You're viewing Docket Item 33 from the case Plumbers' Union Local No. 12 Pension Fund, Individually and On Behalf of All Others Similarly Situated v. Nomura Asset Acceptance Corporation et al. View the full docket and case details.

Download this document:




Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 1 of 72

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

No. 08-cv-10446

CLASS ACTION

CONSOLIDATED AMENDED
COMPLAINT FOR VIOLATION OF §§11,
12(a)(2) AND 15 OF THE SECURITIES ACT
OF 1933

DEMAND FOR JURY TRIAL




PLUMBERS’ UNION LOCAL NO. 12
PENSION FUND, Individually and On Behalf
of All Others Similarly Situated,

Plaintiff,

vs.

NOMURA ASSET ACCEPTANCE
CORPORATION, et al.,

Defendants.







)
)
)
)
)
)
)
)
)
)
)
)
)



Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 2 of 72



NATURE OF THE ACTION

1.

This is a securities class action on behalf of all persons or entities who acquired the

Mortgage Pass-Through Certificates (the “Certificates”) of Nomura Asset Acceptance Corporation

(“Nomura Asset” or the “Company”) pursuant and/or traceable to false and misleading Registration

Statements dated July 22, 2005 and April 19, 2006, and Prospectus Supplements issued in

connection with the Certificates and which were incorporated by reference therein between

September 27, 2005 and December 1, 2006 (collectively, the “Registration Statements”). This action

involves solely strict liability and negligence claims brought pursuant to the Securities Act of 1933

(“1933 Act”).

2.

Nomura Asset was formed in 1992 for the purpose of acquiring, owning and

transferring mortgage loan assets and selling interests in them. Nomura Asset is a subsidiary of

Nomura Asset Capital Corporation (“Nomura Capital”), also known as the Capital Company of

America, a real estate finance subsidiary of Nomura Holding America Inc. Nomura Asset is

engaged in mortgage loan lending and other real estate finance-related businesses, including

mortgage loan banking, mortgage warehouse lending, and insurance underwriting. The issuers of

the various offerings (the “Defendant Issuers”) are Nomura Asset and the Trusts identified in ¶15,

which were established by Nomura Asset to issue billions of dollars worth of Certificates in 2005

and 2006.

3.

On July 22, 2005 and April 19, 2006, the Defendant Issuers caused Registration

Statements to be filed with the Securities and Exchange Commission (“SEC”) in connection with,

and for the purpose of, issuing hundreds of millions of dollars of Certificates. The Certificates were

issued pursuant to Prospectus Supplements, each of which was incorporated into the Registration

Statements. The Certificates were supported by pools of mortgage loans. The Registration

Statements represented that the mortgage pools would primarily consist of loans generally secured

- 1 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 3 of 72



by first and second liens on residential properties, including conventional, adjustable rate and

negative amortization mortgage loans.

4.

Investors who purchased the Certificates were concerned with: (a) the interest rate or

Certificate yield; (b) the timing of principal and interest payments; and (c) the safety of the

investment (risk of default of the underlying mortgage loan assets), including the ratings of the

Certificates. The representations in the Registration Statements concerning the mortgages

underlying the Certificates, and the attendant risks, were therefore material to investors.

Unfortunately for investors, many of these representations were materially false and misleading.

5.

As detailed herein, the Registration Statements included false statements and/or

omissions about: (i) the underwriting standards purportedly used in connection with the underwriting

of the underlying mortgage loans; (ii) the maximum loan-to-value ratios used to qualify borrowers;

(iii) the appraisals of properties underlying the mortgage loans; (iv) the debt-to-income ratios

permitted on the loans; (v) the delinquency of mortgage loans prior to being purchased and

transferred to the Trusts; and (vi) the true ratings of the Certificates.

6.

The true, but undisclosed facts, were:

(a)

that the sellers of the underlying mortgage loans to Nomura Asset were

issuing many of the mortgage loans to borrowers who: (i) did not meet the prudent or maximum

debt-to-income ratio purportedly required by the lender; (ii) did not provide adequate documentation

to support the income and assets required to issue the loans pursuant to the lenders’ own guidelines;

(iii) were steered to stated income/asset and low documentation mortgage loans by lenders, lenders’

correspondents or lenders’ agents, such as mortgage brokers, because the borrowers could not

qualify for mortgage loans that required full documentation; and (iv) did not have the income or

- 2 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 4 of 72



assets required by the lenders’ own guidelines to afford the required mortgage loan payments, which

resulted in a mismatch between the needs and capacity of the borrowers;

(b)

that the lenders or the lenders’ agents knew that the borrowers either could not

provide the required documentation or the borrowers refused to provide it and therefore issued

numerous loans that would be the equivalent of sub-prime loans which were disguised as Alt-A

loans;

(c)

that the Certificates were not “Investment Grade” but rather were far riskier

than represented;

(d)

that dozens of borrowers were 30 or more days delinquent on mortgage loans

at the “cut off date” upon which they were transferred to the Trusts;

(e)

that, in fact, the underwriting, quality control, and due diligence practices and

policies utilized in connection with the approval and funding of the mortgage loans were so weak or

non-existent that borrowers were being extended loans based on stated income in the mortgage loan

applications with purported income amounts that could not possibly be reconciled with the jobs

claimed on the loan applications or through a check of free “online” salary databases such as

salary.com; and

(f)

that the appraisals of many properties were inflated, as appraisers were

induced by lenders, lenders’ correspondents and/or their mortgage brokers/agents, to provide the

desired appraisal value regardless of the actual value of the underlying property so the loans would

be approved and funded. In this way, many appraisers were rewarded for their willingness to

- 3 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 5 of 72



support preconceived or predetermined property values violating USPAP regulations1 and making

the stated loan-to-value (“LTV”) ratios false.

