2 western district of washington at...

SECOND AMENDED COMPLAINT Dietrich Siben Thorpe LLP No. 2:08-md-1919 MJP 2173 Salk Avenue, Suite 250, Carlsbad, CA 92008

No. C09-1756 MJP Tel.: (760) 579-7368 Fax: (760) 579-7369

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The Honorable Marsha J. Pechman

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON

AT SEATTLE

Case 2:08-md-01919-MJP Document 693 Filed 07/23/10 of 92

SECOND AMENDED COMPLAINT Dietrich Siben Thorpe LLP No. 2:08-md-1919 MJP 2173 Salk Avenue, Suite 250, Carlsbad, CA 92008

No. C09-1756 MJP Tel.: (760) 579-7368 Fax: (760) 579-7369

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TABLE OF CONTENTS

I. SUMMARY OF THE ACTION..........................................................................................1

II. JURISDICTION AND VENUE..........................................................................................4

III. THE PARTIES AND RELEVANT NON-PARTIES .........................................................6

IV. DEFENDANTS' WRONGFUL CONDUCT ....................................................................12

A. WaMu's Business and Transformation Into a Predatory Lender .................................12

B. WaMu Artificially Inflated Loan Volumes by Secretly Abandoning Its Purportedly Prudent Underwriting Procedures and Falsely Inflating Appraisals .......14

C. WaMu Forced Appraisers to Falsely Inflate Home Values In Violation of Federal Regulations ..................................................................................................................21

D. As a Result of WaMu’s Undisclosed, Reckless Lending Practices and Falsification of Appraisal Values, WaMu’s Financial Statements Were False and Misleading ...................................................................................................................24

E. Defendants Disregarded WaMu Risk Management’s Internal Reports .......................27

F. The Role of the Audit and Finance Committees of the Board of Directors .................28

G. The Role of the Initial Purchaser Defendants..............................................................30

V. DEFENDANTS' FALSE AND MISLEADING STATEMENTS.....................................36

A. Plainiffs Reasonably Relied on Defendants' False and Misleading Statements ..........36

B. False and Misleading Assurances to Investors Prior to the 2006 Offering..................39

C. The False and Misleading 2006 Offering Documents .................................................46

D. False and Misleading Assurances to Investors Prior to the 2007 Offering .................50

E. The False and Misleading 2007 Offering Documents .................................................59

VI. THE RISKS CONCEALED BY DEFENDANTS' FALSE AND MISLEADING STATEMENTS MATERIALIZE AS WAMU COLLAPSES AND THE TRUTH IS REVEALED ......................................................................................................................64

VII. PLAINTIFFS' INJURY .....................................................................................................69

VIII. CAUSES OF ACTION......................................................................................................69

IX. PRAYER FOR RELIEF ....................................................................................................78

X. JURY TRIAL DEMAND..................................................................................................79


1 SECOND AMENDED COMPLAINT Dietrich Siben Thorpe LLP No. 2:08-md-1919 MJP 2173 Salk Avenue, Suite 250, Carlsbad, CA 92008

No. C09-1756 MJP Tel.: (760) 579-7368 Fax: (760) 579-7369

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Plaintiffs, Flaherty & Crumrine Preferred Income Fund Incorporated, Flaherty & Crumrine

Preferred Income Opportunity Fund Incorporated, Flaherty & Crumrine/Claymore Preferred Securities

Income Fund Incorporated, Flaherty & Crumrine/Claymore Total Return Fund Incorporated, and

Flaherty & Crumrine Investment Grade Fixed Income Fund, make the following allegations based on

the investigation conducted by Plaintiffs’ counsel, including a review and analysis of Washington

Mutual, Inc.’s filings with the United States Securities and Exchange Commission (the “SEC”), news

articles and other media reports, analysts’ reports, and other matters of public record.1

I. SUMMARY OF THE ACTION

1. This is an action arising out of Defendants’ materially false and misleading statements

made in connection with the offerings of unregistered Washington Mutual Preferred Funding Trust

securities issued on or about March 7, 2006 (CUSIP 93934WAA3) (the “2006 Offering”) and October

25, 2007 (CUSIP 93936TAA8) (the “2007 Offering”).

2. The 2006 Offering involved the sale of $1.25 billion of Washington Mutual Preferred

Funding Trust I Fixed-to-Floating Rate Perpetual Non-cumulative Trust Securities automatically

exchangeable in specified circumstances into depository shares representing preferred stock of

Washington Mutual, Inc. (the “2006 Preferred Trust Securities”).

3. The 2007 Offering involved the sale of $1 billion of Washington Mutual Preferred

Funding Trust IV Fixed-to-Floating Rate Perpetual Non-cumulative Trust Securities automatically

exchangeable in specified circumstances into depository shares representing preferred stock of

Washington Mutual, Inc. (the “2007 Preferred Trust Securities”).

4. Plaintiffs purchased the 2006 and 2007 Preferred Trust Securities in reliance upon false

and misleading statements in the offering documents provided to them by Defendants (the “Offering

1 Plaintiffs replead claims dismissed without prejudice in the Court’s Order Granting In Part and Denying In Part Defendants’ Motions to Dismiss, dated June 21, 2010. Plaintiffs removed from the Second Amended Complaint those claims that Plaintiffs earlier dismissed without prejudice, as well as their claim for violation of § 18 of the Securities Exchange Act of 1934, which the Court dismissed with prejudice in its June 21 Order, and reserve their rights to reallege or appeal such claims.



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Circulars”), which also expressly incorporated by reference additional false and misleading statements

made in Washington Mutual’s filings with the SEC, among others.

5. Plaintiffs assert two distinct sets of claims against Defendants; negligence based claims

and claims which sound in fraud. Plaintiffs allege the Officer Defendants, as defined herein, knowingly

participated in a fraudulent scheme to defraud investors such as Plaintiffs. Plaintiffs allege the Director

Defendants and the Initial Purchaser Defendants, as defined herein, participated in the dissemination of

fraudulent statements without awareness of the actual fraud.

6. Washington Mutual was a savings and loan, the primary focus of its business included

the origination, management and servicing of home loans, including subprime loans, home equity lines

of credit, adjustable rate loans, and other traditional and non-traditional loan products. The Offering

Circulars, and documents incorporated therein, falsely and misleadingly represented critical elements of

Washington Mutual’s business practices and financial condition, which had a material impact upon

Washington Mutual’s creditworthiness and the suitability of Plaintiffs’ investment in the Preferred

Trust Securities.

7. As set forth herein, the Offering Circulars stated, among other things, Washington

Mutual (i) adhered to prudent underwriting standards; (ii) utilized independent, fair appraisals; (iii)

encouraged proactive risk management; (iv) maintained effective internal controls; and (v) reported

financial results in compliance with Generally Accepted Accounting Principles (“GAAP”). As the

Officer Defendants knew, and as would be clear to the Director Defendants and Initial Purchaser

Defendants upon conducting any reasonable investigation into the veracity of the statements contained

in the Offering Circulars, these statements were false and misleading.

8. In truth, Washington Mutual had secretly abandoned its purportedly prudent

underwriting standards and was fraudulently inflating appraisals in order to artificially inflate loan

volumes and publicly reported earnings. According to the accounts of numerous percipient witnesses,

including former Washington Mutual employees, as summarized in The New York Times well after the

Relevant Period: “At WaMu, getting the job done meant lending money to nearly anyone who asked



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for it . . . .” As one former appraiser for Washington Mutual recounted: “If you were alive, they would

give you a loan. Actually, I think if you were dead, they would still give you a loan.”2

9. Throughout the Relevant Period, it was critical that Washington Mutual take adequate

reserves for expected loan losses. As a result of Washington Mutual secretly abandoning prudent

underwriting standards, thereby providing loans to persons with inferior credit quality that could be

expected to default in significant numbers, it was imperative that Washington Mutual substantially

increase the Company’s allowance for loan losses accordingly. In violation of accounting regulations,

and to conceal the poor credit quality of the Company’s loan portfolio, Washington Mutual did not

sufficiently increase its loan loss allowance. As a result, the Company’s reported financial statements,

as incorporated by reference in the Offering Circulars, were false and misleading.

10. Defendants’ statements concerning Washington Mutual were material to Plaintiffs’

investment decision. As set forth in the Offering Circulars, payment of the interest and principal on

Plaintiffs’ investment in the Preferred Trust Securities was subject to the financial condition of both

Washington Mutual, Inc. and Washington Mutual Bank.

11. Defendants’ false and misleading statements concealed Washington Mutual’s true

financial condition and creditworthiness and, by doing so, artificially inflated the price of the Preferred

Trust Securities. Defendants’ false and misleading statements concealed factors concerning the

material risk that Washington Mutual’s financial condition would be materially weakened and/or

Washington Mutual would be rendered bankrupt as a result of its undisclosed risky lending practices,

false appraisals and inadequate reserves for loan losses.

12. Washington Mutual’s true financial condition and business practices began to come to

light only days after Defendants completed the 2007 Offering on or about October 25, 2007. On

November 1, New York Attorney General Andrew Cuomo revealed Washington Mutual orchestrated a

systemic fraud to illegally inflate appraisals used in its loan origination process.

2 All emphasis is added unless otherwise noted. References to the “Relevant Period” generally refer to 2004 through 2007.



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13. By December 2007, the SEC launched an inquiry into Washington Mutual’s public

disclosures concerning its lending practices and its accounting for loans. The SEC investigation was

followed up by a criminal investigation, in which a grand jury has been convened.

14. As more evidence of Washington Mutual’s undisclosed risky lending practices and

appraisal fraud came to light, analysts realized the Company had tens of billions of dollars in bad

mortgage loans on its balance sheet. By April 2008, Goldman, Sachs & Co.’s analyst recommended

investors short Washington Mutual stock as the bank had as much as $23 billion in bad loans that it had

not yet accounted for. In effect, Washington Mutual was insolvent.

15. By September, Washington Mutual could no longer conceal its losses from the massive

number of bad loans it extended throughout 2004-2007. On September 25, 2008, the Federal Deposit

Insurance Corporation (“FDIC”) took control of Washington Mutual. According to Lawrence J. White,

professor of economics at the NYU Stern School of Business: “As had been feared, WaMu really did

hold a slew of poorly performing mortgages whose nominal value greatly exceeded their market value.”

Confirming that Washington Mutual had extended loans to borrowers with no ability to repay, upon

purchasing Washington Mutual Bank from the FDIC the same day of its seizure, JP Morgan

immediately marked down the value of Washington Mutual’s loans by $31 billion.

16. On September 26, 2008, as a result of the FDIC’s takeover of Washington Mutual Bank

and the bankruptcy of Washington Mutual, Inc., Plaintiffs’ investments in the Preferred Trust Securities

automatically converted into preferred stock of Washington Mutual, Inc., and thereby rendered

worthless.

II. JURISDICTION AND VENUE

17. This action was originally filed in the Superior Court for the State of California, County

of Los Angeles. On November 2, 2009, Defendants filed a Notice of Removal in the United States

District Court, Central District of California.

18. On December 10, 2009, the Judicial Panel on Multidistrict Litigation entered an order

coordinating this action solely for pre-trial proceedings in the Western District of Washington. The

case is expected to return to the Central District of California for trial.



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19. This Court has jurisdiction over the subject matter of this action pursuant to § 27 of the

Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78aa, because Plaintiffs assert

claims arising under §§ 10(b), 18 and 20(a) of the Exchange Act. The Court also has supplemental

jurisdiction pursuant to 28 U.S.C. § 1367.

20. Each Defendant has minimum contacts with California and/or conducts business in

California sufficient to permit the exercise of jurisdiction. Each of the Initial Purchaser Defendants

conducts substantial, continuous, and systematic business in and/or maintains offices within California.

Each Individual Defendant is a resident of California, has property in California, and/or has otherwise

purposefully availed himself or herself of benefits from California. Each Defendant has caused or

directed acts to occur in Los Angeles County in which the Plaintiffs’ claims arise. Prior to its

bankruptcy, Washington Mutual conducted a significant portion of its business in California,

maintained offices in California, and raised financing from residents of California. Among other

things, Washington Mutual’s subprime origination unit was at all relevant times located within Los

Angeles County. The exercise of jurisdiction over the Defendants is consistent with traditional notions

of fair play and substantial justice.

21. This action is not preempted by the Securities Litigation Uniform Standards Act of 1998

(“SLUSA”). This action is brought on behalf of individual Plaintiffs, and is not a class action or a mass

action on behalf of 50 or more Plaintiffs. Further, the securities purchased by Plaintiffs are not covered

securities as defined by SLUSA.

22. Venue is proper in this District as many of the acts and transgressions constituting the

violations of the law alleged herein occurred in this District, and pursuant to the transfer order by the

United States Judicial Panel on Multidistrict Litigation. Venue is proper in the Central District of

California because many of the violations of law complained of herein occurred in Los Angeles

County, including the dissemination of materially false and misleading statements complained of

herein.

23. The amount of damages sued for is in excess of the jurisdictional minimum of this

Court.



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III. THE PARTIES AND RELEVANT NON-PARTIES

24. Non-party Flaherty & Crumrine Incorporated is an investment adviser specializing in the

management of preferred securities. Founded in 1983, Flaherty & Crumrine Incorporated is a

California corporation headquartered in Pasadena, California. Flaherty & Crumrine Incorporated

manages portfolios for publicly traded closed-end funds open to individual investors, and for a variety

of additional clients, including institutional investors and non-profit foundations. Flaherty & Crumrine

Incorporated is the investment adviser on behalf of Plaintiffs Flaherty & Crumrine Preferred Income

Fund Incorporated, Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated, Flaherty &

Crumrine/Claymore Preferred Securities Income Fund Incorporated, and Flaherty &

Crumrine/Claymore Total Return Fund Incorporated, all of which are closed-end management

investment companies, incorporated in Maryland with their principal place of business in California,

and trade publicly on the New York Stock Exchange. Flaherty & Crumrine Incorporated is also the

portfolio manager for Plaintiff Flaherty & Crumrine Investment Grade Fixed Income Fund, a closed-

end management investment trust established under the laws of the Province of Alberta, Canada, that

trades publicly on the Toronto Stock Exchange. The investment companies and investment trust

described herein are collectively referred to as the “Flaherty & Crumrine Funds” and “Plaintiffs,”

unless otherwise specified. Flaherty & Crumrine Incorporated, as the investment adviser/portfolio

manager for the Flaherty & Crumrine Funds, read and relied upon the Offering Circulars and the

documents incorporated by reference, as well as analyst reports and credit rating agencies’ reports

concerning Washington Mutual that repeated and/or relied upon Defendants’ false and misleading

statements. In reliance on Defendants’ material misrepresentations and omissions, as described below,

Plaintiffs made investment decisions and purchased the 2006 and 2007 Preferred Trust Securities in

California and suffered substantial losses caused by Defendants’ wrongful conduct.

25. Non-party Washington Mutual, Inc. is a Washington corporation, with its headquarters

located at 1301 Second Avenue, Seattle, Washington 98101. During the Relevant Period, Washington

Mutual, Inc. was a savings and loan holding company with two banking subsidiaries and numerous

non-bank subsidiaries. Washington Mutual, Inc.’s wholly owned subsidiaries included, among others,



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Washington Mutual Bank, Washington Mutual Preferred Funding LLC, and Long Beach Mortgage.

Long Beach Mortgage was Washington Mutual, Inc.’s subprime loan origination unit, located in

Anaheim, California. Consistent with the Company’s SEC filings, Plaintiffs refer to Washington

Mutual, Inc. and its subsidiaries collectively herein as “WaMu,” the “Company” or “Washington

Mutual,” unless otherwise specified.

26. Defendant Kerry K. Killinger (“Killinger”) was the Company’s Chief Executive Officer

from 1990 until his departure in September 2008 on the same date that WaMu signed a memorandum of

understanding with the Office of Thrift Supervision (“OTS”) requiring the Company to upgrade its risk

management and compliance. Killinger also served as a member of the Company’s Board of Directors

(the “Board”) from 1988 and as Chairman of the Board from 1991 until June 30, 2008. Killinger has

also served as a member of the Company’s Executive Committee since its creation in 1990, and as

Chair of the Corporate Development Committee since its creation in 1997. Killinger signed certain of

the Company’s false and misleading filings with the SEC, participated in drafting and/or approved the

Company’s false and misleading press releases and Offering Circulars, met with analysts and media to

discuss the Company, and participated in the Company’s conference calls with analysts and investors.

Killinger received over $33 million in compensation from 2005 through 2007, including $7 million in

bonus compensation, largely based on WaMu achieving short-term financial metrics, such as increased

loan volume and earnings per share.

27. Defendant Thomas W. Casey (“Casey”) was Executive Vice President and Chief

Financial Officer of WaMu since October 2002 through the Relevant Period. As a member of the

Executive Committee since 2002, Casey was responsible for the Company’s corporate finance, strategic

planning and investor relations functions. Casey signed certain of the Company’s false and misleading

filings with the SEC, participated in drafting and/or approved the Company’s false and misleading press

releases and Offering Circulars, met with analysts and media to discuss the Company, and participated

in the Company’s conference calls with analysts and investors. Casey received over $11 million in total

compensation, including at least $3 million in bonus compensation, from 2005 through 2007, largely



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based on WaMu achieving short-term financial metrics, such as increased loan volume and earnings per

share.

28. Defendant Stephen J. Rotella (“Rotella”) was WaMu’s President and Chief Operating

Officer since January of 2005, responsible for overseeing, among other things, the Company’s retail

banking and home loans lines of business. Rotella has also served on the Executive Committee since

joining the Company in 2005 through the Relevant Period and, from March 2005 to August 2005, he

served as the Acting Head of the Home Loans Group. As detailed herein, Rotella was personally

responsible for halting WaMu’s credit risk department’s efforts to tighten lending standards, and

personally created a “culture of fear” by pressuring credit officers to approve non-compliant loans.

Rotella participated in drafting and/or approved the Company’s false and misleading SEC filings, press

releases and Offering Circulars, met with analysts and media to discuss the Company, and participated

in the Company’s conference calls with analysts and investors. From 2005 through 2007, Rotella

received over $29.7 million in total compensation, including at least $6.9 million in bonus

compensation, largely based on WaMu achieving short-term financial metrics, such as increased loan

volume and earnings per share.

