ryn-Y , Lionel Z . Glancy # 134180 Frederick W. Gerkens, III GLANCY BINKOW & GOLDBERG LLP 1801 Avenue of the Stars, Suite 311 Los Angeles , CA 90067 (310) 201-9150 Liaison Counsel for Plaintiffs Michael K. Yarnoff (Pro Hac Vice) Christopher L. Nelson (Pro Hac Vice) John J. Gross (Pro Hac Vice) SCHIFFRIN BARROWAY TOPAZ & KESSLER, LLP 280 King of Prussia Road Radnor, PA 19087 (610) 667-7706 Lead Counsel for Plaintiffs K. U.S D+a tIC' cOU+RT A S - Y :;:: CEPIIf Y 13Y ffl UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WAYMAN TRIPP and SVEN MOSSBERGER, Individually and on Behalf of all Others Similarly Situated, Plaintiff, vs. Case No. CV 07 - 1635-GW (VBK ) CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIES EXCHANGE ACT OF 1934 INDYMAC BANCORP, INC.; MICHAEL W. PERRY; SCOTT KEYS JURY TRIAL DEMANDED and S . BLAIR ABERNATHY Defendants. DOCKETED em cm SEP 1 1 2007 BY L :!42 01 CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) .AND 20(a) OF THE SECURITI EXCHANGE ACT OF 1934 -I O RI GIN AL
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ryn-Y ,
Lionel Z. Glancy # 134180
Frederick W. Gerkens, III
GLANCY BINKOW & GOLDBERG LLP1801 Avenue of the Stars, Suite 311Los Angeles, CA 90067(310) 201-9150Liaison Counselfor Plaintiffs
Michael K. Yarnoff (Pro Hac Vice)
Christopher L. Nelson (Pro Hac Vice)
John J. Gross (Pro Hac Vice)SCHIFFRIN BARROWAY TOPAZ
& KESSLER, LLP
280 King of Prussia RoadRadnor, PA 19087(610) 667-7706Lead Counselfor Plaintiffs
K. U.S D+a tIC' cOU+RT
A
S
- Y :;::CEPIIf Y
13Y ffl
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
WAYMAN TRIPP and SVENMOSSBERGER, Individually and onBehalf of all Others Similarly Situated,
Plaintiff,vs.
Case No. CV 07 - 1635-GW (VBK )
CLASS ACTION AMENDEDCOMPLAINT FOR VIOLATIONSOF SECTIONS 10(b) AND 20(a) OFTHE SECURITIES EXCHANGEACT OF 1934
INDYMAC BANCORP, INC.;MICHAEL W. PERRY; SCOTT KEYS JURY TRIAL DEMANDED
and S . BLAIR ABERNATHY
Defendants. DOCKETED em cm
SEP 1 1 2007
BY L:!42 01
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) .AND 20(a) OF THE SECURITI
EXCHANGE ACT OF 1934-I
O RI GINAL
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Lead Plaintiffs, Wayman Tripp and Sven Mossberg (collectively,
I "Plaintiffs" or "Lead Plaintiffs"), individually and on behalf of all others
I similarly situated, by and through their attorneys, allege the following based upon
personal knowledge as to themselves, and information and belief as to all other
I matters, including an investigation conducted on behalf of Plaintiffs' counsel.
This investigation included a review and analysis of all filings made with the
Securities and Exchange Commission ("SEC") by IndyMac Bancorp, Inc.
("IndyMac" or the "Company") during the relevant time period, as well as
I securities analyst reports, press releases, media reports and other publications
issued by and through the Company, and interviews with numerous former
I employees of IndyMac.
NATURE OF THE ACTION
1. This is a class action brought by Lead Plaintiffs on behalf of all
I persons and entities who purchased and/or otherwise acquired common stock of
IndyMac (the "Class") from January 26, 2006 through January 25, 2007,
inclusive (the "Class Period") and were damaged thereby. Lead Plaintiffs seek to
pursue remedies under the Securities Exchange Act of 1934, 15 U.S.C.S. § 78 et
seq. (the "Exchange Act").
2. Defendant IndyMac is the holding company for IndyMac Bank
F.S.B., which operates as a hybrid thrift/mortgage banker. The thrift banking
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIESEXCHANGE ACT OF 1934
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segment of IndyMac invests in loans originated by various product lines,2
including single-family residential mortgage loans, home construction financing,
builder construction financing facilities and mortgage backed securities.
IndyMac's mortgage banking segment originates loans through multiple
channels, including mortgage brokers and bankers, financial institutions, realtors
and homebuilders. The mortgage banking segment also provides commercial
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loans to homebuilders for the construction of new single-family residences and
generates reverse mortgage products for seniors.'
3. Throughout the Class Period, Defendants falsely portrayed IndyMac
as a company that was, and would continue to be, financially stable despite
industry-wide downturns and that this stability was a result of, inter alia, the
quality of and success of the Company's underwriting, hedging activities and
strong internal controls. Defendants accomplished their charade by issuing a
series of false and misleading statements regarding the Company's forecasted
earnings, compliance with the internal control requirements mandated by
' In addition to IndyMac, the following individuals are defendants in thisaction: Michael W. Perry, Chief Executive Officer and Chairman of the Board("Perry"); Scott Keys, Executive Vice President and Chief Financial Officer("Keys") and S. Blair Abernathy, Executive Vice President, Specialty MortgageLending ("Abernathy") (these individuals are, collectively, the "IndividualDefendants"). IndyMac and the Individual Defendants are, collectively,"Defendants."
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Sarbanes Oxley, and the ability to successfully hedge against the effects of
nonperforming or otherwise impaired investments.
4. The falsity of Defendants' Class Period statements was revealed on
January 25, 2007, the last day of the Class Period, when Defendants issued a
press release (the "January 25, 2007 Press Release"), which informed the market
not only that the Company would not meet its forecasted results for the fourth
quarter of 2006, but also that several of the business areas Defendants had touted
as its strongest virtues were, in actuality, profoundly weakened and impaired.
5. Specifically, in the January 25, 2007 Press Release, Defendants
revealed the Company's quarterly earnings per share would be $0.97, rather than
the previously forecasted earnings per share of $1.35. Non-defendant John D.
Olinski, as well as Abernathy and Perry, respectively, stated in the January 25,
2007 Press Release that the imprecision associated with IndyMac's (previously
touted) hedging had caused earnings volatility and that some of the previous
return on equity ("ROE") trumpeted by the Company had been "outsized and
unsustainable"; that a large percentage of the Company 's net interest margin had
decreased and that "[i]n retrospect, we should have more properly planned for
this happening " and that efforts had to be, and were being, made to "tighten up
our forecasting processes."
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EXCHANGE ACT OF 1934-4
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6. Perry further discussed IndyMac' s forecasting problems during an
earnings conference call IndyMac held on the same day, January 25, 2007 (the
"January 25, 2007 Earnings Conference Call") explaining the Company missed
its forecasted results "so badly" that "I grade us a D or an F." Perry also admitted
"[w]e should be doing a much more detailed bottom's up forecasting in all our
business units... and I take responsibility for that."
7. Perry also discussed the fact that IndyMac's supposedly superior
internal controls and forecasting models were insufficient to cope with the
changing credit market. For example, Perry admitted that despite the Company's
best efforts, "[o]ur provision for loan losses is increasing ... Credit quality
generally is deteriorating so I would say that's something we have to do a better
job forecasting, and clearly we want to be a little more conservative as it relates
to that ... This is something we should have done a better job forecasting on. This
is something that we probably could have seen better if we had more precise
models ..."
8. Further evidence of IndyMac 's internal control problems is found in
its financial statements. By the end of the year 2006, Indymac's total allowance
for loan losses2 was reported as $62.4 million. In the fourth quarter of 2006,
2 IndyMac's "allowance for loan losses" is part of its overall credit reserves, andrefers to amounts set aside by IndyMac to cover losses in any of the loan
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Defendants recorded a provision for loan losses of almost $8.9 million compared
to a cumulative loan loss provision for the previous nine months of only
approximately $11 million. [2006 Third Quarter Form 10-Q at 51; 2006 Form
10-K at F-21 ]. IndyMac also reported "charge-offs, net of recoveries" for the
first nine months of 2006 of only $5.2 million, whereas its "charge-offs, net of
recoveries" for the fourth quarter of 2006 were $7.6 million in the fourth quarter
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of 2006, approximately 20% more than the amount charged off for the nine
months ended September 30, 2006. [2006 Third Quarter Form 10-Q at 51; 2006
Form 10-K at F-21]. Further, while IndyMac's secondary market reserves3
totaled $37 million for the year 2006, the Company set its secondary market
portfolios it retains for investment purposes. According to IndyMac, the actualamount of this allowance is determined by management based on their"judgments and assumptions." See 2006 Form 10-K at p. 61.
3 IndyMac packages multiple loans and sells them on the open market. TheCompany makes representations and warranties as to these loans, according toPerry, "just like a manufacturer of an automobile would make warranty reps on acar" See April 25, 2006 Conference Call at 11. The "secondary market reserves"are intended to cover losses that arise in connection with loans that IndyMac maybe required to repurchase because of representation and warranty claims and earlypayment defaults. Quarterly increases to the secondary market reserves are offsetagainst gains on the sale of loans. Lead Plaintiffs allege the increases to thesecondary market reserves made by Defendants were inadequate throughout theClass Period, resulting in an overstatement of the Company's earnings.
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reserves for the first quarter of 2007 at $32 million ; a clear indication Defendants
knew a significant portion of the loans they had sold on the secondary market
during the Class Period were troubled when made and would need to be
repurchased. The foregoing increases in loan losses and charge-offs are clearly
indicative of the lack of internal controls at the Company.
9. IndyMac made several more incriminating statements in the weeks
that followed the January 25, 2007 disclosures. For example, on March 1, 2007,
IndyMac issued a press release (the "March 1, 2007 Press Release") in which
Perry revisited the problems now publicly plaguing IndyMac . Perry stated that as
a result of the Company 's recent experiences , IndyMac would begin managing its
credit risks by making improvements in its underwriting policies ("being smart
and prudent in adjusting our mortgage underwriting guidelines") and its hedging
activities (improving "decisions as to what assets go into our investment portfolio
and/or distributing our risk in the secondary market").
10. Similarly, on May 1, 2007, an IndyMac spokesperson admitted in an
interview with the Orange County Register that the Company, "given strong
competition in a declining overall mortgage market... in order to compete and
grow, loosened its lending standards along with everyone else, though in a
more responsible way..." Lenders and Their Creating Accounting; Part 1,
IndyMac Answers Questions About Loan Losses, The Orange County Register,CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
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May 12, 2007 (emphasis added). Not surprisingly , and as detailed herein,
1ndyMac's "loosened" "lending standards" set the stage for a financial disaster
for the Company and its shareholders.
11. As a result of Defendants' false and misleading statements,
IndyMac's stock traded at inflated levels during the Class Period. On the
I revelation of their falsity, not surprisingly, the price of IndyMac's stock tumbled
to $37.71 on January 25, 2007, down from $40.70 on January 24, 2007 and a far
I cry from the Class Period high of $50.11 on May 8, 2006.
12. Not everyone, however, was harmed as a result of Defendants' false
I and misleading statements . Abernathy used the inflation in IndyMac's stock
during the Class Period for his own profit, illegally selling $1,735,566 worth of
IndyMac stock.
JURISDICTION AND VENUE
13. The claims asserted herein arise under and pursuant to Sections
10(b) and 20(a) of the Exchange Act (15 U.S.C. §§ 78(j)(b) and 78(t)), and Rule
I Ob-5 promulgated there-under (17 C.F.R. § 240.1 Ob-5).
14. This Court has jurisdiction over the subject matter of this action
pursuant to § 27 of the Exchange Act (15 U.S.C. § 78aa) and 28 U.S.C. §
1331(b).
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EXCHANGE ACT OF 1934
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15. Venue is proper in this Judicial District pursuant to § 27 of the
Exchange Act (15 U.S.C. § 78aa) and 28 U.S.C. § 1391(b). Many of the acts and
transactions alleged herein, including the preparation and dissemination of
materially false and misleading information, occurred in substantial part in this
Judicial District . Additionally, the Company maintains a principal executive
office in this Judicial District.
16. In connection with the acts, conduct and other wrongs alleged in this
Complaint, Defendants, directly or indirectly, used the means and
instrumentalities of interstate commerce, including but not limited to, the United
States mails, interstate telephone communications and the facilities of the
national securities exchange.
PARTIES
Plaintiffs
17. Lead Plaintiffs, as set forth in their certifications previously filed
I with the Court and incorporated by reference herein, purchased IndyMac stock at
artificially inflated prices during the Class Period and have suffered damages as a
result of the wrongful acts of Defendants as alleged herein.
Defendants
18. IndyMac operates as a hybrid thrift/mortgage banker. IndyMac's
thrift banking segment invests in loans originated by various product lines,
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EXCHANGE ACT OF 1934
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including single-family residential mortgage loans, home construction financing,
I builder construction financing facilities and mortgage backed securities. The
thrift segment consists of the following divisions: mortgage backed securities,
prime single family residential mortgage loans, home equity, consumer
construction and lot loans, builder construction, warehouse lending and
discontinued products. The IndyMac mortgage banking segment originates loans
through multiple channels, including mortgage brokers and bankers, financial
institutions, realtors and homebuilders. This segment also provides commercial
loans to homebuilders for the construction of new single-family residences and
generates reverse mortgage products for seniors. The mortgage banking segment
consists of the following divisions: mortgage professionals, consumer direct,
financial freedom, retained assets , and servicing. Through the thrift and
mortgage banking segments , IndyMac offers the following products: investment
portfolios, internet based underwriting and risk based pricing system, retail
banking products, commercial lending, servicing of loans, remitting loan
payments and residential construction loan programs.
19. IndyMac is the seventh largest savings and loan and the second
largest independent mortgage lender in the nation. IndyMac has over 8,000
employees, total assets of over $29 billion and a market capitalization of $2.3
billion, and is a major player in this industry.
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EXCHANGE ACT OF 1934-10
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20. IndyMac maintains its principal executive offices at 888 East Walnut
Street, Pasadena , California, 91101.
21. Perry is Chairman of IndyMac's Board of Directors and Chief
Executive Officer of IndyMac and IndyMac Bank, F.S.B. Perry is a Master
Certified Mortgage Banker, as designated by the Mortgage Bankers Association,
I and is a Certified Public Accountant. Prior to working in the mortgage industry,
Perry spent four years as an auditor with KPMG Peat Marwick.
22. Perry reviewed, approved and signed IndyMac's false and
I misleading SEC filings, including the 2005 Form l0-K and all 2006 Form 10-Qs,
and issued numerous other false and misleading public statements during the
Class Period.
23. Keys is Executive Vice President and Chief Financial Officer of
IndyMac and IndyMac Bank, F.S.B. Keys is responsible for IndyMac's financial
and managerial accounting, financial reporting, financial planning, investor
relations and tax. Keys is a certified public accountant, and was a partner with
Ernst & Young LLP prior to joining IndyMac.
24. Keys reviewed, approved and signed IndyMac's false and
misleading SEC filings, including the 2005 Form 10-K and all 2006 Form 10-Qs,
and issued numerous other false and misleading public statements during the
Class Period.
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EXCHANGE ACT OF 1934
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25. Abernathy is Executive Vice President, Specialty Mortgage Lending
of IndyMac Bank, F.S.B. and oversees the Company's consumer construction,
subdivision construction, conforming, and Home Equity Line of Credit products.
According to IndyMac's website, Abernathy was previously "responsible for the
whole loan and mortgage-backed securities investment portfolio, the mortgage
conduit and corporate finance functions, and prior to that hedging, trading,
product development, risk-based pricing and secondary marketing functions of
IndyMac Bank." Abernathy holds a B.S. in business administration , and prior to
joining IndyMac, worked for Commerce Security Bank, managing its accounting
and investment functions, and served as Vice President and Controller of Sunrise
Bancorp of California. Abernathy made false and misleading statements during
the Class Period.
26. The Individual Defendants were privy to adverse non-public
information concerning IndyMac's business, finances, products, markets and
present and future business prospects via access to internal corporate documents,
conversations and connections with other corporate officers and employees,
attendance at management and Board of Directors meetings and committees
thereof, and via reports and other information provided to them in connection
therewith. Because of their possession of such information, the Individual
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF TILE SECURITIES
EXCHANGE ACT OF 1934-12
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Defendants knew or recklessly disregarded that the adverse facts specified herein
had not been disclosed to, and were being concealed from, the investing public.