7.

As a result of the foregoing, the Certificates sold to Plaintiffs and the Class were

secured by assets that had a greater risk profile than what was represented in the Registration

Statements. Moreover, given the great disparity between the actual performance of the assets and

the expected performance of the assets, any reasonable assumptions or projections of future

performance were impossible.

8.

By the summer of 2007, the truth about the performance of the mortgage loans that

secured the Certificates began to be revealed to the public and the rating agencies began to put

negative watch labels on Certificate tranches or classes, ultimately downgrading many. As a result,

the Certificates future cash flow was negatively impacted. As an additional result, the Certificates

are no longer marketable at prices anywhere near the price paid by Plaintiffs and the Class and the

holders of the Certificates are exposed to much more risk with respect to both the timing and

absolute cash flow to be received than the Registration Statements/Prospectus Supplements

represented.

JURISDICTION AND VENUE

9.

The claims alleged herein arise under §§11, 12(a)(2) and 15 of the 1933 Act,

15 U.S.C. §§77k, 77l(a)(2) and 77o. Jurisdiction is conferred by §22 of the 1933 Act and venue is

proper pursuant to §22 of the 1933 Act.



1
The Uniform Standards of Professional Appraisal Practice (“USPAP”) are the generally
accepted standards for professional appraisal practice in North America. USPAP contains standards
for all types of appraisal services. Standards are included for real estate, personal property, business
and mass appraisal.

- 4 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 6 of 72



10.

The violations of law complained of herein occurred in this District, including the

dissemination of materially false and misleading statements complained of herein into this District.

Nomura Asset and each of the bank defendants conduct business in this District.

PARTIES

11.

Plaintiff Plumbers’ Union Local No. 12 Pension Fund acquired $115,000 worth of

Certificates from defendant Nomura Securities International, Inc. (“Nomura Securities”) pursuant

and traceable to the April 19, 2006 Registration Statement and the Prospectus Supplement for Trust

No. 2006-AF1 and has been damaged thereby.

12.

Plaintiff Plumbers & Pipefitters’ Welfare Educational Fund acquired $115,000 worth

of Certificates from defendant Nomura Securities pursuant and traceable to the July 22, 2005

Registration Statement and the Prospectus Supplement for Trust No. 2006-AP1 and has been

damaged thereby.

13.

Plaintiff NECA-IBEW Health & Welfare Fund acquired $55,000 worth of

Certificates from defendant Nomura Securities pursuant and traceable to the July 22, 2005

Registration Statement and the Prospectus Supplement for Trust No. 2006-AP1 and acquired

$55,000 worth of Certificates from defendant Nomura Securities pursuant and traceable to the April

19, 2006 Registration Statement and the Prospectus Supplement for Trust No. 2006-AF1 and has

been damaged thereby.

14.

Defendant Nomura Asset is a Delaware corporation headquartered in New York, New

York. It is a special purpose corporation formed in 1992. Nomura Asset served in the role of the

“Depositor” in the securitization of the Issuing Trusts as identified below, and was an “Issuer” of the

Certificates within the meaning of the 1933 Act, 15 U.S.C. §77b(a)(4).

15.

Nomura Asset and the Issuing Trusts (together the “Defendant Issuers”) issued the

various Certificates in each of the Delaware trusts. The Defendant Issuers issued hundreds of

- 5 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 7 of 72



millions of dollars worth of Certificates in each of these Trusts pursuant to one of the Prospectus

Supplements which listed numerous classes of the Certificates. The Trusts are:

Alternative Loan Trust 2006-AF1 Alternative Loan Trust 2006-AF2
Alternative Loan Trust 2006-AP1 Alternative Loan Trust 2006-AR1
Alternative Loan Trust 2006-AR2 Alternative Loan Trust 2006-AR3
Alternative Loan Trust 2006-AR4 Alternative Loan Trust 2006-WF1

16.

Defendant Nomura Securities is a securities firm which provides a range of financial

services, including engaging in the mortgage banking business. Nomura Securities is a corporation

based in New York, New York. Nomura Securities acted as the underwriter in the sale of Nomura

Asset offerings, helping to draft and disseminate the offering documents. Nomura Securities was the

underwriter of the following Trusts:

2006-AF1
2006-AP1
2006-AR2
2006-WF1





2006-AF2
2006-AR1
2006-AR3

17.

Defendant UBS Securities LLC (“UBS”) is a global investment banking and

securities firm which provides a range of financial services, including advisory services,

underwriting, financing, market making, asset management, brokerage and retail banking on a global

level. UBS acted as the underwriter in the sale of Nomura Asset offerings, helping to draft and

disseminate the offering documents. UBS was the underwriter of the following Trust:

2006-AR4

18.

Defendant Greenwich Capital Markets, Inc. (“GCM”) is an institutional fixed-income

firm providing a full range of debt capital market services to both those seeking to raise capital and

those seeking to invest it. RBS Greenwich Capital is the marketing name for the securities business

of GCM. GCM is a wholly-owned subsidiary of the Royal Bank of Scotland Group PLC. GCM

acted as the underwriter in the sale of Nomura Asset offerings, helping to draft and disseminate the

offering documents. GCM was the underwriter of the following Trusts:

- 6 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 8 of 72



2006-AF2



2006-AR4

19.

