Indymac Mortgage Fraud: Restitution for Investors But Burke Dishonorably Blocked in Federal Courts for 14 Yrs

Court-appointed Lead Plaintiffs

Wyoming State Treasurer and Wyoming Retirement System,

and Intervener-Plaintiffs

City of Philadelphia Board of Pensions and Retirement (“Philadelphia Board of Pensions”)

and

Police and Fire Retirement System of the City of Detroit (“PFRS”)

(collectively, “Plaintiffs”),

on behalf of themselves and all other persons similarly situated, by their undersigned counsel allege the following based upon personal knowledge as to their own acts and information and upon information and belief as to all other matters.

Plaintiffs’ information and belief are based upon the investigation conducted by and through their attorneys and such investigation is ongoing.1

I.                   NATURE OF THE ACTION

1.                  Plaintiffs bring this securities class action on behalf of themselves and all persons or entities who purchased or otherwise acquired the mortgage pass-through certificates (the “Certificates”) issued pursuant and/or traceable to materially untrue and misleading registration statements filed with the United States Securities and Exchange Commission (“SEC”) by IndyMac MBS, Inc. (“IndyMac MBS”) on August 15, 2005, SEC File Number 333-127556 (the “2005 Registration Statement”), February 24, 2006, SEC File Number 333-132042 (the “2006 Registration Statement”)2 and February 14,

1 Since the filing of the Amended Consolidated Complaint on October 29, 2009, certain defendants have been dismissed and certain claims have been narrowed.

However, since this Second Amended Complaint is being filed merely to add the Intervenor-Plaintiffs’ claims as permitted by this Court’s June 21, 2011 Order and since plaintiffs wish to preserve all issues for appeal, it is nearly identical to the Consolidated Complaint and consistent with the Intervenor-Plaintiffs’ May 17, 2010 filing.

(See ECF No. 204, Exs. A and B, and ECF No. 203 n.2).

2 The 2006 Registration Statement was amended on March 29, 2006, April 13, 2006 and June 5, 2007. The June 5, 2007 amendment was later withdrawn on June 14, 2007.

2007, SEC File Number 333-140726 (the “2007 Registration Statement”)3 as well as the Prospectuses and Prospectus Supplements issued thereunder and incorporated therein by reference (the “Class”).4

The 2005 Registration Statement, 2006 Registration Statement and 2007 Registration Statement are collectively referred to herein as the “Registration Statements.”

The Registration Statements, Prospectuses and Prospectus Supplements are collectively referred to herein as the “Offering Documents.”

2.                  Plaintiffs allege that the Offering Documents contain material misstatements and omit material facts in violation of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the “Securities Act”), 15 U.S.C. §§ 77k, 771(a)(2) and 77o.

Accordingly, this action only includes strict liability and negligence claims brought pursuant to the Securities Act.

Plaintiffs expressly exclude and disclaim any allegation of fraud and/or intentional or reckless misconduct by Defendants, as defined below.

3.                  This action arises from the sale of over $61 billion in Certificates pursuant to the Registrations Statements. A mortgage pass-through certificate is a type of asset-backed security secured by a collection of mortgages that entitle the holder to income payments from a pool of mortgage loans, or mortgage backed securities (“MBS”).

The value of pass-through certificates depends on the borrower’s ability to repay the principal and interest on the underlying loans and the adequacy of the collateral in the event of default.

This is because the securitization of loans fundamentally shifts the risk of loss

3 The 2007 Registration Statement was amended on March 1, 2007, June 6, 2007 and June 19, 2007.

4 Claims on behalf of a class of purchasers of securities issued by the Residential Asset Securitization Trust 2006-A8 are being prosecuted by the Court-appointed lead plaintiff in Tsereteli v. Residential Asset Securitization Trust 2006-A8, et al., No. 08-cv-10637- LAK (S.D.N.Y.).

Accordingly, those claims are excluded from the scope of this Complaint.

from the loan originator (such as IndyMac Bank, F.S.B. (“IndyMac Bank”))5 to the investor who purchases an interest in the securitized pool of loans.

4.                  Here, IndyMac Bank originated and/or acquired the risky mortgage loans that IndyMac MBS then bundled together into mortgage pools.

With the assistance of the Rating Agency Defendants and the Underwriter Defendants (both defined below), IndyMac MBS then securitized the mortgage pools.

Securitization is the process of taking a group of assets (in this case, a pool of risky loans) and, through “financial engineering,” transforming them into debt instruments stratified to have different levels of risk.

The different levels of risk are called “tranches,” or classes, each carrying different priorities in terms of seniority and payment as well as different levels of risk exposure to defaults on the underlying loans.

The tranches for Certificates sold to the public then received credit ratings, which were intended to signify the level of risk associated with a particular class of Certificates.

Typically, the senior tranches purportedly had less risk of default and, therefore, carried the highest credit ratings, while more junior tranches received lower ratings and carried greater risk.

5.                  The Rating Agency Defendants worked with the IndyMac Entities in structuring and analyzing the loan pools.

As a result, the vast majority of the senior tranche of the Certificates received nearly perfect ratings – or so-called “triple-A” ratings – which was the equivalent rating for a bond backed by the full faith and credit of the United States (“U.S.”) Government.6

Because the majority of certificateholders were

5 IndyMac Bank and IndyMac MBS are collectively referred to as the “IndyMac Entities” or the “Companies.”

6 Moody’s highest investment grade rating is “Aaa” and S&P and Fitch’s highest rating is “AAA.”

These ratings signify the highest investment-grade for securities, and are considered to be of the “best quality,” and carry the smallest degree of investment risk.

A institutional investors who are obligated by their by-laws or investment guidelines to invest solely in investment-grade securities, these ratings were essential for the Certificates to be marketable.

6.                  Pursuant to the Offering Documents, the IndyMac Entities, the Underwriter Defendants and Rating Agency Defendants solicited, sold and distributed more than $61 billion worth of MBS Certificates in approximately 106 public offerings on or after March 1, 2006 (the “Offerings”).

7.                  The Offering Documents contain untrue statements of material fact, omit to state material facts required to be stated therein, or omit to state material facts necessary to make the statements therein not misleading, regarding:

(a) the underwriting standards purportedly used in connection with the origination of the underlying mortgages;

(b) the appraisals of the real estate acting as collateral for the underlying loans, including whether the loans were properly and fairly appraised in “accordance with the Uniform Standards of Professional Appraisal Practice” (“USPAP”) or other industry standards;

(c) the maximum Loan-to-Value (“LTV”) ratios used to qualify borrowers, and provided the investors with a risk profile of loan pools;

(d) the true effect and impact of its low-documentation loan programs;

and

(e) the rating of the Certificates.

8.                  The representations and omission in the Offering Documents, detailed below, are untrue or misleading because:

(a) the mortgage loans were not underwritten pursuant to the specified underwriting standards, but instead were rapidly approved to

Moody’s rating of “Aa,” “A” and “Baa” represent high quality, upper-medium credit quality and medium credit quality, respectively.

These ratings are considered investment quality.

Anything below “Baa” is not investment quality.

Ratings of “AA,” “A,” and “BBB” from S&P and Fitch represent high quality, upper-medium credit quality and medium credit quality, respectively, and are also considered “investment-grade ratings.”

Any instrument rated below BBB is considered to be below investment-grade.

people with poor credit or those who did not have the ability to repay the loans;

(b) IndyMac Bank relied upon faulty appraisals of the underlying real estate that were not made according to the USPAP or other industry standards and oftentimes grossly overvalued the property/collateral;

(c) as a result of the faulty and overvalued appraisals, the LTV ratios stated in the Offering Documents were untrue and understated the risk of the underlying loans;

(d) the high percentage of low-doc loans included in the loan pools had an undisclosed impact on the overall credit quality of risk associated with the Certificates because these loans were made with insufficient underwriting and documentation contrary to the representations made in the Offering Documents;

and

(e) Defendants failed to disclose that the ratings provided by the Rating Agency Defendants should not be relied upon because they were the result of a highly conflicted collaborative process between the Rating Agency Defendants and the IndyMac Entities, and were based upon inaccurate analyses that used outdated models and relaxed rating criteria.

9.                  Indeed, a February 26, 2009 report issued by the Office of Inspector General (“OIG”) of the U.S. Department of Treasury entitled “Safety and Soundness:

Material Loss Review of IndyMac Bank, FSB” (the “OIG Report”) confirmed that many of these undisclosed or untrue facts were part of long, systematic problems at IndyMac.

The OIG Report portrays IndyMac Bank as a company that focused on aggressive growth without any regard to risk.

To feed its aggressive growth model, IndyMac Bank ignored its stated underwriting guidelines.

IndyMac Bank originated and acquired as many loans as possible (and as quickly as possible) in order to bundle, securitize and then sell them as Certificates to investors without regard to the quality of the loans, the credit-worthiness of the borrowers or the value of the underlying collateral.

OIG Report at 2-3.

10.              For example, while the Offering Documents state that appraisals were conducted in “accordance with the Uniform Standards of Professional Appraisal Practice” and that the “appraiser generally inspects the property, analyzes data including the sales prices of comparable properties and issues an opinion of value,”7 the OIG Report concluded, inter alia, that:

“IndyMac officials accepted appraisals that were not in compliance with the Uniform Standard of Professional Appraisal Practice”

and IndyMac

“accepted appraisals where the property valuation was made without physical site inspection of the subject property or comparable properties.”

OIG Report at 2, 12, 26.

11.              Furthermore, a June 30, 2008 report issued by the Center for Responsible Lending (“CRL”) entitled

“IndyMac: What Went Wrong? How an “Alt-A” Leader Fueled its Growth with Unsound and Abusive Mortgage Lending” (the “CRL Report”)

also found that IndyMac Bank often ignored its stated underwriting and appraisal standards and encouraged its employees to approve loans regardless of the borrower’s ability to repay them.

For example, CRL noted that IndyMac Bank “engaged in unsound and abusive lending practices” and “allowed outside mortgage brokers and in-house sales staffers to inflate applicants’ [financial information] . . . [to] make them look like better credit risks.” CRL Report at 2, 8.

12.              Both the CRL Report and OIG Report confirm that the Companies’ statement in the Offering Documents that its underwriting guidelines

“include[] an analysis of the borrower’s credit history, ability to repay the mortgage loan and the

7 See, e.g., 2005 Registration Statement at S-25; 2006 Registration Statement at S-37.

adequacy of the mortgaged property as collateral”8 were untrue when made because IndyMac underwriters “routinely . . . [made] loans without regard to borrowers’ ability to repay [them],”

CRL Report at 2, and with “little, if any, review of the borrower[‘s] qualifications, including income, assets, and employment,” OIG Report at 11.

13.              In addition to the misstatements and omissions concerning the underwriting process, the Offering Documents also contain material untrue statements about the rating process.

Contrary to the disclosures in the Offering Documents, which state that the ratings addressed the structural, legal and issuer-related aspects of the Certificates along with the nature of the underlying mortgage loans and the credit quality of the credit enhancer or guarantor, the Rating Agency Defendants assigned ratings to the Certificates pursuant to antiquated models that failed to account for the true risk of the current mortgage products that made up the MBS.

This occurred despite the fact that the Rating Agency Defendants had developed newer models that could better evaluate the risk of the new types of mortgages being rated – i.e., Alt-A and subprime mortgages.

14.              In fact, former Managing Director and Head of Residential Mortgage Backed Securities Ratings at Standard & Poor’s (“S&P”), Frank Raiter, testified before Congress in late 2008 that as early as 2004 S&P had developed a ratings model that could account for the new riskier mortgages, but chose not to use it in order to keep costs down and increase revenues for its parent company, The McGraw-Hill Companies (“McGraw Hill”).

15.              S&P was not alone in relying on outdated data for its ratings models. Moody’s Investor Service, Inc. (“Moody’s”) used historical data pertaining to traditional

8 See, e.g., 2005 Registration Statement at S-24-25; 2006 Registration Statement at S-36; 2007 Registration Statement at S-36.

mortgage products going back to the 1960s and 70s, when homebuyers typically had a much larger down payment (and thus more equity in the home), to determine the default and delinquency rates on the new breed of riskier mortgages that could be obtained with little or no money down.

For example, Mark Adelson, former managing director in Moody’s structured-finance division, was quoted by The New York Times as stating that it was “like observing 100 years of weather in Antarctica to forecast the weather in Hawaii.”

Thus, Moody’s methodologies and models simply failed to acknowledge that the new breed of mortgages would likely produce statistically different mortgage default rates than traditional mortgages made in prior decades.

16.              As a result of these untrue statements and omissions in the Offering Documents, Plaintiffs and the Class purchased Certificates that were far riskier than represented, were not of the highest quality and were not equivalent to other investments with the same credit rating.

The Rating Agency Defendants have now downgraded nearly all of the Certificates, many plummeting from investment-grade status to non-investment grade (or “junk”) status.

In fact, in many cases, the Certificates were downgraded from “triple-A” to “junk” in a single day.

In direct response to the untrue statements contained in the Offering Documents, Plaintiffs and the Class have incurred substantial damages.

II.                JURISDICTION AND VENUE

17.              The claims asserted herein arise under and pursuant to Sections 11, 12(a)(2) and 15 of the Securities Act. 15 U.S.C. §§ 77K, 77l (a)(2) and 77(o). This Court has jurisdiction over the subject matter of this action pursuant to Section 22 of the Securities Act, 15 U.S.C. § 77v, and 28 U.S.C. § 1331.

18.              Venue is proper in this District pursuant to Section 22 of the Securities Act, 15 U.S.C. § 77v, and 28 U.S.C. § 1391(b) and (c), as many of the acts and conduct complained of herein occurred in substantial part in this District. In addition, Defendants conduct business in this District.

19.              In connection with the acts and conduct alleged herein, Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including the mails and telephonic communications.

III.             PARTIES

A.                 Court-Appointed Lead Plaintiffs

20.              Court-appointed Lead Plaintiff Wyoming State Treasurer (“Wyoming Treasurer”) manages and invests all funds of the State of Wyoming (with the exception of the Wyoming Retirement System).

Wyoming Treasurer currently manages over $10 billion in non-pension funds.

As reflected on the certification attached hereto as Exhibit A, Wyoming Treasurer purchased and/or acquired Certificates pursuant and/or traceable to the 2005 Registration Statement, the 2006 Registration Statement and the 2007 Registration Statement.

21.              Court-appointed Lead Plaintiff Wyoming Retirement System (“Wyoming Retirement”) administers eight separate retirement programs:

the Public Employees Pension System; the Warden, Patrol and DCI System; two Paid Firefighter systems; the Volunteer Fire Pension System; Volunteer Emergency Medical Technician Pension System; the Law Enforcement Pension System; and the Judicial Pension System.

Wyoming Retirement also administers a defined benefit plan for public employees in Wyoming.

Currently the membership totals over 37,000 active members.

As of December 31, 2007, Wyoming Retirement had $6.6 billion in assets under management.

As reflected on the certification attached hereto as Exhibit B, Wyoming Retirement purchased and/or acquired Certificates pursuant and/or traceable to the 2005 Registration Statement, the 2006 Registration Statement and the 2007 Registration Statement.

B.                 Additional Plaintiffs

22.              Philadelphia Board of Pensions manages the assets of the pension system for active and retired employees of the City of Philadelphia.

Pursuant to this Court’s June 21, 2011 Memorandum Opinion, Philadelphia Board of Pensions has been granted the right to intervene to pursue:

(a) Section 12(a)(2) claims stemming from its purchase of INDA 2007-AR1; and (b) Section 11 claims stemming from its purchase of INDA 2007-AR3.

Attached hereto as Exhibit C, is a certification identifying Philadelphia Board of Pensions’ purchases of units of INDA Mortgage Loan Trust 2007-AR3 and INDA Mortgage Loan Trust 2007-AR1.

23.              Police & Fire Retirement System of the City of Detroit (“PFRS”) manages the pension and benefit funds of approximately 13,388 employee member, retirees and beneficiaries and manages approximately $3.5 billion in net assets.

