Northern Group & Altitude Partners v. Merrill Lynch

FILED: NEW YORK COUNTY CLERK 03/08/2012 INDEX NO. 603271/2008

NYSCEF DOC. NO. 12 RECEIVED NYSCEF: 03/08/2012

SUPREME COURT OF THE STATE OF NEW YORKCOUNTY OF NEW YORK------------------------------------------------------------------------x

NORTHERN GROUP INCORPORATED andALTITUDE PARTNERS, LLC,

Plaintiffs,

-against-

MERRILL LYNCH, PIERCE, FENNER & SMITHINCORPORATED and MERRILL LYNCHGOVERNMENT SECURITIES, INC,

Defendants.

------------------------------------------------------------------------x

Amended Complaint

Index No. 603271/08

Plaintiffs Northern Group Incorporated ("Northern") and Altitude Partners, LLC

("Altitude") (collectively, the "Companies" or "plaintiffs"), by their attorneys Hinman,

Howard & Kattell, LLP, allege as follows:

PRELIMINARY STATEMENT

JURISDICTION

1. This Court has jurisdiction over defendants Merrill Lynch, Pierce, Fenner &

Smith Incorporated and Merrill Lyneh Government Securities, Inc. (colleetively, "Merrill"

or "defendants") pursuant to CPLR § 302 (a)(l) because each defendant has its principal

place of business within the State of New York.

PARTIES

2. PlaintifI Northern Group Incorporated is a Delaware company and has an

office located in New York, New York.

3. Plaintiff Altitude Partners, LLC is a Delaware company and has an ofliee

loeated in New York, New York.

4. Defendant Merrill Lynch, Pierce, Fenner & Smith Incorporated ("ML") is a

Delaware corporation with its principal place of business in New York, New York.

5. Defendant Merrill Lynch Government Securities, Inc. ("MLGS") IS a

Delaware corporation with its principal place of business in New York, New York.

FACTUAL BACKGROUND

6. NOlthern was formed in 1990 and Altitude was !(ll"lued in 2007.

7. Jacqueline Fried ("Fried") and Alexander Dembitzer ("Dembitzer") are the

sole shareholders of Northern and sole members of Altitude.

8. Northern is a management company managed by Fried and Dembitzer to

manage real property which is owned by Fried and Dembitzer through various special

purpose entities.

9. Altitude is an entity managed by Fried and Dembitzer.

10. Altitude's sole business purpose is to hold liquid assets (derived 1\'om the

operation of real property or the sale of real property) until such time as Fried and

Dembitzer need such assets to acquire or improve real property.

11. Northern and Altitude each hold their assets separate £\'om one another and

neither one is: (i) a Qualified Institutional Buyer ("QIB") or an (ii) institutional investor

that is an accredited investor within the meaning of 501(A),(I), (2), (3), or (7) of

Regulation D under the Securities Act of 1933 ("Securities Act").

MERRILL'S SOLICITATION OF' PLAINTIFF TO INVEST IN COMMERCIALMORTGAGE-BACKED SECURITIES

12. In May, 2008, Northern entered into a consulting agreement with Irwin

Boris ("Boris"). Boris's initial responsibility was to assist in obtaining financing as well

as assist in the management of properties managed by Northern.

13. Prior to consulting for Northern, Boris was contacted by John Mulligan

2

("Mulligan"), a Merrill Managing Director, regarding various investments for his then

employer, El Ad.

14. When Boris began working j{)r Norlhern, Boris injurmed Mulligan of his

new position.

15. On April 16, 2008, Mulligan, on behalf of defeudants, met with Fried,

Dembitzer and Boris. Mulligan touted Merrill's expertise in the flnaneial analysis of

companies fur the purpose of providing honest opinions and recommendations on whether

Merrill clients should buy, hold or sell securities. Defendants represented themselves as

the premier llnll in the f,nance industry, adhering to all ethical and regulatory standards,

complying with the 2004 analyst consent agreement, and maintaining their clients'

accounts in accordance with applicable standards within the industry.

16. At the meeting, Fried, Dembitzer, and Boris inf{lrI11ed Mulligan that neither

they nor the plaintiffs had ever invested in commercial mortgage backed securities

("MBS").

17. Fried and Dembitzer also advised Mulligan that: (i) they were not

experienced investors in securities; (ii) Altitude's sale flmction was to hold funds for

Dembitzer and Fried until such time as they were needed to invest in real estate; (iii)

plaintiffs' primary objective was to maintain principal and liquidity so that the funds

would be available to invest in real estate on short notice; (iv) they had a conservative

investment strategy; and (v) if they chose to proceed they would be relying on Merrill's

selection of securities in order to provide the Companies' safety, liquidity and principal

protection.

18. Mulligan then presented plaintiffs with a high pressure sales pitch in an

effort to convince them to invest in MBS and/or collateralized mortgage obligations

3

("CMO," collectively referred to with MBS as "CMBS"). More specifically:

a. Mulligau advised plaintim (via Dembitzer and Fried) that CMBS

are liquid bonds ("Bonds").

b. Mulligan advised plaintiffs that the Bonds traded in an active

market and were prieed by a mark to market system.

e. Merrill advised plaintiffs that it made a market in the Bonds so that

they will always be saleable;

d. Mulligan informed plaintiffs that the Bonds were secured by loans

on eommercial property.

e. Mulligan advised plaintiffs that Merrill was the

originator/underwriter/syndicator of many Bonds ("Merrill Originated Bonds") and that

the underwriting standards used by Merrill in originating such bonds were the most

stringent in the industry;

f Mulligan represented to plaintiffs that the Bonds arc "money good,"

conservative, safe and highly liquid investments and that the safety of the investments arc

reflected by the high ratings from S&P, Moodys and Fitch.

g. Mulligan assured Fried, Dembitzer and Boris that if the plaintiffs

invested in Bonds rated A or higher, the principal risk would be comparable to that of a

similarly rated government security. More specifically, a Bond rated AAA was

comparable in risk to a United States Treasury Bond, while a Bond rated AA was

eomparable to an Israeli Treasury Bond.

h. Mulligan failed to advise plaintiffs that 88% of the Bonds were

rated A or higher, and that seventy pereent of the Bonds were considered "super senior".

