as depositors was to act as conduits through which loans acquired by the sponsor could be securitized and sold to investors. 39. As depositors for the Securitizations, NAA and NHELI transferred the relevant

mortgage loans to the trusts, pursuant to Pooling and Servicing Agreements (the PSAs) that contained various representations and warranties regarding the mortgage loans for the Securitizations. 40. As part of each of the Securitizations, the trustee, on behalf of the

Certificateholders, executed the PSA with the relevant depositor and the parties responsible for monitoring and servicing the mortgage loans in that Securitization. The trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued Certificates, including the GSE Certificates, backed by such loans. The GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust, including the mortgage loans. 2. 41. The Trusts Issue Securities Backed by the Loans

Once the mortgage loans were transferred to the trusts in accordance with the

PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cashflows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates was a function of the capital structure of the related transaction and the credit quality of the underlying mortgages.

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42.

The Certificates were issued pursuant to one of three Shelf Registration

Statements filed with the SEC on a Form S-3 and amended by one or more Forms S-3/A filed with the SEC. Each Individual Defendant signed, or authorized another to sign on his behalf, one or more of the Shelf Registration Statements, including any amendments thereto, which were filed by NAA or NHELI. The SEC filing number, registrants, signatories, and filing dates for the three Shelf Registration Statements and amendments thereto, as well as the Certificates covered by each Shelf Registration Statement, are reflected in Table 2 below. Table 2
Date Registration Statement Filed Date(s) Amended Registration Statements Filed
8/8/2005

SEC File Number

Registrant(s)

Covered Certificates

Signatories of Registration Statement

David Findlay, Shunichi Ito, John McCarthy, John P. Graham, Nathan Gorin David Findlay, Shunichi Ito, John McCarthy, N. Dante Larocca, Nathan Gorin David Findlay, Shunichi Ito, John McCarthy, N. Dante Larocca, Nathan Gorin

Signatories of Amendments
David Findlay, Shunichi Ito, John McCarthy, John P. Graham, Nathan Gorin David Findlay, Shunichi Ito, John McCarthy, N. Dante Larocca, Nathan Gorin David Findlay, Shunichi Ito, John McCarthy, N. Dante Larocca, Nathan Gorin

333-126812

7/22/2005

NAA

NAA 2005-AR6

333-126435

7/7/2005

7/8/2005

NHELI

NHELI 2006-FM1

333-132109

2/28/2006

4/6/2006; 4/13/2006

NHELI

NHELI 2006FM2; NHELI 2006-HE3; NHELI 2007-1; NHELI 2007-2; NHELI 2007-3

43.

The Prospectus Supplement for each Securitization describes the underwriting

guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplement purports to provide accurate statistics regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debt-

14

to-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes, information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property, and information concerning whether the loans were delinquent. 44. The Prospectus Supplement associated with each Securitization was filed with the

SEC as part of the Registration Statement. A Form 8-K attaching the PSA for each Securitization also was filed with the SEC. The date on which the Prospectus Supplement and Form 8-K were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below. Table 3
Date Prospectus Supplement Filed
11/30/2005 1/31/2006 10/31/2006 8/30/2006 1/31/2007 2/1/2007 5/1/2007

Transaction
NAA 2005-AR6 NHELI 2006-FM1 NHELI 2006-FM2 NHELI 2006-HE3 NHELI 2007-1 NHELI 2007-2 NHELI 2007-3

Date Form 8-K Attaching PSA Filed

12/20/2005 4/11/2006 12/8/2006 9/12/2006 3/9/2007 4/13/2007 5/31/2007

Filing No. of Related Registration Statement

333-126812 333-126435 333-132109 333-132109 333-132109 333-132109 333-132109

45.

The Certificates were issued pursuant to the PSAs, and Defendants Nomura

Securities and Greenwich (now RBS Securities) offered and sold the GSE Certificates to Fannie Mae and Freddie Mac pursuant to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements.4

Nomura Securities was the selling underwriter for two of the Securitizations, and Greenwich was the selling underwriter for four of the Securitizations. For the remaining Securitization, the selling underwriter was a non-party. The selling underwriter for each Securitization is reflected in Tables 10 and 11, below at paragraphs 129 and 130.

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II.

Defendants Participation in the Securitization Process A. 46. The Role of Each of the Defendants Each of the Defendants, including the Individual Defendants, had a role in the

securitization process and the marketing for most or all of the Certificates, which included purchasing the mortgage loans from the originators, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 47. With respect to each Securitization, the depositor, underwriters, and Individual

Defendants who signed the Registration Statement, as well as the Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance, and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 48. Nomura Credit

Defendant Nomura Credit was formed in June 1998 as a subsidiary of Nomura

Holding. As stated in the Prospectus Supplement for the NHELI 2007-3 Securitization, Nomura Credit began purchasing residential loans in 2002 and began actively securitizing residential mortgage loans in April 2003. According to the Prospectus Supplement for the NHELI 2007-3 Securitization, as of February 2007, Nomura Credit had purchased in excess of $33.35 billion in residential mortgage loans. 49. Defendant Nomura Credit was the sponsor for each of the Securitizations. In that

capacity, Nomura Credit determined the structure of the Securitizations, initiated the

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Securitizations, purchased the mortgage loans to be securitized, determined distribution of principal and interest, and provided data to the credit rating agencies to secure ratings for the GSE Certificates. Nomura Credit also selected NAA or NHELI as the special purpose vehicles that would be used to transfer the mortgage loans from Nomura Credit to the trusts, and selected Nomura Securities or Greenwich (now RBS Securities) as the underwriter for the Securitizations. In its role as sponsor, Nomura Credit knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 50. Nomura Credit also conveyed the mortgage loans to NAA or NHELI, to serve as

depositor, pursuant to a Mortgage Loan Purchase Agreement. In these agreements, Nomura Credit made certain representations and warranties to NAA and NHELI regarding the groups of loans collateralizing the Certificates. These representations and warranties were assigned by NAA and NHELI to the trustees for the benefit of the Certificateholders. 2. 51. NAA

Defendant NAA has been engaged in the purchase of mortgage loans since its

incorporation in 1992. It is a special purpose entity formed solely for the purposes of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. It is an affiliate of Nomura Credit. 52. NAA was the depositor for the NAA 2005-AR6 Securitization. In its capacity as

depositor, NAA purchased the mortgage loans collateralizing that Securitization from Nomura Credit (as sponsor) pursuant to a Mortgage Loan Purchase Agreement. NAA then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trust. NAA,

17

together with the other Defendants, also was responsible for preparing and filing the Registration Statement pursuant to which the Certificates were offered for sale. The trust in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae. 3. 53. NHELI

Defendant NHELI has been engaged in the purchase of mortgage loans since its

incorporation in 2005. Like NAA, NHELI is a special-purpose entity formed for the sole purposes of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. It is an affiliate of Nomura Credit. 54. NHELI was the depositor for six of the seven Securitizations. In its capacity as

depositor, NHELI purchased the mortgage loans from Nomura Credit (as sponsor) pursuant to a Mortgage Loan Purchase Agreement. NHELI then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. NHELI, together with the other Defendants, also was responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the sole benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 4. 55. Nomura Securities

Defendant Nomura Securities was founded in 1969 and is a subsidiary of Nomura

Holding. Nomura Securities is an SEC-registered broker-dealer. 56. Defendant Nomura Securities was the lead or co-lead underwriter for three of the

Securitizations, and the selling underwriter for two of those Securitizations. It was responsible

18

for underwriting and managing the offer and sale of the Certificates to Fannie Mae and Freddie Mac and other investors. Nomura Securities also was obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 5. 57. RBS Securities

Defendant RBS Securities, known as Greenwich prior to April 2009, was founded

in 1981 and was acquired by The Royal Bank of Scotland Group PLC in 2000. At all relevant times, Greenwich was a registered broker-dealer and one of the leading underwriters of mortgage and other asset-backed securities in the United States. 58. Greenwich was one of the nations largest underwriters of asset-backed securities.

In 2006, Inside Mortgage Finance ranked Greenwich as the fourth largest non-agency mortgagebacked securities underwriter, underwriting over $102 billion of mortgage-backed securities.5 In 2007, Greenwich remained a strong force as the third largest subprime underwriter of nonagency mortgage-backed securities, underwriting over $19 billion of mortgage-backed securities. 59. Greenwich was the lead or co-lead underwriter for four of the Securitizations, and

the selling underwriter for those Securitizations. It was responsible for underwriting and managing the offer and sale of the Certificates to Fannie Mae and Freddie Mac and other investors. Greenwich also was obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to

Agency mortgage-backed securities are guaranteed by a government agency or government-sponsored enterprise such as Fannie Mae or Freddie Mac, while non-agency mortgage-backed securities are issued by banks and financial companies not associated with a government agency or government-sponsored enterprise.

