FILED: NEW YORK COUNTY CLERK 05/18/ :48 PM INDEX NO /2014 NYSCEF DOC. NO. 67 RECEIVED NYSCEF: 05/18/2015

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1 FILED NEW YORK COUNTY CLERK 05/18/ PM INDEX NO /2014 NYSCEF DOC. NO. 67 RECEIVED NYSCEF 05/18/2015 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK x AMBAC ASSURANCE CORPORATION, and THE SEGREGATED ACCOUNT OF AMBAC ASSURANCE CORPORATION, -vs.- Plaintiff, COUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE SECURITIES CORP., COUNTRYWIDE FINANCIAL CORP., and BANK OF AMERICA CORP. Defendants x Index No /2014 Hon. Marcy S. Friedman IAS Part 60 Motion Seq. No. 001 Oral Argument Requested REPLY MEMORANDUM OF LAW IN SUPPORT OF THE COUNTRYWIDE DEFENDANTS MOTION TO DISMISS THE COMPLAINT SIMPSON THACHER & BARTLETT LLP Mary Kay Vyskocil Joseph M. McLaughlin David W. Ichel Kelly E. Mannion 425 Lexington Avenue New York, New York Telephone (212) GOODWIN PROCTER LLP Brian D. Hail The New York Times Building 620 Eighth Avenue New York, New York Telephone (212) David J. Apfel Dahlia S. Fetouh Exchange Place 53 State Street Boston, MA Telephone (617) Attorneys for Defendants Countrywide Home Loans, Inc., Countrywide Securities Corp., and Countrywide Financial Corp.

2 TABLE OF CONTENTS PRELIMINARY STATEMENT... 1 ARGUMENT... 3 I. Ambac Has Failed to Plead Justifiable Reliance as a Matter of Law... 3 A. Ambac Must Demonstrate Justifiable Reliance; New York Insurance Law Section 3015 Does Not Apply Here... 3 B. Ambac Failed to Use the Means Available to It to Verify Loan-Level Data Ambac s General Due Diligence Practices Do Not Constitute a Reasonable Investigation Ambac Failed to Conduct Loan-Level Due Diligence Ambac Failed to Use Contemporaneous Market Data to Verify Loan-Level Data Ambac s Diligence Failures Are Even More Inexcusable Because It Was Alerted to the Risk of Inaccurate or Unreliable Information C. Ambac Did Not Secure Written Assurances as to Loan Quality II. Ambac Cannot Seek Rescissory Damages CONCLUSION i

3 TABLE OF AUTHORITIES Cases Abrahami v. UPC Constr. Co., 224 A.D.2d 231 (1st Dep t 1996)... 6 ACA Fin. Guar. Corp. v. Goldman, Sachs & Co., 106 A.D.3d 494 (1st Dep t 2013)... 2, 3 ACA Fin. Guar. Corp. v. Goldman, Sachs & Co., 2015 N.Y. Slip Op , 2015 WL (May 7, 2015)... 3, 13 Allstate Ins. Co. v. Credit Suisse Sec. (USA) LLC, 2 Misc. 3d 1220(A), 2014 N.Y. Slip Op (U) (Sup. Ct., N.Y. County 2014) Ambac Assurance Corp. v. DLJ Mortg. Capital, Inc., 33 Misc. 3d 1208(A), 2011 N.Y. Slip Op (U) (Sup. Ct., N.Y. County 2011) Ambac Assurance Corp. v. EMC Mortg. LLC, 39 Misc. 3d 1240(A), 2013 N.Y. Slip Op 50954(U) (Sup. Ct., Kings County 2013) Ambac Assurance Corp. v. First Franklin Fin. Corp., 40 Misc. 3d 1214(A), 2013 N.Y. Slip Op (U) (Sup. Ct., N.Y. County , 6, 13 Assured Guar. Mun. Corp. v. DLJ Mortg. Capital, Inc., 44 Misc. 3d 1206(A), 2014 N.Y. Slip Op (U) (Sup. Ct., N.Y. County 2014) Assured Guar. Mun. Corp. v. RBS Secs., Inc., No. 13 Civ (JGK), 2014 WL (S.D.N.Y. May 8, 2014) Centro Empresarial Cempresa S.A. v. Am. Movil, S.A.B. de C.V, 17 N.Y.3d 269 (2011) CIFG Assurance N. Am., Inc. v. Goldman Sachs & Co., 106 A.D.3d 437 (1st Dep t 2013) CIFG Assurance N. Am., Inc. v. Goldman Sachs & Co., No /2011, 2012 WL (Sup. Ct., N.Y. County May 1, 2012) DDJ Mgmt. LLC v. Rhone Grp. LLC, 15 N.Y.3d 147 (2010)... 1, 12 ii