Defendant Citigroup Global Markets Inc. (“Citigroup”) is a subsidiary of Citigroup

Inc., a large integrated financial services institution that, through subsidiaries and divisions, provides

commercial and investment banking services, commercial loans to corporate entities, and acts as the

underwriter in the sale of corporate securities. Citigroup acted as the underwriter in the sale of

Nomura Asset offerings, helping to draft and disseminate the offering documents. Citigroup was the

underwriter of the following Trust:

2006-WF1

20.

Defendant Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) is a

wealth management, capital markets and advisory company which offers a broad range of services to

private clients, small businesses, institutions and corporations. As an investment bank, it is a leading

global trader and underwriter of securities and derivatives across a broad range of asset classes and

serves as a strategic advisor to corporations, governments, institutions and individuals worldwide.

Merrill Lynch acted as the underwriter in the sale of Nomura Asset offerings, helping to draft the

offering documents. Merrill Lynch was the underwriter of the following Trust:

2006-AF2

21.

Defendant Goldman, Sachs & Co. (“Goldman Sachs”) is a global investment banking,

securities and investment management firm that provides a wide range of services worldwide to a

substantial and diversified client base that includes corporations, financial institutions, governments

and high net-worth individuals. Goldman Sachs acted as the underwriter in the sale of Nomura

Asset offerings, helping to draft and disseminate the offering documents. Goldman Sachs was the

underwriter of the following Trust:

2006-AR3

- 7 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 9 of 72



22.

Defendant John P. Graham (“Graham”) was Chief Executive Officer (“CEO”) and

President of Nomura Asset during the relevant time period. Defendant Graham signed the July 22,

2005 and April 19, 2006 Registration Statements.

23.

Defendant Nathan Gorin (“Gorin”) was Controller and Chief Financial Officer of

Nomura Asset during the relevant time period. Defendant Gorin signed the July 22, 2005 and April

19, 2006 Registration Statements.

24.

Defendant John McCarthy (“McCarthy”) was a director of Nomura Asset during the

relevant time period. Defendant McCarthy signed the July 22, 2005 and April 19, 2006 Registration

Statements.

25.

Defendant Shunichi Ito (“Ito”) was a director of Nomura Asset during the relevant

time period. Defendant Ito signed the July 22, 2005 and April 19, 2006 Registration Statements.

26.

Defendant David Findlay (“Findlay”) was a director of Nomura Asset during the

relevant time period. Defendant Findlay signed the July 22, 2005 and April 19, 2006 Registration

Statements.

27.

The defendants identified in ¶¶22-26 are referred to herein as the “Individual

Defendants.” The Individual Defendants functioned as directors to the Trusts as they were directors

to Nomura Asset and signed the Registration Statements for the registration of the securities issued.

CLASS ACTION ALLEGATIONS

28.

Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal Rules

of Civil Procedure on behalf of a class consisting of all persons or entities who acquired the

Certificates pursuant and/or traceable to the false and misleading Registration Statements

(Registration Nos. 333-126812 and 333-132108) dated July 22, 2005 and April 19, 2006, and/or the

Prospectus Supplements issued in connection with the Certificates between September 27, 2005 and

December 1, 2006 which were incorporated therein, and who were damaged thereby (the “Class”).

- 8 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 10 of 72



Excluded from the Class are Defendants, the officers and directors of the Defendants, at all relevant

times, members of their immediate families and their legal representatives, heirs, successors or

assigns and any entity in which Defendants have or had a controlling interest.

29.

The members of the Class are so numerous that joinder of all members is

impracticable. While the exact number of Class members is unknown to Plaintiffs at this time and

can only be ascertained through appropriate discovery, Plaintiffs believe that there are thousands of

members in the proposed Class. Record owners and other members of the Class may be identified

from records maintained by Nomura Asset and Nomura Securities or their transfer agents and may

be notified of the pendency of this action by mail, using the form of notice similar to that

customarily used in securities class actions. The Registration Statements were used to issue

hundreds of millions of dollars worth of Certificates.

30.

Plaintiffs’ claims are typical of the claims of the members of the Class as all members

of the Class are similarly affected by Defendants’ wrongful conduct in violation of federal law that is

complained of herein.

31.

Plaintiffs will fairly and adequately protect the interests of the members of the Class

and have retained counsel competent and experienced in class and securities litigation.

32.

Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

(a)

(b)

whether Defendants violated the 1933 Act;

whether the Registration Statements issued by Defendants to the investing

public negligently omitted and/or misrepresented material facts about the underlying mortgage loans

comprising the pools; and

- 9 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 11 of 72



(c)

to what extent the members of the Class have sustained damages and the

proper measure of damages.

33.

A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the

damages suffered by individual Class members may be relatively small, the expense and burden of

individual litigation make it impossible for members of the Class to individually redress the wrongs

done to them. There will be no difficulty in the management of this action as a class action.

SUBSTANTIVE ALLEGATIONS

Nomura and Its Businesses

34.