27. By virtue of their high-level positions with the Company, the
Individual Defendants directly participated in the management of the Company,
were directly involved in the day-to-day operations of the Company at the highest
levels and were privy to confidential proprietary information concerning the
Company and its business, operations, growth, financial statements, and financial
condition, as alleged herein. The Individual Defendants were involved in
drafting, producing, reviewing and/or disseminating the false and misleading
statements and information alleged herein, were aware, or recklessly disregarded,
that the false and misleading statements were being issued regarding the
Company, and approved or ratified these statements , in violation of the federal
securities laws.
28. As officers and/or directors as well as controlling persons of a
publicly-held company whose common stock was, and is, registered with the
SEC pursuant to the Exchange Act, and was traded on the New York Stock
Exchange ("NYSE") and governed by the provisions of the federal securities
laws, the Individual Defendants had a duty to disseminate promptly, accurate and
truthful information with respect to the Company's financial condition and
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EXCHANGE ACT OF 1934-13
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I management, earnings and present and future business prospects, and to correct
I any previously-issued statements that had become materially false and/or
I misleading, so that the market price of the Company's publicly-traded common
I stock would be based upon truthful and accurate information. The Individual
Defendants' misrepresentations and omissions during the Class Period violated
these specific requirements and obligations.
29. The Individual Defendants, because of their positions of control and
^ authority were able to and did control the content of the various SEC filings,
press releases and other public statements pertaining to the Company during the
Class Period. The Individual Defendants were provided with copies of the
documents alleged herein to be misleading prior to or shortly after their issuance
and/or had the ability and/or opportunity to prevent their issuance or cause them
to be corrected. Accordingly, the Individual Defendants are responsible for the
accuracy of the public reports and releases detailed herein and are therefore
primarily liable for the representations contained therein.
30. Each of the Defendants is liable as a participant in a fraudulent
scheme and course of business that operated as a fraud or deceit on purchasers of
IndyMac common stock by disseminating materially false and misleading
statements and/or concealing material adverse facts. The scheme: (i) deceived
the investing public regarding IndyMac's business, operations, management and
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the intrinsic value of IndyMac common stock; (ii) caused Plaintiffs and other
members of the Class to purchase IndyMac common stock at artificially inflated
prices; and ( iii) when disclosed, caused the price of IndyMac common stock to
plummet, damaging Plaintiffs and the Class.
DEFENDANTS' FRAUDULENT CONDUCT
31. From 2001 until 2005, the United States experienced a bubble in the
housing market resulting in inflated home valuations and a related refinancing
boom. This housing boom ended in late summer, 2005 and a market correction
followed in 2006. Indeed, by August, 2006, the median price of new homes had
dropped by almost 3%, existing home inventories were 39% higher than one year
before and sales were down by 10% from the prior year. See The No Money
Down Disaster, Barron's, August 21, 2006. Clearly, the industry on which
IndyMac depended for its core business - mortgage lending - was in dire straits.
32. Notwithstanding the bad news hitting the industry, Defendants
portrayed IndyMac as a stable and growing company that would not only weather
the bad times facing the mortgage industry, but would emerge from troubling
times even stronger. Indeed, IndyMac went to great lengths to distinguish itself
from other mortgage players, trumpeting its purported ability to function in a
negative market. For example, according to Perry "IndyMac delivered
outstanding results in 2005... despite less than favorable conditions for mortgage
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lenders..." December 31, 2005 Press Release. Indeed, even given the negative
news hammering the rest of the mortgage industry, Keys boldly projected
increased earnings per share (at a time when other like companies were wisely
cutting earnings estimates ) for IndyMac during 2006. Id. (projecting EPS for
2006 as high as $5.20, well in excess of the $4.54 EPS in 2005).
33. By the inception of the Class Period, with the mortgage market
collapsing even faster every day, and a growing storm battering IndyMac, Perry
continued to sing of bright skies. For example, in a January 26, 2006 Conference
Call, Perry stated:
We're excited about entering 2006. Frankly, I likethese more challenging times , because it weeds outthe players that we have in the marketplace. Ithink it also differentiates those companies thathave strong pricing policies , strong interest raterisk management and strong credit riskmanagement policies. And I think that willseparate IndyMac from a lot of the othercompetitors out in the marketplace.
So we're excited about entering 2006. We think we
have a strong team and we'll do well. And certainly,obviously, the market in 2006 is a little bit unknown,
but I think we have a lot of confidence in our ability toexecute in the marketplace that could come out therein 2006. (emphasis added)
34. Unfortunately, and as Defendants knew both before and throughout
the Class Period , Perry' s statement was patently false . IndyMac entered 2006 as
a deeply troubled company that was plagued by profoundly flawed underwritingCLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF TILE SECURITIES
EXCHANGE ACT OF 1934
If,
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and hedging operations, and crippled by deficient and inadequate internal
controls.
35. Rather than address the problems facing the Company, Defendants
chose, instead, to hide them, so that the Individual Defendants could reap the
rewards attendant with their positions at IndyMac. Indeed, during the Class
Period, Abernathy sold $1,735,566 worth of his personally held shares of the
Company's stock. Had Defendants disclosed and fixed the problems facing
IndyMac Abernathy would have been, doubtless, unable to sell his stock at such
inflated prices.
36. The numerous problems facing the Company, and known to
Defendants, can be divided into several key areas, discussed in greater detail,
below. Specifically, during the Class Period: (i) the Company was effectively
unable to underwrite and value loans issued and sold by the Company, resulting
in the issuance of millions of dollars worth of loans for which it would never be
repaid; (ii) the Company lacked, contrary to its public representations, the ability
to effectively hedge lending risks , and to compensate for changing market
conditions and interest rate fluctuations; and (iii) had inadequate and ineffective
internal controls. As a result of the foregoing problems, the Company's Class
Period statements regarding hedging and internal controls were false when made,
and the Company's projections lacked any reasonable basis.
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EXCHANGE ACT OF 1934-17
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IndyMac's Deficient Underwriting
37. Underwriting, in the context of mortgage lending, consists of a
detailed analysis of a borrower's creditworthiness. Essentially, when
underwriting a loan, an issuer analyzes credit information furnished by the
potential borrower (such as employment and salary information) in conjunction
with information provided from outside sources (such as agency credit reports
and scores). IndyMac uses a program called "e-MITS" to assist in this process,
which computes interest rates based on information such as the above (as
entered). The ability to accurately underwrite is absolutely essential to the
success of any business extending loans , including mortgage companies such as
IndyMac because, without accurate underwriting, a company cannot (i) evaluate
how likely a loan is to be repaid; (ii) attach a particular interest rate to a loan
based on creditworthiness; or (iii) accurately price the loan for sale in the
secondary market. Unfortunately for IndyMac and its investors, the underwriting
operations and processes at IndyMac were fatally flawed. These flaws are
discussed, in great detail below, through the words of the Company's former
employees, each of whom was directly involved with the Company's
underwriting, and many of whom were among the Company's most senior
executives and managers.
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38. Confidential Witness Number One ("CW I ") is a former Vice
President and Director of Financial Institutions, Correspondent Lending, in
IndyMac's Mortgage Banking Segment . CW 1 was employed by IndyMac from
July, 2003 until January, 2006, and was directly responsible for (i) designing and
implementing sales and marketing for IndyMac's business loan division; and (ii)
overseeing loan production and acquisition for the Company's Correspondent
Lending Department . While CW 1 left IndyMac at or about the beginning of the
Class Period, his statements are particularly germane, in that they detail the many
problems that were, by the beginning of the Class Period, already impairing the
Company's ability to effectively underwrite its loans.
39. According to CW 1, by the beginning of the Class Period, due to its
desire to keep up with the rest of the players in the industry, IndyMac had been
forced to become extremely aggressive with its underwriting guidelines.
Specifically, to keep pace with competitors in terms of loan origination volume,
by the time CW 1 left IndyMac in January 2006, the Company had greatly
loosened its underwriting guidelines4 in order to drive volume and bring in more
loan sales.
4 The Company's underwriting guidelines are the framework and criteria
by which the Company evaluates whether to issue a particular loan and, if so, on
what terms.
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40. Before discussing exactly how the Company loosened its
I underwriting guidelines to drive volume, and the implications thereof, it is first
necessary to understand the different types of loans originated by IndyMac.
41. "Prime" loans are conventional loans offered to borrowers with high
credit scores. The interest on Prime loans is lower than other types of loans,
reflecting the lower chance of borrower default.
42. "Sub-prime" loans are typically made available to borrowers with
weakened credit histories that include payment delinquencies, and possibly more
severe problems such as charge-offs, judgments , and bankruptcies . They may
also display reduced repayment capacity as measured by credit scores, debt-to-
income ratios, or other criteria that may encompass borrowers with incomplete
credit histories. Subprime borrowers generally have limited income or have
FICO credit scores below 620 . Subprime mortgage loans have a much higher
rate of default than Prime mortgage loans and are priced based on the risk
assumed by the lender.
43. Alternative-A, or "Alt-A" loans are mortgage loans that have prime
credit characteristics, but do not meet the Government Sponsored Enterprises
(Fannie Mae/Freddie Mac) underwriting guidelines. These loans are considered
an intermediate type of loan between Prime and Subprime, and typically carry an
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interest rate about a quarter percentage point higher than a comparable Prime
loan.
44. Alt-A loans are also aptly known as "Reduced Documentation
Loans" or "Liar's Loans" because they require less documentation than Prime
loans to obtain. At one time, Alt-A loans were primarily taken by wealthy buyers
I with large down payments and excellent credit. However, in recent years most
Alt-A borrowers ' credit scores were closer to those of Subprime borrowers. In
fact, Moody's Investors Service recently announced it will begin modeling Alt-A
loans as Subprime loans absent strong compensating factors after finding
I "[a]ctual performance of weaker Alt-A loans has in many cases been comparable
to stronger subprime performance, signaling that underwriting standards were
likely closer to subprime guidelines." Moody's Says Some `Alt A 'Mortgages Are
Like Subprime, Bloomberg , July 31, 2007.
45. IndyMac did not focus on increasing its sales of good "Prime" loans.
Instead, by late 2005, the Company had decided to drive loan origination volume
by changing underwriting guidelines to be more lenient and greatly increasing its
focus on the less desirable "Alt-A" loans, according to CW 1.
46. This drastic change, however, was not disclosed to the public. Nor
did Defendants disclose that IndyMac's increasing market share during the Class
Period was due to increasing its issuance and holdings of Alt-A mortgage loans
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or that it was not accounting or adequately reserving for the escalating credit and
market risks inherent in these non-conventional loans.
47. Numerous witnesses confirm the change in the Company's focus,
explaining how the Company loosened its underwriting quality guidelines, and
expounding on the impact thereof.
48. Confidential Witness Two ("CW 2") is a former IndyMac Senior
Auditor, Post Purchase Quality Control, Central Mortgage Operations, who
worked for the Company from December 1, 2003, through July 19, 2007. CW 2
was responsible for reviewing loan delinquencies for fraud or misrepresentations
in the documents, and determining whether the loan's underwriting comported
with IndyMac's guidelines, policies and procedures. Prior to being promoted to
Senior Auditor, CW 2 was a Senior Underwriter with IndyMac, and is intimately
familiar with all aspects of the Company's loan underwriting.
49. According to CW 2, throughout the Class Period , he saw an
increasing number of loans that appeared to have been issued only through
fraudulent or misrepresented documentation. He also saw a substantial increase
in the number of loan delinquencies. CW 2 stated this increase represented an
increase in the number of defaults attributable to misrepresentations and fraud in
the loan applications, not in cases of "straight default." (which are typically
caused by a change in circumstance, such as divorce or change in employment
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status). CW 2 stated that the increase in loans in default (attributed to
misrepresentations) was due to more relaxed underwriting guidelines, and
approvals of borderline loans on the front end. That is, loans were being
approved to individuals with insufficient or false documentation for the loans that
they were seeking because the underwriting guidelines had been relaxed.
50. This is confirmed by Confidential Witness Three ("CW 3"), who
was an Investigator, Fraud Investigation Department, Post Purchase Quality
Control, Central Mortgage Operations, at IndyMac from December 2004 until
July 17, 2007. In this position , CW 3 investigated loans suspected of being
delinquent due to fraud and reported his findings to management.
51. According to CW 3, during the Class Period, the quality of the loans
originated became a running joke within the Company. In particular, certain
loans with deficient documentation or that were issued to buyers unable to pay
them back became known as "Disneyland Loans." These loans were called
Disneyland Loans because of a loan that was issued to a Disneyland cashier who
claimed in his application that he/she earned $90,000 per year - a proposition
that, on its face, belies logic and even common sense, given prevailing wage rates
for retail cashier operators. As an example of a particularly egregious
"Disneyland Loan," CW 3 related the story of a $500,000 loan that was issued for
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I "swamp lands" in Florida, to a 26 year old first time home buyer with a reported
income of $26,000 per year and $15 .00 in a bank account.
52. As a result of the loosened underwriting guidelines, the Company's
default rates skyrocketed during the Class Period. Confidential Witness Four
("CW 4"), was a Senior Loan Processor, Investigation Unit, Post Purchase
Quality Control, Central Mortgage Operations at IndyMac from August 10, 2003
until October, 2006, and responsible for researching loan transactions.
53. According to CW 4, the number of loans being examined by the
Company increased by 1500% from 2003 to mid-2006. Specifically, according
to CW 4, his/her department was responsible for reviewing 10% of the loans
originated by IndyMac, each month . In 2003, this translated to approximately 60
loans per month . By October , 2006 , CW 4's department was reviewing
approximately 900 loans per month.
54. The drastic increase in default loans was at its worst during the Class
Period. CW 4 stated the number of delinquent loans at IndyMac tripled by
October, 2006. According to CW 4, this increase was the result of
misrepresentations and fraud that were occurring at the "front end" of the loan
originations. Thus, had the Company's underwriting guidelines been more strict,
it is likely that this drastic increase would not have occurred.
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55. The above problems were exacerbated by IndyMac management. In
particular, the number of unqualified loans increased so drastically as a direct
result of management's direction that underwriters begin "pushing through"
unqualified loans to maintain origination volume. The Company's policy of
"pushing through" unqualified loans evidences a Company-wide knowledge of
IndyMac's underwriting problems.
56. Confidential Witness Five ("CW 5") was an underwriter for
IndyMac from March, 2005 until June 30, 2007. In this position, CW 5 was
responsible for writing and reviewing loan applications.
57. According to CW 5, loan originations increased significantly during
his tenure at the Company . CW 5 directly attributed this increase to relaxed
underwriting guidelines and the closing of "questionable deals."
58. CW 5 stated that when he first started at IndyMac , there was a very
strict environment regarding loan originations ; however, toward the end of his
employment, this had evolved into "organized chaos" that was little more than a
"free for all" where "anything goes" to get a loan closed.
59. These changes did not occur on their own, but rather, were expressly
directed by IndyMac management to drive loan origination volume. CW 5 stated
^ underwriters were encouraged by management to "push through loans" that
normally would not be closed. During the originating process, all loans that were
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not closed and processed because of qualification issues had to be reported to
management. Management was consistently giving the "green light" on loans
that CW 5 would not have closed . For example, if a loan was submitted based on
income, and income could not be verified, managers would look to verify bank
^ account balances. Even if the source of funding for the balance in the bank
account could not be verified, managers would try to use unsubstantiated bank
account balances as verification of income. CW 5 also noted that appraisal
values were adjusted in order to "make the loan work. ,5
60. CW 5 stated that, in several instances , management overturned his
decision to not approve a loan , which CW 5 documented in his "working notepad
field" in e-MITS (IndyMac's loan software).
61. According to CW 5, as a result of lax underwriting guidelines and
bad loan push-throughs, loan delinquencies had increased significantly at
IndyMac by mid-2006.
5 That is, an appraisal value would be moved up to justify issuing a loan of
a particular amount. Essentially, the greater the appraisal value, the greater valuethe property (which secures the loan) appears to have. This means that if the loandefaults, the Company could sell the property for more money to recover its loan.
The problem arises, however, when a loan defaults, and the Company discoversthat the "adjusted" value of the property is inflated, and it is not able to recoverthe full amount of the loan.
