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2:14-cv-13459-BAF-MKM Doc # 17 Filed 02/03/15 Pg 1 of 60 Pg ID 197
UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN
JUSTIN G. LUBBERS, Individually and : Civil Action No.: 14-cv-13459 : on Behalf of All Others Similarly Situated, : AMENDED COMPLAINT
Plaintiff(s), v.
FLAGSTAR BANCORP INC., ALESSANDRO P. DINELLO, and PAUL D. BORJA,
Defendants.
: : : : : : : :
Hon. Bernard A. Friedman
Hon. Mona K. Majzoub
JURY TRIAL DEMANDED
Lead Plaintiff Rodney Boone (“Plaintiff”), individually and on behalf of all
other persons similarly situated, by his undersigned attorneys, for his complaint
against defendants, alleges the following based upon personal knowledge as to
himself and his own acts, and information and belief as to all other matters, based
upon, inter alia, the investigation conducted by and through his attorneys, which
included, among other things, a review of the defendants’ public documents,
conference calls and announcements made by defendants, United States Securities
and Exchange Commission (“SEC”) filings, wire and press releases published by
and regarding Flagstar Bancorp Inc., (“Flagstar” or the “Company”), analysts’
reports and advisories about the Company, interviews with Confidential Witnesses
(“CW”) and information readily obtainable on the Internet. Plaintiff believes that
substantial evidentiary support will exist for the allegations set forth herein after a
reasonable opportunity for discovery.
2:14-cv-13459-BAF-MKM Doc # 17 Filed 02/03/15 Pg 2 of 60 Pg ID 198
NATURE OF THE ACTION
1. This is a federal securities class action brought on behalf of all
persons and entities that purchased shares of Flagstar Bancorp Inc. (“Flagstar” or
the “Company”) common stock during the period of October 22, 2013 through
August 26, 2014, both dates inclusive (the “Class Period”), against Flagstar and
certain of its officers and/or directors for violations of the Securities Exchange Act
of 1934 (the “Exchange Act”).
2. Flagstar is the holding company for Flagstar Bank, FSB (“Flagstar
Bank”). Flagstar Bank accepts deposits from the general public and originates or
acquires residential mortgage loans. Flagstar Bank’s primary business is its
mortgage banking segment. As part of its mortgage banking segment, Flagstar
Bank originates mortgage loans and acts as a mortgage servicer responsible for the
day-to-day management of mortgage loans. In the capacity of servicing mortgages,
Flagstar Bank offers loan modifications to borrowers experiencing financial
difficulties in making loan payments. Flagstar Bank also administers “loss
mitigation” programs to delinquent borrowers on behalf of the owners or
guarantors of the loans.
3. During the Class Period, Flagstar Bank was being audited and
reviewed by the Consumer Financial Protection Bureau (“CFPB”) for years of
failing to comply with mortgage lending requirements, specifically loss mitigation
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and default servicing. As early as 2011, representatives of the Federal National
Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage
Corporation (“Freddie Mac”), Government Sponsored Entities (“GSE”) that
provides liquidity and stability for the mortgage market in the United States, had
been threatening Flagstar Bank with termination rights for servicing loans owned
or guaranteed by Fannie Mae and Freddie Mac in violation of consumer protection
laws.
4. Administering loan modifications and loss mitigation services is
regulated under the Consumer Financial Protection Act of 2010 (the “CFPA”).
Prior to and during the Class Period, Flagstar Bank violated the CFPA’s
prohibition against unfair, deceptive, or abusive acts or practices by, inter alia:
• Failing to review loss mitigation applications in a reasonable amount
of time;
• Withholding critical information that borrowers needed to complete
their loss mitigation applications;
• Improperly denying loan modifications to qualified borrowers;
• Applying prolonged trial periods for loan modifications;
• Depriving borrowers of the ability to make informed choices about
how to save or dispose of their property;
• Improperly closing loss mitigation applications;
• Improperly denying loan modifications to eligible borrowers;
• Charging borrowers excessive capitalized interest and fees; and,
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• Misrepresenting borrowers’ rights to appeal the denial of a loan
modification.
5. As evidenced by testimony from Confidential Witnesses – and
verified by the Findings and Conclusions of the CFPB noted in a Consent Order
entered into between Flagstar Bank and the CFPB – unfair, deceptive, or abusive
acts or practices were notorious and rampant within Flagstar Bank. Regardless,
throughout the Class Period, Defendants told the investing public that Flagstar
Bank’s mitigation activities were “effective,” “proactively worked with
borrowers,” “adopted a strategic focus that improved loss mitigation processes.”
Indeed, Defendants conditioned the market to believe in the effectiveness of its
loan modification and loss mitigation services prior to and during the Class Period
stating that it had converted to a nationally recognized mortgage loan servicing
system and made significant investments and enhancements in loss mitigation and
default servicing, when, in fact, Flagstar Bank’s mortgage servicing continually
failed to comply with the requirements of the CFPA.
6. Accordingly, throughout the Class Period, Defendants made
materially false and/or misleading statements, and failed to disclose material
adverse facts about the Company’s business, operations, prospects, performance,
and compliance with federal law. Specifically, during the Class Period, Defendants
made false and/or misleading statements and/or failed to disclose that: (i) dating
back to 2011, the Company’s loss mitigation practices and default servicing
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operations were not in compliance with federal financial consumer protections
laws; (ii) the Company lacked proper internal controls to assure compliance with
federal financial consumer protection laws; (iii) that it was at risk of having its
rights to servicing loans owned by or guaranteed by GSEs terminated; and (iv) that
the CFPB was investigating and/or bringing an action against Flagstar Bank for
violations of the CFPA going back as early as 2011.
7. Moreover, when Defendants chose to speak about Flagstar Bank’s
mortgage servicing, and specifically about loss mitigation and default servicing,
Defendants failed to speak completely and tell the whole truth about Flagstar
Bank’s inability and failure to comply with financial consumer protection laws, the
threats to terminate the bank’s rights, and the risk that the CFPB’s enforcement
procedures had on the bank’s financial condition.
8. The omissions and affirmative misrepresentations disseminated by
Defendants about the true nature of Flagstar Bank’s loss mitigation and default
servicing practices during the Class Period artificially maintained the price of
Flagstar common stock during the Class Period violation of the Exchange Act.
9. On August 26, 2014, the Company made the first of a series of partial
disclosures regarding their violations of the CFPA, when Defendants informed the
public that it was in discussions with the CFPB over alleged violations dating back
to 2011.
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10. In reaction to that partial disclosure, Mark Palmer, an analyst at BTIG,
downgraded its rating on Flagstar to sell, noting that the “allegations raise
questions regarding servicing operations amid uncertainty of potential rebound of
its mortgage business.”
11. On this news, Flagstar stock fell, on unusually heavy trading volume,
to close at $17.66 on August 27, 2014 from the previous day’s closing price of
$18.49 per share.
12. Over the next day, news filtered through the market that Flagstar’s
unusual disclosure meant that a settlement with the CFPB was “imminent,” as the
priced continued to decline to $17.33 per share.
13. As a result of disclosures of Defendants’ wrongful acts and omissions,
and the attendant decline in the market value of Flagstar common stock, Plaintiff
and other Class members have suffered significant losses and damages.
JURISDICTION AND VENUE
14. The claims asserted herein arise under and pursuant to §§10(b) and
20(a) of the Exchange Act (15 U.S.C. §§78j(b) and 78t(a)) and Rule 10b-5
promulgated thereunder by the SEC (17 C.F.R. §240.10b-5).
15. This Court has jurisdiction over the subject matter of this action under
28 U.S.C. §1331 and §27 of the Exchange Act.
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16. Venue is proper in this District pursuant to §27 of the Exchange Act
(15 U.S.C. §78aa) and 28 U.S.C. §1391(b), as a significant portion of the
Defendants’ actions, and the subsequent damages, took place within this District.
17. 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 mail,
interstate telephone communications and the facilities of the national securities
exchange.
PARTIES
18. Lead Plaintiff purchased the common stock of Flagstar at artificially
inflated prices during the Class Period and was damaged upon the disclosure of
Defendants’ violations of the Exchange Act alleged herein.
19. Defendant Flagstar is a Michigan corporation with its principal
executive offices located at 5151 Corporate Drive, Troy, MI 48098-2639.
Flagstar’s common stock trades on the New York Stock Exchange under the ticker
symbol “FBC.”
20. Defendant Alessandro P. DiNello (“DiNello”) has served as the
Company’s President and Chief Executive Officer at all relevant times.
21. Defendant Paul D. Borja (“Borja”) has served as the Company’s
Executive Vice President and Chief Financial Officer at all relevant times.
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22. Defendants referenced above in ¶¶ 20 and 21 are sometimes referred
to herein, collectively, as the “Individual Defendants.”
23. Defendant Flagstar and the Individual Defendants are referred to
herein, collectively, as the “Defendants.”
