“As alleged in the complaint, this is not a case of of ‘failure to predict’ riskiness or future mortgage market downturns but [an] instance where loans were internally known to be of poor quality, inadequately reviewed, improperly described, and highly risky at the time they were purchased,” Judge Sweet wrote. “Because the issue in this action is what the defendants knew and when they knew it, a securities violation has been adequately pled.”
The plaintiffs alleged that E-Trade misled investors about its mortgage loan business, which at one time was its most profitable unit. They claim that instead of following a conservative approach of originating and acquiring high-quality loans–which is what it told investors it was doing–E-Trade was actually buying up loans from subprime lenders like Countrywide and National City. When the subprime market started to tank, E-Trade continued to tell investors that its securities were rated AAA. But through piecemeal disclosures, the truth started to come out. When E-Trade finally disclosed a $185.5 million write-down on its mortgage investments in November 2007, the company’s stock dropped 58 percent.