19

the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 6. 60. Nomura Holding

Nomura Holding employed its wholly owned subsidiaries, Nomura Credit, NAA,

NHELI, and Nomura Securities, in the key steps of the securitization process. Unlike typical arms length transactions, the Securitizations here involved various Nomura subsidiaries and affiliates at virtually each step in the chain. For all seven Securitizations, the sponsor was Nomura Credit, and the depositor was NAA or NHELI. In addition, for three Securitizations, the lead or co-lead underwriter was Nomura Securities. Nomura Holding profited substantially from this vertically integrated approach to mortgage-backed securitization. 61. As the corporate parent of Nomura Credit, NAA, NHELI, and Nomura Securities,

Nomura Holding had the practical ability to direct and control the actions of Nomura Credit, NAA, NHELI, and Nomura Securities related to the Securitizations, and in fact exercised such direction and control over the activities of these entities related to the issuance and sale of the Certificates. 7. 62. The Individual Defendants

Defendant N. Dante Larocca was a Managing Director at Nomura Securities and

the President and Chief Executive Officer of NHELI. Mr. Larocca signed or authorized another to sign on his behalf two Shelf Registration Statements (applicable to six Securitizations) and the amendments thereto. 63. Defendant David Findlay was a Senior Managing Director and the Chief Legal

Officer of Nomura Holding and Nomura Securities. Mr. Findlay also served as a Director of both NAA and NHELI. Mr. Findlay signed or authorized another to sign on his behalf all three Shelf Registration Statements and the amendments thereto.

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64.

Defendant Nathan Gorin was Controller and Chief Financial Officer of Nomura

Securities, NAA, and NHELI. Mr. Gorin signed or authorized another to sign on his behalf all three Shelf Registration Statements and the amendments thereto. 65. Defendant John P. Graham was a Managing Director at Nomura Credit and the

President and Chief Executive Officer of NAA. Mr. Graham signed or authorized another to sign on his behalf one Shelf Registration Statement (applicable to one Securitization) and the amendment thereto. 66. Defendant John McCarthy was a Director of both NAA and NHELI. Mr.

McCarthy signed or authorized another to sign on his behalf all three Shelf Registration Statements and the amendments thereto. B. 67. Defendants Failure To Conduct Proper Due Diligence The Defendants failed to conduct adequate and sufficient due diligence to ensure

that the mortgage loans underlying the Securitizations complied with the representations in the Registration Statements. 68. During the time period in which the Certificates were issuedapproximately

2005 through 2007 Nomuras involvement in the mortgage-backed securitization market was rapidly expanding. In an effort to increase revenue and profits, Nomura vastly expanded the volume of mortgage-backed securities it issued as compared to prior years. According to the Prospectus Supplement for the NHELI 2007-2 Securitization, Nomura Credit initially securitized a relatively small volume of mortgage loansabout $687 million in 2003. In 2004, however, the volume of mortgage loans that Nomura Credit securitized nearly tripled to $2.4 billion. In 2005, the volume tripled again to $7.2 billion. In 2006, Nomura Credit securitized its largest volume of mortgage loans $10 billion.

21

69.

Defendants had enormous financial incentives to complete as many offerings as

quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, NAA and NHELI, as the depositors, were paid a percentage of the total dollar amount of the offerings upon completion of the Securitizations, and Nomura Securities and Greenwich (now RBS Securities), as the underwriters, were paid a commission based on the amount they received from the sale of the Certificates to the public. 70. The push to securitize large volumes of mortgage loans contributed to the absence

of controls needed to prevent the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or otherwise to ensure the accuracy of the statements in the Registration Statements pertaining to the Securitizations. 71. For instance, Nomura retained third-parties, including Clayton Holdings, Inc.

(Clayton), to analyze the loans it was considering placing in its securitizations, but waived a significant number of loans into the Securitizations that these firms had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines or had compensating factors that excused the loans non-compliance with those guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending

22

standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. 72. Nomura was negligent in allowing into the Securitizations a substantial number of

mortgage loans that, as reported to Nomura by third-party due diligence firms, did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements. Even upon learning from the third-party due diligence firms that there were high percentages of defective or at least questionable loans in the sample of loans reviewed by the third-party due diligence firms, Nomura failed to take any additional steps to verify that the population of loans in the Securitizations did not include a similar percentage of defective and/or questionable loans. 73. Claytons trending reports revealed that in the period from the first quarter of

2006 to the first quarter of 2007, 37.85 percent of the mortgage loans Nomura submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 58 percent of the loans were subsequently waived in by Nomura without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/the-impact-of-the-financial-crisissacramento#documents. 74. Defendant NHELI is presently defending an action in the U.S. District Court for

the District of Kansas brought in June 2011 by the National Credit Union Administration Board, as Liquidating Agent of U.S. Central Federal Credit Union, against it and a number of other defendants. The plaintiffs have asserted claims under Sections 11 and 12(a)(2) of the Securities

23

Act of 1933 for misrepresentations made in connection with various securitizations, including the NHELI 2007-1 Securitization at issue here. National Credit Union Administration Board v. RBS Securities, Inc., No. 11-cv-2340 (D. Kan.). 75. On or about March 13, 2008, after a seven-month investigation requested by the

President of the United States, a working group led by the Secretary of Treasury and including the chairmen of the Federal Reserve Board, the SEC, and the Commodities Futures Trading Commission, issued a report finding: (i) a significant erosion of market discipline by those involved in the securitization process, including originators, underwriters, and credit rating agencies, related in part to failures to provide or obtain adequate risk disclosures; and that (ii) the turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for United States subprime mortgages. See Policy Statement on Financial Market Developments, The Presidents Working Group on Financial Markets, March 2008, available at http://www.treasury.gov/resource-center/finmkts/Documents/pwgpolicystatemktturmoil_03122008.pdf. III. The Registration Statements and the Prospectus Supplements A. 76. Compliance With Underwriting Guidelines The Prospectus Supplement for each Securitization describes the mortgage loan

underwriting guidelines pursuant to which the mortgage loans underlying the related Securitization were to have been originated. These guidelines were intended to assess the creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 77. The statements made in the Prospectus Supplements, which, as discussed, formed

part of the Registration Statement for each Securitization, were material to a reasonable investors decision to purchase and invest in the Certificates because the failure to originate a

24

mortgage loan in accordance with the applicable guidelines creates a higher risk of delinquency and default by the borrower, as well as a risk that losses upon liquidation will be higher, thus resulting in a greater economic risk to an investor. 78. The Prospectus Supplements for the Securitizations contained several key

statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. For example, the Prospectus Supplement for the NHELI 2006-FM1 Securitization, for which Fremont was the originator, Nomura Credit was the Sponsor, NHELI was the depositor, and Nomura Securities was the underwriter, stated that, All of the mortgage loans were originated or acquired by Fremont, generally in accordance with the underwriting criteria described in this section, and that Fremonts underwriting guidelines are primarily intended to assess the ability and willingness of the borrower to repay the debt and to evaluate the adequacy of the mortgaged property as collateral for the mortgage loan. 79. The NHELI 2006-FM1 Prospectus Supplement stated that underwriting

exception[s] might be made on a case by case basis, but emphasized that exceptions would be based upon compensating factors, which included low loan-to-value ratio, low debt to income ratio, substantial liquid assets, good credit history, stable employment and time in residence at the applicants current address. 80. The Prospectus Supplement also emphasized Fremonts quality control

procedures: Fremont conducts a number of quality control procedures, including a cost-funding review as well as a full re-underwriting of a random selection of loans to assure asset quality. Under the funding review, all loans are reviewed to verify credit grading, documentation compliance and data accuracy. Under the asset quality procedure, a random selection of each months originations is reviewed. The loan review confirms the existence and accuracy of legal

25

documents, credit documentation, appraisal analysis and underwriting decision. A report detailing review findings and level of error is sent monthly to each loan production office for response. 81. The Prospectus and Prospectus Supplement for each of the remaining

Securitizations had similar representations to those quoted above. The relevant statements in the Prospectus and Prospectus Supplement pertaining to originating entity underwriting standards for each Securitization are reflected in Appendix A to this Complaint. As discussed below at paragraphs 110 through 128, in fact, the originators of the mortgage loans in the Supporting Loan Group for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 82. Further, the Prospectuses and Prospectus Supplements included additional

representations by the sponsor regarding the purported quality of the mortgage loans that collateralized the Certificates. 83. For example, the NHELI 2006-FM2 Prospectus Supplement stated, The sponsor

will make certain representations and warranties as to the accuracy in all material respects of certain information furnished to the trustee with respect to each Mortgage Loan. In addition, the sponsor will represent and warrant, as of the Closing Date, that, among other things: (i) at the time of transfer to the depositor, the sponsor has transferred or assigned all of its right, title and interest in each Mortgage Loan and the Related Documents, free of any lien; (ii) each Mortgage Loan complied, at the time of origination, in all material respects with applicable local, state, and federal laws . . . These representations are described for each Securitization in Appendix A.