29. Defendant Ronald J. Cathcart (“Cathcart”) served as Executive Vice President and Chief

Enterprise Risk Officer of WaMu from December 2005 until April 2008. In this position, Cathcart was

responsible for overseeing the credit, market, operational, and compliance risk functions for the

Company. Cathcart also served as a member of the Executive Committee from December 2005 to

April 2008. Cathcart participated in drafting and/or approved the Company’s false and misleading SEC

filings, press releases and Offering Circulars, met with analysts and media to discuss the Company, and

participated in the Company’s conference calls with analysts and investors. During 2007, Cathcart

received at least $1.9 million in compensation, largely based on WaMu achieving short-term financial

metrics, such as increased loan volume and earnings per share.

30. Defendant David C. Schneider (“Schneider”) was Executive Vice President and

President of Home Loans from August 2005, responsible for overseeing all aspects of the Company’s

home lending operations. Schneider was a member of the Executive Committee since August 2005



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through the rest of the Relevant Period. Schneider was head of WaMu’s major subprime lending arm,

Long Beach Mortgage, where he oversaw the underwriting process in detail. Schneider participated in

drafting and/or approved the Company’s false and misleading SEC filings, press releases and Offering

Circulars, met with analysts and media to discuss the Company, and participated in the Company’s

conference calls with analysts and investors. In 2005, Schneider received $2.3 million in total

compensation, including at least $492,000 in bonus compensation, largely based on WaMu achieving

short-term financial metrics, such as increased loan volume and earnings per share.

31. Defendants Killinger, Casey, Cathcart, Rotella, and Schneider are referred to herein

collectively as the “Officer Defendants.”

32. Defendant Anne V. Farrell (“Farrell”) was as a director of the Company from 1994

through April 2008. Farrell served on the Finance Committee between 2004 and 2008.

33. Defendant Stephen E. Frank (“Frank”) was a director of the Company since 1997

through the Relevant Period. Frank served on the Audit Committee from 1997 to 2008, as well as the

Finance Committee between 2001 and 2008.

34. Defendant Thomas C. Leppert (“Leppert”) was a director of the Company since

September 2005 through the rest of the Relevant Period. Leppert served on the Audit Committee

between 2005 and 2008.

35. Defendant Charles M. Lillis (“Lillis”) was a director of the Company since June 2005

through the rest of the Relevant Period. Lillis served on the Finance Committee between 2005 and

2008.

36. Defendant Phillip D. Matthews (“Matthews”) was a director of the Company since 1998

through the Relevant Period. Matthews served on the Audit Committee between 2001 and 2007, as

well as the Finance Committee between 2001 and 2004.

37. Defendant Regina Montoya (“Montoya”) was a director of the Company since April

2006 through the rest of the Relevant Period. Montoya served on the Finance Committee between 2006

and 2008.



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38. Defendant Michael K. Murphy (“Murphy”) was a director of the Company since 1985

through the Relevant Period. Murphy served on the Audit Committee between 2004 and 2008, as well

as the Finance Committee between 2001 and 2008.

39. Defendant Margaret Osmer McQuade (“Osmer McQuade”) was a director of the

Company since 2002 through the Relevant Period. Osmer-McQuade served on the Finance Committee

between 2002 and 2008.

40. Defendant Mary E. Pugh (“Pugh”) was a director of the Company between 1999 and

April 2008. Pugh served on the Finance Committee between 2001 and 2008.

41. Defendant William G. Reed, Jr. (“Reed”) was a director of the Company since 1970

through the Relevant Period. Reed served on the Audit Committee between 1996 and 2008, as well as

the Finance Committee between 2004 and 2008. Reed was also a director of Washington Mutual Bank.

42. Defendant Orin C. Smith (“Smith”) was a director of the Company since July 2005

through the rest of the Relevant Period. Smith served on the Audit Committee between 2005 and 2008,

as well as the Finance Committee in 2008.

43. Defendant James H. Stever (“Stever”) was as a director of the Company since 1991

through the Relevant Period.

44. Defendant Willis B. Wood, Jr. (“Wood”) served as a director of the Company between

1997 and April of 2006.

45. Defendants Farrell, Frank, Leppert, Lillis, Matthews, Montoya, Murphy, Osmer

McQuade, Pugh, Reed, Smith, Stever, and Wood, are referred to herein collectively as the “Director

Defendants.” The Director Defendants are alleged to have, among other things, (i) negligently

authorized the sale of the Preferred Trust Securities pursuant to false and misleading Offering Circulars;

(ii) negligently made false and misleading statements included in the Offering Circulars, including

statements contained in WaMu’s Form 10-K filings signed by the Director Defendants and incorporated

by reference in the Offering Circulars; and (iii) acted as control persons of the Company at times in

which the Company, through the acts of the Officer Defendants, defrauded Plaintiffs.



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46. The Officer Defendants and the Director Defendants are collectively referred to as the

“Individual Defendants.”

47. Defendant Goldman, Sachs & Co. was an initial purchaser in the Offerings, soliciting

and selling the Preferred Trust Securities directly to Plaintiffs. Plaintiffs stand in direct contractual

privity with Goldman, Sachs & Co. Goldman, Sachs & Co. is a subsidiary of The Goldman Sachs

Group, Inc., a leading global investment banking, securities and investment management firm that

provides a wide range of services worldwide to a substantial and diversified client base that includes

corporations, financial institutions, governments and high-net-worth individuals. Goldman Sachs

Group, Inc., and its subsidiaries that are under its control, including Goldman, Sachs & Co., operate as

a single integrated enterprise and are referred to herein collectively as “Goldman Sachs,” as Goldman

Sachs does in its SEC filings. Goldman, Sachs & Co. is a citizen of Delaware and New York, with its

principal place of business in New York and its state of incorporation in Delaware.

48. Defendant Credit Suisse Securities (USA) LLC was an initial purchaser in the Offerings,

soliciting and selling the Preferred Trust Securities directly to investors. Credit Suisse Securities (USA)

LLC is a subsidiary of Credit Suisse Group, a bank headquartered in Zurich, Switzerland. Credit Suisse

Group, and its subsidiaries that are under its control, including Credit Suisse Securities (USA) LLC,

operate as a single integrated enterprise and are referred to herein collectively as “Credit Suisse,” as

Credit Suisse does in its SEC filings. Credit Suisse provides investment banking, private banking, and

asset management services to its clients around the world. Credit Suisse Securities (USA) LLC is a

citizen of Delaware and New York, with its principal place of business in New York and its state of

incorporation in Delaware.

49. Defendant Morgan Stanley & Co. Incorporated was an initial purchaser in the Offerings,

soliciting and selling the Preferred Trust Securities directly to investors. Morgan Stanley & Co.

Incorporated is a subsidiary of Morgan Stanley, a global financial services firm that, through its

subsidiaries and affiliates, provides its products and services to a large and diversified group of clients

and customers, including corporations, governments, financial institutions and individuals. Morgan

Stanley, and its subsidiaries that are under its control, including Morgan Stanley & Co., operate as a



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single integrated enterprise and are referred to herein collectively as “Morgan Stanley,” as Morgan

Stanley does in its SEC filings. Morgan Stanley & Co. Incorporated is a citizen of Delaware and New

York, with its principal place of business in New York and its state of incorporation in Delaware.

50. Defendants Goldman Sachs, Credit Suisse, and Morgan Stanley are collectively referred

to herein as the “Initial Purchasers” or “Initial Purchaser Defendants.” The Initial Purchasers are

alleged to have, among other things, (i) negligently sold the Preferred Trust Securities pursuant to false

and misleading Offering Circulars; (ii) negligently drafted and approved the false and misleading

Offering Circulars; and (iii) negligently failed to perform reasonable due diligence with respect to the

Offerings.

51. The Individual Defendants and the Initial Purchaser Defendants are collectively referred

to herein as “Defendants.” In connection with the issuance, offer, and sale of the Preferred Trust

Securities, Defendants, and each of them, were responsible for the authorization, preparation and/or

distribution of the Offering Circulars, and the false and misleading statements incorporated by reference

therein, at issue in this action.

IV. DEFENDANTS’ WRONGFUL CONDUCT

A. WaMu’s Business and Transformation Into a Predatory Lender

52. Prior to its collapse, WaMu was a savings and loan. WaMu’s business included the

origination, management and servicing of home loans, including subprime loans, home equity lines of

credit, adjustable rate loans, and other traditional and non-traditional loan products.

53. Loans originated by WaMu were retained by the Company as an investment, securitized,

or sold to third-party investors.

54. When the Company securitized loans, the loans were sold to a qualifying special-purpose

entity (“QSPE”), typically a trust. The QSPE then issued securities, commonly referred to as mortgage-

backed securities, secured by future cash flows on the sold loans. The QSPE sold the mortgage-backed

securities to investors, with the proceeds paid to WaMu.

55. When WaMu sold or securitized loans, WaMu provided purchasers of its mortgage loans

with representations and warranties regarding the underwriting and appraisal standards the Company



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followed in originating the loans. If a purchaser of the mortgage loans determined that WaMu violated

its representations and warranties, or the loan suffered an early default, the purchaser could require

WaMu to repurchase the mortgage loan or otherwise make the purchaser whole.

56. Compliance with underwriting and appraisal standards, and the credit quality of the loans

WaMu originated, were critically important to the Company’s financial condition. WaMu was

obligated to repurchase or otherwise compensate purchasers of loans originated by WaMu that suffered

an early default or that did not comply with stated underwriting/appraisal standards. In addition, WaMu

retained for investment significant numbers of loans it originated.

57. At all relevant times, as Defendants knew, the success of WaMu’s business and the

Company’s creditworthiness depended in substantial part upon the Company originating residential

mortgage loans that (i) complied with the Company’s underwriting and appraisal standards, (ii)

borrowers had the ability and intent to repay, and (iii) were backed by adequate collateral in the event a

borrower could not repay the loan.

58. Prior to the Relevant Period, WaMu was a conservatively run bank that properly

underwrote loans to borrowers who could afford to make repayments. Beginning in 2003, WaMu’s

senior executives, including the Officer Defendants, secretly morphed WaMu into a predatory lender

pushing loans that borrowers could ill afford. As The Seattle Times reported:

For decades, Washington Mutual lived up to its image as a staid, straight-laced Seattle institution. Its motto: “The Friend of the Family.”

By the time WaMu made history last year as the nation’s biggest bank failure,

it bore no resemblance to this homey image. What few people knew was that bank executives crafted a radical new

business strategy in 2003 that was intended to boost profits. The new WaMu used huge sales commissions and misleading marketing to hawk risky and overpriced loans to borrowers.

In short, WaMu became one of the nation’s biggest predatory lenders.



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B. WaMu Artificially Inflated Loan Volumes by Secretly Abandoning its Purportedly Prudent Underwriting Procedures and Falsely Inflating Appraisals

59. Throughout the Relevant Period prior to and during the Offerings, WaMu reported

strong revenues and earnings by regularly – but secretly – disregarding its own underwriting policies

and procedures, and artificially inflating home price appraisals, in order to close risky loans to

borrowers with no reasonable expectation of repaying the loans.

60. Former WaMu employees personally witnessed the Company’s purposeful disregard for

underwriting standards, and appraisal manipulation, to artificially inflate loan volume and distort the

Company’s publicly reported financial results. For example, an October 13, 2008, ABC News article

entitled WaMu Insiders Claim Execs Ignored Warnings, Encouraged Reckless Lending recounts that

WaMu lenders and underwriters told ABC “they felt pressure to sell as many loans as possible and push

risky but lucrative loans onto all borrowers.” According to the article, based upon the accounts of

numerous former WaMu employees, WaMu marginalized and otherwise ignored risk managers, the

“gatekeepers” who were supposed to safeguard WaMu from incurring undue lending risks: “With no

gatekeeper, former WaMu lenders and underwriters described the companywide loan approval process

as ‘very scary.’ They claimed there was an ‘abandonment of basic tenants [sic] of underwriting and

risk’ and said loans were made to anyone . . . .”

61. According to former WaMu home mortgage underwriters, WaMu’s most senior officers

purposefully pushed the Company to make ever more risky loans for the purpose of reporting loan

volume in line with Wall Street’s expectations, even at the risk of WaMu’s long-term viability:

Dorothea Larkin, a former WaMu senior underwriter, told ABC News that she was uncomfortable with what she said were loose lending standards. “It was all about

making the numbers, closing all the loans that came through the door,” she said -- loans like higher risk option arms and subprime.

WaMu’s underwriters were told not to question whether or not a home loan

should have been approved, but just to ensure certain lending procedures were followed, according to Larkin. She called this hands-off underwriting approach “unusual.”

Larkin described a bank eager to loan money at any long-term cost. For example, she said WaMu lent millions to a borrower even after he defaulted on a



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multimillion dollar home construction project. “We just kept giving him money,” she said, “and I’m sure that’s one of the foreclosures WaMu is still sitting on.”

Larkin blamed senior management, and like George, claimed that she and

many others saw it coming.

“The executives are the ones who made the decision to take WaMu in this direction,” she said. “Too many of the middle folks like myself said this is wrong, we’re making loans we shouldn’t be making, we’re qualifying borrowers who we

know are going to struggle to pay the loan back.”

62. Further, according to the October 13, 2008 ABC News article, WaMu senior

management, including the Officer Defendants, “willfully ignored” risk managers’ repeated warnings:

Dale George, a former WaMu senior risk manager who spoke exclusively to ABC News, explained that risk managers are like the brakes on a car. WaMu executives “took the brakes off and drove over a cliff,” he said.

George described how he said senior management willfully ignored warnings

from its own “gatekeeper,” the bank’s risk management group. He and other company insiders claimed that risk managers were brushed aside while the business

units adopted a strategy of dangerous and reckless lending that eventually took down the company.

George, an MBA with three decades of experience in banking and risk

management, said that the WaMu he joined in 2003, “was all about good old-fashioned banking.” He described a company with a rigorous risk management program and sensible loan production. It was a bank he said he was proud to work at.

But as the housing bubble swelled and high-risk mortgage lending became

more lucrative, the bank changed, according to George. WaMu began approving as

many loans as it could. “Everything was refocused on loan volume, loan volume, loan volume,” he told ABC News.

And to further boost profit, WaMu increased its share of higher-risk subprime

and option adjustable rate loans, known as “option arms,” said George. These loans offer low introductory rates and let borrowers defer interest payments, but can strap them with significantly higher interest rates and payments in the future.

George said WaMu was competing with subprime giant Countrywide, which

also imploded. “They were in a neck-and-neck race” and “both went off the cliff together, one after the other,” he said. This high-risk, high-return game turned a century-old traditional bank that made steady but modest returns into “just an arm of Wall Street,” said George.

* * *



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To those wondering why no one saw the risks, George responded: “We did . . . WaMu had all these great, experienced risk managers around. But they were ignored.”

63. WaMu’s risk managers formally warned WaMu’s executives, including the Officer

Defendants, that the Company’s new loan products were particularly risky thereby emphasizing the

necessity that the Company abide by its underwriting standards and assess the adequacy of its reserves

for bad loans. According to ABC News, “In a September 2005 confidential ‘Corporate Risk Oversight

Report’ obtained exclusively by ABC News, WaMu’s own risk management team found that the future

performance of popular loans like Option Arms was ‘untested’ and created ‘major and growing risk

factors in our portfolio.’” The Corporate Risk Oversight Report, which was provided to the Officer

Defendants, identified deficiencies in WaMu’s internal controls and computer modeling that the

Company never properly addressed.

64. According to Dale George, a senior credit-risk officer in Irvine, California, WaMu’s

chief compliance and risk-oversight officer made it clear in Fall 2005: “They weren’t going to have

risk management get in the way of what they wanted to do, which was basically lend the customers

more money.”

65. By no later than Fall 2005, WaMu senior executives, including the Officer Defendants,

actively discouraged WaMu’s risk managers from performing their responsibilities, purposefully

dissuading risk managers from raising meaningful issues or negative findings.

66. Shortly after the ABC News article published in October 2008, The New York Times

published an expose on December 28, 2008, titled Saying Yes, WaMu Built Empire on Shaky Loans.

According to The New York Times’ interviews with former WaMu employees, by no later than 2005

WaMu had abandoned appropriate and customary underwriting standards in order to artificially inflate

loan volume. According to The New York Times, “During Mr. Killinger’s tenure, WaMu pressed sales

agents to pump out loans while disregarding borrowers’ incomes and assets, according to former

employees.” Similarly, according to The New York Times’ article, “WaMu pressured appraisers to

provide inflated property values that made loans appear less risky, enabling Wall Street to bundle

them more easily for sale to investors.”



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67. According to John D. Parson, a former supervisor at a WaMu loan processing center

from 2002 to 2005, interviewed for The New York Times article, he “was accustomed to seeing baby

sitters claiming salaries worthy of college presidents, and school teachers with incomes rivaling

stockbrokers’. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank

was known, was all about saying yes.”

68. According to The New York Times’ expose, WaMu’s undisclosed risky lending practices

were ubiquitous and unparalleled:

At WaMu, getting the job done meant lending money to nearly anyone who asked for it — the force behind the bank’s meteoric rise and its precipitous collapse this year in the biggest bank failure in American history.

On a financial landscape littered with wreckage, WaMu, a Seattle-based bank

that opened branches at a clip worthy of a fast-food chain, stands out as a singularly

brazen case of lax lending. . . . Interviews with two dozen former employees, mortgage brokers, real estate

agents and appraisers reveal the relentless pressure to churn out loans that produced such results. While that sample may not fully represent a bank with tens of thousands of people, it does reflect the views of employees in WaMu mortgage operations in

California, Florida, Illinois and Texas.

69. Contrary to its public statements, as set forth infra, WaMu did not underwrite loans in an

effort to ensure the loan would be repaid or that the borrower had the capacity to repay the loan.

According to The New York Times article:

“It was the Wild West,” said Steven M. Knobel, a founder of an appraisal company, Mitchell, Maxwell & Jackson, that did business with WaMu until 2007. “If

you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan.”

* * *

“It was a disgrace,” said Dana Zweibel, a former financial representative at a

WaMu branch in Tampa, Fla. “We were giving loans to people that never should have had loans.”

If Ms. Zweibel doubted whether customers could pay, supervisors directed her

to keep selling, she said.



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“We were told from up above that that’s not our concern,” she said. “Our concern is just to write the loan.”

70. WaMu’s scheme to artificially inflate loan volumes by disregarding its own and

customary underwriting procedures was hidden from investors. As The New York Times reported:

For those who placed their faith and money in WaMu, the bank’s implosion came as a shock.

“I never had a clue about the amount of off-the-cliff activity that was going on at Washington Mutual, and I was in constant contact with the company,” said Vincent Au, president of Avalon Partners, an investment firm. “There were people at WaMu that orchestrated nothing more than a sham or charade. These people broke every fundamental rule of running a company.”