Nomura Holdings, Inc. (“Nomura Holdings”), together with its subsidiaries, provides

investment, financing, and related services to corporations, financial institutions, individuals, and

governments and governmental agencies worldwide. It operates through five segments: Domestic

Retail, Global Markets, Global Investment Banking, Global Merchant Banking, and Asset

Management. Nomura Holdings is a holding company for the Nomura Group. The Nomura Group,

one of the largest global investment banking and securities firms, is represented in North and South

America by Nomura Holding America Inc. (“NHA”). Nomura Credit & Capital, Inc. (“Nomura

Credit”), a subsidiary of NHA, is the primary entity involved in the origination, purchase and sale of

mortgage loans. Nomura Securities, a subsidiary of NHA, acts as NHA’s broker/dealer.

35.

Nomura Capital is a subsidiary of Nomura Holdings. Nomura Capital formed

Nomura Asset, a special purpose Delaware corporation, to engage in mortgage lending and other real

estate finance-related businesses, including mortgage loan banking, mortgage loan warehouse

lending, and insurance underwriting. Nomura Asset was created to acquire mortgage loan pools that

were transferred to the Trusts, and Certificates of various classes were sold to investors pursuant to

Registration Statements and Prospectus Supplements.

- 10 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 12 of 72



Residential Mortgage Loan Categories

36.

Borrowers who require funds to finance the purchase of a house, or to refinance an

existing mortgage, apply for residential mortgage loans with a loan originator. These loan

originators assess a borrower’s ability to make payments on the mortgage loan based on, among

other things, the borrower’s Fair Isaac & Company (“FICO”) credit score. Generally, borrowers

with higher FICO scores were able to receive loans with less documentation during the approval

process, as well as higher loan-to-values. Using a person’s FICO score, a loan originator assesses a

borrower’s risk profile to determine the interest rate of the loan to issue, the amount of the loan

(loan-to-value), and the general structure of the loan.

37.

A loan originator will issue a “prime” mortgage loan to a borrower who has a high

credit score and who can supply the required documentation evidencing their income, assets,

employment background, and other documentation that supports their financial health. Borrowers

who are issued “prime” mortgage loans are deemed to be the most credit-worthy and receive the best

rates and structure on mortgage loans.

38.

If a borrower has the required credit score for a “prime” mortgage loan, but is unable

to supply supporting documentation of his financial health, then a loan originator will issue the

borrower a loan referred to as a low documentation or Alt-A loan, and the interest rate on that loan

will be higher than that of a prime mortgage loan and the general structure of the loan will not be as

favorable as it would be for a prime borrower. While borrowers of low documentation or Alt-A

loans typically have clean credit histories, the risk profile of the low documentation or Alt-A loan

- 11 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 13 of 72



increases because of, among other things, higher LTV ratios2, higher debt-to-income ratios or

inadequate documentation of the borrower’s income and assets/reserves.

39.

A borrower will be classified as “sub-prime” if the borrower has a lower credit score

and higher debt ratios. Borrowers that have low credit ratings are unable to obtain a conventional

mortgage because they are considered to have a larger than average risk of defaulting on a loan. For

this reason, lending institutions often charge interest on sub-prime mortgages at a rate that is higher

than a conventional mortgage in order to compensate themselves for assuming more risk.

The Secondary Market

40.

Traditionally, the model for a mortgage loan involved a lending institution (i.e., the

loan originator) extending a loan to a prospective home buyer in exchange for a promissory note

from the home buyer to repay the principal and interest on the loan. The loan originator also held a

lien against the home as collateral in the event the home buyer defaulted on the obligation. Under

this simple model, the loan originator held the promissory note until it matured and was exposed to

the concomitant risk that the borrower may fail to repay the loan. As such, under the traditional

model, the loan originator had a financial incentive to ensure that: (1) the borrower had the

financial wherewithal and ability to repay the promissory note; and (2) the underlying property had

sufficient value to enable the originator to recover its principal and interest in the event that the

borrower defaulted on the promissory note.



2
A loan-to-value ratio is a financial metric that Wall Street analysts and investors commonly
use when evaluating the price and risk of mortgage-backed securities. The LTV ratio is a
mathematical calculation that expresses the amount of a mortgage as a percentage of the total
appraised value of the property. For example, if a borrower seeks to borrow $90,000 to purchase a
house worth $100,000, the LTV ratio is $90,000/$100,000, or 90%.

- 12 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 14 of 72



41.

Beginning in the late 1990s, persistent low interest rates and low inflation led to

increased demand for mortgages. As a result, banks and other mortgage lending institutions took

advantage of this opportunity, introducing financial innovations in the form of asset securitization to

finance an expanding mortgage market. As discussed below, these innovations altered the foregoing

traditional lending model, severing the traditional direct link between borrower and lender, and the

risks normally associated with mortgage loans.

42.

Unlike the traditional lending model, an asset securitization involves the sale and

securitization of mortgages. Specifically, after a loan originator issues a mortgage to a borrower, the

loan originator sells the mortgage in the financial markets to a third-party financial institution. By

selling the mortgage, the loan originator obtains fees in connection with the issuance of the

mortgage, receives upfront proceeds when it sells the mortgage into the financial markets, and

thereby has new capital to issue more mortgages. The mortgages sold into the financial markets

are typically pooled together and securitized into what are commonly referred to as mortgage-

backed securities or MBS. In addition to receiving proceeds from the sale of the mortgage, the loan

originator is no longer subject to the risk that the borrower may default; that risk is transferred with

the mortgages to investors who purchase the MBS.

43.

As illustrated below, in a mortgage securitization, mortgage loans are acquired,

pooled together or “securitized,” and then sold to investors in the form of MBS, whereby the

investors acquire rights in the income flowing from the mortgage pools.