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84.

The inclusion of these representations in the Prospectuses and Prospectus

Supplements had the purpose and effect of providing additional assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations and the compliance of that collateral with the underwriting guidelines described in the Prospectuses and Prospectus Supplements. These representations were material to a reasonable investors decision to purchase the Certificates. B. 85. Statements Regarding Occupancy Status of Borrower The Prospectus Supplements contained collateral group-level information about

the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplement for each of the Securitizations presented this information in tabular form, in a table entitled Occupancy Status of the Mortgage Loans. This table divided all the loans in the collateral group by occupancy status into the following categories: (i) Primary, or Owner Occupied; (ii) Second Home; and (iii) Investor. For each category, the table stated the number of loans in that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:6 Table 4
Transaction
NAA 2005-AR6 NHELI 2006-FM1 NHELI 2006-FM2

Supporting Loan Group

Group III Group I Group I

Primary or Owner Occupied

50.00% 88.78% 93.24%

Second Home
8.78% 0.95% 0.41%

Investor
41.22% 10.27% 6.35%

Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner occupied, investor, and second home. These numbers have been converted to percentages.

27

Transaction
NHELI 2006-HE3 NHELI 2007-1 NHELI 2007-2 NHELI 2007-3

Supporting Loan Group

Group I Group II-1 Group I Group I

Primary or Owner Occupied

89.52% 45.78% 91.00% 90.03%

Second Home
1.22% 8.23% 1.40% 2.64%

Investor
9.26% 45.99% 7.60% 7.33%

86.

As Table 4 makes clear, the Prospectus Supplements for all of the Securitizations

reported that 45 percent or more of the mortgage loans in the Supporting Loan Groups were owner occupied. Indeed, for all but two of the Securitizations, 85 percent or more of the mortgage loans in the Supporting Loan Groups were reported to be owner occupied, while only a small percentage of the loans were reported to be non-owner occupied (i.e. a second home or investment property). 87. The statements about occupancy status were material to a reasonable investors

decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are more likely to care for their primary residence and less likely to default than borrowers who purchase homes as second homes or investments and live elsewhere, the percentage of loans in the collateral group of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 88. Other things being equal, the higher the percentage of loans not secured by

owner-occupied residences, the greater the risk of loss to the certificateholders. Even small differences in the percentages of primary/owner-occupied, second home, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable

28

investor whether to purchase any such certificate. As discussed below at paragraphs 100 through 103, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 89. Statements Regarding Loan-to-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the

balance of the mortgage loan to the value of the mortgaged property when the loan is made. 90. The denominator in the LTV ratio is the value of the mortgaged property, and is

generally the lower of the purchase price or the appraised value of the property. In a refinancing or home-equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risk associated with a given loan. 91. The Prospectus Supplement for each Securitization also contained group-level

information about the LTV ratio for the underlying group of loans as a whole. The percentage of loans with an LTV ratio at or less than 80 percent and the percentage of loans with an LTV ratio greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan Groups are reflected in Table 5 below.7

As used in this Complaint, LTV refers to the original loan-to-value ratio for first lien mortgages and for properties with second liens that are subordinate to the lien that was included in the securitization (i.e., only the securitized lien is included in the numerator of the LTV calculation). However, for second lien mortgages, where the securitized lien is junior to another loan, the more senior lien has been added to the securitized one to determine the numerator in the LTV calculation (this latter calculation is sometimes referred to as the combined-loan-to-value ratio, or CLTV).

29

Table 5
Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80%
99.08% 63.00% 68.40% 58.81% 93.04% 56.59% 59.31%

Transaction

Supporting Loan Group

Percentage of loans, by aggregate principal balance, with LTV greater than 100% as stated in Prospectus Supplement
0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

NAA 2005-AR6 NHELI 2006-FM1 NHELI 2006-FM2 NHELI 2006-HE3 NHELI 2007-1 NHELI 2007-2 NHELI 2007-3

Group III Group I Group I Group I Group II-1 Group I Group I

92.

As Table 5 makes clear, the Prospectus Supplement for each Securitization

reported that the majority of the mortgage loans in the Supporting Loan Groups had an LTV ratio of 80 percent or less and that zero mortgage loans in the Supporting Loan Group had an LTV ratio over 100 percent. 93. The LTV ratio is among the most important measures of the risk of a mortgage

loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV ratio, the greater the equity cushion, so the greater the likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 94. Thus, LTV ratio is a material consideration to a reasonable investor in deciding

whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay

30

certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed below at paragraphs 104 through 109, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and/or materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates. D. 95. Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of mortgage-backed securitizations by

the credit rating agencies, including Moodys Investors Service, Standard & Poors, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time the GSEs purchased the GSE Certificates, investments with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, securities with credit ratings between AAA or its equivalent through BBB- or its equivalent were generally referred to as investment grade. 96. Rating agencies determine the credit rating for each tranche of a mortgage-backed

securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cashflows based on the quality of the underlying mortgages by using sponsor-provided loan-level data. Credit enhancements, such as subordination, represent the

31

amount of cushion or protection from loss incorporated into a given securitization.8 This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificateholders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating. 97. Credit ratings have been an important tool to gauge risk when making investment

decisions. For almost a hundred years, investors like pension funds, municipalities, insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Mae and Freddie Macs respective internal policies limited their purchases of private label residential mortgage-backed securities to those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their equivalent). 98. Each tranche of the Securitizations received a credit rating upon issuance, which

purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the GSE Certificates was investment grade, always AAA or its equivalent. The accuracy of these ratings was material to a reasonable investors decision to purchase the Certificates. As set forth

Subordination refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are subordinate to the senior certificates in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate securities thus provide a degree of protection to the senior certificates from losses on the underlying loans.

32

in Table 8 below, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect data concerning the attributes of the underlying mortgage collateral to the rating agencies, and, as a result, Defendants sold and marketed the GSE Certificates as AAA (or its equivalent) when, in fact, they were not. IV. Falsity of Statements in the Registration Statements and Prospectus Supplements A. 99. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False A review of loan-level data was conducted in order to assess whether the

statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, on a statistically significant basis, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data review demonstrates that the data concerning owner occupancy and LTV ratios was materially false and misleading. 1. 100. Owner-Occupancy Data Was Materially False

The data review has revealed that the owner-occupancy statistics reported in the

Prospectus Supplements were materially false and inflated. In fact, far fewer underlying properties were occupied by their owners than disclosed in the Prospectus Supplements, and more correspondingly were held as second homes or investment properties. 101. To determine whether a given borrower actually occupied the property as

claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrowers tax bill was being mailed to the property or to a different address; whether the borrower had claimed a tax exemption on the property; and whether the mailing address of

33

the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it much more likely that a borrower will not repay the loan. 102. A significant number of the loans failed two or more of these tests, indicating that

the owner-occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. For example, for the NHELI 2006-FM2 Securitization, for which Nomura Credit was the sponsor, Greenwich (now RBS Securities) the underwriter, and NHELI the depositor, the Prospectus Supplement stated that 6.76 percent of the underlying properties by loan count in the Supporting Loan Group were not owner occupied. But the data review revealed that, for 12.55 percent of the properties represented as owner occupied, the owners lived elsewhere, indicating that the true percentage of non-owner-occupied properties was 18.46 percent, nearly triple the percentage reported in the Prospectus Supplement.9 103. The data review revealed that for each Securitization, the Prospectus Supplement

misrepresented the percentage of non-owner-occupied properties. The true percentage of nonowner-occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization, is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for each Securitization understated the percentage of non-owner-occupied properties by more than 5 percent, and for some Securitizations by more than 10 percent.

This conclusion is arrived at by summing (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 6.76 percent), and (b) the product of (i) the stated owner-occupied percentage (here, 93.24 percent) and (ii) the percentage of the properties represented as owner occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 12.55 percent).

34

Table 6
Percentage of Properties Reported as Owner Occupied With Strong Indication of Non-Owner Occupancy10
14.49% 15.76% 12.55% 12.45% 12.92% 10.21% 9.15%

Transaction

Supporting Loan Group(s)

Reported Percentage of NonOwner Occupied

Actual Percentage of Non-OwnerOccupied Properties

Prospectus Understatement of Non-OwnerOccupied Properties

NAA 2005-AR6 NHELI 2006-FM1 NHELI 2006-FM2 NHELI 2006-HE3 NHELI 2007-1 NHELI 2007-2 NHELI 2007-3

Group III Group I Group I Group I Group II-1 Group I Group I

50.00% 11.22% 6.76% 10.48% 54.22% 9.00% 9.97%

57.25% 25.21% 18.46% 21.62% 60.13% 18.29% 18.20%

7.25% 13.99% 11.70% 11.14% 5.92% 9.29% 8.23%

2. 104.