71. According to WaMu’s former employees, as reported in The New York Times, the

scheme to inflate loan volume was directed by WaMu’s senior management. “[P]ressure to keep

lending emanated from the top, where executives profited from the swift expansion — not least, Kerry

K. Killinger, who was WaMu’s chief executive from 1990 until he was forced out in September.”

72. Defendant Rotella also directed the scheme to inflate loan volume and personally acted

to hamper the Company’s credit risk department in its efforts to prevent risky lending practices. As

reported in a November 4, 2008 article in The Seattle Times, according to “several high-level former

WaMu executives” Rotella “pushed for more mortgages, including subprime and other risky loans, and

ignored warnings from colleagues who said the company needed to be more careful in its lending.”

Further, according to The Seattle Times article:

When Rotella arrived after leading JPMorgan’s residential-lending business, WaMu had been making subprime and other risky loans for years.

Even then, people in its credit-risk department, which controls how tight or

loose lending standards are, thought WaMu’s mortgage business focused too much on driving sales and not enough on limiting risks, said two former executives.

They had just begun to overhaul that area, adding more controls to the

appraisal process, improving loan underwriting standards and creating more realistic mortgage pricing. Within weeks of his arrival, Rotella halted that overhaul. “It was abandoned,” said one executive. “The part that was supposed to reverse risk was reversed.”



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According to yet another longtime executive, Rotella became involved more than most top bank executives when the mortgage sales staff complained about applications that were declined.

More than once, Rotella pressured credit officers to reverse their decisions,

this executive said. “Steve Rotella created a culture of fear.” While Rotella pushed for sales, former executives said, the credit-risk

department that was supposed to balance that impulse was in disarray. WaMu had five chief credit officers during the less than four years Rotella

was at the bank. Insiders who cautioned that WaMu needed to pay more attention to risk were

“looked at as heretics for talking about the need for better disclosures and concerns about option ARMs” and other high-risk mortgages, one former executive said.

According to another former executive, Rotella hassled the bank’s internal

reviewers, whose job was to make sure WaMu followed its own policies on lending, deposit accounts and other matters, and to report problems to top executives and the board.

“Most presidents say thanks for bringing this to my attention, we’re going to

fix this fast,” he said. With Rotella, “these people had to have a very thick skin. He would say,

‘You need to be better qualified, you’re wrong.’”

73. Percipient witnesses’ accounts of the Officer Defendants’ purposeful disregard for risk

management and compliance is corroborated by WaMu’s own actions after-the-fact. WaMu’s Board

simultaneously fired Defendant Killinger and promised its chief regulator it would bolster risk

management and compliance. According to a September 8, 2008 article in The New York Times titled

Chief Forced Out at Washington Mutual, WaMu announced after firing Defendant Killinger it also

“had signed a memorandum of understanding with its chief regulator, the Office of Thrift Supervision,

that requires improvement in its risk management and compliance.”

74. According to The Seattle Times, “interviews with former WaMu executives and

employees, along with government and internal company documents, reveal” that WaMu’s “executives

chart[ed] a reckless course that doomed the bank.”



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75. According to former employees, as reported by The Seattle Times:

• In its headlong pursuit of growth, WaMu systematically dismantled or weakened the internal controls meant to prevent the bank from taking on too much risk — the very standards and practices that had helped it grow in the first place. • WaMu’s riskiest loans raked in money from high fees, but because the bank skimped on making sure borrowers could repay them, they eventually failed at disastrously high rates. As loans went bad, they sucked massive amounts of cash that WaMu needed to stay in business. • WaMu’s subprime home loans failed at the highest rates in the nation. Foreclosure rates for subprime loans made from 2005 to 2007 — the peak of the boom — were calamitous. In the ten hardest-hit cities, more than a third of WaMu subprime loans went into foreclosure.

76. As The Seattle Times reported, according to former employees, WaMu “pressured

appraisers to inflate home values [and] told its underwriters to find ways to make loans ‘work,’

regardless of WaMu’s own standards.”

77. As a result of WaMu’s reckless lending practices, the Company’s loans performed

terribly. In particular, the Company’s subprime mortgage lender, Long Beach Mortgage, generated

loans with abysmal failure rates. In the ten cities with the worst foreclosure rates on less-than-prime

loans from 2005 to 2007, Long Beach Mortgage had the highest failure rate in eight of them, according

to an analysis last year by the federal Office of the Comptroller of the Currency. Overall, 34.1% of

WaMu subprime loans went into foreclosure in those ten markets — more than three times the 10.2%

rate of Countrywide (whose loose lending practices have been the subject of regulatory, SEC and

investor actions.)

78. As reported by The Seattle Times in December 2009, after an investigative analysis of

loans sold by WaMu’s subprime lending unit, Long Beach Capital: “Evidence that something was

terribly wrong shows up in the astronomical foreclosure rate at Long Beach. . . . Defaults in the first

few months of a loan are a red flag for fraud, the FBI has said in court documents. By 2006, a stunning

number of loans at Long Beach were quickly going into default.”



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C. WaMu Forced Appraisers to Falsely Inflate Home Values in Violation of Federal Regulations

79. An appraisal is “a written statement independently and impartially prepared by a

qualified appraiser setting forth an opinion as to the market value of an adequately described property

as of a specific date(s), supported by the presentation and analysis of relevant market information.” 12

C.F.R § 564.2.

80. As set forth above, WaMu artificially inflated appraisals throughout the Relevant Period

leading up to both Offerings. However, starting in April 2006, WaMu began outsourcing appraisal

responsibilities to purportedly independent appraisal companies.

81. Shortly after Plaintiffs’ purchase of Washington Mutual’s 2007 Preferred Trust

Securities, investors were shocked when, on November 1, 2007, New York Attorney General Andrew

Cuomo filed a lawsuit – after an extensive nine month investigation involving the review of millions of

documents – alleging that WaMu pressured First American and its subsidiary eAppraiseIT into

fraudulently and illegally inflating the appraisals used in WaMu’s loan origination process. According

to New York’s Deputy Attorney General for Economic Justice: “Simply put, First American and

eAppraiseIT signed over their independence to Washington Mutual, so that Washington Mutual’s loan

staff could illegally hand-pick the appraisers who would hit the numbers that Washington Mutual

wanted.”

82. On November 1, 2007, the New York Attorney General’s Office issued a press release

stating:

NY ATTORNEY GENERAL SUES FIRST AMERICAN AND ITS SUBSIDIARY FOR CONSPIRING WITH WASHINGTON MUTUAL TO

INFLATE REAL ESTATE APPRAISALS

Washington Mutual (WaMu) Demanded Appraisers Who Inflated Property Values

Internal E-Mails Show eAppraiseIT Executives Knew Their Scheme Was Illegal:

“We have agreed to roll over and just do it” NEW YORK, NY (November 1, 2007) - Attorney General Andrew M. Cuomo today announced that he is suing one of the nation’s largest real estate



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appraisal management companies and its parent corporation for colluding with the largest savings and loan in the country to inflate the appraisal values of homes. In a scheme detailed in numerous e-mails, eAppraiseIT (“EA”), a subsidiary of First American Corporation (NYSE: FAF), caved to pressure from Washington Mutual (“WaMu”) (NYSE: WM) to use a list of preferred “Proven Appraisers” who provided inflated appraisals on homes. The e-mails also show that executives at EA knew their behavior was illegal, but intentionally broke the law to secure future business with WaMu. “The independence of the appraiser is essential to maintaining the integrity of the mortgage industry. First American and eAppraiseIT violated that independence when Washington Mutual strong-armed them into a system designed to rip off homeowners and investors alike,” said Attorney General Cuomo. “The blatant actions of First American and eAppraiseIT have contributed to the growing foreclosure crisis and turmoil in the housing market. By allowing Washington Mutual to hand-pick appraisers who inflated values, First American helped set the current mortgage crisis in motion.”

83. As the New York Attorney General recognized in his press release, “appraisal fraud can

damage the entire housing market, including consumers and investors alike.” Moreover, appraisal

fraud “skews the value and risk of loans.”

84. Moreover, as set forth by the New York Attorney General, WaMu (and thus its senior

officers including the Officer Defendants) were motivated to collude in this appraisal fraud as “WaMu

profited from these higher appraisals because they could close more home loans, at greater values.

Over the course of their relationship, between April 2006 and October 2007, EA provided

approximately 262,000 appraisals for WaMu.”

85. WaMu’s manipulation of appraisal values was not limited to isolated instances but,

rather, was a systemic fraud. According to the New York Attorney General, after conducting an

extensive investigation:

The integrity of our mortgage system depends on independent appraisers. Washington Mutual compromised the fairness of this system by illegally pressuring appraisers to provide inflated values. Every company that buys loans from Washington Mutual must be sure that the loans they purchased are not corrupted by this systemic fraud.

86. The New York Attorney General’s complaint was filed only after “investigators had

spent nine months interviewing hundreds of mortgage industry executives and poring over millions of



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documents obtained through subpoenas.” The New York Attorney General’s complaint is available at

http://www.oag.state.ny.us/media_center/2007/nov/EA%20Complaint.pdf.

87. The e-mails cited by the New York Attorney General evidence that WaMu’s third party

appraisers knew WaMu’s efforts to inflate appraisals and interfere with the appraisers’ independence

was improper and illegal. The appraisers’ concerns that WaMu’s interference was illegal were

conveyed to WaMu more than six months before the 2007 Offering. Indeed, on April 17, 2007,

eAppraiseIT’s President wrote a memorandum to WaMu that WaMu’s selection of appraisers “appears

to be directly in contradiction to the interagency guidelines” promulgated by the Office of Thrift

Supervision, Office of the Comptroller of the Currency, and the FDIC, among others.

88. By fraudulently inflating appraisals, WaMu was able to originate loans that had

artificially low loan-to-value ratios (“LTV”). According to WaMu’s 2005 Amended Form 10-K: “The

loan-to-value ratio measures the ratio of the original loan amount to the appraised value of the collateral

at origination.” Fraudulently increased appraisals led to decreased LTV ratios, which made the

Company’s loan portfolios look less risky.

89. Falsifying appraisals also allowed WaMu to do loans that should never have been

approved and could not be sold in the secondary market with a proper appraisal. This increased

WaMu’s reported loan origination volumes and revenues, inflating WaMu’s reported financial results.

90. The scheme to fraudulently falsify appraisals exposed Plaintiffs to substantial

undisclosed risk, including increased credit risk. According to WaMu’s own 2006 Form 10-K: “Credit

risk is the risk of loss arising from . . . the availability and quality of collateral.” WaMu’s appraisal

manipulation exposed Plaintiffs to material, undisclosed risks of loss on loans WaMu owned and on

loans WaMu sold and/or securitized to third party investors. Purchasers of loans sold and/or securitized

by WaMu could force WaMu to repurchase loans originated in violation of representations and

warranties associated with such loans concerning, among other things, WaMu’s adherence to

regulations governing appraisals.



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D. As a Result of WaMu’s Undisclosed, Reckless Lending Practices and Falsification of Appraisal Values, WaMu’s Financial Statements Were False and Misleading

91. Prior to the 2006 and 2007 Offerings, WaMu published false and misleading financial

statements that violated GAAP and SEC Regulations prohibiting false and misleading public

disclosures.

92. GAAP are those principles recognized by the accounting profession as the conventions,

rules and procedures necessary to define accepted accounting practices. The SEC has the statutory

authority to promulgate GAAP for public companies, and has delegated that authority to the Financial

Standards Accounting Board (“FASB”). As set forth in SEC Regulation S-X (17 C.F.R. § 210.4-

01(a)(1)), financial statements filed with the SEC that are not presented in accordance with GAAP will

be presumed to be misleading, despite footnotes or other disclosures.

93. GAAP required WaMu, including the Officer Defendants and the Director Defendants

on WaMu’s audit committee, to establish a reserve for incurred credit losses resulting from borrowers

defaulting on their obligations to make monthly mortgage payments or when it was probable that

borrowers would do so (the “Allowance for Loan and Lease Losses” or “Allowance”).

94. During the Relevant Period, it was widely recognized that WaMu’s Allowance was a

critical metric for investors, for which senior management and the audit committee were directly

responsible. As described in a December 2006 “Interagency Policy Statement on the Allowance for

Loan and Lease Losses,” issued jointly by the Office of the Comptroller of the Currency, the Board of

Governors of the Federal Reserve System, the FDIC, the National Credit Union Administration, and the

OTS (collectively, the “Agencies”):

The [Allowance] represents one of the most significant estimates in an institution’s financial statements and regulatory reports. Therefore, each financial institution has a responsibility for ensuring that controls are in place to consistently determine the [Allowance] in accordance with GAAP, the institution’s stated policies and procedures, and relevant supervisory guidance.

95. Reserving for loan losses, the Allowance directly impacted WaMu’s reported earnings.

Under GAAP, a provision for loan and lease losses is recorded as an expense, which reduces pre-tax



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earnings on a dollar-for-dollar basis. Thus, increases in the Allowance directly reduced reported net

income and the Company’s earnings per share.

96. Throughout the Relevant Period, WaMu and the Officer Defendants and Director

Defendants on the audit committee understated the Allowance by not properly taking into consideration

the deteriorating credit quality of the Company’s loan portfolio resulting from the abandonment of

appropriate underwriting and appraisal practices. By doing so, the Officer Defendants, the Director

Defendants on the audit committee and WaMu overstated WaMu’s net income and earnings per share.

97. The SEC provided explicit guidance on the proper accounting that WaMu should have

followed, but did not. SEC Staff Accounting Bulletin: No. 102 – Selected Loan Loss Allowance

Methodology and Documentation Issues, states in part:

The staff normally would expect a registrant that engages in lending activities to develop and document a systematic methodology to determine its provision for loan losses and allowance for loan losses as of each financial reporting date. It is critical that loan loss allowance methodologies incorporate management’s current

judgments about the credit quality of the loan portfolio through a disciplined and consistently applied process. A registrant’s loan loss allowance methodology is influenced by entity-specific factors, such as an entity’s size, organizational structure, business environment and strategy, management style, loan portfolio characteristics, loan administration procedures, and management information systems. However, as indicated in the AICPA Audit and Accounting Guide, Banks and Savings Institutions (Audit Guide), “[w]hile different institutions may use different methods, there are certain common elements that should be included in any [loan loss allowance] methodology for it to be effective.” A registrant’s loan loss allowance methodology generally should:

• Include a detailed analysis of the loan portfolio, performed on a regular basis;

• Consider all loans (whether on an individual or group basis); • Identify loans to be evaluated for impairment on an individual basis

under SFAS No. 114 and segment the remainder of the portfolio into groups of loans with similar risk characteristics for evaluation and analysis under SFAS No. 5;

• Consider all known relevant internal and external factors that may

affect loan collectability;

• Be applied consistently but, when appropriate, be modified for new factors affecting collectability;



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• Consider the particular risks inherent in different kinds of lending; • Consider current collateral values (less costs to sell), where applicable; • Require that analyses, estimates, reviews and other loan loss allowance

methodology functions be performed by competent and well-trained personnel; • Be based on current and reliable data; • Be well documented, in writing, with clear explanations of the

supporting analyses and rationale . . .; and • Include a systematic and logical method to consolidate the loss

estimates and ensure the loan loss allowance balance is recorded in accordance with GAAP. For many entities engaged in lending activities, the allowance and provision for loan losses are significant elements of the financial statements. Therefore, the staff believes it is appropriate for an entity’s management to review, on a periodic basis, its methodology for determining its allowance for loan losses. 98. The Company substantially deviated from its underwriting standards at all relevant times

and provided loans to persons with inferior credit quality that could be expected to default in significant

numbers. Because the Officer Defendants caused the Company’s employees to deviate from the

Company’s underwriting standards when originating loans, the Officer Defendants and Director

Defendants on the audit committee should have substantially increased the Company’s Allowance

accordingly, but did not.

99. Moreover, WaMu also under-reserved for loan losses as a result of the Company’s

systematic inflation of appraisal values. As stated in WaMu’s 2006 Form 10-K, “[t]he estimation of the

allowance [for loan and lease losses] is based on a variety of factors, including . . . the estimated value

of underlying collateral.”

100. As a result of under-reserving for loan losses, the Company’s reported earnings were

materially inflated, and the poor credit quality of the Company’s loans was concealed, in violation of

GAAP. Moreover, the true value of the loans (assets) on WaMu’s balance sheet was artificially

inflated, thereby providing a false picture of WaMu’s creditworthiness. Accordingly, the Company’s



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publicly reported financial results, including those incorporated by reference in the Offering Circulars

relied upon by Plaintiffs, were false and misleading.

E. Defendants Disregarded WaMu Risk Management’s Internal Reports

101. Throughout the Relevant Period and on a regular basis, as WaMu stated publicly in SEC

filings, Washington Mutual Bank’s credit risk oversight department conducted quality control reviews

of statistical samplings of mortgage loans originated by WaMu and those loans originated by other

entities that WaMu purchased. The stated purpose of such loan samplings was to confirm that the loans

complied with all applicable underwriting and appraisal criteria.

102. Extensive and rigorous statistical samplings of loans for the purpose of confirming

compliance with underwriting and appraisal standards was an industry standard, a fact that would have

been known to all the Defendants.

103. Re-underwriting samplings of funded mortgages is a recognized critical component of

fundamental risk management within mortgage lenders and is regularly reported to a mortgage

company’s directors and senior officers. For example, the following representation appeared in

Countrywide Financial’s Form 10-K filed with the SEC on March 12, 2004:

In addition to our pre-funding controls and procedures, we employ an extensive post funding quality control process. Our quality control department, under the direction of the Chief Credit Officer, is responsible for completing comprehensive loan audits that consist of a re-verification of loan documentation, an in depth underwriting and appraisal review, and if necessary, a fraud investigation. We also employ a post-funding proprietary loan performance evaluation system. This system identifies fraud and poor performance of individuals and business entities associated with the origination of our loans. The combination of this system and our audit results allows

us to evaluate and measure adherence to prescribed underwriting guidelines and compliance to laws and regulations to ensure that current loan production

represents acceptable credit risk, as defined by the Board of Directors.