1. Mulligan also stated that a portfolio of CMBS in different

4

geographic areas and different propClty elassitlcations (i.e. retail, industrial, otlice, hotels

...) would provide diversification and thus, additional security far superior to municipal

bonds.

J. Mulligan fililed to advise plaintiffs that many of the loans

underlying the Bonds would have been in default but for funds escrowed at closing.

k. Mulligan failed to advise plaintiffs of the decline in underwriting

metries used to generate both the bonds and their underlying loans. To wit: (i) in greater

loan to value ratios; (ii) greater percentage of loan interest only; (iii) use of j(llward

looking rather than actual tlnaneials in determining debt service coverage.

I. Mulligan fi.uther advised plaintiffS that Merrill would provide the

plaintifls with repurchase tlnaneing ("Repo Financing") on the Merrill Bonds. Mulligan

also reassured them that Merrill has always in the past provided, and would continue to

provide, Repo Financing on securities bought ji'om Men'ill's trading inventory ("Inventory

Bonds").

m. Mulligan stated that the llnaneing offered on Bonds varied based

on the ratings of these securities. The higher the rating on the Inventory Bonds, the

greater the amount of tlnancing Merrill would provide. Merrill otIered the Inventory

Bonds with a repurehase roll-over period ("Repo Roll"). This means that after 30 days the

interest rate for the Bonds would be reset in accordance with the current L1BOR pricing.

Thc tlnancing Merrill offered the plaintiffs on Bonds with a 30-day rcpo roll was as

follows:

AAA 85%AA 75%A 65%

BBB 50%

5

n. Apparently anticipating concerns about the heavy leverage,

Mulligan then repeated his assurances about the safety and liquidity of the investments

and that the leverage would create a nominal risk. In this vein, Mulligan stated: (i) if

plaintiffs purchased short term Bonds, the price fluctuations were meaningless because

the Bond would payoff in ftl!l within that time frame; and (ii) the strength of the collateral

underlying the Bonds would minimize any l1uctuation.

o. Mulligan then recommended certain Inventory Bonds.

19. The plaintiffs left the meeting believing that investing in Bonds was

in line with their business objectives.

MERRILL'S OPENING AND OPERAnON OF THEINVESTMENTS ACCOUNTS

20. On April 18, 2007, Max Baker, Director of CMBS Trading at Merrill,

emailed the plaintiffs an offering of some Bonds.

21. On April 21,2008, Merrill assigned Matthew LoVecchio, CLoVecehio"),

hom Merrill's Global Markets and Investment Banking (GMI) ._.. NY Fixed Income Sales

Group, to act as the plaintiffs' registered representative and sales consultant.

22. That same day, LoVecchio emailed the plaintiffs an introduction, offered

his assistance and outlined the required doeUli1entation to open an account with Merrill:

specifically, a Master Repurchase Agreement ("MRA") with Merrill, an Investment

Management Agreement ("IMA"), an offering memorandum or prospectus for the

plaintiffs, a certificate of formation or articles of incorporation, and a tax ID form.

23. This was the only detailed documentation Merrill requested Ii'om the

plaintiffs for Merrill to open and maintain the accounts.

6

24. The plaintiffs reviewed such requests and advised Merrill that they had no

offering memorandum or prospectus.

25. On April 28, 2008, LoVecchio emailed the plaintiffs to notify them that

Merrill had set up accounts n no IMA was ever submitted. In that same email, LoVeeehio

offered the plaintiffs two Bonds that were eaeh rated A.

26. Shortly thereafter, LoVeeehio requested a Enaneial statement for Merrill's

credit department to review to approve plaintiffs' creditworthiness for the purchase and

financing of Bonds.

27. On or about May 2, 2008, Northern providcd a statement of assets it

managed, whieh were constructively owned by Dembitzer and Fried. The flnaneial

statement was unaudited, unexecuted and was a merely a two page statement, with the

Erst page listing cash and real estate owned by Dembitzer and Fried through special

purpose entities while the second page listed mortgages and a net value - - i.e. assets

luinus lTIOltgages.

28. No Enaneial statement was providcd by Altitude.

29. LoVecchio and his group continued the sophisticated hard-sell methods

that Merrill employed throughout Merrill's relationship with the plaintiffs. Beginning on

April 22, 2008, LoVecchio called plaintiffs on almost a daily basis, in an effort to

convince them to purchase Inventory Bonds. LoVecchio also sent the plaintiffs emails

praetieally every day eontaining an offering ofInventory Bonds. At no time, however, did

Merrill send the plaintiffs any kind of account analysis or market analysis of the

InventOlY Bonds that adequately disclosed the risks of investing in CMBS. To wit:

degradation of underwriting metries, rapid decline of the eollateral underlying eertain

segments of CMBS, laek ofliqnidity in CMBS, and the inability to have an aeeurate mark

7

to market price due to the lack of liquidity in the CMBS market.

30. Boris asked LoVechhio for information regarding the Bonds and was told

that the only information required was that contained on the Trepp Sheets.

31. The Trepp Sheets providcd a snapshot of the performance of the loans

underlying the Bonds. To wit: Loan: Amount of Loan; Loan Balance; ldentitleation of

Property; Term of Loan; Amortization Term; lntercst Only Period; Status of Loan -­

current, delinquent or default; and a summary of each category.