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62. The increases in bad loans and push throughs is not surprising, as the
I Company directly rewarded underwriters and managers with bonuses for
I reaching loan origination targets. That is, underwriters were issued bonuses one
I month after loan targets were reached without regard to whether the loans
I ultimately ended in default. This Company policy, essentially, incentivized the
issuance of loans without regard to quality or the creditworthiness and
I encouraged "making deals work" that should not have worked, according to CW
5.
63. In addition to the above direct evidence of the origination of bad
loans and loose underwriting guidelines, IndyMac (as discussed below) was
forced, under warranty agreements, to repurchase substantially increased numbers
of loans (now in default) that it had previously sold on the secondary market.
This further evidences the Defendants' knowledge of the problems facing
IndyMac.
64. By way of background , according to CW 2, once a loan was
originated, it was immediately packaged with other loans and sold on the
secondary market. According to Perry, IndyMac makes representations and
warranties on these loans, "just like a manufacturer of an automobile would make
warranty reps on a car" See April 25, 2006 Conference Call at 11. When a loan
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that it has sold is deficient, IndyMac repurchases it. These repurchases are called
"kickbacks."
65. According to CW 5, during his employment, the number of
"kickbacks" from the secondary market increased drastically. In an effort to
"cushion the blow" of these kickbacks, IndyMac initiated a "special project" on
the weekends in 2006. According to CW 5, underwriters would receive a list of
loans that IndyMac had to repurchase after the loan had been previously sold on
the secondary market. Underwriters would then have to rework the loan and
"make it work" so that it could be bundled and sold again in the secondary
market. The underwriters involved in the "special project" aggressively did what
they could to make the loans "work," according to CW 5. For example, in
instances where the loan had defaulted and been kicked back because of lack of
income verification, underwriters would go to a website provided by IndyMac,
such as www.salary.com, and try to obtain an average national salary for the
borrower based on the average salary reported for those positions.
66. Further, underwriters were receiving loans that had originally been
closed by other underwriters at the Company; therefore, the underwriter trying to
fix particular loans was not familiar with their details. Additionally, when
underwriters received loan data, they did not receive the entire loan application;
only the portions that were deficient. Therefore, there was no documentation
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pertaining to the other data provided by the borrower - eliminating the ability to
Icross-check borrower reported information.
67. CW 3 confirms the Company's "special projects." According to CW
3, some of the loans rewritten by the underwriters were resold, and the remaining
loans were channeled to his/her department, so those employees could also try to
"make [them] work."
68. These problems were obviously known to Defendants, and the
implications to the Company were devastating . During 2005, IndyMac was
forced to repurchase $106 million worth of kicked-back deficient loans from the
secondary market. In 2006, the value of kicked-back loans climbed to $167
million - an increase of over 50% in less than a year. Most striking, however, is
that during the first quarter of 2007 lndyMac repurchased $224 million worth of
loans from the secondary market - clear evidence that the loans issued during the
Class Period were grossly deficient as a result of the Company's lack of adequate
underwriting guidelines and controls.
IndyMac's Deficient Hedging
69. Complicating the problems faced by IndyMac is the fact that it
failed, almost utterly during the Class Period (and again, unbeknownst to
investors), to adequately hedge against the foregoing risks and market downturns.
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EXCHANGE ACT OF 1934- 29
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70. Hedging is the use of investments to cancel out or reduce the risk of
another investment. Done correctly , hedging can lead to minimized exposure to
unwanted risk, while still allowing for profit from an investment activity.
According to Perry, one of the reasons IndyMac was able to maintain stable
interest margins and profits was the Company's successful hedging activities.
See January 26, 2006 Conference Call.
71. Defendants, however, failed to disclose a key fact that would prove
disastrous to investors: despite its representations to the public, IndyMac was
not fully hedged . In particular, IndyMac knowingly had at least $1.5 billion in
liabilities , bearing an interest rate of 2.95%, due to mature in the fourth quarter of
2006, that, contrary to Defendants' repeated representations, were unhedged
and/or for which hedges were not being accounted for at "fair value." The
Company's failure to hedge, according to Perry, resulted in at least $0.05 of the
Company' s earnings per share miss. See January 25, 2007 Earnings Conference
throughout the Class Period. For example, during the Company's January 26,
2006 earnings conference call, Perry stated hedging was "one of the reasons we
have been able to maintain our Thrift net interest margin at very stable levels and
manage our Mortgage Banking margins and our profits well in more difficult
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environments." He also stated "[a]nd if we were not hedging our Thrift net
interest margin properly, you would see a dramatic decline in our net interest
margin , and you see very little change." Id. And "...we hedged out to where we
have a VAR with a 95% confidence factor." Similarly, IndyMac's April 25, 2006
I entitled "IndyMac Bancorp Announces Quarterly EPS of $1.18, up 20%" (the
"April 25, 2006 Press Release" ), stated "[t]his division saw a strong increase in
ROE from 17 percent to 29 percent, which we believe to be a more normal rate of
return for this business, as we have been able to achieve significant scale in our
mortgage servicing operations and improved effectiveness at hedging this
asset..."
73. These statements, however, were diametrically opposed to the truth
about IndyMac' s hedging, which emerged on January 25, 2007. On that day non-
defendant John D. Olinski, Executive Vice President, Co-Head, Capital Markets,
stated, in contrast to the Company's earlier statements, that:
hedging is not a perfect science, and the imprecisionassociated with hedging can cause a certain level ofquarterly earnings volatility. For the fourth quarter theROE fell to twenty percent [from 30% in the previousquarter and 38% a year before], which is a morerealistic level than the outsized and unsustainable ROElevels we achieved in the third quarter and one yearago.
January 25, 2007 Press Release (Emphasis added).CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIES
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74. The same day, Perry explained IndyMac's hedging failures on the
Company's Analyst Conference Call and admitted that the Company had
intentionally allowed hedges on $1.5 billion worth of potential liabilities to expire
- leaving the Company naked and wholly unprotected:
PAUL MILLER: So let me get this straight . You pulled off some
hedges because you didn ' t like the accounting of it?
PERRY: No, they were expiring, they were expiring their period.
Paul, I don't want to get in to this more than this right here. We can
talk about it off-line.
75. Defendants' decision to allow these hedges to expire, according to
Defendants themselves, resulted in $0.05 of the Company's earnings per share
miss. See January 25, 2007 Earnings Conference Call Tr. at 4.
IndyMac's Deficient Internal Controls
76. In addition to concealing the problems the Company had created by
loosening underwriting guidelines and its deficient (or non-existent) hedging,
Defendants went to great lengths to conceal grossly inadequate internal controls.
77. By way of background , "internal controls" are the measures an
organization adopts to encourage adherence to company policies and procedures;
promote operational efficiency and effectiveness ; safeguard assets; and ensure the
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reliability of accounting data. A company's internal controls encompass both
internal administrative controls and internal accounting controls. At their core,
internal controls are supposed to ensure the accuracy of a company's financial
reporting, and to ensure that fraud is prevented, or at least detected in a timely
fashion.6 One of the most important purposes of internal controls (and, indeed,
underlying the implementation of Sarbanes-Oxley) is to protect against the risk
that senior management may override important financial controls to manipulate
financial reporting. Here unfortunately for the Class, not only did IndyMac lack
adequate and effective internal controls , but Defendants knew, and concealed this
fact.
78. In particular, Defendants knew that IndyMac lacked the requisite
internal controls to accurately report financial statements prepared in accordance
with Generally Accepted Accounting Principles ("GAAP"). This is abundantly
clear from the Company' s own disclosures , as well as the statements of former
employees.
6 The current mandated requirements for internal controls are set forth inthe Sarbanes-Oxley Act. 15 USC §7201 et seq. Under Sarbanes-Oxley,companies must not only perform regular fraud risk assessments and assessrelated controls, but individual officers must also personally certify theeffectiveness of those controls. Id. at §7262.
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79. The disclosures made by IndyMac concerning its inadequate internal
controls show the Company's financial results during the Class Period were based
I upon defective assumptions concerning (i) the quality of IndyMac's underwriting,
(ii) credit risks, (iii) hedging activities, (iv) management reporting, and (v) the
Company's loan loss provisions and secondary market reserves.
80. The Company's disclosures are confirmed, again, by several former
employees. Confidential Witness Six ("CW 6") is a former Senior Analyst in the
Servicing and Investment Portfolio who was employed by IndyMac from January,
2006 until February, 2007. In this role, CW 6 was primarily responsible for
compiling data and creating reports for senior management based on investment
portfolio statistics, models and data.
81. According to CW 6, forecasts were given to Keys, and "if Keys had a
number in mind, and the forecasts did not reflect that number, Keys had the
authority to change it."
82. Keys' authority to sua sponte change the Company's forecasts is well
in line with the culture at IndyMac, which actively discouraged detecting and/or
reporting fraud . According to CW 3, he would have to be prepared to "drop
gloves and go to war" when he wanted to report findings of fraud due to
underwriter and seller negligence. There was constant push back by management
as to the legitimate fraudulent findings he reported.
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83. Indeed, this pressure went all the way up the management ladder.
I For example, CW 3 states even the Company's former Vice President of the
Fraud Investigation Department, Michelle Leigh, was pressured by upper
management not to report fraud. According to CW 3, Leigh's superior, Michelle
Minier, in one case , expressly requested that Leigh make changes to a monthly
report that Leigh felt did not accurately depict the loan pipeline. Despite Leigh's
protest, the report was subsequently sanitized.
84. As was the case with the bonus structure for managers and
underwriting, the auditors' bonus structure also dissuaded the detection of fraud.
Auditors' bonuses were based on the number of loans reviewed, not the number of
fraudulent findings found . Thus, according to CW 3, IndyMac rewarded more
work, but not the detection of fraud. This, of course, encouraged workers to
simply review, in a cursory fashion, potentially fraudulent loans.
85. Further evidence of IndyMac's internal control problems is found in
its financial statements. By the end of the year 2006, Indymac's total allowance
for loan losses was reported as $62.4 million. In the fourth quarter of 2006,
Defendants recorded a provision for loan losses of almost $8.9 million compared
to a cumulative loan loss provision for the previous nine months of only
approximately $11 million . [2006 Third Quarter Form 10-Q at 51; 2006 Form
10-K at F-21 ]. IndyMac also reported "charge-offs, net of recoveries" for the first
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nine months of 2006 of only $5.2 million, whereas its "charge-offs, net of
recoveries" for the fourth quarter of 2006 were $7.6 million in the fourth quarter
of 2006, approximately 20% more than the amount charged off for the nine
months ended September 30, 2006. [2006 Third Quarter Form l 0-Q at 51; 2006
Form 10-K at F-21 ]. Further, while IndyMac's secondary market reserves totaled
$37 million for the year 2006, the Company set its secondary market reserves for
the first quarter of 2007 at $32 million; a clear indication Defendants knew a
significant portion of the loans they had sold on the secondary market during the
Class Period were troubled when made and would need to be repurchased.
Clearly, IndyMac's lack of adequate internal controls allowed for manipulation
and thus unreliable, false financial reporting that did not come to light until the
end of the Class Period.
Defendants ' False And Misleading Statements Issued During The Class
Period
86. On January 26, 2006, IndyMac issued a press release entitled
"IndyMac Announces FY 2005 EPS of $4.54, Up 34% and Fourth Quarter EPS of
$1.09, Up 20%," announcing the Company's results of operations and financial
condition for the full year and quarter ended December 31, 2005 (the "January 26,
2006 Press Release"). The January 26, 2006 Press Release stated in part:
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIESEXCHANGE ACT OF 1934
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IndyMac Bancorp, Inc. (NYSE:NDE) ("IndyMac" or the
"Company"), the holding company for IndyMac Bank(R)
F.S.B. ("IndyMac Bank"), today reported earnings of $300.2
million or $4.54 per share for full year 2005. This represents
increases of 42 percent and 34 percent, respectively, compared
with proforma net earnings of $211.3 million or $3.40 per
share for the full year of 2004. On a GAAP basis, IndyMac
earned $170.5 million or $2.74 per share in 2004 (a
reconciliation between GAAP and proforma results is found at
the end of this release).
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Our Thrift segment and MSR division are structured through
our interest rate risk management practices to provide stablereturns on equity in a variety of interest rate environments.
These two combined utilized 65 percent of our average capital
and provided a ROE of 22 percent in the fourth quarter of 2005
up from 19 percent in the fourth quarter of 2004. Remarkably,our mortgage production divisions, which are expected to havehigher but more volatile returns, produced very stable ROEs of
48 percent and 49 percent, in the fourth quarters of 2005 and
2004, respectively, in an industry environment where volumes
were down 6 percent, profit margins declined substantially andthe yield curve reflected nearly 200 basis points of flattening. I
am incredibly proud of the performance of our IndyMac teamfor the results produced in this environment," commentedPerry.
Commenting on the Company's outlook for 2006, ChiefFinancial Officer Scott Keys noted, "We currently expect EPSto range from $4.50 to $5.20 per share...
87. The January 26, 2006 Press Release was materially false and
misleading in that it failed to disclose that: (i) IndyMac was either not hedging or
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIES
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I considering in its forecast at least $1.5 billion of liabilities due to mature in the
fourth quarter of 2006 (discussed in more detail , herein at 3-4, 69-75 ) and (ii)
Indymac's provision for loan losses and increases to secondary market reserves
did not consider the impact of the lack of internal controls on credit risks, as
Defendants admitted (discussed in more detail, herein at 3-4, 8, 68, 85).
88. The January 26, 2006 Press Release was further materially false and
misleading in that Defendants knowingly lacked any reasonable basis for the
Company's EPS projection for 2006, as the Company's loan underwriting
guidelines and internal controls were manipulated by Defendants. This resulted
in the issuance of millions of dollars of bad loans to unqualified borrowers, for
which the Company would never be paid back, or would not be able to sell on
the secondary market. See herein at 3-4, 8-10, 37-68, 85. Additionally, as a
result of Defendants' manipulation of the underwriting guidelines and controls,
the Company was forced to purchase back, from the secondary loan market,
many of these "bad" or "uncollectible" loans, at a substantial loss to the
Company. See Id.
89. Also on January 26, 2006, Defendants held the "Q4 2005 IndyMac
II Bancorp, Inc. Earnings Conference Call." Perry and Keys spoke at this
conference and answered questions from several analysts.
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90. During the January 26, 2006 earnings conference call, Defendants
touted the Company's "economic" results for the year ended December 31, 2005
as well as the Company's purported internal controls over hedging to keep
earnings smooth:
PERRY: But I think clearly one of the reasons we have been
able to maintain our Thrift net interest margin at very stable
levels and manage our Mortgage Banking margins and our
profits well in more difficult environments is our enterprise risk
management, both on the credit and the interest rate risk side.
We also - I think we have some of the best segment reporting
out there. We have a channel segment report in our Q - 8-K,
actually, for this time, . . . But both by channel and by product,great segment reporting. And it basically leaves no room to hide
for our management team in terms of accountability...
And ifwe were not hedging our Thrift net interest margin
properly, you would see a dramatic decline in our net interestmargin , and you see very little change.
PERRY: Well, we did have some hedge outperformance withinthe quarter ... But we had a good quarter in terms of hedging.That doesn't mean we are taking any bets. It's just, when you'rehedging, even with the VAR model that we have implemented,that has a probability - we hedged out to where we have a VARwith a 95% confidence factor. Like, for example, right now, Ithink we could lose or make, in any one day, on the almost -what is it, 900 million in capitalized servicing that we have?
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KEYS: Or 1 billion.
PERRY: 1 billion of capitalized servicing; we could lose $1.5million, roughly, in any one day or make $1.5 million in any day. We
think that's pretty - we have hedged that risk pretty low. But that
means that there is some volatility in terms of the returns within aquarter. [emphasis added]
91. The foregoing statements made by Perry were materially false and
misleading for at least the following reasons: (a) there were material weaknesses
in Indymac's risk management which prevented the Company from controlling
interest rate and credit risks, as well as forecasting and (b) hedge
"outperformance" likely was a result of "taking bets," as Defendants admitted
certain "repriced liabilities" were not hedged, and the net interest on loans held
for sale were not hedged (as discussed in detail, herein at 3-4, 69-75) therefore,
the Company could and did lose greater than the purported possible 5% that was
supposed to be the maximum that the Company could lose as a result of its
hedging practices. Id.
