Suit: DB Securtized, Then Dumped $1B+ In Already-Defaulted Loans While Betting $10B On Their Failure; NYS 6-Year Statute Of Limitations Comes In Handy

Thompson Reuters News & Insight reports:

• Bernstein Litowitz Berger & Grossman filed a scorcher of a suit against Deutsche Bank Wednesday, claiming that the bank sold financial services group Dexia more than $1 billion in mortgage-backed securities at the same time Deutsche Bank bet $10 billion that those notes would fail. The 175-page (!) New York state supreme court complaint is Bernstein Litowitz's second major new MBS filing in a week, coming on the heels of Allstate's suit against Morgan Stanley (Go here for Allstate v. Morgan Stanley lawsuit).



• The Deutsche complaint is filled with eye-popping allegations. Bernstein claims, for instance, that senior traders at the bank described the securities they were peddling to clients like Dexia as "crap," "pigs," and "generally horrible."



• One trader, Greg Lippman, allegedly wrote, "DOESN'T THIS DEAL BLOW" in an e-mail to a colleague about an offering Dexia sank $23 million into.(1)



• In another e-mail the complaint cites, this one to a hedge fund investor, Lippman allegedly disclosed a $1 billion short position on mortgage-backed securities that was going to make him "oceans of money." (That Lippman e-mail is from 2005, but thanks to New York State's convenient six-year statute of limitations, Dexia's fraud and negligent misrepresentation claims can go way back.)

For more, see Dexia sues Deutsche Bank over $1 billion MBS investment.

Thamks to Deontos for the heads up on the story.

(1) See also: Dexia suit: DB securitized mortgages it sued originators over"

• But the new MBS complaint Dexia filed Thursday against Deutsche Bank includes an assertion I haven't seen before. Dexia's lawyers at Bernstein Litowitz Berger & Grossman claim Deutsche Bank securitized mortgage loans that had already defaulted by the time they were repackaged and sold to investors-and that Deutsche Bank engineered those securitizations even as it sued mortgage loan originators to demand that they repurchase the deficient loans.



• According to the Dexia complaint, Deutsche Bank was deceiving both MBS issuers and loan originators. It was including the "early payment default" loans in MBS pools despite telling investors that the securities were backed by loans that met underwriting standards. And at the same time, Deutsche Bank was claiming in repurchase suits against mortgage originators such as Cameron Financial, First Capital, Lancaster Mortgage, and Liberty Mortgage that it couldn't include the early payment default loans in securitizations, even though it had already packaged the loans into offerings it sold to Dexia and other investors.

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• "This type of conduct--complaining in court that loans cannot be securitized due to early default and then securitizing those very loans and selling the securities to its clients--exemplifies the duplicitous nature of the fraud Deutsche Bank perpetrated against Dexia, and demonstrates Deutsche Bank's knowledge that these securities were destined to fail," said Dexia counsel Avi Josefson of Bernstein Litowitz.

For the lawsuit, see Dexia SA/NV, et al. v. Deutsche Bank AG, et al.