Loan-to-Value Data Was Materially False

The data review has further revealed that the LTV ratios disclosed in the

Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review and servicing. AVMs rely upon similar data as appraisersprimarily county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data.

As described more fully in paragraph 101, failing two or more tests of owner occupancy is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property.

10

35

105.

Applying the AVM to the available data for the properties securing the sampled

loans shows that the appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of LTV. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. 106. For example, for the NHELI 2007-1 Securitization, which was sponsored by

Nomura Credit and underwritten by Greenwich (now RBS Securities), with NHELI as the depositor, the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 12.19 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 93.04 percent of the loans had LTV ratios at or below 80 percent. The data review indicated, however, that only 46.94 percent of the loans had LTV ratios at or below 80 percent. 107. The data review revealed that for each Securitization, the Prospectus Supplement

misrepresented the percentage of loans with an LTV ratio that was above 100 percent and the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true percentage of mortgages in each Supporting Loan Group with an LTV ratio above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in each Supporting Loan Group with an LTV ratio at or below 80 percent, versus the percentage reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregated principal balance.

36

Table 7
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio At Or Under 80%
99.08% 63.00% 68.40% 58.81% 93.04% 56.59% 59.31%

Transaction

Supporting Loan Group(s)

DATA REVIEW True Percentage of Loans With LTV Ratio At Or Under 80%
63.83% 40.32% 38.73% 40.02% 46.94% 33.83% 37.62%

PROSPECTUS Percentage of Loans Reported to Have LTV Ratio Over 100%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

DATA REVIEW True Percentage of Loans With LTV Ratio Over 100%
3.84% 15.26% 18.23% 15.36% 12.19% 19.58% 20.16%

NAA 2005-AR6 NHELI 2006-FM1 NHELI 2006-FM2 NHELI 2006-HE3 NHELI 2007-1 NHELI 2007-2 NHELI 2007-3

Group III Group I Group I Group I Group II-1 Group I Group I

108.

As Table 7 demonstrates, the Prospectus Supplements for all of the

Securitizations reported that none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent. In fact, the data review revealed that all of the Securitizations had mortgage loans in the Supporting Loan Groups with an LTV ratio over 100 percent. Indeed, the percentage of mortgage loans with an LTV ratio over 100 percent was over ten percent in all but one of the Securitizations, and over 19 percent in two of the Securitizations. 109. These inaccuracies with respect to reported LTV ratios also indicate that the

representations in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the Financial Crisis Inquiry Commission (the

37

FCIC), which identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See FCIC, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (January 2011). B. 110. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statements contained material misstatements and omissions

regarding compliance with underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage lending businesses. This is confirmed by the systematically misreported owner-occupancy and LTV statistics, discussed above, and by (1) investigations into originators underwriting practices, which have revealed widespread abandonment of originators reported underwriting guidelines during the relevant period; (2) the collapse of the Certificates credit ratings; and (3) the surge in delinquency and default in the mortgages in the Securitizations. 1. Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines

111.

The abandonment of underwriting guidelines is confirmed by several reports and

investigations that have described rampant underwriting failures throughout the period of the Securitizations, and, more specifically, have described underwriting failures by the very originators whose loans were included by Defendants in the Securitizations. 112. For instance, in November 2008, the Office of the Comptroller of the Currency,

an office within the United States Department of the Treasury, issued a report identifying the

38

Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 20052007 originations. Ownit, Fremont, and ResMAE, which originated many of the loans for the Securitizations at issue here, were all on that list. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008. 113. Ownit, which originated many of the loans for the NHELI 2007-2 Securitization,

was a mortgage lender based in Agoura Hills, California. In September 2005, the investment bank Merrill Lynch & Co. (Merrill Lynch) acquired a 20 percent stake in the company. According to Ownits founder and chief executive, William D. Dallas, shortly after Merrill Lynch acquired that stake, it instructed Ownit to loosen underwriting standards. Andrews, Edmund L., Busted: Life Inside the Great Mortgage Meltdown, W.W. Norton & Company, New York: 2009, at 158. Ownit thus abandoned its underwriting standards in order to originate more loans. 114. On October 4, 2007, the Commonwealth of Massachusetts, through its Attorney

General, brought an enforcement action against Fremont, which originated all the loans for the NHELI 2006-FM1 and NHELI 2006-FM2 Securitizations, for an array of unfair and deceptive business conduct, on a broad scale. See Complaint, Commonwealth v. Fremont Investment & Loan and Fremont General Corp., No. 07-4373 (Mass. Super. Ct.) (the Fremont Complaint). According to the Massachusetts Attorney Generals complaint, Fremont approve[ed] borrowers without considering or verifying the relevant documentation related to the borrowers credit qualifications, including the borrowers income; approv[ed] borrowers for loans with inadequate debt-to-income analyses that do not properly consider the borrowers ability to meet their overall level of indebtedness and common housing expenses; failed to meaningfully

39

account for [ARM] payment adjustments in approving and selling loans; approved borrowers for these ARM loans based only on the initial fixed teaser rate, without regard for borrowers ability to pay after the initial two year period; consistently failed to monitor or supervise brokers practices or to independently verify the information provided to Fremont by brokers; and ma[de] loans based on information that Fremont knew or should have known was inaccurate or false, including, but not limited to, borrowers income, property appraisals, and credit scores. See Fremont Complaint. 115. On December 9, 2008, the Supreme Judicial Court of Massachusetts affirmed a

preliminary injunction that prevented Fremont from foreclosing on thousands of its loans issued to Massachusetts residents. As a basis for its unanimous ruling, the Supreme Judicial Court found that the record supported the lower courts conclusions that Fremont made no effort to determine whether borrowers could make the scheduled payments under the terms of the loan, and that Fremont knew or should have known that [its lending practices and loan terms] would operate in concert essentially to guarantee that the borrower would be unable to pay and default would follow. Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548, 556 (Mass. 2008). The terms of the preliminary injunction were made permanent by a settlement reached on June 9, 2009. 116. Peoples Choice originated many of the loans in the NHELI 2006-3

Securitization. In 2004 and 2005, Peoples Choice originated more than $5 billion in mortgages per year. There have been numerous reports indicating failures by Peoples Choice to adhere to its underwriting practices, including: (i) a lack of quality control, which led mortgage brokers to manipulate documents and allowed borrowers to get away with lying on their loan applications; (ii) borrowers missing one or more of their first three payments, indicating poor underwriting;

40

and (iii) approving borrowers without the income levels required by Peoples Choices own guidelines, because mortgage brokers forged borrowers bank statements, signatures, and income. For instance, an investigation by NBC in 2009 revealed that borrowers included a massage therapist who claimed an income of $180,000 a year and a manicurist who claimed an income of over $200,000 a year. See Richard Greenberg and Chris Hanson, If You Had A Pulse, We Gave You A Loan, (Dateline NBC March 22, 2009), available at http://www.msnbc.msn.com/id/29827248/ns/dateline_nbcthe_hansen_files_with_chris_hansen/t/if-you-had-pulse-we-gave-you-loan/. 117. Former Peoples Choice COO James LaLiberte has stated that he tried to

implement more controls over the loan origination process, but ran into resistance. According to NBCs investigation, other former Peoples Choice employees have stated that: i) underwriters felt pressured by sales staff to approve questionable applications; ii) underwriters would challenge some loansin one case, as many as one-third of all loansbut would be overruled by company executives the vast majority of the time; and iii) there was a lot of keep your mouth shut going on, meaning you just didnt ask questions about things you knew were wrong. See Greenberg and Hanson, above. 118. As part of a plan to take Peoples Choice public, in 2005 the company hired

auditors to conduct an Ethical Climate Survey. Id. Nearly three-quarters of respondents said that they were expected to do what they were told no matter what. Id. Nearly half stated that while they cared about ethics, they act differently. Id. One-third said they had witnessed breaches of applicable laws and regulations. Id. In 2009, former CEO Neil Kornswiet admitted to NBC through a spokesperson that management and the Board were dismayed by what they read. Id.

41

119.