104. Similarly, subprime lender Accredited Home Lender disclosed in its SEC filings that it

conducted extensive re-underwriting of originated loans and the results of these tests were reported to

the company’s audit committee:

Quality Control. Each month, Accredited’s internal audit and quality control department generally reviews and re-underwrites a sample of the loans originated by Accredited. The statistical sample of loans is chosen by random selection and based



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on the prior defect rates. In addition, targeted reviews are conducted, including but not limited to the following areas: regulatory compliance, non-performing assets, targeted and discretionary reviews, or where fraud is suspected. The quality control department re-underwrites these loans through an in-depth analysis of the following areas: application, income/employment, appraisals, credit decision, program criteria, net tangible benefits, re-verifications, and compliance. Specifically, these tests focus on verifying proper completion of borrower disclosures and other loan documentation, correct processing of all legally required documentation, and compliance with time frames imposed by applicable law. When fraud is suspected, the quality control department undertakes a comprehensive re-underwriting of not only the loan in question, but any related loans connected by broker, appraiser, or other parties to the transaction. All findings of the internal audit and quality

control department are reported on a regular basis to members of senior management and the audit committee of the board of directors. The Chief Executive Officer and the Chief Operating Officer, along with the Director of Operations and others analyze the results of the monthly internal audit and quality control department audits as well as performance trends and servicing issues. Based upon this analysis, corrective actions are taken. 105. Throughout the Relevant Period, WaMu’s risk management group conducted analyses of

the Company’s loans, but, as subsequently revealed by former WaMu employees, the warnings of the

risk managers were disregarded.

106. Defendants either were negligent in not learning, recklessly disregarded, and/or

intentionally concealed the results of internal WaMu analyses of mortgage loans originated and/or

purchased by WaMu.

F. The Role of the Audit and Finance Committees of the Board of Directors

107. The Audit and Finance Committees of the Board of Directors approved and oversaw

WaMu’s policies with respect to operational and credit risk during the Relevant Period, as well as

financial reporting. The Director Defendants maintained positions on either or both the Audit and

Finance Committees during the Relevant Period. According to WaMu’s Forms 10-K for 2006 and

2007, the “Board of Directors, assisted by the Audit and Finance Committees on certain delegated

matters, oversees the Company’s monitoring and controlling of significant risk exposures, including the

Company’s policies governing risk management.” Further, according to WaMu’s 2006 Form 10-K

“Risk exceptions, depending on their type and significance, are elevated to management or Board

committees responsible for oversight.”



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108. According to WaMu’s Proxy Statements for 2005 through 2008, the Audit Committee

performed the following functions: (1) assisted with the oversight of the integrity of the Company’s

financial reporting process and financial statements and systems of internal controls; (2) assisted with

the oversight of the Company’s compliance with legal and regulatory requirements; (3) selected and

retained the independent auditor, and reviewed its qualifications, independence and performance; (4)

selected the general auditor, and assisted with the oversight of the performance of the Company’s

internal audit function; and, (5) approved and monitored the administration of policies addressing

management of operational risk.

109. The Audit Committee specifically oversaw WaMu’s operational risks. WaMu’s 2006

Form 10-K described that “The Operational Risk Management Policy, approved by the Audit

Committee of the Board of Directors, establishes the Company’s operational risk framework and

defines the roles and responsibilities for the management of operational risk.” Likewise, according to

the 2006 Form 10-K, “The Internal Audit function, which reports to the Audit Committee of the Board

of Directors, independently assesses the Company’s compliance with risk management controls,

policies and procedures.”

110. Additionally, the Audit Committee Charter called for the Audit Committee to meet with

management “to discuss significant risk exposures facing the Company and to discuss the steps that

management has taken to monitor and control such exposures, including the Company’s guidelines and

policies governing risk assessment and risk management.”

111. According to WaMu’s Proxy Statements for 2005 through 2008, the Finance Committee

performed the following functions: (1) monitored investments and dispositions of loans and financial

instruments, and significant purchases and dispositions of real property acquired by the Company

(excluding the Company’s premises or other real property acquired for use by the Company); (2)

approved and monitored the administration of policies addressing the Company’s allocation of capital

and the Company’s management of market and credit risk; (3) monitored the development and

implementation of strategies that guide the Company’s financial management activities; and, (4)



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reviewed and made recommendations with respect to the payment of dividends, the issuance and

repurchase of equity, and the issuance and retirement of debt.

112. The Finance Committee of the Board directly oversaw WaMu’s credit, liquidity and

market risks. According to WaMu’s 2006 Form 10-K, “[i]n 2006, the Finance Committee . . . approved

a set of credit risk concentration limits.”

113. Further, in a March 27, 2008 letter to WaMu shareholders, the CtW Investment Group

described a meeting with members of WaMu’s Board and senior management. During the meeting,

WaMu admitted that as early as 2005 its Finance Committee closely monitored, and received reports

from Goldman Sachs concerning, the Company’s mortgage credit losses, i.e. the quality of its

residential loan portfolio:

Company representatives pointed out that Finance Committee meetings had been restructured in 2005 to increase focus on matters of significant concern and reduce time devoted to routine matters; that the Committee had been receiving reports on the housing market regularly since 2005; that management had incorporated an assumption of zero house price appreciation for 2006 and 2007; and that the Committee had heard from outside experts, such as BlackRock, Standard & Poors,

and Goldman Sachs, on various matters, including mortgage servicing rights and credit losses.

114. On April 3, 2008, WaMu filed a response to the shareholder letter with the SEC stating

that the entire Board had “been actively engaged in formulating and overseeing management’s

implementation of risk management policies.” The Company’s response also outlined the steps it had

purportedly taken to mitigate risk since 2004, including “tightening subprime underwriting standards.”

G. The Role of the Initial Purchaser Defendants

115. The Initial Purchaser Defendants (along with Lehman Brothers who acted as an initial

purchaser on the October 2007 Offering) collectively participated in the review and drafting of the

Offering Circulars, approved the final Offering Circulars, solicited sales of the Offerings, and identified

themselves as the initial purchasers for the Offerings. The Offering Circulars further identified

Goldman Sachs as the Sole Structuring Coordinator and Bookrunner, i.e. the leader of the initial

purchaser syndicate.



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116. The Initial Purchasers purchased the Preferred Trust Securities from WaMu for resale to

investors, including Plaintiffs. The Initial Purchasers entered into a “firm commitment” underwriting

agreement with WaMu; the Initial Purchasers were obligated to purchase all of the Preferred Trust

Securities if they purchased any of the Preferred Trust Securities. In addition, in connection with the

Offerings, the Initial Purchasers made a secondary market in the Preferred Trust Securities.

117. The Initial Purchaser Defendants had a duty to discover and compel disclosure of

material facts about the Offerings, as well as to ensure that statements in the Offering Circulars, as well

as those materials incorporated by reference, were truthful and complete.

118. The Initial Purchaser Defendants were negligent in failing to disclose the following true

facts which made statements in the Offering Circulars, and documents incorporated therein by

reference, false and misleading: (i) WaMu did not maintain or comply with underwriting standards and

risk management procedures; (ii) the Company artificially inflated appraisals to get loans approved and

to be able to sell the loans to investors; (iii) the true extent of the Company’s exposure to a decline in

the housing market; (iv) the Company’s true creditworthiness; (v) the Company’s ineffectual internal

controls; (vi) the Company’s ineffectual risk management; and (vii) the Company’s financial statements

did not comply with GAAP. The Initial Purchasers should have known, among other things, that

WaMu’s mortgage loans were being carried on WaMu’s balance sheet at exceedingly high valuations

with improper allowances for loan losses as a result of the significant risk the loans would not be

repaid. Accordingly, the Initial Purchaser Defendants disseminated false and misleading information to

Plaintiffs in the Offering Circulars and the documents incorporated by reference.

119. Had the Initial Purchasers conducted a reasonable investigation at the time of the 2006

and 2007 Offerings, the true, but undisclosed, facts would have been readily apparent to them.

120. The Initial Purchasers conducted extensive business operations in the residential

mortgage market. For example, as reported by The New York Times: “In the heyday of subprime

mortgage lending, Goldman Sachs both issued mortgage-backed securities and underwrote them, too.

From 2005 through 2007, Goldman issued more than $33 billion in mortgage-backed securities,

creating tradable securities from packages of individual subprime mortgages. In 2005 and 2006, it also



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underwrote $53 billion of securitized loans made by others.” The other Initial Purchasers were

similarly active participants in the residential mortgage markets.

121. As a result of the Initial Purchasers’ extensive business operations within the residential

mortgage market, the Initial Purchasers were knowledgeable of, among other things (i) industry

standards within the mortgage lending industry, including underwriting and appraisal requirements; (ii)

standard representations and warranties provided by loan originators to purchasers in the secondary

market; and (iii) the market for mortgage-backed securities.

122. Goldman Sachs, Credit Suisse and Lehman Brothers’ experience in the secondary

mortgage market included the 2005-2006 underwriting of over $10 billion in securities backed by

subprime loans originated by WaMu’s wholly owned subsidiary Long Beach Mortgage. Long Beach

Mortgage was WaMu’s subprime origination unit.

123. As underwriters of securities backed by billions of dollars of WaMu’s subprime loans,

Goldman Sachs, Credit Suisse and Lehman Brothers had direct access to extensive, non-public data

concerning the credit quality of Washington Mutual’s subprime loans. For example, Goldman Sachs,

Credit Suisse and Lehman Brothers had access to all of the underlying loan documents and, as

underwriters of the mortgage backed securities, were obligated to review samplings of the underlying

loan documents to ascertain whether the loans were underwritten in accordance with applicable

underwriting standards.

124. Moreover, prior to the 2006 and 2007 Offerings, the Initial Purchasers knew Washington

Mutual’s credit risk oversight department conducted quality control reviews of statistical samplings of

previously originated mortgage loans on a regular basis (as set forth in § IV.E). These quality control

reviews were specifically referenced in the Offering Circulars and in the offering documents for the

mortgage-backed securities underwritten by Goldman Sachs, Credit Suisse and Lehman Brothers, and

such samplings of originated loans was standard in the industry. These reports were conducted to

determine whether the Company’s loans complied with its underwriting polices and procedures. Prior

to the 2006 and 2007 Offerings, the Initial Purchasers had access to these and other internal, non-public

Washington Mutual reports concerning the credit quality of WaMu’s loans.



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125. The Initial Purchasers also had access to, and a duty to review, internal WaMu

documents in connection with their significant business contacts with WaMu. Among other things, the

Initial Purchaser Defendants underwrote public offerings of WaMu securities. Goldman Sachs, Credit

Suisse and Morgan Stanley acted as underwriters and joint book-running managers/co-managers for

August 2006 and September 2006 offerings of registered WaMu securities to the public. Credit Suisse

and Morgan Stanley also acted as underwriters and joint book-running managers for an offering of $500

million in WaMu registered notes to the public on October 25, 2007. As with the 2006 and 2007

Offerings, the Initial Purchasers were obligated to conduct due diligence with respect to the statements

made in the offering documents for the sale of WaMu’s publicly traded securities and to conduct due

diligence with respect to WaMu’s business operations and creditworthiness. As with the 2006 and

2007 Offerings, the Initial Purchasers had access to internal, non-public WaMu documents in

connection with their underwriting of WaMu publicly traded securities.

126. Goldman Sachs, in particular, was negligent in not knowing that the statements in the

2007 Offering Circular were false and/or misleading, and was negligent in failing to adequately disclose

the truth concerning WaMu to Plaintiffs at the time Plaintiffs purchased the 2007 Preferred Trust

Securities from Goldman Sachs. As detailed infra, Goldman Sachs should have known, among other

things, that WaMu’s mortgage loans were being carried on WaMu’s balance sheet at exceedingly high

valuations with improper allowances for loan losses as a result of the significant risk the loans would

not be repaid.

127. Prior to the 2007 Offering, Goldman Sachs’ chief economist predicted home prices

would fall 15% nationally, leading to drastic increases in defaults and losses by lenders.

128. Further, as a result of Goldman Sachs’ superior access to information concerning the

residential mortgage market, for almost a year before the 2007 Offering, Goldman Sachs believed that

the subprime and general housing market would collapse.

129. Goldman Sachs’ negligence in failing to discover and disclose that WaMu was carrying

loans on its balance sheet at excessive valuations without adequate allowances for loan losses is

evidenced by Goldman Sachs’ own trading and trading recommendations.



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130. At the same time Goldman Sachs was selling the 2007 Preferred Trust Securities to

Plaintiffs – the valuation of which was dependent upon, among other things, Washington Mutual’s

subprime mortgage loan portfolios and subprime lending business – Goldman Sachs was (unbeknownst

to Plaintiffs) making billions of dollars by betting against the subprime mortgage market.

131. Only days after the 2007 Offering, Goldman Sachs admitted to betting on declines in the

subprime mortgage market for most of 2007. Goldman Sachs Chief Accounting Officer Sarah Smith

wrote in an October 30, 2007 letter to the SEC: “[D]uring most of 2007 we maintained a net short sub-

prime position with the use of derivatives and therefore stood to benefit from declining prices in the

mortgage market.” The letter was not made public until January 14, 2008.

132. As The Wall Street Journal reported in December 2007, Goldman Sachs’ bet that

subprime loans would collapse in value was large by any measure:

The subprime-mortgage crisis has been a financial catastrophe for much of Wall Street. At Goldman Sachs Group Inc., . . . it has generated one of the biggest windfalls the securities industry has seen in years.

The group’s big bet that securities backed by risky home loans would fall in value generated nearly $4 billion of profits during the year ended Nov. 30, according to people familiar with the firm’s finances.

133. Goldman Sachs’ bet against subprime loans was made with the full blessing and under

the supervision of Goldman Sachs’ senior officers, including Chief Financial Officer David Viniar, who

in December 2006 directed the Company’s traders to bet against residential subprime loans.

134. Months before the 2007 Offering in October, Goldman Sachs began writing down the

values of mortgage backed securities similar to the loans carried on WaMu’s balance sheet – with

explosive ramifications for Goldman Sachs’ trading partners. In April through June 2007, Goldman

Sachs was front-and-center in a high-stakes dispute over the valuations of these securities. Two hedge

funds run by Bear Stearns – the Bear Stearns High Grade Structured Credit Strategies Master Fund Ltd.

and the Bear Stearns High Grade Structured Credit Strategies Enhanced Master Fund Ltd. – that

invested primarily in high grade collateralized debt obligations backed by mortgage securities,

collapsed in May and June 2007. The funds lost 100% of their values, resulting in losses to investors of

approximately $1.4 billion. According to press reports in 2009, the Bear Stearns hedge funds collapsed



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after Goldman Sachs significantly marked down the valuations of mortgage-backed securities owned by

the funds.

135. According to statements made after the Relevant Period by Gary Cohn, the co-president

of Goldman Sachs, in the third quarter of 2007, Goldman Sachs wrote down the value of mortgage-

backed securities to as low as 30% of their face value.

136. As was revealed after WaMu’s collapse, in August through October 2007, Goldman

Sachs wrote down the valuations of mortgage-backed securities linked to trades (credit default swaps)

with insurer AIG. In writing down the valuations on the securities linked to the credit default swaps,

Goldman Sachs sought collateral calls from AIG of $1.5 billion in August 2007 and $3 billion in

October 2007.

137. Thus, at the same time Goldman Sachs was selling to Plaintiffs the 2007 Preferred Trust

Securities – the value of which was dependent upon, among other things, the inflated valuations of

residential subprime mortgage loans on WaMu’s balance sheet – Goldman Sachs was secretly insisting

for its own purposes that securities backed by residential subprime mortgage loans were significantly

impaired and their valuations had to be written down.

138. Less that six months after selling the 2007 Preferred Trust Securities to Plaintiffs

pursuant to the false and misleading 2007 Offering Circular, on April 11, 2008, Goldman Sachs issued

an analyst report, recommending that its clients short-sell WaMu stock. Goldman Sachs’ analyst wrote:

“The bad news is that our new product-by-product analysis of its mortgage portfolio suggests $17

billion to $23 billion of embedded losses in WaMu’s current book of business, of which only $3 billion

have been absorbed so far; subsequently, we forecast a $14bn provision charge in 2008.”

139. Thus, Goldman Sachs’ own analyst – who purportedly did not have access to the non-

public, inside information concerning WaMu that was available to Goldman Sachs in connection with

its work on the Offerings and via its other WaMu work – was able to ascertain that WaMu was carrying

loans on its balance sheet at artificially inflated values without adequate loan loss reserves.

140. Goldman Sachs’ analyst’s recommendation to “short” WaMu was a significant

revelation to investors. As reported by Fortune Magazine:



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Goldman Sachs recently provided a glimpse of one of the rarest occurrences on Wall Street: an analyst recommended that clients bet against a company by selling its shares short. In this case, the company was struggling Seattle thrift Washington Mutual, which happens to be a Goldman client.

* * *

Wall Street traders make a real distinction between a standard sell call and a short recommendation. According to traders, a “sell” or “avoid” rating implies that the company’s stock is sharply overvalued or is facing some bad news for a prolonged stretch. But advising clients to short a stock is, in the words of one hedge fund trader, like “Yelling at the world: ‘There is a major problem here - get out!’”

141. Unlike Goldman Sachs’ analyst who warned investors of WaMu’s overvalued loans after

the October 2007 Offering, Goldman Sachs had access to all of the information necessary to warn

investors prior to the 2006 and 2007 Offerings that there was a “major problem” at WaMu – but

Goldman Sachs did no such thing.

142. The Initial Purchasers Defendants negligently failed to disclose WaMu’s true financial

condition, the quality of its loan origination practices and subsequent value of WaMu’s loan portfolios,

or the fraudulent practices that artificially inflated WaMu’s apparent earnings and creditworthiness, to

make the Offerings more attractive to potential investors, which disclosures were necessary to make the

statements in the Offering Circulars not misleading.

V. DEFENDANTS’ FALSE AND MISLEADING STATEMENTS

A. Plaintiffs’ Reasonably Relied on Defendants’ False and Misleading Statements

143. Plaintiffs relied on the supposed truthfulness and accuracy of Defendants’ public

statements, as detailed in § V.B-E, prior to purchasing the Preferred Trust Securities. Plaintiffs’ claims

arise out of the purchase of the Preferred Trust Securities. Plaintiffs do not allege claims based on

forbearance in the sale of the Preferred Trust Securities – commonly referred to as a “holder” claim.

144. Flaherty & Crumrine Incorporated (“F&C”) serves as the sole investment adviser/

portfolio manager for Plaintiffs, with full investment authority and discretion. F&C manages the day-

to-day investment decisions for Plaintiffs through a combination of quantitative analysis, credit research

and pragmatic trading strategies. F&C utilizes a dedicated credit research team of money management



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professionals that performs comprehensive analysis of the risks faced by preferred securities holders,

consisting of Messrs. Robert M. Ettinger, R. Eric Chadwick, Bradford S. Stone, Donald F. Crumrine,

and several credit analysts.

145. Mr. Ettinger and Mr. Chadwick have the primary responsibility for implementing

investment strategies of F&C and act as the firm’s traders. Mr. Ettinger serves as the primary liaison

between F&C and the brokerage community. Mr. Ettinger also serves as President of the U.S. Flaherty

& Crumrine funds. Mr. Ettinger has a B.A. in Economics from UCLA and received his M.B.A. from

the Wharton School at the University of Pennsylvania.