32. In this regard, LoVecchio gavc plaintifh his password so tlicy could acccss

the Trepp Sheets.

33. Plaintiffs were never provided with any offering memorandums,

prospectus' or private placement memorandums ("Offering Memorandums") for any of

the Bonds which they purchased.

34. On April 18, 2008, Merrill attempted to send plaintiffs two offering

memorandums via email. Apparently due to the tremendous size of the attachments,

neither document was received. Altitude did ultimately purchase Bonds reflected in one

of the offering memorandums.

35. Other than the futile attempt to provide plaintifls with Offering

Memorandums on April 18, 2008 (see paragraph 33 above), plaintiffs never received any

Offering Memorandums until they were provided in discovely in this action.

36. On or around May 5, 2008, in reliance on Merrill's representations set fortb

above, Northern and Altitnde each entered into a Master Repurchase Agreement ("Repo

Agreement) with Merrill, dated April 28, 2008, and provided Merrill with Northern's

Certificate of Incorporation and Altitude's Certificate of Formation. No IMA was

provided or even requested.

8

37. Upon information and belief, an IMA is required pursuant to Merrill's

internal compliance manual, and the Know Your Client Rules contained in FINRA Rule

2090.

38. Northern did not make any investments or conduct any trading activities

with Merrill. Only Altitude purchased Bonds fi'om Menill.

39. Altitude would never have invested in Bonds if Merrill had not represented

to the plaintiffs that the Bonds were "money good," conservative, safe, sound, highly

rated, highly liquid investments, and if Menill had not assured it of the safety of making

these investments with the levels of financing Merrill agreed to provide.

THE INITIAL CMBS PURCHASES IN PLAINTIFFS' ACCOUNTS

40. On or about May 12,2008, Altitude purchased eight inventory Bonds with

a face value of $23,626,000, for $16,985,945 ("Purchase 1") with Merrill Providing 30­

day Repo Financing as follows: (i) ML Commercial CMO 2006 4 Crated AA for

$3,981,138.28; (ii) Waehovia Bank CMO 2006 C29 Crated AA for $2,779,605.70; (iii)

ML Commercial CMO 2007 6E rated A- for $2,623,880.16; (iv) ML Commercial TR

CMO 2007 Cl B rated AA tor $ 105,710.94; (v) Waehovia Bank CMO 2007 C31 AJ

rated AAA telr $2,841,222.66; (vi) Waehovia Bank CMO 2007 C31 F rated Ate)]'

$4,077,656.25; (vii) ML Commercial CMO 2007 5 D rated Ate)]' $272,544.18; and (viii)

ML Commercial CMO 2007 8 Crated AA for $304,187.50.

41. Plaintiffs were never given an Offering Memorandnm for any of sueh

Bonds and thus were not privy to the numerous risk tiletors detailed therein.

42. Plaintiffs were never provided with the updated financials t,)r any of such

Bonds.

9

43. On May 12, 2008, the settlement date for these purchases, Altitude paid for

the Bonds in cash by wiring $4,700,792 to Merrill, with $12,326,000 in financing hom

Men·ill.

44. On May 19, 2008, Altitude purchased two additional Bonds with a

combined $2,964,000 filce value for $2,810,425 with Merrill providing 30 day Repo

Financing of $2,389,000 ("Purchase 2") as follows: (i).lP Morgan Chase CMO 2006

FL2A A2 rated AAA for $365,929.69;and (ii) Greenwich Capital CMO 2006 FL4A A2

rated AAA for $2,444,495.63.

45. PlaintiiTs were never provided with offering memorandum for either Bond and

thus were not privy to the numerous risk factors detailed therein.

46. On June 4, 2008, Altitude purchased another two bonds with a combined

face value of $7,020,000 for $6,387,661 with Merrill providing 30 day Repo Financing in

the amount of $4,754,000 ("Purchase 3") as follows: (i) Bank of America Large Loan

2007 BMB 1 Crated AA for $4,505,273.44; and (ii) Citigroup CMT 2007 FL3A A2 Rated

AAA for $1,882,387.50.

47. Merrill never provided plaintiffs with any Offering Memorandums !{ll' any

of those Bonds, and thus plaintiffs were not privy to any of the risk factors detailed

therein.

48. Merrill never provided plaintiffs with any updated !inancials !{)r any of

such Bonds.

49. On June II, 2008, the Repo Financing for Purchase 1 came due. Merrill

sent the Companies notification that for Altitude to roll Purchase I for another repo

period, Altitude had to pay an additional $112,000 to cover market valuations.

50. As of June II, 2008, Altitude had purchased a total of $33,61 0,000.00 face

10

amount of Inventory Bonds hom Merrill f'lr purchase prices totaling $26,184,03 I .00 with

Repo Financing totaling $19,469,000.

5I. On June 16, 2008, LoVecchio advised Northern that it must execute and

return a QIBLlST Application ("QIB Form").

52. The QIB Form is a representation that the buyer of securities is a qualillcd

institutional investor and therefore, eligible to purchase unregistered securities (such as

Bonds) pursuant to an excmption in the Securities Act of 1933 ("Securities Act").

53. According to Part 230.144A of the General Rules and Regulations of the

Securities Act, to be effective, a QIB Form must be exeeuted by a company's Chief

Financial Officer, a person lulfilling an equivalent funetion, or other exeeutive offieer of

the purehaser.

54. On June 16, 2008, Boris exeeuted the QIB Form and returned same to

LoVeeehio.

55. Boris was never the Chief Financial Offker, a person fulfilling an

equivalent fi.lIlction or other executive officcr of any of the plaintiffs. Merrill was awarc

that plaintiffs were a mother, son operation and that Boris was a new hire and Merrill

should have looked to one of the principals of plaintiffs for such signature.