92. Also during the January 26, 2006 earnings conference call,
Defendants boasted of their forecasts for 2006 despite a "difficult environment":
PERRY: And I think that's clearly the $64 question, is where is
the mortgage market going in 2006? Where are interest ratesgoing to 2006? And how is IndyMac going to perform in thatenvironment? ... Now, you would expect, if that was the onlything that changed [i.e., the 2004 and 2005 mortgage market
was flat], that IndyMac would do very well in a flat marketbecause we tend to do well when the market is flat and alsowhen the market is declining... And what we've said is that
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Indymac's hybrid thrift\mortgage banking model - we are not
immune to industry volumes and industry problems, but think
our business model and our superior execution will result in
us performing better than most. [Tr. at 2-3] [emphasis
added]
93. The foregoing statements were materially false and misleading
when made for the reasons previously discussed at ¶ 97.
94. On March 1, 2006, Defendants filed on Form 10-K Indymac's
Annual Report for the year ended December 31, 2005 (the "2005 10-K"). Perry
and Keys signed the 2005 10-K.
95. The 2005 10-K contained the following materially false and
11 misleading statements, among others : "The objective of our hedging strategy is to
mitigate the impact of changes in interest rates on the net economic value of the
balance sheet and quarterly earnings, not to speculate on interest rates." [2005 10-
K at p. 50]
96. The foregoing statement was materially false and misleading in that
II it omitted to disclose that the Company was not hedging adequately. For
I example, Perry, on the January 25, 2007 Analyst Conference Call, admitted that:
"In mortgage production, this is - we had a 13% decline from forecast. You can
^ see that spread income, you know, we don't hedge as we talk many times, the
loans for sale net interest margin... " [emphasis added] (discussed in detail,
herein at 3-4, 69-75).
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97. The 2005 Form 10-K further stated : "We utilize several
methodologies to estimate the adequacy of our ALL [Allowance for Loan Losses]
and to ensure that the allocation of the ALL to the various portfolios is reasonable
given current trends and economic outlook."
98. The foregoing statement was false and misleading in that it omitted
to disclose that Indymac's forecasted loan loss reserves did not consider the
impact of the Company's lack of controls over credit risks, as Defendants
admitted. (discussed in detail, herein at 3-4, 8, 68, 85).
99. Attached to the 2005 10-K, as Exhibits 31.1, 31.2, 32.1, and 32.2,
were the CEO and CFO certifications required by SOX executed by Perry and
Keys.
100. Perry and Keys, pursuant to Exhibits 31.1 and 31.2, each separately
certified that:
I have reviewed this annual report on Form 10-K of IndyMacBancorp;
Based on my knowledge, this annual report does not containany untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light ofthe circumstances under which such statements were made, notmisleading with respect to the period covered by this annualreport;
Based on my knowledge, the financial statements, and otherfinancial information included in this annual report, fairlypresent in all material respects the financial condition, results of
CLASS ACTION :MENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIESEXCHANGE ACT OF 1934
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operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d - 15(e))and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and we have:
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(a) designed such disclosure controls and procedures,or caused such disclosure controls and procedures tobe designed under our supervision, to ensure thatmaterial information relating to the registrant,including its consolidated subsidiaries, is made knownto us by others within those entities, particularlyduring the period in which this annual report is beingprepared;
(b) designed such internal control overfinancialreporting, or caused such internal control overfinancial reporting to be designed under oursupervision, to provide reasonable assuranceregarding the reliability offinancial reporting andthe preparation offinancial statements for externalpurposes in accordance with generally acceptedaccounting principles;(c) evaluated the effectiveness of the registrant'sdisclosure controls and procedures and presented inthis report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end ofthe period covered by this report based on suchevaluation; and(d) disclosed in this report any change in theregistrant's internal control over financial reportingthat occurred during the fourth fiscal quarter that hasmaterially affected, or is reasonably likely tomaterially affect, the registrant's internal control overfinancial reporting; and
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIESEXCHANGE ACT OF 1934
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The registrant's other certifying officer and I have disclosed,based on our most recent evaluation of internal control overfinancial reporting, to the registrant's auditors and the auditcommittee of the registrant's board of directors (or personsperforming the equivalent functions):
(a) all significant deficiencies and material weaknesses inthe design or operation of internal control over financialreporting which are reasonably likely to adversely affectthe registrant's ability to record, process, summarize andreport financial information; and
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(b) any fraud, whether or not material, that involvesmanagement or other employees who have a significantrole in the registrant's internal control over financialreporting. [emphasis added]
101. The foregoing certifications were materially false and misleading as
not all assets and liabilities were being hedged, as reported (discussed in detail,
herein at 3-4, 69-75); and IndyMac had inadequate underwriting controls and
guidelines (discussed in detail, herein at 3-4, 9-10, 37-68).
102. IndyMac announced its results of operations and financial condition
for the first quarter of 2006 in the Company's April 25, 2006 Press Release,
which stated in part:
IndyMac Bancorp, Inc. (NYSE:NDE) ("IndyMac(R)" or the"Company"), the holding company for IndyMac Bank, F.S.B.("IndyMac Bank(R)"), today reported net earnings of $80million, or $1.18 per share, for the first quarter of 2006,compared with net earnings of $63 million, or $0.98 per share,in the first quarter of 2005, representing increases of 26 percentin net earnings and 20 percent in earnings per share...
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIESEXCHANGE ACT OF 1934
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"In light of our strong performance in the first quarter of 2006and the outlook for the remainder of the year, we are raising ourearnings guidance for the year to a range between $5.00 and$5.40 per share, up from our prior range of $4.50 to $5.20.
103. The foregoing statements contained in the April 25, 2006 Press
Release were materially false and misleading when made for at least the
following reasons: ( a) net earnings were overstated as a result of the Company's
understatement of loan loss reserves and inadequate secondary market reserves
(which are offset against gains on sales of loans), as Indymac's loan loss reserves
and secondary market reserves did not consider the impact of the lack of controls
over credit risks, as Defendants admitted and (b) there was no good faith or
reasonable basis to actually increase expected 2006 EPS to a range of $5.00 to
$5.40 per share from $4.50 to $5.20 per share, as (i) IndyMac was either not
hedging or considering in the forecast the repricing of hedges on at least $1.5
billion of liabilities due to mature in the fourth quarter of 2006 and (ii) Indymac's
provision for loan losses and increases to secondary market reserves did not
consider the impact of the lack of internal controls on credit risks, as Defendants
admitted.
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104. The EPS forecast was further without reasonable basis as the
Company' s loan underwriting guidelines and internal controls were manipulated
by Defendants. This resulted in the issuance of millions of dollars of bad loans to
unqualified borrowers, for which the Company would never be paid back or be
I able to sell on the secondary market. See herein at 3-4, 8-10, 37-68, 85.
Additionally, as a result of Defendants' manipulation of the underwriting
guidelines and controls, the Company was forced to purchase back, from the
secondary loan market, many of these "bad" or "uncollectible" loans, at a
substantial loss to the Company. Id.
105. Also on April 25, 2006, the Company filed its Form 10-Q for the
I quarter ended March 31, 2006, which included the Company's above reported
financial results . The Form 10-Q was signed by Perry and Keys (the 2006 First
Quarter Q").
106. The statements contained in the 2006 First Quarter Q were false and
misleading , for at least the same reasons as the April 26, 2006 Press Release as
described in paragraphs 103-104.
107. In addition, the 2006 First Quarter Q also stated: "The Company
hedges the interest rate risk inherent in its pipeline of mortgage loans held for sale
to protect its margin on sale of loans ." Id. at 27. This statement was false and
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIESEXCHANGE ACT OF 1934
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misleading when made, as Defendants admitted, they were not hedging as they
"talk." (discussed in detail , herein at paragraphs 3-4, 69-75).
108. The 2006 First Quarter Q also reported a provision for loan losses of
$3.8 million , $1.7 million of loan charge-offs net of recoveries , Id., at 47, and
stated the following in regard to the allowance for loan losses at March 31, 2006:
to
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Our determination of the level of the allowance for loan lossesand, correspondingly, the provision for loan losses, is based onmanagement's judgments and assumptions regarding variousmatters, including general economic conditions, loan portfoliocomposition, loan demand, delinquency trends and prior loanloss experience. In assessing the adequacy of the allowance forloan losses in its entirety, management reviews the performancein the portfolios of loans held for investment and the non-coreportfolio of discontinued product lines, which consists ofmanufactured housing and home improvement loans. Acomponent ofthe overall allowancefor loan losses is notspecifically allocated to the loan portfolios ("unallocatedcomponent "). The unallocated component reflectsmanagement 's assessment of various factors that createinherent imprecision in the methods used to determine thespecific portfolio allocations. Those factors include, but are notlimited to levels of and trends in delinquencies and impairedloans, charge-offs and recoveries, volume and terms of theloans, effects of any changes in risk selection and underwritingstandards, other changes in lending policies, procedures, andpractices, and national and local economic trends andconditions. As ofMarch 31, 2006, the unallocated componentofthe total allowance for loan losses was $18.7 million,unchangedfrom the unallocated allowance at December 31,2005.
109. Further, IndyMac recorded an increase of approximately $4.5
million to secondary market reserves. See 2006 First Quarter Q.
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110. The foregoing statements were materially false and misleading when
made as Indymac's provision for loan losses and increases to the secondary
market reserves did not consider the lack of internal controls over credit risks, as
Defendants admitted (discussed in detail, herein at paragraphs 3-4, 8, 68, 85).
111. Finally, the 2006 First Quarter Q also stated that they "currently
expect 2006 EPS to range from $5.00 to $5.40 per share." This statement was
materially false and misleading for the same reasons stated in connection with the
Company's April 25, 2006 Press Release.
112. Attached to the 2006 First Quarter 10-Q, as Exhibits 31.1, 31.2,
32.1, and 32.2 were the CEO and CFO certifications required by SOX. These
certifications, executed by Perry and Keys, are virtually identical to the SOX
certifications previously discussed in connection with the Company's 2005 10-K,
and are materially false and misleading for the same reasons. See paragraph 101.
113. Also on April 25, 2006, Defendants held the "Q1 2006 IndyMac
Bancorp, Inc. Earnings Conference Call." Perry and Keys spoke at this
conference and answered questions from several analysts. Specifically, during
the call, they reiterated the increase in projected EPS for 2006, and continued to
trumpet the Company' s hedging activities, stating that:
Another key was that our loan servicing portfolio, as interestrates have risen, and as we've improved our hedging activities,our servicing portfolio has performed much better.
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We've improved our hedging strategies, implemented value atrisk analysis which has helped us tremendously in hedging thisasset.
114. The foregoing statements were materially false and misleading in
that they Company had no control over hedging and lacked a reasonable basis for
the EPS forecast. See paragraphs 3-4, 69-85.
115. On July 27, 2006, the Company issued a press release entitled
"IndyMac Bancorp Announces Record Quarterly EPS of $1.49, Up 20%,"
announcing the Company's results of operations and financial condition for
second quarter 2006 (the "July 27, 2006 Press Release" ). The July 27, 2006 Press
Release stated in part:
IndyMac Bancorp, Inc. (NYSE:NDE) ("IndyMac®" or the"Company"), the holding company for IndyMac Bank, F.S.B.("IndyMac Bank®"), today reported net earnings of $105million or $1.49 per share for the second quarter of 2006,compared with net earnings of $82 million, or $1.24 per sharein the second quarter of 2005, representing increases of 28percent in net earnings and 20 percent in earnings per share....
* * *
With respect to 2006 earnings guidance, Indymac's ChiefFinancial Officer Scott Keys added, "In light of our continuedstrong performance this quarter, we are reiterating ourpreviously issued forecast of earnings of $5.00 to $5.40 pershare, although we feel more confident that we will finish theyear above the mid-point of this range."
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116. The foregoing statements contained in the July 27, 2006 Press
Release were materially false and misleading when made for at least the
following reasons: (a) net earnings were overstated as a result of the Company's
understatement of loan loss reserves, as Indymac's provision for loan losses and
increases to secondary market reserves did not consider the impact of the lack of
internal controls on credit risks, as Defendants admitted; and (b) there was no
good faith or reasonable basis to actually increase expected 2006 EPS to a range
of $5.00 to $5.40 per share from $4.50 to $5.20 per share, as (i) IndyMac was
either not hedging or considering in the forecast the repricing of hedges on at
least $1.5 billion of liabilities due to mature in the fourth quarter of 2006 and (ii)
Indymac's loan loss reserves and increases to its secondary market reserves did
not consider the impact of the lack of controls over credit risks, as Defendants
admitted.
117. The EPS forecast was further without reasonable basis as the
Company's loan underwriting guidelines and internal controls were manipulated
^ by Defendants. This resulted in the issuance of millions of dollars of bad loans to
unqualified borrowers, for which the Company would never be paid back or be
able to sell on the secondary market. See herein at paragraphs 3-4, 8-10, 37-68,
85. Additionally, as a result of Defendants' manipulation of the underwriting
guidelines and controls, the Company was forced to purchase back, from the
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secondary loan market, many of these "bad" or "uncollectible" loans, at a
substantial loss to the Company. Id.
118. Also on July 27, 2006, the Company filed its Form 10-Q for the
quarter ended June 30, 2006, which included the July 27, 2006 Press Release.
The Form 10-Q was signed by Perry and Keys (the "2006 Second Quarter Q").
The statements contained in the 2006 Second Quarter Q were false and
misleading , for at least the same reasons as the July 27, 2006 Press Release as
described in paragraphs 116-117.
119. The 2006 Second Quarter Q also stated: "The Company hedges the
interest rate risk inherent in its pipeline ofmortgage loans held for sale to protect
its margin on sale of loans ." Id. at 24. This statement was false and misleading
11 when made, as Defendants admitted, they were not hedging as they "talk."
( discussed in detail, herein at 3-4, 69-75).
120. The 2006 Second Quarter Q also reported an approximate $2.2
million provision for loan losses and $1.6 million of loan charge-offs, net of
recoveries. Id., at 44. Defendants stated the following in regard to the allowance
^ for loan losses at June 30, 2006:
Our determination of the level of the allowance for loan lossesand, correspondingly, the provision for loan losses, is based onmanagement's judgments and assumptions regarding variousmatters, including general economic conditions, loan portfoliocomposition, loan demand, delinquency trends and prior loan
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loss experience. In assessing the adequacy of the allowance forloan losses in its entirety, management reviews the performancein the portfolios of loans held for investment and the non-coreportfolio of discontinued product lines, which consists of
manufactured housing and home improvement loans. Acomponent ofthe overall allowancefor loan losses is notspecifically allocated to the loan portfolios ("unallocatedcomponent'). The unallocated component reflectsmanagement 's assessment ofvarious factors that createinherent imprecision in the methods used to determine the
specific portfolio allocations. Those factors include, but are not
limited to levels of and trends in delinquencies and impairedloans, charge-offs and recoveries, volume and terms of theloans, effects of any changes in risk selection and underwritingstandards, other changes in lending policies, procedures, andpractices, and national and local economic trends andconditions. As ofJune 30, 2006, the unallocated component ofthe total allowancefor loan losses was $19. 3 million,comparable to $18. 7 million of unallocated allowance atDecember 31, 2005.
[2006 Second Quarter Q at 45]
121. Furthermore, Defendants recorded an addition of $10.2 million to
IndyMac's secondary market reserve. See 2006 Second Quarter Q.
122. The foregoing statements were materially false and misleading
when made as Indymac's provisions for loan losses and increases to the
secondary market reserve did not consider the lack of controls over credit risks,
as Defendants admitted (discussed in detail, herein at paragraphs 3-4, 8, 68, 85).
123. Finally, the 2006 Second Quarter Q reiterated the Company's EPS
forecast of $5.00 to $5.40 per share for 2006, which was materially false and
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misleading for the same reasons stated in connection with the Company's July
27, 2006 Press Release.
124. Attached to the 2006 Second Quarter 10-Q, as Exhibits 31.1, 31.2,
32.1, and 32.2 were the CEO and CFO certifications required by SOX. These
certifications , executed by Perry and Keys, are virtually identical to the SOX
certifications previously discussed in connection with the Company's 2005 10-K,
and are materially false and misleading for the same reasons. See paragraph 101.