Pursuant to this Court’s June 21, 2011 Memorandum Opinion, PFRS has been granted the right to intervene to pursue its Section 12(a)(2) claims stemming from its purchase of INDX 2007-AR5.

Attached hereto as Exhibit D, is a certification identifying PFRS’s purchase of units of INDX Mortgage Loan Trust 2007-AR5 on February 7, 2008.

C.                 Interested Parties

24.              IndyMac Bank is an interested party because it was the Sponsor, Seller and Servicer of the Certificates and Issuing Trusts.

IndyMac Bank was a federal savings bank with its principal office located in the state of California. On July 11, 2008, IndyMac Bancorp, Inc. became the third-largest bank failure in U.S. history when the U.S. Department of the Treasury, Office of Thrift Supervision seized it and announced that the Federal Deposit Insurance Corporation (“FDIC”) would seek a buyer for IndyMac Bank.

This led IndyMac Bank to file for bankruptcy protection on July 31, 2008.

The FDIC estimated the cost to its insurance fund as a result of the IndyMac takeover at between $4 billion and $8 billion.

On March 19, 2009, the FDIC completed the sale of IndyMac Federal Bank, FSB (which was the newly-created entity by the FDIC) to OneWest Bank, F.S.B.

OneWest Bank, F.S.B. is a newly-formed federal savings bank organized by IMB HoldCo LLC.

All deposits of IndyMac Federal Bank, FSB were transferred to OneWest Bank, FSB.

IndyMac Bank is not named as a defendant herein solely based on its filing for Chapter 7 bankruptcy protection on July 31, 2008.

25.              Lehman Brothers Inc. (“Lehman Brothers”) is an interested party because it was listed as an underwriter and participated in the drafting and dissemination of one or more of the relevant Offering Documents. Lehman Brothers is not named as a defendant herein solely based on its filing for Chapter 11 bankruptcy protection on September 15, 2008.

D.                 Defendants

1.                  IndyMac Defendants

26.              Defendant IndyMac MBS is a wholly-owned subsidiary of IndyMac Bank.

IndyMac MBS was a Depositor in the securitizations and the Registrant of the Offering Documents with the SEC. As a pass-through entity, it would receive the loans from IndyMac Bank, securitize those mortgage assets and assign the securitized loans to the Issuing Trusts, defined below.

27.              Defendant Michael W. Perry (“Perry”) was, at all relevant times, Chairman of IndyMac Bank’s Board of Directors and its Chief Executive Officer (“CEO”).

Based on his position as the senior-most executive officer at IndyMac Bank, he was in a position to control the activities of the Companies and was a participant to the violations alleged herein.

2.                  Individual Defendants

28.              Defendant John Olinski (“Olinski”) was, at all relevant times, Chairman of the Board, Chief Executive Officer and Director of IndyMac MBS. During all relevant times, he was also the Executive Vice President of Secondary Marketing & Retained Assets of IndyMac Bank. Olinski signed all three Registrations Statements in his official capacity.

29.              Defendant S. Blair Abernathy (“Abernathy”) was, at all relevant times, Executive Vice President and Director of IndyMac MBS. During all relevant times, he was also Executive Vice President and Chief Investment Officer of IndyMac Bank. Abernathy signed all three Registration Statements in his official capacity.

30.              Defendant Lynette Antosh (“Antosh”) was a Director of IndyMac MBS and signed the 2005 Registration Statement in her official capacity.

31.              Defendant Raphael Bostic (“Bostic”) was a Director of IndyMac MBS and signed the 2006 Registration Statement and 2007 Registration Statement in his official capacity.

32.              Defendant Samir Grover (“Grover”) was IndyMac MBS’s Chief Financial Officer, Senior Vice President and Principal Accounting Officer. During the relevant times, he was also a Senior Vice President of IndyMac Bank. Grover signed the 2005

Registration Statement and 2006 Registration Statement in his official capacity.

33.              Defendant Simon Heyrick (“Heyrick”) was IndyMac MBS’s Senior Vice President and Chief Financial Officer. Heyrick signed the 2007 Registration Statement in his official capacity.

34.              Defendant Victor H. Woodworth (“Woodworth”) was IndyMac MBS’s Vice President and Assistant Secretary. Woodworth signed the 2006 Registration Statement and 2007 Registration Statement in his official capacity.

35.              Defendants Olinski, Abernathy, Antosh, Bostic, Grover, Heyrick and Woodworth are collectively referred to herein as the “Individual Defendants.”

3.                  Underwriter Defendants

36.              Defendant Bank of America Corp. (“Bank of America”) is named in its capacity as successor-in-interest to Merrill, Lynch, Pierce, Fenner & Smith, Inc. (“Merrill Lynch”). Bank of America is a Delaware corporation and is headquartered in North Carolina. Merrill Lynch was listed as an underwriter and participated in the drafting and dissemination of one or more of the relevant Offering Documents.9

37.              Defendant Bank of America is also named in its capacity as successor-in- interest to Countrywide Securities Corp. (“Countrywide”). Countrywide was listed as an underwriter and participated in the drafting and dissemination of one or more of the relevant Offering Documents.

38.              Defendant  Credit  Suisse  Securities  (USA)  LLC  (“Credit  Suisse”), formerly known as Credit Suisse First Boston Corp., operates as an investment bank in

9 For the Court’s convenience, attached hereto as Exhibits E–G are tables that detail, in part, the following: (1) each Registration Statement and the particular Prospectus Supplements issued pursuant to each Registration Statement; (2) the underwriter(s) for each Offering; (3) the size of each Offering; and (4) the rating agencies responsible for rating each Offering, as well as the ratings assigned to each Offering, including any subsequent downgrades.

the U.S. Credit Suisse was listed as an underwriter and participated in the drafting and dissemination of one or more of the relevant Offering Documents.

39.              Defendant Deutsche Bank Securities Inc. (“Deutsche Bank”) is a U.S. investment bank. Deutsche Bank was listed as an underwriter and participated in the drafting and dissemination of one or more of the relevant Offering Documents.

40.              Defendant J.P. Morgan Securities Inc. (“J.P. Morgan”) is headquartered in this District. J.P. Morgan was listed as an underwriter and participated in the drafting and dissemination of one or more of the relevant Offering Documents.

41.              J.P. Morgan is also named in its capacity as successor-in-interest to Bear, Stearns & Co. Inc. (“Bear Stearns”). Bear Stearns was listed as an underwriter and participated in the dissemination of one or more of the relevant Offering Documents.

42.              Defendant Greenwich Capital Markets, Inc. (“Greenwich Capital”) (n/k/a RBS Securities Inc.) is headquartered in Connecticut. Greenwich Capital was listed as an underwriter and participated in the drafting and dissemination of one or more of the relevant Offering Documents.

43.              Defendant Morgan Stanley & Co., Inc. (“Morgan Stanley”) is a global financial services provider headquartered in this District. Morgan Stanley was listed as an underwriter and participated in the drafting and dissemination of one or more of the relevant Offering Documents.

44.              Defendant UBS Securities LLC (“UBS Securities”) (f/k/a UBS Warburg LLC) is an indirect wholly-owned subsidiary of UBS AG, a Swiss corporation. UBS Securities is an investment banking firm with its principal place of business located in

Stamford, Connecticut. UBS Securities was listed as an underwriter and participated in the drafting and dissemination of one or more of the relevant Offering Documents.

45.              Defendant HSBC Securities (USA) Inc. (“HSBC”) is an investment banking firm with its headquarters located in this District. HSBC was listed as an underwriter and participated in the drafting and dissemination of one or more of the relevant Offering Documents.

46.              Defendant Goldman, Sachs & Co. (“Goldman Sachs”) is an investment banking firm principally located in this District. Goldman Sachs was listed as an underwriter and participated in the drafting and dissemination of one or more of the relevant Offering Documents.

47.              Defendant Citigroup Global Markets Inc. (“Citigroup”) is a subsidiary of Citigroup Inc., a Delaware corporation that is headquartered in this District. Citigroup was listed as an underwriter and participated in the drafting and dissemination of one or more of the relevant Offering Documents.

48.              Defendant IndyMac Securities Corporation (“IndyMac Securities Corp.”) is a corporation with offices located in California. IndyMac Securities Corp. was a wholly-owned subsidiary of IndyMac Bank before it was dissolved on November 21, 2008.

IndyMac Securities Corp. is listed as an underwriter and participated in the drafting and dissemination of one or more of the relevant Offering Documents.

49.              Defendants Bank of America, Countrywide, Credit Suisse, Deutsche Bank, J.P. Morgan, Bear, Stearns, Greenwich Capital, Morgan Stanley, UBS Securities, HSBC, Goldman Sachs, Citigroup, and IndyMac Securities Corp. are collectively referred to herein as the “Underwriter Defendants.”

4.                  Rating Agency Defendants

50.              Defendant Moody’s is a Delaware Corporation with its principal place of business located in this District. Moody’s provides credit ratings, research and risk analysis to investors.

Moody’s acted as an “Underwriter” of the Certificates within the meaning of the Securities Act, 15 U.S.C. § 77b(a)(11), because Moody’s actively collaborated with the IndyMac Entities to create the structure of the securitization transactions related to the Certificates so they would receive the highest ratings.

Moody’s then provided ratings for the Certificates.

Moody’s also participated in the drafting and dissemination of the Offering Documents pursuant to which Plaintiffs and the Class purchased the Certificates

51.              Defendant McGraw-Hill is a New York corporation with its principal place of business located in this District. S&P, a division of McGraw-Hill, provides credit ratings, research and risk analysis to investors. S&P acted as an “Underwriter” of the Certificates within the meaning of the Securities Act, 15 U.S.C. § 77b(a)(11), because S&P actively collaborated with the IndyMac Entities to create the structure of the securitization transactions related to the Certificates so they would receive the highest ratings.

S&P then provided ratings for the Certificates. S&P also participated in the drafting and dissemination of the Offering Documents pursuant to which Plaintiffs and the Class purchased the Certificates.

52.              Defendant Fitch, Inc.’s (“Fitch”) corporate headquarters is located within this District. Fitch provides credit ratings, research and risk analysis to investors.

Fitch acted as an “Underwriter” of the Certificates within the meaning of the Securities Act, 15 U.S.C. § 77b(a)(11), because Fitch actively collaborated with IndyMac to create the structure of the securitization transactions related to the Certificates so they would receive the highest ratings.

Fitch then provided ratings for the Certificates.

Fitch also participated in the drafting and dissemination of the Offering Documents pursuant to which Plaintiffs and the Class purchased the Certificates.

53.              Defendants Moody’s, S&P and Fitch are collectively referred to herein as the “Rating Agency Defendants.”

IV.             FACTUAL BACKGROUND

A.                 The Origination and Sale of Mortgage Loans at the IndyMac Entities

54.              Prior to its July 2008 bankruptcy filing, IndyMac Bancorp, Inc. was the holding company for IndyMac Bank, which was a hybrid thrift/mortgage bank that focused on home mortgage lending and originated mortgages in all fifty (50) states.

IndyMac Bank was founded as a passive mortgage real estate investment trust (“REIT”) in 1985 and transitioned its business model to become an active, operating mortgage lender in 1993.

In 2000, IndyMac Bank terminated its status as a REIT and converted to a fully-taxable entity.

55.              From the time IndyMac Bank transformed from a REIT into a savings and loan association, it embarked on a path of aggressive growth.

This growth was a result of IndyMac Bank’s business strategy to expand from a mortgage lender to a major player in the world of structural finance.

Specifically, IndyMac Bank put a focus on originating and buying as many mortgage loans as possible in order to bundle, securitize and sell the resulting MBS to investors.

56.              IndyMac Bank’s business strategy worked well for a time.

IndyMac Bank went from generating about $10 billion in loans in 2000 to a high of $90 billion in 2006.

The volume of mortgage loan securitizations sponsored by IndyMac Bank similarly surged from $5.78 billion in 2003 to $39.17 billion in 2006.

This increased activity had a significant effect on IndyMac Bank’s revenue, which grew from a little over $337 million in 2000 to $1.3 billion in 2006, or 285.6%.

B.                 The Certificates Issued by the IndyMac Entities

1.                  Securitization and the Importance of Proper Underwriting and Accurate Appraisals

57.              “The essence of structured finance activities is the pooling of economic assets (e.g., loans, bonds, mortgages) and subsequent issuance of a prioritized capital structure of claims, known as ‘tranches,’ against these collateral pools.”

The Economics of Structured Finance, Harvard Business School, Working Paper, at 2 (2008) (emphasis added). Securitization transactions are structured so that the risk of loss is divided among different tranches, each with a different level of risk and reward.

It is the structuring of these different levels of risk that enables certain of the debt instruments issued to qualify for investment grade, “triple-A” ratings.

58.              This securitization of loans fundamentally shifts the risk of loss from the loan originator (in this case, IndyMac Bank) to the investor who purchases an interest in the securitized pool of loans.

When an originator holds the mortgage through the term of the loan, it profits from the borrower’s payment of interest and repayment of principal.

It also, however, bears the risk of loss if the borrower defaults and the property value is not sufficient to repay the loan.

In such situations, the originator is economically incentivized in establishing the creditworthiness of the borrower and the true value of the underlying property through accurate appraisal before issuing the mortgage loans.

59.              By contrast, in securitizations like the ones here, where IndyMac Bank had no intention to hold the mortgages to term, but rather intended to immediately bundle and sell the loans as MBS certificates to investors, the originator does not have the same economic incentive to verify borrower creditworthiness or to obtain a fair appraisal value of the property.

To the investor who purchases certificates representing an interest in a pool of such loans, however, the creditworthiness of the buyer and accurate appraisals of the underlying properties are crucial to ensuring payment on, and marketability, of the Certificates.

60.              Between 2001 and 2007, there was enormous growth in loan origination and securitizations involving private sector financial institutions, including IndyMac Bank.

Many MBS issued by private sector institutions were backed primarily by subprime and Alt-A loans.

61.              “Subprime mortgage” is a term that generally refers to mortgages made to a borrower with lower credit (or FICO10) scores who cannot obtain a conventional mortgage loan because the lender views the borrower as having too large of a risk of defaulting on the loan.

Given these risks, subprime mortgages carry higher interest rates. An “Alt-A” loan is a classification of mortgage loan where the risk profile for underwriting falls between prime and subprime.

Alt-A loans are generally issued to buyers that appear to have good credit, but the loans do not meet the definition of prime.

For example, loans to borrowers with limited or no income or asset verification are considered Alt-A loans.

The Alt-A sector also increasingly includes loans for which the LTV ratio was too high to qualify for a prime loan.

By 2006, IndyMac Bank was the largest Alt-A lender in the U.S.

10 A FICO score, created by the Fair Isaac Corporation, is the best-known credit scoring system in the U.S. It represents a way of measuring an individual’s creditworthiness without requiring access to their income history or employment status.

62.              Because investors in securitizations were generally buying interests in pools comprised of non-prime loans, proper loan underwriting and appraisals were crucial considerations for investors, as they directly impacted the value of the Certificates in a number of ways.

First, they provided “safeguards” if the borrower defaulted on the underlying loans.

If borrowers on these loans defaulted in excess of the assumptions built into the certificate payment structure, the incoming cash flow diminished and investors suffered losses.

Second, proper loan underwriting also helped ensure the creditworthiness of the borrower and, thus, reduced the risk of default.

2.                  The Securitization Process and Participants

63.              IndyMac Bank originated or acquired thousands of risky home mortgage loans and, with the assistance of IndyMac MBS and other Defendants, bundled them together in securitized transactions where it then issued Certificates to investors.

The Certificates are securities in which the holder’s interest represents an equity interest in the “issuing trust.”

The Certificates entitle the holders to income payments from the pools of mortgage loans and/or mortgage-backed securities.

This process was virtually identical in all of the offerings pursuant to the three defective Registration Statements at issue herein.

a.                  Origination of Loans

64.              First, a “sponsor” or “seller” (IndyMac Bank) originated and/or acquired the mortgage loans in exchange for cash.