4 Global Minerals & Metals Corp. v. Holme, 35 A.D.3d 93 (1st Dep t 2006)... 1 HSH Nordbank AG v. UBS AG, 95 A.D.3d 185 (1st Dep t 2012)... 2, 4, 10 Leon v. Martinez, 84 N.Y.2d 83 (1994)... 7 MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 105 A.D.3d 412 (1st Dep t 2013)... 3 MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 39 Misc. 3d 1220(A), 2013 N.Y. Slip Op (U) (Sup. Ct., N.Y. County 2013)... 5, 6, 7, 12 MBIA Ins. Corp. v. J.P. Morgan Sec. LLC, 45 Misc. 3d 1202(A), 2014 N.Y. Slip Op (U) (Sup. Ct., N.Y. County 2014)... 4 MBIA Ins. Corp. v. Morgan Stanley, 42 Misc. 3d 1213(A), 2011 N.Y. Slip. Op (U) (Sup. Ct., Westchester County 2011)... 7 Permasteelisa, SPA v. Lincolnshire Mmgt., Inc., 16 A.D.3d 352 (1st Dep t 2005) Phoenix Light SF Ltd. v. Goldman Sachs Grp., Inc., 43 Misc. 3d 1233(A), 2014 N.Y. Slip Op (U) (Sup. Ct., N.Y. County 2014)... 8 Skillgames, LLC v. Brody, 1 A.D.3d 247 (1st Dep t 2003)... 7 Syncora Guar. Inc. v. Alinda Capital Partners LLC, No /2012 WL (Sup. Ct., N.Y. County July 1, 2013)... 7, 8 Syncora Guar. Inc. v. EMC Mortg. LLC, No /2012, 2013 WL (Sup. Ct., N.Y. County Aug. 21, 2013) VisionChina Media Inc. v. S holder Representative Servs., LLC, 109 A.D.3d 49 (1st Dep t 2013)... 4 Other Authorities N.Y. Ins. L iii

5 Countrywide respectfully submits this reply memorandum of law in further support of its motion to dismiss Ambac s Complaint. 1 PRELIMINARY STATEMENT Ambac does not deny that New York law imposes an affirmative duty on sophisticated actors to protect themselves from misrepresentations... by investigating the details of the transaction[ ]. Global Minerals & Metals Corp. v. Holme, 35 A.D.3d 93, 100 (1st Dep t 2006). Ambac does not deny that it performed zero loan-level due diligence prior to insuring the Securitizations at issue in exchange for millions of dollars in premiums. Nor does Ambac deny that it did not go through the trouble to insist on a written representation from Countrywide regarding the loans backing the Securitizations. DDJ Mgmt. LLC v. Rhone Grp. LLC, 15 N.Y.3d 147, 154 (2010). A sophisticated commercial party providing financial guaranty insurance for a $1.68 billion transaction cannot be heard in fraud where it neither conducted its own due diligence nor obtained written warranties covering potential misrepresentations. This is particularly true where the party is alerted to the risk that the information on which it relies may be inaccurate or unreliable. Here, Ambac was on notice of various loan risk factors, including the heightened risk of borrower fraud, inaccurate appraisals, and adverse negative amortization loan performance. Yet Ambac did not inquire further of Countrywide; in fact, the Complaint alleges no pre-closing communications whatsoever with Countrywide concerning the seven Securitizations that Countrywide played no role in underwriting. Further, the Complaint conclusively establishes that even without inquiry to Countrywide, Ambac could have discovered the alleged misrepresentations by checking information readily available in its 1 Capitalized terms not defined herein shall have the same meaning set forth in the Memorandum of Law in Support of the Countrywide Defendants Motion to Dismiss the Complaint ( Br. ), dated February 20, 2015.