SUBSTANTIVE ALLEGATIONS
Background
24. Flagstar operates as the holding company for Flagstar Bank, which
provides various financial products and services to individuals and businesses in
the United States. Flagstar Bank’s Mortgage Banking segment originates,
acquires, sells, and services mortgage loans through home loan centers, national
call centers, Internet, unaffiliated banks, and mortgage brokerage companies. Its
Community Banking segment offers various financial products and services to
individuals, small and middle market businesses, and mortgage lenders.
25. Flagstar Bank was originally chartered in 1987 as First Security
Savings Bank, FSB. In 1994, it purchased a Jackson, Michigan bank, Securities
Saving Bank, and the two were merged in 1996 as Flagstar. In 1997, Flagstar
Bancorp, Inc. went public and was listed on the NASDAQ under the symbol
FLGS. Flagstar was listed on the New York Stock Exchange in 2001 under its
current ticker, FBC.
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26. As the mortgage industry took off in the 2000’s, Flagstar Bank rose to
become the eighth largest mortgage originator in the United States. The bank
originates virtually all residential first mortgages for sale and, during the Class
Period, was one of the ten largest sellers to Fannie Mae and one of the ten largest
originators of FHA/VA mortgages. Flagstar Bank serviced upward to $76 million
in mortgages for others, primarily Fannie Mae and Freddie Mac.
27. The crash of the housing bubble, the decline of the mortgage backed
securities market, and the disclosure of fraud in the mortgage underwriting
industry beginning in 2008 had an adverse impact on Flagstar Bank. Flagstar Bank
was listed by Bloomberg News as the biggest bank in the U.S. with more than10%
of its loans non-performing in 2009. See Ari Levy, "Toxic Loans Topping 5%
May Push 150 Banks to Point of No Return," Bloomberg News (New York City,
NY) (Aug. 24, 2009).
28. In late 2008, faced with possible insolvency, Flagstar turned to an
investment firm that specialized in acquiring distressed assets, MatlinPatterson
Global Advisors LLC (“MatlinPatterson”), to bail the Company out. Flagstar
issued shares of convertible participating voting preferred stock pursuant to an
investment agreement between Flagstar and MatlinPatterson, which bypassed the
normal requirement of shareholder approval accordingly to the Shareholder
Approval Policy of the New York Stock Exchange. The Company stated that:
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The Audit Committee of the Board of Directors of Flagstar
determined that the delay necessary in securing shareholder approval
for the consummation of the stock issuance would seriously
jeopardize the financial viability of Flagstar . . . . The Audit
Committee believed that without the immediate receipt of additional
capital, rather than awaiting stockholder approval, significant
disruption of Flagstar’s operations could result as Flagstar’s business
model is reliant on selling assets, hedging interest rate risk and
obtaining funding from counterparties, including GSEs [Government
Sponsored Enterprises], the FHLB [Federal Home Loan Bank] and
certain depositors and customers, that are increasingly seeking to do
business with financial institutions operating at enhanced capital
levels due to the uncertainty in the current marketplace. Further, the
Audit Committee believed that the immediate receipt of private equity
capital would enhance Flagstar’s position with banking regulators and
the United States Department of Treasury in connection with
Flagstar’s application to participate in the TARP [Troubled Asset
Relief Program] Capital Purchase Program.
29. Accordingly, in December 2008, MatlinPatterson paid Flagstar $250
million, and Flagstar received $267 million of bailout money from the U.S.
Treasury’s TARP funds. Flagstar insiders added $5.23 million. In total, Flagstar
received a capital infusion of $523 million to stave off insolvency.
30. In January 2009, however, Flagstar reported $200 million in losses
which prompted MatlinPatterson to add another $100 million to protect its
investment. MatlinPatterson was now into Flagstar for $350 million. With its
investment, David Matlin and Mark Patterson, the two principals of
MatlinPatterson, were added to Flagstar’s Board of Directors. In September 2009,
MatlinPatterson changed Flagstar’s management and made Joseph Campanelli the
new Chief Executive Officer.
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31. The change of management did not result in improved financials or
better internal controls. In 2010, the Office of Thrift Supervision (“OTS”) entered
an enforcement action against Flagstar. The OTS cautioned that Flagstar needed to
raise additional capital as the Company had engaged in unsafe or unsound
practices. MatlinPatterson invested an additional $300 million in Flagstar, while
Flagstar agreed to improve its loan administration. Flagstar experienced an
increase in non-performing loans, which resulted in lower income and a need for
more capital infusion. MatlinPatterson invested another $350 million by October
2010.
32. By October 2010, MatlinPatterson had acquired approximately 70%
of Flagstar’s common stock, and sunk $1 billion in Flagstar. The value of
Flagstar’s stock and book value continued to decline, with MatlinPatterson’s
investment reduced to $200 million. In the first half of 2011, Flagstar lost another
$107 million.
33. With mortgage originations declining and mitigation and default
servicing rising, Flagstar was concerned about its Tier I capital and satisfying the
Federal Reserve’s stress tests which measure, among others, the ratio of risk to
capital. The infusion of capital by MatlinPatterson offset bank losses and sustained
retained earnings, which together with the Senior Preferred Stock purchased under
TARP were included in the Tier I capital ratios. With the high rate of non-
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performing loans, however, Flagstar needed to reduce its non-interest expenses to
help boost retained earnings.
34. One of the largest non-interest expenses is personnel. Although
Flagstar Bank experienced an increase in loan modification applications and
default servicing in 2010 through 2011, it did not adequately adjust the size and
management of the loss mitigation department to handle the increases. It also did
not adequately increase investment in technology systems to handle the increases.
As a result, Flagstar Bank had a significant backlog of loan modification
applications and loss mitigation cases, delays in foreclosure referrals, and failures
in meeting the timelines for foreclosures.
35. The significant backlog and failure to properly or timely perform loss
mitigation duties and obligations led Fannie Mae, one of the GSE’s whose loans
Flagstar serviced, to intervene on behalf of borrowers. The problems were such
that in September 2011, Fannie Mae threatened Flagstar Bank with termination of
its servicing rights on loans owned or guaranteed by Fannie Mae. At that time,
Flagstar was one of the largest servicers of Fannie Mae loans. The consequence of
losing the servicing rights would have been catastrophic to Flagstar.
36. In response, Flagstar Bank hired additional staff in the loss mitigation
department in the fourth quarter of 2011. Flagstar Bank’s non-interest expenses,
however, rose concomitantly in that same quarter compared to the prior three
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quarters and the same quarter of 2010. Although Flagstar Bank increased the
number of positions and attempted to restructure the loss mitigation department, it
continued to pay low, if not under-market, wages, used temporary employee
agencies, and by December 2012, reportedly had over 100 open positions.
37. Although it was understood throughout Flagstar Bank that positions
were not being filled, that there was increased employee turnaround, and that the
new employees hired were inexperienced, senior management – under pressure
from MatlinPatterson to show positive results and maintain adequate Tier I capital
ratios – reduced the bank’s non-investment expenses ( e.g. headcount) and touted
the fact to analysts as a positive development in the valuation of the Company’s
stock. In fact, the reduction of non-investment expenses was misleading as it hid
from investors the underlying failures on the part of Flagstar Bank to resolve the
backlog in loss mitigation and the myriad of violations under the CFPA which had
been raised by Fannie Mae and other GSEs to senior management at Flagstar Bank
in a letter dated September 12, 2011. Indeed, Flagstar Bank not only hid the truth
behind misleading statements about expenses, it further knowingly, or in reckless
disregard of the truth, touted the efficiency and adequacy of its loss mitigation and
default servicing in regular filings with the SEC.
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Confidential Witnesses
38. Interviews were conducted with former Flagstar Bank employees who
had first-hand knowledge of loan modification, loss mitigation and default
servicing throughout the relevant period, both prior to and during the Class Period.
Their testimony established that violations of the CFPB occurred, that Defendants
were aware of the violations, and that much of the violations were the result of a
lack of proper internal controls related to the software systems, lack of proper
training of managers and loss mitigation personnel, high turn-over, low wages, and
cost-cutting. Indeed, their statements attest to that fact that management turned a
blind eye to regulatory violations in order to be able to tell the market that Flagstar
Bank was keeping expenses down during a time of lowering mortgage
originations.
39. CW 1 was a Loss Mitigation Manager, Assistant Vice-President of
Loss Mitigation, and Assistant Vice-President of the Escalation Department. CW
1 worked at Flagstar Bank from 2002 through September 2013. CW 1stated that
loss mitigation managers lacked sufficient knowledge of loss mitigation
regulations and willfully ignored servicing processes, which exacerbated the
backlog of loan modification applications submitted by borrowers.
40. Indeed, CW 1 stated that there were discussions within the loss
mitigation department that another Assistant Vice-President of Loss Mitigation
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held “denial parties” on Saturdays where loss mitigation staff simply denied loan
modification requests in bulk, even though in some cases, it was Flagstar Bank’s
fault that applications were not complete. The Assistant Vice-President who held
the denial parties worked until January 2013.