56. Merrill's failure to have the QIB form executed prior to the purchase or by

an authorized person, is yet an other example (no IMA) of how its desperation to unload

the InventOly Bonds took precedenec over following proper proecdure.

57. On Junc 23, 2008, Northern rewarded Boris by making him its Chief

Investmcnt Officer ("CIa") a title which is not traditionally considered to be an actual

officer but rather a mere job title. Tellingly, Boris was not cIa of Altitude, and he

I 1

gained such title with Northern after he executed the QIB Form.

58. Merrill was precluded Ii'om selling any of the Bonds to the plaintiffs

because they did not qualify to use any of the exemptions fi'om registration under tbe

Securities Act of 1933

PLAINTIFFS SUCCUMB TO ADDITIONAL SALES PRESSURE FROM

MERRILL

59. On June 13, 2008, Dembitzer and Boris, met with Merrill to discuss

investing in Bonds. Those present from Merrill werc Matthew LoVecchio, Roger Lehman

CLehman"), Max Baker ("Baker"), and Julia Tcherkassova ("Tcherkassova"). At that

meeting, LoVecchio, Baker and Tcherkassova reiterated that CMBS are strong, secure,

liquid investments and that Bonds are rated A and above are "money good." This

meeting induced Altitude to retain its existing positions regarding the Bonds Altitude had

already purchased and to purchase additional Bonds. At such mccting, Lchman

vigorously stated that the higher rated Bonds held almost no principal risk because they

were in a senior position to the lower rated Bonds. What Lebman and Merrill Lynch f~tiled

to disclose at such meeting was that close to ninety percent of all the Bonds were in this

senior position, thereby making this statement almost meaningless -- the senior Bonds

were effectively not senior to any other bonds. In addition, Lehman failed to disclose the

degeneration of underwriting metries that had occurred since 2003, thereby weakening the

value of the underlying collateral. To wit: loan to value ratio increased; the cash How to

debt service coverage decreased; loans were written on pro-forma financials rather than

actual financials; the methods of appraisal were loosened allowing for higher valuations.

60. During that conversation, LoVecchio informed Boris that Altitude had

12

initial approval for $50 million of Repo Financing, and that, if needed after quarter-end,

the plaintiffs could discuss increasing their Repo Financing amounts based on their past

performance, Boris also asked LoVecchio if the plaintifls could extend their repo periods

for 90 days or morc. LoVecchio answcred that he spoke with Merrill's rcpurchase

tlnancing group and they suggested repeating this request after quarter-end.

61. On .June 20, 2008, the Repo Financing from Purchasc 2 expired and

LoVecchio stated that in order to roll the tlnancials ovcr for another period, Altitude must

invcst an additional $14,000, which Altitude then did.

THE EARLY MARGIN CALLS

62. On .June 24, 2008, Merrill sent Altitude a notice of a margin call with an

exposure of $464,468, which Merrill claimed was duc to a decrease in markct value for all

the Bonds purchased by Altitude. Altitude covered the margin call.

63. On June 30, 2008, Merrill sent Altitude noticc of a second margin call for

$396,452, which Merrill once again claimed was due to the decreasc in market value for

all thc Bonds purchased by Altitude. Altitude covercd the margin call.

64. On July 7, 2008, the Repo Financing camc due. Paul Caputo, another

representative at Merrill who was handling the Companies' accounts at Merrill while

LoVecchio was away, told Altitude that it would have to invest an additional $100,000 in

cash to roll the financials over for another 30-day period, which Altitude did.

65. When Dembitzer and Boris asked LoVecchio why Altitude was recclvmg

all these margin calls, LoVecchio responded that it was due to the fact that it was the end

of the current qumier. He said there is always volatility at the end of the quarter, but that

the prices would readjust in a few days. LoVecchio further assured Dembitzer and Boris

13

that these were just paper losses and that the Bonds were good investments.

MORE SALES PRESSURE, MORE PURCHASES

66. With that reassurance in mind, on July 9, 2008, in response to the daily

offering sheet provided by LoVecchio ofInventory Bonds, Altitude purchased two Bonds

with a combined IIlce value of $10,000,000 jix $9,140,625 with Merrill providing 30 day

Repo Financing of $7,770,000 ("Purchase 4") as follows: (i) ML CMO 2006 1 A2 rated

AAA for $4,603,125; and (ii) ML CMO 20061 B ratcd AAA fi)r $4,537,500.

67. Plaintin~ were never given an Offering Memorandum fi)r either of such

Bonds, and thus were not privy to any of the risk factors detailed therein.

68. From July 11, 2008 to July 24, 2008, the Repo Financing expired and was

rolled for 30 days. This time, Merrill did not request any additional funds Ii'om Altitude.

69. On July 18, 2008, Altitude purchased two Inventory Bonds with a

combined face value of $2,000,000 for $1,177,031 with Merrill providing 30 day Rcpo

Financing of $880,000 ("Purchase 5") as follows: (i) CW Capital Cabal CMO 2006 CI G

rated BBB fi)r $402,187.50; and (ii) ML Commercial CMO 2007 7 AJ rated AAA lill"

$774,843.75.

70. Plaintiffs were never given an Offering Memorandum for either of sucb

Bonds, and thus were not privy to any of the risk factors detailed therein.

71. On July 21, 2008, Altitnde purchased one Inventory Bond with a face

value of $5,000,000 face for $4,097,656 with Merrill providing 30 day Repo Financing in

the amount of $3,483,000 ("Purchase 6") as follows: ML Commercial CMO 2006 3 AI

rated AAA.

72. PlaintiilS were never given an Olfering Memorandnm for snch Bond, and

thus were not privy to any of the risk factors detailed therein.

14

MOUNTING MARGIN CALLS IN JULY AND AUGUST Z008

73. On July 30, 2008, Merrill sent Altitude notice of a margin call for

$1, I05,110, which Merrill, once again, claimed was due to decrease in market value for

all the Bonds Altitude purchased. Altitude covered the margin call.