6 files against market data. Ambac s Opposition Brief ( Opp. Br. ) does not demonstrate otherwise. This concession alone warrants dismissal of the Complaint. See HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, (1st Dep t 2012). Under the weight of New York authority dismissing fraud claims by sophisticated plaintiffs on justifiable reliance grounds, Ambac s fraud claim must be dismissed here. See Br. at 16. Ambac s arguments in opposition are unavailing, and do not preclude dismissal First, Ambac mistakenly contends that New York Insurance Law 3105 does not require it to demonstrate justifiable reliance on its common-law fraud claim for monetary damages. The First Department has made clear that the justifiable reliance requirement applies here. See, e.g., ACA Fin. Guar. Corp. v. Goldman, Sachs & Co., 106 A.D.3d 494, (1st Dep t 2013), rev d on other grounds, 2015 N.Y. Slip Op (May 7, 2015). Second, Ambac s purported due diligence practices from cannot establish justifiable reliance here. Its generalized on-site due diligence visits to Countrywide untied to the Securitizations at issue and its projection of modeled losses on the Securitizations do not constitute a reasonable investigation of the transactions. Ambac points to no court decision sustaining a sophisticated plaintiff s fraud claim on such tenuous grounds. Third, Ambac is incorrect that its supposed reliance on R&Ws that Countrywide made to non-parties, years before the Securitizations closing, precludes granting Countrywide s motion. Ambac did not insist upon written warranties covering the pre-closing loan tape data. And neither was Ambac party to, nor beneficiary of, the contracts in which Countrywide made loan-level R&Ws. Ambac s untenable position that a sophisticated monoline insurer may simply, in Ambac s words, look to these prior R&Ws in lieu of examining any loan-level data 2

7 at the time of insuring billion-dollar transactions years later undermines the very principle of justifiable reliance. Ambac s Complaint must be dismissed. ARGUMENT I. Ambac Has Failed to Plead Justifiable Reliance as a Matter of Law A. Ambac Must Demonstrate Justifiable Reliance; New York Insurance Law Section 3015 Does Not Apply Here Ambac argues that New York Insurance Law Section 3105 eschews the element of justifiable reliance[.] Opp. Br. at 13 (citing MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 105 A.D.3d 412 (1st Dep t 2013)). This is incorrect. The MBIA opinion observed only that a trial court is not required to ignore the insurer/insured nature of the relationship between the parties it did not hold that Insurance Law 3105 entirely supplants the well-established common-law requirements for a fraud claim. See 105 A.D.3d at 412. In fact, MBIA does not address the reliance requirement for a fraud claim at all. Id. And since MBIA, the First Department has continued to apply the justifiable reliance requirement in the insurance context. See, e.g., ACA Financial, 106 A.D.3d at 497. The Court of Appeals similarly continues to analyze a plaintiff-monoline insurer s fraudulent inducement claim by reference to common-law justifiable reliance principles. See ACA Fin. Guar. Corp. v. Goldman, Sachs & Co., 2015 N.Y. Slip Op , 2015 WL (May 7, 2015). Moreover, by its plain language, Insurance Law 3105 applies only to rescission claims. See N.Y. Ins. L ( No misrepresentation shall avoid any contract of insurance or defeat recovery thereunder unless such misrepresentation was material. ). Specifically, 3105 applies where the insurer attempts to avoid i.e., to rescind the insurance contract, or to defeat recovery thereunder i.e., to assert a defense against a policyholder claim. It plainly 3

8 does not apply to Ambac s common-law fraud claim to recover compensatory damages. 2 Ambac must prove justifiable reliance under New York common law to prevail in this action. Br. at 15. B. Ambac Failed to Use the Means Available to It to Verify Loan-Level Data Ambac has not shown (and cannot show) that it justifiably relied on Countrywide s alleged misrepresentations. The Complaint must therefore be dismissed under clear First Department precedent. See VisionChina Media Inc. v. S holder Representative Servs., LLC, 109 A.D.3d 49, 57 (1st Dep t 2013) ( Sophisticated investors must show they used due diligence and took affirmative steps to protect themselves from misrepresentations by employing what means of verification were available at the time. ); HSH Nordbank, 95 A.D.3d at (same). 1. Ambac s General Due Diligence Practices Do Not Constitute a Reasonable Investigation In opposition, Ambac contends that it did use the means available to it to investigate Countrywide s operations, the Transactions, and the Transaction loans. Opp. Br. at 15. But Ambac s arguments about its due diligence do not withstand scrutiny. First, nothing in Ambac s Complaint or Opposition suggests that Ambac investigate[d]... the Transaction Loans. Ambac still does not connect its alleged operational due diligence visits throughout to the specific Securitizations at issue; indeed, Ambac s complaints in its other two lawsuits against Countrywide make reference to the exact same visits. See Br. at 12, n.18. With respect to its modeling, Ambac suggests it used two 2 Even if Insurance Law 3105 informs Ambac s fraud claim, it bears only on the materiality element, not on justifiable reliance. See MBIA Ins. Corp. v. J.P. Morgan Sec. LLC, 45 Misc. 3d 1202(A), 2014 N.Y. Slip Op (U), at *11 (Sup. Ct., N.Y. County 2014) ( There is nothing in Insurance Law Section 3015 that dispenses with, or alters, the common law requirement that an insurer must show reliance upon the claimed misrepresentation in a fraud action. ). 4