41. Complaints by CW 1 and others to senior management about delayed
loan modifications, missing documents and other modification issues fell on deaf
ears until an audit by Fannie Mae personnel revealed rampant problems at Flagstar.
42. CW 1 stated that things were so bad in the loss mitigation department
that, in nine times out of ten, loss mitigation staff closed files without actually
doing what they were required to do with the files. Much of this was because the
staff was not properly trained, and that the department was headed by incompetent
managers. The loss mitigation department failed to send missing documents letters
to people that applied for loan modifications if their packages were incomplete,
although such letters were required.
43. CW 1 stated that, although required to do so, loss mitigation staff
failed to put loan modification applicants through forbearance plans according to
each borrower’s requirements before setting up a loan modification. The
department was required to find ways to work out about 80% of the applications
for modification, but the numbers were way below that figure.
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44. In July 2011, Fannie Mae and Freddie Mac mandated that Flagstar
Bank create an Escalation Department to independently examine loss mitigation
complaints received by Flagstar Bank customers. The Escalation Department was
up and running by October 2011. CW 1 stated that weekly reports were sent to
senior management that detailed the loss mitigation department’s failure to
properly handle loan modifications, but that they did not pay any attention to the
problems until Fannie Mae held them accountable.
45. CW 1 stated that the loss mitigation department was a mess, run by a
Vice President of Loss Mitigation who was not versed in the full scope of loss
mitigation and regulatory requirements, hired staff without regard for
qualifications, and did not properly train new staff. The Vice President applied one
guideline for all borrowers, without taking into consideration each borrower’s
unique requirements. In defense of the Vice President, CW 1 stated that the Vice
President’s intention was to cure the backlog, but, on the contrary, had the effect of
amplifying the backlog. The Vice President relied on colleagues that also lacked
experience and training in loss mitigation, and even promoted them.
46. CW 1 stated that proper and common sense loss mitigation procedures
were ignored. The backlog grew from 2011 forward. Staff quit, inexperienced and
poorly trained replacements were hired, and the backlog grew further, along with
systemic problems that fed it.
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47. CW 1 stated that borrowers had 15 days to respond to missing
document letters, but in many cases never received the correspondence. Upon
investigation, many letters were never sent, cases were improperly closed and
properties were sent to foreclosure without the borrower knowing that Flagstar
Bank needed more information.
48. CW 1 was among the employees that complained to senior
management about the problems experienced in the loss mitigation department, but
such complaints fell on deaf ears. Eventually, management closed the loss
mitigation department and escalation department and subcontracted the work,
selling its default servicing operations. Selene Finance was hired to handle default
servicing. The rationale given to CW 1 was that it was cheaper shipping out the
operations than keeping permanent employees and paying benefits. Some of
Flagstar Bank’s staff went to work for Selene Finance, while others returned to
Flagstar on a contract basis.
49. CW 2 was an Assistant Vice-President of Loss Mitigation and Senior
Vice-President of Collections. CW 2 worked at Flagstar Bank from June 2008
through July 2013. CW 2 stated that Flagstar Bank lacked policies, procedures and
technology to manage the growing loan modifications and default servicing. The
absence of written policies and procedures resulted in a huge backlog of loan
modification requests that were not processed for many months.
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50. CW 2 stated that some borrowers had to send in their loan
modification packages six to eight times, and that Flagstar Bank took more than
fourteen months to process the requests. By the second half of 2012, Fannie Mae
was leaning pretty hard on management to clean up Flagstar Bank’s operations.
CW 2 stated that the Chief Executive Officer and Chief Operating Officer were
aware of the problems. Indeed, CW 2 was told by Executive Vice-President
Czaplicki and Executive Vice-President Mike Maher (“Maher”) that Fannie Mae
had threatened to pull Flagstar Bank’s servicing authority in 2012.
51. CW 2 stated that Flagstar Bank initially worked well when CW 2
started, but that as Flagstar Bank began taking on riskier loans, problems arose.
CW 2 noted that when the market declined, Flagstar Bank realized how poorly
prepared it was to handle delinquent loans and got hammered. The bank’s systems
were outdated and management was sloppy and inadequate to the task.
52. CW 2 stated that loss mitigation staff struggled to reach its goals.
Loan modification applications were snagged at different stages. A single
application could go back and forth six times before being approved. By the time
the approval was granted, evidentiary documents in the application had often
expired, prompting the whole process to start again.
53. CW 2 stated that Flagstar Bank’s loss mitigation managers did not
know anything about servicing. Had the CFBP looked back farther, Flagstar Bank
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would have paid a bigger fine. The senior managers did not come from a real
estate background. Moreover, when problems came to their attention, fixing them
would have required admitting they had a problem – something few were willing
to do. Furthermore, managers had a monetary incentive to hide their incompetence.
The size of one’s bonus or deferred compensation was dependent on whether or
not it appeared that they were making forward progress.
54. CW 2 stated that while people attempted to mask their ignorance or
hide the dysfunction in their departments, the problems only mounted. At virtually
every level, people were both under-qualified and undertrained. Flagstar Bank was
hiring people off the street and paying them $12 an hour. Even managers and
assistant manager level positions were often paid between $11 to $16 dollars per
hour, thus the quality of people hired was, in general, low.
55. CW 2 stated that only when mandated by federal regulators were
policies and procedures developed. The entire loss mitigation operation was
managed on inaccurate and inconsistent Excel spreadsheets. Bank staff was using
different versions of spreadsheets and there was no networked, consistent formula
or format employed. A technology system for loss mitigation was not addressed
until 2012, when a new IT platform began to be phased in.
56. CW 2 stated that senior management had to have known about the
extreme backlog in loss mitigation, as Executive Vice-President Joan Anderson
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(“Anderson”) walked through half of the department when she got off the elevator
to go to her own office. The desks Anderson walked past had 80 to 150 files
stacked on their desks, on the floor. The process was paper-based, so there were
paper files. Anderson knew people were working until 8 p.m. or 10 p.m. at night,
as she knew the timelines. Anderson’s office was next to First Vice-President
Linda Krasicky’s office.
57. CW 2 stated that by the second half of 2012, Fannie Mae was leaning
pretty hard on management to clean up Flagstar Bank’s operations, and that the
frequency of meeting with Flagstar staff was stepped up and the level of
management invited to participate became higher and higher. Indeed, everybody
was aware of the problems with loss mitigation and default servicing. At one point
there was a meeting that included senior management, MatlinPatterson, and all
managers from the default department. Flagstar had been told in no uncertain
terms to fix this. MaitlinPatterson had invested $1 billion in Flagstar by this time
and they wanted to protect their investment and were pushing hard on
management.
58. CW 2 noted that toward the end of 2012 and beginning of 2013, the
Office of the Comptroller of the Currency (“OCC”) ordered Flagstar Bank to sell
risky assets from its balance sheet because more than 50% of the Flagstar Bank’s
assets were comprised of Mortgage Service Rights (“MSR”). An MSR refers to a
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loan the bank originates and sells to an investor, but for which the bank retains the
right to service in exchange for the servicing fee. These can be highly volatile, and
the OCC determined that Flagstar Bank’s assets should be comprised of less than
25% MSR.
59. CW 2 stated that the response by Flagstar to the OCC’s order included
the closing of the bulk of its Loss Mitigation department by selling a portion of its
portfolio to Selene Finance. The divestiture program to Selene Finance involved
only GSE loans, not Flagstar Bank’s Held For Investment (“HFI”) portfolio. Half
of the GSE portfolio was sold to Selene Finance. The terms required the purchaser
to immediately subcontract servicing back to Flagstar Bank for all loans less than
sixty days delinquent, while Selene would accept servicing responsibilities for all
loans sixty or more days delinquent. Thus, Flagstar Bank outsourced all loans in
default.
60. CW 2 had figured out for some time that Flagstar Bank’s published
delinquency rate was artificially lowered. Certain delinquent loans that CW 2
managed for the HFI portfolio were kept in bucket called Other Assets, while
certain non-delinquent loans were held in the standard, and more prominent, HFI
bucket. After discussing with the Chief Accounting Officer, CW 2 confirmed that
if loans repurchased from Fannie Mae were current at the time of repurchase, they
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were placed in the HFI bucket. If the repurchased loans were delinquent, they
were put in the Other Assets bucket.
61. CW 2 reviewed the Company’s Form 10-K filed with the SEC and
found a long and tortured statement describing the accounting, but noted that the
disclosure of the Other Assets was several pages after the explanation of loans that
were placed in the HFI category. CW 2 mentioned the situation to Executive Vice-
President Maher in 2012 or 2013, who confirmed what CW 2 had discovered.
62. CW 3 was a commercial loan officer and Assistant Vice-President,
Senior Risk Analyst. CW 3 worked at Flagstar Bank from January 2011 through
February 2014. CW 3 stated that Flagstar Bank was plagued by antiquated data
management systems with unreliable data that was hard to access. The unreliable
data management systems undermined the credibility of risk analysis. CW 3 stated
that DiNello and Borja both were aware of the data weaknesses at all relevant
times.