74. On August 6, 2008, the Repo Financing for the purchases came due and

Merrill permitted Altitude to roll it over. The cash remaining from the rollover was

applied to the account.

75. On August II, 2008, Merrill sent Altitude notice of a margin call for

$533,000 which Merrill once again claimed was due to dccrease in market value for all

the Bonds purchased by Altitudc. Altitude covered the margin call.

76. On August 15, 2008, Merrill sent Altitude notice of a margin call for

$392,000 which Merrill once again claimed was due to decrease in market value It)r all

the Bonds purehased by Altitude. Altitude covered the margin call.

77. On August 19, 2008, Merrill sent Altitude notice of a margm call It)r

$607,000 which Merrill once again claimed was duc to decrease in market value for all

the Bonds purchased by Altitude.

78. Prior to covering certain of the margm calls, plaintiffs inquired as to

whether it could sell the Bonds. Defendants responded that there was a limited market for

the Bonds and that, although Merrill would pnrchase them from plaintiffs, it would be at a

mark approximately forty percent less than the one used to determine the margin call. As

a result, Altitude had no option but to cover the margin calls.

79. Despite the margin calls during that period, LoVecchio repeatedly advised

the plaintiffs via telephone calls and emails that the Bonds the plaintiffs purchased were

highly attractive, safe, highly rated, "money good" investments with long term value, a

15

nice upside and high payoffs. In this regard, Merrill provided plaintiffs with daily market

color from its trading desk as well as weekly CMBS research reports.

80. The weekly CMBS Rcsearch would, as a general rule, discuss a negative

occurrence in the commercial rcal estate market but then disingenuously minimize its

impact. For instance, when discussing Stuyvesant Town ("Stuy Town") and Peter Cooper

Village, Lehman wrotc that although at its present rate, Stuy Town would not have

enough funds to satisfy its debt in 4 months, it was immaterial over the next twelve

months; and (ii) when discussing a failing borrower, such as: Riverton; Mervins; West

Oak Mall; Feldman Mall; Goody,; Steve & Barrys'; Linens and Things; Boseows; Lillian

Vernon; Shatver Image; Bombay Company or Borders, Lehman would state that the size

of default was immaterial as it was only a miniscule percentage of the bonds -- tellingly

Lehman never aggregated the exposure created in a segment ie. retail.

CONSOLIDAnON OF THE ACCOUNTS

8I. On August 22, 2008, the Repo Financings for all the purchases were

consolidated ("Consolidated Repo") and Altitude had a surplus of $2.4MM of margin

cash. To roll these consolidated purchases, $2.4MM of the margin cash was applied to

Altitude's account at Merrill.

82. Through late Angust 2008, the net result of the purchases, the margin calls

and the Consolidated Repo was that Northern and Altitude had purchased $50,610,000.00

face amount of Bonds for $8,997,334.00 cash plus roll-over and margin payments of

$3,427,483.00 for total payments of $12,424,827.00 with total remaining margin of

$28,480,000.

83. Throughout September 2008, Merrill made numerous telephone calls to the

plaintiffs and sent the plaintiffs numerous emails containing market reports (CMBS

16

Weekly and Daily Color) (i-om Merrill stating that the Bonds were highly attractivc, safe,

highly rated, "money good" investments with high payoffs.

LATE SEMPTEMBER: THE MOUNTING D1SASn~RANn EXPANDING LIES

OF MERRILL

84. On September 22, 2008, the Consolidated Rcpo came duc and, without any

notice, Merrill reduecd Altitude's levcrage by flve percent. Thus, Altitude had to invcst

an additional $772,000 to cover reduced leverage. Altitude wired the additional $772,000

to Merrill.

85. That same day, Dembitzer and Boris on behalf of Altitude, had a

conversation with LoVccchio. During that conversation, LoVecchio stated that Mcrrill

would continue providing Repo Financing for Altitude. LoVecchio also assured

Dembitzer and Boris that Men·ill is in the business of buying and selling Bonds and

providing flnancing to facilitate transactions. He said that Merrill had reduced the

flnancing amounts and therefore, their exposure on a temporaIy basis bccause of market

conditions and balance sheet concerns with the pending acquisition of Merrill by Bank of

Amcrica. He also reassured Dembitzer and Boris that the fundamentals were sound and

that Altitude's investments were liquid, safe and secure.

86. Later that day, Boris contacted LoVecchio to discuss Repo Financing.

LoVecchio then called the repo desk at Merrill with Boris in the background. Boris then

heard the person LoVecchio was speaking with at the repo desk state that Merrill would

continue to provide Repo Financing for Merrill Bonds.

87. On October 1, 2008, Merrill sent Altitude notice of a margin call for

$1,063,000, which Merrill once again claimed was due to decrease in market value for all

the Bonds purchased by Altitude. Altitude covered the margin call.

17

88. On October 2, 2008, Merrill sent Altitnde notice of a margin call for

$9 I4,000, which Men'ill once again claimed was due to decrease in market value for all

the Bonds purchased by Altitude. Altitude covered the margin call.

89. On October 10, 2008, Merrill sent Altitude notice of a margin call for

$3 I9,000, which Merrill once again claimed was due to dccreasc in market value for all

the Bonds purchased by Altitude. Altitude covered the margin call.

90. On October 16, 2008, Merrill sent Altitude notice of a margin call for

$1,828,000, which Merrill once again claimed was due to decrease in market value for all

the Merrill Bonds purchased by Altitude.

91. On Oetober 20, 2008, Merrill fired more than SOO employees.

92. On October 22, 2008, the Consolidated Repo came due. Merrill informed

Altitude that to roll the Consolidated Repo, in addition to applying the entire margin cash,

Altitude had to invest an additional $100,000 to cover reduced leverage. Altitude wired

the additional $772,000 to Merrill.