- 13 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 15 of 72





(Source: The Wall Street Journal)

44. When mortgage borrowers make interest and principal payments as required by the

underlying mortgages, the cash flow is distributed to the holders of the MBS certificates in order of

priority based on the specific tranche held by the MBS investors. The highest tranche (also referred

to as the senior tranche) is first to receive its share of the mortgage proceeds and is also the last to

absorb any losses should mortgage-borrowers become delinquent or default on their mortgage. Of

course, since the investment quality and risk of the higher tranches is affected by the cushion

afforded by the lower tranches, diminished cash flow to the lower tranches results in impaired

value of the higher tranches.

45.

In this MBS structure, the senior tranches received the highest investment rating by

the rating agencies, usually AAA. After the senior tranche, the middle tranches (referred to as

mezzanine tranches) next receive their share of the proceeds. In accordance with their order of

priority, the mezzanine tranches were generally rated from AA to BBB by the rating agencies.

46.

The process of distributing the mortgage proceeds continues down the tranches through

to the bottom tranches, referred to as equity tranches. This process is repeated each month and all

investors receive the payments owed to them so long as the mortgage-borrowers are current on their

mortgages. The following diagram illustrates the concept of tranches within a MBS comprised of

residential mortgages (often referred to as a “residential mortgage backed securities” or “RMBS”):

- 14 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 16 of 72



(Source: The Wall Street Journal)



47.

As illustrated below, in the typical securitization transaction, participants in the

transaction are: (1) the servicer of the loans to be securitized, often called the “sponsor”; (2) the

depositor of the loans in a trust or entity for securitization; (3) the underwriter of the MBS; (4) the

trust; and (5) the investors in the MBS.

48.

Viewing the securitization process as a series of arms-length transactions, the process

of securitization begins with the sale of mortgage loans by the sponsor—the original owner of the

mortgages – to the depositor in return for cash. The depositor then sells those mortgage loans and

related assets to the trust, in exchange for the trust issuing certificates to the depositor. The depositor

then works with the underwriter of the trust to price and sell the certificates to investors.

- 15 -



Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 17 of 72



49.

Thereafter, the mortgage loans held by the trusts are serviced, i.e., principal and

interest are collected from mortgagors, by the servicer, which earns monthly servicing fees for

collecting such principal and interest from mortgagors. After subtracting a servicing fee, the servicer

sends the remainder of the mortgage payments to a trustee for administration and distribution to the

trust, and ultimately, to the purchasers of the MBS certificates.

50.

In this case, however, the transactions among the sponsor, depositor and trusts were

not arms-length transactions as all these entities were interrelated. The sponsor was Nomura Credit.

Nomura Credit held all the shares of capital stock of the depositor, Nomura Asset. The Trusts were

set up by Nomura to acquire mortgage loans. Further, the underwriter for the majority of the trusts

was Nomura Securities – an “affiliate” of Nomura Credit.

Sub-Prime and Low Documentation Alt-A Loans and the Secondary Market

51.

Over the past 30 years, the sub-prime mortgage market has evolved from being just a

small percentage of the overall U.S. home mortgage market to one that has originated hundreds of

billions of dollars of sub-prime loans annually. While several important legislative and regulatory

changes have induced such growth, the sub-prime mortgage market would not have experienced

such enormous growth without the development of a strong secondary market for home mortgage

loans.

52.

During the 1980s, credit rating agencies began rating privately-issued MBS, which

made them more suitable to a wider range of investors and expanded the market for MBS. By 1988,

52% of outstanding residential mortgage loans had been securitized, up from 23% four years earlier.

53.

This rapid expansion of the secondary mortgage market significantly increased

mortgage lenders’ access to capital and dramatically reduced the need for loan originators to possess

a large deposit base in order to maintain their liquidity. As a result, non-depository mortgage lenders

proliferated, comprising approximately 32% of lenders of home mortgage loans by 1989.

- 16 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 18 of 72



54.

During the early to mid-1990s, rising interest rates decreased the demand for prime

mortgage loans. To spur continued sales of mortgages, lenders became amenable to originating sub-

prime mortgages. This willingness, coupled with technological advances that helped credit rating

companies accumulate credit information on a greater number of debtors, increased the market for

sub-prime mortgage loans. By 1998, approximately $150 billion in sub-prime mortgage loans were

originated, up from approximately $35 billion in 1994.

55.

The growth in the sub-prime mortgage loan market during the 1990s was also aided

by mechanisms that purported to allocate and/or moderate risk in sub-prime MBS. These

mechanisms, called “credit enhancements,” allowed issuers to obtain investment-grade ratings on all,

or part of, their MBS, despite the higher risk on the sub-prime mortgages upon which the MBS were

based.

56.

As a result of these credit enhancement mechanisms, MBS were deemed to be

suitable to a wider market of investors, and the value of sub-prime MBS sold in the secondary

mortgage market grew from $10 billion in 1991 to more than $60 billion in 1997. These sales of

MBS provided lenders, including non-depository and mortgage-only companies who were

responsible for much of the sub-prime mortgage lending, with ample liquidity to originate new sub-

prime loans. By 2005, the amount of new sub-prime mortgage loans that were originated grew to

over $620 billion.

57.

During the 1990s, a new category of mortgage loans emerged. These loans, which

became very popular between 2004 through 2006, offered more lenient lending standards than

“prime” loans, but were considered less risky than “sub-prime” loans. This loan category, which

consisted primarily of Alt-A loans, was originally designed for self-employed borrowers who had

high FICO scores and were able to document assets, but could not easily document their income.