63. One of the major projects that CW 3 worked on was a review of all
loan modifications to assess their impact on the Flagstar Bank’s risk for future
losses. The project was commenced in March or April 2014 at the request of the
OCC. The results were reported to senior management on the Allowance for Loan
and Lease Losses (“ALLL”) Committee. The ALLL used the reports in their
calculations for loan loss reserves.
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64. CW 3 reviewed loan documents to ascertain the original and modified
loan terms. CW 3 incorporated that data into a master spreadsheet that would
calculate the resulting loss in revenue to the bank. CW 3 stated that across the
board, there was a lack of current appraisals and data. Flagstar Bank’s data
systems that kept track of loan modifications were outmoded. CW 3 said that there
were multiple versions of documents in files, and that loan modifications all
needed interpretation because they were not done the same way.
65. CW 3 stated that because Flagstar Bank had been under a Consent
Order with the OCC since 2012, senior management was closely involved in
responding to the federal regulators, and that one of the concerns of the federal
regulators was the accuracy of Flagstar Bank’s data. The OCC had required
Flagstar Bank to establish written procedures and policies for the ALLL, and that
DiNello and Borja were members of the ALLL Committee. In fact, CW 3 attended
monthly meetings with the ALLL Committee at which DiNello and Borja were
present. At these meetings, CW 3 reported on Flagstar Bank’s lost revenue from
loan modifications as part of the Troubled Debt Restructuring Analysis.
66. CW 3 stated that Flagstar Bank was required to undertake the review
of losses from loan modifications because in the past, the bank either did not
conduct the reviews or was not conducting them properly. Initially the group
working on the ALLL was short-staffed and only had about four people from the
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enterprise risk group. CW 3 ended up pulling in about eight or ten additional
credit analysts to help.
67. CW 3 was not surprised about the settlement with the CFPB. CW 3
echoed the same issues as the other confidential witnesses: when there are
processes and procedure that require a lot of work and skilled people, and you have
layoffs, that is what happens.
68. CW 4 was a Senior Administrative Assistant at Flagstar Bank. CW 4
worked at Flagstar Bank from December 2010 until January 6, 2014. CW 4
reported to several supervisors through frequent management changes, including
an Assistant Vice-President in Default Servicing. CW 4 stated that Flagstar Bank
hired scores of new employees with no experience in loan modifications or default
servicing to work in the loss mitigation department. Further, the new employees
were inadequately trained, and had experienced high turnover rates.
69. CW 4 worked at Flagstar’s headquarters in Troy, Michigan on the
third floor where loss mitigation, foreclosure, bankruptcy, mediation and reporting
departments were located. Part of CW 4’s duties included setting up new hires
with computers and outfitting new computers with necessary software and
programs. CW 4, therefore, was aware of the turnover rate in loss mitigation. In a
single year, Flagstar Bank hired about 200 people in the department alone. The
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large number of hires was partly due to address the backlog, as well as to fill gaps
from the high turnover rate in the department.
70. CW 4 stated that in the loss mitigation department, 90% of the new
hires had no experience and only six weeks of training before handling mortgages
for loss mitigation. They were also undercompensated at $14 to $16 dollars per
hour, which led to high turnover. Moreover, people who worked at Flagstar Bank
for four years may still only make $14 per hour. The turnover rate was so high that
Flagstar began to hire from temporary agencies.
71. CW 5 was loan processor and underwriter at Flagstar Bank. CW 5
worked at Flagstar Bank from August 2011 through September 2013. CW 5
worked in the loss mitigation call center which was chaotic with a high turnover
rate. A borrower could call in one day and be told all of the necessary paperwork
was in, and the next day would be told their application was incomplete or that
they were going into foreclosure.
72. CW 5 stated that loans were not supposed to stay in the pipeline for
more than thirty days. At day thirty-one, an unresolved loan modification
application was to be closed out, meaning the borrower would have to send a new
packet for review and start from scratch to apply for a loan modification. If the
loan became four months delinquent at any point in the process, it was referred for
foreclosure. Some borrowers’ loans were foreclosed due to the Bank’s errors in
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handling the processing, even though the borrowers had submitted or thought that
they had submitted all of the necessary paperwork to apply for a loan modification.
73. CW 5 stated that Flagstar Bank was always in trouble with Fannie
Mae, and that it had threatened to pull Flagstar Bank’s servicing rights.
Management sent directives to the staff, as it was clear there was some type of
trouble if Fannie Mae is coming every week or every month. CW 5 spoke with
people that worked at other banks in the area that serviced mortgages, and none of
them said that Fannie Mae or Freddie Mac were on site or ever sat side-by-side
with employees to monitor their work as Fannie Mae and Freddie Mac did at
Flagstar Bank.
74. CW 5 stated that Flagstar Bank managers frequently met with Fannie
Mae agents starting in late 2012 and into early 2013. The loss mitigation
department was moved to an annex on Big Beaver Road in Troy around the end of
2012, and meetings were conducted in that facility. The meetings took place on
the third floor, where loss mitigation was located. Fannie Mae agents attended
conference calls, and Flagstar managers and supervisors attended in the same
room, including upper management.
75. CW 5 also cited the high turnover rate as exacerbating the high
backlogs of applications for loan modification. When someone would leave, the
cases in that person’s pipeline would be inaccessible until a supervisor re-assigned
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the cases. This slowed down the department’s ability to respond to a borrower
until the reassignment. It also clogged up the pipeline for others who got the
reassignments. At one time, the call center staffers had 200 borrowers each in their
pipelines, which is a lot when the staffers are expected to follow up with each
borrower every two or three business days. The turnover rate was caused by
dissatisfaction at Flagstar Bank, including the poor pay. CW 5 was paid $14.32 an
hour at the loss mitigation call center, whereas bilingual workers were brought in
at $16 per hour. Moreover, former colleagues that had left Flagstar were being
paid $22 to $26 per hour for the same work at Quicken. Even temporary workers
at Flagstar were being paid as much as full time employees. The low pay with the
lack of training caused a lot of people to leave, which increased the backlog.
76. CW 6 started as a wholesale processor and ultimately was an
Assistant Vice-President of Default servicing. CW 6 worked at Flagstar Bank from
January 2008 through January 2013. CW 6 stated that senior management was
unresponsive to complaints from middle management about internal deficiencies in
the loss mitigation and default servicing departments, and that backlog resulted
from inadequate staffing. CW 6 implemented policies and procedures that had not
previously existed for employee training in 2012 and 2013.
77. CW 6 stated that when first working at Flagstar Bank, the expected
turnaround time for loan modification was 30 to 45 days from application to
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resolution, and one individual specialist handled the entire process from beginning
to end. The volume spiked during the mortgage crisis and some borrowers did not
get any attention to their loan modification applications for several months. There
was no question that the backlog was caused by deficient staffing, which extended
the amount of time loss mitigation cases went unresolved.
78. According to CW 6, there was never appropriate staffing. When CW 6
started, a loss mitigation staffer would be responsible for about 70 loans, and there
were 12 people in the entire department. By the time CW 6 left in 2013, there
were 16,000 to 17,000 accounts in the loss mitigation department, probably double
that number in default servicing. CW 6 was never able to fully staff the 125
positions in CW 6’s charge because the positions were always in flux with high
turnover. There were generally 110 to 120 active employees at any one time in CW
6’s area, which did not include foreclosure, bankruptcy or collections.
79. CW 6 stated that in the last year CW 6 was at Flagstar Bank, things
began to heat up as with fines being imposed by federal regulators and an increase
in auditing activities. Audits by Fannie Mae and the CFPB overlapped. The last
nine to ten months of CW 6’s employment involved the CFPB audit, which was
very extensive. All of the audits, Fannie Mae and CFPB, were coordinated by the
Senior Vice-President and Director of Mortgage Banking Operations, Governance
and Analytics. During this period, there were weekly meetings with every manager
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in default servicing, as well as Fannie Mae representatives, Senior Vice-President
Judy Fehler, Senior Vice-President John Czaplicki, and Executive Vice-President
Maher. The meetings occurred in Flagstar’s annex building on Big Beaver Road
where the loss mitigation department had been moved. These audits were in
addition to the monthly or quarterly audits by Wetzell Trott (currently d/b/a/
Stewart Lender Services).
80. CW 6 also stated that there were times during 2012 when CW 6 was
called into the board room by Mike Tierney, who was then-president of Flagstar
Bank, to discuss the CFPB audit. MatlinPatterson representatives attended by
telephone. CW 6 was told by Tierney that the federal regulators were Flagstar
Bank’s investors and the Bank works for them, so we have to do what they want
and quit complaining.