Silver State, which originated many of the loans in the NAA 2005-AR6 and the

NHELI 2007-1 Securitizations, was a wholesale and residential mortgage lender based in Las Vegas, Nevada. In a 2008 episode of the National Public Radio program This American Life, Mike Garner, a former employee of Silver State, described the loosening of underwriting standards in 2005 and 2006: To obtain a loan, a borrower just [had] to have a credit score and a pulse. Alex Blumberg & Adam Davidson, The Giant Pool of Money (This American Life Episode Transcript, Program #355, broadcast May 9, 2008), transcript available at http://www.thisamericanlife.org/sites/default/files/355_transcript.pdf. Garner reported that mortgage brokers would pressure him to allow them to offer loans with loose guidelines so they could earn commissions, and that Garner would oblige if he could find a Wall Street firm to purchase the loans: Id get on the phone and start calling these street firms . . . and once I got a hit, Id call back and say, Hey, Bear Stearns is buying this loan. Id like to give you the opportunity to buy it too. Once one person buys them, all the rest of them follow suit. Garner also described the reaction of his boss, a 25-year veteran of the industry: He hated those loans. He hated them and used to rant and say, It makes me sick to my stomach the kind of loans that we do. He fought the owners and sales force tooth and neck about these guidelines. He got [the] same answer. Nope, other people are offering it. Were going to offer them too. Were going to get more market share this way. House prices are booming, everythings gonna be good. And . . . the company was just rolling in the cash. In September 2008, the Nevada Financial Institutions division closed Silver State, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. 120. The originators of the mortgage loans underlying the Securitizations went beyond

the systematic disregard of their own underwriting guidelines. Indeed, as the FCIC has

42

confirmed, mortgage loan originators throughout the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. This resulted in lower LTV ratios, discussed above, which in turn made the loans appear to the investors less risky than they were. 121. As described by Patricia Lindsay, a former wholesale lender who testified before

the FCIC in April 2010, appraisers fear[ed] for their livelihoods, and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. See Written Testimony of Patricia Lindsay to the FCIC, April 7, 2010, at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that [i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again . . . . [T]oo often state licensed and certified appraisers are forced into making a Hobsons Choice. See Testimony of Jim Amorin to the FCIC, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRANAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgage-backed securitizations. 2. The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines

122.

The total collapse in the credit ratings of the GSE Certificates, typically from

AAA or its equivalent to non-investment speculative grade, is further evidence of the originators

43

systematic disregard of underwriting guidelines, amplifying that the GSE Certificates were impaired from the start. 123. The GSE Certificates that Fannie Mae and Freddie Mac purchased were originally

assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 124. Nomura provided or caused to be provided loan-level information to the rating

agencies that they relied upon in order to calculate the Certificates assigned ratings, including the borrowers LTV ratio, owner-occupancy status, and other loan-level information described in aggregation reports in the Prospectus Supplements. Because the information that Nomura provided or caused to be provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA (or its equivalent) certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported AAA (or its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and carried inadequate credit enhancement. 125. Since the issuance of the Certificates, the rating agencies have dramatically

downgraded their ratings to reflect the revelations regarding the true underwriting practices used to originate the mortgage loans, and the true value and credit quality of the mortgage loans. Table 8 details the extent of the downgrades.11

Applicable ratings are shown in sequential order separated by forward slashes: Moodys/S&P/Fitch. A hyphen after a forward slash indicates that the relevant agency did not provide a rating at issuance.

11

44

Table 8
Transaction
NAA 2005-AR6 NHELI 2006-FM1 NHELI 2006-FM2 NHELI 2006-HE3 NHELI 2007-1 NHELI 2007-2 NHELI 2007-3

Tranche
IIIA1 IA IA1 IA1 II1A IA1 IA1

Ratings at Issuance (Moodys/S&P/Fitch)

Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/--

Ratings as of July 2011 (Moodys/S&P/Fitch)

Caa3/CCC/-B3/BBB-/-Ca/CCC/C Caa2/B-/CC Ca/D/-Caa3/CCC/-Ca/CC/--

3.

The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines

126.

Even though the Certificates purchased by Fannie Mae and Freddie Mac were

supposed to represent long-term, stable investments, a significant percentage of the mortgage loans backing the Certificates have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is a direct consequence of the fact that they were not underwritten in accordance with applicable underwriting guidelines as represented in the Registration Statements. 127. Loan groups that were properly underwritten and contained loans with the

characteristics represented in the Registration Statements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 sets forth the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011. Table 9
Transaction
NAA 2005-AR6 NHELI 2006-FM1

Supporting Loan Group

Group III Group I

Percentage of Delinquent/Defaulted/Foreclosed Loans as of July 2011

32.1% 52.1%

45

Transaction
NHELI 2006-FM2 NHELI 2006-HE3 NHELI 2007-1 NHELI 2007-2 NHELI 2007-3

Supporting Loan Group

Group I Group I Group II-1 Group I Group I

Percentage of Delinquent/Defaulted/Foreclosed Loans as of July 2011

58.9% 40.4% 44.0% 38.3% 44.7%

128.

The confirmed misstatements concerning owner occupancy and LTV ratios, the

confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations, and the extraordinary drop in credit rating and rise in delinquencies across those Securitizations, all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. V. Fannie Maes and Freddie Macs Purchases of the GSE Certificates and the Resulting Damages 129. In total, between November 30, 2005 and April 30, 2007, Fannie Mae and Freddie

Mac purchased over $2 billion in residential mortgage-backed securities issued in connection with the Securitizations. Table 10 reflects each of Freddie Macs purchases of the Certificates.12 Table 10
Settlement Date of Purchase by Freddie Mac
1/31/2006 10/31/2006 8/31/2006 1/31/2007 1/31/2007

Transaction
NHELI 2006-FM1 NHELI 2006-FM2 NHELI 2006-HE3 NHELI 2007-1 NHELI 2007-2

Tranche
IA IA1 IA1 II1A IA1

CUSIP
65536HBT4 65537FAA9 65536QAA6 65537KAA8 65537MAA4

Initial Unpaid Principal Balance ($)

309,550,000 525,197,000 441,739,000 100,548,000 358,847,000

Purchase Price (% of Par)

100.00% 100.00% 100.00% 100.00% 100.00%

Seller to Freddie Mac

Nomura Securities Greenwich (now RBS Securities) Greenwich (now RBS Securities) Greenwich (now RBS Securities) Greenwich (now RBS Securities)

Purchased securities in Tables 10 and 11 are stated in terms of unpaid principal balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par.

12

46

Transaction
NHELI 2007-3

Tranche
IA1

CUSIP
65537NAA2

Settlement Date of Purchase by Freddie Mac

4/30/2007

Initial Unpaid Principal Balance ($)

245,105,000

Purchase Price (% of Par)

100.00%

Seller to Freddie Mac

Lehman Brothers, Inc.

130.

Table 11 reflects Fannie Maes purchase of the Certificates: Table 11

Settlement Date of Purchase by Fannie Mae
11/30/2005

Transaction

Tranche

CUSIP

Initial Unpaid Principal Balance ($)

64,943,000

Purchase Price (% of Par)

101.11%

Seller to Fannie Mae

Nomura Securities

NAA 2005-AR6

IIIA1

65535VRJ9

131.

The statements and assurances in the Registration Statements regarding the credit

quality and characteristics of the mortgage loans underlying the GSE Certificates, and the origination and underwriting practices pursuant to which the mortgage loans were originated, which were summarized in such documents, were material to a reasonable investors decision to purchase the Certificates. 132. The false statements of material facts and omissions of material facts in the

Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer hundreds of millions of dollars in damages, including without limitation depreciation in the value of the securities. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements. 133. Fannie Maes and Freddie Macs losses have been much greater than they would

have been if the mortgage loans had the credit quality represented in the Registration Statements.

47

134.

Defendants misstatements and omissions in the Registration Statements

regarding the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchase of the GSE Certificates. Defendants proximately caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants Nomura Securities, RBS Securities, NHELI, David Findlay, John McCarthy, N. Dante Larocca, and Nathan Gorin) 135. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 136. This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act of

1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against Defendants Nomura Securities and RBS Securities (formerly known as Greenwich) with respect to each of the Registration Statements corresponding to the Securitizations they underwrote. This claim is also brought against (i) Defendant NHELI and (ii) Defendants David Findlay, John McCarthy, N. Dante Larocca, and Nathan Gorin (the foregoing Individual Defendants collectively referred to as the Section 11 Individual Defendants), with respect to the Registration Statements filed by NHELI that registered securities that were bona fide offered to the public on or after September 6, 2005. 137. This claim is predicated upon the strict liability of Defendants Nomura Securities

and RBS Securities for making false and materially misleading statements in the Registration Statements applicable to one or more Securitizations and for omitting facts necessary to make the facts stated therein not misleading. Defendants NHELI and the Section 11 Individual

48

Defendants are strictly liable for making false and materially misleading misstatements in the Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005, including the related Prospectus Supplements, and for omitting facts necessary to make the facts stated therein not misleading. 138. Defendants Nomura Securities and RBS Securities (formerly known as

Greenwich) served as underwriters for six of the Securitizations, and as such, are liable for the misstatements and omissions in the corresponding Registration Statements under Section 11 of the Securities Act. 139. Defendant NHELI filed two Registration Statements under which six of the

