New York Attorney General Eric T. Schneiderman today filed a Martin Act complaint against Credit Suisse Securities (USA) LLC and its affiliates for making fraudulent misrepresentations and omissions to promote the sale of residential mortgage-backed securities (RMBS) to investors. According to Attorney General Schneiderman’s lawsuit, Credit Suisse deceived investors as to the care with which they evaluated the quality of mortgage loans packaged into residential mortgage-backed securities prior to 2008. RMBS sponsored and underwritten by Credit Suisse in 2006 and 2007 have suffered losses of approximately $11.2 billion.
Attorney General Schneiderman’s complaint is the most recent enforcement action by the Residential Mortgage-Backed Securities Working Group, a state-federal task force created by President Obama earlier this year to investigate those responsible for misconduct contributing to the financial crisis through the pooling and sale of residential mortgage-backed securities. In October, Attorney General Schneiderman filed a Martin Act lawsuit against J.P. Morgan Securities LLC (formerly known as Bear, Stearns & Co. Inc.), JP Morgan Chase Bank, N.A., and EMC Mortgage LLC (formerly known as EMC Mortgage Corporation) for making fraudulent misrepresentations and omissions to promote the sale of residential mortgage-backed securities (RMBS) to investors.
“This lawsuit against Credit Suisse marks another significant step in our efforts to hold financial institutions accountable for the misconduct that led to the worst financial crisis in nearly a century,” said Attorney General Schneiderman. “Our investigations and legal actions demonstrate that there must be one set of rules for all – no matter how big or powerful the institution may be – and that those rules will be enforced vigorously. We need real accountability for the illegal and deceptive conduct in the creation of the housing bubble in order to bring justice for New York’s homeowners and investors.”
According to Attorney General Schneiderman’s complaint, Credit Suisse led its investors to believe that the quality of the loans in its mortgage-backed securities had been carefully evaluated and would be continuously monitored. In fact, as in the case of other RMBS market participants, Credit Suisse did neither. Instead, it systematically failed to adequately evaluate the loans, ignored defects that its limited review did uncover, and kept its investors in the dark about the inadequacy of its review procedures and defects in the loans. The loans in Credit Suisse’s mortgage-backed securities included many that had been made to borrowers who were unable to repay the loans, were very likely to default, and ultimately did default in large numbers.
As explained in the Attorney General’s complaint, filed today in New York State Supreme Court, RMBS were pools of mortgages deposited into trusts. Shares of the RMBS trusts were sold as securities to investors, who were to receive a stream of income from the mortgages packaged in the RMBS.
In offering documents and marketing materials, Defendants led investors to believe that they had carefully evaluated—and would continue to monitor—the quality of the loans in the RMBS. The Attorney General’s lawsuit charges that Credit Suisse failed to abide by its representations that the loans underlying their RMBS were originated in accordance with the applicable underwriting guidelines, i.e., the standards in place to ensure, among other things, that loans were extended to borrowers who demonstrated the willingness and ability to repay. Further, while Defendants claimed that they undertook “due diligence” to ensure that the loans they purchased from originators complied with the relevant guidelines, in reality, the due diligence review process was compromised by, among other things, Defendants’ desire to maintain good relationships with loan originators.