81. CW 6 stated that a lot of the computer systems at Flagstar Bank were
deficient and that there were a lot of issues with senior management not lending
support. There were a lot of times when it felt like things would fall on deaf ears if
one was experiencing an issue with a system, or not having the necessary
equipment or staffing. Although one could ask and ask, and write a report that
went through many individuals, if a solution was ever presented, it did not
necessarily address the problem at hand. There was a lot of bureaucracy and red
tape, and if one was too vocal, it was said that you were the problem.
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82. CW 7 was a Loan Administrative Assistant in the loss mitigation
department from January 2012 through September 2013. CW 7’s responsibilities
were with document preparation. If loan modification applications were not
complete, CW 7 would send the applicant a new application to start from scratch.
Examples of technical deficiencies that prompted a new application were: missing
or incorrectly placed signatures; signatures that did not match others on file for the
borrower; missing notarization or incomplete documentation of the notary’s
credentials; signatures or other writing that bled into the one-inch margin on the
application, which was required to be kept clear.
83. CW 7 stated that when a loan modification was returned to a
borrower, one cover letter was a form letter that accompanied all new applications,
and the second letter was a template correction letter intended to explicitly direct
the borrower on how to apply correctly. Administrative assistants abandoned the
template correction letter they were supposed to send, and instead, sent their own
customized letters although directed by the Loss Mitigation Manager to send the
template correction letter.
84. CW 8 was a Senior Loan Counselor at Flagstar Bank from May 2009
through February 2014. CW 8 worked at the Company’s headquarters in Troy,
Michigan until the collections department was moved to the annex building. Part
of CW 8’s responsibilities included talking to borrowers that were behind in their
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mortgage payments and discuss options with them. If the borrowers chose loan
modification, their case would go to the loss mitigation department.
85. CW 8 stated that managers did not know their jobs, the Company
hired inept employees, and the system was difficult for mortgagees to understand --
all contributing to delays in the loan modification applications. It was important
for borrowers to be notified regarding what they needed to do for their loan
modification applications and on what timeframe. Flagstar, however, failed to
keep borrowers informed, and that the loss mitigation department would not even
answer their phones. CW 8, and other collections personnel, would receive calls
from borrowers needing to speak with the loss mitigation department, and that CW
8 and collections personnel would pull up the borrowers’ information from the loss
mitigation screen on their computers and attempt to tell the borrowers what they
needed to do.
86. CW 9 was a counselor in the loss mitigation call center at Flagstar
Bank from January 2012 through January 2014. CW 9 contacted borrowers who
were behind in their mortgage payments to advise them on what options were
available and tell them the deadlines for filing loan modifications. CW 9 is
bilingual and translated and explained documents for Spanish-speaking borrowers.
CW 9 was in charge of Freddie Mac loans, which had different documentation
from Fannie Mae loans and government loans, e.g., FHA/VA loans.
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87. CW 9 stated that there were many complaints from borrowers that it
took too long to modify their loans. There were many calls from Spanish speaking
borrowers and not enough loss mitigation counselors who spoke Spanish. The
volume of applicants in the other government loans department was even larger
than the Freddie Mac and the Fannie Mae departments, and the departments were
understaffed to handle the wave of requests for loan modifications.
The CFPB Consent Order
88. On September 29, 2014, The CFPB filed a Consent order in an
Administrative Proceeding captioned, In the Matter of: Flagstar Bank, FSB, File
No. 2014-CFPB-0014. The Consent Order was executed pursuant to a Stipulation
between Flagstar Bank and the Bureau consenting to the issuance of the Consent
Order. Per the Stipulation, Flagstar Bank did not admit or deny any of the findings
of fact or conclusions of law, except those facts which established the Bureau’s
jurisdiction over Flagstar Bank and subject matter of the action.
89. In the Consent Order, the Bureau found that Flagstar Bank had failed
to review loss mitigation application in a reasonable amount of time from at least
2011 until September 2013 in violation of sections 1036(a)(1)(B) and 1031(C)(1)
of the CFPA. The Bureau specifically found that Flagstar Bank, inter alia:
• failed to review loss mitigation application documents before they
expired under investor guidelines;
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• failed to make a decision on loss mitigation applications prior to referring borrowers to foreclosure;
• caused the improper closure of loss mitigation applications;
• caused borrowers to drop out from the loss mitigation process; and
• deprived borrowers of their ability to make an informed choice about
how to retain or dispose of their homes.
90. The Bureau found that Flagstar Bank withheld critical information
that borrowers needed to complete their loss mitigation applications for at least a
nine month period in 2012 through 2013 2013 in violation of sections
1036(a)(1)(B) and 1031(C)(1) of the CFPA. The Bureau specifically found that
Flagstar Bank, inter alia:
• failed to send, or delayed sending, missing document letters to
borrowers;
• failed to resolve underlying systems problems related to missing
document letters;
• caused improper closure of loss mitigation applications; and
• rejected borrowers’ loss mitigation applications for reasons outside of
their control.
91. The Bureau found that Flagstar Bank denied loan modifications to
qualified borrowers by regularly and frequently miscalculating borrower income in
violation of sections 1036(a)(1)(B) and 1031(C)(1) of the CFPA. The Bureau
specifically found that Flagstar Bank, inter alia:
• lacked a systemized, controlled process for calculating borrower
income;
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. failed to accurately calculate borrower income;
• deprived borrower of their ability to make an informed choice about
how to retain or dispose of their home.
92. The Bureau found that Flagstar Bank improperly prolonged
borrowers’ trial period plans for loan modifications in violation of sections
1036(a)(1)(B) and 1031(C)(1) of the CFPA. The Bureau specifically found that
Flagstar Bank, inter alia:
• the majority of trial period plans entered between October 2011 and
June 2013 lasted more than 120 days, and a substantial number lasted
more than 150 days.
93. The Bureau found that Flagstar Bank violated the loss mitigation
procedures, see 12 C.F.R. § 1024.41, and general servicing policies, procedures
and requirement, see 12 C.F.R. §§ 1024.38, of the Mortgage Servicing Rule, in
violation of sections 1036(a)(1)(B) and 1031(C)(1) of the CFPA. The Bureau
specifically found that Flagstar Bank, inter alia:
• failed to notify borrowers, in writing, within five business days of
receiving their loss mitigation applications whether their applications
were complete and what documents were missing;
• failed to provide written evaluation notices timely, or at all, with the
specific reason for denial of a loan modification option;
• allowed denial of loan modification simply by stating “does not fulfill investor requirements/guidelines” when Flagstar Bank’s internal
system indicated a different and more specific reason for denial;
• failed to provide appeal forms to borrowers;
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• incorrectly stated that borrowers have the right to appeal the denial of
a loan modification only if they reside in certain states, when in fact
borrowers in all states have the right to appeal the denial of a loan
modification option;
• failed to maintain policies and procedures designed to ensure the bank
can provide accurate and timely disclosures to borrowers;
• failed to maintain policies and procedures designed to ensure the bank
can provide timely and accurate acknowledgement notices;
• failed to provide clear and consistent guidance in its manuals
regarding the content and timing of the acknowledgement notices.
94. In support of the Consent Order findings of fact, the CFPB cited
testimony from employees of Flagstar Bank referencing events similar or identical
to the testimony from the Confidential Witnesses referenced above.
95. Throughout the Class Period, Defendants were aware that the CFPB
was auditing Flagstar Bank’s compliance with federal regulations, which
overlapped with Fannie Mae and Freddie Mac enforcement that began as early as
September 2011. The threat of termination by Fannie Mae and Freddie Mac in
2011 and the risk of violations evidenced in the audit by the CFPB during the Class
Period were known material events that were withheld from disclosure to investors
by the Defendants, who further materially misled investors by touting the
efficiency of their loss mitigation and default servicing practices in periodic filings
with the SEC.
96. During 2013, with mounting pressure by federal regulators to cease
the violations of federal consumer protection laws, Flagstar Bank decided to sell
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off loss mitigation and loan servicing of loans, especially non-performing or loans
in default, instead of correcting the systematic violations referenced above, and
represented that the sale was simply an attempt to lower non-interest expenses.
Defendants continued to tout the Company’s loss mitigation and default servicing,
and withheld from the investing public the fact that Flagstar Bank had failed to
comply with federal consumer protection laws since at least as early as 2011, that
the severity of the violations of borrowers’ rights was such that Fannie Mae
threatened terminating Flagstar Bank’s right to loan servicing of mortgages owned
or guaranteed by Fannie Mae, and that the CPFB had served Civil Investigative
Demands on Flagstar Bank. Indeed, regardless of the sale of servicing rights,
Flagstar Bank was still liable for violations of consumer protection laws going
back to 2011.
Materially False and Misleading Statements Issued During the Period
97. On October 22, 2013, Flagstar filed a Form 8-K with the SEC which
included a press release disseminated that day announcing financial results for the
third quarter of fiscal 2013, emphasizing that “non-interest expense decreased by
$16 million during the quarter, with further savings anticipated.” The press release
further stated that “compensation and benefits decreased . . . . driven by . . . a
decrease in both headcount and contract employees. .. .”