125. Also on July 27, 2006, Defendants held the "Q2 2006 IndyMac
Bancorp , Inc. Earnings Conference Call." Perry and Keys spoke at this
conference and continued to laud the Company's hedging and stated:
PERRY: I mean, it really should be volumes and more, andreally more and more banking margins should be the concern.That's what -- if you look at our economic model of driving ourearnings. More banking revenue margins isn't job one. And thatreally drives our earnings. You could double, triple, quadrupleour credit losses and it has a very minimal impact in terms ofour earnings.
[Tr. at 13; Emphasis added]
126. The foregoing statement was materially false and misleading
because, as discussed above, at paragraphs 3-4, 69-75, the Company's hedging
was severely impaired or non-existent.
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127. On November 2, 2006, the Company issued a press release entitled
"IndyMac Bancorp Announces Third Quarter EPS of $1.19, up 3%," announcing
the Company's results of operations and financial condition for third quarter 2006
(the "November 2, 2006 Press Release"). The November 2, 2006 Press Release
stated in part:
PASADENA, Calif.--(BUSINESS WIRE)--Nov. 2, 2006--
IndyMac Bancorp, Inc. (NYSE:NDE) ("IndyMac(R)" or the
"Company"), the holding company for IndyMac Bank, F.S.B.
("IndyMac Bank(R)"), today reported net earnings of $86
million, or $1.19 per share, for the third quarter of 2006,
compared with net earnings of $78 million, or $1.16 per share,
in the third quarter of 2005, representing increases of 11
percent in net earnings and three percent in earnings per share .
With respect to 2006 earnings guidance, Keys added, "We now
expect full year 2006 earnings per share in an approximate
range of $5.16 to $5.26, reflecting continued strength in ourproduction operations and the growth and stable returns in our
thrift and servicing segments.
128. The foregoing statements contained in the November 2, 2006 Press
Release were materially false and misleading when made for at least the
following reasons: (a) net earnings were overstated as a result of the Company's
understatement of the provision for loan losses and the secondary market
reserves, as Indymac did not consider the impact of the lack of internal controls
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIES
EXCHANGE ACT OF 1934- 54
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over credit risks, as Defendants admitted and (b) there was no good faith or
reasonable basis to actually increase expected 2006 EPS to a range of $5.00 to
$5.40 per share from $4.50 to $5.20 per share, as (i) IndyMac was either not
hedging or considering in the forecast the repricing of hedges on at least $1.5
billion of liabilities due to mature in the fourth quarter of 2006 and (ii) Indymac's
loan loss reserves and inadequate secondary market reserves did not consider the
impact of the lack of controls over credit risks, as Defendants admitted.
129. The EPS forecast was further without reasonable basis as the
Company's loan underwriting guidelines and internal controls were manipulated
by Defendants. This resulted in the issuance of millions of dollars of bad loans to
unqualified borrowers, for which the Company would never be paid back or be
able to sell on the secondary market. See herein at paragraphs 3-4, 8-10, 37-68,
85. Additionally, as a result of Defendants' manipulation of the underwriting
guidelines and internal controls, the Company was forced to purchase back, from
the secondary loan market, many of these "bad" or "uncollectible" loans, at a
substantial loss to the Company. See Id.
130. Also on November 2, 2006, the Company filed its Form 10-Q for the
quarterly period ended September 30, 2006, which included the Company's
previously reported financial results (the "2006 Third Quarter Q"). The Form 10-
Q was signed by Perry and Keys. The statements contained in the 2006 Third
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIESEXCHANGE ACT OF 1934
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Quarter Q were false and misleading , for at least the same reasons as the
November 2, 2006 Press Release as described in paragraphs 128-129.
131. The 2006 Third Quarter Q also stated : "The Company hedges the
interest rate risk inherent in its pipeline of mortgage loans held for sale to protect
its margin on sale of loans. " Id. at 29. This statement was false and misleading
when made, as Defendants admitted, they were not hedging as they "talk."
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(discussed in detail, herein at paragraphs 3-4, 69-75).
132. The 2006 Third Quarter Q also reported an approximate $4.9 million
increase to loan loss provisions, and approximately $1.8 million of loan charge-
offs, net of recoveries and a $4.9 million provision for loan losses . Id., at 51.
The 2006 Third Quarter Q stated the following in regard to the allowance for loan
loss reserves at September 30, 2006:
Our determination of the level of the allowance for loan losses
and, correspondingly, the provision for loan losses, is based on
management's judgments and assumptions regarding various
matters, including general economic conditions, loan portfolio
composition, loan demand, delinquency trends and prior loan
loss experience. In assessing the adequacy of the allowance forloan losses in its entirety, management reviews the performance
in the portfolios of loans held for investment and the non-coreportfolio of discontinued product lines, which consists ofmanufactured housing and home improvement loans. Acomponent ofthe overall allowancefor loan losses is notspecifically allocated to the loan portfolios ("unallocatedcomponent'). The unallocated component reflectsmanagement's assessment ofvarious factors that create
inherent imprecision in the methods used to determine the
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specific portfolio allocations. Those factors include, but are not
limited to levels of and trends in delinquencies and impaired
loans, charge-offs and recoveries, volume and terms of the
loans, effects of any changes in risk selection and underwriting
standards, other changes in lending policies, procedures, and
practices, and national and local economic trends andconditions. As ofSeptember 30, 2006, the unallocated
component ofthe total allowance for loan losses was
$19.4 million, comparable to $18. 7 million of unallocatedallowance at December 31, 2005.
[2006 Third Quarter Q at 52].
133. Furthermore, Defendants recorded an addition of approximately $9.3
million to the secondary market reserves. See 2006 Third Quarter Q.
134. The foregoing statements were materially false and misleading when
made as Indymac's loan loss reserves and secondary market reserves did not
consider the impact of the lack of internal controls over its credit risks (discussed
in detail , herein at 3-4, 8, 68, 85).
135. Finally, the 2006 Third Quarter Q reiterated the Company's EPS
forecast of between $5.16 and $5.26 per share for 2006, which was materially
false and misleading for the same reasons stated in connection with the
Company's July 27, 2006 Press Release.
136. Attached to the 2006 Third Quarter 10-Q, as Exhibits 31.1, 31.2,
32.1, and 32.2 were the CEO and CFO certifications required by SOX. These
certifications, executed by Perry and Keys, are virtually identical to the SOX
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20 (a) OF THE SECURITIESEXCHANGE ACT OF 1934
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certifications previously discussed in connection with the Company's 2005 10-K,
3and are materially false and misleading for the same reasons. See paragraph 101.
137. Also on November 2, 2006, Defendants held the "Q3 2006 IndyMac
Bancorp, Inc. Earnings Conference Call." Perry and Keys spoke at this
conference and answered questions from several analysts.
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Last year in 2005 we provided $10 million in loan loss reserves.This year, even though charge-offs are actually down year-over-year, we provided $16 million in loan loss reserves andwe'reforecasting in our 2007forecast that more thandoubling to $35 million in loan loss reserves. We're also doingthe same, you'll see in a second, that our warranty reserve isgrowing significantly, and also our mark-to-market, and loansheld for sale. [Tr. at 6]
We're also saying give those factors, plus the fact our industryhas significant operating leverage, actual earnings andprospects can change rapidly. And so predicting future earningsis challenging. So we're telling people that that's the case. Butin the same vein, we also want to tell them things like, hey,we're doubling -- we're forecasting a doubling of our loan lossprovisions next year embedded in those earnings numbers. [Tr.at 16]
138. The foregoing statements were materially false and misleading when
made for the following reasons: Defendants had no control over forecasting loan
loss reserves or secondary market reserves because Indymac did not consider the
impact of the lack of internal controls over credit risks. (discussed in detail,
herein at 3-4, 8, 68, 85). Indeed, Defendants increased their loan loss reserve by
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIESEXCHANGE ACT OF 1934
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over 80% in the 2006 Fourth Quarter without disclosing this to the market before
reporting earnings.
139. Finally, Perry reiterated the Company's EPS forecast for 2006,
which was materially false and misleading for the same reasons stated in
connection with the Company's November 2, 2006 Press Release.
140. On January 16, 2007, the Company issued a press release entitled
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"IndyMac Provides Update on 2006 Results" (the "January 16, 2007 Press
Release") The January 16, 2007 Press Release stated in part:
PASADENA, Calif.--(BUSINESS WIRE)--Jan. 16 , 2007--Thefollowing is a letter to shareholders of IndyMac and otherIndyMac stakeholders from Michael W. Perry, Chairman andChief Executive Officer:
Dear Shareholders and other IndyMac Stakeholders:
Unfortunately, we are starting the year off with some bad news.
Based on the earnings forecast we provided after the end of lastquarter, we anticipated that our EPS for the fourth quarterwould be $1.35 (in a range of $1.30 to $1.40). However, lastweek, as we began to complete our quarterly accounting "roll-up," it became clear that our Q4 earnings would besubstantially below our forecast. While our internal quarterlyaccounting certification process is not yet complete andadjustments could still be made as we finalize our accounting,we now expect to report approximately $0.97 EPS for thequarter when we release earnings as scheduled on January 25th.
This shortfall reflects the challenging times being faced by themortgage and housing industries and the difficult nature offorecasting earnings in our business. I have stated many times
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(s) OF THE SECURITIESEXCHANGE ACT OF 1934
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before that IndyMac is not immune to deteriorating mortgageindustry conditions, and it is clear now that during the fourthquarter industry conditions continued to erode. While we havenot yet completed our detailed analysis of all of the variances,our assessment as of today is that the main differences betweenour prior forecast of $1.35 and what looks to be our earnings of$0.97 are the following:
1. An increase in credit costs related to the loan lossprovision, secondary market reserve, and marking-to-market delinquent loans held-for-sale and residuals andnon-in vestment grade securities;
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2. A reduction in net interest margin related to loans held-for-sale and the thrift investment portfolio due to yieldcurve inversion and thefact that our loan production mixshifted more towardfixed rate and intermediate term fixedrate loans;
3. A decline of the servicing/interest-only securitiesportfolio return on equity (ROE) from a high level of 30percent last quarter to a more normalized level, in additionto a forecasted sale of some securities (at a gain) that did notoccur; and
4. As an offset to the above shortfalls, a tax benefit,reflecting the reduction of our annual effective tax rate from39.5 percent to 39.1 percent. The effective rate declined as aresult of doing more business in lower tax-rate states than inCalifornia.
While I and the rest of Indymac's management team are clearlydisappointed with our shortfall from expectations, steppingback from this situation ... if we do report EPS of $0.97 for thequarter, this would represent a 14.6 percent ROE ... in a verychallenging market for housing and the mortgage business. ThisROE would still be significantly better than the average ROEreported for the third quarter for the top ten thrifts, excludingIndyMac, of 10.3 percent, while at the same time many
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a ) OF THE SECURITIESEXCHANGE ACT OF 1934
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mortgage companies and mortgage divisions of major financial
institutions reported losses.
In addition, if we report $0.97 for the fourth quarter as now
anticipated, we would still earn an all-time record $4.82 for
2006, representing a 19.1 percent ROE and a 9 percent increase
from 2005 ... in a year where industry volumes were down 17
percent, the third year in a row of down industry volumes. In
comparison, our research indicates that a majority of the top ten
thrifts will report EPS declines for 2006, while only IndyMac
and a few others will grow EPS for the year.
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Despite our solid performance in a tough market, I understand
that Indymac's reputation has been hurt by this earnings miss,
and I take full responsibility for this situation. While our
internal forecasting processes have been generally predictive of
actual earnings in the past and we have had few earnings
surprises prior to this quarter, as we have stated in past press
releases, in our industry - which has significant operating
leverage - actual earnings and future prospects can change
rapidly, making it a challenge to forecast future earnings.
Nonetheless, we feel strongly that management has aresponsibility to provide earnings forecasts to its shareholders
to the best of its ability. Accordingly, we will have an updated
2007 forecast when we formally release earnings on January
25th, and, at that time, we will present an action plan of key
steps we will take to improve our prospects and continue to
outperform our peers in the current market environment. Asone of these steps, I will be recommending to our board of
directors that we not increase our quarterly dividend butmaintain it at the current level of $0.50 per share for thisquarter. We also plan to explore stock repurchases, a step wehave successfully used in the past, as a way to enhanceshareholder value.
Thank you again for the trust and confidence you have placedin IndyMac and its team. We will continue to work tirelessly toensure that your trust and confidence are justified.
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIES
EXCHANGE ACT OF 1934-61
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Very truly yours,
Michael W. PerryChairman and Chief Executive Officer
141. The foregoing statements, while revealing some portion of the
relevant truth concealed during the Class Period, were still materially false and
misleading when made, as the Company failed to disclose: (a) that earnings per
share would only reach $4.82 for 2006 at least in part due to the manipulation of
the Company' s loan underwriting guidelines by Defendants. This resulted in the
issuance of millions of dollars of bad loans to unqualified borrowers, for which the
Company would never be paid back or be able to sell on the secondary market.
See herein at 3-4, 8-10, 37-68, 85. Additionally, as a result of Defendants'
manipulation of the underwriting guidelines and controls, the Company was forced
to purchase back, from the secondary loan market, many of these "bad" or
"uncollectible" loans, at a substantial loss to the Company. See Id.; (b) the
Company's inadequate internal controls over hedging of interest rates and loan 1
reserves, and a planned change in accounting therefore; (c) that a material portion
of the earnings miss was due to the fact that a material portion of Indymac's
derivatives and/or assets or liabilities were not being accounted for by SFAS No.
156, as the market was led to believe; (d) $1.5 billion of liabilities were "repriced"
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIESEXCHANGE ACT OF 1934
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in the fourth quarter, which was not considered in Defendants' original 2006
Fourth Quarter forecast; and (e) the "Enterprise Risk Management Committee"
or the business units employing management or "economic" accounting and
reporting did not reconcile such to GAAP earnings.
Defendants' Class Period Ending Disclosures
142. Approximately one week later, IndyMac released the January 25,
2007 Press Release, announcing the Company's results of operations and
financial condition for fourth quarter 2006. The January 25, 2007 Press Release
stated in part:
PASADENA, Calif.--(BUSINESS WIRE)--Jan. 25, 2007--IndyMac Bancorp, Inc. (NYSE:NDE) ("lndyMac(R)" or the"Company"), the holding company for 1ndyMac Bank, F.S.B.("IndyMac Bank(R)"), today reported net earnings of $72million, or $0.97 per share, for the fourth quarter of 2006,compared with net earnings of $70 million, or $1.06 per share,in the fourth quarter of 2005, representing a 3 percent increasein net earnings and an 8 percent decrease in earnings per share(EPS)...
"However, I and the rest of Indymac's management team areclearly disappointed with these results because they wereconsiderably below our normal earnings growth and ROElevels and fell far short of what we had forecasted for thequarter. In response, I want to assure our shareholders that weare redoubling our efforts to both improve our earnings andtighten up our forecasting processes.
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF TILE SECURITIESEXCHANGE ACT OF 1934
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"Notwithstanding our earnings shortfall for the fourth quarter,"
continued Perry, "for the full year 2006, we achieved record
mortgage loan production, net income and EPS and earned a
strong 19 percent ROE, reflecting the strength of our hybrid
thrift/mortgage banking business model and solid execution
against our strategic plan.
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"Tough times, like what we are now facing, are when
companies like IndyMac can gain ground on the competition -
and that is exactly what we are doing. We had a strong quarter
for loan production, with $26 billion in total loans produced, up
8 percent over the prior quarter and 44 percent over Q4-05.
With these production gains, we grew our estimated market
share(1) to 4.51 percent in the fourth quarter versus 3.83
percent in the third quarter and 2.51 percent one year ago.
"At the same time, we maintained reasonable and prudent credit
quality in our mortgage loan production. Our fourth quarter
production consisted of 97 percent prime loans and 3 percent
subprime. The $22 billion of our loan production that we were
able to evaluate using S&P's LEVELS model had an estimated
lifetime loss percentage of 84 basis points, average FICO of
703 and average combined loan-to-value (CLTV) ratio of 81
percent, as compared to 82 basis points lifetime loss, 702 FICO
and 81 percent CLTV in the prior quarter, and 74 basis points
lifetime loss, 700 FICO and 78 percent CLTV in Q4-05. Also,
our mortgage production segment was solidly profitable for the
quarter, earning $71 million, up slightly over the prior quarterand up 17 percent over the fourth quarter of 2005.