Securitizations were carried out. As depositor, Defendant NHELI is issuer of the GSE Certificates pursuant to the Registration Statements it filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, it is liable for the misstatements and omissions in the Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 140. At the time Defendant NHELI filed the Registration Statements, the Section 11

Individual Defendants who signed the Registration Statement were officers and/or directors of NHELI. In addition, the Section 11 Individual Defendants signed or authorized another to sign on their behalf the Registration Statements and the amendments thereto. As such, the Section 11 Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in the Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 141. At the time that they became effective, the Registration Statements contained

material misstatements of fact and omitted information necessary to make the facts stated therein

49

not misleading, as set forth above. The facts misstated or omitted were material to a reasonable investor reviewing the Registration Statements. 142. The untrue statements of material facts and omissions of material fact in the

Registration Statements are set forth above in Section IV and pertain to compliance with underwriting guidelines, occupancy status and loan-to-value ratios. 143. Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE

Certificates pursuant to the false and misleading Registration Statements. Fannie Mae and Freddie Mac made these purchases in the primary market. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know of the facts concerning the false and misleading statements and omissions alleged herein, and if the GSEs would have known those facts, they would not have purchased the GSE Certificates. 144. Nomura Securities and RBS Securities (formerly known as Greenwich) owed to

Fannie Mae, Freddie Mac, and other investors a duty to make a reasonable and diligent investigation of the statements contained in the Registration Statements applicable to the Securitizations they underwrote at the time they became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Section 11 Individual Defendants owed the same duty with respect to the Registration Statements that they signed that registered securities that were bona fide offered to the public on or after September 6, 2005. 145. Nomura Securities, RBS Securities (formerly known as Greenwich), and the

Section 11 Individual Defendants did not exercise such due diligence and failed to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration

50

Statements filed in connection with the Securitizations, as set forth herein. In addition, NHELI, though subject to strict liability without regard to whether it performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations. 146. Fannie Mae and Freddie Mac sustained substantial damages as a result of the

misstatements and omissions in the Registration Statements. 147. This action is brought within three years of the date that the FHFA was appointed

as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). 148. By reason of the conduct herein alleged, Nomura Securities, RBS Securities

(formerly known as Greenwich), NHELI, and the Section 11 Individual Defendants are jointly and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against Nomura Securities, RBS Securities, NAA, and NHELI) 149. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 150. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities

Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements in the Securitizations listed in paragraph 2. 151. This claim is predicated upon the negligence of Nomura Securities, RBS

Securities (formerly known as Greenwich), NAA and NHELI for making false and materially misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements,

51

hereinafter referred to in this Section as Prospectuses) for one or more Securitizations (as specified in Table 1, above at paragraph 35). 152. Nomura Securities and RBS Securities (formerly known as Greenwich) are

prominently identified in the Prospectuses, the primary documents that they used to sell the GSE Certificates. Nomura Securities and RBS Securities offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac their GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 153. Nomura Securities and RBS Securities (formerly known as Greenwich) offered

and sold the GSE Certificates to Fannie Mae and Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Nomura Securities and RBS Securities reviewed and participated in drafting the Prospectuses. 154. Nomura Securities and RBS Securities (formerly known as Greenwich)

successfully solicited Fannie Maes and Freddie Macs purchases of the GSE Certificates. As underwriters, Nomura Securities and RBS Securities obtained substantial commissions based on the amount received from the sale of the Certificates to the public. 155. Nomura Securities and RBS Securities (formerly known as Greenwich) offered

the GSE Certificates for sale, sold them, and distributed them by the use of means or instruments of transportation and communication in interstate commerce. 156. NAA is prominently identified in the Prospectus for one of the Securitizations,

NAA 2005-AR6, and NHELI is prominently identified in the Prospectuses for the remaining six

52

Securitizations. NAA and NHELI offered the Certificates publicly and actively solicited their sale, including to Fannie Mae and Freddie Mac. 157. NAA and NHELI offered the GSE Certificates to Fannie Mae and Freddie Mac

by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. NAA and NHELI reviewed and participated in drafting the Prospectuses. 158. NAA and NHELI offered the GSE Certificates for sale by the use of means or

instruments of transportation and communication in interstate commerce. 159. Each of Nomura Securities, RBS Securities (formerly known as Greenwich),

NAA, and NHELI actively participated in the solicitation of the GSEs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 160. Each of the Prospectuses contained material misstatements of fact and omitted

information necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses. 161. The untrue statements of material facts and omissions of material fact in the

Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios. 162. Nomura Securities, RBS Securities (formerly known as Greenwich), NAA, and

NHELI offered and sold the GSE Certificates offered pursuant to the Registration Statements directly to Fannie Mae and Freddie Mac, pursuant to the false and misleading Prospectuses.

53

163.

Nomura Securities and RBS Securities (formerly known as Greenwich) owed to

Fannie Mae and Freddie Mac, as well as to other investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses for the Securitizations they underwrote, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. NAA and NHELI owed the same duty with respect to the Prospectuses carried out under the Registration Statements they filed. 164. Nomura Securities, RBS Securities (formerly known as Greenwich), NAA, and

NHELI failed to exercise such reasonable care. These Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 165. In contrast, Fannie Mae and Freddie Mac did not know of the untruths and

omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If the GSEs would have known of those untruths and omissions, they would not have purchased the GSE Certificates. 166. Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market

pursuant to the Prospectuses. 167. Fannie Mae and Freddie Mac sustained substantial damages in connection with

their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 168. This action is brought within three years of the date that the FHFA was appointed

as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12).

54

THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against Nomura Credit, Nomura Holding, and the Individual Defendants) 169. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 170. This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.

77o (Section 15), against Nomura Credit, Nomura Holding, and the Individual Defendants for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 171. The Individual Defendants at all relevant times participated in the operation and

management of NAA, NHELI, and/or Nomura Securities, and conducted and participated, directly and indirectly, in the conduct of NAA, NHELI, and/or Nomura Securities business affairs. Defendant N. Dante Larocca was President and Chief Executive Officer of NHELI and a Managing Director of Nomura Securities. Defendant David Findlay was a Director of NAA and NHELI and a Senior Managing Director and Chief Legal Officer of Nomura Securities. Defendant Nathan Gorin was Controller and Chief Financial Officer of NAA, NHELI, and Nomura Securities. Defendant John P. Graham was President and Chief Executive Officer of NAA. Defendant John McCarthy was a Director of NAA and NHELI. 172. Defendant Nomura Credit was the sponsor for the Securitizations, and culpably

participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting NAA and NHELI as the special purpose vehicles, and selecting Nomura Securities or RBS Securities (formerly known as Greenwich) as underwriter. In its role as sponsor, Nomura Credit knew and

55

intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 173. Defendant Nomura Credit also acted as the seller of the mortgage loans for the

Securitizations, in that it conveyed such mortgage loans to Defendants NAA and NHELI pursuant to a Mortgage Loan Purchase Agreement. 174. Defendant Nomura Credit also controlled the business of NAA and NHELI, as

NAA and NHELI were merely special purpose entities created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, there was some overlap between the officers and directors of Nomura Credit, NAA, NHELI, and Nomura Securities. In addition, because of its position as sponsor, Nomura Credit was able to, and did in fact, control the contents of the Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 175. Defendant Nomura Holding controlled the business operations of Nomura Credit,

Nomura Securities, NAA, and NHELI. Defendant Nomura Holding is the corporate parent of Nomura Credit, Nomura Securities, NAA, and NHELI. As the corporate parent, Nomura Holding had the practical ability to direct and control the actions of Nomura Credit, Nomura Securities, NAA, and NHELI in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Nomura Credit, Nomura Securities, NAA, and NHELI in connection with the issuance and sale of the Certificates. 176. Nomura Holding expanded its share of the residential mortgage-backed

securitization market in order to increase revenue and profits. The push to securitize large

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volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 177. Nomura Holding culpably participated in the violations of Section 11 and

12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as NAA, NHELI, and the issuing trusts to serve as conduits for the mortgage loans. 178. Nomura Credit, Nomura Holding, and the Individual Defendants are controlling

persons within the meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of NAA, NHELI, and Nomura Securities at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 179. Fannie Mae and Freddie Mac purchased in the primary market Certificates issued

pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 180. Fannie Mae and Freddie Mac did not know of the misstatements and omissions in

the Registration Statements; had the GSEs known of those misstatements and omissions, they would not have purchased the GSE Certificates. 181. Fannie Mae and Freddie Mac have sustained damages as a result of the

misstatements and omissions in the Registration Statements, for which they are entitled to compensation.

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182.