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98. The statements in paragraph 97 were materially misleading as
Defendants failed to disclose that the reduction in headcount was driven by the
failure to comply with consumer protection regulations that had caused Fannie
Mae to threaten to terminate Flagstar’s rights to loan servicing as early as 2011.
Moreover, Defendants failed to disclose that the sale of servicing rights did not end
Flagstar Bank’s liability for violations of the CFPA going back to 2011.
99. On October 30, 2013, Flagstar filed its Form 10-Q for the third quarter
of fiscal 2013, which was signed by Defendants Di Nello and Borja, and included
the same materially misleading references to non-interest expense as in the press
release above. In addition, the Form 10-Q stated:
Mortgage-Related Litigation, Regulatory and Other Matters
Regulatory Matters
From time to time, governmental agencies conduct investigations or examinations of various mortgage related practices
of the Bank. Ongoing investigations relate to whether the Bank has
properly complied with laws or regulations relating to mortgage
origination or mortgage servicing practices and to whether its
practices with regard to servicing residential first mortgage loans are
adequate. The Bank is cooperating with such agencies and providing
information as requested. In addition, the Bank has routinely been
named in civil actions throughout the country by borrowers and
former borrowers relating to the origination, purchase, sale and
servicing of mortgage loans.
100. The statements referring to “investigations” in paragraph 99 are
boilerplate information that had been in Flagstar’s SEC filings for years, with no
reference to specific investigations. Moreover, the introduction of the statement as
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“from time to time,” make the investigations or examinations appear routine,
whereas the actual investigations were caused by violations of consumer protection
laws that resulted in foreclosures of homes due to only to Flagstar Bank’s
wrongdoing. The statements are further materially misleading because they fail to
disclose that Fannie Mae had threatened to terminate Flagstar’s rights to loan
servicing as early as 2011, and that Flagstar was being investigated for violations
of the CFPA by the CFPB.
101. On December 18, 2013, Flagstar filed a Form 8-K with the SEC
which included a press release disseminated that day announcing that Flagstar
Bank had entered an agreement to sell mortgage servicing rights to Matrix
Financial Services Corporation. The agreement covered mortgage loans serviced
for both Fannie Mae and Ginnie Mae.
102. The statements in paragraph 101 were materially misleading as
Defendants failed to disclose that Fannie Mae to threaten to terminate Flagstar’s
rights to loan servicing as early as 2011. Moreover, Defendants failed to disclose
that the sale of servicing rights did not end Flagstar Bank’s liability for violations
of the CFPA going back to 2011, and that Flagstar was being investigated for
violations of the CFPA.
103. On January 22, 2014, Flagstar filed a Form 8-K with the SEC which
included a press release disseminated that day announcing financial results for the
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fourth quarter of fiscal 2013, which emphasized “organization restructuring,”
described as including “workforce reductions” and the “outsourcing of default
servicing.” Defendant DiNello added that Flagstar had “increased our Tier I ratio,
lowered our MSR concentration, reduced operating costs .....”
104. The statements in paragraph 103 were materially misleading as
Defendants failed to disclose that the reduction in headcount was driven by the
failure to comply with consumer protection regulations that had caused Fannie
Mae to threaten to terminate Flagstar’s rights to loan servicing as early as 2011.
Moreover, Defendants failed to disclose that the sale of servicing rights did not end
Flagstar Bank’s liability for violations of the CFPA going back to 2011, and that
Flagstar was being investigated for violations of the CFPA.
105. On March 5, 2014, the Company filed an annual report on Form 10-K
with the SEC which was signed by defendants DiNello and Borja. The Form 10-K
contained signed certifications pursuant to the Sarbanes-Oxley Act of 2002 by
defendants DiNello and Borja, falsely and misleadingly stating that: the
information contained in the Form 10-K was accurate and complete, and all
material changes to the Company’s internal controls were disclosed.
106. In the 10-K, the Company stated:
Expanded regulatory oversight over our business could significantly
increase our risks and costs associated with complying with current
and future regulations, which could adversely affect our financial
condition and results of operations.
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As a result of increasing scrutiny and regulation of the banking
industry and consumer practices, we may face a greater number or
wider scope of investigations, enforcement actions and litigation,
thereby increasing our costs associated with responding to or
defending such actions.
107. The underscored statement in paragraph 106 above was materially
false and misleading when made, as Flagstar was, at that time, the subject of an
investigation. The representations made in the entire section under “Regulatory
Risk” in the Form 10-K gave the false representation that any investigation or
oversight would be in the future, when in fact Flagstar had been investigated since
as early as 2011 by Fannie Mae and Freddie Mac, and was subject of a criminal
action for predatory lending by the United States Attorney for the Southern District
of New York.
108. The Form 10-K also stated:
The CFPB may reshape the consumer financial laws through
rulemaking and enforcement. Compliance with any such changes
may impact our operations.
The CFPB has broad and unique rulemaking authority to
administer and carry out the provisions of the Dodd-Frank Act with
respect to financial institutions that offer covered financial products and
services to consumers, including prohibitions against unfair, deceptive
or abusive practices in connection with any transaction with a
consumer for a consumer financial product or service, or the offering of
a consumer financial product or service. The concept of what may be
considered to be an "abusive" practice is new under the law. Moreover,
the Bank will be supervised and examined by the CFPB for compliance with the CFPB’s regulations and policies. While the full scope of the
CFPB’s rulemaking and regulatory agenda relating to the mortgage
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industry remains unclear, it has already been active in issuing
guidelines, rules and regulations affecting our business, and it has also
been active in enforcing consumer financial protection laws against
mortgage originators and servicers.
109. The statements in paragraph 108 were materially false and/or
misleading when made. Aside from giving the misleading impression that the
CFPB was not then-currently investigating Flagstar Bank for violations of the
CFPA, certain if the statements were directly false. The underscored statement
that “abusive” practices was new under the law was belied by the investigation by
Fannie Mae in 2011 and the Letter received by the Company from Fannie Mae
which specifically listed practices that were abusive violations of consumer
protection laws.
110. The Form 10-K also stated:
We may incur fines, penalties and other negative consequences from
regulatory violations, possibly even for inadvertent or unintentional
violations.
We maintain systems and procedures designed to ensure that
we comply with applicable laws and regulations. However, some legal
and regulatory frameworks provide for the imposition of fines or
penalties for noncompliance even though the noncompliance was
inadvertent or unintentional and even though there was in place at the
time systems and procedures designed to ensure compliance.
111. The statements in paragraph 110 were materially misleading as
Defendants failed to disclose that Flagstar since at least as early as 2011, Fannie
Mae had exposed violations that were neither inadvertent nor unintentional.
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Indeed, the testimony of the Confidential Witnesses referenced above, as well as
the findings of fact in the Consent Order, demonstrate that Flagstar Bank had
committed intentional violations of the consumer protection laws, including the
CFPA, and that they were clearly subject to fines and possible termination of their
rights. Moreover, senior management at Flagstar Bank had ignored complaints and
issues raised by middle management and other personnel in the loss mitigation,
loan modification, and default servicing departments since as early as 2011. As
such, any representation to Flagstar Bank having systems and procedures ensuring
compliance were materially misleading at best, if not intentionally false.
112. On April 22, 2014, Flagstar filed a Form 8-K with the SEC which
included a press release disseminated that day announcing financial results for the
first quarter of fiscal 2014, which emphasized “cost reductions,” which Defendant
DiNello described as “enhancing efficiency across the organization led to a
reduction of noninterest expense as we completed the previously announced
workforce reduction.”
113. The statements in paragraph 112 were materially misleading as
Defendants failed to disclose that the reduction in headcount was driven by the
failure to comply with consumer protection regulations that had caused Fannie
Mae to threaten to terminate Flagstar’s rights to loan servicing as early as 2011.
Moreover, Defendants failed to disclose that the sale of servicing rights did not end
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Flagstar Bank’s liability for violations of the CFPA going back to 2011, and that
Flagstar was being investigated for violations of the CFPA.
114. On May 9, 2014, Flagstar filed its Form 10-Q for the first quarter of
fiscal 2014, which was signed by Defendants Di Nello and Borja, and included the
same materially misleading references to cost reductions as in the press release
above. In addition, the Form 10-Q stated:
Mortgage-Related Litigation, Regulatory and Other Matters
Regulatory Matters
From time to time, governmental agencies conduct investigations or examinations of various mortgage related practices
of the Bank. Ongoing investigations relate to whether the Bank has
properly complied with laws or regulations relating to mortgage
origination or mortgage servicing practices and to whether its
practices with regard to servicing residential first mortgage loans are
adequate. The Bank is cooperating with such agencies and providing
information as requested. In addition, the Bank has routinely been
named in civil actions throughout the country by borrowers and
former borrowers relating to the origination, purchase, sale and
servicing of mortgage loans.