9 different loan models to determine whether the Transactions provided adequate loss coverage[.] Opp. Br. at 17. But the modeling of transaction structure (based on unverified loan tape data) is not an investigation into the underlying Transaction Loans. 3 Ambac similarly refers to scrutiny of third-parties assessments of the Securitizations. Id. at 15. But Ambac does not allege that it scrutinized, for example, any assessment made by a due diligence vendor or outside auditor of the Securitizations. Rather, Ambac merely looked to the shadow credit ratings provided by Moody s and S&P for an outside opinion[.] Id. at 17. Reading the shadow rating provided on a securitization is not scrutiny and, in any event, does not constitute investigation of the underlying loan collateral. Ambac s feeble argument cannot be credited. Second, Ambac inappropriately relies on two cases to argue that its diligence practices (i.e., visiting Countrywide on occasion throughout , modeling the transaction structure, and looking to shadow credit ratings) is the sort of diligence courts have routinely found sufficient to show justifiable reliance. Id. at Ambac conveniently omits the other bases on which these courts found a demonstration of justifiable reliance. First, in Ambac Assurance Corp. v. First Franklin Financial Corp., 40 Misc. 3d 1214(A), 2013 N.Y. Slip Op (U) (Sup. Ct., N.Y. County 2013, the court emphasized that Ambac also requested access to sample loan files on at least two occasions and reviewed a third-party vendor s due diligence [report] of 1,968 loans in the Transaction. Id. at *8. Similarly in MBIA Insurance Corp. v. Countrywide Home Loans, Inc., 39 Misc. 3d 1220(A), 2013 N.Y. Slip Op (U) (Sup. Ct., N.Y. County 2013), the court highlighted that MBIA also reviewed results of loan- 3 Even if Ambac s modeling analyses provided Ambac with information about the individual mortgage loans, it is apparent that Ambac did not rely on such information. Ambac s own Complaint evidences that Ambac employees took only one day to receive the loan tape from Goldman Sachs, run the models, and prepare the credit approval memorandum recommending that Ambac insure the CWALT deal. See Compl ; Br. at 12. 5

10 level credit and compliance reviews performed by Countrywide s third-party due diligence providers. Id. at *7. Here, Ambac does not allege that it performed any diligence of this nature. Significantly, moreover, the monoline insurers in these cases took these verification steps even where, unlike here, they had obtained written R&Ws from the defendant. See First Franklin, 2013 N.Y. Slip Op (U) at *9 10 (noting that Ambac negotiated for express contractual R&Ws in an insurance and indemnity agreement with defendant which warrant[ed] the accuracy of information provided to Ambac ); MBIA, 2013 N.Y. Slip Op (U) at *6 (highlighting the express representations and warranties [MBIA] obtained from Countrywide regarding the characteristics of the loans ). Here, by contrast, Ambac neither verified the accuracy of the loan-level data it purportedly relied upon nor bargained for applicable warranties. Its general visits to Countrywide throughout and its modeling of transaction structure cannot satisfy its affirmative duty to protect itself from potential misrepresentation. See Abrahami v. UPC Constr. Co., 224 A.D.2d 231, 234 (1st Dep t 1996) (emphasizing the duty to conduct an independent appraisal of the assumed risk). 2. Ambac Failed to Conduct Loan-Level Due Diligence Ambac does not dispute that, as detailed in the Opening Brief, it wholly failed to perform or review any diligence on the specific loans underlying the Securitizations. Br. at Contrary to customary practice in the RMBS market and contrary to Ambac s statements to the investing public Ambac did not independently review loan files, hire a diligence vendor to evaluate loan tape data integrity, or request a sample loan audit to determine compliance with Countrywide s underwriting guidelines for the Securitizations. See id. at 10 12, Perhaps most significantly, Ambac s Complaint acknowledges that the Securitization underwriters typically commissioned due diligence reviews of their own, see Compl. 180, yet Ambac does not allege that it ever requested or reviewed any such due diligence report here. 6

