NY FCA Complaint - Proposed

PROPOSED DRAFT FOR ATTORNEY GENERAL CONSIDERATION ONLY PRIVILEGED AND ATTORNEY WORK PRODUCT SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK STATE OF NEW YORK, ex rel. AVRAM CIMERRING, appearing QUI TAM, Plaintiff/Relator -against-

MERRILL LYNCH MORTGAGE INVESTORS, INC. MORTGAGE PASS-THROUGH CERTIFICATES SERIES 1999-C1, MERRILL LYNCH MORTGAGE INVESTORS, INC. MORTGAGE PASS-THROUGH CERTIFICATES SERIES 1998-C1-CTL, MERRILL LYNCH MORTGAGE INVESTORS, INC. MORTGAGE PASS-THROUGH CERTIFICATES SERIES 1998-C2, WELLS FARGO BANK, N.A.,

Defendants.

Index No. FILED UNDER SEAL Pursuant to N.Y. State Finance Law § 190(2)(b)

COMPLAINT JURY TRIAL DEMANDED

Realtor Avram Cimerring brings this qui tam action, and related causes of action, on

behalf the State of New York, against Merrill Lynch Mortgage Investors, Inc. Mortgage Pass-

Through Certificates Series 1999-C1, the Merrill Lynch Mortgage Investors, Inc. Mortgage Pass-

Through Certificates Series 1998-C1-CTL, and the Merrill Lynch Mortgage Investors, Inc.

Mortgage Pass-Through Certificates Series 1998-C2 (collectively referred to herein as the

“MLMI Trusts”), alleging based upon personal knowledge, relevant documents, and information

and belief as follows:

INTRODUCTION

1. This is a qui tam action under the New York False Claims Act (“NYFCA”) by the

State of New York, by Relator Avram Cimerring, to recover treble damages and civil penalties

under the New York False Claims Act, as amended, N.Y. Fin. Law §§ 187-194, arising from

PROPOSED DRAFT FOR ATTORNEY GENERAL CONSIDERATION ONLY PRIVILEGED AND ATTORNEY WORK PRODUCT

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fraud on the investors in the MLMI Trusts, commonly known as certificateholders, in connection

with the MLMI Trusts’ loan servicing practices.

2. As set forth more fully below, the MLMI Trusts and their loan servicers have

profited for years from engaging in specific loan servicing practices in violation of the federal

Real Estate Mortgage Investment Conduit (“REMIC”) regulations. At the same time, the MLMI

Trusts failed to implement quality control measures to stop the reckless loan servicing practices

that the MLMI Trusts engaged in. Not only has the MLMI Trusts’ conduct cost the State of New

York hundreds of millions of dollars, but it has also led to significant losses in value of the

certificates purchased by investors in the MLMI Trusts.

PARTIES, JURISDICTION AND VENUE

3. New York State is a real party in interest plaintiff in this action.

4. Plaintiff/Realtor Avram Cimerring is a citizen of the United States and resides in

Jerusalem, Israel, and pursuant to the aforementioned statutes, brings this action on behalf of the

State of New York. In or about June of 2006, Realtor became a part owner in a private entity

known as Super Futures Equities, Inc. (“SFE”), a Nevada corporation with a principal place of

business in the State of Texas.

5. Defendant Merrill Lynch Mortgage Investors, Inc. Mortgage Pass-Through

Certificates Series 1999-C1 (“MLMI 1999-C1”) is a New York common law trust with a

principal place of business at World Financial Center North Tower, 250 Vesey Street 10th Floor,

New York, New York 10281.


Certificates Series 1998-C1-CTL (“MLMI 1998-C1-CTL”) is a New York common law trust


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with a principal place of business at c/o Wells Fargo Bank Northwest, N.A. 7485 New Horizon

Way, Fredrick, Maryland 21703.


Certificates Series 1998-C2 (“MLMI 1998-C2”) is a New York common law trust with a

principal place of business at c/o Wells Fargo Bank Northwest, N.A. 7485 New Horizon Way,

Fredrick, Maryland 21703.

8. Defendant Wells Fargo Bank, N.A. (“Wells Fargo” or the “Trustee”) is a national

banking association organized and existing under the laws of the United States, having numerous

places of business within the State of New York, including maintaining an office at 40 West 57th

Street, New York, New York and having its corporate headquarters located at 420 Montgomery

Street, San Francisco, California. At relevant times hereunder, Wells Fargo served as trustee of

the MLMI Trusts discussed herein.