146. Mr. Chadwick shares responsibility with Mr. Ettinger for initiating and maintaining

relationships with the brokerage community. Mr. Chadwick also serves as Chief Financial Officer,

Vice President and Treasurer of the U.S. Flaherty & Crumrine funds. In addition, Mr. Chadwick

oversees the financial reporting and tax operations for the U.S. Flaherty & Crumrine funds. Mr.

Chadwick received his M.B.A. from the Anderson School at UCLA and has a B.S. in Economics from

the University of Kansas.

147. Mr. Stone is in charge of the economic and credit research group of F&C. Mr. Stone

also serves as Vice President and Assistant Treasurer of the U.S. Flaherty & Crumrine funds. Mr.

Stone received his M.B.A. from Wharton Graduate School of Business and his A.B. in Economics from

Dartmouth College.

148. Mr. Crumrine co-founded Flaherty & Crumrine in 1983 and is actively involved in the

day-to-day management of all client portfolios and directs client service and marketing efforts. Mr.

Crumrine also serves as Chairman of the Board, Chief Executive Officer and a Director of the U.S.

Flaherty & Crumrine funds. Mr. Crumrine has a B.S. in Finance from the University of Southern

California and earned his M.B.A. from the Wharton School at the University of Pennsylvania.

149. Prior to purchasing the Preferred Trust Securities, F&C took specific actions to ensure

that in performing its duties as an investment adviser/portfolio manager, F&C never purchased any

security without first reading available offering documents, SEC filings and analyst and credit rating

agencies’ reports related to the issuer and/or the specific security. Indeed, F&C had a pattern and



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practice of always reading and reviewing such available offering documents, SEC filings and analyst

and credit rating agencies’ reports prior to making investments. As part of their job functions,

employees of F&C had the responsibility to read and review available offering documents, SEC filings

and analyst and credit rating agencies’ reports. F&C’s specific actions to ensure it read and reviewed

available offering documents, SEC filings and analyst and credit rating agencies’ reports prior to

making an investment decision applied with equal force to its decision to purchase the Preferred Trust

Securities, and F&C did in fact read and review available offering documents, SEC filings and analyst

and credit rating agencies’ reports.

150. F&C received the Offering Circulars on behalf of Plaintiffs in California after being

solicited by Goldman Sachs in California to purchase the Preferred Trust Securities. F&C read and

reviewed the Offering Circulars upon receiving them on or about February 24, 2006, and October 18,

2007, respectively. F&C also read and reviewed the historic SEC filings incorporated by reference into

each of the Offering Circulars, at or near the time F&C received the Offering Circulars and prior to

purchasing the respective 2006 and 2007 Preferred Trust Securities. In addition, F&C read and relied

upon contemporaneous analyst reports and credit rating agencies’ reports concerning Washington

Mutual that repeated and/or relied upon Defendants’ false and misleading oral statements, prior to

purchasing the 2006 and 2007 Preferred Trust Securities. F&C reviewed the historic SEC filings,

analyst reports and credit rating agencies’ reports via Bloomberg terminals maintained by F&C.

Through the Bloomberg terminals, F&C accessed the Bloomberg Professional service to monitor and

analyze real-time financial market data movements, news, price quotes, place trades, and message other

financial professionals across its proprietary secure network.

151. F&C reviewed Defendants’ false and misleading statements alleged in § V.B-E in

connection with its quantitative analysis and credit research prior to determining that Plaintiffs should

purchase the Preferred Trust Securities. For example, F&C reviewed Defendants’ statements regarding

Washington Mutual’s (i) underwriting and risk management standards; (ii) home appraisal policies and

practices; and (iii) reserves for loan losses. F&C reviewed these statements in assessing whether

Washington Mutual was, among other things, supposedly creditworthy.



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152. Messrs. Ettinger and Chadwick read and reviewed Defendants’ false and misleading

statements alleged herein, and/or relied upon another F&C employee’s analysis of Defendants’ false

and misleading statements alleged herein, prior to participating in F&C’s decision to cause Plaintiffs to

purchase the Preferred Trust Securities.

153. Messrs. Ettinger and Chadwick read and reviewed Defendants’ false and misleading

statements alleged herein, and/or relied upon another F&C employee’s analysis of Defendants’ false

and misleading statements alleged herein, because they believed Defendants’ statements to be material

to F&C’s investment decision, as described above in ¶151.

154. Had F&C and/or Plaintiffs read a truthful account of WaMu’s creditworthiness and

underlying business activities alleged herein, F&C and Plaintiffs would not have decided to purchase

any of the Preferred Trust Securities. Disclosure of the true financial condition of WaMu and its

lending practices, as alleged herein, would have indicated to F&C and Plaintiffs that any investment in

the Preferred Trust Securities posed an exceedingly high risk of being rendered worthless without

adequate compensation to the investor for this heightened risk.

155. F&C and Plaintiffs reasonably and justifiably relied on Defendants’ false and misleading

statements in deciding to purchase the Preferred Trust Securities. F&C and Plaintiffs were ignorant of

the truth concerning Defendants’ wrongful conduct, as detailed in § IV, and believed the false and

misleading statements detailed in § V.B-E to be complete and truthful. Had F&C and Plaintiffs known

of the truth concerning Washington Mutual’s business practices, they would not have decided to


B. False and Misleading Assurances to Investors Prior to the 2006 Offering

156. On March 14, 2005, WaMu filed with the SEC its Form 10-K for the quarter and year

ended December 31, 2004. Defendants Killinger, Casey, Farrell, Frank, Matthews, Murphy, Osmer

McQuade, Pugh, Reed, Stever, and Wood signed the 2004 Form 10-K. The 2004 Form 10-K was

expressly incorporated by reference into the 2006 Offering Circular.



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157. In the 2004 Form 10-K, Defendants misleadingly stated that WaMu utilized

underwriting procedures to mitigate loan losses in its subprime loan portfolio: “We seek to mitigate the

credit risk in this portfolio by re-underwriting all purchased subprime loans.”

158. The 2004 Form 10-K also falsely assured investors the Company implemented

appropriate steps to establish its Provision and Allowance for Loan and Lease Losses:

The allowance for loan and lease losses represents management’s estimate of credit losses inherent in the Company’s loan and lease portfolios as of the balance sheet date. The estimation of the allowance is based on a variety of factors, including past loan loss experience, the current credit profile of our borrowers, adverse situations that have occurred that may affect the borrowers’ ability to repay, the estimated value of underlying collateral, the interest rate climate as it affects adjustable-rate loans and general economic conditions. 159. Plaintiffs, through their investment adviser/portfolio manager, F&C, reviewed, read, and

relied upon Defendants’ statements in ¶¶157-158 prior to purchasing the Preferred Trust Securities.

Specifically, F&C read Defendants’ statements filed with the SEC. Defendants’ false and misleading

statements impacted F&C’s and Plaintiffs’ decision to purchase the Preferred Trust Securities because

Defendants’ statements falsely assured F&C and Plaintiffs that Washington Mutual was, among other

things, creditworthy and, among other things, maintained (i) prudent underwriting and risk management

standards; and (ii) properly reserved for loan losses. Had F&C and/or Plaintiffs read a truthful account

of WaMu’s creditworthiness and underlying business activities alleged herein as of the date of

Defendants’ false statements alleged in ¶¶157-158, F&C and Plaintiffs would not have decided to


160. The statements in WaMu’s 2004 Form 10-K, incorporated by reference into the 2006

Offering documents, were false and misleading at the time they were made and at the time of the 2006

Offering. As detailed in § IV.B, WaMu was not seeking to mitigate credit risk within its subprime

portfolio through proper underwriting, but rather, as evidenced by former employees’ accounts, to

artificially inflate loan volume WaMu was extending loans to persons who could not reasonably be

expected to fulfill their repayment obligation. Similarly, WaMu’s Provision and Allowance for Loan

and Lease Losses was based on fraudulently manipulated appraisals and therefore did not take into

account the true value of the underlying collateral. Moreover, WaMu’s Allowance was far too



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inadequate in light of the true credit profile of its borrowers, many of whom only obtained loans from

WaMu because the Company abandoned appropriate underwriting standards.

161. On October 19, 2005, WaMu issued a press release announcing its financial results for

the quarter ended September 30, 2005. This press release was expressly incorporated by reference into

the 2006 Offering Circular. In this press release, WaMu “announced third quarter 2005 net income of

$821 million, or $0.92 per diluted share, up 21 percent on a per share basis when compared with net

income of $674 million, or $0.76 per diluted share, in the third quarter of 2004.” Defendant Killinger

characterized the Company’s performance as “solid” and lauded the Company’s “continued focus” on

risk management. In this press release, the Company also reported that its provision for loan and lease

losses was $52 million, compared to $56 million in the fourth quarter 2005, bringing the Company’s

total Allowance for Loan and Lease Losses to $1.26 billion.

162. On that same day, during a conference call with investors, WaMu Chief Executive

Officer Killinger declared, “we believe we can effectively manage our credit quality by continuing to

be disciplined and vigilant in our underwriting standards, our portfolio management, and our reserving

methodology.” WaMu Chief Financial Officer Casey claimed: “Our credit performance continues [to

be] very good . . . . We continue to proactively manage our credit risk, and are taking steps now to

reduce potential future exposure.”

163. On November 7, 2005, WaMu filed with the SEC its Form 10-Q for the quarter ended

September 30, 2005, which was expressly incorporated by reference into the 2006 Offering Circular.

Defendant Casey signed the Form 10-Q for the quarter ended September 30, 2005.

164. The November 7, 2005 Form 10-Q reported the same false and misleading financial

information contained in the October 19, 2005 press release.

165. Further, in the November 7, 2005 Form 10-Q the Company falsely assured investors that

WaMu implemented and monitored effective and appropriate risk management practices:

Enterprise Risk Management works with the lines of business to establish appropriate policies, standards and limits designed to maintain risk exposures within the Company’s risk tolerance. Significant risk management policies approved by the relevant management committees are also reviewed and approved by the Audit and Finance Committees of the Board of Directors. Enterprise Risk Management also



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provides objective oversight of risk elements inherent in the Company’s business activities and practices and oversees compliance with laws and regulations.

* * * Risk exceptions, depending on their type and significance, are elevated to management or Board committees responsible for oversight. 166. WaMu’s November 7, 2005 Form 10-Q also falsely reassured investors that WaMu

maintained effective internal controls, monitored by management, and that appropriate actions were

taken to fix all deficiencies. The Company’s Form 10-Q falsely stated:

The Company’s management, under the direction of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934.

Management reviews and evaluates the design and effectiveness of disclosure controls and procedures on an ongoing basis, and improves controls and procedures over time and corrects any deficiencies that may be discovered.

167. The November 7, 2005 Form 10-Q included signed certifications by Defendants

Killinger and Casey stating, in pertinent part:

(1) I have reviewed this quarterly report on Form 10-Q of Washington Mutual, Inc.;

(2) Based on my knowledge, this quarterly report does not contain any untrue

statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial

information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

168. Further, Defendants Killinger and Casey certified that they had designed, established,

and maintained an effective system of internal controls and procedures over the Company’s financial



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reporting that is “effective in recording, processing, summarizing and reporting, on a timely basis,

information required to be disclosed by the Company in the reports that it files or submits under the

Securities Exchange Act of 1934.”

169. On November 15, 2005, Defendant Killinger told attendees of WaMu’s Investor Day

conference: “On credit risk. We have excellent processes, policies, underwritings, standards and

reserving methodologies in place and they have served us very well for quite some time.”

170. At the Investor Day Conference, Defendant Schneider misleadingly stated: “In addition,

we’ve maintained effective risk management processes. This is clearly a top priority for us. We’ve

invested a significant amount in terms of talent and technology in building risk management[.]”

Defendant Schneider also represented that the Company had tightened its underwriting guidelines for

its Option ARM loans: “We’ve done a few things to improve our margins [for Option ARM loans]. . . .

Those combined with some tightening of underwriting guidelines primarily around the investor

property will ensure that we can generate higher margins and receive the required returns on the

product.”

171. Plaintiffs, through their investment adviser/portfolio manager, F&C, reviewed, read, and


Specifically, F&C read Defendants’ statements filed with the SEC, as well as contemporaneous analyst

reports and credit rating agencies’ reports concerning Washington Mutual that repeated and/or relied

upon Defendants’ false and misleading statements (including oral statements). Defendants’ false and

misleading statements impacted F&C’s and Plaintiffs’ decision to purchase the Preferred Trust

Securities because Defendants’ statements falsely assured F&C and Plaintiffs that Washington Mutual

was, among other things, creditworthy and, among other things, maintained (i) prudent underwriting

and risk management standards; (ii) appropriately appraised home values; and (iii) properly reserved for

loan losses. Had F&C and/or Plaintiffs read a truthful account of WaMu’s creditworthiness and

underlying business activities alleged herein as of the date of Defendants’ false statements alleged in

¶¶161-170, F&C and Plaintiffs would not have decided to purchase the Preferred Trust Securities.



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172. At the time the statements were made and at the time of the 2006 Offering, the

statements in ¶¶161-170 were materially false and misleading. As detailed in § IV, WaMu (i)

artificially inflated loan volume by secretly abandoning prudent underwriting standards; (ii) disregarded

the warnings of its risk managers and otherwise minimized the role of risk management so as to pursue

its undisclosed risky business practices; (iii) artificially inflated appraisal values to close loans that

otherwise would not have been done; and (iv) misstated its financial results by not properly

provisioning for loan losses that were highly likely to result from the Company’s disregard for proper

underwriting and fraudulent appraisal manipulations. In particular, the October 19, 2005 press release’s

false reassurance of a “continued focus” on risk management is directly at odds with the accounts of

numerous senior, former employees of WaMu. Similarly, WaMu was not “effectively manag[ing]

credit quality by continuing to be disciplined and vigilant in [its] underwriting standards” but had in

fact abandoned appropriate underwriting standards. The statements in ¶¶165-166 – concerning the

Company’s purportedly “appropriate policies, standards and limits designed to maintain risk exposures”

and the effectiveness of its internal controls – were false and misleading because, at least as early as

2005, WaMu and the Officer Defendants had intentionally decreased the effectiveness of WaMu’s risk

management group to effectuate more loan volume.

173. On January 18, 2006, WaMu issued a press release announcing its financial results for

the fourth quarter and year ended December 31, 2005. This press release was expressly incorporated by

reference into the 2006 Offering Circular. In this press release, WaMu “announced fourth quarter 2005

net income of $865 million, or $0.85 per diluted share, up 12 percent on a per share basis when

compared with net income of $668 million, or $0.76 per diluted share, in the fourth quarter of 2004.

Net income of $3.43 billion, or $3.73 per diluted share, for 2005 increased 14 percent on a per share

basis when compared with net income of $2.88 billion, or $3.26 per diluted share, in 2004.”

174. The press release quoted Defendant Killinger: “Despite the challenging environment,

especially in the home loans business, we delivered solid performance . . . . [O]ur risk management

efforts are on track[.]”



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175. On that same day, WaMu held a conference call for investors in which the Officer

Defendants misleadingly reassured investors that WaMu was proactively protecting the Company from

credit risks and the potential for a downturn in the housing market by properly underwriting loans to

assure credit quality. For example, Defendant Casey stated: “Our credit quality continued to be strong

for most of 2005, but we continued to proactively manage our portfolio to minimize credit risk

understanding that a more difficult environment may be ahead of us.”

176. On January 31, 2006, Defendant Rotella spoke at the Citigroup Financial Service

Conference, falsely stating that “[o]n the credit side, you can see we had a pretty good year. We feel

like we are in good shape.” In particular, Rotella assured investors that with regard to the Company’s

“pretty substantial balance sheet of option ARM products,” the Company had evaluated the credit risk

appropriately and “feel[s] pretty good about the credit risk.”








was, among other things, creditworthy and, among other things, maintained prudent underwriting and

risk management standards and properly evaluated internal credit risks. Had F&C and/or Plaintiffs read

a truthful account of WaMu’s creditworthiness and underlying business activities alleged herein as of

the date of Defendants’ false statements alleged in ¶¶173-176, F&C and Plaintiffs would not have

decided to purchase the Preferred Trust Securities.

178. At the time these statements were made and at the time of the 2006 Offering, the






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underwriting and fraudulent appraisal manipulations. Contrary to Defendants Killinger and Casey’s

statements, WaMu’s risk management efforts were not on track and the Company was not proactively

managing its portfolio to minimize credit risk. Rather, the Individual Defendants intentionally,

recklessly and/or negligently disregarded the admonitions of WaMu’s risk managers to cease its risky

lending activities. Contrary to Defendant Rotella’s statements, he had personally prevented WaMu’s

credit risk managers from evaluating credit risk appropriately as set forth in ¶72.

C. The False and Misleading 2006 Offering Documents

179. Goldman Sachs, Credit Suisse and Morgan Stanley sold $1.25 billion of the Preferred

Trust Securities to investors, including Plaintiffs, by means of a false and misleading offering circular

dated February 24, 2006 (the “2006 Offering Circular”).

180. The 2006 Offering Circular incorporated by reference the false and misleading

statements set forth in the Form 10-K for the year ended December 31, 2004, the press release issued on

October 19, 2005, the Form 10-Q for the quarter ending September 30, 2005, and the press release

issued on January 18, 2006.

181. In addition to incorporating by reference the preceding false and misleading statements,

the 2006 Offering Circular itself contained false and misleading statements describing WaMu’s

underwriting and appraisal practices, as well as the strength and importance of the Company’s risk

management procedures.

182. The structure of the 2006 Offering included the conveyance of home equity loans

(“HELs”) originated by a subsidiary of Washington Mutual, Inc., Washington Mutual Bank, to the shell

entity or “trust” created to issue the 2006 Preferred Trust Securities.



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183. As the conveyance of the HELs was a part of this structured financing, the 2006

Offering Circular purported to describe WaMu’s lending practices, underwriting procedures, credit risk

safeguards, and dedication to appropriate risk management.3

184. The 2006 Offering Circular falsely and misleadingly described WaMu’s underwriting

practices:

Underwriting

General

The HELs owned by the Asset Trust were, in all material respects, originated in accordance with the underwriting guidelines of WMB as described in herein. The HELs have been underwritten by WMB using automated underwriting systems. WMB’s underwriting guidelines generally are intended to evaluate the

prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. Some HELs are manually underwritten, in which case an underwriter reviews information submitted by the borrower and supporting documentation, if required, and a credit report of the borrower, and based on that review determines whether to originate loan in the amount and with the terms requested by the borrower. Some HELs are underwritten through WMB’s automated underwriting system, described below. Prospective borrowers are required to provide details about their financial factors such as their assets, liabilities and related monthly expenses, as well as

income and employment information.