According to the Offering Documents, IndyMac Bank as seller, acquired the mortgage loans underlying the MBS Certificates principally through four channels:

(1) mortgage professionals;

(2) consumer direct;

(3) correspondent;

and

(4) conduit.11

65.              Whether acquired directly from consumers by IndyMac Bank or indirectly through third-parties such as mortgage brokers, IndyMac Bank purported to conduct detailed underwriting of the loans, borrowers, property and the underlying mortgage originators/sellers.12

66.              Once the loans were acquired by IndyMac Bank, IndyMac Bank initiated the securitization process by transferring (i.e., selling) the mortgage loans to a “depositor,” in this case, IndyMac MBS.

The depositor then securitized the pool of loans so that the rights to the cash-flows from the inventory can be sold to investors.

11 The Prospectuses Supplements define “mortgage professionals” as mortgage brokers, bankers, financial institutions and homebuilders who have taken applications from prospective borrowers and submitted those applications to IndyMac Bank.

“Consumer direct” channels are mortgage loans initiated through direct contact with IndyMac Bank and the borrower.

“Correspondent” channels are mortgage brokers and bankers, financial institutions and homebuilders who sell previously funded mortgage loans to IndyMac Bank.

A “conduit” channel refers to pools of mortgage loans acquired by IndyMac Bank either from the original mortgagee or from an intermediate owner of the loans.

See, e.g., Prospectus Supplement (“Pros. Supp.”) INDX 2006-AR3 at S-28; Pros. Supp. INDA 2007-AR7 at S-67-68; Pros. Supp. INDX 2006-AR35 at S-66.

12 According to the Prospectus Supplements, as a seller, IndyMac Bank “approve[d] each mortgage loan seller prior to the initial transaction on the basis of the seller’s financial and management strength, reputation and prior experience” and represented that “[s]ellers are periodically reviewed and if their performance as measured by compliance with the applicable loan sale agreement is unsatisfactory, IndyMac Bank will cease doing business with them.”

As a seller, IndyMac Bank also “represent[ed] and warrant[ed] to the depositor in the pooling and servicing agreement that the Mortgage Loans were selected from among the outstanding . . . mortgage loans in the seller’s portfolio . . . and that the selection was not made in a manner intended to affect the interests of the certificateholders adversely.”

See, e.g., Pros. Supp. INDA 2006-AR2 at S-25, S-83; Pros. Supp. INDX 2006-AR11 at S-26, S-57; RAST 2006-A2 at S-26, S-31.

b.                  Securitization/Rating of Loan Pools

67.              In the securitization process, the underlying pools of loans were structured, with direct input from the Underwriter Defendants and Rating Agency Defendants, to allocate the risk of loss and reward among different tranches.

Any losses to the underlying loans due to default, delinquency or otherwise, are to be applied in reverse order of seniority.

The most senior tranches of the pass-through certificates carry the least risk and are often rated as the best quality or “triple-A” by the Rating Agency Defendants.

68.              Typically, each and every tranche assembled from the pool of mortgage loans contains the same undifferentiated grouping of underlying mortgage loans (i.e., the same average risk profile).

To stratify the risk of loss due to nonpayment on these mortgage loans, different forms of “credit enhancement” (i.e., loss protection) are utilized, which results in debt instruments with distinct risk profiles that can be sold separately to investors.

Thus, from a pool of mortgage loans with one risk profile, different debt instruments can be created that have more or less risk, depending on the tranche from which an investor purchases.

69.              The most common credit enhancement used by Defendants was “subordination.”

Subordination creates a hierarchy of tranches based on the order of loss absorption – i.e., losses are not allocated to a particular tranche until the balances of all junior or “subordinated” tranches have been reduced to zero.

Thus, losses that are incurred to the underlying loans due to default, delinquency or other factors are applied in reverse order of seniority.

The structuring of bonds in this tiered (or subordinated) manner is known as a “waterfall.”

The subordinated tranches (i.e., those at the bottom of the waterfall) thus serve as loss protection for the senior tranches by absorbing the losses first.

While subordinated tranches are less insulated from risk, they offer the highest yield.

70.              The Prospectus Supplements involved in this action specifically state that “[t]he issuance of senior certificates and subordinated certificates by the issuing entity is designed to increase the likelihood that senior certificateholders will receive regular distributions of interest and principal.”

See, e.g., Pros. Supp. INDX 2006-AR11 at S-15; Pros. Supp. INDX 2006-AR3 at S-12; Pros. Supp. INDX 2006-AR35 at S-19; Pros. Supp. INDA 2007-AR7 at S-15.13

71.              Thus, through the financial engineering of subordination and other forms of credit enhancement, a pool of risky subprime and Alt-A loans were structured to produce a senior tranche purportedly with enough loss protection to warrant a “triple-A” rating.

72.              The issuance of an investment-grade credit rating for each of the tranches issued in connection with the offering was a key step in the process of creating and ultimately selling the Certificates. The credit rating that is assigned to a particular “tranche indicate[d] the credit rating agency’s view as to the creditworthiness of the debt instrument in terms of the likelihood that the issuer would default on its obligations to make the interest and principal payments on the debt instrument.” Summary Report of

13 Because of the number of Offerings relevant to this action, only a few of the Prospectus Supplements issued pursuant to each Registration Statement are cited herein as examples. During the relevant period, the 2005, 2006 and 2007 Registration Statements were the only Registration Statements filed by IndyMac MBS related to mortgage-backed securities.

Issues Identified in the Commission Staff’s Examinations of Select Credit Rating Agencies, July 2008 (the “SEC Report” at 7).

73.              As noted above, the issuance of “triple-A” (or equivalent) ratings to certain tranches had particular importance to institutional holders who have policies restricting purchases to investments with low risk that carry “investment grade” ratings.

The high ratings that the Certificates at issue here received enabled the Certificates to be promoted as means to generate stable financial returns, with exposure only to safe, high- grade assets.

74.              Testimony by the Managing Director of Moody’s sums up how the structuring worked and the benefit it purportedly yielded to those who purchased at the top of the waterfall:

[T]he likelihood that an investor in a particular tranche will receive both the principal and interest due on the bond depends not only on the quality of the loans in the securitization, but also on the amount of loss protection provided.

Because losses on subprime loans are generally expected to be much higher than losses on “prime” loans, a greater amount of loss protection is needed in a subprime securitization for the senior tranche to receive the same rating as the senior tranche of a prime securitization.

The higher the seniority of a bond issued in a securitization, the more likely it will be repaid in full — meaning it is “less risky.”

Conversely, the lower the seniority of a bond, the less protection it will have against losses, making it less likely to be repaid in full.

As a result, the tranches of a subprime securitization generally receive progressively lower ratings as the seniority of the tranches get lower.

Each progressively more subordinate bond has less loss protection because each has fewer bonds that can provide a cushion to absorb losses in case of defaults on some of the loans in the pool.

Congressional Testimony of Warren Kornfeld at 12, Apr. 17, 2007.

75.              The following diagram demonstrates the basic structure of subordinated tranches and the varying levels of loss protection:

c.                   Sale of Certificates

76.              In connection with the issuance of the Certificates, the Depositor formed the Issuing Trusts (i.e, INDX 2006-AR3; IndyMac MBS, INDA 2007-AR7).

These Issuing Trusts, which have no directors, officers or employees, are run by a trustee and have very limited purposes, outlined in their respective pooling and servicing agreements.14

The Issuing Trusts were formed at the closing of a particular deal and are essentially shell corporations in which the different tranches and Certificates were created before the Certificates were transferred back to the Depositor for sale and distribution to investors.

14 The Issuing Trusts are common law trusts formed under the laws of the state of New York.

77.              Once the Issuing Trusts passed the Certificates back to the Depositor, the Depositor then sold the Certificates to the specific Underwriter Defendants of the Certificates pursuant to the terms of the underwriting agreements.

The relevant Underwriter Defendants also inspected the Offering Documents, which were to be (and were) filed with the SEC and disseminated to prospective investors, to ensure their accuracy.

Then the Underwriter Defendants offered the various Certificates to investors.

Investors paid billions of dollars to purchase the Certificates.

The Underwriter Defendants then paid these proceeds back to the Depositor, minus fees owed to them.

78.              After the Certificates were sold, a servicer (here, also IndyMac Bank) collects payments on the underlying loans and distributes them to investors according to the distribution schedule set forth in the Offering Documents.

The Issuing Trust is responsible for making payments and distributions to the certificateholder, filing taxes and preparing monthly statements for certificateholders.

Thus, when borrowers make principal and interest payments on the mortgage loans, these payments are typically “passed through” the Issuing Trusts to the certificateholders.

79.              The process as a whole is summarized by the diagram below:

C.                 The Individual Defendants’ and Perry’s Role in the Sale of the Certificates

80.              The Individual Defendants were each officers and/or directors of IndyMac MBS and each signed one or more of the Registration Statements at issue in this lawsuit.

By their signatures and as officers and directors of the IndyMac Entities, the Individual Defendants provided their consent and personally validated the information contained in the Registration Statements used to offer the Certificates to the public.

81.              Each of the Individual Defendants and Defendant Perry, by virtue of his or her control, ownership, offices, directorship and specific acts, was, during the relevant time period, a controlling person of IndyMac Bank and/or IndyMac MBS within the meaning of Section 15 of the Securities Act.

Each of the Individual Defendants and Perry had the power and influence, and exercised that power and influence, to cause IndyMac Bank and/or IndyMac MBS to engage in violations of the Securities Act, as described herein.

82.              The Individual Defendants, as a result of their control, position and influence had access to the underlying documentation about the Certificates and performance of the underlying loans.

Moreover, the Individual Defendants’ control, position and influence made them privy to the material facts and omissions that were concealed from Plaintiffs and the Class.

As such, the Individual Defendants had the opportunity to make a reasonable investigation to ensure that statements contained in the Offering Documents were true and/or that there were no omissions of material fact necessary to make the statements contained therein untrue or misleading.

83.              Defendant Perry, as a result of his position of influence as the senior-most IndyMac Bank executive, was also privy to information about the performance of the certificates and underlying loans.

According to former IndyMac Bank employees, as detailed below, Perry was responsible for implementing and promoting the business model of originating and acquiring as many mortgages as possible to sell to investors without regard for the safety and soundness of the underwriting and lending practices in doing so.

Furthermore, according to Confidential Witness (“CW”) 4, Perry was responsible for the push to allow IndyMac Bank managers to over-ride underwriters’ denial of loans.

D.                 The Underwriter Defendant’s Role in the Sale of the Certificates

84.              The respective Underwriter Defendants for each Certificate, which are specifically named as underwriters in the Prospectus Supplements, were responsible for distribution of the Certificates to the public pursuant to the terms of the Offering Documents.

85.              The Offering Documents state that the Certificates are offered “by negotiated firm commitment or best efforts underwriting and public reoffering by underwriters. . .”

See, e.g., Pros. Supp. INDX 2006-AR3 at 98, Pros. Supp. INDA 2007- AR7 at 128, Pros. Supp. INDX 2006-AR35 at 121.

86.              Each of the Underwriter Defendants participated in the distribution of one or more of the Certificates, and directly or indirectly participated in drafting and disseminating the Offering Documents pursuant to which the Certificates were sold to Plaintiffs and the Class.

As such, they were responsible for the truth of the statements made in the Offering Documents and are liable to Plaintiffs and the Class for any misstatements or omissions contained therein.

87.              The Underwriter Defendants, as a result of their control, position or influence, had access to the underlying documentation about the Certificates and performance of the underlying loans.

As such, the Underwriter Defendants had the opportunity to make a reasonable investigation to ensure that statements contained in the Offering Documents were true and/or that there were no omissions of material fact necessary to make the statements contained therein not untrue or misleading.

88.              The Underwriter Defendants also played a direct role in structuring the underlying deals, particularly when the Underwriter Defendants also served as an originator for the underlying loans.

According to CW 7, a former vice president of IndyMac’s Secondary Marketing Department from 2004 until 2008, the underwriting investment banks would provide feedback on the structuring and securitization of the underlying loans in order to obtain the desired rating.

The underwriting investment banks would also interact with the rating agencies on the IndyMac Companies’ behalf in an effort to secure the best ratings possible for the Certificates.

E.                 The Rating Agency Defendants’ Role as Underwriters

89.              Traditionally, the province of credit rating agencies was to rate bonds issued by corporations, municipalities and sovereign nations – i.e., entities that were ongoing concerns sensitive to market, economic and industry developments.

To determine the risk to the note-holder, their analysis emphasized the expected cash flow generated by the obligors’ ongoing business.

There was nothing that a rated entity could do to change the credit characteristics of the issuer before or during the rating process.

Moreover, the rating agencies had no ability to change the credit characteristics of the bonds.

90.              With the advent and proliferation of structured financial products, however, the Rating Agency Defendants transformed from passive raters into active participants in the structuring of deals for mortgage-backed securities.

1.                  The Rating Agency Defendants Participated in Creating the Structure of the Offerings to Attain Investment-Grade Ratings

91.              Contrary to their traditional role as passive publishers of opinion on the credit quality of a bond, the Offering Documents provided to investors explicitly state that the Rating Agency Defendants worked together with the sponsor and the Underwriter Defendants in “structuring” the securitized transactions:

As the sponsor, IndyMac Bank originates and acquires mortgage loans and initiates their securitization by transferring the mortgage loans to the depositor.

The mortgage loans are then transferred to the issuing entity for the related securitization.

The sponsor works with underwriters and rating agencies in structuring their securitization transactions.

See, e.g., 2006 Registration Statement at S-36; Pros. Supp. INDX 2006-AR3 at S-37; Pros. Supp. INDX 2006-AR35 at S-73; Pros. Supp. INDA 2007-AR7 at S-74 (emphasis added).

92.              The Rating Agency Defendants were actively involved in the creation and structure of the Offerings in a number of ways, such as through their active “collaboration” on the structuring of the deals (including providing advisory opinions on what make-up of loans would generate the desired ratings) and by providing tools to the issuers to pre-structure deals to achieve the desired rating.

93.              First, the Rating Agency Defendants closely collaborated with the issuers to properly structure the underlying tranches and credit enhancements to ensure that a Certificate received a desired rating. As the co-Chief Operating Officer of Moody’s admitted:

“You start with a rating and build a deal around a rating.”

94.              A recent new article summarized this new, active role of the Rating Agency Defendants in “rating” structured finance vehicles:

Late last year, officials from Moody’s Investors Service gave a PowerPoint presentation to a group of mortgage lenders in Moscow. . . .

But midway through the presentation, Moody’s revealed a significant, and ultimately more dangerous, role that the agencies play in financial markets.

The slides detailed an “iterative process, giving feedback” to underwriters before the bonds are even issued.

They laid out how Moody’s and its peers help their clients put together complicated mortgage securities before they receive an official ratings stamp. . . .

* * *

Ratings-agency officials conceded that they work with Wall Street banks, even if they don’t exactly shout it from the rooftops.

“You start with a rating and build a deal around a rating,” explains Brian Clarkson, Moody’s [co-Chief Operating Officer].

But the agencies reject the accusation that they take an active role in structuring the deal.

Portfolio, Overrated, Aug. 13, 2007 (“Overrated”) (emphasis added).

95.              The Rating Agency Defendants describe this active role as “collaboration” between them and the issuers.

S&P has acknowledged this collaboration in its proprietary publication entitled, “The Fundamentals Of Structured Finance Ratings:”

Since the arrangers are selling to investors in each tranche a specific type of risk and since investors compare these tranches using the universal scoring system of the rating agency, it follows that arrangers will seek to tailor their structure to generate the rating for each tranche that matches what the buyers are seeking [i.e., “triple-A” ratings].

Not doing so could result in no buyers being found for the tranches that don’t meet investor appetite.

If the structure as it is first presented to the rating agencies doesn’t satisfy the investor, then it is rational for the arranger to make changes that will meet the buyer’s need.

To do that, they must have a dialogue with the agencies.

This dialogue will inevitably take as many iterations as are necessary for the structure to provide what investors are seeking or for the arranger to conclude that no viable structure can be created, at which point the transactions are usually abandoned.

Standard & Poor’s, “The Fundamentals of Structured Finance Ratings,” at 3 (Aug. 2007) (emphasis added).