93. Instead of providing a thirty day roll over period, Merrill decreased the

Consolidated Repo period to seven days without any notice to Altitude. LoVecchio

claimed that on account of the layoffs that occurred on October 20, 2008, of more than

SOO people at Merrill, LoVecchio could not obtain credit approval for a repo period of 30

days. LoVecchio stated that he would work on extending the repo period for the next

time the Consolidated Repo came due.

94. On October 29, 2008, the Consolidated Repo period expired and was

rolled for 30 days. Nevertheless, that same day, Merrill demanded from Altitude a IS%

principal paydown on all the Merrill Securities in Altitude's account. Merrill claimed that

this was being done to all bond issues and claims on all its accounts. Merrill demanded

18

$4,721,991.87 hom Altitude on account of the "repo roll," $1,218,991.87 of which was

immediately paid by Altitude.

95. On Halloween, October 31, 2008, Merrill sent Altitude a margin call of

$1,774,054.42. Merrill claimed that Altitude had to pay the margin call and the

outstanding balance from the repo roll of $3,503,000, a total of $5,477,054.42, by

November 4, 2008, or else Altitude's account would be liquidated.

96. Altitude made repeated requests to Merrill to explain their unrcasonable

dcmand on such a short notice. Dembitzer informed Merrill that the funds werc

immediately available, but that, without admitting that Merrill is entitled to demand this

kind of money, Altitude wanted to simply place the funds in escrow until Altitude

received an explanation for Merrill's most recent demand for an additional

$5,477,054.42.

97. However, Merrill rejected Altitudc's proposal and thrcatened to liquidate

the account immediately - at an additional loss of tens of millions of dollars -- if

Altitude did not hand over nearly $5.5 million immediately.

98. On November 4, 2008, Dembitzer arranged for Altitude to pay

$5,477,054.42 cash to Mcrrill.

99. Altitude made this payment on November 4, 2008, under protest. If

Altitude did not make this payment, Merrill would have immediately liquidated Altitude's

account at Merrill and would have done so without regard for the prices Merrill could

obtain for the securities in Altitude's account. Therefore, Altitude's account at Merrill

would have incurred extremc and unreasonable losses.

100. On November 21, 2008, Altitude paid Merrill the sum of$13,383,183.29, in

full satisfaction of plaintiffs' elebt to Merrill Lynch.

19

101. In January 2009, Altitude transferred Bonds 111 exchange for

$ I6, 194,953.17 credit fi'om Moselle Developments, LTD.

AS AND FOR A FIRST CAUSE OF ACTION

Fraud

102. Plaintiffs repeat and reallege the allegations set forth in the paragraphs "I"

through "101" above as if liIlIy set fOlih herein.

103. In April 2008, Merrill made material representations to plaintiffs as set

forth in paragraphs 17 above, and summarized below:

a. The Bonds are "money good," conservative, safe and highly liquid

investments and that the Bonds have high ratings from the principal rating agencies.

b. Investing in the Bonds would provide the plaintiffs' safety,

liquidity, principal protection and diversilication.

c. If the plaintiffs' invested 111 the Bonds they would realize high

returns.

d. Merrill would provide the plaintiffs with continued Repo Financing

on the Bonds.

e. That the Bonds rated A or higher were as secure as similar

government bonds because such Bonds were senior to the other bonds on the same debt.

f. Based upon the liquidity and safety of these Bonds, Northern and

Altitude could buy the Bonds in large quantities with full leverage as stated above and

nominal risk.

104. If Merrill had not made the misrepresentations set forth in paragraph

"102" above, then plaintiffs would not have invested in the Bonds.

I05. Plaintiffs did, in fact, rely on the information diselosed by Merrill.

20

106. Merrill intended that plaintiffs rely on such information when it disclosed

it to plaintills.

107. Such bonds were unsuitable for plaintiffs needs -- a safe secure investment

which could be easily liquidated to investment in real estate -- and plaintiffs knew such

investment was not suitable fix plaintiffs.

108. At the time of the account opening and plaintills' signing of the MRAs,

Merrill induced plaintiffs to do so by intentionally omitting vital and material information.

109. Merrill failed to follow its proper procedures when opening plaintiffs'

accounts -- to wit: no IMA and minimal effort to follow the Know Your Customer

regulations contained in FINRA Rnle 2090.

110. If Merrill had followed the regulations contained in FINRA Rule 2090, it

would have known the Bonds were not suitable for plaintills needs.

111. Merrill never infonned plaintills or anyone else affiliated with the

Companies the true value and risks of the investments they put plaintiffs into.

112. Merrill knowingly concealed from the Companies that:

(a) it had a liquidity crisis caused in large part by its inability to sell the

Bonds it originated and it was desperately trying to unload its inventories of commercial

and residential mortgage-backed securities during the very months it was pushing many of

those securities into plaintiffS' accounts;

(b) it had offered substantial financial iucentives (.5% paper commission)

to its registered representatives in the event they were able to sell any Inventory Bonds.