This action is brought within three years of the date that the FHFA was appointed

as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). FOURTH CAUSE OF ACTION Violation of Section 13.1-522(A)(ii) of the Virginia Code (Against RBS Securities and NHELI) 183. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 184. This claim is brought by Plaintiff pursuant to 13.1-522(A)(ii) of the Virginia Code

and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain to only those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. 185. This claim is predicated upon RBS Securities (formerly known as Greenwich)

negligence for making false and materially misleading statements in the Prospectuses for the Securitizations for which it served as the selling underwriter and which were purchased by Freddie Mac on or after September 6, 2006. Defendant NHELI acted negligently in making false and materially misleading statements in the Prospectuses for the Securitizations carried out under the Registration Statements it filed. 186. RBS Securities (formerly known as Greenwich) is prominently identified in the

Prospectuses, the primary documents that it used to sell the GSE Certificates. RBS Securities offered the Certificates publicly, including selling to Freddie Mac its GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 187. RBS Securities (formerly known as Greenwich) offered and sold the GSE

Certificates to Freddie Mac by means of the Prospectuses, which contained untrue statements of

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material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. RBS Securities reviewed and participated in drafting the Prospectuses. 188. RBS Securities (formerly known as Greenwich) successfully solicited Freddie

Macs purchases of the GSE Certificates. As underwriter, RBS Securities obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 189. RBS Securities (formerly known as Greenwich) offered the GSE Certificates for

sale, sold them, and distributed them to Freddie Mac in the State of Virginia. 190. NHELI is prominently identified in the Prospectuses for the Securitizations

carried out under the Registration Statements it filed. NHELI offered the Certificates publicly and actively solicited their sale, including to Freddie Mac. 191. NHELI offered the GSE Certificates to Freddie Mac by means of Prospectuses

which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. NHELI reviewed and participated in drafting the Prospectuses. 192. RBS Securities (formerly known as Greenwich) and NHELI actively participated

in the solicitation of Freddie Macs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 193. Each of the Prospectuses contained material misstatements of fact and omitted

information necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses.

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194.

The untrue statements of material facts and omissions of material fact in the

Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios. 195. RBS Securities (formerly known as Greenwich) and NHELI offered and sold the

GSE Certificates offered pursuant to the Registration Statements directly to Freddie Mac, pursuant to the false and misleading Prospectuses. 196. RBS Securities (formerly known as Greenwich) owed to Freddie Mac, as well as

to other investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses for the Securitizations they underwrote, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. NHELI owed the same duty with respect to the Prospectuses carried out under the Registration Statements it filed. 197. RBS Securities (formerly known as Greenwich) and NHELI failed to exercise

such reasonable care. These Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 198. In contrast, Freddie Mac did not know of the untruths and omissions contained in

the Prospectuses at the time it purchased the GSE Certificates. If Freddie Mac would have known of those untruths and omissions, it would not have purchased the GSE Certificates. 199. Freddie Mac sustained substantial damages in connection with its investments in

the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon.

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200.

This action is brought within three years of the date that the FHFA was appointed

as Conservator of Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). FIFTH CAUSE OF ACTION Violation of Section 13.1-522(C) of the Virginia Code (Against Nomura Credit, Nomura Holding, David Findlay, John McCarthy, N. Dante Larocca, and Nathan Gorin) 201. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 202. This claim is brought under Section 13.1-522(C) of the Virginia Code and is

asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 10 above that were purchased on or after September 6, 2006. This claim is brought against Nomura Credit, Nomura Holding, David Findlay, John McCarthy, N. Dante Larocca, and Nathan Gorin (the foregoing Individual Defendants collectively referred to as the Section 13 Individual Defendants) for controllingperson liability with regard to the Fourth Cause of Action set forth above. 203. The Section 13 Individual Defendants at all relevant times participated in the

operation and management of NHELI, and conducted and participated, directly and indirectly, in the conduct of NHELIs business affairs. Defendants David Findlay and John McCarthy were Directors of NHELI. Defendant N. Dante Larocca was President and Chief Executive Officer of NHELI. Defendant Nathan Gorin was Controller and Chief Financial Officer of NHELI. 204. Defendant Nomura Credit was the sponsor for the Securitizations, and culpably

participated in the violations of Section 13.1-522(A)(ii) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting NHELI as the special purpose vehicle, and selecting RBS Securities (formerly known as Greenwich) as

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underwriter. In its role as sponsor, Nomura Credit knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 205. Defendant Nomura Credit also acted as the seller of the mortgage loans for the

Securitizations, in that it conveyed such mortgage loans to Defendant NHELI pursuant to a Mortgage Loan Purchase Agreement. 206. Defendant Nomura Credit also controlled the business of NHELI, as NHELI was

merely a special purpose entity created for the purpose of acting as a pass-through for the issuance of the Certificates. In addition, because of its position as sponsor, Nomura Credit was able to, and did in fact, control the contents of the Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 207. Defendant Nomura Holding controlled the business operations of Nomura Credit

and NHELI. Defendant Nomura Holding is the corporate parent of Nomura Credit and NHELI. As the corporate parent, Nomura Holding had the practical ability to direct and control the actions of Nomura Credit and NHELI in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Nomura Credit and NHELI in connection with the issuance and sale of the Certificates. 208. Nomura Holding expanded its share of the residential mortgage-backed

securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements.

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209.

Nomura Holding culpably participated in the violations of

Section 13.1-522(A)(ii) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as NHELI and the issuing trusts to serve as conduits for the mortgage loans. 210. Nomura Credit, Nomura Holding, and the Section 13 Individual Defendants are

controlling persons within the meaning of Section 13.1-522(C) by virtue of their actual power over, control of, ownership of, and/or directorship of NHELI at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 211. Freddie Mac purchased Certificates issued pursuant to the Registration

Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 212. Freddie Mac did not know of the misstatements and omissions in the Registration

Statements; had Freddie Mac known of those misstatements and omissions, it would not have purchased the GSE Certificates. 213. Freddie Mac has sustained damages as a result of the misstatements and

omissions in the Registration Statements, for which it is entitled to compensation. 214. This action is brought within three years of the date that the FHFA was appointed

as Conservator of Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12).

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SIXTH CAUSE OF ACTION Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against Nomura Securities and NAA) 215. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 216. This claim is brought by Plaintiff pursuant to Section 31-5606.05(a)(1)(B) and is

asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to the GSE Certificate for the NAA 2005-AR6 Securitization. 217. This claim is predicated upon Nomura Securities negligence for making false and

materially misleading statements in the Prospectus for the NAA 2005-AR6 Securitization. Defendant NAA also acted negligently in making false and materially misleading statements in this Prospectus. 218. Nomura Securities is prominently identified in the Prospectus, the primary

document it used to sell the Certificates for the NAA 2005-AR6 Securitization. Nomura Securities offered the Certificates publicly, including selling the GSE Certificate to Fannie Mae. 219. Nomura Securities offered and sold the GSE Certificate to Fannie Mae by means

of the Prospectus, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Nomura Securities reviewed and participated in drafting the Prospectus. 220. Nomura Securities successfully solicited Fannie Maes purchase of the GSE

Certificate for the NAA 2005-AR6 Securitization. As underwriter, Nomura Securities obtained substantial commissions based upon the amount received from the sale of the Certificates to the public.

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221.

Nomura Securities offered the GSE Certificate for sale, sold it, and distributed it

to Fannie Mae in the District of Columbia. 222. NAA is prominently identified in the Prospectus for the NAA 2005-AR6

Securitization, which was carried out under a Registration Statement it filed. This Prospectus was the primary document used to sell the Certificates for the NAA 2005-AR6 Securitization. NAA offered the Certificates publicly and actively solicited their sale, including the sale of the GSE Certificate to Fannie Mae. 223. NAA offered the GSE Certificate for the NAA 2005-AR6 Securitization to Fannie

Mae by means of a Prospectus which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. NAA reviewed and participated in drafting the Prospectus. 224. Nomura Securities and NAA actively participated in the solicitation of the Fannie

Maes purchase of the GSE Certificate for the NAA 2005-AR6 Securitization, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statement, filing the Registration Statement, and assisting in marketing the GSE Certificate. 225. The Prospectus contained material misstatements of fact and omitted information

necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectus. 226. The untrue statements of material facts and omissions of material fact in the

Registration Statement, which includes the Prospectus, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios.

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227.

Nomura Securities and NAA offered and sold the GSE Certificate for the NAA

2005-AR6 Securitization offered pursuant to the Registration Statement directly to Fannie Mae, pursuant to the false and misleading Prospectus. 228. Nomura Securities owed to Fannie Mae, as well as to other investors in this trust,

a duty to make a reasonable and diligent investigation of the statements contained in the Prospectus for the Securitization that it underwrote, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. NAA, which filed the Registration Statement, owed the same duty with respect to the Prospectus for the Securitization. 229. Nomura Securities and NAA failed to exercise such reasonable care. These

Defendants in the exercise of reasonable care should have known that the Prospectus contained untrue statements of material facts and omissions of material facts at the time of the Securitization as set forth above. 230. In contrast, Fannie Mae did not know of the untruths and omissions contained in

the Prospectus at the time it purchased the GSE Certificate for the NAA 2005-AR6 Securitization. If Fannie Mae would have known of those untruths and omissions, it would not have purchased the GSE Certificate. 231. Fannie Mae sustained substantial damages in connection with its investment in

the GSE Certificate for the NAA 2005-AR6 Securitization and has the right to rescind and recover the consideration paid for the GSE Certificate, with interest thereon. 232. This action is brought within three years of the date that the FHFA was appointed

as Conservator of Fannie Mae, and is thus timely under 12 U.S.C. 4617(b)(12).