11 Unable to dispute its clear lack of diligence on the underlying loans, Ambac contends that it was not required to reunderwrite loan files as a matter of law. Opp. Br. at 13, This argument misses the mark. Ambac s failure was not only that it declined to reunderwrite loan files; it also failed to take any affirmative step to verify (or otherwise secure warranty protection on) the loan-level data on which it purportedly relied. This failure is fatal to Ambac s fraud claim. Ambac s cited authorities, Opp. Br. at 22 23, do not hold otherwise. In MBIA v. Countrywide, for example, the court held that plaintiff s failure to review individual loan files did not render its reliance unreasonable as a matter of law where MBIA also, among other things, reviewed loan-level due diligence reports and obtained R&Ws covering the loans. MBIA, 2013 N.Y. Slip Op (U) at *7 8; see also MBIA Ins. Corp. v. Morgan Stanley, 42 Misc. 3d 1213(A), 2011 N.Y. Slip. Op (U), at *3 4 (Sup. Ct., Westchester County 2011) (emphasizing that defendant provided R&Ws directly to MBIA). Similarly, in the Syncora case Ambac cites, plaintiff-bond insurer entered into an agreement to insure defendant s bond offering to finance a public toll road. Syncora Guar. Inc. v. Alinda Capital Partners LLC, No /2012, 2013 WL , at *2 (Sup. Ct., N.Y. County July 1, 2013). In that agreement, defendant represented to Syncora that the bond offering memorandum did not... omit to state 4 Ambac also contends that it did not have pre-closing access to loan files. But Ambac admits that it did not affirmatively plead a lack of access to loan files in its Complaint. Opp. Br. at 23. Ambac s belated assertion in its Opposition that it had no pre-closing right to loan files does not cure Ambac s affirmative pleading defect. See Leon v. Martinez, 84 N.Y.2d 83, 88 (1994). And, in any event, Ambac s contention that Countrywide stymied Ambac s requests for loan files (made only after Ambac started to pay claims), Compl , is facially implausible. The transaction documents indicate that Ambac s right of access to the loan files was through the trustees or their designated custodians, not Countrywide. See Br. at 11, nn This Court need not credit implausible contentions. Skillgames, LLC v. Brody, 1 A.D.3d 247, 250 (1st Dep t 2003) (On a motion to dismiss, factual allegations that... are inherently incredible or clearly contradicted by documentary evidence are not entitled to such consideration. ). 7

12 any material fact required to be stated. Id. at *3, *9. That offering memorandum incorporated the promising traffic and revenue forecasts of a purportedly neutral consultant. Id. at *2. Syncora later discovered that defendant paid the consultant success fees for its forecasts, and sued in fraud. The court held that, under its agreement with defendant, Syncora was entitled to rely on the consultant s forecasts and need not conduct independent diligence on the consultant. Id. at *10. Notably, the court drew an explicit distinction between transactors, sellers of securities and assets of and from whom the law requires independent diligence and/or warranty protection in order to recover in fraud and consultants, accountants, or other experts. Id. at *9 10; * Here, Ambac did not enter into an agreement with Countrywide wherein Countrywide represented the accuracy of the Securitizations prospectus supplements to Ambac. Nor was Countrywide a consultant, account, or other expert in any sense of the word. Syncora only reinforces the principle that New York law bars Ambac s fraud claim where it conducted no independent diligence of the Securitizations. As explained in the Opening Brief, the Phoenix Light case is squarely on point here. Br. at 22. Ambac s attempt to distinguish it is unavailing. The Phoenix Light court dismissed an institutional investor s fraud claim, holding that [i]t does not matter if the failure to seek this [loan-level] information was because of blind faith in the process of origination and/or securitization, or if it was attributable to the desire to quickly get on board of what the investors thought was a profitable bandwagon, the obligation of a sophisticated investor to inquire cannot be merely excused. Phoenix Light SF Ltd. v. Goldman Sachs Grp., Inc., 43 Misc. 3d 1233(A), 2014 N.Y. Slip Op (U), at *6 7 (Sup. Ct., N.Y. County 2014). Ambac attempts to distinguish Phoenix Light on the grounds that plaintiff there did not review loan files, and also failed to plead either reliance on representations or warranties or due diligence 8