(c) that it was considering, and then cffectuating, the sale of a large part of

its own inventory of mortgage-backed securities to a third party at a 78 percent discount at

the same time it was selling such securities to the Companies at only a 20 percent

21

discount;

(d) its own flnancial instability - leaving its sales people and advisors in

a desperate need to "pnsh product" 'and maximize sales and commissions if they were to

have any chance of salvaging their jobs and avoiding the fate of tens of thousands of their

peers;

(e) it had stopped originating Bonds in 2007, because it was unable to

place a substantial percentage (more than ten billion dollars) of the Bonds it had already

originated;

(1) its liquidity crisis was caused by its inability to liquidate its InventOly

of Bonds;

(g) its poliey to pay higher bonuses to its registered representatives for the

sale of any Inventory Bonds;

(h) of the lack of transparency in the CMBS market and that the marks

utilized by Merrill for both the sales and margin calls were generated by tertiary forms of

mark to market because there were no comparable sales;

(i) in an effort to generate profits through the origination of CMBS, Merrill

had abandoned longstanding underwriting principals, To wit: (a) the loan to value ratios

increased; (b) loans were underwritten on 'pro-forma flnancials rather than actual

performance; and (c) cash flow to debt service ratio's decreased;

(j) institutional traders were aware of such dcgradation in thc underwriting

metrics which was contributing to the laek of liquidity in the CMBS market;

(k) eighty eight percent of all the Bonds were rated A or higher thereby

minimizing any protections that might be allorded the higher rated classes.

(I) many of the Bonds never or rarely traded;

22

(m) that the prices which it used to sell the Bonds, f{)r margin ealls were

not actually market prices but generated by its traders based on a review of: (i) sales of

identieal Bonds; (ii) sales of similar bonds; (iii) market activity in general; (iv) Markit

CMBX; and (v) conversations with other Merrill traders and clients;

(n) that the finaneial woes of: Riverton; Mervis; West Oak Mall; Feldman

Malls; Goodys; Steve & Barrys'; Linen and Things; Boseouns; Lilior Vernon; Sharper

Image; Bombay Company eolleetively had an impact on the performanee of CMBS; and

that the escrowing of funds masked the lack of finaneial viability of Stuyvesant Town;

Extended Stay and other borrowers directly impacting select Bonds as well as the CMBS

market;

(0) Merrill had net losscs of $2.6 billion m the third quarter of 2007

resulting primarily from completed and planned asset sales across residential and

commercial exposures; and

(p) that the projimnas included in the proxy statement dated September

27, 20 II stated that there were preliminary adjustments of 5.3 billion dollars to its loan

portfolio.

113. In its desperation to unload the Inventory Bonds, Merrill sold over thirty

million dollars of Bonds to plaintiffs without qualifying plaintiffs as either a QIB within

the meaning of Rule 144A under the Seeurities Act of 1933 ("Securities Act") or a

Purchaser in offshore transaction in reliance on Regulation S ("Reg S Purchaser") under

the Securities Act.

114. Merrill never provided plaintiffs with offering memorandums for any of

the Bonds they purchased.

115. If Merrill had provided plaintiffs with Offering Memorandums complete

23

with Risk Factors, plaintiffs would not havc invested in the Bonds.

J 16. Plaintiffs were not a QIB or Reg S Purchaser.

117. Men·ill knew or should have known that plaintiffs were not a QIB or Reg S

Purchaser.

118. In its desperation to unload the Inventory Bonds, Merrill negligently or

recklessly tiled to determine that the plaintiffs were not a QIB or Reg S Purchaser.

119. Pursuant to the statements contained in the Offering Memorandums, the

Bonds were unregistered securities and could only be sold to QIB's or a Reg S Purchaser.

120. If Merrill had disclosed the information set forth in paragraphs "106" to

"112" above, then plaintill~ would not have invested in the CMBS.

121. Plaintiffs did, in fact, rely on the information disclosed by Merrill m

making the decision to purchase the Bonds.

122. Merrill's acts were willful and exceeded the bounds of decency and would

be considered outrageous by our society as a whole.

123. By reason of such !i·aud, plaintim seek actual damages of twenty five

million dollars, plus interest hom December I, 2008; as well as exemplary and punitive

damages in such amount as the jury deems appropriate to discourage such behavior.

AS FOR A SECOND CAUSE OF ACTION

Breach of Fiduciary Duty

124. Plaintiffs repeat and reallege the allegations set forth in the paragraphs" I"

through "123" above as iffully set forth herein.

24

125. As the brokerage finn for plaintiffs, Merrill owed plaintiffs fiducimy duties

of honesty, hdl disclosure and compliance with securities regulations and generally

accepted brokerage firm principles and standards.

126. Merrill had a flducimy duty to execute the sales to plaintiffs at the mark to

market price.

127. Merrill had a fiduciary duty to make its margin calls at the mark to market

pncc.

128. Merrill breached this fiduciary duty by selling the Bonds to Altitude at

grossly inflated prices.

129. Merrill breached this fiduciary duty by selling the Bonds to plaintiffs

without qualifying plaintiffs for an exemption fi'om registration under the Securities Act,

and therefore, if Merrill didn't breach this fiducimy duty, plaintiffs would not have been

able to purchase the Bonds.

130. Merrill did not use accurate pricing when making the margin calls, but

instead utilized numbers designed to increase Merrill's cash position.

131. Merrill's breach of flduciary duty has caused plaintifls to incur damages in

excess of twenty four million dollars.

132. By reason of the foregoing, plaintifls demands judgment in the amount

twenty-four million dollars, plus interest.

AS AND FOR A THIRD CAUSE OF ACTION

Reckless and Negligent Misrepresentation

133. Plaintiffs repeat and reallege the allegations set forth in the paragraphs" I"

through "132" above as if fully set fOith herein.

25

134. Defendants held out themselves as experts for the purpose of providing

honest opinions and recommendations on whether plaintiffs should huy, hold or sell

CMBS from Merrill Securities in plaintiffs' accounts with Merrill, as well as which

CMBS securities should be initially purchased. Merrill represented itself as a finn in the

finance induslIy that maintained its clients' accounts in accordance with applicable

standards within the industry.