96.              This concept was further stressed in the Offering Documents, which provided:

“The amount, type, and nature of credit enhancement established for a class of securities will be determined on the basis of criteria established by each rating agency rating classes of the securities.”

See, e.g., Pros. Supp. INDX 2006-AR3 at 13; Pros. Supp. INDX 2006-AR35 at 15; Pros. Supp. INDA 2007-AR7 at 15 (emphasis added).

97.              Second, in addition to directly collaborating with issuers to structure deals, the Rating Agency Defendants freely disseminate their ratings model tools to issuers so that issuers can pre-structure and modify their MBS with a focus on obtaining a desired rating.

For example, S&P makes its LEVELS model available to investors for a licensing fee.

According to a S&P Executive Vice President’s Congressional testimony, this system was widely used by MBS issuers:

“The vast majority of those involved in issuing [MBS] have access to LEVELS and use it regularly.”

Congressional Testimony of Vickie A. Tillman (Executive Vice President of S&P), Sept. 26, 2007.

98.              According to the Bank for International Settlements:

What distinguishes the rating of structured finance transactions from the rating of traditional instruments is that the former requires the rating agencies to be involved in the deal’s structuring process……………………………………………………………………………………………… Deal origination thus involves obtaining implicit structuring advice by the rating agencies, at least to the extent that arrangers use rating agency models to pre-structure deals and subsequently engage in an iterative dialogue with the agencies in order to finalize these structures. As a result, ratings of structured finance instruments have a decidedly ex ante character.

Joseph R. Mason & Joshua Rosner, Where Did the Risk Go?

How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt Obligation Market Disruptions, at 13 n.30, May 14, 2007 (quoting Bank for International Settlements, Committee on the Global Financial System, The Role of Ratings in Structured Finance: Issues and Implications 2 (Jan. 2005)) (emphasis added).

99.              Numerous confidential witnesses confirmed the intertwined relationship between the IndyMac Companies and the Rating Agency Defendants.

One confidential witness interviewed by Plaintiffs, CW 1, who worked for the IndyMac Companies in California as a transaction manager in the Secondary Marketing Department from 2001- 2008, stated that IndyMac traders routinely worked directly with the Rating Agency Defendants to obtain specific ratings for the securitized MBS.

CW 1 personally assisted the packaging of the MBS that were sold to private investors, including investment banks. CW 1, who worked directly with the Rating Agency Defendants, confirmed that the Rating Agency Defendants reviewed the Prospectus Supplements prior to their being filed with the SEC.

In fact, CW 1 personally sent the Rating Agency Defendants the Prospectus Supplements so that they could review the documents before they were filed.

100.          CW 7, a former vice president of IndyMac’s Secondary Marketing Department from 2004 until 2008, confirmed that the Rating Agency Defendants received and reviewed portions of the prospectus filings and provided specific feedback, including changes to the language in the Offering Documents, prior to their being filed with the SEC.

Moreover, CW 7 also stated that IndyMac’s Secondary Marketing Department held weekly conference calls with the Rating Agency Defendants to discuss current transactions and upcoming or potential deals.

In some instances, CW 7 confirmed that both the underwriter investment banks and the Rating Agency Defendants would participate in these conference calls.

CW 7 also confirmed that the Rating Agency Defendants would provide guidance on which loans to put in a specific pool, and what level of credit enhancement would need to be applied in order to achieve a “triple-A” rating.

101.          Likewise, CW 2, an analyst in IndyMac’s Secondary Marketing Department15 from 2006 through summer 2008, confirmed that the Rating Agency Defendants were essential participants in the sales of the Certificates because the loans could not be sold until the “final rating[s]” were issued.

CW 2 was responsible for pooling together Alt-A loans for IndyMac so that they could be sold to the counterparties, including Countrywide, Lehman Brothers UBS and Morgan Stanley, who underwrote

15 The Secondary Marketing Department, headed by Olinski, was responsible for packaging pools of residential mortgages that IndyMac traders sold to various counterparties and Underwriter Defendants of the Certificates.

some of the certificate offerings in this action.

CW 2 directly interacted with each of the Rating Agency Defendants in order to get the securitized MBS rated.

CW 2 stated that each of the Rating Agency Defendants would initially receive a loan tape (which contained a Microsoft Excel spreadsheet) and would provide IndyMac with the “initial risk levels” of the proposed loan pools.

When 80-85% of the loan pool had been funded, IndyMac would send a second tape to the Rating Agency Defendants to obtain a second rating.

IndyMac could add or delete loans from the loan pool after it had been initially graded in order to reach the desired rating – generally a “triple-A” rating for higher tranches.

CW 2 explained that IndyMac personnel would run the pool of loans through proprietary software programs received from the Rating Agency Defendants to assess the securitized pool’s likely rating before the packaged bundles were sent to them.

102.          Similarly, CW 3 confirmed that, after Fitch assigned its initial ratings to a pool of loans, it would send the results back to the IndyMac Entities and have discussions with the IndyMac Entities about the ratings.

Fitch provided this so-called “feedback” to the IndyMac Entities and other loan originators on specific mortgage bundles it was asked to rate.

103.          In addition, the Prospectus Supplements make clear that the Rating Agency Defendants played other important and vital roles in the structuring and administration of the Certificates.

These roles demonstrate their substantial control over many parties to the securitization transaction.

104.          For example, the Prospectus Supplements explicitly state that “[t]he trustee may at any time resign by giving written notice of resignation to the depositor, the Swap Counterparty, the Servicer and each Rating Agency not less than 60 days before the specified resignation date.”

See, e.g., Pros. Supp. INDX 2006-AR35 at S-76; Pros. Supp. INDX 2006-AR3 at S-39 (substantially similar language); Pros. Supp. INDA 2007-AR7 at S-77 (substantially similar language)

In addition, the Prospectus Supplements also provide that, in the event any holders of Certificates evidencing at least 51% of the voting rights of each class of Certificates seeks to remove the trustee and appoint a successor trustee, then “[n]otice of any removal of the trustee shall be given to each Rating Agency by the successor trustee.”

See, e.g., Pros. Supp. INDX 2006-AR3 at S-40, Pros. Supp. INDX 2006-AR35 at S-76, Pros. Supp. INDX 2007-AR7 at S-77.

105.          The Rating Agency Defendants also had the ability to exercise, significant control over whether the pooling and servicing agreements could be amended.

The Prospectus Supplements stated that each Pooling and Servicing Agreement could be amended by the Depositor, the Master Servicer and the Trustee without the consent of the Certificateholders for a number of reasons, including, but not limited to

(i) curing any ambiguity or mistake;

(ii) correcting any defective provision or supplementing any provision in the Agreement that may be inconsistent with any other provision;

or

(iii) adding to the duties of the Depositor, the servicer or the trustee. Such amendments could only be made provided such amendments did not adversely affect in any material respect the interest of any Certificateholder, as evidenced by

(i) an opinion of counsel confirming that the amendment will not adversely affect in any material respect the interest of any holder of the certificates;

or

(ii) a letter from each rating agency

confirming that such amendment will not cause the reduction, qualification or withdrawal of the then-current ratings of the certificates.

See, e.g., Pros. Supp. INDX 2006-AR35 at 82; Pros. Supp. INDX 2006-AR3 at 69; Pros. Supp. INDA 2007-AR7 at 84 (emphasis added).

106.          The Rating Agency Defendants also had the ability to exercise significant control over the master servicer’s rights and obligations.

For example, the master servicer had a right to assign its rights and delegate its duties, but only with the prior written consent of the depositor and upon delivery to the trustee and the depositor of a letter from each of the Rating Agency Defendants to the effect that such action shall “not result in a downgrading of the rating of any of the securities” or “certificates.”

See, e.g., Pros. Supp. INDX 2006-AR35 at 79-80; Pros. Supp. INDX 2006-AR3 at 64-5; Pros. Supp. INDA 2007-AR7 at 83-84.

107.          Similarly, under the pooling and servicing agreement, the Servicer could not resign without the written consent of the Rating Agency Defendants.

See Pooling & Servicing Agreement, Section 6.04

(“Limitation on Resignation of the Servicer. The Servicer shall not resign from the obligations and duties hereby imposed on it except

(a) upon appointment of a successor servicer and receipt by the Trustee of a letter from each Rating Agency that such a resignation and appointment will not result in a downgrading, qualification or withdrawal of the rating of any of the Certificates

or

(b) upon determination that its duties under this Agreement are no longer permissible under applicable law.”).

2.                  The Certificates Could Not Have Been Sold Without Investment-Grade Ratings from the Rating Agency Defendants

108.          As the SEC observed, “[a] key step in the process of creating and ultimately selling a subprime [mortgage-backed security] . . . [was] the issuance of a credit rating for each of the tranches issued by the trust.”

SEC Report at 7.

The Prospectus Supplements corroborate this inasmuch as it was an express condition precedent to the issuance of the Certificates that the senior tranches be rated “triple-A” by the Rating Agency Defendants.

“It is a condition to the issuance of the Offered Certificates that they be assigned ratings not lower than the following by . . . [the Credit Rating Agencies].”

See, e.g., Pros. Supp. INDX 2006-AR3 at S-86; Pros. Supp. INDX 2006-AR35 at S-143; Pros. Supp. INDA 2007-AR7 at S-119.

Without their collaboration in obtaining these ratings, the Certificates could not have been issued.

Thus, the Rating Agency Defendants’ role was vital to the success of the Offerings and allowed for the sale of the Certificates.

a.                  The OIG Report

123.          The OIG Report found that rather than following its disclosed underwriting processes, IndyMac Bank had “embarked on a path of aggressive growth” that was supported by its high risk business strategy of “originating . . . Alt-A loans on a large scale” and then “packag[ing] them together in securities” and selling “them on the secondary market” to investors.

OIG Report at 2, 6, 7.

“To facilitate this level of [loan] production, [OIG] found that IndyMac often did not perform adequate underwriting.”

Id. at 21.

This “aggressive growth strategy” resulted in IndyMac Bank’s assets “gr[owing] from nearly $5 billion [in mid-2000] to over $30 billion [in the first quarter of 2008]” and was also “[t]he primary cause[] of IndyMac’s failure.”

Id. at 2, 6 (emphasis added).

124.          In its effort to “produce as many loans as possible and sell them in the secondary market,” (Id. at 21), IndyMac Bank “relaxed” and effectively abandoned its underwriting standards to permit risky borrowers to qualify for Alt-A loans, thus sacrificing loan quality for quantity.

“IndyMac often made loans without verification of the borrower’s income or assets, and to borrowers with poor credit histories.

Appraisals obtained by IndyMac on underlying collateral were often questionable as well.”

Id. at 2.

Ultimately, IndyMac Bank was making loans to “borrowers who simply could not afford to make their payments.”

Id.

125.          OIG documented several examples of loans that it felt demonstrated IndyMac Bank’s “high-risk activities over many years.”

OIG Report at 4.

In fact, the Appendix of the OIG Report contained a detailed discussion of several IndyMac Bank- originated loans that it believed demonstrated IndyMac’s “weakest underwriting practices.”

Id. at 71.

a)                  On May 2, 2007, IndyMac Bank approved a so-called “stated income” loan in the amount of $926,000, which was secured by a piece of property located in Florida.

The claimed purpose of the loan was to pay off a previous loan made from a different lender and to fund the building of a house on the property.

As a “stated income” loan, IndyMac Bank did not verify the borrower’s claimed income of $50,000 per month nor did IndyMac Bank verify the borrower’s assets.

In addition, while the loan file did include a signed authorization from the borrower to allow IndyMac Bank to request his previously-filed tax returns, the OIG “found no evidence that IndyMac ever obtained the tax returns.”

In fact, according to a former First Vice President, Quality Control – Enterprise Risk Management, “IndyMac had borrowers sign such requests as a ‘scare tactic,’ assuming that they would be more forthcoming on their stated income.”

Indeed, the OIG “w[as] told that IndyMac seldom forwarded the signed requests on to the IRS.”

To make matters worse, while the loan file contained an appraisal for the property of $1.43 million, “the comparable properties were located closer to the ocean and bay, and their values were based on listing price instead of the actual selling price.

The appraised value also did not take in[to] consideration a slowdown in the real estate market.”

The borrower ended up defaulting on the loan and owed IndyMac $1.01 million.

At the time the OIG was conducting its review, the property was listed for sale for only $599,000 – or 50% less than the claimed appraised value. OIG Report at 71-72.

b)                  In November 2007, IndyMac Bank approved a $3.0 million stated income loan which was secured by the borrower’s primary residence.

The loan was allegedly going to be used to refinance the primary residence that the borrower had owned for eleven years.

“Contrary to IndyMac policy, the borrower selected the appraiser who appraised the property at $4.9 million.”

However, notes in the loan file indicated that the borrower was unable to sell the house previously for $4.9 million and also failed to sell the house once he reduced the asking price to $4.5 million.

“Despite this, the appraiser concluded that the value of $4.9 million appeared to be reasonable” and did not insist on physically inspecting the property.

“The borrower made no payments on the loan before default.

The total delinquent loan amount as of November 2008 was $3,015,625.

According to the IndyMac official, the property sold in October 2008 for $2.0 million” – or 200% less than the appraised price. OIG Report at 72.

c)                  In February 2007, IndyMac approved a stated income 80/2017 loan for a total combined value of $1.475 million, which was also the original appraised value of the property.

Because the loan was based on the borrower’s stated income, IndyMac Bank performed no verification of his claimed income of $28,500 a month.

Also, while IndyMac Bank’s guidelines for 80/20 loans only allowed for a combined maximum loan amount of $1.0 million

(i.e., $800,000 first loan and $200,000 second loan), “[t]his loan was an exception to [that] policy. . .”

However, “[v]arious appraisals in the loan file [for the property] contained significant differences with no indication of how [the differences] were resolved by IndyMac.”

For example, an appraisal in January 2007 claimed the property was worth $1.48 million, but “[a] valuation analysis prepared by an IndyMac Bank employee on January 25, 2007, stated that the skill level of the appraiser was unacceptable – the appraiser had not provided accurate comparable properties . . . and did not accurately consider the location of the property.”

Rather than accept the original appraisal of $1.48 million, the IndyMac Bank employee estimated that the property was worth only $1.0 million “and recommended that another appraisal be obtained.”

Yet the loan file also indicated that another IndyMac Bank official “overruled the employee’s recommendation and the appraisal was accepted [with a slight 10% discount].”

The borrower defaulted on the loan prior to making a single payment.

In November 2008, an IndyMac Bank official estimated “that the property was worth about $700,000” – or less than 50% of the originally-accepted appraised value. OIG Report, at 72-73.

17 An “80/20” loan is a way of purchasing a home with 100% financing, but avoiding paying for mortgage insurance.

In essence, a borrower gets two loans, the first is for 80% of the sales price and the second is for 20% of the sales price; the smaller of which acts as the borrower’s down payment.

b.         The CRL Report

126.          The CRL Report similarly found a number of underwriting failures prevalent at IndyMac Bank during the relevant time. According to CRL, “the quality of [IndyMac Bank’s] loans became a running joke among its employees . . .”

CRL Report at 2.

“These practices left many [borrowers] deep in debt and struggling to avoid foreclosure.”

Id.

In fact, IndyMac Bank CEO Perry “admitted” that IndyMac Bank “had gotten a little bit laxed” about underwriting and “didn’t have the focus on fraud that we should have in this area, . . .”

Id. at 17 (internal quotations omitted).

127.          Former IndyMac Bank underwriters explained that low-doc loans were a “big problem” because the “loans allowed outside mortgage brokers and in-house [sales] staffers to inflate applicants’ [financial information] . . . and make them look like better credit risks.”

CRL Report at 8.

In fact, the “shoddily documented loans were known inside [IndyMac] as ‘Disneyland loans’ – in honor of a mortgage issued to a Disneyland cashier whose loan application claimed an income of $90,000 a year.”

Id. at 3.

2.                  Former Employees Recount Underwriting Failures at IndyMac Bank

128.          In addition to the OIG and CRL Reports, several former employees of IndyMac Bank also confirmed that the Company’s underwriting processes were deficient and contrary to the stated practices in the Offering Documents.