13 efforts of some other kind. Opp. Br. at 24 (emphasis omitted). But the Phoenix Light hearing transcript (which Ambac attaches in opposition) belies Ambac s assertion. Just like Ambac, the Phoenix Light plaintiff attempted to argue that it receive[d] information on the loans in the form of loan tapes [and prospectus supplements] and relied on the mere understanding that the loan characteristics were subject to written reps and warranties. See Opp. Br. Ex. 2 at (emphasis added). And (unlike Ambac), it allegedly hir[ed] [its] investment managers, to analyze characteristics of the loans[.] See id. In response to these arguments, the Phoenix Light court noted that plaintiff essentially... made no inquiry, id. at 14, rejecting the notion that a sophisticated purchaser can buy hundreds of millions of dollars worth of a product and not ask a meaningful question about it and still recover in fraud. Id. at These same principles apply here and bar Ambac s fraud claim where it never bothered to diligence a product on which it placed an irrevocable $1.68 billion guaranty. 3. Ambac Failed to Use Contemporaneous Market Data to Verify Loan- Level Data As explained in the Opening Brief, Ambac s own Complaint establishes that it could have uncovered Countrywide s alleged misrepresentations through reference to public records and the use of an industry-standard AVM. See Br. at Ambac backtracks in opposition, claiming that the proprietary software that Ambac s third-party vendor used to analyze the loans was not available until years [after the Securitizations closed]. Opp. Br. at 25. This claim is inapposite. Ambac did not need a specialized algorithm to identify[] the specific loans underlying the Securitizations. Opp. Br. Ex. 3 at 8, 11. Ambac knew this information; it had access to the names of individual borrowers and the addresses of the mortgaged properties from the loan tapes and mortgage loan schedules a point Ambac does not dispute. See Br. at 14 & n.19. Further, Ambac did not need a particular tool developed in 2010 to conduct its 9

14 appraisal and LTV analyses; AVMs were readily available in the marketplace at the time Ambac decided to insure the Securitizations, as evidenced by the fact that they are referenced throughout the transaction documents. See, e.g., Opp. Br. Ex. 5 (CWALT Pro Supp.) at S-22 (discussing use of an automated property value system); Opp. Br. Ex. 8 (Lehman XS N Pro Supp.) at S-69 ( In some cases, an automated valuation model (AVM) may be used in lieu of an appraisal. ). Furthermore, as a sophisticated insurer with assets of $20 billion, Ambac could have conducted or outsourced this low-cost analysis prior to closing. Any claim that this investigation (or any other) would be difficult or impractical does not foreclose dismissal of Ambac s Complaint. See HSH Nordbank, 95 A.D.3d at 195; cf. MBIA Ins. Corp. v. Merrill Lynch, 81 A.D.3d 419, 419 (1st Dep t 2011) ( Given their level of sophistication and the undisputed fact that the information was not exclusively in defendants possession, plaintiffs contention that it would have been impractical to conduct the investigation necessary to discern the truth of defendants allegedly fraudulent representations does not satisfy the requirements of the peculiar knowledge exception ). 5 Ambac s admitted failure to use contemporaneous market data and tools to investigate the underlying loans precludes its fraud claim under HSH Nordbank. See 95 A.D.3d at 195 (requiring dismissal where the true nature of the risk being assumed could have been ascertained from reviewing market data or other publicly available information ). Ambac s attempts to distinguish HSH Nordbank, Opp. Br. at 25 26, are unavailing. As demonstrated above and in the Opening Brief, the information at issue was contemporaneous data. Further, just as CDO market participants in HSH knew about the practice 5 In a footnote, Ambac argues that the alleged misrepresentations were within Countrywide s peculiar knowledge. Opp. Br. at 15 n.9. This is a non-starter, belied by Ambac s own Complaint and forensic analysis undertaken without resort to loan files. See Br. at

15 of ratings arbitrage, so RMBS market participants were aware of the practice of non-full documentation and exception loan origination. See, e.g., Ex. J.2, J.6 (applicable prospectus supplement disclosures). 6 And, similar to plaintiff in HSH Nordbank, Ambac disclaimed reliance on any information not contained in the Securitizations prospectus supplements seven out of eight of which were prepared by non-party underwriters. Ex. J.8; Br. at Ambac s Diligence Failures Are Even More Inexcusable Because It Was Alerted to the Risk of Inaccurate or Unreliable Information It is well settled that when the party to whom a misrepresentation is made has hints of its falsity, a heightened degree of diligence is required of it. Centro Empresarial Cempresa S.A. v. Am. Movil, S.A.B. de C.V, 17 N.Y.3d 269, 279 (2011). While Ambac may be correct that, [o]n their own, hints of falsity are not enough to warrant granting a motion to dismiss[,] Opp. Br. at 20, the presence of these hints bears on the reasonableness of a sophisticated plaintiff s affirmative steps to investigate the subject transaction. Ambac identifies no such steps, despite its awareness of transaction risk and its assumption of unconditional and irrevocable responsibility for the performance of the securitized loan pools. In fact, Ambac disclaimed reliance on any representation not contained in the prospectus supplements the very documents that put Ambac on notice of various loan origination and performance risks. It was thus unreasonable for Ambac to rely on Countrywide s alleged oral representations throughout , particularly so because these oral representations were untethered to the specific Securitizations at issue. 7 6 Ex. refers to the exhibits attached to the Affirmation of Christina A. Hoffman in Support of the Countrywide Defendants Motion to Dismiss, dated February 20, Ambac s Opposition, like its Complaint, does not point to any misstatement specifically tied to the Securitizations at issue. And significantly, Ambac does not deny that alleged misstatements about Countrywide s fully-amortizing PayOption ARM loan product do not apply here based on clear statements in the prospectus supplements. See Br. at

