Acting Attorney General Announces Lawsuit Against Credit Suisse Arising From Sale of Over $10 Billion in Troubled Mortgage Backed Securities

TRENTON – December 18, 2013 – (RealEstateRama) — Acting Attorney General John J. Hoffman and Division of Law Director Christopher S. Porrino announced today that the State has filed a lawsuit against Credit Suisse Securities (USA) LLC and two of its affiliates alleging that they offered more than $10 billion in residential mortgage backed securities trusts for sale while misrepresenting the risks involved in the investments, and failing to disclose to investors information about significant defects in the offerings.

Filed today on behalf of the Bureau of Securities, the lawsuit alleges that Credit Suisse did not disclose to investors there had been a wholesale abandonment of underwriting guidelines designed to ensure that the mortgage loans underlying its securities trusts were made in accordance with appropriate lending guidelines.

In addition, it allegedly was not disclosed to investors that numerous loan originators had poor track records of defaults and delinquencies, and some had even been suspended from doing business with Credit Suisse. Other material information that was not disclosed, according to the State’s lawsuit, included that:

Approximately 25 percent of the loans which Credit Suisse had examined were underwater with combined loan-to-value ratios of more than 100 percent.

Credit Suisse’s traders had warned against the risky nature of certain types of loans, and were not willing to hold them on Credit Suisse’s own books at the same time Credit Suisse was unloading them to investors.

Credit Suisse had pocketed tens of millions of dollars in reimbursements from loan originators arising out of defective loans, without passing those funds along to the trusts that actually owned the loans.

The lawsuit announced today names Credit Suisse Securities (USA) LLC and its affiliates Credit Suisse First Boston Mortgage Securities Corp. and DLJ Mortgage Capital, Inc. as defendants. The suit was filed in State Superior Court in Mercer County by attorneys from the Division of Law on behalf of Acting New Jersey Bureau of Securities Chief Amy Kopleton.

Acting Attorney General Hoffman noted that the alleged conduct outlined in the State’s complaint is particularly egregious because investors in the mortgage-backed securities sold by Credit Suisse included charities and educational institutions, as well as public and private pension funds.

“The kind of conduct described in this lawsuit is the kind of conduct that helped put the nation in financial crisis, with loan originators and investment banking firms abandoning prudent lending guidelines in order to generate quick profits,” said Acting Attorney General Hoffman. “Ultimately, it was consumers who suffered the harm caused by these reckless lending practices, and by the misrepresentations used to make these doomed investments seem attractive. This kind of conduct cannot, and will not, be tolerated.”

“We are committed to combating this kind of irresponsible behavior on the part of large financial institutions, and will take legal action when necessary to hold those who engage in such conduct accountable,” said Division of Law Director Christopher S. Porrino. “Last month, we filed a lawsuit against Standard and Poor’s arising out of their alleged lack of independence and objectivity in rating mortgage-backed securities. Today we are dropping the other shoe by bringing this legal action against one of the leading underwriters of these toxic, mortgage-backed securities.”

The State is represented in the Credit Suisse matter by Assistant Attorney General Brian McDonough, Deputy Attorneys General Martin Gandelman, Toral Joshi, and Paul Minnefor, and Special Deputy Attorneys General Nicholas Dolinsky, Elisabeth Juterbock, Thomas Keeling and Steven Scutti of the Division of Law’s Affirmative Civil Enforcement Practice Group. New Jersey Bureau of Securities Investigators Peter Cole and Delfin Rodriguez handled the Bureau’s investigation of the matter.

New Jersey is part of the Residential Mortgage-Backed Securities (RMBS) Working Group (RMBS), a collaborative effort of state Attorneys General and the U.S. Department of Justice focused on investigating fraud and abuse in the RMBS market that helped create the 2008 nationwide financial crisis.

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