For example, CW 4, a former underwriter in IndyMac Bank’s Atlanta, Georgia Wholesale Lending Division said that, throughout CW 4’s tenure at IndyMac Bank, CW 4 noticed that more and more loan approvals that had initially been denied by in-house underwriters were being pushed through by IndyMac Bank management.

CW 4 understood that this was being pushed by CEO Perry.

In fact, CW 4 recalled that sometime in 2006, IndyMac Bank adopted a new slogan for its underwriters:

“Start with a Yes.”

CW 4 viewed this campaign by IndyMac Bank as an attempt to get underwriters to be more lenient in approving loans.

Toward this goal, according to CW 4, IndyMac Bank even hired inexperienced underwriters right out of college in the hope that they would be more amendable to pushing problematic loans through.

129.          According to CW 5, an underwriting manager in IndyMac Bank’s Dallas, Texas office from 2003 through 2009, there was a big change in IndyMac Bank’s organizational structure in late 2005 or early 2006 that resulted in increased pressure for underwriters to approve loans.

CW 5 was personally pressured to approve loans, just as other underwriting managers were, and was reprimanded by senior management and told, “[w]e need to approve stuff.”

130.          Similarly, CW 6, a former IndyMac Bank underwriter in its Wholesale Loan Division in Kansas City, Kansas from 2004 to 2007, stated that IndyMac Bank loosened up its underwriting standards during the mortgage boom.

As an underwriter, CW 6 would receive bonuses for meeting or exceeding the number of loans they were expected to underwrite each week.

CW 6 said it was not uncommon to receive several thousand dollars in bonuses each month during this time.

131.          Several of the underwriters at IndyMac Bank reported that the loan files frequently would be missing the required documentation.

According to CW 4, “[m]any times there wouldn’t be any documentation – just a loan application.”

132.          Furthermore, according to CW 4, the information that was included in the loan files oftentimes was fraudulent. For example, a borrower might claim to have worked for a particular company for several years, but upon further investigation, CW 4 would discover (by calling the Secretary of State’s office) that the relevant company had only been in existence for several months (as opposed to years).

CW 4 would reject such a loan and would later be informed that “management would waive [the defect].”

133.          CW 6 also confirmed that underwriters at IndyMac Bank “frequently” approved stated income loans when they “knew that there was no way that [the borrower] made that much money.”

Even when the stated income was blatantly suspect, it was not the policy for underwriters at IndyMac Bank to verify the income that borrowers stated in their loan applications until sometime in 2007.

In fact, CW 6 stated that “[i]t was normal practice” for IndyMac Bank to “accept[]” loans when the loan file included bank statements where all of the deposits from the borrower’s employer were crossed out in black ink.

134.          CW 8, a former IndyMac Underwriter Team Leader from 2005 to 2007, stated that the pressure on the loan underwriters to close loans at any costs came directly from IndyMac Bank’s headquarters in Pasadena and Defendant Perry specifically.

According to CW 8, in late 2006 or early 2007, Defendant Perry sent an email to all sales personnel, copying IndyMac’s loan underwriters.

In that email, Defendant Perry told the sales staff that he wanted the name of any underwriter who was not approving loans, or was not with “the program.”

CEO Frank Sillman would also periodically send out emails similar to those of Defendant Perry.

Further, CW 8 stated that on a monthly basis, Defendant Perry would send emails simply stating:

“WE NEED VOLUME”, and “WE NEED CLOSINGS.”

In order to churn more loans as quickly as possible, CW 8 also stated that IndyMac Bank would have unqualified personnel, including inexperienced clerical staff, review loan applications.

According to CW 8, the clerical staff did not apply any underwriting principles, guidelines or best practices, but simply funded and closed loans.

These clerical loan reviewers become know as “funderwriters” because they only funded and closed loans without reviewing the loan’s worthiness.

135.          CW 9, an IndyMac underwriter from 2006-2008, noted that the Company’s e-MITS system, which was used by brokers as well as other mortgage professionals, was a system ripe for abuse.

According to CW 9, a user would apply for approval of a loan by entering borrower and loan characteristics directly into the e-MITS system. If a loan was rejected, the user could simply modify any aspect of the application (stated income, savings, etc.) and resubmit the application as many times as necessary until receiving an approval message.

136.            The evidence that IndyMac Bank abandoned its loan underwriting procedures and guidelines in lieu of increased loan production makes its statements regarding its underwriting procedures in the Offering Documents untrue.

3.                  Actions Against Countrywide Financial Evidence Underwriting Failure in IndyMac’s Acquisition of Loan

137.          As alleged above, the Offering Documents state that IndyMac Bank either originated the loans it packaged into the MBS Certificates in-house or acquired them via four channels: unnamed mortgage professionals, consumer direct, correspondent and conduit channels.

See, e.g., Pros. Supp. INDX 2006-AR3 at S-51-52, Pros. Supp. INDA 2007-AR7 at S-67-68, Pros. Supp. INDX 2006-AR35 at S-66.

The Offering Documents, however, did not disclose which originators of the underlying loans were used.

Nevertheless, the Offering Documents assured purchasers that loans acquired from these four channels met IndyMac Bank’s underwriting criteria and/or were independently underwritten after acquisition by IndyMac Bank.

See 2006 Registration Statement at S- 28, S-35.

138.          The above-referenced statements were untrue when made because loan originators failed to meet IndyMac Bank’s purported underwriting and appraisal guidelines.

One example of a lender who failed to meet IndyMac Bank’s stated underwriting and appraisal guidelines was Countrywide. According to CW 7, a former vice president of IndyMac’s Secondary Market Department from 2004 to 2008, IndyMac Bank made bulk purchases of loans from other financial institutions, including Countrywide Financial Corporation (“Countrywide Financial”), that it then put into the loan pools and securitized.

Countrywide Financial, however, was a significantly troubled lender.

The fact that such loans did not meet IndyMac Bank’s underwriting guidelines is supported by evidence uncovered in numerous governmental actions against Countrywide Financial, based on its systematic underwriting abuses.

139.          For example, in March 2008, it was reported that Countrywide Financial was being investigated by the Federal Bureau of Investigations (“FBI”) regarding its “underwriting and mortgage origination practices.”

According to a March 8, 2008 article in The Wall Street Journal, the FBI’s investigation focused on “whether company officials made misrepresentations about the company’s financial position and the quality of its mortgage loans in securities filings.”

Glenn R. Simpson & Evan Perez,

“FBI Investigates Countrywide – U.S. Scrutinizes Filings On Financial Strength, Loan Quality for Fraud,” THE WALL STREET Journal, Mar. 8, 2008.

140.          On June 4, 2009, the SEC filed a complaint against Countrywide Financial’s three most senior executives from 2005 through 2007,18 alleging they misled Countrywide Financial investors by failing to disclose increasingly lenient underwriting guidelines used by Countrywide Financial to originate loans.

The SEC alleged that defendants failed to disclose substantial negative information regarding Countrywide Financial’s loan products, including:

·         The increasingly lax underwriting guidelines used by the company in originating loans;

·         The high percentage of loans it originated that were outside its own already widened underwriting guidelines due to loans made as exceptions to guidelines;

·         Countrywide’s definition of “prime” loans included loans made to borrowers with FICO scores well below any industry standard definition of prime credit quality;

·         The high percentage of Countrywide’s subprime originations that had a loan to value ratio of 100%, for example, 62% in the second quarter of 2006; and

·         Countrywide’s subprime loans had significant additional risk factors, beyond the subprime credit history of the borrower, associated with increased default rates, including reduced documentation, stated income, piggyback second liens, and LTVs in excess of 95%.

See id. at 4-5.

141.          In addition, Attorneys General from various states have initiated investigations into Countrywide Financial’s lending practices and also have alleged that Countrywide Financial systematically departed from the underwriting standards it professed using for originating residential loans.

For example, the Illinois Attorney General (“AG”) began an investigation into Countrywide Financial’s loan practices and,

18 See Securities and Exchange Commission v. Angelo Mozilo, David Sambol, and Eric Sieracki, Cv-09-03994 VBF AJWx (C.D. Cal. June 4, 2009).

on June 25, 2008, filed an action in the Chancery Division of the Circuit Court of Cook County, Illinois, entitled The People of the State of Illinois v. Countrywide Financial Corporation, et al., No. 08CH22994 (“The Illinois AG Complaint”).

According to the Illinois AG Complaint, Countrywide Financial employees interviewed by the Illinois AG stated that Countrywide Financial originated loans that did not meet its underwriting criteria because Countrywide Financial employees were incentivized to increase the number of loan originations without concern for whether the borrower was able to repay the loan.

142.          The California AG’s Office also commenced an investigation in Countrywide Financial’s practices and filed a Complaint (“California AG Complaint”) alleging several ways in which Countrywide Financial departed from its stated underwriting standards, including incentivizing employees to extend loans without regard to the underwriting standard and failing to verify documents provided by borrowers.

143.          Likewise, the Connecticut AG filed a Complaint in Superior Court, Judicial District of Hartford, entitled State of Connecticut v. Countrywide Financial Corporation et. al, No. CV08-40390945, alleging, among other things,

that Countrywide Financial’s employees inflated borrowers’ incomes in order to qualify them for loans they otherwise would not have received (the “Connecticut AG Complaint”).

144.          Many of the allegations in the Illinois, California and Connecticut complaints were confirmed by investigations in other states such as Washington, West Virginia, Indiana and Florida.

Significantly, on October 6, 2008, Countrywide Financial announced that it had settled the claims brought by eleven states, including California and Illinois, for an estimated $8.4 billion.

145.          Furthermore, according to Mark Zachary, a former regional vice president and manager of Countrywide Financial subsidiary Countrywide KB Home Loans, Countrywide Financial blatantly ignored its underwriting policies and procedures and its employees were advising customers to lie about their income on loan applications.

Also, according to a Mr. Zachary, Countrywide Financial employees were “strongly advising” appraisers to inflate property values so that loans would close.

B.                 The Offering Documents Contain Untrue Statements Regarding the Appraisal Standards and Practices Used in Valuing the Real Estate Properties Acting as Collateral for the Mortgage Loans Underlying the Certificates

146.          The Offering Documents represented that the underlying mortgaged properties would provide adequate security for the mortgage loans based, in substantial part, on the appraised values of the properties serving as collateral for the securitized mortgage loans.

According to the Offering Documents, the adequacy of the mortgaged properties as security for repayment of the loans was determined by an independent appraisal, conducted in accordance with the USPAP or other industry standards.

147.          The Offering Documents state that appraisals would be made according to specified industry standards in order to ensure the value of the mortgaged property is sufficient collateral for the loan.

For example:

[t]o determine the adequacy of the property to be used as collateral, an appraisal is generally made of the subject property in accordance with the Uniform Standards of Profession[al] Appraisal Practice.

The appraiser generally inspects the property, analyzes data including the sales prices of comparable properties and issues an opinion of value using a Fannie Mae/Freddie Mac appraisal report form, or other acceptable form.

In some cases, an automated valuation model (AVM) may be used in lieu of an appraisal.

AVMs are computer programs that use real estate information, such as demographics, property characteristics, sales prices, and price trends to calculate a value for the specific property.

The value of the property, as indicated by the appraisal or AVM, must support the loan amount.

See, e.g., 2005 Registration Statement at S-25; 2006 Registration Statement at S-30; Pros. Supp. INDX 2006-AR3 at S-31, Pros. Supp. INDA 2007-AR7 at S-69, Pros. Supp. INDX 2006 AR35 at S-68-69.

148.          The 2007 Registration Statement states:

In determining the adequacy of the Property as collateral, an appraisal is made of each property considered for financing.

Except as described in the applicable prospectus supplement, an appraiser is required to inspect the property and verify that it is in good repair and that construction, if new, has been completed.

The appraisal is based on the market value of comparable homes, the estimated rental income (if considered applicable by the appraiser) and the cost of replacing the home.

2007 Registration Statement at 36.

149.          The statements made in paragraphs 144 and 145 above were untrue statements of material fact and failed to disclose that IndyMac Bank was not following, and in many cases was disregarding, its stated guidelines because the appraisals were not performed in accordance with USPAP principals and industry standards.

150.          With respect to real estate appraisals, the USPAP requires, in part, that:

(1) “[a]n appraiser must perform assignments with impartiality, objectivity, and independence, and without accommodation of personal interests;”

(2) “[a]n appraiser must not advocate the cause or interest of any party or issue;”

(3) “[a]n appraiser must not accept an assignment that includes the reporting of predetermined opinions and conclusions;”

and

(4) that “it is unethical for an appraiser to accept an assignment, or to have a compensation arrangement for an assignment, that is contingent on any of the following:

(i) the reporting of a predetermined result (e.g., opinion of value);

(ii) a direction in assignment results that favors the cause of the client;

(iii) the amount of a value opinion;

(iv) the attainment of a stipulated result; or

(v) the occurrence of a subsequent event directly related to the appraiser’s opinion and specific to the assignment’s purpose.”

USPAP, 2008-2009 Edition, pages U-7 – U-8.

151.          These statements in paragraphs 144-145 were untrue because, as detailed by the allegations in the Illinois, California and other governmental investigations, Countrywide Financial relied upon faulty appraisals of the underlying real estate that were not made according to the USPAP or other industry standards and oftentimes grossly overvalued the property/collateral.

152.          Moreover, in violation of USPAP, IndyMac Bank allowed their sales personnel or account executives to order and control the appraisals.

These sales personnel were typically on a commission-only pay structure and were therefore highly motivated to close as many loans as possible.

The sales personnel and account executives would therefore pressure appraisers to appraise properties at artificially high levels or they would not be hired again, resulting in appraisals being done either negligently or fraudulently.

153.          The falsity of the appraisal practices is evidenced by the findings in the OIG Report and by confidential witnesses who were involved in IndyMac Bank appraisals.

1.                  Appraisal Abuses Noted by Public Reports

154.          The lack of independence with appraisals in the mortgage industry was noted by Alan Hummel (“Hummel”), Chair of the Appraisal Institute’s Government Relations Committee and former President of the Appraisal Institute, in his testimony before the Senate Committee on Banking on June 26, 2007.

Hummel noted this dynamic created a “terrible conflict of interest” where appraisers “experience systematic problems with coercion” and were “ordered to doctor their reports” or else they would “never see work from these parties again” and were placed on an “exclusionary list” or “blacklist[]” for “no other reason than the appraiser failed to hit a predetermined value” in appraising a piece of property.

Too often, this pressure succeeded in generating artificially high appraisals and appraisals where appraisers issued their appraisals without a reasonable basis for doing so.

155.          IndyMac Bank was a significant contributor to such appraisal abuses.

As noted in the OIG Report, “IndyMac obtained multiple appraisals on a property that had vastly different values” with “no evidence to support, or explain why different values were determined.”

Id. at 12

. For example, “the file for one . . . $1.5 million loan [OIG] reviewed contained several appraisals with values ranging between $639,000 and $1.5 million.

There was no support to show why the higher appraisal was the appropriate one to use for approving the loan.” Id.

In fact, according to Marla Freedman, the assistant inspector general for audit at the OIG, IndyMac Bank “always went with the high appraisal because their goal was to get these loans done and make a profit.”

William Heisel, “THRIFTS; Regulators Ignored Ills At IndyMac; A Report Says Warning Signs About Shaky Loans Were Missed, Leading To The Lender’s Collapse Last Summer.,” THE LOS ANGELES TIMES, Feb. 27, 2009.

156.          The statements in the Offering Documents regarding the property appraisals were untrue and omitted material facts when issued because, as noted in the OIG Report, there were “weaknesses with property appraisals obtained to support the collateral on the loans.”

Indeed, the OIG Report specifically noted that:

(a) “[a]ppraisals obtained by IndyMac on underlying collateral were often questionable;”

(b) “IndyMac officials accepted appraisals that were not in compliance with the Uniform Standard of Professional Appraisal Practice;”

(c) “IndyMac obtained multiple appraisals on a property that had vastly different values . . . [when] [t]here was no evidence to support, or explain why different values were determined;”

(d) “IndyMac allowed the borrowers to select the appraiser” in violation of the USPAP;

(e) IndyMac Bank accepted appraisals “where the property valuation was made without physical site inspection of the subject property or comparable properties” and “where the appraiser was not located in the immediate area” of the relevant property;

and

(f) appraisals were accepted that did not rely on photos of the relevant property or even comparable pieces of property. OIG Report at 2, 12, 26.