9. The State of New York, through the Realtor, brings this action pursuant to State

Finance Law §§ 189 and 190 et seq. This court has personal jurisdiction over defendants

because the defendants can be found, reside, and/or transact business in New York State and

New York County.

10. Venue is proper in this Court pursuant to CPLR § 503.

CONDITIONS PRECEDENT

11. Pursuant to State Finance Law § 190 et seq, this Complaint is to be filed in

camera and under seal, and is to remain under seal for a period of at least sixty days and shall not

be served on defendants until the Courts so orders. Further, the State of New York may elect to

intervene and proceed with the action within sixty day time period after it receives both the

Complaint and the material evidence submitted to it.


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12. This suit is not based on prior public disclosure of allegations or transactions in

criminal, civil, or administrative hearing, lawsuit, or investigation. In the alternative, to the

extent there has been a public disclosure unknown to Relator, he is an original source under the

aforementioned statute. As more fully set forth in this Complaint, Realtor has direct and

independent knowledge of the information on which the allegations herein are based.

13. Contemporaneous with the filing of this Complaint, Realtor is serving a copy of

same upon the State of New York, together with the aforementioned verbal and written

disclosure statements setting forth and enclosing all material evidence and information he

possess, pursuant to the requirements State Finance Law § 190(2)(b) et seq.

THE NEW YORK FALSE CLAIMS ACT

14. Section 188 of the New York False Claims Act provides in pertinent part as

follows:

1. “Claim” (a) means any request or demand . . . for money or property that (i) is presented to an officer, employee or agent of the state or a local government . . . 2. “False claim” means any claim which is, either in whole or part, false or fraudulent. 3. “Knowing and knowingly” (a) means that a person, with respect to information: (i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information; and (b) require no proof of specific intent to defraud, provided, however that acts occurring by mistake or as a result of mere negligence are not covered . . . .

(N.Y. State Finance Law § 188(1), (2) & (3), as amended August 13, 2010.)

15. Section 189 of the New York False Claims Act, provides in pertinent part as

follows:


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[A]ny person who . . . (a) knowingly presents, or causes to be presented a false or fraudulent claim for payment or approval; (b) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim; (c) conspires to commit a violation of paragraph (a), (b) [or] (g); . . . (g) knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the state or a local government shall be liable to the state or a local government, as applicable, for a civil penalty of not less than six thousand dollars and not more than twelve thousand dollars, plus three times the amount of all damages, including consequential damages, which the state or local government sustains because of the act of that person.

(N.Y. State Finance Law § 189(1)(a), (b) & (g), as amended August 13, 2010.)

16. Section 189 further provides in pertinent part as follows:

4(a) This section shall apply to claims, records, or statements made under the tax law only if (i) the net income or sales of the person against whom the action is brought equals or exceeds one million dollars for any taxable year subject to any action brought pursuant to this article; and (ii) the damages pleaded in such action exceed three hundred and fifty thousand dollars.

(N.Y. State Finance Law § 189(4)(a), as amended August 13, 2010).

REAL ESTATE MORTGAGE INVESTMENT CONDUITS

17. Realtor incorporates by reference paragraphs 1 through 16 of his Complaint as if

fully set forth herein.

18. Under sections 860A–860G of the Internal Revenue Code, certain types of entities

may qualify as REMICs, which operate as pass-through entities and are given federal and state

tax-exempt status.

19. The first step to operating as a REMIC is to formally designate that the entity

specifically intends to operate as one. For mortgage-backed securitizations, which are generally

organized as trust entities, this is done by specifically stating in the trust agreement or pooling

and servicing agreement (“PSA”) that the trust intends to operate as a REMIC.


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20. In addition formal designation, there are two other requirements to operating as a

REMIC. First, all of the interests issued by the REMICs must be either “regular interests” or

“residual interests.” I.R.C. § 860D(a)(2).

21. A REMIC regular interest is defined as an interest which unconditionally entitles

the holder to receive a specified amount of principal and interest. I.R.C. § 860G(a)(l)(A) and (B).

A residual interest is an interest “which is not a regular interest, and which is designated as a

residual interest.” I.R.C. § 860G(a)(2).