135. In the rendering of investmcnt advice and sale of securities to plaintiffs,

defendants have obtained money or property by means of untrue statements of material

facts or by omissions to state material facts necessary in order to make the statements

made, in light of the circumstances under which they were made, not misleading,

including, but not limited to, those misrepresentations specifically described in the

sections above, including that:

a. the Bonds are liquid;

b. the Bonds traded in an active market and were priced by a mark to

market system.

c. Merrill made a market in the Bonds so that they will always be

saleable;

d. Merrill was the originator/underwriter/syndicator of many Bonds

and that the underwriting standards used by Merrill in originating such bonds were the

most stringent in the industry;

f. the Bonds are "money good," conservative, safe and highly liquid

investments and that thc safety of the investments are reflected by the high ratings from

0&13, Moodys and Fitch;

g. a Bond rated AAA was comparable 111 risk to a United States

26

Treasury Bond, while a Bond rated AA was comparable to an Israeli Treasury Bond;

h. 88% of the Bonds were rated A or higher, and that seventy percent

of the Bonds were considered "super senior";

1. a portfolio of CMBS in different geographic areas and different

property classifications (i.e. retail, industrial, office, hotels . .) would provide

diversifkation and thus, additional security hlr superior to municipal bonds;

J. if plaintiJTs purchased short term Bonds, the price fluctuations were

meaningless because the Bond would payoff in full within that time Ji'ame and the

strength of the collateral underlying the Bonds would minimize any fluctuation;

and material omissions specifically described in the sections above, including that:

a. Merrill had a liquidity crisis caused in large part by its inability to

sell the Bonds it originated and it was desperately trying to unload its inventories of

commcrcial and residcntial mortgage-backed securities during the very months it was

pushing many of those securities into plaintifTs' accounts;

b. Merrill had offered substantial financial incentives (.5% paper

commission) to its registered representatives in the event they werc able to sell any

Inventory Bonds;

e. Menill was considering, and then effectuating, the sale of a large

part of its own inventOly of mortgage-backed securities to a third party at a 78 percent

discount at the same time it was selling such securities to the Companies at only a 20

percent discount;

d. Merrill's own financial instability - leaving its sales people and

advisors in a desperate need to "push product" and maximize sales and commissions if

they were to have any chance of salvaging their jobs and avoiding the fate of tens of

27

thousands of their peers;

e. Merrill had stopped originating Bonds in 200?, because it was

unable to place a substantial percentage (more than ten billion dollars) of the Bonds it had

already originated;

f. Merrill's liquidity crisis was caused by its inability to liquidate its

Inventory of Bonds;

g. Merrill's policy to pay higher bonuses to its registered

representatives for the sale of any Inventory Bonds;

h. there was a lack of transparency in the CMBS market and that the

marks utilized by Merrill for both the sales and margin calls were gcnerated by tertiary

forms of mark to market becausc there were no comparable sales;

I. in an effort to generate profits through the origination of CMBS,

Merrill had abandoned longstanding underwriting principals. To wit: (a) the loan to value

ratios increased; (b) loans were underwritten on pro-forma financials rather than actual

performance; and (c) cash flow to debt service ratio's decreased;

.J. institutional traders were aware of such degradation in the

underwriting metrics which was contributing to the lack of liquidity in the CMBS market;

k. eighty eight percent of all the Bonds were rated A or higher thereby

minimizing any protections that might be afforded the higher rated classes.

l. many of the Bonds never or rarely traded;

m. the prices which it used to sell the Bonds, for margin calls were not

actually market prices but generated by its traders based on a review of: (i) sales of

identical Bonds; (ii) sales of similar bonds; (iii) market activity in general; (iv) Market

CMBS; and (v) conversations with other Merrill traders and clients;

28

n. the financial woes of Riverton; Mervis; West Oak Mall; Feldman

Malls; Goodys; Steve & Barrys'; Linen and Things; Boscouns; Lilior Vernon; Sharper

Image; Bombay Company collectively had an impact on the perfonuance of CMBS; and

that the escrowing of funds masked the lack of fInancial viability of Stuyvesant Town;

Extended Stay and other borrowers directly impacting select Bonds as well as the CMBS

market;

o. Merrill had net losses of $2.6 billion in the third quarter of 2007

resulting primarily jj'om completed and planned asset sales across residential and

commercial exposures; and

p. the pro~fimnas included in the proxy statement dated September

27, 2011 stated that there were preliminary adjustments of 5.3 billion dollars to its loan

portfolio.

136. Plaintiffs recklessly and or negligently represented that the Bonds were

suitable for plaintifTs.

137. In making the foregoing misrepresentations and material omISSIons,

defendants acted with recklessness or with negligence with the direct consequence of

deceiving plaintiffs and inducing plaintiffs to act or refrain from acting bascd upon the

false disclosures and nondisclosures by defendants.

138. Plaintiffs relied on the representatiol1s made by defendants, and upon the

misinformation caused by defendants' material omissions, by placing their brokcrage

investments with Merrill, acquiring the CMBS from Merrill's inventory, and placing their

investment accounts with Merrill.

139. Plaintiffs suffered mJury and damages in the amount of $25 million,

proximately caused by and as a result of defendants' reckless or negligent

29

misrepresentations and Olnissions.

WHEREFORE, plaintiffs demand judgment as follows:

a. on its first cause of action for fi'aud in the amount of $24,000,000.00 plus

punitive dmnages and interest;

b. on its second cause of action fllr breach of fiduciary duty in the amount of

$24,000,000.00 plus punitive damages and interest;

c. on its third cause of action of negligent misinterpretation in the amount of

$24,000,000 plus interest;

d. An award to plaintiffs of attorneys' fees, costs and disbursements; and

e. An order and judgment granting such fllrthcr relief as may be just.

1Dated: New York, New York

December 6, 20 II

30

;/~'" y ~ '2 ~J "'1)

.To cpl N. Pay (l inman, Howard & Kattell, LLPAttorneys for Plaintiffs185 Madison Avenue, 7''' FloorNew York, New York 10016(212) 725-4423