* * * Evaluation of the Borrower’s Repayment Ability

In evaluating a prospective borrower’s ability to repay a HEL, the loan underwriter considers the ratio of the borrower’s total monthly debt (including non-

housing expenses) to the borrower’s gross income (referred to as the debt-to-income ratio” or “back-end ratio”). The maximum acceptable ratios may vary depending on other loan factors, such as loan amount and loan purpose, loan-to-value ratio, credit score and the availability of other liquid assets. Exceptions to the ratio guidelines

may be made when compensating factors are present.

3 The 2006 Offering Circular refers to Washington Mutual, Inc. as “WMI” and Washington Mutual Bank as “WMB”.



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185. In truth, as detailed in § IV.B & E, WaMu operated outside of its credit risk limits,

originating loans that deviated from WaMu’s underwriting guidelines and from appropriate

underwriting standards in order to increase loan volume, while the Defendants knowingly and/or

negligently ignored credit risk management’s warnings.

186. The 2006 Offering Circular falsely and misleadingly described WaMu’s appraisal

practices:

Evaluation of the Adequacy of the Collateral

The adequacy of the property being pledged as collateral generally is determined by an appraisal made in accordance with pre-established appraisal

guidelines. At origination, all appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation, and are made on forms acceptable to the Federal National Mortgage Association and/or the Federal Home Loan Mortgage Corporation. Appraisers may be staff appraisers employed by WMB or independent appraisers selected in accordance with the pre-established appraisal guidelines. Such guidelines generally require that the appraiser, or an agent on its behalf, personally inspect the property and verify whether the property is in adequate condition and, if the property is new construction, whether it is substantially completed. However, in the case of HELs underwritten through WMB’s automated underwriting system, an automated valuation method (“AVM”) may be used in lieu of a traditional appraisal. The AVM relies on public records regarding the encumbered property and/or neighboring property and statistically derives a value using that information. If AVMs are used, they comply with the requirements of the Financial Institutions Reform and Recovery Act of 1989, as amended, and are independently verified periodically. In either case, the appraisal normally is based upon a market data analysis of recent sales of comparable

properties and, when deemed applicable, a replacement cost analysis based on the current costs of constructing or purchasing a similar property.

187. In truth, as detailed in § IV.B & C, WaMu forced appraisers to inflate stated home loan

values in violation of federal and state regulations. Among other things, WaMu’s appraisal

manipulations falsified LTV ratios enabling the Company to originate loans that otherwise could not be

approved, thereby subjecting the Company and investors like Plaintiffs to undisclosed increased risk

resulting from defaulted loans.



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188. The 2006 Offering Circular falsely and misleadingly stated WaMu did not deviate from

its underwriting and appraisal parameters without a reasonable and legitimate basis:

Exceptions to Program Parameters

Exceptions to WMB’s loan program parameters may be made on a case-by-case basis if compensating factors are present. In those cases, the basis for the exception is documented, and in some cases the approval of a senior underwriter is required. Compensating factors may include, but are not limited to, low loan-to-

value ratio, good credit standing, the availability of other liquid assets and stable employment.

189. In truth, as detailed in § IV.B, WaMu employees routinely granted unwarranted

exceptions to underwriting standards in order to increase loan volume.

190. The 2006 Offering Circular falsely and misleadingly assured investors that WaMu

maintained appropriate credit risk management procedures and policies to monitor the Company’s

lending practices and loan portfolio, and to safeguard the Company from incurring unreasonably risky

loans from borrowers who could not afford to repay. The 2006 Offering Circular misleadingly stated:

Quality Control Review

WMB’s credit risk oversight department conducts quality control reviews of statistical samplings of previously originated HEL’s on a regular basis. Credit Risk Management Policies

Credit risk within the WMI Group is managed by means of a broad set of policies and principles contained in its credit policy. The Chief Credit Officer is responsible for overseeing the work of a credit policy committee, monitoring the quality of the WMI Group’s credit portfolio, determining the reasonableness of the WMI Group’s allowance for loan losses, reviewing and approving large credit exposures and setting underwriting criteria for credit-related products and programs. Credit risk management is based on analyzing creditworthiness of the borrower, the

adequacy of the underlying collateral given current events and conditions and the existence and strength of any guarantor support.

Credit risk assessment is a process that requires the evaluation of numerous

factors, many of which are qualitative. Process integrity relies on the ability of the WMI Group’s lending personnel to analyze all risk elements. It also depends on maintaining risk rating accuracy by recognizing changing elements of credit risk and promptly initiating risk rating changes.



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191. In truth, as detailed in § IV.B & E, Defendants knowingly and/or recklessly ignored risk

management’s direct warnings that the Company was operating outside of acceptable risk limits by,

among other things, allowing unwarranted exceptions to less than creditworthy borrowers.


relied upon Defendants’ statements in ¶¶184, 186, 188 and 190 prior to purchasing the Preferred Trust

Securities. Specifically, F&C read the 2006 Offering Circular on or about February 24, 2006, as well as

the historic SEC filings incorporated by reference in the 2006 Offering Circular. Defendants’ false and



was, among other things, creditworthy and, among other things, maintained prudent lending practices,

underwriting procedures, credit risk safeguards, and appropriate risk management. Had F&C and/or

Plaintiffs read a truthful account of WaMu’s creditworthiness and underlying business activities alleged

herein as of the date of Defendants’ false statements alleged in ¶¶184, 186, 188 and 190, F&C and

Plaintiffs would not have decided to purchase the Preferred Trust Securities.

D. False and Misleading Assurances to Investors Prior to the 2007 Offering

193. On March 15, 2006, WaMu filed with the SEC its Form 10-K for the fourth quarter and

fiscal year ended December 31, 2005, which was amended on August 9, 2006. Defendants Killinger,

Casey, Farrell, Frank, Leppert, Lillis, Matthews, Murphy, Osmer McQuade, Pugh, Reed, Smith, Stever,

and Wood signed the Form 10-K for the fourth quarter and fiscal year ended December 31, 2005.

WaMu’s 2005 Form 10-K falsely reassured investors of the Company’s dedication to appropriate

underwriting to safeguard against unwarranted loan losses in its subprime business: “The Company

seeks to mitigate the credit risk in this portfolio by ensuring compliance with underwriting standards on

loans originated to subprime borrowers and by re-underwriting all purchased subprime loans.”

194. Similarly, in its 2005 Form 10-K, the Company misleadingly reassured investors it

understood loan-to-value ratios exceeding 80% were particularly risky, and provided detailed statistics

on the number of loans held by the Company in which the loan-to-value ratio exceeded 80%. Absent

from the 2005 Form 10-K, but which was material to investors such as Plaintiffs, was any detail of how



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WaMu had secretly pressured its appraisers to inflate the stated value of the homes underlying WaMu’s

loans, thus manipulating the loan-to-value ratios for WaMu’s mortgages and exposing the Company to

much greater credit risk than was disclosed to investors.

195. WaMu and the Officer Defendants continued to make the same kinds of false and

misleading statements throughout the period up until the October 2007 offering. For example, at the

Company’s annual Investor Day conference, held on September 6 and 7, 2006, WaMu’s executives

praised the Company’s “strong underwriting,” “conservative lending standards,” “rigorous credit

standards,” and “disciplined credit culture.” Specifically, Defendant Cathcart noted: “At origination,

WaMu focuses on an effective underwriting process and borrower disclosures[.]” Hence, “[w]ith

respect to the borrower, the portfolio quality is very sound.” Cathcart continued: “Even after maximum

negative amortization and with no home price appreciation, the portfolio should remain well secured

and the borrower should have sufficient equity to refinance, should they choose to do so.” Defendant

Cathcart concluded that, for Option ARM borrowers, “WaMu controls the underwriting, so we have the

opportunity to evaluate the borrower at the time of origination. Overall, we are comfortable with this

portfolio.”

196. During the Company’s Investor Day, the Officer Defendants falsely claimed WaMu was

prepared for a weak housing market. Killinger misleadingly stated: “For WaMu, a slowdown in

housing will no doubt lead to higher delinquencies and credit cost, and again, we factor that into our

planning. However, as I alluded to earlier, we began planning for this quite some time ago, took a

number of defensive actions. And so, I believe that we are very well positioned, regardless of what

happens in the housing market.”

197. Defendant Schneider misleadingly assured investors that the Company had “reserved for

[subprime losses] appropriately and we have also, in second quarter of ‘06, tightened up a number of

our underwriting guidelines, and you can see that in our numbers.”

198. Touting his experience through many housing cycles, Rotella stated the Officer

Defendants “[felt] good about the fact that we’ve been aggressive in controlling what we can control.

Frankly, we’ve been ahead of the market in my perspective.” Defendant Cathcart misleadingly asserted



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“we have been watching our credit profile diligently for the last two years, and we’ve been making

strategic choices to prepare for the environment we currently find ourselves in.”

199. When analysts at the Investor Day questioned the Officer Defendants regarding the

Company’s use of third-party appraisers, Defendant Killinger misleadingly assured investors “there’s a

very strong governance process over those external appraisers.”




















underwriting and fraudulent appraisal manipulations. Contrary to WaMu’s Form 10-K, WaMu did not

ensure compliance with underwriting standards on loans originated to subprime borrowers. Contrary to

statements made at the investor conference, WaMu’s loan quality was not “very sound” but rather very



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risky and the Company had not been making “strategic choices to prepare for” a downturn in the

housing market. Contrary to Defendant Schneider’s statements, WaMu was not appropriately reserved

for subprime losses and had not meaningfully tightened its underwriting guidelines as the Company

continued to issue significant loans in violation of its stated underwriting guidelines.

202. On March 1, 2007, WaMu filed with the SEC its Form 10-K for the fourth quarter and

fiscal year ended December 31, 2006, which was expressly incorporated by reference in the 2007

Offering Circular. Defendants Killinger, Casey, Farrell, Frank, Leppert, Lillis, Matthews, Murphy,

Osmer McQuade, Montoya, Pugh, Reed, Smith, and Stever signed the 2006 Form 10-K. Defendants

Killinger and Casey signed certifications attesting to the accuracy of the information contained in the

2006 Form 10-K and the adequacy of the Company’s internal controls, substantially similar to the

statements in ¶¶167-168.

203. The 2006 Form 10-K reported WaMu’s false and misleading 2006 financial results

which were not prepared in accordance with GAAP. According to the 2006 Form 10-K, WaMu

reported fourth quarter 2006 net income of $1.06 billion, or $1.10 per diluted share, compared with net

income of $865 million, or $0.85 per diluted share, in the fourth quarter of 2005. For the full year

2006, the Company’s reported net income was $3.56 billion, or $3.64 per diluted share, compared with

a net income of $3.43 billion, or $3.73 per diluted share, in 2005.

204. In the 2006 Form 10-K, the Company continued to misleadingly emphasize its

underwriting and other procedures as a safeguard against incurring unwarranted credit risk. For

example, WaMu stated in the 2006 Form 10-K: “The Company actively manages the credit risk

inherent in its Option ARM portfolio primarily by ensuring compliance with its underwriting standards,

monitoring loan performance and conducting risk modeling procedures.” Likewise, the 2006 Form 10-

K emphasized the Company’s underwriting practices for its subprime mortgages, reassuring investors

that “loan application and appraisal packages are reviewed to ensure conformity with the Company’s

stated credit guidelines . . . . Similarly, all purchases from Subprime Lenders must satisfy the

Company’s stated credit guidelines.”



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205. Again, as it did in the 2005 Form 10-K, WaMu’s 2006 Form 10-K misleadingly

reassured investors about WaMu’s caution in making loans exceeding 80% loan-to-value ratios without

disclosing WaMu had secretly pressured its appraisers to inflate the stated value of the homes

underlying WaMu’s loans.



Specifically, F&C read Defendants’ statements filed with the SEC. Defendants’ false and misleading

statements impacted F&C’s and Plaintiffs’ decision to purchase the Preferred Trust Securities because

Defendants’ statements falsely assured F&C and Plaintiffs that Washington Mutual was, among other

things, creditworthy and, among other things, maintained (i) prudent underwriting and risk management

standards; (ii) appropriately appraised home values; and (iii) properly reserved for loan losses. Had

F&C and/or Plaintiffs read a truthful account of WaMu’s creditworthiness and underlying business

activities alleged herein as of the date of Defendants’ false statements alleged in ¶¶203-205, F&C and

Plaintiffs would not have decided to purchase the Preferred Trust Securities.

207. At the time the statements were made and at the time of the 2007 Offering, the







underwriting and fraudulent appraisal manipulations. Contrary to WaMu’s public statements,

undisclosed to Plaintiffs, the Company regularly disregarded its “stated credit guidelines.”

208. On April 17, 2007, WaMu issued a false and misleading press release announcing its

financial results for the quarter ended March 31, 2007. WaMu reported that, for the first quarter of

2007, the Company had net income of $784 million, or $0.86 per diluted share and total assets of

$319.9 billion and Defendant Killinger praised the Company’s performance, stating, “[o]verall, we



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delivered solid results in the first quarter despite the challenging interest rate environment and slowing

housing market.”

209. That same day, the Company conducted a conference call with investors to discuss the

results. Defendant Killinger falsely stated that the Company was “seeing encouraging signs with the

improvement in the prime business that we saw in the first quarter, and with the steps that we’ve taken

into the subprime area of increasing pricing, improving underwriting, that we are starting to see that

show up in the way of early signs of credit on the 2007 production looks much better than ‘06, so that’s

encouraging.” Defendant Casey echoed these false statements by asserting that “we have significantly

increased our pricing and decreased our risk profile that we’re willing to underwrite to, and so we think

all those factors taken together will make this business a little more profitable. We are being selective

with our underwriting.” Additionally, Defendant Rotella stated, “we have absolutely no plans to shut

down our subprime channel. We have, as you’ve heard, since the beginning of last year been tightening

credit in that part of our business.”

210. On May 10, 2007, the Company filed with the SEC its Form 10-Q for the quarter ended

March 31, 2007, which Form 10-Q was expressly incorporated by reference into the 2007 Offering

Circular. The Form 10-Q was signed by Defendant Casey, and Defendants Killinger and Casey signed

certifications attesting to the accuracy of the information contained in the Form 10-Q and the adequacy

of the Company’s internal controls, substantially similar to the statements in ¶¶167-168.

211. The May 10, 2007 Form 10-Q repeated the same false and misleading financial results

set forth in the Company’s April 17, 2007 press release.

212. The Form 10-Q again misleadingly assured investors WaMu mitigated loan losses by

strictly monitoring LTV ratios as based on proper appraisals. The Form 10-Q stated that “loan-to-value

ratios are one of the two key determinants in determining future loan performance” and that credit risk

was dependent on the “quality of collateral.”






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underwriting and fraudulent appraisal manipulations. In particular, Defendant Casey’s statement that

the Company was “selective with our underwriting” and Defendant Rotella’s statement that WaMu was

“tightening credit” in the subprime channel during the April 17, 2007 conference call are contradicted

by former employees’ accounts of lax underwriting and approval processes, as described in § IV.B.

215. On July 18, 2007, WaMu issued a press release announcing its financial results for the

quarter ended June 30, 2007. This press release was expressly incorporated by reference into the 2007

Offering Circular. In this press release, WaMu announced “that second quarter 2007 earnings per share

increased 16 percent from a year ago. Continued strong performance led to net income of $830 million,

or $0.92 per diluted share, compared with net income of $767 million, or $0.79 per diluted share, in the

second quarter of 2006. Second quarter net income was also up from $784 million, or $0.86 per share,

in the prior quarter.”



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216. That same day, the Company held a conference call with investors to discuss the results.

During the call, the Officer Defendants again sought to reassure investors that WaMu was prudent and

conservative in its business practices. For instance, Defendant Killinger stated that WaMu was

“tightening underwriting” and helping “lead the industry to what we think is much more prudent and

appropriate underwriting standards at this point in the cycle.” Further, Defendant Casey stated, “While

we anticipate that we will see higher [nonperforming assets] across all of our home loan portfolios, we

expect losses in the prime loans to be much lower due to the lower LTVs and high FICO profile of our

prime portfolio.”

217. On August 9, 2007, the Company filed with the SEC its Form 10-Q for the quarter ended

June 30, 2007, which Form 10-Q was expressly incorporated by reference into the 2007 Offering

Circular. The Form 10-Q for the quarter ended June 30, 2007 was signed by Defendant Casey, and

Defendants Killinger and Casey signed certifications attesting to the accuracy of the information

contained in the Form 10-Q and the adequacy of the Company’s internal controls, substantially similar

to the statements in ¶¶167-168.

218. The August 9, 2007 Form 10-Q repeated the same false and misleading financial results

set forth in the Company’s July 18, 2007 press release.

219. Again, the Form 10-Q stated that “loan-to-value ratios are one of the two key

determinants in determining future loan performance” and that credit risk was dependent on the

underlying “quality of collateral.”

220. Further, in the August 9, 2007 Form 10-Q the Company falsely assured investors that

WaMu implemented and monitored effective and appropriate risk management practices:

Enterprise Risk Management works with the lines of business to establish appropriate policies, standards and limits designed to maintain risk exposures within the Company’s risk tolerance. Significant risk management policies approved by the relevant management committees are also reviewed and approved by the Audit and Finance Committees. Enterprise Risk Management also provides objective oversight of risk elements inherent in the Company’s business activities and practices, oversees compliance with laws and regulations, and reports periodically to the Board of Directors.



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Management is responsible for balancing risk and reward in determining and executing business strategies. Business lines, Enterprise Risk Management and Treasury divide the responsibilities of conducting measurement and monitoring of the Company’s risk exposures. Risk exceptions, depending on their type and significance, are elevated to management or Board committees responsible for oversight.




















underwriting and fraudulent appraisal manipulations. Contrary to Defendant Killinger’s statement that

WaMu was “tightening underwriting” and Defendant Casey’s assurance that loan losses would be

lower, WaMu had already significantly deviated from stated underwriting guidelines and would be



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required to increase its Provision and Allowance for Loan and Lease Losses due to non-performing

mortgages.

223. On October 17, 2007, WaMu issued a press release announcing its financial results for

the quarter ended September 30, 2007. This press release was expressly incorporated by reference into

the 2007 Offering Circular. In this press release, WaMu announced “third quarter 2007 net income of

$210 million, or $0.23 per diluted share, compared with net income of $748 million, or $0.77 per

diluted share, in the third quarter of 2006. The company attributed the decline to a weaker housing

market and disruptions in the capital markets.” Defendant Killinger misleadingly attributed the

Company’s lower results to “the increasingly difficult market conditions that are challenging the

banking industry” without reference to the Company’s prior disregard for proper underwriting and

appraisal standards.