22. The second requirement is that the REMICs are permitted to hold only two types

of assets, which are qualified mortgages and permitted investments. I.R.C. § 860D(a)(4). Under

the REMIC provisions, a qualified mortgage is “any obligation which is principally secured by

an interested in real property” I.R.C. § 860G(a)(3). A qualified reserve asset is “any intangible

property which is held for investment and as part of a qualified reserve fund.” I.R.C § 860(a)(7).

Permitted investments include only cash flow investments, qualified reserve assets, and

foreclosure properties. I.R.C. § 860G(a)(5).

23. Under the REMIC provisions, a cash flow investment is “any investment of

amounts received under qualified mortgages for a temporary period before distribution to holders

of interests in the REMIC” (I.R.C. § 860G(a)(6)) and foreclosure property is that “which is

acquired [by the REMIC] in connection with the default or imminent default of a qualified

mortgage held by the REMIC” (I.R.C. § 860G(a)(8)).

24. Regarding qualified mortgages, “[i]f a REMIC releases its lien on real property

that secures a qualified mortgage, that mortgage ceases to be a qualified mortgage on the date the

lien is released…” Treas. Reg. § 1.860G-2(a)(8).


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25. Under the federal REMIC rules and regulations, REMICs may only engage in

certain types of transactions without jeopardizing their pass-though nature. If REMICs engaged

in transactions that are prohibited under the REMIC rules and regulations, the entities could lose

their tax-exempt status and may be taxed at the prevailing corporate tax rate at both the federal

and state level.

26. To insure that the REMIC trust operates smoothly, its representatives are

permitted to enter into financial arrangements - also known as credit enhancement contracts -

that requires third parties to make certain advances to or on behalf of the REMIC trust in the

event that borrowers fail to make timely mortgage payments.

27. Such financial arrangements greatly reduce the risk of certificateholders not

receiving timely distributions due to lack of available funds collected by the REMIC trust on a

monthly basis. Under the REMIC provisions, a credit enhancement contract is “any arrangement

whereby a person agrees to guarantee full or partial payment of the principal or interest payable

on a qualified mortgage or on a pool of such mortgages, or full or partial payment on one or

more classes of regular interests or on the class of residual interests, in the event of defaults or

delinquencies on qualified mortgages, unanticipated losses or expenses incurred by the REMIC,

or lower than expected returns on cash flow investments.” Treas. Reg. § 1.860G-2(c)(2).

28. For example, “an arrangement by a REMIC sponsor, mortgage servicer, or other

third party to advance to the REMIC out of its own funds an amount to make up for delinquent

payments on qualified mortgages is a credit enhancement contract.” Treas. Reg. § 1.860G-

2(c)(3)(i). Such credit enhancements contacts are designed to financially support only one kind

of permitted asset held by the REMIC trust. Namely, qualified mortgages.


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29. The REMIC provisions provide that any amount received by the REMIC trust

under a credit enhancement contract is not considered a separate ownership interest in the trust

itself. Treas. Reg. § 1.860G-2(c)(1). Rather, the amounts received are treated as principal and

interest revenue related to the specific loans in default or in imminent default that triggered the

obligations under the credit enhancement contract. Treas. Reg. § 1.860G-2(g)(ii)(A).

30. Moreover, once a mortgage loan has defaulted and foreclosure proceedings have

brought the property to auction, the property may either be acquired by a third party for cash or

by the REMIC trust itself in the form of a real estate owned (“REO”) property.

31. The borrower may prevent the auction from ever going though by either paying

off the loan or by executing a deed in lieu foreclosure in the name of the REMIC trust.

32. Whether through a foreclosure auction sale or a deed-in-lieu foreclosure

transaction, the REMIC trust releases its lien on the mortgage property itself.

33. At auction, if the cash received from a third party purchaser or the market value of

the property does not meet the outstanding balance on the loan, then under certain circumstances,

the REMIC trust may seek a deficiency judgment against the borrowers and any guarantors.

Seeking deficiency judgments are generally more common in commercial property foreclosures

as opposed to residential property foreclosures.

34. Regardless, through a foreclosure auction or deed-in-lieu transaction, the lien on

the mortgage property has been extinguished and pursuant to the REMIC provisions, the loan

itself ceases to be a qualified mortgage for REMIC purposes. See Treas. Reg. § 1.860G-2(a)(8).