- 17 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 19 of 72



The Alt-A loans enabled these borrowers to be approved for a mortgage without extensive

supporting documentation of their financial history or income.

58. While Alt-A loans generally have hard to define characteristics, their most distinctive

attribute is that borrowers are not required to provide supporting documentation with their

applications. For example, a borrower typically does not provide complete documentation of his

assets or the amount or source of his income. Other characteristics of Alt-A loans include: (i) LTV

ratio in excess of 80%, but that lack primary mortgage insurance; (ii) a borrower who is a temporary

resident alien; (iii) the loan is secured by non-owner occupied property; or (iv) a debt-to-income

ratio above normal limits. MBS that are backed by Alt-A loans are appealing because Alt-A loans

are perceived to offer temporary protection from prepayment risk, which is the risk that borrowers

will pay off their loans immediately. Mortgage loan securitizations were traditionally valued using

prepayment speeds as an important component. Alt-A loan borrowers show greater resistance to

prepayments during the first nine to twelve months following their origination. Prime borrowers, by

contrast, tend to be very sensitive to changing interest rates and they refinance or prepay their

mortgage loans on a continual basis as interest rates decline.

59.

The introduction of Alt-A loans eventually gave way to abuses wherein borrowers or

mortgage brokers used the Alt-A process to inflate earnings on loan applications. The market for

Alt-A loans, or so called “liar loans,” has increased faster than that of sub-prime. A record $400

billion of Alt-A loans were originated in 2006 and accounted for 13.4% of all mortgages offered that

year, up from 2.1% in 2003. However, the delinquency rate for Alt-A loans has also increased.

After 18 months, Alt-A loans that were originated in 2006 had a delinquency rate of 4.71%, versus

1.97% for such loans from 2005 and 1.07% for 2004. The trend for 2007 loans is even worse than

2006.

- 18 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 20 of 72



60.

Additionally, over the past several years, the quality of the borrowers of Alt-A-type

mortgage loans has weakened. During this time, Alt-A-type loans were extended to borrowers who

should otherwise have qualified for: (i) sub-prime loans; (ii) much smaller dollar value loans at

lower LTV ratios; or (iii) no mortgage loans at all. These lower quality Alt-A-type loans were either

Alt-B loans, sub-prime loans, or loans for completely unqualified borrowers, and include increased

risk such as a high LTV ratio and the lack of supporting financial documentation. Essentially, these

Alt-B loans are sub-prime loans in disguise and should not have been securitized without sufficient

disclosures as to the true quality of the loans. However, certain of these Alt-B mortgage loans were

securitized and improperly presented as being the higher-quality Alt-A loans.

Nomura Acquires Loans and Sells Certificates Backed by These Loans to Plaintiffs
and the Members of the Class

61.

Nomura Credit purchased mortgage loans that were classified as mainly Alt-A and

Alt-B loans, from several originators. Nomura Asset then acquired these mortgage loans from

Nomura Credit pursuant to mortgage loan purchasing agreements. Nomura Asset purchased and

subsequently transferred the mortgage loans to the defendant issuers, as set forth in the pooling and

servicing agreements and other documents. These loans were then pooled, secured certificates were

issued and the Certificates were sold to investors pursuant to the Registration Statements and

Prospectus Supplements.

62.

Nomura Asset caused the following Registration Statements to be issued between

July 2005 and November 2006, which were used to issue hundreds of millions of dollars in

Certificates:

REGISTRATION
STATEMENT DATE
April 19, 2006





REGISTRATION NO.
333-132108




- 19 -


TRUST NO.
2006-AF1
2006-AF2
2006-WF1
2006-AR3

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 21 of 72







July 22, 2005





333-126812



2006-AR4

2006-AR1
2006-AP1
2006-AR2

63.

The Trusts and Nomura Asset were the “Issuers” which caused the Registration

Statements, dated July 22, 2005 and April 19, 2006, to be filed with the SEC. The Registration

Statements and prospectus supplements which were incorporated into the Registration Statements

provided additional information regarding the mortgage loans contained in the mortgage pools held

by the Defendant Issuers. In the Registration Statements, Defendants represented that the loans

underlying the Certificates were loans made to creditworthy borrowers.

64.

Nomura Asset also caused Prospectus Supplements to be issued between September

2005 and December 2006. The Prospectus Supplements issued by Nomura included:

May 25, 2006 Prospectus Supplement for
Alternative Loan Trust, Series 2006-AF1

March 29, 2006 Prospectus Supplement for
Alternative Loan Trust, Series 2006-AR2

July 28, 2006 Prospectus Supplement for
Alternative Loan Trust, Series 2006-AF2

September 28, 2006 Prospectus Supplement
for Alternative Loan Trust, Series 2006-AR3

September 27, 2005 Prospectus Supplement
for Alternative Loan Trust, Series 2006-AP1

November 30, 2006 Prospectus Supplement for
Alternative Loan Trust, Series 2006-AR4

February 15, 2006 Prospectus Supplement for
Alternative Loan Trust, Series 2006-AR1

August 29, 2006 Prospectus Supplement for
Alternative Loan Trust, Series 2006-WF1

65.

