Allstate today filed suit in New York state court alleging that JP Morgan Chase, WaMu and Bear Stearns had materially misrepresented just about everything in selling more than $750 million in mortage loans to the insurer.
Specific misrepresentations alleged involved underwriting standards and practices, owner occupancy statistics, loan-to-value and combined loan-to-value ratios, debt-to-income ratios, credit ratings, credit enhancements, underwriting exceptions, alternative documentation loans, full documentation loans, adverse selection of mortgage loans and failure to disclose negative results of due diligence.
The complaint states causes of action for common-law fraud, negligent misrepresentation and violations of sections 11 and 12 of the Securities Act of 1933. Here’s the opening salvo:
1. This action arises out of Defendants’ fraudulent sale of residential mortgage backed securities in the form of pass-through certificates (the “Certificates”) to Allstate. Whereas Allstate was made to believe it was buying highly-rated, safe securities backed by pools of loans with specifically-represented risk profiles, in fact, Defendants knew the pool was a toxic mix of loans given to borrowers that could not afford the properties, and thus were highly likely to default.
2. Defendants made numerous material misrepresentations and omissions regarding the riskiness and credit quality of the Certificates in registration statements, prospectuses, prospectus supplements, and other written materials (the “Offering Materials”).
There’s little doubt that many of these misrepresentations occurred, but does anyone come to this battle with clean hands? Are we to believe Allstate’s claim (not unlike that of New York Life and other investors last month) that it innocently and in good faith relied on those misrepresentations?