115. The statements referring to “investigations” in the paragraph 114 are
boilerplate information that had been in Flagstar’s SEC filings for years, with no
reference to specific investigations. Moreover, the introduction of the statement as
“from time to time,” make the investigations or examinations appear routine,
whereas the actual investigations were caused by violations of consumer protection
laws that resulted in foreclosures of homes due to only to Flagstar Bank’s
wrongdoing. The statements are further materially misleading because they fail to
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disclose that Fannie Mae had threatened to terminate Flagstar’s rights to loan
servicing as early as 2011, and that Flagstar was being investigated for violations
of the CFPA by the CFPB.
116. On July 22, 2014, Flagstar filed a Form 8-K with the SEC which
included a press release disseminated that day announcing financial results for the
second quarter of fiscal 2014, which emphasized “continued focus on expense
management.”
117. The statements in paragraph 116 were materially misleading as
Defendants failed to disclose that the reduction in headcount was driven by the
failure to comply with consumer protection regulations that had caused Fannie
Mae to threaten to terminate Flagstar’s rights to loan servicing as early as 2011.
Moreover, Defendants failed to disclose that the sale of servicing rights did not end
Flagstar Bank’s liability for violations of the CFPA going back to 2011, and that
Flagstar was being investigated for violations of the CFPA.
118. On July 29, 2014, Flagstar filed its Form 10-Q for the first quarter of
fiscal 2014, which was signed by Defendants Di Nello and Borja, and included the
same materially misleading references expenses as in the press release above. In
addition, the Form 10-Q stated:
From time to time, governmental agencies conduct investigations or examinations of various mortgage related practices
of the Bank. Ongoing investigations relate to whether the Bank has
properly complied with laws or regulations relating to mortgage
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origination or mortgage servicing practices and to whether its
practices with regard to servicing residential first mortgage loans are
adequate. The Bank is cooperating with such agencies and providing
information as requested. In addition, the Bank has routinely been
named in civil actions throughout the country by borrowers and
former borrowers relating to the origination, purchase, sale and
servicing of mortgage loans.
119. The statements referring to “investigations” in the paragraph 118 are
boilerplate information that had been in Flagstar’s SEC filings for years, with no
reference to specific investigations. Moreover, the introduction of the statement as
“from time to time,” make the investigations or examinations appear routine,
whereas the actual investigations were caused by violations of consumer protection
laws that resulted in foreclosures of homes due to only to Flagstar Bank’s
wrongdoing. The statements are further materially misleading because they fail to
disclose that Fannie Mae had threatened to terminate Flagstar’s rights to loan
servicing as early as 2011, and that Flagstar was being investigated for violations
of the CFPA by the CFPB.
The Truth Begins to Emerge
120. On August 26, 2014, the Company filed a Form 8-K with the SEC,
announcing that it has begun settlement discussions with the CFPB over alleged
violations of consumer finance laws dating back to 2011. In the 8-K, the Company
stated, in part:
Flagstar Bancorp, Inc., the holding company of Flagstar Bank,
FSB (the “Bank”), announced today that the Bank has
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commenced discussions with the Consumer Financial
Protection Bureau, or CFPB, related to alleged violations of
various federal consumer financial laws arising from the Bank's
loss mitigation practices and default servicing operations dating
back to 2011. The Bank previously provided the CFPB with
documents and other information concerning the Bank’s loss
mitigation practices and default servicing operations in
response to Civil Investigative Demands received from the
CFPB. While the Bank intends to vigorously defend against any
enforcement action that may be brought, it has commenced
discussions with the CFPB staff to determine if a settlement can
be achieved. Those discussions are ongoing.
121. As a result of these allegations, Mark Palmer, an analyst at BTIG,
downgraded its rating on Flagstar to sell, noting that the “allegations raise
questions regarding servicing operations amid uncertainty of potential rebound of
its mortgage business.”
122. On the news, Flagstar stock fell $0.83, or almost 4.5%, on unusually
heavy trading volume, to close at $17.66 on August 27, 2014.
123. The market understood that the disclosure of the “discussions with the
CFPB” were not part of the usual investigations conducted by the CFPB.
Accordingly to an article on Housing Wire News dated August 27, 2014, a report
from Compass Point Trading and Research stated that it was “unusual” for a bank
such as Flagstar to disclose the Civil Investigation Demands (“CIDs”), as other
“large mortgage servicers . . . have received CIDs from the CFPB before.”
Accordingly, the report found that because “FBC felt it was necessary to mention
the company was in discussion with the CFPB, . . . a material settlement may be
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imminent.” See Brena Swanson, Flagstar Mortgage Servicing Settlement With
CFPB Imminent , http://www.housingwire.com/articles/31179-flagstar-mortgage -
servicing-settlement-with-cfpb-imminent (Aug. 27, 2014).
124. With additional disclosure of an imminent settlement with the CFPB
filtered through the market through outlets such as Housing Wire News and
Compass Point Trading and Research, the price of Flagstar continued to decline the
following day, closing at $17.33 on August 28, 2014.
125. As a result of Defendants’ wrongful acts and omissions, and the
precipitous decline in the market value of the Company’s securities, Plaintiff and
other Class members have suffered significant losses and damages.
PLAINTIFF’S CLASS ACTION ALLEGATIONS
126. Plaintiff brings this action as a class action pursuant to Federal Rule of
Civil Procedure 23(a) and (b)(3) on behalf of a Class of all persons and entities that
purchased shares of Flagstar Bancorp Inc. common stock during the period of
October 22, 2013 through August 26, 2014, both dates inclusive. Excluded from
the Class are Defendants herein, 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, officer or directors
have or had a controlling interest.
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127. The members of the Class are so numerous that joinder of all
members is impracticable. Throughout the Class Period, Flagstar securities were
actively traded on the NYSE. While the exact number of Class members is
unknown to Plaintiff at this time and can be ascertained only through appropriate
discovery, Plaintiff believes 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 Flagstar 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.
128. Plaintiff’s 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.
129. Plaintiff will fairly and adequately protect the interests of the
members of the Class and has retained counsel competent and experienced in class
and securities litigation. Plaintiff has no interests antagonistic to or in conflict with
those of the Class.
130. 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:
• whether the federal securities laws were violated by
Defendants’ acts as alleged herein;
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• whether statements made by Defendants to the investing public
during the Class Period misrepresented material facts about the
business, operations and management of Flagstar;
• whether the Individual Defendants caused Flagstar to issue
false and misleading financial statements during the Class
Period;
• whether Defendants acted knowingly or recklessly in issuing
false and misleading financial statements;
• whether the prices of Flagstar securities during the Class Period
were artificially inflated because of the Defendants’ conduct
complained of herein; and,
• whether the members of the Class have sustained damages and,
if so, what is the proper measure of damages.
131. 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 make it
impossible for members of the Class to individually redress the wrongs done to
them. There will be no difficulty in the management of this action as a class
action.
132. Plaintiff will rely, in part, upon the presumption of reliance
established by the fraud-on-the-market doctrine in that:
• Defendants made public misrepresentations or failed to disclose
material facts during the Class Period;
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~ the omissions and misrepresentations were material;
~ Flagstar securities are traded in efficient markets;
~ the Company’s shares were liquid and traded with moderate to
heavy volume during the Class Period;
~ the Company traded on the NYSE, and was covered by multiple
analysts;
~ the misrepresentations and omissions alleged would tend to
induce a reasonable investor to misjudge the value of the
Company’s securities; and
~ Plaintiff and members of the Class purchased and/or sold
Flagstar securities between the time the Defendants failed to
disclose or misrepresented material facts and the time the true
facts were disclosed, without knowledge of the omitted or
misrepresented facts.
133. Based upon the foregoing, Plaintiff and the members of the Class are
entitled to a presumption of reliance upon the integrity of the market.
134. Alternatively, Plaintiff and the members of the Class are entitled to
the presumption of reliance established by the Supreme Court in Affiliated Ute
Citizens of the State of Utah v. United States , 406 U.S. 128, 92 S. Ct. 2430 (1972),
as Defendants omitted material information in their Class Period statements in
violation of a duty to disclose such information, as detailed above.
COUNT I
Violations of Section 10(b) of The Exchange Act and Rule 10b-5
Against All Defendants
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135. Plaintiff repeats and realleges each and every allegation contained
above as if fully set forth herein.
136. This Count is asserted against Defendants and is based upon Section
10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated
thereunder by the SEC.
137. During the Class Period, Defendants engaged in a plan, scheme,
conspiracy and course of conduct, pursuant to which they knowingly or recklessly
engaged in acts, transactions, practices and courses of business which operated as a
fraud and deceit upon Plaintiff and the other members of the Class; made various
untrue statements of material facts and omitted to state material facts necessary in
order to make the statements made, in light of the circumstances under which they
were made, not misleading; and employed devices, schemes and artifices to
defraud in connection with the purchase and sale of securities. Such scheme was
intended to, and, throughout the Class Period, did: (i) deceive the investing public,
including Plaintiff and other Class members, as alleged herein; (ii) artificially
inflate and maintain the market price of Flagstar securities; and (iii) cause Plaintiff
and other members of the Class to purchase or otherwise acquire Flagstar securities
and options at artificially inflated prices. In furtherance of this unlawful scheme,
plan and course of conduct, Defendants, and each of them, took the actions set
forth herein.