16 Ambac s failure to diligence the Securitizations because it [took] comfort in Countrywide s reputation, Opp. Br. at 17, is plainly inexcusable. The prospectus supplements were replete with disclosures regarding borrower quality, negative amortization loans, expanded underwriting guidelines and exception loan processes, as well as the associated risks of borrower fraud and inaccurate or inflated appraisals. See Br. at & Ex. J; cf. Ambac Assurance Corp. v. DLJ Mortg. Capital, Inc., 33 Misc. 3d 1208(A), 2011 N.Y. Slip Op (U), at *7 10 (Sup. Ct., N.Y. County 2011) (ruling that similar alleged misrepresentations were specifically contradicted by warnings in the offering documents), rev d in part on other grounds, 102 A.D.3d 487 (1st Dep t 2013). At the very least, these disclosures triggered Ambac s duty to investigate the Securitizations. See Permasteelisa, SPA v. Lincolnshire Mmgt., Inc., 16 A.D.3d 352, 352 (1st Dep t 2005). Ambac s willful choice not to investigate bars its fraud claim. Id. C. Ambac Did Not Secure Written Assurances as to Loan Quality In lieu of this further investigation, Ambac claims that it looked to written R&Ws Countrywide made about the securitized loans, seeking to invoke the Court of Appeals decision in DDJ to guard against dismissal. Opp. Br. at This argument is meritless. The plain language of DDJ makes clear that a plaintiff must affirmatively secure warranty protection not passively look to the warranties secured by others to take advantage of the DDJ exception. See DDJ Mgmt., 15 N.Y.3d at 154 (noting that where a plaintiff has gone to the trouble to insist on a written representation that certain facts are true, it may be justified in accepting that representation instead of making further inquiry) (emphasis added); 8 see also, e.g., MBIA v. Countrywide, 2013 N.Y. Slip Op (U) at *8 (noting that, 8 Ambac s reading of DDJ, Opp. Br. at 27, ignores the fact that plaintiff there itself took the steps to obtain the applicable warranties, albeit from a non-party affiliate of defendants. See 15 N.Y.3d at 153,

17 under DDJ, MBIA made a significant effort to protect itself by obtaining [R&Ws] ). Despite professing an extensive course of dealing with Countrywide, Opp. Br. at 29, Ambac never sought to guarantee the accuracy of the loan-level data and offering documents it received from the Securitization underwriters, or even to question Countrywide about its origination practices for these specific Securitizations. Ambac did not insist on written assurances or otherwise make a significant effort to protect itself here. Each of Ambac s cited authorities is distinguishable on these grounds. In Ambac v. First Franklin, Ambac separately negotiated for express R&Ws in an insurance contract with the defendant N.Y. Slip Op (U) at *9. In CIFG Assurance North America, Inc. v. Goldman Sachs & Co., the plaintiff-insurer had the right to rely on defendant-originator s loanlevel R&Ws restated in a separate contract to which plaintiff was an express beneficiary. See No /2011, 2012 WL , at *2, 5 6 (Sup. Ct., N.Y. County May 1, 2012). 9 And in Ambac Assurance Corp. v. EMC Mortgage LLC, as an express third-party beneficiary to the relevant contracts, Ambac could rely on defendant-sponsor s written representations guaranteeing the accuracy of the mortgage loan information described in the prospectus supplements (prepared and issued by affiliated defendant-underwriter). See 39 Misc. 3d 1240(A), 2013 N.Y. Slip Op 50954(U) at *2, 7 (Sup. Ct., Kings County 2013). None of these circumstances apply here Unlike here, plaintiff in CIFG also conducted an independent investigation of the underlying loan collateral. See 106 A.D.3d 437 (1st Dep t 2013). 10 These cases, and Ambac s admitted extensive history with Countrywide, make clear that there was ample opportunity for Ambac to negotiate a written restatement of warranties for Ambac s express or intended benefit. There were multiple contracts in which Ambac could have requested the insertion of prophylactic language, unlike in ACA Financial. See 2015 N.Y. Slip Op at *2 3. Further distinguishing ACA Financial, Ambac points to no specific inquiry over which it sought assurances and received, instead, an affirmative misrepresentation. Id. 13