Moreover, any deficiency judgment rendered cannot be considered a qualified mortgage in and

of itself because it is not an “obligation which is principally secured by an interest in real

property.” I.R.C. § 860G(a)(3).


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35. Since credit enhancement contracts are designed to only support one type of

permitted REMIC asset – namely, qualified mortgages – any payments made pursuant to an

agreement that amounts to a credit enhancement contract that financially supports any other type

of permitted REMIC investments are nevertheless considered prohibited transactions under the

REMIC provisions. This is because only qualified mortgages or interests based on the payments

received from qualified mortgages are permitted to be financially supported by credit

enhancement contracts.

36. Once the loan is converted into an REO or the property is acquired by the REMIC

trust through a deed-in-lieu transaction and the related lien is extinguished, the REMIC trust

owns the property outright. It follows that the REMIC trust cannot receive payments pursuant to

a credit enhancement contract that guarantees loan payments on loans that no longer qualify as

qualified mortgages.

37. If in this scenario a principal and interest advance is made to the REMIC trust on

behalf of an unqualified mortgage loan then it must be considered a prohibited transaction that

would violate the REMIC provisions. Such transactions would cause the REMIC trust to lose its

federal and state tax-exempt status. Because the REMIC trust would lose its tax-exempt status,

the REMIC trust should have been taxed at the prevailing federal and state corporate tax rate on

any and all income flowing into the trust.

COMMON FACTUAL ALLEGATIONS



39. Upon information and belief, there was a common practice within the MBS loan

servicing industry that when managing properties for the REMIC trusts, acquired either through


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foreclosure auctions or deed-in-lieu transactions, loan servicers continued to make principal and

interest advances to the REMIC trusts in support of the already extinguished loans formally

linked to now designated REO properties.

40. Actual examples of this improper loan servicing practice involved the three

REMIC trusts discussed herein.

41. In or about June of 2006, Mr. Cimerring became a part owner of the private entity

known as Super Future Equities, Inc. (“SFE”), a Nevada corporation with a principal place of

business in the State of Texas. Prior to that time, SFE had invested in a number of commercial

mortgage-backed securitization trusts (“CMBS”), three of which are the MLMI Trusts discussed

herein.

42. As an initial matter, all of the MLMI Trusts were formally designated to operate

as a REMIC in the trust agreements that created them.

43. As an investor in specific securitizations, SFE gained access to all reports and

filings, both public and private, generated by the MLMI Trusts in accordance with each trust’s

duties and responsibilities under their respective trust agreements.

44. In the context of mortgage-backed securitization trusts, the trust agreement takes

the form of a pooling and servicing agreement (“PSA”), which in addition to creating the trust

relationship itself, sets forth the duties and responsibilities of each party involved in the specific

MBS.

45. One set of reports generated by the MLMI Trusts was known as the distribution

reports, which are sent to certificateholders on a monthly basis and contain detailed information

and analysis on every loan owned by the specific securitized trust.


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46. For each of the MLMI Trusts, Wells Fargo Bank, N.A., or its predecessor in

interest acted as the trustee and generated the monthly distribution reports for certificateholders.

Every distribution report generated by the MLMI Trusts was divided into sections that included:

“Mortgage Loan Detail,” “Principal Prepayment Detail,” “Historical Detail,” “Delinquency Loan

Detail,” “Specially Serviced Loan Detail,” “Modified Loan Detail,” and “Liquidated Loan

Detail.”

47. The Delinquency Loan Detail section had approximately ten columns, two of

which were greatly pertinent to this analysis. The “Current P&I1 Advances” column listed the

amounts paid to the REMIC trust during the specific reporting period, and the “REO Date”

column listed the date that loans were converted from mortgage loans into REO properties or

when deed-in-lieu transactions were executed between the borrowers and the REMIC trust.

48. Upon information and belief, for at least the years 2001 through 2006, the MLMI

Trusts’ loan servicers made payments of more than eight million dollars to the MLMI Trusts that

were designated as principal and interest advances on loans that had already been extinguished

either through foreclosure auctions or deed-in-lieu transactions.