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138. Pursuant to the above plan, scheme, conspiracy and course of conduct,
each of the Defendants participated directly or indirectly in the preparation and/or
issuance of the quarterly and annual reports, SEC filings, press releases and other
statements and documents described above, including statements made to
securities analysts and the media that were designed to influence the market for
Flagstar securities. Such reports, filings, releases and statements were materially
false and misleading in that they failed to disclose material adverse information
and misrepresented the truth about Flagstar’s finances and business prospects.
139. By virtue of their positions at Flagstar, Defendants had actual
knowledge of the materially false and misleading statements and material
omissions alleged herein and intended thereby to deceive Plaintiff and the other
members of the Class, or, in the alternative, Defendants acted with reckless
disregard for the truth in that they failed or refused to ascertain and disclose such
facts as would reveal the materially false and misleading nature of the statements
made, although such facts were readily available to Defendants. Said acts and
omissions of Defendants were committed willfully or with reckless disregard for
the truth. In addition, each defendant knew or recklessly disregarded that material
facts were being misrepresented or omitted as described above.
140. Defendants were personally motivated to make false statements and
omit material information necessary to make the statements not misleading in order
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to salvage the investment by MatlinPatterson after having invested approximately
$1 billion and seeing that investment evaporate as the mortgage industry imploded.
Indeed, Defendants, senior management and the directors of the Company owed
their employment at Flagstar to MatlinPatterson, and they were motivated to bring
the Company back to profitability by any means necessary.
141. Information showing that Defendants acted knowingly or with
reckless disregard for the truth is peculiarly within Defendants’ knowledge and
control. As the senior managers and/or directors of Flagstar, the Individual
Defendants had knowledge of the details of Flagstar’s internal affairs.
142. The Individual Defendants are liable both directly and indirectly for
the wrongs complained of herein. Because of their positions of control and
authority, the Individual Defendants were able to and did, directly or indirectly,
control the content of the statements of Flagstar. As officers and/or directors of a
publicly-held company, the Individual Defendants had a duty to disseminate
timely, accurate, and truthful information with respect to Flagstar’s businesses,
operations, future financial condition and future prospects. As a result of the
dissemination of the aforementioned false and misleading reports, releases and
public statements, the market price of Flagstar securities was artificially inflated
throughout the Class Period. In ignorance of the adverse facts concerning
Flagstar’s business and financial condition which were concealed by Defendants,
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Plaintiff and the other members of the Class purchased or otherwise acquired
Flagstar securities at artificially inflated prices and relied upon the price of the
securities, the integrity of the market for the securities and/or upon statements
disseminated by Defendants, and were damaged thereby.
143. During the Class Period, Flagstar securities were traded on an active
and efficient market. Plaintiff and the other members of the Class, relying on the
materially false and misleading statements described herein, which the Defendants
made, issued or caused to be disseminated, or relying upon the integrity of the
market, purchased or otherwise acquired shares of Flagstar securities at prices
artificially inflated by Defendants’ wrongful conduct. Had Plaintiff and the other
members of the Class known the truth, they would not have purchased or otherwise
acquired said securities, or would not have purchased or otherwise acquired them
at the inflated prices that were paid. At the time of the purchases and/or
acquisitions by Plaintiff and the Class, the true value of Flagstar securities was
substantially lower than the prices paid by Plaintiff and the other members of the
Class. The market price of Flagstar securities declined sharply upon public
disclosure of the facts alleged herein to the injury of Plaintiff and Class members.
144. By reason of the conduct alleged herein, Defendants knowingly or
recklessly, directly or indirectly, have violated Section 10(b) of the Exchange Act
and Rule 10b-5 promulgated thereunder.
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145. As a direct and proximate result of Defendants’ wrongful conduct,
Plaintiff and the other members of the Class suffered damages in connection with
their respective purchases, acquisitions and sales of the Company’s securities
during the Class Period, upon the disclosure that the Company had been
disseminating misrepresented financial statements to the investing public.
COUNT II
Violations of Section 20(a) of The Exchange Act
Against The Individual Defendants
146. Plaintiff repeats and realleges each and every allegation contained in
the foregoing paragraphs as if fully set forth herein.
147. During the Class Period, the Individual Defendants participated in the
operation and management of Flagstar, and conducted and participated, directly
and indirectly, in the conduct of Flagstar’s business affairs. Because of their senior
positions, they knew the adverse non-public information about Flagstar’s
misstatement of income and expenses and false financial statements.
148. As officers and/or directors of a publicly owned company, the
Individual Defendants had a duty to disseminate accurate and truthful information
with respect to Flagstar’s financial condition and results of operations, and to
correct promptly any public statements issued by Flagstar which had become
materially false or misleading.
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149. Because of their positions of control and authority as senior officers,
the Individual Defendants were able to, and did, control the contents of the various
reports, press releases and public filings which Flagstar disseminated in the
marketplace during the Class Period concerning Flagstar’s results of operations.
Throughout the Class Period, the Individual Defendants exercised their power and
authority to cause Flagstar to engage in the wrongful acts complained of herein.
The Individual Defendants therefore, were “controlling persons” of Flagstar within
the meaning of Section 20(a) of the Exchange Act. In this capacity, they
participated in the unlawful conduct alleged which artificially inflated the market
price of Flagstar securities.
150. Each of the Individual Defendants, therefore, acted as a controlling
person of Flagstar. By reason of their senior management positions and/or being
directors of Flagstar, each of the Individual Defendants had the power to direct the
actions of, and exercised the same to cause, Flagstar to engage in the unlawful acts
and conduct complained of herein. Each of the Individual Defendants exercised
control over the general operations of Flagstar and possessed the power to control
the specific activities which comprise the primary violations about which Plaintiff
and the other members of the Class complain.
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151. By reason of the above conduct, the Individual Defendants are liable
pursuant to Section 20(a) of the Exchange Act for the violations committed by
Flagstar.
PRAYER FOR RELIEF
WHEREFORE , Plaintiff demands judgment against Defendants as follows:
A. Determining that the instant action may be maintained as a class
action under Rule 23 of the Federal Rules of Civil Procedure, and certifying
Plaintiff as the Class representative;
B. Requiring Defendants to pay damages sustained by Plaintiff and the
Class by reason of the acts and transactions alleged herein;
C. Awarding Plaintiff and the other members of the Class prejudgment
and post-judgment interest, as well as their reasonable attorneys’ fees, expert fees
and other costs; and
D. Awarding such other and further relief as this Court may deem just
and proper.
DEMAND FOR TRIAL BY JURY
Plaintiff hereby demands a trial by jury.
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Respectfully submitted,
POMERANTZ LLP
/s/ Jeremy A. Lieberman
Jeremy A. Lieberman Gustavo F. Bruckner Francis P. McConville 600 Third Avenue, 20th Floor New York, New York 10016 Telephone: (212) 661-1100 Facsimile: (212) 661-8665 E-mail: [email protected]
POMERANTZ LLP Patrick V. Dahlstrom Ten South LaSalle Street, Suite 3505 Chicago, Illinois 60603 Telephone: (312) 377-1181 Facsimile: (312) 377-1184 E-mail: [email protected]
CAFFERTY CLOBES MERIWETHER
& SPRENGEL LLP Patrick E. Cafferty 101 North Main Street, Suite 565 Ann Arbor, MI 48104 Telephone: (734)769-2144 Facsimile: (734) 769-1207 E-mail: [email protected]
Mich. Bar No. P35613
Attorneys for Plaintiff
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CERTIFICATE OF SERVICE
I hereby certify that on February 3, 2015, I electronically filed the foregoing paper
with the Clerk of the Court using the ECF system which will send notification of such
filing to the following:
Jeffrey Alan Crapko Miller Canfield 840 W. Long Lake Road Suite 200 Troy, MI 48098 (248) 879-2000 Fax: (248) 879-2001 [email protected]
Matthew P. Allen Miller, Canfield, Paddock and Stone, PLC 840 West Long Lake Road Suite 200 Troy, MI 48098-6358 (248) 267-3290 Fax: (248) 879-2001 [email protected]
Thomas W. Cranmer Miller Canfield Paddock and Stone PLC 840 W. Long Lake Road Suite 200 Troy, MI 48098-6358 (248) 879-2000 Fax: (248) 879-2001 [email protected]
Todd A. Holleman Miller, Canfield, (Detroit) 150 W. Jefferson Avenue Suite 2500 Detroit, MI 48226-4415 (313) 963-6420 [email protected]
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/s/ Jeremy A. Lieberman
POMERANTZ LLP 600 Third Avenue, 20th Floor New York, New York 10016 Telephone: (212)1-1100 Facsimile: (212) 661-8665 E-mail: [email protected]
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