The law firm representing Teachers Insurance & Annuity Association and ING Investment Management in their suit against Enterprise Mortgage Acceptance Co. significantly amended the original complaint last week, further alleging that EMAC's majority equity investor and co-defendant Koch Industries had thorough knowledge of the company's alleged questionable lending practices, and was even represented to investors as being involved in the underwriting process.
Koch, of course, disputes the allegations and plans to move for a dismissal on or before the deadline set by the court, which was recently extended to Sept. 6. "We are confident that Koch will be shown to have acted completely appropriately," said Mary Beth Jarvis, spokesperson for Koch. "The complaint, amended or otherwise, has no merit, and we intend to move promptly to have it dismissed."
Meanwhile, more insurance company investors have filed additional complaints against EMAC, Koch, and several former principals of EMAC. Most recently, Americo Financial and subsidiary Great Southern Life submitted a complaint before the U.S. Court Southern District of New York, which was directed to the Judge Shirley Wohl Kram, who has received all complaints filed against the EMAC defendants following the original complaint filed in March by TIAA.
"After an intensive investigation, the new complaint implicates Koch to a far greater degree with the knowledge of the breakdowns in the underwriting of the loans that went into the EMAC pools," said Douglas McKeige, of Bernstein Litowitz Berger & Grossmann, which represents TIAA and, more recently, the ING group of plaintiffs.
The amended filing claims that several EMAC employees had repeatedly complained to Koch about the lending practices of EMAC's then President and Chief Executive Officer Kenneth Saverin.
Further, according to the filing, ING analyst Ted Naeckel was assured of EMAC's "strong sponsorship from Koch, which included double underwriting,' [and was told] that Koch performed a second level of underwriting on proposed loans approved after EMAC had completed its purportedly stringent loan acceptance process."
Koch's counsel is Skadden, Arps, Slate, Meagher & Flom. EMAC is represented by Weil Gotshal & Manges.
The initial complaints against EMAC are founded on the allegation that the company was propping its securitizations by subsidizing certain borrowers, allowing them to stay current so that the company could continue to securitize, therefore defrauding investors. It is alleged that EMAC was lending recklessly and in contrast to stated underwriting practices, often to parties personally affiliated with the underwriters or other EMAC employees.
The amended lawuist also alleges that EMAC was using shell companies to dispose of nonperforming loans and properties.
There is approximately $900 million in outstanding EMAC bonds from three transactions that closed between 1998 and 2000. According to Street research, more than one-third of the outstanding balance on the EMAC securitizations is delinquent. All of the classes initially rated triple-A have fallen below investment grade.