224. WaMu’s earnings as reported in the October 17, 2007 press release were false and

misleading and not in compliance with GAAP. WaMu substantially and materially understated the

amount of the provision that WaMu was required to record under GAAP to properly reserve for its

impending loan losses. WaMu’s Provision and Allowance for Loan and Lease Losses was based on

fraudulently manipulated appraisals and therefore did not take into account the true value of the

underlying collateral. Moreover, WaMu’s allowance was far too inadequate in light of the true credit

profile of its borrowers, many of whom only obtained loans from WaMu because the Company

abandoned appropriate underwriting standards. The inadequacy of the Company’s allowance began to

be revealed when, on November 1, 2007, the New York Attorney General revealed WaMu had falsified

appraisals and then again, on December 10, 2007, when WaMu was forced to announce it was

increasing its allowance provision for the fourth quarter by approximately $400 million and expected to

take additional substantial increases throughout 2008.

E. The False and Misleading 2007 Offering Documents

225. Goldman Sachs, Credit Suisse, and Morgan Stanley, along with now-bankrupt Lehman

Brothers Inc., sold $1 billion of the 2007 Preferred Trust Securities to investors, including Plaintiffs, by



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means of a false and misleading offering circular dated October 18, 2007 (the “2007 Offering

Circular”).

226. The 2007 Offering Circular incorporated by reference the false and misleading

statements set forth in the Form 10-K for the year ending December 31, 2006, the Form 10-Q for the

quarter ending March 31, 2007, the July 18, 2007 press release, and the Form 10-Q for the quarter

ending June 30, 2007.

227. In addition to incorporating by reference false and misleading statements, the 2007

Offering Circular itself contained false and misleading statements describing WaMu’s underwriting and

appraisal practices, as well as the strength and importance of the Company’s risk management

procedures.

228. The structure of the 2007 Offering included the conveyance of HELs and adjustable rate

mortgages (“ARMs”), originated by a subsidiary of Washington Mutual Inc., Washington Mutual Bank,

to the shell entity or “trust” indirectly owned by WaMu and created to issue the 2007 Preferred Trust

Securities.

229. As the conveyance of the HELs and ARMs was a part of this structured financing, the

2007 Offering Circular purported to describe WaMu’s lending practices, underwriting procedures,

credit risk safeguards, and dedication to appropriate risk management.4

230. The 2007 Offering Circular falsely and misleadingly described WaMu’s underwriting

practices:

Underwriting

General

The HELs owned by Asset Trust I were, in all material respects, originated in accordance with the underwriting guidelines of WMB as described in herein. The HELs were underwritten by WMB using automated underwriting systems.

4 The 2007 Offering Circular refers to Washington Mutual, Inc. as “WMI” and Washington Mutual Bank as “WMB”.



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WMB’s underwriting guidelines generally are intended to evaluate the prospective borrower’s credit standing and repayment ability and the value and

adequacy of the mortgaged property as collateral. Some HELs are manually underwritten, in which case an underwriter reviews information submitted by the borrower and supporting documentation, if required, and a credit report of the borrower, and based on that review determines whether to originate a loan in the amount and with the terms requested by the borrower. Some HELs are underwritten through WMB’s automated underwriting system, described below. Prospective borrowers are required to provide details about their financial

factors such as their assets, liabilities and related monthly expenses, as well as income and employment information.

* * *

Evaluation of the Borrower’s Repayment Ability

In evaluating a prospective borrower’s ability to repay a HEL, the loan

underwriter considers the ratio of the borrower’s total monthly debt (including non-housing expenses) to the borrower’s gross income (referred to as the debt-to-income

ratio” or “back-end ratio”). The maximum acceptable ratios may vary depending on other loan factors, such as loan amount and loan purpose, loan-to-value ratio, credit score and the availability of other liquid assets. Exceptions to the ratio guidelines may be made when compensating factors are present.

231. In truth, WaMu’s stated underwriting guidelines were routinely circumvented in order to

approve loans to less-than-creditworthy borrowers. WaMu did not originate loans in accordance with

its own underwriting guidelines, and it was misleading to assert WaMu’s “underwriting guidelines

generally are intended to evaluate the prospective borrower’s credit standing and repayment ability and

the value and adequacy of the mortgaged property as collateral” without disclosing that WaMu

regularly and repeatedly extended loans to borrowers known to be incapable of repaying the loan and

that WaMu fraudulently inflated loan appraisals, as witnessed by former employees of the Company.

232. The 2007 Offering Circular falsely and misleadingly described WaMu’s appraisal

practices:

Evaluation of the Adequacy of the Collateral

The adequacy of the property being pledged as collateral generally is determined by an appraisal made in accordance with pre-established appraisal

guidelines. At origination, all appraisals are required to conform to the Uniform



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Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation, and are made on forms acceptable to the Federal National Mortgage Association and/or the Federal Home Loan Mortgage Corporation. Appraisers may be staff appraisers employed by WMB or independent appraisers selected in accordance with the pre-established appraisal guidelines. Such guidelines generally require that the appraiser, or an agent on its behalf, personally inspect the property and verify whether the property is in adequate condition and, if the property is new construction, whether it is substantially completed. However, in the case of HELs underwritten through WMB’s automated underwriting system, an automated valuation method (“AVM”) may be used in lieu of a traditional appraisal. The AVM relies on public records regarding the encumbered property and/or neighboring property and statistically derives a value using that information. If AVMs are used, they comply with the requirements of the Financial Institutions Reform and Recovery Act of 1989, as amended, and are independently verified periodically. In either case, the appraisal

normally is based upon a market data analysis of recent sales of comparable properties and, when deemed applicable, a replacement cost analysis based on the current costs of constructing or purchasing a similar property.

233. In truth, appraisers were instructed by WaMu to inflate home values, which falsely

increased LTV ratios and exposed WaMu to increased loan losses.

234. The 2007 Offering Circular falsely and misleadingly stated WaMu did not deviate from

its underwriting and appraisal parameters without a reasonable and legitimate basis:

Exceptions to Program Parameters

Exceptions to WMB’s loan program parameters may be made on a case-by-case basis if compensating factors are present. In those cases, the basis for the exception is documented, and in some cases the approval of a senior underwriter is required. Compensating factors may include, but are not limited to, low loan-to-value ratio, good credit standing, the availability of other liquid assets and stable

employment.

235. In truth, WaMu deviated from its stated underwriting guidelines and made exceptions

even when compensating factors were not present in order to increase loan volume.

236. The 2007 Offering Circular falsely and misleadingly assured investors that WaMu

maintained appropriate credit risk management procedures and policies to monitor the Company’s

lending practices and loan portfolio and safeguard the Company from incurring unreasonably risky



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loans from borrowers who could not afford to repay. The 2007 Offering Circular misleadingly stated:

Quality Control Review

WMB’s credit risk oversight department conducts quality control reviews of statistical samplings of previously originated HEL’s on a regular basis. Credit Risk Management Policies

Credit risk within the WMI Group is managed by means of a broad set of policies and principles contained in its credit policy. The Chief Credit Officer is responsible for overseeing the work of a credit policy committee, monitoring the quality of the WMI Group’s credit portfolio, determining the reasonableness of the WMI Group’s allowance for loan losses, reviewing and approving large credit exposures and setting underwriting criteria for credit-related products and programs. Credit risk management is based on analyzing creditworthiness of the borrower, the adequacy of the underlying collateral given current events and conditions and the

existence and strength of any guarantor support.

Credit risk assessment is a process that requires the evaluation of numerous factors, many of which are qualitative. Process integrity relies on the ability of the

WMI Group’s lending personnel to analyze all risk elements. It also depends on maintaining risk rating accuracy by recognizing changing elements of credit risk and promptly initiating risk rating changes.

237. In truth, the Individual Defendants ignored credit risk management’s warnings that the

Company was operating outside acceptable risk limits by approving unwarranted exceptions to its

underwriting guidelines and accepting inflated home appraisals.

238. The 2007 Offering Circular made the same, or substantially similar, false and misleading

statements with respect to other loan types held by the trust (primarily ARMs), as set forth in Exhibit A.

239. The 2007 Offering Circular falsely stated that the loans held by the trusts, which were

originated by WaMu, were believed to be “originated in compliance with applicable laws and

regulations in all material respects.” For the same reasons set forth in the complaint filed by the New

York Attorney General approximately one week after the 2007 Offering, a substantial sum of WaMu’s

loans originated between April 2006 and October 2007 were pursuant to fraudulent appraisals in

violation of state and federal laws and regulations. As part of the structured financing of the 2007

Offering, a material number of the loans held by the trusts were originated during this time period.



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240. In addition to the Company’s SEC filings incorporated by reference, the 2007 Offering

Circular attributed to the Company’s poor financial results for the third quarter of 2007 to “adverse

developments in the mortgage lending business (and in the housing market more generally) and related

volatility and liquidity constraints in the capital markets since June 30, 2007.” In truth, the Company’s

reported financial third quarter 2007 financial results misrepresented the Company’s net income,

earnings per share, Allowance Provision for Loan and Lease Losses, and assets because the Company

failed to properly account for the increased risks of default resulting from the Company’s departure

from its lending standards, including its improper appraisal and underwriting practices. Further,

attributing WaMu’s losses to a market-wide upheaval was misleading in the absence of a disclosure that

WaMu had abandoned proper underwriting standards and inflated appraisals, thereby setting the stage

for future debilitating loan losses the Company would suffer.


relied upon Defendants’ statements in ¶¶223, 230, 232, 234, 236, 239 and 240 prior to purchasing the

Preferred Trust Securities. Specifically, F&C read the 2007 Offering Circular on or about October 18,

2007, as well as the historic SEC filings incorporated by reference in the 2007 Offering Circular.

Defendants’ false and misleading statements impacted F&C’s and Plaintiffs’ decision to purchase the

Preferred Trust Securities because Defendants’ statements falsely assured F&C and Plaintiffs that

Washington Mutual was, among other things, creditworthy and, among other things, maintained

prudent lending practices, underwriting procedures, credit risk safeguards, and appropriate risk

management. Had F&C and/or Plaintiffs read a truthful account of WaMu’s creditworthiness and


¶¶223, 230, 232, 234, 236, 239 and 240, F&C and Plaintiffs would not have decided to purchase the

Preferred Trust Securities.

VI. THE RISKS CONCEALED BY DEFENDANTS’ FALSE AND MISLEADING

STATEMENTS MATERIALIZE AS WAMU COLLAPSES AND THE TRUTH IS

REVEALED

242. On November 1, 2007, the public, i.e. investors, first learned of WaMu’s improper

manipulation of appraisal values. As alleged herein at ¶¶80-85, New York Attorney General Andrew



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Cuomo revealed Washington Mutual pressured purportedly independent appraisal companies into

fraudulently inflating the appraisals used in Washington Mutual’s loan origination process.

243. Then, on November 7, 2007, Attorney General Cuomo announced he would be

expanding his investigation into WaMu’s fraudulent appraisal practices. In a press release, Attorney

General Cuomo specifically warned purchasers of WaMu loans, including Fannie Mae and Freddie

Mac, to ensure “that the loans they purchased are not corrupted by this systemic fraud.” Also on

November 7, 2007, WaMu announced at its 2007 Annual Investor Day Conference that residential

borrower delinquencies were much higher than in the past and that the Company’s provision for loan

losses would exceed $1.1 billion in the first quarter of 2008.

244. On November 21, 2007, Moody’s Investors Service downgraded the ratings of certain

mortgage backed securities issued by WaMu in 2006 and late 2005, and placed under review for

possible downgrade additional WaMu-related mortgage-backed securities. Moody’s downgrade

recognized the mortgages backing these securities were incurring higher-than-anticipated rates of

delinquency and foreclosure.

245. On December 10, 2007, after the close of the market, WaMu announced alarming

changes to its business model and previous practices, which were the foreseeable result of the

Company’s unsustainable and undisclosed risky lending practices, appraisal fraud and GAAP

violations. WaMu was cutting its quarterly dividend from $0.56 per share to $0.15 per share. WaMu

further increased its loan loss provision guidance for the fourth quarter 2007 to $1.5 to $1.6 billion,

from $1.1 to $1.3 billion, and announced additional substantial increases would result throughout 2008.

The Company also announced it would end its subprime lending business, significantly pull back on its

other residential lending business, and incur a $1.6 billion after-tax charge against goodwill associated

with its home loans business.

246. As a result of WaMu’s disclosures on December 10, 2007, Moody’s cut WaMu’s credit

rating two notches to Baa2 from A3, noting the move was based on “its view that credit losses from

WaMu’s mortgage operations will be noticeably higher than previously estimated.” That same day,

Fitch Ratings downgraded WaMu to A- from A citing “worsening asset quality metrics.”



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247. On December 20, 2007, after the market closed, The Wall Street Journal reported that

the SEC had launched an inquiry into WaMu’s public disclosures of its mortgage lending practices and

accounting. According to The Wall Street Journal, the SEC was investigating whether “the company

properly accounted for its loans in financial disclosures to investors of the company.” WaMu

confirmed the SEC’s inquiry.

248. WaMu announced its 2007 financial results on January 17, 2008, reporting a quarterly

net loss of $1.87 billion, or $2.19 per share and a net loss of $67 million, or $0.12, for the full year

2007.

249. On March 3, 2008, Fitch Ratings downgraded $2.3 billion worth of WaMu subprime

mortgage-backed securities. Fitch based its downgrade on “the deteriorating performance of [WaMu’s

mortgage] pools from 2007, 2006 and late 2005 with regard to continued poor loan performance and

home price weakness.”

250. On March 6, 2008, Standard & Poor’s downgraded WaMu’s long-term credit rating

from BBB+ to BBB because of credit concerns.

251. On March 7, 2008, Fitch Ratings lowered its ratings on WaMu because of the “rapid

deterioration” in WaMu’s home equity loans portfolio.

252. On March 14, 2008, Moody’s downgraded WaMu’s senior unsecured debt rating from

Baa2 to Baa3. A rating of Baa3 is only one level above junk status. Moody’s downgraded WaMu

because of its beliefs “that remaining lifetime losses on [WaMu’s residential mortgage loan] portfolio

will be higher than previously expected” and that “WaMu’s required provisioning is likely to be greater

than $12 billion and that full year 2008 net losses could eliminate the company’s approximately $6

billion capital cushion above regulatory well capitalized minimums.” Further, Moody’s placed WaMu

on a negative credit outlook.

253. On March 27, 2008, Lehman Brothers issued an analyst report estimating WaMu would

need to take loan loss provisions of $10 billion in 2008 and an additional $5 billion in 2009. Further,

according to Lehman Brothers’ analyst, WaMu would report an earnings loss of $2.84 per share for



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2008. WaMu, Lehman Brothers’ analyst estimated, would incur $6 billion in charge-offs in 2008 and

$7 billion in charge-offs in 2009.

254. On April 8, 2008, WaMu announced a net loss of $1.1 billion, or $1.40 per share, for the

first quarter of 2008. The Company recorded a loan loss provision of $3.5 billion.

255. On April 11, 2008, Goldman Sachs issued an analyst report, recommending that its

clients short-sell WaMu stock. Goldman Sachs wrote: “The bad news is that our new product-by-

product analysis of its mortgage portfolio suggests $17 billion to $23 billion of embedded losses in

WaMu’s current book of business, of which only $3 billion have been absorbed so far; subsequently,

we forecast a $14bn provision charge in 2008.” Goldman Sachs further estimated that WaMu may lose

$3.30 per share in 2008. Goldman Sachs’ recommendation to “short” WaMu was a significant

revelation to investors, as set forth in § IV.G, supra.

256. On July 14, 2008, Lehman Brothers’ analyst Bruce Harting predicted WaMu would

report $26 billion in cumulative losses ($21 billion from home loans) for the second quarter of 2008.

Lehman Brothers’ analyst anticipated WaMu would have to take a $4 billion provision in the second

quarter and that the Company would report a loss of $1.48 per share in the quarter, far more than the

93-cent- per-share loss being predicted by other analysts.

257. On July 22, 2008, WaMu announced its second quarter 2008 financial results, including

that the Company suffered a net loss of $3.3 billion as a result of a significant increase in its loan loss

reserves. This was a loss of $3.34 per share (excluding a one-time earnings reduction customarily

made by analysts in assessing GAAP earnings). WaMu had to take a $5.9 billion loan loss provision in

the quarter and had to increase its loan loss reserves by $3.74 billion to $8.46 billion. WaMu now

anticipated cumulative losses in its residential mortgage portfolio to total $19 billion.

258. As a result of these disclosures, Moody’s placed WaMu and its bank subsidiary on

review for a downgrade to junk status.

259. Throughout September 2008, WaMu’s financial condition worsened and the rating

agencies downgraded their estimation of its creditworthiness. On September 25, 2008, the FDIC took

control of WaMu and dismissed its senior management. WaMu was insolvent. The Company’s



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securities, already significantly depressed, were rendered essentially worthless. Massive lending losses,

exacerbated by insufficient reserves, caused WaMu’s collapse, the biggest bank failure in U.S. history.

WaMu’s collapse was the foreseeable result of WaMu’s undisclosed reckless lending practices and

improper accounting.

260. Upon seizing WaMu, the FDIC immediately sold off WaMu’s assets and bank deposits

to the highest bidder. (WaMu’s debt and preferred equity securities obligations, such as those owned

by Plaintiff, were not part of the transaction.) The FDIC’s auction of WaMu’s assets and bank deposits

revealed WaMu had significantly inflated the valuations of the residential mortgage loans on its balance

sheet and had engaged in excessively risky lending practices. As Lawrence J. White, a professor of

economics at the NYU Stern School of Business and a former member of the Federal Home Loan Bank

Board, wrote in Forbes magazine:

In the WaMu transaction, JPMorgan Chase won the auction that the FDIC held among potential acquirers earlier in the week. JPMorgan Chase assumed all of WaMu’s deposit obligations – uninsured as well as insured. These deposits totaled about $188 billion. It also absorbed all of WaMu’s net assets, which were mostly residential mortgages and mortgage-backed securities. . . . The net assets acquired by JPMorgan Chase had a nominal value of around $240 billion.

* * *

JPMorgan Chase absorbed $240 billion in nominal assets and $188 billion in deposit liabilities, plus some unstated value for the branch network. The net value of this package should be somewhere north of $52 billion. But JPMorgan Chase paid the FDIC only $1.9 billion--and this was the best bid that the FDIC received!