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SEVENTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against Nomura Credit, Nomura Holding, David Findlay, John McCarthy, John P. Graham, and Nathan Gorin) 233. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 234. This claim is brought under Section 31-5606.05(c) of the District of Columbia

Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to the GSE Certificate for the NAA 2005-AR6 Securitization. This claim is brought against Nomura Credit, Nomura Holding, David Findlay, John McCarthy, John P. Graham, and Nathan Gorin (the foregoing Individual Defendants collectively referred to as the Section 31 Individual Defendants) for controlling-person liability with regard to the Sixth Cause of Action set forth above. 235. The Section 31 Individual Defendants at all relevant times participated in the

operation and management of NAA and/or Nomura Securities, and conducted and participated, directly and indirectly, in the conduct of NAA and/or Nomura Securities business affairs. Defendant David Findlay was a Director of NAA and a Senior Managing Director and Chief Legal Officer of Nomura Securities. Defendant John McCarthy was a Director of NAA. Defendant John P. Graham was President and Chief Executive Officer of NAA. Defendant Nathan Gorin was Controller and Chief Financial Officer of NAA and Nomura Securities. 236. Defendant Nomura Credit was the sponsor for the Securitizations, and culpably

participated in the violations of Section 31-5606.05(a)(1)(B) set forth above with respect to the offering of the GSE Certificate for the NAA 2005-AR6 Securitization by initiating this Securitization, purchasing the mortgage loans to be securitized, determining the structure of the Securitization, selecting NAA as the special purpose vehicle, and selecting Nomura Securities as

67

underwriter. In its role as sponsor, Nomura Credit knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 237. Defendant Nomura Credit also acted as the seller of the mortgage loans for the

NAA 2005-AR6 Securitization, in that it conveyed such mortgage loans to Defendant NAA pursuant to a mortgage loan purchase agreement. 238. Defendant Nomura Credit also controlled the business of NAA, as NAA was

merely a special purpose entity created for the purpose of acting as a pass-through for the issuance of the Certificates. In addition, because of its position as sponsor, Nomura Credit was able to, and did in fact, control the contents of the Registration Statement, including the Prospectus and Prospectus Supplement, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 239. Defendant Nomura Holding controlled the business operations of Nomura Credit,

Nomura Securities, and NAA. Defendant Nomura Holding is the corporate parent of Nomura Credit, Nomura Securities, and NAA. As the corporate parent, Nomura Holding had the practical ability to direct and control the actions of Nomura Credit, Nomura Securities, and NAA in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Nomura Credit, Nomura Securities, and NAA in connection with the issuance and sale of the GSE Certificate for the NAA 2005-AR6 Securitization. 240. Nomura Holding expanded its share of the residential mortgage-backed

securitization market in order to increase revenue and profits. The push to securitize large

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volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statement. 241. Nomura Holding culpably participated in the violations of Section 31-

5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statement and establish special-purpose financial entities such as NAA and the issuing trusts to serve as conduits for the mortgage loans. 242. Nomura Credit, Nomura Holding, and the Section 31 Individual Defendants are

controlling persons within the meaning of Section 31-5606.05(c) by virtue of their actual power over, control of, ownership of, and/or directorship of NAA and Nomura Securities at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statement. 243. Fannie Mae purchased the GSE Certificate for the NAA 2005-AR6 Securitization,

issued pursuant to the Registration Statement, including the Prospectus and Prospectus Supplement, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 244. Fannie Mae did not know of the misstatements and omissions in the Registration

Statement; had Fannie Mae known of those misstatements and omissions, it would not have purchased the GSE Certificate. 245. Fannie Mae has sustained damages as a result of the misstatements and omissions

in the Registration Statement, for which it is entitled to compensation.

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246.

This action is brought within three years of the date that the FHFA was appointed

as Conservator of Fannie Mae and is thus timely under 12 U.S.C. 4617(b)(12). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against Nomura Securities, RBS Securities, NAA, and NHELI) 247. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 248. This is a claim for common law negligent misrepresentation against Defendants

Nomura Securities, RBS Securities (formerly known as Greenwich), NAA, and NHELI. 249. Between November 30, 2005 and April 30, 2007, Nomura Securities, RBS

Securities (formerly known as Greenwich), NAA, and NHELI sold the GSE Certificates to the GSEs as described above. Because NAA and NHELI, as depositors, owned and then conveyed the underlying mortgage loans that collateralized the Securitizations, NAA and NHELI had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through their possession of the loan files and other documentation. 250. Likewise, as lead underwriter for three of the Securitizations and selling

underwriter for two, Nomura Securities was obligated toand had the opportunity toperform sufficient due diligence to ensure that the Registration Statements for those Securitizations, including without limitation the corresponding Prospectus Supplements, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As lead and selling underwriter for four of the Securitizations, RBS Securities (formerly known as Greenwich) had the same obligation and opportunity. As a result of this privileged position as underwriterswhich gave them access to loan file information and obligated them to perform adequate due diligence to

70

ensure the accuracy of the Registration StatementsNomura Securities and RBS Securities had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 251. Nomura Securities and RBS Securities (formerly known as Greenwich) also had

unique, exclusive, and special knowledge of the work of third-party due diligence providers, such as Clayton, who identified significant failures of originators to adhere to the underwriting standards represented in the Registration Statements. The GSEs, like other investors, had no access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on Nomura Securities and RBS Securities knowledge and their express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans. 252. Nomura Securities, RBS Securities (formerly known as Greenwich), NAA, and

NHELI were aware that the GSEs reasonably relied on their reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the Securitizations, and that the GSEs depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. In purchasing the GSE Certificates from these Defendants, the GSEs relied on their special relationships with these Defendants, and the purchases were made, in part, in reliance on that special relationship.

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253.

Based upon their unique, exclusive, and special knowledge and expertise about

the loans held by the trusts in the Securitizations, Nomura Securities, RBS Securities (formerly known as Greenwich), NAA, and NHELI had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. Nomura Securities, RBS Securities, NAA, and NHELI negligently breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. 254. In addition, having made actual representations about the underlying collateral in

the Securitizations and the facts bearing on the riskiness of the Certificates, Nomura Securities, RBS Securities (formerly known as Greenwich), NAA, and NHELI had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon these Defendants representations about the Securitizations, and these Defendants failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans. 255. Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the

representations by Nomura as the sponsor and depositor for the seven Securitizations and as the selling underwriter for two of these Securitizations. Freddie Mac also purchased the GSE

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Certificates based upon the representations by RBS Securities (formerly known as Greenwich), as the lead and selling underwriter for four Securitizations. The GSEs received term sheets containing critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner-occupancy statistics, which term sheets were delivered, upon information and belief, by Nomura and RBS Securities. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 256. The GSEs relied upon the accuracy of the data transmitted to them and

subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by Nomura Securities, RBS Securities (formerly known as Greenwich), NAA, and NHELI relating to the collateral quality of the underlying loans and the structure of the Securitizations. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were AAA quality (or its equivalent)meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 257. Nomura, as sponsor and depositor for the seven Securitizations and selling

underwriter for two, provided detailed information about the underlying collateral and structure of each Securitization it sponsored to the credit rating agencies. The credit rating agencies based their ratings on the information provided to them by Nomura, and the agencies anticipated ratings of the Certificates were dependent on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit ratings and the actual credit ratings assigned to the

73

Certificates by the credit rating agencies, and upon the accuracy of Nomuras and RBS Securities representations in the term sheets and Prospectus Supplements. 258. In addition, the GSEs relied on the fact that the originators of the mortgage loans

in the Securitizations had acted in conformity with their underwriting guidelines, which were described in the Prospectus Supplements. Compliance with underwriting guidelines was a precondition to the GSEs purchase of the GSE Certificates in that the GSEs decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards. 259. In purchasing the GSE Certificates, the GSEs justifiably relied on Nomuras and

RBS Securities (formerly known as Greenwich) false representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. 260. But for the above misrepresentations and omissions, the GSEs would not have

purchased or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decision to acquire the GSE Certificates, as described above. 261. The GSEs were damaged in an amount to be determined at trial as a direct,

proximate, and foreseeable result of these Defendants misrepresentations, including any half truths. 262. This action is brought within three years of the date that the FHFA was appointed

as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows:

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