"Bottom line, we are gaining market share, maintainingreasonable credit quality in our mortgage production andearning solid profits, while the mortgage industry, as a whole, isstruggling. While no one knows for sure how long the currentdownturn will last and how severe it will get, when themortgage business does turns around, I am confident thatIndyMac will come out of this down cycle stronger than ever."
Capital Allocations and Performance by Business Segment
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"We deployed a record $1.8 billion in capital during the quarterin our main business segments - mortgage production, mortgageservicing rights, and the thrift," continued Perry. "While for thethird quarter I reported that 'we fired on all three cylinders' withrespect to these segments, this quarter saw erosion in the ROEsof each, given the challenging market conditions which haveresulted in increased credit costs and narrower net interest andmortgage banking revenue margins."
Mortgage Production
"While we achieved records for loan production and marketshare, we are not happy with the fact that earnings from themortgage production segment did not grow this quarter versuslast," commented Richard Wohl, IndyMac Bank's President."Our mortgage banking revenue margin declined to 91 basispoints during the fourth quarter from 103 basis points in theprior quarter and 110 basis points in Q4-05. Market conditionscontributed to the margin erosion in the form of a shift in ourproduction mix from higher margin ARM loans to lowermargin fixed rate loans and increased credit costs related tomarking-to-market delinquent loans held for sale and increasingour secondary marketing loan repurchase reserve. In addition,our less predictable Conduit business accounted for 39 percentof our production volume during the quarter versus 31 percentone year ago. While the Conduit may have lower profitmargins, it earned a solid 29 percent ROE for the quarter on netearnings of $17 million, up 56 percent from one year ago.Contributing strongly again was Financial Freedom, theCompany's reverse mortgage subsidiary, which had record netearnings of $18.7 million, up 15 percent from the prior quarterand more than double Q4-05, and achieved an ROE of 58percent. Overall, the mortgage production segment earned a 42percent ROE, which was down from 53 percent in the thirdquarter and 54 percent in Q4-05. Looking ahead, there willlikely be further erosion in mortgage banking revenue marginsand overall profitability before the current down cycleeventually turns up."
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIESEXCHANGE ACT OF 1934
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Mortgage Loan Servicing
The Company's portfolio of loans serviced for others increased
to $140 billion in the fourth quarter, up 12 percent over the
third quarter and 65 percent year over year. However, net
earnings for the segment were $14.8 million, down 26 percent
from the prior quarter and 5 percent from the same quarter last
year. The ROE was also down, to 20 percent for the fourth
quarter from 30 percent in the third quarter and 38 percent one
year ago.
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Commenting on the earnings and ROE declines, John Olinski,
EVP in charge of Secondary Marketing and Retained Assets,
stated, "While we hedge the servicing asset very well, hedging
is not a perfect science, and the imprecision associated with
hedging can cause a certain level of quarterly earnings
volatility. For the fourth quarter the ROE fell to 20 percent,
which is a more realistic level than the outsized and
unsustainable ROE levels we achieved in the third quarter and
one year ago. Over time we have managed the interest rate risk
of the servicing asset well, as illustrated by our year over year
performance. For all of 2006, a year which had considerable
interest rate risk and volatility, we had strong performance,
earning $66 million, up 120% from 2005, and achieving a 26
percent ROE versus a 22 percent ROE in 2005.
"While we will likely see continued quarterly earnings volatility
from the servicing asset going forward, we should be able to
achieve stable earnings growth over time if we hedge this asset
correctly. Growth will come from continued strong growth in
the servicing portfolio as we continue to grow our productionvolumes. Stability will come from the fact that, unlike our other
business segments, servicing is not subject to the competitivemargin pressures and credit risks that come with the housingand mortgage production cycles. Over time we expect ourROEs from the servicing asset to be in the range of 18 percentto 23 percent."
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIES
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Residuals and Non-Investment Grade Securities
This asset class, which totaled $331 million as of December 31,2006 and 1.1 percent of the Company's total assets, includes
prime and subprime mortgage residuals and non-investmentgrade securities, as well as HELOC and lot loan residuals whichare accounted for in the Thrift segment.
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The combined net earnings for this portfolio were $1.7 millionfor the fourth quarter, down 85 percent from the prior quarterand 76 percent from the same quarter last year. These earningstranslated into an ROE of 3.6 percent for the quarter, downfrom 24 percent in the third quarter and 23 percent one yearago.
"We are clearly not satisfied with the performance of theseportfolios during the quarter, but we feel that this quarter'sperformance was an aberration that will likely not recur in thefuture," continued Olinski. "Two main factors drove theearnings decline. First, we implemented a new, more refinedprepayment model for our residual securities that resulted in aone-time downward valuation adjustment of $5 million. Goingforward the new model will enable us to hedge these assetsmore effectively, improving our performance. Second, HELOCresidual securities from 2004 incurred a $6.5 million write-down for credit impairment required by GAAP accounting thatwe feel does not reflect the true economics of these securities.These securities are callable over the next 4-24 months, and,accordingly, we expect to book gains during this time periodmore than offsetting the fourth quarter write-downs, such thatwe expect strong overall returns on our 2004 HELOC residualsecurities over their lives.
"Looking at the portfolio of residuals and non-investment gradesecurities over a longer time period, our performance has beenstrong. ROEs for 2004 and 2005 were 27 percent and 26percent, respectively, and 2006's full year ROE of 17 percentwas significantly impacted by the fourth quarter's poor
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIESEXCHANGE ACT OF 1934
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performance. In coming quarters, we expect the ROE willreturn to a more normal range of 15 percent to 20 percent.
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Thrift Portfolio
Net earnings for the thrift portfolio, which consists of single-family residential mortgage loans (whole loans), consumer andsubdivision construction loans, and mortgage backed securities(MBS), were $25 million, down 30 percent from the thirdquarter and 23 percent from one year ago. "Even though weincreased our average earning assets in the thrift investmentportfolio, our net interest margin declined substantially to 1.64percent in the fourth quarter from 2.02 percent both in the thirdquarter and one year ago," noted Blair Abernathy, Indymac'sChief Investment Officer. "The compression in net interestmargin was due primarily to an increased cost of funds for ourwhole loan and MBS portfolios. Longer term, fixed-ratefunding for these portfolios of approximately $1.5 billion atroughly a 2.95 percent cost of funds matured during the quarterand was replaced at a significantly higher funding cost. This hasresulted in a more permanent shift in our net interest margin,such that the 1.64 percent margin realized during the quarter islikely what we can expect going forward. In retrospect, weshould have more properly planned for this happening.
"Net earnings for the fourth quarter were also negativelyimpacted by a GAAP $6.5 million credit-related valuationwrite-down on HELOC residual securities (noted above) and anincrease in the loan loss provision to $9 million from $5 millionin the prior quarter and $1.6 million in Q4-05. As a result of theearnings decline, the thrift portfolio produced an ROE of 14percent, below our expectations, versus 20 percent in the priorquarter and 22 percent one year ago. Going forward, we believethe ROE for this portfolio should be in a range of 15 percent to20 percent. We are clearly not happy about the fact that thefourth quarter's performance fell below this range, and we willprovide updates on steps we are taking to improve performanceas the year progresses."
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIESEXCHANGE ACT OF 1934
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Non-performing Assets and Charge-offs Increase from Historic
Low Levels
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Non-performing assets to total assets increased to 63 basis
points during the quarter from 51 basis points in the third
quarter and 34 basis points in Q4-05. Net charge-offs increased
to $7.6 million during the quarter from $1.9 million both in the
prior quarter and one year ago. "We have previously noted that
the historically low NPAs and charge-offs we have experienced
over the last few years were unsustainable, and, indeed, we saw
erosion in our credit metrics during the fourth quarter. In lightof this, we are increasing our provision for loan losses,"commented Scott Keys, Indymac's Chief Financial Officer."We expect current credit conditions to worsen further in 2007in connection with the housing market cycle and therefore areplanning for significant increases in loan loss provisions andcharge-offs in 2007 versus 2006. Nonetheless, we believe thatour credit losses will remain manageable inasmuch as 94percent of our assets consists of low credit risk assets (cash andFHLB stock, investment grade MBS securities, mortgage loansheld-for-sale) mortgage loans held-for-investment, MSRs andconsumer construction loans). In addition, our $6.5 billionsingle-family mortgage held-for-investment loan portfolio is ofprime credit quality, with original average combined loan-to-value ratios (CLTVs) of 73 percent, current average CLTVratios estimated to be 61 percent, and an average FICO score of716."
143. Perry further discussed IndyMac's forecasting problems during an
earnings conference call IndyMac held on the same day, January 25, 2007 (the
"January 25, 2007 Earnings Conference Call") explaining the Company missed
its forecasted results "so badly" because of market forces and "a little hubris in
terms of our forecasting process." Perry also admitted "[w]e should be doing aCLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIES
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much more detailed bottom's up forecasting in all our business units... and I take
responsibility for that."
144. Perry also discussed the fact that IndyMac's supposedly superior
internal controls and forecasting models were insufficient to cope with the
changing credit market. For example, Perry admitted that despite the Company's
best efforts, "[o]ur provision for loan losses is increasing ... Credit quality
generally is deteriorating so I would say that's something we have to do a better
job forecasting, and clearly we want to be a little more conservative as it relates
to that... This is something we should have done a better job forecasting on. This
is something that we probably could have seen better if we had more precise
models ..."
145. Indymac's January 25, 2007 disclosures drove its share price
downward, to close that same day at $37.71, or 7.35% below the previous day's
closing price of $40.70 per share.
Defendants' Post Class Period Disclosures
146. On March 1, 2007, the Company issued a press release entitled
"IndyMac Issues 2006 Annual Shareholder Letter, Updating 2007 Forecast" (the
"March 1, 2007 Press Release" ). In the March 1, 2007 Press Release, Defendants
admitted they knew that the steadily worsening conditions of the housing market
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and yield curve during 2006, was not properly considered in Indymac's financial
reporting - both forecasting and historical accounting:
IndyMac Bancorp, Inc. (NYSE: NDE) ("IndyMac(R)" or the
"Company"), the holding company for IndyMac Bank, F.S.B.
("IndyMac Bank(R)"), today released its annual letter to
shareholders from Chairman and CEO Michael W. Perry, that
will be contained in the Company's annual report, which will be
issued as scheduled at the end of March. . .
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Dear Shareholders:
2006 was a challenging year in the mortgage banking industry.
Industry loan volumes of $2.5 trillion were 34 percent below2003's historic high level and 17 percent lower than in 2005.
Mortgage banking revenue margins declined further after sharpdeclines in 2005, and net interest margins continued tocompress, as the yield curve inverted with the average spreadbetween the 10-year Treasury yield and the I -month LIBOR
declining from 89 basis points in 2005 to negative 31 basispoints in 2006. To cap it off, the housing industry slowed downsignificantly, increasing loan delinquencies and non-performingassets and driving up credit costs for all mortgage lenders.
Notwithstanding our solid results for the year in the face ofchallenging market conditions, our year ended on adisappointing note. Our fourth quarter EPS declined bothsequentially and versus the fourth quarter of 2005, and we fellshort of EPS expectations for the quarter. Also, our ROE of14.6 percent for the quarter, while solid, was at the lowest levelin 23 quarters. While I am disappointed with how we finished2006 and with our outlook for 2007, where EPS will likely bedown from 2006 given tough conditions in the mortgagemarket, I believe we will emerge from this difficult mortgageenvironment a stronger and more competitive company.
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While we run IndyMac with a vision for the long-term, I am
acutely aware that we must also deliver results short-term,
especially in today's environment, where many shareholders
own our stock for relatively brief time periods and, overall, our
shares turn over six times per year. Given that reality, here is
what we will do to improve performance for our shareholders
right now:
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1. Manage our credit risks by being smart andprudent in
adjusting our mortgage underwriting guidelines, setting ourrisk-based pricing, making decisions as to what assets go intoour investment portfolio and/or distributing our risk into thesecondary market, and executing on best in class lossprevention and loss mitigation practices. [Emphasis added.]
Given the robust housing market and highly liquid secondarymarkets (for even the "riskiest loans'9 - both ofwhichpersistedfor years longer than anticipated - and given strongcompetition in a declining overall mortgage market, IndyMac,in order to compete and grow, also loosened its lendingstandards, though in a much more responsible way. That wedid not do this to the same extent as many other lenders isevidenced by the fact that our mortgage production in 2006 hadan average FICO of 701 and average combined loan-to-value(CLTV) ratio of 80 percent as compared to an average FICO of702 and average CLTV of 76 percent in 2005. Though wesuffered increased credit losses in thefourth quarter evenafter we began tightening our lending standards early in2006, these losses in no way threaten the viability ofourcompany. With the benefit of hindsight, if I had to do it overagain, I would not do anything materially different for twoimportant reasons : ( 1) Indymac 's competitive position in theindustry has been significantly enhanced for the long-term bythe market share we have gained and will hold and grow as a
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result of our product innovation and reasonable risk-taking, and
(2) you don't just lose short-term profits if you do not meet the
competitive tactics of your major long-term competitors ... you
lose customers and you lose your sales force (to your
competitors) ... which would, in my view, have impaired
IndyMac more than the credit losses we will suffer over the
next few years. [Emphasis added.]
Michael W. PerryChairman and Chief Executive Officer
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ADDITIONAL SCIENTER ALLEGATIONS
Defendants' Admissions
147. At the end of the Class Period, Indymac's CEO made the following
admissions, among others:
(a) The source for forecasting and much of external financial reporti
was management accounting not GAAP accounting; there was no
internal reconciliation between the two:
When we do forecasting "[w]e should be doing a much more detailedbottom-ups forecasting in all of our business units ... and I takeresponsibility for that ... and we're going to be expecting the forecastto be accurate ... It will be more like a SOX [Sarbanes-Oxley]approach that we're using for GAAP accounting ... [Presently] thebusiness units are managing risk, and on an economic basis, and sosome of them lost sight of their GAAP earnings versus their economicearnings and I think that led to some of the confusion and also us notrealizing that there was a big difference between some of thoseeconomic and GAAP earnings.
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[A]s I said earlier in the presentation, is [sic] the units are running
those areas very much focused on economic earnings and economic
profits because they're not, you know, they're not as focused on
dealing with the vagaries of GAAP accounting. For example, swaps,
they had some fixed-rate swaps that matured in the quarter, and as a
result of those, their cost of funds went up dramatically. They had
known about that. They had smoothed out in their economic
earnings report, but had not reconciled that to the GAAP earnings,
and I think that's one of the things that, you know, I take
responsibility for, and the bottom line is that it's something we should
have been warning about long before the fourth quarter."
(b) Defendants did not hedge, as represented in SEC filings and
conference calls:
"In mortgage production, this is - we had a 13% declinefromforecast You can see that spread income, you know, we don't hedgeas we talk many times, the loans held for sale net interest margin ..."
[Analyst:] "And the other issue is, can you go over this again, this$1.5 billion in liabilities that repriced, and did you really know thatwas repricing in thefourth quarter? ...[CEO:] Yeah, I mean, Ithink, you know Paul, obviously I detect some anger there anddisappointment ..."
(c) In their forecasts , Defendants did not account for the GAAP
mark-to-market impairment loss on certain residual rights
securities, as the market was led to believe:
"Our home equity securities , at least the 2004 ones , reside in the[T]hrift. And on a GAAP basis, there was a 5 cent impairment forincreases in delinquencies and credit losses on those.. . [Analyst:]First, on the write-down ofthe residuals in the [T]hrift, the GAAP
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versus economic recognition, I thought those securities were carriedatfair value? . .. [CEO:] No, they're carried at lower of cost to [sic]market."
(d) Defendants changed their accounting method for certain loan
losses without informing the market that the change would dramatically
affect both forecasted and actual net income:
"There are two pieces of valuation loss there. 5 cents of it was wechanged to a more precise, loan-level model on some of our residualsecurities, and that resulted in an increase in our prepayment speeds.It's kind of a one-time increase in our prepayment speeds ... Thatcame in in the [fourth] quarter and wefelt that was the right thingto do because it was something weplanned to do, to go to that low-level model and be able to improve our hedging. "
(e) In stark contrast to statements made in earnings conference
calls and SEC filings, Defendants admitted that Indymac's
methods for determining credit loss reserves was woefully
inadequate:
[CEO:] "Our provision for loan losses is increasing. . . Credit qualitygenerally is deteriorating so I would say that's something we have todo a better job forecasting, and clearly we want to be a little moreconservative as it relates to that. As I said, thrift interest margincompressed 38 basis points. This is something we should have done abetter job forecasting on. This is something that we probably couldhave seen better if we had more precise models ..."