As had been feared, WaMu really did hold a slew of poorly performing mortgages whose nominal value greatly exceeded their market value. Yet WaMu had a reputation (until recently) of being a well-run organization that didn’t undertake excessively risky activities or engage in abusive lending practices.

261. Indeed, upon acquiring WaMu’s loan portfolio, JP Morgan announced on September 25,

2008, that it recognized WaMu was carrying loans on its balance sheet at artificially inflated valuations.

JP Morgan publicly disclosed: “In conjunction with this acquisition, JPMorgan Chase will be

marking down the acquired loan portfolio by approximately $31 billion, which primarily represents

our estimate of remaining credit losses related to the impaired loans.”



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VII. PLAINTIFFS’ INJURY

262. As a direct and proximate result of Defendants’ material misrepresentations, omissions

and conduct as alleged herein, Plaintiffs purchased the 2006 and 2007 Preferred Trust Securities at

prices far exceeding their true worth.


and conduct as alleged herein, Plaintiffs were damaged when the market value of the 2006 and 2007

Preferred Trust Securities declined upon disclosures of WaMu’s previously undisclosed risky lending

activities, falsification of appraisals, violations of GAAP, and true financial condition – certain of

which disclosures are set forth supra.

264. Defendants’ false and misleading statements concealed WaMu’s true financial condition

and creditworthiness and, by doing so, artificially inflated the price of the Preferred Trust Securities.

Defendants’ false and misleading statements concealed factors concerning the material risk that

WaMu’s financial condition would be materially weakened and/or WaMu would be rendered bankrupt

as a result of its undisclosed risky lending practices, false appraisals and inadequate reserves for loan

losses. These undisclosed material risks materialized, causing the market value of the Preferred Trust

Securities to plummet to zero to the detriment of Plaintiffs.

265. As reported by The Seattle Times: “In the end, said Bill Longbrake, WaMu’s longtime

chief financial officer, the bank failed because its leaders abandoned its historical balance between

growth and prudence.” WaMu’s secret abandonment of prudent business practices in order to drive

loan volume caused plaintiffs’ losses.


and conduct as alleged herein, Plaintiffs have been damaged by their purchase of the 2006 and 2007

Preferred Trust Securities.

VIII. CAUSES OF ACTION

FIRST CAUSE OF ACTION Against the Officer Defendants for

Fraud

267. Plaintiffs incorporate by reference each of the substantive paragraphs of this Complaint.



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268. As alleged herein, the Officer Defendants made or participated in making material

misrepresentations and omissions with knowledge of their falsity or with utter disregard and

recklessness as to whether the representations and omissions were true or false.

269. The Officer Defendants intended for Plaintiffs to rely upon the material

misrepresentations and omissions alleged herein.

270. Plaintiffs justifiably relied on the material misrepresentations and omissions alleged

herein.

271. Plaintiffs were unaware of the falsity of the Officer Defendants’ misrepresentations and

omissions alleged herein and would not have relied on the Officer Defendants’ misrepresentations and

omissions if they had known the misrepresentations and omissions were false.

272. Plaintiffs were injured as a direct and proximate result of their justifiable reliance on the

material misrepresentations and omissions alleged herein.

273. Plaintiffs suffered damages caused by reliance on the material misrepresentations and

omissions alleged herein, in an amount that will be determined according to proof at trial.

274. In making the intentional misrepresentations and omissions alleged herein, the Officer

Defendants, each of them, acted with oppression, fraud and malice in conscious derogation of Plaintiffs’

rights under applicable law. Plaintiffs are entitled to punitive damages in an amount to be determined at

trial, which amount would be appropriate to punish or set an example of the Officer Defendants, and

each of them.

SECOND CAUSE OF ACTION Against the Officer Defendants for

Violations of California Civil Code §§ 1572, 1709 and 1710


276. As alleged herein, the Officer Defendants made or participated in making material

misrepresentations and omissions with knowledge of their falsity or with utter disregard and

recklessness as to whether the representations and omissions were true or false.

277. The Officer Defendants intended for Plaintiffs to rely upon the material

misrepresentations and omissions alleged herein.



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278. Plaintiffs justifiably relied on the material misrepresentations and omissions alleged

herein.

279. Plaintiffs were unaware of the falsity of the Officer Defendants’ misrepresentations and

omissions alleged herein and would not have relied on the Officer Defendants’ misrepresentations and

omissions if they had known the misrepresentations and omissions were false.


material misrepresentations and omissions alleged herein.

281. Plaintiffs suffered damages caused by their reliance on the material misrepresentations

and omissions alleged herein, in an amount that will be determined according to proof at trial.

282. In making the intentional misrepresentations and omissions alleged herein, the Officer

Defendants, each of them, acted with oppression, fraud and malice in conscious derogation of Plaintiffs’

rights under applicable law. Plaintiffs are entitled to punitive damages in an amount to be determined at

trial, which amount would be appropriate to punish or set an example of the Officer Defendants, and

each of them.

THIRD CAUSE OF ACTION Against All Defendants for

Negligent Misrepresentation


284. Defendants owed a duty to Plaintiffs, as issuer, officer, director, initial purchaser, or

control person to use reasonable care in connection with the offer and sale of the Preferred Trust

Securities.

285. Defendants breached that duty by failing to use reasonable care in ascertaining the actual

financial condition and business operations of WaMu and in failing to disclose material adverse

information regarding WaMu in connection with the offer and sale of the Preferred Trust Securities.

286. As alleged herein, Defendants made or participated in making materially false and

misleading statements without reasonable grounds to believe the statements were true.

287. Defendants intended for Plaintiffs to rely upon the materially false and misleading

statements alleged herein.



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288. Plaintiffs justifiably relied on the materially false and misleading statements alleged

herein.


materially false and misleading statements alleged herein.

290. Plaintiffs suffered damages caused by their reliance on the materially false statements

alleged herein, in an amount that will be determined according to proof at trial.

FOURTH CAUSE OF ACTION Against the Officer Defendants for

Violations of California Corp. Code §§ 25400 and 25500


292. In connection with the issuance, offer, and sale of the Preferred Trust Securities, the

Officer Defendants prepared and issued false and misleading statements transmitted in California.

293. The Officer Defendants systematically included material, untrue statements in the

materials transmitted to Plaintiffs.

294. The Officer Defendants also systematically omitted facts necessary in order to make the

statements, in light of the circumstances under which they were made, not misleading.

295. The Officer Defendants’ false statements and material omissions were made for the

purpose of inducing the purchase of the Preferred Trust Securities. The Officer Defendants knew

and/or had reasonable grounds to believe that the false statements and material omissions were false and

misleading.

296. The Officer Defendants willfully participated in the above-described acts.

297. Plaintiffs suffered damages caused by the material misrepresentations and omissions

alleged herein.

FIFTH CAUSE OF ACTION Against Defendant Goldman Sachs for

Violations of California Corp. Code §§ 25401 and 25501 Against the Officer Defendants for

Violations of California Corp. Code §§ 25504.1




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299. In connection with the issuance, offer, and sale of the Preferred Trust Securities by

Defendants, Defendants prepared and issued false and misleading statements transmitted in California.

300. Defendants’ false statements and material omissions were made for the purpose of

inducing the purchase of the Preferred Trust Securities.

301. Defendant Goldman Sachs sold the Preferred Trust Securities to Plaintiffs.

302. The Officer Defendants materially assisted with the intent to deceive and knew that the

false statements and material omissions were false and misleading.

303. Plaintiffs suffered damages caused by the material misrepresentations and omissions

alleged herein.

SIXTH CAUSE OF ACTION Against the Officer Defendants for

Violations of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 Promulgated Thereunder

304. Plaintiffs repeat and reallege each and every allegation set forth above as if fully set forth

herein.

305. This Count is brought by Plaintiffs against the Officer Defendants for violations of

§ 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

306. Defendants named in this Count, individually and in concert, directly and indirectly, by

the use of means or instrumentalities of interstate commerce and/or of the mails, engaged and

participated in a continuous course of conduct that operated as a fraud and deceit upon Plaintiffs; made

various untrue and/or misleading statements of material facts and omitted to state material facts

necessary in order to make the statements made, in light of the circumstances under which they were

made, not misleading; made the above statements with a severely reckless disregard for the truth; and

employed devices, and artifices to defraud in connection with the purchase and sale of securities, which

were intended to, and, during the Relevant Period, did: (i) deceive Plaintiffs regarding, among other

things, WaMu’s earnings, assets, loan origination, loan quality, underwriting processes, and the

accuracy of the Company’s financial reporting of performance; (ii) artificially inflate and maintain the



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market price of WaMu securities; and (iii) cause Plaintiffs to purchase WaMu securities at artificially

inflated prices.

307. Defendants had actual knowledge that the statements specifically alleged above were

materially false and misleading and that additional disclosures were necessary to correct the misleading

effect of their statements. In the alternative, Defendants acted with reckless disregard for the truth in

that they failed or refused to ascertain that their statements were materially false and misleading and/or

lacking in reasonable basis at all relevant times.

308. As a result of the dissemination of the materially false and misleading information and

failure to disclose material facts, as set forth above, the price of the Preferred Trust Securities was

artificially inflated throughout the Relevant Period in which Plaintiffs purchased those securities. In

ignorance of the materially false and misleading nature of the representations and statements described

above, Plaintiffs relied to their detriment on the statements described above.

309. At the time of said misrepresentations and omission, Plaintiffs were ignorant of their

falsity, and believed them to be true and complete. Plaintiffs could not, in the exercise of reasonable

diligence, have known the actual facts. Plaintiffs would not have purchased the Preferred Trust

Securities at the prices they paid for them, if Plaintiffs had known the true facts concerning WaMu.

310. The value of the Preferred Trust Securities declined materially upon the various partial

public disclosures of the true facts about the fraudulent and improper practices which had inflated their

prices and which material facts had been misrepresented and/or concealed as alleged herein. Plaintiffs

have therefore suffered substantial damages as a direct and proximate result of Defendants’ misconduct

as alleged herein.

311. By virtue of the foregoing, Defendants have violated § 10(b) of the Exchange Act and

Rule 10b-5 promulgated thereunder.

312. Plaintiffs are therefore entitled to damages in an amount to be determined at trial.



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SEVENTH CAUSE OF ACTION Against the Officer Defendants for

Violations of § 20(a) of the Securities Exchange Act of 1934

313. Plaintiffs repeat and reallege each and every allegation set forth above as if fully set forth

herein.

314. This Count is asserted against the Officer Defendants for violations of § 20(a) of the

Exchange Act, 15 U.S.C. § 78t(a).

315. As alleged in detail above, WaMu committed a primary violation of the federal securities

laws, through its knowing and/or reckless dissemination of materially false and misleading statements

and omissions throughout the Relevant Period.

316. During their tenures as senior officers of WaMu, each of the Officer Defendants was a

controlling person of WaMu within the meaning of § 20(a) of the Exchange Act. By reason of their

positions of control and authority as officers of WaMu, these Defendants had the power and authority to

cause WaMu to engage in the wrongful conduct complained of herein. The Officer Defendants were

able to and did, directly and indirectly, exert control over WaMu, including the content of the public

statements made by WaMu during the Relevant Period, thereby causing the dissemination of the false

and misleading statements and omissions of material facts as alleged herein.

317. In their capacities as senior corporate officers of the Company, the Officer Defendants

had direct involvement in the day-to-day operations of the Company and in WaMu’s financial reporting

and accounting functions. Each of the Officer Defendants was also directly involved in providing false

information and certifying and/or approving the false financial statements and other false and

misleading statements disseminated by WaMu during the Relevant Period, including the false and

misleading statements in the Offering Circulars. Further, the Officer Defendants had direct

involvement in the presentation and/or manipulation of false financial reports included within the

Company’s press releases and filings with the SEC, including those false and misleading statements

incorporated by reference in the Offering Circulars.

318. Each of the Officer Defendants is a “controlling person” within the meaning of Section

20(a) of the Exchange Act and had the power and influence to direct the management and activities of



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the Company and its employees, and to cause the Company to engage in the unlawful conduct

complained of herein. Because of their positions, the Officer Defendants had access to adverse non-

public financial information about the Company and acted to conceal the same, or knowingly or

recklessly authorized and approved the concealment of the same. Moreover, each of the Officer

Defendants was also involved in providing false information and certifying and/or approving the false

financial statements disseminated by WaMu during the Relevant Period. Each of the Officer

Defendants was provided with or had access to the Offering Circulars and copies of the Company’s

reports, press releases, public filings and other statements alleged by Plaintiffs to be misleading prior to

and/or shortly after these statements were issued and had the ability to prevent the issuance of the

statements or cause the statements to be corrected.

319. As set forth above, WaMu violated § 10(b) of the Exchange Act by its acts and

omissions alleged in this Complaint. By virtue of their positions as controlling persons of WaMu and

as a result of their own aforementioned conduct, the Officer Defendants are liable pursuant to § 20(a) of

the Exchange Act, jointly and severally with, and to the same extent the Company would be liable if

named as a defendant herein. Moreover, each of the Officer Defendants is culpable for the material

misstatements and omissions made by WaMu, including such misstatements in the Company press

releases, Forms 10-K, and Forms 10-Q, and the Offering Circulars.

320. As a direct and proximate result of the Officer Defendants’ conduct, Plaintiffs suffered

damages in connection with their purchase of the Preferred Trust Securities.

EIGHTH CAUSE OF ACTION Against the Director Defendants for

Violations of § 20(a) of the Securities Exchange Act of 1934

321. Plaintiffs repeat and re-allege each and every allegation contained above as if fully set

forth herein.

322. This Count is asserted against the Director Defendants, who were members of WaMu’s

Audit Committee and Finance Committee, and/or signed WaMu’s annual Form 10-K reports filed with

the SEC, for violations of § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a).



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323. During their tenure as directors of WaMu, each of the Director Defendants was a

controlling person of WaMu within the meaning of § 20(a) of the Exchange Act. By reason of their

positions of control and authority as directors of WaMu, who signed and authorized the Company’s

Form 10-K filings and/or served as members of the Finance Committee and/or Audit Committees of

WaMu, the Director Defendants had the power and authority to cause WaMu to engage in the wrongful

conduct complained of herein. The Director Defendants were able to and did control, directly and

indirectly, the content of the public statements made by WaMu during the Relevant Period, thereby

causing the dissemination of the false and misleading statements and omissions of material facts as

alleged herein.

324. Each of the Director Defendants had the power to control and/or influence the particular

practices and conduct giving rise to the securities violations alleged herein, and exercised the same. In

their capacities as directors of WaMu, during their tenure the Director Defendants each signed certain of

the Company’s filings, including the Company’s Forms 10-K, and therefore had the power and

authority to control the statements made in such filings. As a result, these Defendants, as a group and

individually, were controlling persons within the meaning of § 20(a) of the Exchange Act.

325. By reason of their positions as directors of WaMu, and more specifically as members of

the Audit Committee and/or the Finance Committee, each of the Director Defendants is a “controlling

person” within the meaning of § 20(a) of the Exchange Act and had the power and influence to direct

the management and activities of the Company and its employees, and to cause the Company to engage

in the unlawful conduct complained of herein. Because of their positions, the Director Defendants had

access to adverse non-public financial information about the Company including, among others things,

its risk management and acted to conceal the same, or knowingly or recklessly authorized and approved

the concealment of the same.

326. As set forth above, WaMu violated § 10(b) of the Exchange Act by its acts and

omissions alleged in this Complaint. By virtue of their positions as controlling persons of WaMu and

as a result of their own aforementioned conduct, the Director Defendants are liable pursuant to § 20(a)

of the Exchange Act, jointly and severally with, and to the same extent as the Company would be liable



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under § 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, to Plaintiffs and the other

members of the Class who purchased or otherwise acquired WaMu securities. Moreover, as detailed

above, during the respective times the Director Defendants served as directors of WaMu, each of the

Director Defendants is culpable for the material misstatements and omissions made by WaMu,

including such misstatements in the Company press releases, Forms 10-K, Forms 10-Q, and the

Offering Circulars.

327. As a direct and proximate result of the Director Defendants’ conduct, Plaintiffs suffered

damages in connection with their purchase the Preferred Trust Securities.

IX. PRAYER FOR RELIEF

WHEREFORE, Plaintiffs pray for judgment as follows:

1. Full and complete rescission and all remedies ancillary thereto.

2. Actual damages in an amount to be proven at trial.

3. Prejudgment interest and post-judgment interest as allowed pursuant to statutory and

common law.

4. Exemplary and punitive damages in an amount sufficient to punish the Officer

Defendants and make an example of them.

5. Such other and further relief as the Court may deem just and proper.



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X. JURY TRIAL DEMAND

Plaintiffs demand a trial by jury.

DATED: July 23, 2010 DIETRICH SIBEN THORPE LLP

By: /s/ David A. Thorpe

David A. Thorpe Edward P. Dietrich Matthew P. Siben 2173 Salk Avenue, Suite 250 Carlsbad, CA 92008 Tel.: (760) 579-7368 Fax: (760) 579-7369 Email: [email protected] [email protected] [email protected]

Attorneys for Plaintiffs Flaherty & Crumrine Preferred Income Fund Incorporated, Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated, Flaherty & Crumrine/Claymore Preferred Securities Income Fund Incorporated, Flaherty & Crumrine/Claymore Total Return Fund Incorporated, and Flaherty & Crumrine Investment Grade Fixed Income Fund


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CERTIFICATE OF SERVICE Dietrich Siben Thorpe LLP

No. 2:08-md-1919 MJP 2173 Salk Avenue, Suite 250, Carlsbad, CA 92008

No. C09-1756 MJP Tel.: (760) 579-7368 Fax: (760) 579-7369

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CERTIFICATE OF SERVICE

I hereby certify that on July 23, 2010, I filed the foregoing with the Clerk of the Court using the CM/ECF system, and served all parties via ECF.

DATED: July 23, 2010 DIETRICH SIBEN THORPE LLP

By: /s/ David A. Thorpe

David A. Thorpe Edward P. Dietrich Matthew P. Siben 2173 Salk Avenue, Suite 250 Carlsbad, CA 92008 Tel.: (760) 579-7368 Fax: (760) 579-7369 Email: [email protected] [email protected] [email protected]

Attorneys for Plaintiffs Flaherty & Crumrine Preferred Income Fund Incorporated, Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated, Flaherty & Crumrine/Claymore Preferred Securities Income Fund Incorporated, Flaherty & Crumrine/Claymore Total Return Fund Incorporated, and Flaherty & Crumrine Investment Grade Fixed Income Fund