18 Ambac instead claims passive (unjustifiable) reliance on R&Ws Countrywide made to non-parties in contracts dated, in some instances, years before the Securitizations closing contracts to which Ambac was neither a party nor the actual, intended, or expected beneficiary of these undertakings. See Br. at 8 10, Ambac does not dispute that Countrywide made no R&Ws to Ambac. Rather, Ambac reads DDJ to hold that, so long as a plaintiff is aware that a defendant made R&Ws to someone, at some point in time, it is entitled to rely on them in lieu of an independent investigation. Opp. Br. at But this cannot be the case. Ambac points to no decision endorsing this position; indeed, such a rule undermines the very principle of justifiable reliance. Contrary to Ambac s contention, this Court never heeded DDJ s caution or made a conclusion that the mere presence of R&Ws and a contractually-defined repurchase protocol can sustain a sophisticated plaintiff s fraud claim stemming from an RMBS transaction. See id. at 27 (citing to two different parts of this Court s decision in Allstate Ins. Co. v. Credit Suisse Sec. (USA) LLC, 2 Misc. 3d 1220(A), 2014 N.Y. Slip Op (U) (Sup. Ct., N.Y. County 2014)). The Phoenix Light court, in fact, rejected such a position. See Opp. Ex. 2 at 12. This Court should do the same. Finally, even crediting Ambac s untenable position that the mere presence of prior Countrywide R&Ws to other parties brought it within the DDJ exception, Ambac still cannot establish justifiable reliance in this case. Like the plaintiff in Syncora Guaranty v. EMC, Ambac was on notice as to the riskiness of the Transaction, yet it conducted no due diligence on the subject securitizations. Syncora Guar. Inc. v. EMC Mortg. LLC, No /2012, 2013 WL , at *3 4 (Sup. Ct., N.Y. County Aug. 21, 2013). As in Syncora, the presence of written R&Ws does not preclude dismissal where Ambac, a sophisticated insurer, so recklessly failed to investigate a transaction involving risky RMBS collateral and expanded underwriting guidelines. 14

19 In sum, unlike in other RMBS actions that have survived the motion to dismiss stage, Ambac here neither bothered to diligence the Securitizations nor bargained for applicable warranties. Its Complaint must be dismissed. See Assured Guar. Mun. Corp. v. DLJ Mortg. Capital, Inc., 44 Misc. 3d 1206(A), 2014 N.Y. Slip Op (U), at *5 (Sup. Ct., N.Y. County 2014) (dismissing monoline plaintiff s fraud claim where it did not [c]onduct due diligence or procure sufficient prophylactic coverage to protect against [its] undiligenced risk ). II. Ambac Cannot Seek Rescissory Damages Ambac s demand for all past and future claims payments must be dismissed under clear First Department precedent. See Br. at 29. Courts squarely reject the argument, advanced by Ambac here, that this demand is not the equivalent of rescissory damages. See, e.g., Assured Guar. Mun. Corp. v. RBS Secs., Inc., No. 13 Civ (JGK), 2014 WL , at *2 (S.D.N.Y. May 8, 2014) (on reconsideration from a motion to dismiss, dismissing claims payment damages as the economic equivalent of rescission despite plaintiff s compensatory damages label); Opp. Br. at 30. As in Assured, this Court may and should dismiss Ambac s damages claim at this stage. As explained in the Opening Brief, Ambac s damages, if any, must be limited to the percentage of claims attributable to loans (i) originated by Countrywide; 11 and (ii) proven to be fraudulently misrepresented. See Br. at CONCLUSION For the reasons explained in the Opening Brief and herein, Ambac s Complaint must be dismissed in its entirety. Alternatively, the Complaint must be dismissed to the extent it seeks rescissory damages. 11 Ambac s continuing claim that it has paid or expects to pay claims of over $600 million, Opp. Br. at 12, still does not distinguish between losses attributable to Countrywideoriginated collateral (which, for four of the Securitizations, was less than half) versus third-party collateral underlying the Securitizations insured certificates. See Br. at

20