2.                  Appraisal Abuses Noted by Confidential Witnesses

157.          CW 6 confirmed that, at IndyMac Bank, the broker who made the loan also chose the appraisal firm that did the appraisal.

Likewise, CW 4 stated that one of the reasons IndyMac Bank had so many problems with the appraisals was because appraisers were not hired by IndyMac Bank, but were hired by the mortgage brokers bringing in the loans.

Thus, the entities interested in selling mortgages to IndyMac Bank (presumably for the highest price possible), were the same parties who were selecting the appraisers.

158.          CW 4 also confirmed that in CW 4’s underwriting review of the loans files, there were many problems with “shoddy appraisals,” and frequent problems with loan file having multiple appraisals.

C.                 The Prospectus Supplements Misrepresent and Omit Material Facts Regarding The True LTV Ratios Underlying the Securitized Mortgage-Backed Securities

159.          The flawed (and inflated) appraisals also made the disclosed LTV ratios contained in the Offering Documents materially untrue when issued.

160.          As noted in the Prospectus Supplements, the LTV ratio of a mortgage loan compares the loan with the appraised value of the property underlying the loan:

[A]t any given time is a fraction, expressed as a percentage, the numerator of which is the principal balance of that [mortgage loan] at the date of determination and the denominator of which is . . . the lesser of the selling price of the mortgaged property or its appraised value at the time of sale.

See, e.g., Pros. Supp. INDX 2006-AR3 at S-25, Pros. Supp. INDX 2006-AR35 at S-36, Pros. Supp. INDA 2007-AR7 at S-33.

161.          Several of the Offering Documents disclose both LTV ratios and various LTV restrictions that IndyMac Bank purportedly applied to various loans.

For example, many of the Prospectus Supplements noted that, “[a]t origination, all of the Mortgage Loans had a Loan-to-Value Ratio” of no greater than 95% to 100%.

See, e.g., Pros Supp. INDX 2006-AR3 at S-25 (stating that all of the mortgage loans had an LTV of less than 95% at origination);

Pros. Supp. INDX 2006-AR35 at S-36 (noting that at origination, all of the loans had an LTV of 100% or lower);

Pros. Supp. INDA 2007-AR7 at S-33 (same).

162.          As for Prospectus Supplements that offered securitized bundles of so- called “negative amortization” loans – i.e., loans in which the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loan actually increases – the Prospectus Supplements also disclosed the maximum allowed LTV ratio of those loans prior to the loans being reset.19

19 See, e.g., Pros. Supp. INDX 2006-AR2 at S-5

(noting that 96.5% of the underlying loans allowed for a maximum LTV ratio of 110% and the remainder of the loans allowed for a maximum LTV ratio of 115%);

Pros. Supp. INDX 2006-AR14 at S-9

(stating that 60.94% of the securitized loans allowed for a maximum LTV ratio of 110%, 39.02% of the loans allowed for a maximum LTV ratio of 115%, and 0.04% allowed for a maximum LTV ratio of 125%);

Pros. Supp. INDX 2007-FLX5 at S-8

(disclosing that 99.7% of the

163.          An accurate LTV of a loan is highly material to an investor because it is a barometer of the riskiness of the loan.

For example, if a $90,000 loan is made on a piece of property worth $100,000, the LTV ratio is 90%.

A high LTV ratio indicates a greater risk of default by the borrower because the borrower has less equity in the property and less incentive to pay the mortgage in the event of a default.

See, e.g., Pros. Supp. INDX 2006-AR3 at S-21

(noting that “[m]ortgage loans with higher loan-to-value ratios may present a greater risk of default and, in the case of defaults, an increase in the severity of losses”);

Pros. Supp. INDX 2006-AR35 at S-31 (same), Pros. Supp. INDA 2007-AR7 at S-26 (same).

Moreover, for a mortgage with a high LTV ratio, even a slight drop in housing prices could cause the balance of the loan to exceed the value of the underlying property.

For instance, if the property described above was not worth $100,000, but rather only $85,000, then the borrower owes more than the property is worth, creating an even greater incentive for the borrower to default on the loan and walk away from the depreciated property.

164.          The inflated appraisals caused the LTV ratios of the underlying mortgage loans to be materially understated at the time the Prospectus Supplements were issued.

For example, the LTV ratio of a $100,000 loan that is secured by a mortgaged property with an “actual” (or accurately appraised) value of $95,000 (i.e., $100,000/$95,000) is 1.05 or 105%.

However, the LTV ratio of a $100,000 loan that is secured by a mortgaged  property  with  an  inflated  appraisal  value  of  $125,000  (i.e., $100,000/$125,000) is 0.8 or 80%. The “actual” LTV ratio greater than 100% means that

underlying loans allowed for a maximum LTV ratio of 115% and the remainder allowed for a maximum LTV ratio of 110%).

the borrower has no equity in the mortgaged property and is a significant default risk. Thus, securities derived from this loan are highly risky. The “inflated” LTV ratio less than 100% is a misrepresentation that the borrower has equity in the mortgaged property and is thus less likely to default; meaning, the loan should be considerably less risky.

165.          The flawed and inflated appraisals also made the disclosed LTV ratios contained in the Offering Documents untrue when issued.

Therefore, statements made in the Prospectus Supplements regarding the average LTV ratio of the mortgaged properties, and that no mortgage loan at origination had an LTV ratio greater than a certain percentage, were materially untrue because, as noted above, they:

(i) overstated borrowers’ equity;

(ii) understated the default probabilities of the mortgage loans;

and

(iii) understated the true risks of the Certificates due to defaults on properties with little to no equity.

Also, the disclosures concerning purported restrictions IndyMac Bank placed on loans with LTV ratios exceeding 80% – i.e., the requirement of mortgage insurance – omitted that those restrictions were ineffective in protecting Certificateholders because the mortgage loans’ LTV ratios were materially understated as a result of the undisclosed and faulty appraisal process.

D.                 The Offering Documents Contain Untrue Statements Regarding the Credit Quality of So-Called Low-Doc Loans

166.          The Offering Documents for each Certificate disclose that the relevant securitized loans were underwritten and originated pursuant to one of seven documentation programs (Full/Alternate, Fast Forward, Limited, Stated Income, No Ratio, No Income/No Asset and No Doc).

Each Prospectus Supplement would disclose the breakdown of securitized mortgage loans that were originated pursuant to each documentation program.

For many of the Offerings, the underlying loans were predominately low-documentation loans, not requiring full documentation prior to those loans being granted.

167.          While the securitization included many low-documentation loans, the Offering Documents make clear that this was not an abandonment of underwriter procedures.

Rather, the Offering Documents expressly state that, under the No Income/No Asset Documentation Program and the No Doc Documentation Program, emphasis is placed on the credit score of the prospective borrower and on the value and adequacy of the mortgaged property as collateral.

168.          Specifically, the Offering Documents note that the relevant securitized loans were underwritten and originated pursuant to the following documentation programs (which are listed in order of required documentation levels beginning with the most stringent):

IndyMac Bank purchases loans that have been originated under one of seven documentation programs:

Full/Alternate, Fast Forward, Limited, Stated Income, No Ratio, No Income/No Asset and No Doc.

In general, documentation types that provide for less than full documentation of employment, income and liquid assets require higher credit quality and have lower loan-to-value ratios and loan amount limits.

***

Under the No Income/No Asset Documentation Program and the No Doc Documentation Program, emphasis is placed on the credit score of the prospective borrower and on the value and adequacy of the mortgaged property as collateral, rather than on the income and the assets of the prospective borrower.

Prospective borrowers are not required to provide information regarding their assets or income under either program, although under the No Income/No Asset Documentation Program, employment is orally verified.

See, e.g., Pros. Supp. INDX 2006-AR3 at S-30 (emphasis added), Pros. Supp. INDX 2006-AR35 at S-68 (substantially similar language); Pros. Supp. INDA 2007-AR7 at S- 68-69 (substantially similar language).

169.          The above referenced statements were untrue and misleading statements of material fact when made because, while IndyMac Bank claimed that these low-doc loan programs placed an “emphasis . . . on the credit score of the prospective borrower and on the value and adequacy of the mortgaged property as collateral, rather than on the income and the assets of the prospective borrow,” Defendants failed to disclose that IndyMac Bank was not following its stated documentation guidelines.

Indeed, the Office of Thrift Supervision found that, during its 2008 internal failed bank review of IndyMac Bank, that the “risk from its loan products . . . was not sufficiently offset by other underwriting parameters, primarily higher FICO scores and lower LTV ratios.”

OIG Report at 31.

170.          Moreover, the above referenced statements are also untrue because, for the reasons detailed above in paragraphs 156 to 162, IndyMac Bank was reporting artificially deflated LTV ratios.

E.                 The Offering Documents Contain Material Misstatements and Omissions Regarding the Rating Agency Defendants’ Rating Processes and Material Conflicts of Interest

171.          The Offering Documents contained material misstatements and omissions regarding the Rating Agency Defendants’ practices and processes in rating the Certificates, including the failure to disclose:

(a) that the Rating Agency Defendants used outdated models, inaccurate assumptions, and invalidated data that failed to account for the true risk of investing in the Certificates;

(b) that the Rating Agency Defendants were not independent evaluators, but were highly conflicted participants in the Offerings; and

(c) that the IndyMac Entities engaged in “ratings shopping” to assure the highest possible ratings.

172.          The link between the rating and riskiness of the investment is summed up in the Registration Statements as follows:

Ratings on mortgage pass-through securities address the likelihood of receipt by securityholders of all distributions on the underlying mortgage loans.

These ratings address the structural, legal and issuer-related aspects associated with the securities, the nature of the underlying mortgage loans and the credit quality of the credit enhancer or guarantor, if any.

2005 Registration Statement at 91; 2006 Registration Statement at 121; 2007 Registration Statement at 126.

173.          The Offering Documents claimed that the Rating Agency Defendants considered several factors when assigning their ratings, including:

[T]he credit quality of the mortgage pool, including any credit support providers, structural and legal aspects associated with the certificates, and the extent to which the payment stream on the mortgage pool is adequate to make the payments required by the certificates.

See, e.g., Pros. Supp. INDX 2006-AR3 at S-86; Pros. Supp. INDX 2006-AR35 at S-143 (substantially similar language); Pros. Supp. INDA 2007-AR7 at S-119 (same).

174.          These statements were materially untrue when made because the Offering Documents did not disclose that the Rating Agency Defendants

(a) evaluated and assigned ratings to the Certificates pursuant to a defective ratings process that involved reliance upon outdated ratings models that considered historical data and loan statistical information that failed to account for the true risk of the securities – even while newer and better models had been developed;

(b) failed to perform any due diligence on the loans included in the certificates they rated and made no attempt to independently evaluate or verify suspect mortgage loan data provided by issuers;

and

(c) failed to disclose the Rating Agency Defendants’ conflicts of interest, including their participation in ratings shopping.

1.                  The Rating Agency Defendants Failed to Disclose that Their Models Were Outdated and Materially Deficient

175.          The Rating Agency Defendants claim that their ratings are based on reliable, mathematical and statistical models.

However, according to the SEC Report, the models that the Rating Agency Defendants were using included archaic assumptions that were “out of touch with the underlying economic reality.”

These flawed models, included, inter alia:

·         failing to account for deteriorating mortgage loan origination standards;

·         failing to account for the new trend of “piggybacking” second mortgage loans (i.e., 80/20 loans where a second loan acts as the down payment);

·         continuing to use traditional mortgage loan assumptions when the loss rates for the Alt-A and subprime mortgages were much more risky; and

·         making “out-of-model adjustments” to ensure a high ratings.

176.          The SEC Report also revealed that ratings were being issued notwithstanding the fact that one or more issues raised during the analysis of the deal remained unresolved.

For example, in an email provided to the SEC during the course of its investigation, one analysis stated that “her firm’s model did not capture ‘half’ of the deal’s risk.”

SEC Report at 12.

177.          The New York Times found similar problems with the Rating Agency Defendants’ methodology of relying on outdated statistical models.

By way of example, The New York Times took a closer look at a $750 million mortgaged-backed securitization that Moody’s rated in late 2006 using its outdated model:

Moody’s used statistical models to assess [CDOs]; it relied on historical patterns of default.

This assumed that the past would remain relevant in an era in which the mortgage industry was morphing into a wildly speculative business.

The complexity of [CDOs] undermined the process as well. Jamie Dimon, the chief executive of JPMorgan Chase . . . says,

“There was a large failure of common sense” by rating agencies and also by banks like his. “Very complex securities shouldn’t have been rated as if they were easy-to-value bonds.”

* * *

Moody’s rated three-quarters of this [CDO’s] bonds triple-A.

The ratings were derived using a mathematical construct known as a Monte Carlo simulation — as if each of the underlying bonds would perform like cards drawn at random from a deck of mortgage bonds in the past.

There were two problems with this approach.

First, the bonds weren’t like those in the past; the mortgage market had changed.

As Mark Adelson, a former managing director in Moody’s structured-finance division, remarks, it was “like observing 100 years of weather in Antarctica to forecast the weather in Hawaii.”

And second, the bonds weren’t random.

Moody’s had underestimated the extent to which underwriting standards had weakened everywhere.

When one mortgage bond failed, the odds were that others would, too.

Moody’s estimated that this [CDO] could potentially incur losses of 2 percent.

It has since revised its estimate to 27 percent.

The bonds it rated have been decimated, their market value having plunged by half or more.

A triple-A layer of bonds has been downgraded 16 notches, all the way to B.

Hundreds of [CDOs] have suffered similar fates (most of Wall Street’s losses have been on [CDOs]).

For Moody’s and the other rating agencies, it has been an extraordinary rout.

Roger Lowenstien, Triple-A Failure, THE NEW YORK TIMES, Apr. 27, 2008 (“Triple-A Failure”).

178.          In April 2007 and July 2008, Moody’s and S&P, respectively, announced that their ratings models, which had been deployed around 2002 and continued to be used through early 2007, needed to be revised.

According to Moody’s, the “considerable evolution of the mortgage market since 2002” was the reasoning behind the need to revise its ratings methods. S&P stated that the standard variables – i.e., FICO scores, LTV ratios, ownership status, etc. – used to evaluate a borrower’s risk for default “[we]re proving less predictive” than in the past.

As one member of the press noted, these were “stunning admission[s] . . . [that the rating agencies’] model[s] had been based on a world that no longer existed.”

179.          According to Jerome Fons, a former Managing Director of Credit Policy at Moody’s, the Rating Agency Defendants “did not update their models or their thinking” during the period of deterioration in credit standards.

Congressional Testimony of Jerome Fons, Oct. 22, 2008.

180.          Frank Raiter (“Raiter”), the former Managing Director and Head of Residential Mortgage Backed Securities Ratings at S&P, was even more adamant that the problems with the ratings models were directly caused by the Rating Agency Defendants’ actions (or inactions) in not updating their models on a timely basis – as they had done for years – and were not the result of unanticipated economic conditions.

In fact, by early 2004, S&P had developed a ratings model that considered nearly 10 million loans that “covered the full spectrum of new mortgage products, particularly in the Alt-A and fixed/floating payment categories.”

However, that model was never implemented.

According to Raiter’s written testimony to Congress in 2008:

In 1995 S&P used a rules-based model for determining the loss expected on any given bond.

Late that year, the decision was made to develop a more sophisticated statistically-based approach to estimating the default and loss of individual loans and pools.

A new model was built based on approximately 500,000 loans with performance data going back 5 or more years. . . Implicit in this promise was S&P’s commitment to keep the model current.

In fact, the original contract with the model consultant called for annual updates to the model based on growing data bases.

An update was accomplished in late 1998 or early 1999 when the second version of LEVELs was released.

This version was built with a data base of approximately 900,000 loans with 6 to 8 years of performance information.

Each version of the model was better than its predecessor in determining default probabilities.