49. Such payments contravened the REMIC provisions as they were made to the

MLMI Trusts on behalf of loans that no longer qualified as qualified mortgages. By engaging in

prohibited transactions, the MLMI Trusts ceased to operate as pass-through entities and lost their

federal and state tax-exempt status.

50. While such payments were made by servicers of the trusts, the trustees of the

trusts were ultimately responsible for maintaining the trusts’ REMIC status.

1 “P&I” stands for principal and interest.


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51. Pursuant to the REMIC provisions and New York State income tax laws, the

MLMI Trusts should have paid New York State income taxes at the entity level on any income

that flowed into the trusts once the MLMI Trusts lost their tax-exempt status2. This includes all

principal and interest payments received for the duration of the trusts’ existence and as long as

the trusts received principal and interests payments from borrowers.

52. The forgoing actual examples are representative illustrations of widespread loan

servicing practices used in both residential and commercial mortgage-backed securitization trusts

that caused previously designated REMIC pass-through entities to lose their federal and state

tax-exempt status and, as a result, causing them to be subject to income tax at both the entity

level and again at the post-distribution certificateholder level.

53. Upon information and belief, loan servicers have followed these practices for the

ten years prior to filing of this Complaint. The money lost to New York State each tax period as

a result of MBS trusts engaging in such loan servicing practices which resulted in the trusts’

failure to pay income taxes is repeated in virtually every MBS trust that has been designated as a

REMIC and has issued certificates to the investing public3. The loss of income tax revenue to

New York State is in well excess hundred million dollars.

FIRST CAUSE OF ACTION (N.Y. State Finance Law §§ 189(1)(a), (b), (c) & (g))



2 It should be noted that the result is that certificateholders are again taxed on this income when they receive monthly distributions from the MBS trusts. 3 It is estimated that there were over 2500 commercial mortgage-backed securitization trusts alone formed throughout the United States over the past ten years who have been engaging in such loan servicing practices.


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55. Defendants, by failing to pay the proper amount of tax to New York State has

engaged in a continuous practice of: (a) knowingly presenting, and causing to be presented, to

an officer and/or agent of New York State false and fraudulent claims for payment and approval;

(b) knowingly making, using, and causing to be made and used, false records and statements to

get false and fraudulent claims paid and approved by New York State; (c) conspiring to defraud

New York State by getting false and fraudulent claims allowed or paid; and/or (d) knowingly

making, using, or causing to be made or used, false records or statements material to an

obligation to pay or transmit money or property to the State and or City; all in violation of N.Y.

State Finance Law §§ 189(1)(a), (b), (c) & (g).

PRAYER FOR RELIEF

WHEREFORE, Relator, on behalf of herself, and acting on behalf, and in the

name, of New York State, demands and prays that judgment be entered against the Defendants as

follows:

1. That Defendant shall be ordered to cease and desist from violating the New York

False Claims Act, N.Y. State Finance Law §§ 189-194.

2. On the First Cause of Action, judgment shall be entered against Defendant in the

amount of three times the amount of damages New York State has sustained because of

Defendant’s actions, plus a civil penalty of $12,000.00 for each act in violation of the New York

False Claims Act, as provided by N.Y. State Finance Law § 189(1)(i) & (ii), with interest.

3. That Relator shall be awarded the maximum amount available under N.Y. State

Finance Law § 190(6) for bringing this action, namely, 25 percent of the proceeds of the action

or settlement of the claim if New York State intervenes in the matter (or pursue the claims

through any alternate remedy available to New York State, N.Y. State Finance Law § 190(7)) or,


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alternatively, 30 percent of the proceeds of the action or settlement of the claim, if New York

State declines to intervene.

4. That Relator shall be awarded all reasonable expenses necessarily incurred in

prosecution of this action, plus all reasonable attorneys' fees and costs, as provided by N.Y. State

Finance Law § 189(3) and § 190(7).

5. And, such other relief shall be granted in the favor of New York State and the

Relator as this Court deems just and proper.

DEMAND FOR JURY TRIAL

6. Relator hereby demands trial by jury of any issue of fact triable of right by a jury.

Dated: Cedarhurst, New York January___2013 Respectfully submitted, Law Offices of Erik J. Wiesel By: ________________________ Erik J. Wiesel 329 Buckingham Road Cedarhurst, New York 11516 Tel: (516) 537-8760 Attorney for Realtor Avram Cimerring

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NY FCA Complaint - Proposed