[Analyst:] ... "I was kind of doing the math on the [loan loss]provision, given your charge-off guidance and your guidance for net-loan growth, and it seems like the provision could be up pretty
CLASS ACTION AiMMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIESEXCHANGE ACT OF 1934
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substantially year-over-year. I think your guidance was about $35
million. If I just put in the charge-offs and reserves and assume a
flattish reserve coverage, that's a good 48, 49 million. Add in a little
bit for the additional non-performers and it seems like you could be
well north of $70 or $75 million."
148. Throughout the Class Period, as in prior years, Indymac increased its
I market share. However, this time, it was by entering into the increasingly risky
Alt-A mortgage loan area. Knowing that relevant market and credit variables were10
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moving against Indymac, Defendants , in violation of SEC reporting rules and
GAAP, deferred charges until the fourth quarter of 2006 , at times, admitting as
much, while analysts lost credibility in management:
[Analyst]: "They've changed on the down side on that, even I think,in December, at a coupe ofconferences you guys were still saying,you know, things are really looking well. . . I think it's the forecastthat really confuses everybody, because it was so bullish in nature,and it changed rather rapidly ..."
[CEO:] "So we did, I would grade us a D or an F on the forecasting.. We're owning up to it. I take full responsibility for it."
[CEO:] [I]n my opinion the GAAP accounting isn't great and we'vestopped using those instruments o.k? Because it doesn't allow for asmooth expensing of the cost of those hedging instruments. And sowe've gone to different hedging instruments that have a smoother,more stable, net interest spread ... I personally would rather see allfinancial services companies mark their entire balance sheet to marketeach period ... because then what you have, is you have theaccounting reflecting the economics." [Analyst:] "So just let me getthis straight. You pulled offsome hedges din thefourth quarter]because you didn't like the accounting of it? [CEO:] No. They were
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expiring ... So, the real issue is we didn't warn on the timing of whenthis was going to fall off a cliff . . ."
[CEO:] Well, the write-down [in the fourth quarter] on that residualsecuritythat was related to prepayments was actually a refinement of theprepayment model where we went to a loan level versus a pool levelmodel on it and so it was an improvement in our ability to projectprepayments... It's not something that was some big change. It's justthat we had, in a normal quarter, right, we would have something likethat and we would have four things that would offset it. In thisquarter really, we had everything going one way, pretty much, whichwas negative.
[CEO:] "Charge-ups [sic] also increased, but I would tell you that inthe fourth quarter we accelerated some sale of non-performing loansrelated to our held for investment portfolio. We hadn't been selling inour held for investment portfolio throughout the year, and we soldthem all through the fourth quarter. That resulted in charge-offsoccurring during that quarter that were not normalized..."
Finally, as explained above, Defendants almost doubled lndymac'sprovision for loan losses and charge-offs in the fourth quarter of 2006.
149. Not surprisingly, analysts lost confidence in Defendants'
statements at the end of the Class Period. "We are downgrading NDE ... we
NDE's management team lost some credibility. We will revisit our
rating and price target when fundamentals improve and management gains
back credibility with investors." January 26, 2007 FBR Research Report at
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIESEXCHANGE ACT OF 1934
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150. Defendants also admitted that they did not reconcile
"economic" or management reporting to GAAP reporting , particularly in
regard to securitized loans for resale:
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PAUL MILLER, [analyst , Friedman , Billings Ramsey]: But one ofthe things that really changed in your model though was not mortgagebanking-related per se but was your liability cost . Can you just goover again - because you made a comment that, you kind of implied, Ijust want to make sure I read this correctly that maybe this was not -this is really an accounting margin loss and not necessarily aneconomic loss? ... (ellipses in original).
DEFENDANT PERRY: Yeah, I mean it ...
PAUL MILLER: Not an economic decline ...
DEFENDANT PERRY: Yeh, I think it ...
PAUL MILLER: Can you go over that again?
DEFENDANT PERRY: I mean, I think it's a reasonably complexissue that, you know, is hard to explain in person, over the phone, butifyou look at it, some ofthe accounting for some ofthe hedginginstruments used to hedge our heldfor investment and mortgagebacked securities portfolio, that allowed us to fixfloating rateliabilities to fixed rates, ok, the accounting for those, you know,under GAAP accounting, in my opinion, the GAAP accounting isn'tgreat and we've stopped using those instruments, ok? Because itdoesn't allowfor smooth expensing ofthe cost ofthose hedginginstruments. And so we've gone to different hedging instruments thathave a smoother, more stable, net interest spread, and I think that welost sight of some of these that were going to impact us from a GAAPaccounting standpoint, because the business unit manages theirearnings on an economic basis point. They're looking at a lot of theactivities that happen in GAAP are not, you know, economicallycorrect. ... Ipersonally would rather see allfinancial servicescompanies mark their entire balance sheet to market each period
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and look at the change in equity. That's where I would like to see
accounting to in thefinancial services area, because then what you
have is you have the accounting reflecting the economics. if you
and I owned IndyMac, that's all we'd want to know, let's mark-to-
market the assets and liabilities each quarter, and look at the change in
equity, you know, less dividends paid and you know, capital raised,
and that's really the economic profit that you and I, if we owned
IndyMac, would have achieved, and that would be in perfectalignment to how companies run their business, on an economic basis.
So I think that, you know, we learned some very hard lessons about
forecasting. We've learned some very hard lessons aboutreconciling our economic profits to our GAAP accounting profits,and I don't think they're going to be mistakes that we'll make in thismagnitude going forward. That's really all I can say about that.
PA UL MILLER: So let me get this straight. You pulled offsomehedges because you didn 't like the accounting of it?
DEFENDANT PERRY: No, they were expiring , they were expiringtheir period . Paul, I don ' t want to get in to this more than this righthere. We can talk about it off-line.
PAUL MILLER: Thanks for taking my question.
DEFENDANT PERRY: Thanks Paul.
RICHARD ECKERT [Analyst, Roth Capital Partners ]: ... First, onthe write-down ofthe residual securities in the thrift, the GAAPversus economic recognition, I thought those securities were carriedatfair value?
DEFENDANTPERRY. No, they 're carried at lower [of] cost to[sic] market.
RICHARD ECKERT: And second , was the residuals written down in
the mortgage sector, and the servicing portfolio, you know, it seems to
me that prepayments were an issue there, and I was just wondering
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why we didn 't see that earlier in the year given the free fall in long-term interest rates?
DEFENDANT PERRY : Well, the write-down on that residualsecurity that was related to prepayments was actually a refinement ofthe prepayment model where we went to a loan level versus a poollevel model on it and so it was an improvement in our ability toproject prepayments...
Tr. at 13, 18 [Emphasis added].
151. Notwithstanding, Defendants, keenly aware of the purported
difference between GAAP accounting and economic results stated
repeatedly that it controlled for such: "The objective ofour hedging
strategies is to mitigate the impact ofinterest rate changes, on an
economic and accounting basis, on net interest income and the fair value of
our balance sheet." Form 10-Q for the quarter ended March 31, 2006 at 72.
[Emphasis added].
Insider Tradin
152. During the twelve month Class Period, Abernathy sold a large block of
his beneficially-owned shares of IndyMac. Abernathy sold 37,700 shares on
November 14, 2006 resulting in proceeds of $1,735,566.
7 Moreover, non-defendant Olinski sold 40,000 shares on January 31, 2006resulting in proceeds of $1,624,708.
CLASS ACTION & MENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIESEXCHANGE ACT OF 1934
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153. Abernathy' s sales of IndyMac common stock were suspicious in
i timing. Abernathy's sales were made at the tail end of the Class Period during
IndyMac's fourth quarter. More importantly, these sales came just days after
Abernathy made false and misleading statements regarding margins and the
following statement regarding the thrift segment in general in the Company's
November 2, 2006 Press Release:
Heading into the fourth quarter, this portfolio - including $10billion in loans held for investment and $4 billion in securities -is at a record high level and should produce a growing earningsstream and ROEs consistent with our targeted level of 20 to 25percent based on our current forecasts of interest rates andcredit losses.
November 2, 2006 Press Release
154. Later, in the January 25, 2007 Press Release, Abernathy would
comment on the same quarter, stating "[i]n retrospect, we should have more
properly planned for this [a more permanent negative shift in the net interest
margin] happening" and that fourth quarter net earnings were "negatively
impacted" by "an increase in the loan loss provision to $9 million from $5 million
in the prior quarter and $1.6 million in Q4-05."
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIES
EXCHANGE ACT OF 1934-8I
Other Undisclosed Weaknesses In Internal Controls Were Known to
Defendants
155. Section 13(b)(2)(B) of the Exchange Act requires every issuer that
has securities registered pursuant to Section 12 of the Exchange Act to devise and
maintain a system of internal accounting controls sufficient to reasonably assure,
among other things, that transactions are recorded as necessary to permit
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preparation of financial statements in conformity with GAAP.
156. Defendants touted various methods by which they controlled interest
rate risks on Indymac's various investments, including servicing-related assets:
HEDGING INTEREST RATE RISK ON SERVICING-
RELATED ASSETS
With respect to the investment in servicing-related assets(AAA-rated and agency interest -only securities , non-investmentgrade residual securities and MSRs), the Company is exposedto interest rate risk as a result of other than predictedprepayment of loans. Our retained assets and servicing divisionis responsible for the management of interest rate andprepayment risks in the servicing-related assets, subject topolicies and procedures established by, and oversight from, ourmanagement-level Interest Rate Risk Committee ("IRRC"),Variable Cash Flow Instruments Committee ("VCI ") andEnterprise Risk Management ("ERM') group, and our BoardofDirectors-level ERM Committee. The objective ofourhedging strategy is to mitigate the impact ofchanges ininterest rates on the net economic value ofthe balance sheetand quarterly earnings, not to speculate on interest rates. Assuch, we manage the comprehensive interest rate risk ofourservicing-related assets usingfinancial instruments and our
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIESEXCHANGE ACT OF 1934
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servicing portfolio retention efforts. Historically, we havehedged servicing-related assets using a mix of securities on ourbalance sheet, such as AAA-rated principal-only securities,prepayment penalty securities, buying and/or selling mortgage-backed or U.S. Treasury securities, as well as derivatives suchas futures, floors, interest rate swaps, or options. As there are nohedge instruments that would be perfectly correlated with thesehedged assets, we use a mix of the above instruments designedto correlate well with the hedged servicing assets and ouranticipated servicing retention rates. The MSRs and RetentionAsset segment results on page 24 reflect the entire riskmanagement result.
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2005 Form l0-K at 50 [Emphasis added].
157. Defendants also boasted of Indymac 's "Interest Rate Sensitivity"
controls:
In addition to our hedging activities to mitigate the interest raterisk in our pipeline of mortgage loans held for sale, rate locksand our investment in servicing-related assets, we performextensive, company-wide interest rate risk analyses. Ourprimary measurement tool used to evaluate interest rate riskover the comprehensive balance sheet is net portfolio value("NPV") analysis. The NPV analysis estimates the exposure ofthe fair value of net assets attributable to shareholders' equity tochanges in interest rates.
The following table sets forth the NPV and change in NPV thatwe estimate might result from a 100 basis point change ininterest rates as of December 31, 2005, and December 31, 2004.Our NPV model has been built to focus on the Bank alone asthe $1.1 billion of assets at the Parent Company and its non-bank subsidiaries have very little interest rate risk exposure.
2005 Form 10-K at 62.
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158. Finally, Defendants spoke of even another practice in place for
secondary market inventory (i.e., GSEs, and whole loans and Securitized trusts),
credit and market reserves:
The Company maintains secondary market reserves for lossesthat arise in connection with loans that we may be required torepurchase from whole loan sales, securitization transactionsand sales to the GSEs. These reserves, which totaled$27.6 million at December 31, 2005, have two generalcomponents: reserves for repurchases arising fromrepresentation and warranty claims and reserves for disputeswith investors and vendors with respect to contractualobligations pertaining to mortgage operations. See furtherdiscussion on legal matters associated with loans sold in"Note 21 - Commitments and Contingencies" included in theCompany's consolidated financial statements incorporatedherein. Also included in the reserves was a $1.3 million chargeprovided in the third quarter of 2005 (reduction of gain on saleof loans) for potential investor claims on loans that wepreviously sold and which are collateralized by properties in theareas affected by Gulf Coast Hurricanes. The amount estimatedis based on the current information available to us and couldvary from the actual amount.
2005 Form 10-K at 67.
159. In contrast to these Class Period statements, Defendants admitted
that they knew or were reckless in not knowing that there were either no controls
in place that alerted them to the fact that hedges were maturing and were not
being replaced or that such maturation ofhedges without replacement was
deliberate in order to speculate that interest rates would move in a favorable
manner:
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PAUL MILLER (analyst): So let me get this straight. You
pulled off some hedges because you didn't like the accounting
of it?
PERRY: No. They were expiring, they were expiring their
period. Paul, I don't want to get in to this more than right here.
We can talk about it off-line.
MICHAEL VINCIQUERRA (analyst, Raymond James &
Associates ): ... I don't want to get back to Paul's issue too
deeply, but one simple question that I think he was getting at:
Are there economic returns that will come back to you, because
you said there was a difference between economic and GAAP
accounting , and they were hedging on an economic basis. Will
actually receive those benefits on an economic basis in future
periods?
PERRY: No, I think that what it was that we were looking at
it and saying our economic returns were lower but stillacceptable. So the real issue is we didn't warn on the timing
ofwhen this was going to fall off a cliff, and I that's somethingthat our forecasting system wasn't focused on, and I think thatit didn't have the detail and rigor that it should have had there.
(Jan. 25 , 2007, Tr. at 13).
160. This previously undisclosed impact of an expiring hedge resulted in
a greater than $6.5 million loss for the quarter ended December 31, 2006, a $0.05
per share miss from previously forecasted earnings per share of $1.35 for the
same period.
161. Thus, Defendants violated Section 13(b)(2)(B) of the Exchange Act
by, among other things, failing to maintain the required internal accounting
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controls necessary to integrate and coordinate hedge expiration and accounting
and exposing the Company to unintended and undisclosed risks. Further, this
impaired the Company's ability to timely prepare its financial statements in
accordance with GAAP and provide accurate forecasts.
162. See also AICPA' s Generally Accepted Auditing Standards
definition of "Material Weakness" in internal controls:
A material weakness is a condition that precludes the entity'sinternal control from providing reasonable assurance thatmaterial misstatements in the financial statements in thefinancial statements will be prevented or detected on a timelybasis.
AT § 501.55.
Reckless Disregard for GAAP and SEC Reporting Rules
163. During the Class Period, as set forth herein, Defendants misled the
investing public by inflating the price of the Company's securities, by publicly
issuing false and misleading financial statements and omitting to disclose
material facts necessary to make Defendants' statements not false and
misleading. Said statements and omissions were materially false and misleading
in that they failed to disclose material adverse information and misrepresented
the truth about the Company, its financial condition, results of operations, and
prospects in violation of the federal securities laws and GAAP. Defendants'
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widespread and flagrant violations of the basic and core principles of GAAP are
Istrongly probative of their scienter.
164. GAAP consists of those principles recognized by the accounting
profession as the conventions, rules, and procedures necessary to define accepted
accounting practice at the particular time. Regulation S-X, 17 C.F.R. § 210.4-
01(a)(1), provides that financial statements that are not prepared in compliance
with GAAP, are presumed to be misleading and inaccurate.
165. Statements of Financial Accounting Standards No. 5, Accounting
for Contingencies ("SFAS 5"), states that:
An estimated loss from a loss contingency... shall be accruedby a charge to income if both of the following conditions aremet:
(a) Information available prior to issuance of thefinancial statements indicates that an asset hadbeen impaired or that a liability had been incurredat the date of the financial statements. It is implicitin this condition that it must be probable that oneor more future events will occur confirming thefact of the loss, and;
(b)The amount of the loss can be reasonablyestimated.
Disclosure of the nature of an accrual made ... and the amountaccrued may be necessary for the financial statements not to bemisleading.
SFAS 5,11 8,9.