Each new version was built with growing data on traditional as well as new mortgage products, particularly the growing subprime market.

It was critical to maintain the best models as they were the linchpin of the rating process.

During this time frame, the analytical staff in the [MBS] group at Standard and Poor’s enjoyed the full support of senior management.

That was critical as acquiring data, performing the statistical analysis and utilizing information technology to put the model into the rating process was expensive and required significant staff support.

* * *

The point of this rather long recital is that the analysts at S&P had developed better methods for determining default which did capture some of the variations among products that were to become evident at the advent of the crisis.

It is my opinion that had these models been implemented we would have had an earlier warning about the performance of many of the new products that subsequently lead to such substantial losses.

That, in turn, should have caused the loss estimates mentioned above to increase and could have thus caused some of these products to be withdrawn from the market as they would have been too expensive to put into bonds.

* * *

An unfortunate consequence of continuing to use out-dated versions of the rating model was the failure to capture changes in performance of the new non-prime products.

As a result, expected loss estimates no longer provided the equity necessary to support the AAA bonds.

This, in turn, generated the unprecedented number of AAA downgrades and subsequent collapse of prices in the RMBS market.

Congressional Testimony of Raiter at 3-7, Oct. 22, 2008.

2.                  The Rating Agency Defendants Failed to Perform the Requisite Due Diligence on the Loans Included in the Certificates They Rated

181.          The Rating Agency Defendants, as a result of their positions and role in the Offerings, had access to the underlying documentation about the Certificates and performance of the underlying loans.

As such, the Rating Agency Defendants had the opportunity to make a reasonable investigation to ensure that statements contained in the Offering Documents were true and/or that there were no omissions of material fact necessary to make the statements contained therein not misleading.

Had the Rating Agency Defendants performed the requisite due diligence using the proper models and tools, they would have discovered the underwriting problems underlying the loans and either would not have provided ratings or would have assigned lower ratings to the Certificates.

182.          According to the SEC Report, the ratings process20 began when the sponsor (or arranger) sent certain data on each of the loans to the rating agencies.

The required information included, inter alia:

the principal amount of the loans;

the geographic location of the properties;

the credit history (or FICO score) of the borrowers;

the loan-to-value ratio of each property;

the types of loans involved (i.e., first lien, second lien, primary residence, secondary residence);

the proposed capital structure of the issuing trust;

any proposed levels (or types) of credit enhancements to be provided to each tranche of the issuing trust;

and the originator’s underwriting guidelines.

Typically, once the rating agency received the necessary information, it would assign a lead analyst who was responsible for reviewing and analyzing the data and formulating a preliminary rating recommendation for a committee comprised of analysts and/or senior-level analytical personnel to accept, modify or deny.

183.          This process was confirmed by CW 3 a residential mortgage-backed securities analyst at Fitch from 2001 until 2008.

During CW 3’s tenure at Fitch, CW 3 was the primary analyst assigned to rating IndyMac Bank’s Alt-A mortgage-backed securities.

CW 3 explained that IndyMac Bank would send a package of information to Fitch for rating.

The package of information would generally be in a Microsoft Excel spreadsheet and consist of the information discussed above.

Similarly, CW 3 stated that, if the loan was considered “subprime,” Fitch would require IndyMac Bank to provide it

20 According to the SEC Report, the Rating Agency Defendants each followed the same general procedures for rating mortgage-backed securities.

with an estimate on the likelihood that the borrower would default; this review generally consisted of IndyMac Bank providing a “grade” on a scale of A – D.

184.          Despite access to the underlying loan information, representatives of Moody’s also admitted that they assigned “triple-A” ratings to securities derived from poor quality loans without independently evaluating the borrower and loan data they received from issuers.

As Raiter stated in his written testimony to Congress:

Another area that deserves attention as the rating agencies re-make themselves is in the document reviews, the “structure” in structured finance.

The foundation of the rating analysis is the data relied on for determining credit enhancement levels.

Rating agencies do not perform “due diligence” on the data, rather they rely on representations and warranties (guarantees) from the issuer that the data submitted is indeed accurate.

Congressional Testimony of Raiter at 7, Oct. 22, 2008.

185.          Raiter also told Congress that the Rating Agency Defendants did not even look at the tapes containing the borrower’s data for the underlying loans before they fed that data into their models and warranted the accuracy of the resulting ratings:

Rep. Thomas M. Davis III: Now, the rating can only be as good, then, as the data that’s put into the models.

Raiter: Correct.

Rep. Thomas M. Davis III: But there is no independent verification that the data is accurate.

Raiter: No independent verification of the [underlying mortgage tapes by the Rating Agency Defendants], that’s correct.

* * *

Rep. Thomas M. Davis III: OK. Now, if it’s not the rating agencies’ job to ensure the accuracy of the data it’s using to rate these securities, whose job is it?

Raiter: That’s correct. We determined that it was better to put the onus on the issuer.

House of Representatives Committee on Oversight and Government Reform “Credit Rating Agencies and the FINANCIAL CRISIS” Transcript of Committee Hearing, Oct. 22, 2008 at pg. 110-11.

186.          Similarly, Michael Kanef, the Group Managing Director of Moody’s, told Congress in September 2007 that:

[Moody’s] do[es] not conduct any “due diligence” on these loans.

* * *

[I]t should be noted that the quality of our opinions is directly tied to the quality of the information we receive from the originators and the investment banks.

Regardless of the quality of data we assess, if the data we receive is faulty – e.g., as a result of misrepresentations – the quality of our rating opinions will be jeopardized.

Congressional Testimony of Michael Kanef at 7, Sept. 27, 2007.

187.          Likewise, Stephen W. Joynt, President and CEO of Fitch also admitted that Fitch did not perform due diligence on the loans it was rating because “due diligence is not currently, nor should be the responsibility of the credit rating agencies.”

Congressional Testimony of Stephen W. Joynt, Aug. 5, 2009.

188.          This lack of due diligence was confirmed by CW 3, a mortgage-backed securities analyst for Fitch from 2001 through 2008. CW 3 stated that Fitch “only rated deals based on the information that was provided to us [by loan originators].”

In fact, CW 3 claimed that “everyone knew the quality [of the loans] was going down” and that some of the information from the loan originators looked suspect, yet Fitch continued to provide high ratings.

189.          Based on the above, it is no surprise that the President’s Working Group on Financial Markets, Policy Statement Financial Market Developments (March 2008), found that there were flaws in Rating Agency Defendants’ assessment of subprime MBS and other complex structured financial products because “[a]lthough market participants had economic incentive to conduct due diligence . . . the steps they took were insufficient.”

190.          Plaintiffs and the Class were denied crucial information detailing that the ratings were based on outdated ratings models and non-verified loan data, which combined to erode the ratings’ predictive value about the riskiness of the securities to which they were assigned.

The Rating Agency Defendants failed to properly consider the credit quality of the mortgage loans and the structure of the Certificates when assigning them investment-grade ratings.

191.          As a result of the undisclosed problems with the Rating Agency Defendants’ ratings process, the Rating Agency Defendants have downgraded the vast majority of Certificates.

As demonstrated at Exhibits E-G attached hereto, many of the Certificates have been downgraded from “triple-A” to “junk” or non-investment grade status.

3.                  The Rating Agency Defendants Were Highly Conflicted Participants in the Offerings

192.          The Offering Documents also did not disclose that the ratings given by the Rating Agency Defendants were highly conflicted evaluations of the Offerings because:

(a) the Rating Agency Defendants providing those ratings were paid by IndyMac Bank to participate and assist in the structuring of the Certificates;

(b) the Rating Agency Defendants were also paid by IndyMac Bank to rate the very Certificates that they were

paid to assist in structuring;

and

(c) IndyMac Bank would engage in “ratings shopping” with the Rating Agency Defendants whereby it would use the enticement of these large payments for rating the deal to make the Agency Defendants compete against each other, awarding the business of providing the credit rating to the credit rating agency who provided the highest rating to the structured product.

193.          Traditionally, investors paid a subscription fee for access to ratings and analysis.

Beginning in the 1970s, however, the rating agencies moved to an “issuer pays” model, whereby the rating agencies were paid by the very issuers whose debt was receiving the rating.

194.          With the advent and proliferation of structured financial products, the Rating Agency Defendants transformed from passive raters into active participants in the structuring of deals for MBS, and saw their revenues soar.

As the volume of structured finance deals rated by the Rating Agency Defendants increased, so too did the revenues that they derived from rating these products.

For example, total revenues for the Rating Agency Defendants doubled from $3 billion in 2002 to over $6 billion in 2007.

As a former Managing Director for Credit Quality at Moody’s stated in testimony before Congress in November 2008,

“[i]n my view, the focus of Moody’s shifted from protecting investors to being a marketing-driven organization” and that “[m]anagement’s focus increasingly turned to maximizing revenues. Stock options and other incentives raised the possibility of large payoffs.”

According to CW 7, the Rating Agency Defendants charted between $100,000 and $200,000 to rate a deal depending on its size and the types of loans involved.

195.          Moody’s charged between $200,000 and $250,000 to rate a $350 million mortgage pool.

By contrast, rating a municipal bond of an equivalent size would have generated only $50,000 in fees.

In 2005, structured finance generated $715 million, over 40% of Moody’s total revenue.

By the first quarter of 2007, structured finance accounted for 53% of Moody’s revenue.

Moody’s financial statements show that from 2000 to 2007, operating margins averaged 53%.

In 2007, its margins outpaced those of even Exxon and Microsoft.

For five years in a row, Moody’s had the highest profit margin of any company in the S&P 500.

196.          The revenue S&P garnered from structured finance grew 800% from 2002 to 2006.

In 2006, its revenues rose by 20% to $2.7 billion, with almost half of that growth from increased sales of structured finance ratings.

197.          Fitch, too, brought in record profits for rating structured finance products.

Fitch reported that structured finance accounted for 51% of its total revenue of $480.5 million in the fiscal year that ended on September 30, 2006.

According to Forbes, before the subprime debacle, Fitch had its best year ever in 2007, earning $240 million in profits, which was up 22% from the year before, on revenue of $1.1 billion, which increased by 18% from the previous year.

198.          The SEC Report identified a serious and inherent conflict of interest in the “issuer pays” model for structuring and rating MBS.

As noted above, the “issuer pays” model replaced the “subscription fee” model.

With the “subscription fee” model, investors paid a subscription fee for access to ratings and analysis.

Thus, the rating agencies’ clients were investors.

Now, however, approximately 95% of the Rating Agency Defendants’ annual revenue is coming directly from the issuers that are seeking

to have their debt rated. Thus, the issuer (as opposed to the investor) has incredible leverage over the relevant rating agency because the rating agency is highly incentivized to issue high ratings to keep the issuers coming back for additional ratings.

This conflict of interest is further exacerbated in the realm of structured finance because the issuer has almost absolute flexibility to alter the deal structure to obtain the desired credit rating and the Rating Agency Defendants help structure the deals to obtain the desired ratings.

See SEC Report at 31.

199.          Indeed, Stephen W. Joynt, President and CEO of Fitch, stated that “Fitch has long acknowledged the potential conflict[] of [interest in the issuer-pays model].”

200.          On June 16, 2008, the SEC issued proposed rule amendments to “impose additional requirements” on the Rating Agency Defendants “in order to address concerns about the integrity of their credit rating procedures and methodologies in the light of the role they played in determining credit ratings for securities collateralized by or linked to subprime residential mortgages.”

SEC, Proposed Rules for Nationally Recognized Rating Organizations, June 16, 2008.

One of the proposed rules was aimed at prohibiting rating agencies from rating the products they structured:

“the interaction between the NRSRO and the arranger during the [MBS] . . . rating process has raised concerns that the NRSROs are rating products they designed (i.e., evaluating their own work).”

201.          As noted by former SEC Chairman Christopher Cox:

The credit rating agencies, which until late September 2007 were not regulated by statute, notoriously gave AAA ratings to these structured mortgage-backed securities.

But that was not all: the ratings agencies sometimes helped to design these securities so they could qualify for higher ratings.

These ratings . . . also skewed the computer risk models and regulatory capital computations.

Both the risk models used by financial institutions and the capital standards used by banking and securities regulators had the credit ratings hard-wired into them.

Congressional Testimony of Christopher Cox, Oct. 23, 2008 (emphasis added).

202.          However, the Rating Agency Defendants failed to disclose these material conflicts of interest in the Offering Documents.

These material conflicts of interest had a direct impact on the ratings assigned to the Certificates discussed herein.

203.          Moreover, each Certificate involved in this litigation was rated by at least two of the three Rating Agency Defendants.

Meaning, prior to the issuance of the Certificates, at least two of the Rating Agency Defendants received large fees from the IndyMac Entities to provide investment-grade ratings.

However, issuers of structured finance products commonly approached all three Rating Agency Defendants and hired the two agencies that provide the desired rating – generally “triple-A” ratings for the highest tranche securities.

See “The Role of Credit Rating Agencies in Structured Finance Markets: Final Report,” written by the Technical Committee of the International Organization of Securities Commissions, May 2008, at 13.

Knowing this, issuers were able to shop around among the three Rating Agency Defendants to ensure that most of their deals received at least investment-grade ratings.

This process is commonly referred to as “ratings shopping.”

204.          Michael S. Barr, Assistant Secretary for Financial Institutions at the U.S. Department of Treasury, noted the tremendous problem with “ratings shopping” in his testimony before the United States Senate on August 5, 2009.

More specifically, Mr. Barr stated that:

“[c]urrently, an issuer may attempt to ‛shop’ among rating agencies by soliciting ‛preliminary ratings’ from multiple agencies and enlisting the agency that provides the highest preliminary rating.

Consistently, this [ratings] agency also provides a high final rating.

A number of commentators have argued that either the existence or threat of such ‘ratings shopping’ by issuers played an important role in structured products leading up to the crisis.”

Mr. Barr then disclosed that the U.S. Department of Treasury was proposing rules that “would shed light on this practice [of ratings shopping] by requiring an issuer to disclose all of the preliminary ratings it had received from different credit rating agencies so that investors could see how much the issuer had ‘shopped’ and whether the final rating exceeded one or more preliminary ratings.”

205.          Similarly, Raymond McDaniel (“McDaniel”), Chief Operating Officer at Moody’s, also confirmed the significance of ratings shopping in a confidential presentation to Moody’s Board of Directors in 2007 entitled

“Credit Policy Issues at Moody’s Suggested by the Subprime Liquidity Crisis.”

In the presentation, which was made public in recent U.S. Congressional hearings, McDaniel admitted that Moody’s had conflicted itself into a corner.

For example, he stated that Moody’s ha[d] struggled “with this dilemma [of ratings shopping].

On the one hand, we need to win the business and maintain market share, or we cease to be relevant.

On the other hand, our reputation depends on maintaining ratings quality (or at least avoiding big visible mistakes).”

Based on this inherent conflict, McDaniel’s conceded that the market-share war had undermined the independence of each of the Rating Agency Defendants.

206.          In October 2008, Sean Egan, Managing Director of Egan-Jones Ratings, testified about the practice of ratings shopping.

He stated, in part, the following:

Rep. Brian Bilbray: Do you think the rate shopping played a major role in this crisis?

Mr. EGAN: Absolutely.   But I think there is a deeper problem, and the deeper problem is addressing the question why is there ratings shopping?

Why can issuers go from one firm to the other firm to the other firm and get the highest rating and there is relatively little downside for the rating firm because they have the freedom of speech defense?

Congressional Testimony of Sean Egan at 58, Oct. 2008.

207.          Mr. Egan further testified that “we have ample evidence that ratings shopping is alive and well.

And when you couple that with the fact that ratings have been viewed as opinions and therefore there is relatively little downside to inaccurate opinions, you have a condition that has led to the collapse we are experiencing.”

Id. at 86.

208.          The Offering Documents failed to disclose the ratings shopping being conducted prior to the issuance of the Certificates.

F.                 The Offering Documents Contain Untrue Statements Concerning Deviations from IndyMac’s Stated Underwriting Standards

209.          The Offering Documents also state that IndyMac would disclose any deviations from its underwriting standards:

In the event a lender underwrites mortgage loans under programs less restrictive than the one described above, a description of those programs will be set forth in the related prospectus supplement.