The Trusts and Nomura Asset, as Issuers, caused the Prospectus Supplements to be

filed with the SEC. The Prospectus Supplements that were issued for each Trust explained the

characteristics of the mortgages that Nomura Asset had acquired and transferred to each Trust and

the related Certificates that were issued pursuant to the respective Prospectus Supplement.

66.

The Prospectus Supplements described the details of the Certificates issued from each

Trust, including the Certificates’ ratings, the interest rates and the principal balances. The

Prospectus Supplements also provided information regarding the mortgage loans transferred to the

- 20 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 22 of 72



Trusts and identified the major originators of the mortgage loans for each pool and the underwriting

standards that were allegedly used in originating the mortgage loans.

The Registration Statements and Prospectus Supplements Which Were Incorporated into
the Registration Statements Misrepresented and Omitted Material Information Regarding
the Poor Loan Underwriting Used to Generate the Underlying Mortgage Loans

67.

The Registration Statements and the Prospectus Supplements which were

incorporated into the Registration Statements contained representations concerning the standards

purportedly used to underwrite the mortgages in the Issuing Trusts. Sound underwriting is critically

important to the investors acquiring the Certificates issued by the Issuing Trusts because the ability

of borrowers to repay the principal and interest on the mortgages collateralizing the Issuing Trusts is

the fundamental basis upon which the investment in the Certificate is valued. If however, the

mortgages pooled in the MBS suffered delinquencies in excess of the assumptions built into the

mortgage pool, owners of the Certificates would suffer losses as the principal and income necessary

to service the Certificates would necessarily diminish. This would reduce the yield on the

Certificates and their corresponding value.

68.

The Prospectus Supplements each contained specific representations about the

underwriting guidelines used by the loan originators to issue the mortgages which ultimately backed

the securities at issue. These statements indicated that the originators would evaluate the prospective

borrower’s credit standing and the ability to repay the loan, and would evaluate the value and

adequacy of the proposed mortgaged property as collateral.

69.

The Prospectus Supplement for Alternative Loan Trust, Series 2006-AF1, Series

2006-AP1, and Series 2006-AR4 stated that key originator First National Bank of Nevada’s

(“FNBN”) “underwriting guidelines are primarily intended to evaluate the prospective borrower’s

credit standing and ability to repay the loan” and “are applied in a standard procedure that is

intended to comply with applicable federal and state laws and regulations.” These Prospectus

- 21 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 23 of 72



Supplements further falsely and misleadingly stated that a “prospective borrower must have a credit

history that demonstrates an established ability to repay indebtedness in a timely fashion” and that

“employment history is verified through written or telephonic communications.” These Prospectus

Supplements stated:

FNBN’s underwriting guidelines are primarily intended to evaluate the
prospective borrower’s credit standing and ability to repay the loan, as well as the
value and adequacy of the proposed mortgaged property as collateral. A
prospective borrower applying for a mortgage loan is required to complete an
application, which elicits pertinent information about the prospective borrower
including, depending upon the loan program, the prospective borrower’s financial
condition (assets, liabilities, income and expenses), the property being financed and
the type of loan desired. FNBN employs or contracts with underwriters to
scrutinize the prospective borrower’s credit profile. If required by the underwriting
guidelines, employment verification is obtained either from the prospective
borrower’s employer or through analysis of copies of borrower’s federal withholding
(IRS W-2) forms and/or current payroll earnings statements. . . .

Based on the data provided in the application and certain verifications (if
required), a determination will have been made that the borrower’s monthly income
(if required to be stated or verified) should be sufficient to enable the borrower to
meet its monthly obligations on the mortgage loan and other expenses related to the
mortgaged property (such as property taxes, standard hazard insurance and other
fixed obligations other than housing expenses). Generally, scheduled payments on a
mortgage loan during the first year of its term plus taxes and insurance and other
fixed obligations equal no more than a specified percentage of the prospective
borrower’s gross income. The percentage applied varies on a case by case basis
depending on a number of underwriting criteria including, but not limited to, the
loan-to-value ratio of the mortgage loan or the amount of liquid assets available to
the borrower after origination.

*

*

*

FNBN’s underwriting guidelines are applied in a standard procedure that
is intended to comply with applicable federal and state laws and regulations.
However, the application of FNBN’s underwriting guidelines does not imply that
each specific criterion was satisfied individually. FNBN will have considered a
mortgage loan to be originated in accordance with a given set of underwriting
guidelines if, based on an overall qualitative evaluation, in FNBN’s discretion such
mortgage loan is in substantial compliance with such underwriting guidelines or if
the borrower can document compensating factors. A mortgage loan may be
considered to comply with a set of underwriting guidelines, even if one or more
specific criteria included in such underwriting guidelines were not satisfied, if other

- 22 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 24 of 72



factors compensated for the criteria that were not satisfied or the mortgage loan is
considered to be in substantial compliance with the underwriting guidelines.

70.

The Prospectus Supplement for Alternative Loan Trust, Series 2006-AF1 and Series

2006-AF2 stated that one of its key originators, Metrocities Mortgage, LLC’s (“Metrocities”),

“Underwriting Guidelines are primarily intended to evaluate the prospective borrower’s credit

standing and repayment ability and the value and adequacy of the mortgaged property as collateral”

and “are applied in a standard procedure that is intended to comply with applicable federal and state

laws and regulations.” These Prospectus Supplements stated:

The Underwriting Guidelines are primarily intended to evaluate the
prospective borrower’s credit standing and repayment ability and the value and
adequacy of the mortgaged property as collateral. The Underwriting Guidelines
are applied in a standard procedure that is intended to comply with applicable
federal and state laws and regulations. On a case-by-case basis, the [sic]
Metrocities may determine that, based upon compensating factors, a loan applicant,
not strictly qualifying under the Underwriting Guidelines, warrants an exception.
Compensating factors may include, but are not limited to, loan-to-value ratio, debt-
to-income ratio, good credit history, stable employment history, length at current
employment and time in residence at the applicant’s current address.