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166. SFAS 5 requires the following disclosures if no loss accrual is made
in the financial statements:
If no accrual is made for a loss contingency because one or
both of the conditions in paragraph 8 are not met, or if an
exposure to a loss exists in excess of the amount accrued
pursuant to the provisions of paragraph 8, disclosure of the
contingency shall be made when there is at least a reasonable
possibility that a loss or an additional loss may have been
incurred. The disclosure shall indicate the nature of thecontingency and shall give an estimate of the possible loss or
range of loss or state that such an estimate cannot be made.
[Footnote 6:] Disclosure is also required of some losscontingencies that do not meet the condition in paragraph 8(a) -namely, those contingencies for which there is a reasonable
possibility that a loss may have been incurred even thoughinformation may not indicate that it is probable that an asset
had been impaired or a liability had been incurred at the date ofthe financial statements.
167. Defendants violated SFAS No. 5 in that during the Class Period
Indymac's Form 10-K, and Forms 10-Q failed to accrue for and/or disclose credit
losses that were at least "probable" and/or "reasonably possible."
168. Lending and other financial institutions' "management's
methodology" for assessing the adequacy of credit losses should, at least: (a)
include a detailed and regular analysis of the loan portfolio and off-balance sheet
instruments with credit risk; (b) include procedures for timely identification of
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problem credits; (c) be used consistently; (d) consider all known relevant internal
and external factors that may affect collectibility; (e) consider all loans (whether
on an individual or pool-of-loans basis) and other relevant credit exposure; (f)
consider the particular risks inherent in the different kinds of lending; (g)
consider current collateral fair values, where applicable; (h) be performed by
competent and well-trained personnel; (i) be based on current and reliable data;
and (j) be well documented, with clear explanations of the supporting analysis
and rationale . AICPA Audit and Accounting Guide, Depository and Lending
Institutions ("AAG-DEP"), at 204 (AICPA May 1, 2007).
169. Defendants violated SFAS No. 5 for failing to provide for probable
loan losses during the Class Period. Defendants later admitted that although they
knew of the likelihood of losses on Alt-A and other subprime mortgage loans,
they failed to increase their credit reserves and enhance a known improvement to
the monitoring thereof until the fourth quarter of 2006.
170. Despite these failures, Defendants boasted of Indymac's credit
controls throughout the Class Period:
We utilize several methodologies to estimate the adequacy ofour [Allowance for Loan Losses ("ALL")] to ensure that theallocation of the ALL to the various portfolios is reasonablegiven current trends and the economic outlook . In this regard,we segregate assets into homogeneous pools of loans andheterogeneous loans. Homogeneous pools of loans exhibitsimilar characteristics and, as such , can be evaluated as pools of
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assets through the assessment of default probabilities andcorresponding loss severities. Our homogeneous pools includeresidential mortgage loans, manufactured home loans and homeimprovement loans. The estimate of the allowance for loanlosses for homogeneous pools is based on expected inherentlosses resulting from two methodologies: 1) Internal Loan LossEstimation Model - This model estimate losses based onseveral key loan characteristics. . . . 2) Historical LoanAnalysis - This analysis compares the level of allowance to thehistorical losses actually incurred in prior years. Our builderconstruction loans generally carry higher balances and involveunique loan characteristics that cannot be evaluated solelythrough the use of default rates, loss severities and trendanalysis. To estimate an appropriate level of ALL for ourheterogeneous loans, we constantly screen the portfolios on anindividual asset basis to classify problem credits and to estimatepotential loss exposure. In this estimation, we determine thelevel of adversely classified assets (using the classificationcriteria described below) in a portfolio and the related losspotential and extrapolate the weighing of those two factorsacross all assets in the portfolio.
171. Amazingly, Perry admitted that even though the Company had
sophisticated means to assess credit risk, such procedures were not implemented
until the fourth quarter of 2006, causing an unexpected material downward
adjustment to net earnings of at least 5 cents per share. See paragraph 142.
172. Further, Pursuant to Item 303 of Regulation S-K, registrants are
required to disclose the existence of known trends, events or uncertainties that it
reasonably expects will have a material unfavorable impact on net revenues or
income. See 17 C.F.R. § 229.303.
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173. Defendants violated Item 303 by failing to disclose the existence of
known trends, events or uncertainties as to IndyMac's business, as discussed
passim, that they reasonably expected would have a material, unfavorable impact
on net revenues or income or that were reasonably likely to result in the
Company's liquidity decreasing in a material way, and that failure to disclose the
information rendered the statements that were made during the Class Period
materially false and misleading.
174. The foregoing is particularly so, given that Defendants repeatedly
provided earnings guidance at conference calls and analyst presentations, and
even in SEC filings, while also touting Indymac's forecasting reliability.
LOSS CAUSATION/ECONOMIC LOSS
175. During the Class Period, as detailed herein, Defendants engaged in a
scheme to deceive the market and a course of conduct that artificially inflated
IndyMac's stock price and operated as a fraud or deceit on Class Period
purchasers of IndyMac stock. During the Class Period, Defendants achieved a
facade of stable revenue results, success, growth and strong future business
prospects by:
• Disseminating financial forecasts Defendants knewlacked a reasonable basis;
• Disseminating statements Defendants knew were false andmisleading regarding, inter alia, the Company's underwriting,hedging, loan loss provisions, secondary market reserves,
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market forces, internal controls, and compliance with securities
laws.
176. Defendants' false and misleading statements and forecasts caused
IndyMac stock to trade at artificially inflated levels, reaching as high as $50.11
per share, throughout the Class Period.
177. On January 25, 2007, Defendants were forced to publicly disclose
IndyMac was not the financially sound company investors had been led to
believe it was during the Class Period. Defendants revealed it would be unable
to achieve the unreasonably high forecasted results for the fourth quarter of 2006,
and that the manner in which the forecasts were determined was so flawed that
complete overhaul was necessary. Defendants further explained they were not
able to weather the industry downturns as had been previously claimed, and that
the Company's highly touted hedging activities had been unsuccessful. As a
direct result of Defendant's fraud and falsity, the artificial inflation of its
common stock evaporated , and its price per share fell 7% to close at $37.71,
damaging investors.
178. The timing and magnitude of IndyMac's stock price decline negates
any inference that the loss suffered by Plaintiffs and other Class members was
caused by changed market conditions, macroeconomic or industry factors or
Company-specific facts unrelated to the Defendants' fraudulent conduct.
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APPLICABILITY OF THE PRESUMPTION OF RELIANCE:
FRAUD-ON-THE-MARKET DOCTRINE
179. At all relevant times, the market for IndyMac common stock was an
efficient market for the following reasons, among others:
(a) IndyMac stock met the requirement for listing, and was listed
and actively traded on the NYSE, a highly efficient and automated market;
(b) As a regulated issuer, IndyMac filed periodic public reports
with the SEC and NYSE;
(c) IndyMac regularly communicated with public investors via
established market communication mechanisms, including through regular
dissemination of press releases on the national circuits of major newswire
services and through other wide-ranging public disclosures, such as
communications with the financial press and other similar reporting
services; and
(d) IndyMac was followed by several securities analysts
employed by major brokerage firms who wrote reports which were
distributed to the sales force and certain customers of their respective
brokerage firms. Each of these reports was publicly available and entered
the public marketplace.
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180. As a result of the foregoing, the market for IndyMac common stock
promptly digested current information regarding IndyMac from all publicly-
available sources and reflected such information in IndyMac's stock price. Under
these circumstances, all purchasers of IndyMac common stock during the Class
Period suffered similar injury, and a presumption of reliance applies.
NO STAUTORY SAFE HARBOR EXISTS
FOR DEFENDANTS ' STATEMENTS
181. The statutory safe harbor provided for forward-looking statements
under certain circumstances does not apply to any of the false statements pleaded
in this complaint . The specific statements pleaded herein either were not
identified as "forward-looking statements" when made or were not accompanied
by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those in the purportedly forward-
looking statements. To the extent that the statutory safe harbor does apply to any
forward-looking statements pleaded herein, Defendants are liable for those false
forward-looking statements because at the time each of those forward-looking
statements was made, the particular speaker knew that the particular forward-
looking statement was authorized and/or approved by an executive officer of
IndyMac who knew that those statements were false when made.
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CLASS ACTION ALLEGATIONS
182. Lead Plaintiffs bring this action as a class action pursuant to Federal
Rule of Civil Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all
those who purchased or otherwise acquired the common stock of IndyMac from
January 26, 2006 through January 25, 2007, inclusive and who were damaged
thereby. Excluded from the Class are Defendants, the officers and directors of the
Company, at all relevant times, members of their immediate families and their
legal representatives, heirs, successors or assigns and any entity in which
Defendants have or had a controlling interest.
183. The members of the Class are so numerous that joinder of all
members is impracticable. Throughout the Class Period, IndyMac's common
stock was actively traded on the NYSE. While the exact number of Class
members is unknown to Plaintiffs at this time and can only be ascertained
through appropriate discovery, Plaintiffs believe that there are hundreds or
thousands of members in the proposed Class. Record owners and other members
of the Class may be identified from records maintained by IndyMac or its transfer
agent and may be notified of the pendency of this action by mail, using the form
of notice similar to that customarily used in securities class actions.
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184. Plaintiffs' claims are typical of the claims of the members of the
Class as all members of the Class are similarly affected by Defendants' wrongful
conduct in violation of federal law that is complained of herein.
185. Plaintiffs will fairly and adequately protect the interests of the
members of the Class and they have retained counsel competent and experienced
in class and securities litigation.
186. Common questions of law and fact exist as to all members of the
Class and predominate over any questions solely affecting individual members of
the Class. Among the questions of law and fact common to the Class are:
(a) whether the federal securities laws were violated by
Defendants' acts as alleged herein;
(b) whether statements made by Defendants to the investing
public during the Class Period misrepresented material facts about the
business, operations and management of IndyMac; and
(c) to what extent the members of the Class have sustained
damages and the proper measure of damages.
187. A class action is superior to all other available methods for the fair
and efficient adjudication of this controversy since joinder of all members is
impracticable. Furthermore, as the damages suffered by individual Class
members may be relatively small, the expense and burden of individual litigation
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make it impossible for members of the Class individually to redress the wrongs
done to them. There will be no difficulty in the management of this action as a
class action.
FIRST CLAIM
Violations of Section 10(b) of the Exchange Act
And Rule 10b-5 Promulgated Thereunder
Against All Defendants
188. Plaintiffs repeat and reallege each and every allegation contained
above.
189. Each of the Defendants: (a) knew or recklessly disregarded material
adverse nonpublic information about the Company's financial results and then
existing business conditions, which was not disclosed; and (b) participated in
drafting, reviewing and/or approving the misleading statements, releases, reports,
and other public representations of and about the Company.
190. During the Class Period, Defendants, with knowledge of or reckless
disregard for the truth, disseminated or approved the false statements specified
above, which were misleading in that they contained misrepresentations and
failed to disclose material facts necessary in order to make the statements made,
in light of the circumstances under which they were made, not misleading.
191. Defendants have violated § 10(b) of the Exchange Act and Rule 1Ob-
5 promulgated thereunder in that they: (a) employed devices, schemes and
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artifices to defraud; (b) made untrue statements of material facts or omitted to
state material facts necessary in order to make statements made, in light of the
circumstances under which they were made, not misleading; or (c) engaged in
acts, practices and a course of business that operated as a fraud or deceit upon the
purchasers of IndyMac stock during the Class Period.
192. Plaintiffs and the Class have suffered damage in that, in reliance on
I the integrity of the market, they paid artificially inflated prices for IndyMac
stock. Plaintiffs and the Class would not have purchased IndyMac stock at the
prices they paid, or at all, if they had been aware that the market prices had been
artificially and falsely inflated by Defendants' false and misleading statements.
193. As a direct and proximate result of Defendants' wrongful conduct,
Plaintiffs and the Class suffered damages in connection with their respective
purchases of the Company's common stock during the Class Period.
SECOND CLAIMViolations of Section 20(a) of the Exchange Act
Against the Individual Defendants
194. Plaintiffs repeat and reallege each and every allegation contained
above.
195. The Individual Defendants acted as controlling persons of the
Company within the meaning of § 20(a) of the Exchange Act. By reason of their
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIESEXCHANGE ACT OF 1934
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I senior executive positions they had the power and authority to cause the
Company to engage in the wrongful conduct complained of herein.
196. By reason of such wrongful conduct, the Individual Defendants are
liable pursuant to § 20( a) of the Exchange Act. As a direct and proximate result
of their wrongful conduct, Plaintiffs and the other members of the Class suffered
damages in connection with their purchases of IndyMac stock during the Class
Period.
PRAYER FOR RELIEF
WHEREFORE, Plaintiffs pray for relief and judgment, as follows:
A. Determining that this action is a proper class action and certifying
Plaintiffs as class representatives under Rule 23 of the Federal Rules of Civil
Procedure;
B. Awarding compensatory damages in favor of Plaintiffs and the other
Class members against all Defendants, jointly and severally, for all damages
sustained as a result of Defendants' wrongdoing, in an amount to be proven at
trial, including interest thereon;
C. Awarding Plaintiffs and the Class their reasonable costs and
expenses incurred in this action, including counsel fees and expert fees; and
D. Such other and further relief as the Court may deem just and proper.
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JURY TRIAL DEMANDED
Plaintiffs hereby demand a trial by jury.
I Dated: September 7, 2007Respectfully submitted,
SCHIFFRIN BARROWAY TOPAZ
& KESSLER, LLP
KI' hael K. *offChristopher L. NelsonJohn J. Gross280 King of Prussia RoadRadnor, PA 19087(610) 667-7706Lead Counsel for Plaintiffs
GLANCY BINKOW & GOLDBERG, LLP
Lionel Z. GlancyFrederick W. Gerkens, IIIDale MacDiarmid1801 Avenue of the StarsSuite 311Los Angeles, CA 90067(310) 201-9150Liaison Counsel for Plaintiffs
COHEN, MILSTEIN, HAUSFELD& TOLL, P.L.L.C.
Steven J. TollAndrew N. FriedmanMatthew B. Kaplan1100 New York Avenue, N.W.Suite 500, West TowerWashington, DC 20005(202) 408-4600Additional Counsel for Plaintiffs
CLASS ACTION AMENDED COMPLAINT FOR VIOLATIONS OF SECTIONS 10(b) AND 20(a) OF THE SECURITIES
EXCHANGE ACT OF 1934-100
PROOF OF SERVICE
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I, the undersigned, say:
I am a citizen of the United States and am employed in the office of a memberof the Bar of this Court . I am over the age of 18 and not a party to the within action.My business address is 1801 Avenue of the Stars , Suite 31 1, Los Angeles , California90067.
On September 7, 2007, 1 served the following:
CLASS ACTION AMENDED COMPLAINT FORVIOLATIONS OF SECTIONS 10(B) AND 20(A) OF THESECURITIES EXCHANGE ACT OF 1934
on the parties shown below by placing a true copy, thereof enclosed in a sealedenvelope with postage thereon hilly prepaid in the United States mail at Los Angeles,California.
Stuart L. BermanSean M. Handler*Ian D. BergChristopher L. NelsonJohn J. GrossMichael YarnoffSchiffrin Barroway "Topaz & Kessler, LLP280 King of Prussia RoadRadnor, PA 19087* Attorney for Sven Mossberg and IVaymanTripp (Intervenor Pl(intiffs)Attorneysfor Plaintiff Claude A. Reese
Matthew B KaplanCohen Milstein I-lausfeld & Toll, PLLC1100 New York Avenue, NW,Suite 500 , West TowerWashington , DC 20005Attorneys for Plaintiff Claude A. Reese
Evan .) SmithBrodsky and Smith9595 Wilshire Boulevard , Suite 900Beverly Hills , CA 90212* Attorney for Sven Mossberg and WayinanTripp (Intervenor Plaintifj)
Glancy Binkow and GoldbergFrederick W Gerkens, III1501 Broadway, Suite 1900New York, NY 10036
Attorneys for Plaintiff Claude A. Reese
William Frederick SalleLaw Offices of William Frederick Salle425 East Colorado Street , Suite 755Glendale , CA 91205Telephone : 818.543.1900Facsimile: 818.543.1550
Edwin V. Woodsome, Jr.Daniel J. TyukodyMichael C. TuOrrick, Herrington & Sutcliffe LLP777 South Figueroa Street, Suite 3200Los Angeles, CA 90017
Counselfor Defendants
Executed on September 7, 2007, at Lo ngeles, California. I certify underpenalty of perjury that the foregoing is correct.