See, e.g., 2005 Registration Statement at 25; 2006 Registration Statement at 37; 2007 Registration Statement at 36; Pros. Supp. INDX 2006-AR3 at 30; Pros. Supp. INDX 2006-AR35 at 36; Pros. Supp. INDA 2007-AR7 at 36.

210.          The above statement contain material untrue statements and material omissions, because Defendants did not disclose any deviations from the Companies’ underwriting standards, even though, as set forth above, a material portion of the underlying collateral for the Certificates were not in accordance with stated credit, appraisal and underwriting standards.

G.                The Offering Documents Contain Misleading Risk Factors

211.          The Prospectus Supplements included ten to fifteen pages of boilerplate, similar disclosures under the heading, “Risk Factors”, that were untrue and failed to fully reveal the true risk associated with the Certificates in order to the make the statements in the Prospectus Supplements not misleading.

212.          The risk disclosures were themselves untrue and omitted material facts because they did not disclose that the IndyMac Entities and their loan originators (including Countrywide Financial) had not followed their stated underwriting guidelines when issuing loans to borrowers.

Likewise, as discussed above, the risk disclosures did not disclose that the underlying mortgages were based on faulty appraisals that overstated the value of the underlying collateral, or that the ratings stated in the Prospectus were based on outdated assumptions and relaxed rating criteria.

VI.             CERTIFICATES’ PERFORMANCE

213.          Since the Offerings, the Certificates have experienced a material decline in value, damaging the Plaintiffs and the Class.

This decline in value flows from the serious decline in the performance of the underlying mortgage loans.

214.          As reflected on the attached charts (Exhibits E-G), the Rating Agency Defendants maintained investment-grade ratings on many Certificates originally rated as “triple-A” until mid/late 2008 and early 2009.

Since that time, the ratings on virtually all of the Certificates within each of the Issuing Trusts have been downgraded, significantly reducing the value of the Certificates.

The vast majority of these downgrades occurred on or after July 2008. In many cases, the ratings fell precipitously several levels, often plummeting from “triple-A” or other investment grade ratings to junk status in a single day.

For example:

a.                   Moody’s rating of INDX 2006-AR15 top two Senior Certificates (Classes A-1 and A-2) fell eighteen (18) levels from a “triple-A” rating to a junk status (“Caa3) on January 29, 2009.

b.                  Moody’s rating of INDX 2006-AR3 Senior Certificates fell from “Aaa” to “Caa2” or lower also on January 29, 2009.

S&P, initially rated the same Trust “AAA”, but had reduced it to “A” in November of 2008, and then to “CCC” in July 2009.

c.                   S&P’s “AAA” rating of INDX 2006-AR29 Senior Certificates fell from “AAA*” to “CCC” on June 10, 2009.

d.                  Fitch’s original “AAA” rating of INABS 2006-D (Class 2A-2) fell from “AA” to “CC” in June 2009.

215.          Further, according to monthly performance reports, the delinquency, foreclosure and bank ownership rates on the underlying mortgages have skyrocketed since the issuance of the Certificates.

By way of example, as of August 2009:

a.                   44.85% percent of the underlying mortgages underlying INDX 2006 AR14 (Class 1-A1A) were either 60 days or more delinquent, in foreclosure or the collateral was retained by the lender.

b.                  42.48% percent of the underlying mortgages underlying INDYL 2006-L2 (Class A-1) were either 60 days or more delinquent, in foreclosure or the collateral was retained by the lender.

c.                   41.39% percent of the underlying mortgages underlying INDX 2006-AR4 (Class A1-A) were either 60 days or more delinquent, in foreclosure or the collateral was retained by the lender.

216.          As reflected in the chart below, which contains a sampling of 16 Trusts, for 11 of those Trusts (or nearly 70%), more than 30% of the underlying mortgages were either 60 days or more delinquent, in foreclosure or the collateral was retained by the lender.

217.          In addition to the sample provided above, several additional Issuing Trusts currently are backed by pools of mortgages with more than 30% of the underlying loans

21  REO refers to “real estate owned” by IndyMac Bank. either 60 days or more delinquent, in foreclosure or the collateral was retained by the lender.

VII.          CLASS ACTION ALLEGATIONS

218.          Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3), individually and on behalf of themselves and all persons or entities who purchased or otherwise acquired beneficial interests in the Certificates issued pursuant and/or traceable to IndyMac MBS’s materially untrue Registration Statements dated August 15, 2005, February 14, 2007 and February 24, 2006, as amended, and who were damaged thereby.

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.22

219.          This action is properly maintainable as a class action for the following reasons:

(a)               The Class is so numerous that joinder of all members is impracticable.

Defendants issued billions of dollars worth of Certificates pursuant to the Registrations Statements. While the exact number of Class members is unknown to Plaintiffs at this time and can only be ascertained through discovery, Plaintiffs believe that there are hundreds or thousands of members of the putative Class who may be identified from records maintained by Defendants or relevant non-parties, and may be notified of this action using the form of notice customarily used in securities class action cases.

22 As noted above, claims on behalf of a class of purchasers of securities issued by the Residential Asset Securitization Trust 2006-A8 are being prosecuted by the Court- appointed lead plaintiff in Tsereteli v. Residential Asset Securitization Trust 2006-A8, et al., No. 08-cv-10637-LAK.

Accordingly, those claims are excluded from the scope of this Complaint.

(b)               Plaintiffs are committed to prosecuting this action and have retained competent counsel highly experienced in securities class action litigation.

Plaintiffs’ claims are typical of the claims of the other members of the Class and Plaintiffs have the same interests as all of the other members of the Class.

Plaintiffs purchased their Certificates pursuant to all three of the Registration Statements and other Offering Documents, which contained virtually identical statements.

Accordingly, Plaintiffs are adequate representatives of the Class and will fairly and adequately protect the interests of the entire Class.

(c)               The prosecution of separate actions by individual members of the Class would create the risk of inconsistent or varying adjudications with respect to individual members of the Class, which could establish incompatible standards of conduct for Defendants, or adjudications with respect to individual members of the Class which would, as a practical matter, be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests.

(d)               A class action is superior to all other methods for a fair and efficient adjudication of this controversy. There will be no difficulty in the management of this action as a class action.

Furthermore, the expense and burden of individual litigation makes it impracticable for members of the Class to individually redress the wrongs alleged to have been done to them.

220.          There are questions of law and fact which are common to the Class and which predominate over questions affecting any individual Class member. The common questions include, inter alia, the following:

(a)               Whether Defendants violated the Securities Act;

(b)               Whether statements made by Defendants to the investing public in the Offering Documents omitted and/or misrepresented material facts about the mortgages underlying the Certificates; and

(c)               The extent and proper measure of the damages sustained by members of the Class.

VIII.        CAUSES OF ACTION

FIRST CAUSE OF ACTION

For Violation of Section 11 of the Securities Act (Against IndyMac MBS, the Individual Defendants, the Underwriter Defendants and the Rating Agency Defendants)

221.          Plaintiffs repeat and reallege each and every allegation above as if set forth in full herein. Plaintiffs expressly exclude and disclaim any allegation that could be construed as alleging fraud or intentional misconduct. This Count is based solely on claims of strict liability and/or negligence under the Securities Act.

222.          This Cause of Action is brought pursuant to Section 11 of the Securities Act, on behalf of Plaintiffs and the Class and against IndyMac MBS, the Individual Defendants, the Underwriter Defendants and the Rating Agency Defendants (the “Section 11 Defendants”). This Cause of Action is predicated upon the Section 11 Defendants’ strict liability to Plaintiffs and the Class for making materially untrue statements and omissions in the Offering Documents.

223.          The Registration Statements and other Offering Documents for the Offerings were materially misleading, contained untrue statements of material fact, omitted to state other facts necessary to make the statements not misleading, and omitted to state material facts required to be stated therein.

224.          The Individual Defendants are liable as they each signed one or more Registration Statements.

225.          Each of the Underwriter Defendants and each of the Rating Agency Defendants acted as underwriters in the sale of the Certificates issued by the Issuing Trusts, directly and indirectly participated in the distribution of the Certificates and directly and indirectly participated in drafting and disseminating the Offering Documents for the Certificates. The Prospectus Supplements specifically named the Underwriter Defendants as underwriters for the respective Certificates.

226.          All Section 11 Defendants owed to the Plaintiffs and the other Class member the duty to make a reasonable and diligent investigation of the statements contained in the Offering Documents at the time they become effective to ensure that such statements were true and correct and that there was no omission of material facts required to be stated in order to make the statements contained therein not misleading.

227.          The Section 11 Defendants knew, or in the exercise of reasonable care should have known, of the material misstatements and omissions contained in or omitted from the Offering Documents as set forth herein.

228.          The Section 11 Defendants failed to possess a reasonable basis for believing, and failed to make a reasonable investigation to ensure, that misstatements contained in the Offering Documents were true and/or that there were no omissions of material fact necessary to make the statements contained therein not misleading.

229.          The Section 11 Defendants issued and disseminated, caused to be issued or disseminated, and participated in the issuance and dissemination of material statements to the investing public, which were contained in the Registration Statements and other

Offering Documents, which made untrue statements and/or misrepresented or failed to disclose material facts, as set forth herein.

230.          By reason of the conduct alleged herein, each of the Section 11 Defendants violated Section 11 of the Securities Act and are liable to Plaintiffs and the Class.

231.          Plaintiffs and the Class acquired Certificates pursuant and/or traceable to the Registration Statements. At the time Plaintiffs and the Class obtained their Certificates, they did so without knowledge of the facts concerning the misstatements and omissions alleged herein.

232.          Plaintiffs and the Class have sustained damages as a direct and proximate result of the conduct alleged herein by the Section 11 Defendants and in violation of the Securities Act.

233.          By virtue of the foregoing, Plaintiffs and the Class are entitled to damages, jointly and severally, from each of the Section 11 Defendants, as set forth in Section 11 of the Securities Act.

234.          This action was brought within one year after the discovery of the untrue statements and omissions contained in the Offering Documents and within three years of the Certificates being sold to the public. Despite the exercise of reasonable diligence, Plaintiffs could not have reasonably discovered the untrue statements and omissions in the Offering Documents at an earlier time.

SECOND CAUSE OF ACTION

For Violation of Section 12(a)(2) of the Securities Act (Against IndyMac MBS and the Underwriter Defendants)

235.          Plaintiffs repeat and reallege each and every allegation above as if set forth in full herein. Plaintiffs again expressly exclude and disclaim any allegation that could be construed as alleging fraud or intentional misconduct. This Count is based solely on claims of strict liability and/or negligence under the Securities Act.

236.          This Cause of Action is brought pursuant to Section 12(a)(2) of the Securities Act on behalf of Plaintiffs and the Class and against IndyMac MBS and the Underwriter Defendants.

237.          IndyMac MBS and Underwriter Defendants promoted and sold Certificates pursuant to the defective Prospectuses and Prospectus Supplements for their own financial gain. The Prospectuses and Prospectus Supplements contained untrue statements of material fact, omitted to state facts necessary to make statements not misleading, and concealed and failed to disclose material facts.

238.          By means of the Prospectuses and Prospectus Supplements, IndyMac MBS and the Underwriter Defendants sold the Certificates to Plaintiffs and the Class in return for proceeds in excess of $61 billion.

239.          IndyMac MBS and the Underwriter Defendants owed to Plaintiffs and the Class who purchased Certificates pursuant to the Prospectuses and Prospectus Supplements a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses and Prospectus Supplements, to ensure that such statements were true and that there were no omissions of material fact necessary to make the statements contained therein not misleading.  IndyMac MBS and the Underwriter

Defendants, in the exercise of reasonable care, should have known of the material misstatements and omissions contained in the Prospectus Supplements, as set forth herein.

240.          Plaintiffs and the Class purchased or otherwise acquired Certificates pursuant to the defective Prospectus Supplements. Plaintiffs and the Class did not know, and in the exercise of reasonable diligence could not have known, of the misstatements and omissions contained in the Prospectus Supplements.

241.          By reason of the conduct alleged herein, IndyMac MBS and the Underwriter Defendants violated Section 12(a)(2) of the Securities Act, and are liable to Plaintiffs and other Class members who purchased Certificates pursuant to the Prospectus Supplements.

242.          Plaintiffs and the Class were damaged by IndyMac MBS’s and the Underwriter Defendants’ conduct. Those Class members who have retained their Certificates have the right to rescind and recover the consideration paid for their Certificates, as set forth in Section 12(a)(2) of the Securities Act. Those Class members who have sold their Certificates are entitled to rescissory damages as set forth in Section 12(a)(2) of the Securities Act. Plaintiffs and the Class hereby tender their Certificates, or proceeds from the sale thereof, to IndyMac MBS and the Underwriter Defendants in exchange for the value of the consideration paid for such Certificates, plus interest. In the alternative, Plaintiffs and the Class seek recovery of damages in an amount to be proven at trial.

243.          This action was brought within one year after the discovery of the untrue statements and omissions contained in the Offering Documents and within three years of the Certificates being sold to the public. Despite the exercise of reasonable diligence, Plaintiffs could not have reasonably discovered the untrue statements and omissions in the Offering Documents at an earlier time.

THIRD CAUSE OF ACTION

For Violation of Section 15 of the Securities Act (Against the Individual Defendants, the Rating Agency Defendants and Defendant Perry)

244.          Plaintiffs repeat and reallege each and every allegation as if set forth in full herein. Plaintiffs once again expressly exclude and disclaim any allegation that could be construed as alleging fraud or intentional misconduct. This Count is based solely on claims of strict liability and/or negligence under the Securities Act.

245.          This Cause of Action is brought against the Individual Defendants, Defendant Perry and the Rating Agency Defendants as controlling persons pursuant to Section 15 of the Securities Act. Each of the Individual Defendants and Defendant Perry, by virtue of his or her control, ownership, offices, directorship, and specific acts set forth above, was, during the relevant time period, a controlling person of IndyMac Bank, and/or IndyMac MBS, within the meaning of Section 15 of the Securities Act. Each of the Individual Defendants and Defendant Perry had the power and influence, and exercised that power and influence, to cause IndyMac Bank and IndyMac MBS to engage in violations of the Securities Act, as described herein. The Individuals Defendants’ and Defendant Perry’s control, ownership and position made them privy to the material facts concealed from Plaintiffs and the Class.

246.          Each of the Individual Defendants was a participant in the violations alleged herein, based on their having prepared, signed or authorized the signing of the

Registrations Statements and having otherwise participated in the consummation of the Offerings detailed herein.

247.          In addition to participating in a necessary role in the Certificates’ distribution, the Prospectus Supplements make clear that the Rating Agency Defendants played other important and vital roles regarding the structuring and administration of the Certificates. These roles allowed them to exercise substantial control over many parties to the securitization transaction, including the depositor.

248.          The Rating Agency Defendants also had the ability to exercise, and did exercise, significant control in causing the Depositor to engage in violations of the Securities Act, as described herein. In particular, the Rating Agency Defendants controlled the issuance of the Certificates through their pre-established ratings, the assignment of which was a condition precedent for the issuance of the Certificates.

249.          The Individual Defendants’, Defendant Perry’s and the Rating Agency Defendants’ control, position and influence made them privy to the material facts and omissions concealed from Plaintiffs and the Class.

250.          By virtue of the conduct alleged herein, the Individual Defendants, Defendant Perry and the Rating Agency Defendants are liable to Plaintiffs and the Class for their sustained damages.

IX.             PRAYER FOR RELIEF

WHEREFORE, Plaintiffs pray for relief and judgment as follows:

(a)                Determining that this action is properly maintainable as a class action and certifying Plaintiffs as Class representatives;

(b)               Awarding compensatory and/or resc1ss10nary damages in favor of Plaintiffs and other Class members against all defendants, jointly and severally, for an damages sustained as a result of Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

(c)                Awarding Plaintiffs and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and

(d)               Awarding such additional relief as the Court may deem just and proper.

JURY DEMAND

Plaintiffs hereby demand a trial by jury.