*

*

*

Based on the data provided in the application and certain verifications (if
required), a determination is made by the original lender that the borrower’s monthly
income (if required to be stated) will be sufficient to enable the borrower to meet
their monthly obligations on the mortgage loan and other expenses related to the
property such as property taxes, utility costs, standard hazard insurance and other
fixed obligations other than housing expenses. Generally, scheduled payments on a
mortgage loan during the first year of its term plus taxes and insurance and all
scheduled payments on obligations that extend beyond ten months equal no more
than a specified percentage not in excess of 60% of the prospective borrower’s gross
income. The percentage applied varies on a case by-case basis depending on a
number of underwriting criteria, including, without limitation, the loan-to-value ratio
of the mortgage loan. The originator may also consider the amount of liquid assets
available to the borrower after origination.

71.

The Prospectus Supplement for Alternative Loan Trust, Series 2006-AR3 and Series

2006-AR4 stated that its originators, including Silver State Mortgage (“Silver State”), follow certain

underwriting standards and represented that: “Generally, each borrower will have been required to

- 23 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 25 of 72



complete an application designed to provide to the original lender pertinent credit information

concerning the borrower.” These Prospectus Supplements further stated:

Based on the data provided in the application and certain verifications (if required), a
determination is made by the original lender that the borrower’s monthly income (if
required to be stated) will be sufficient to enable the borrower to meet their monthly
obligations on the mortgage loan and other expenses related to the property such as
property taxes, utility costs, standard hazard insurance and other fixed obligations
other than housing expenses. Generally, scheduled payments on a mortgage loan
during the first year of its term plus taxes and insurance and all scheduled payments
on obligations that extend beyond ten months equal no more than a specified
percentage not in excess of 60% of the prospective borrower’s gross income. The
percentage applied varies on a case-by-case basis depending on a number of
underwriting criteria, including, without limitation, the loan-to-value ratio of the
mortgage loan. The originator may also consider the amount of liquid assets
available to the borrower after origination.

72.

The Prospectus Supplement for Alternative Loan Trust, Series 2006-WF1 stated its

sole originator, Wells Fargo Bank, N.A.’s (“Wells Fargo”) “underwriting standards are applied by or

on behalf of Wells Fargo Bank to evaluate the applicant’s credit standing and ability to repay the

loan, as well as the value and adequacy of the mortgaged property as collateral.” The Prospectus

Supplement further stated:

A prospective borrower applying for a mortgage loan is required to complete
a detailed application. The loan application elicits pertinent information about the
applicant, with particular emphasis on the applicant’s financial health (assets,
liabilities, income and expenses), the property being financed and the type of loan
desired. . . . Generally, significant unfavorable credit information reported by the
applicant or a credit reporting agency must be explained by the applicant.

*

*

*

Verifications of employment, income, assets or mortgages may be used to
supplement the loan application and the credit report in reaching a determination as
to the applicant’s ability to meet his or her monthly obligations on the proposed
mortgage loan, as well as his or her other mortgage payments (if any), living
expenses and financial obligations.

73.

This Prospectus Supplement provided that in the case of stated income loans:

The borrower’s employment, income sources and assets must be stated on the signed
loan application. The borrower’s income as stated must be reasonable for the

- 24 -

Case 1:08-cv-10446-RGS Document 33 Filed 01/20/2009 Page 26 of 72



borrower’s occupation as determined in the discretion of the loan underwriter.
Similarly, the borrower’s assets as stated must be reasonable for the borrower’s
occupation as determined in the discretion of the loan underwriter.

74.

The remaining Prospectus Supplements (Alternative Loan Trust, Series 2006-AR1

and Series 2006-AR2) each contained the following representations about their originators’

underwriting standards:

Generally, each borrower will have been required to complete an application
designed to provide to the original lender pertinent credit information concerning the
borrower. . . .

Based on the data provided in the application and certain verifications (if
required), a determination is made by the original lender that the borrower’s monthly
income (if required to be stated) will be sufficient to enable the borrower to meet
their monthly obligations on the mortgage loan and other expenses related to the
property such as property taxes, utility costs, standard hazard insurance and other
fixed obligations other than housing expenses. Generally, scheduled payments on a
mortgage loan during the first year of its term plus taxes and insurance and all
scheduled payments on obligations that extend beyond ten months equal no more
than a specified percentage not in excess of 60% of the prospective borrower’s gross
income. The percentage applied varies on a case-by-case basis depending on a
number of underwriting criteria, including, without limitation, the loan-to-value ratio
of the mortgage loan. The originator may also consider the amount of liquid assets
available to the borrower after origination.

75.

The April 19, 2006 Registration Statement contained representations similar to those

found in the Prospectus Supplements which were incorporated into it. The Registration Statement

represented:

Generally, each borrower will have been required to complete an application
designed to provide to the original lender pertinent credit information concerning the
borrower. As part of the description of the borrower’s financial condition, the
borrower generally will have furnished certain information with respect to its assets,
liabilities, income (except as describe