case 1:08-cv-08143-whp document 24 filed 02/20/2009 page 1...

Case 1:08-cv-08143-WHP Document 24 Filed 02/20/2009 of 88

UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK

xPLUMBERS & STEAMFITTERS LOCAL : Civil Action No. 1:08-cv-08143-WHP773 PENSION FUND, Individually and on :Behalf of All Others Similarly Situated, : CLASS ACTION

:Plaintiff, : CONSOLIDATED CLASS ACTION

: COMPLAINT FOR VIOLATIONS OFvs. : FEDERAL SECURITIES LAWS

:CANADIAN IMPERIAL BANK OF :COMMERCE, GERALD McCAUGHEY, :THOMAS D. WOODS, BRIAN G. SHAW, :and KEN KILGOUR, :

:Defendants.

: x


3. Prior to the Class Period, CIBC World Markets developed a reputation for venturing

into high-stakes business areas in pursuit of large returns. This resulted, however, in CIBC being

exposed to substantial risk. In 2005, after experiencing massive regulatory and litigation settlement

expenses related to CIBC’s involvement in the Enron scandal and actions by the New York Attorney

General and SEC regarding illegal mutual fund market timing, CIBC publicly claimed to embark

upon a new strategy to strengthen its risk management practices, pursuant to which CIBC would

operate as a conservative, low-risk institution.

4. Accordingly, at or about that time, CIBC promoted Defendant Gerald T. McCaughey

(“McCaughey”) from within the Company to President and Chief Executive Officer (“CEO”) of

CIBC. According to an article in The Globe and Mail published during the Class Period,

McCaughey’s promotion was supposed to signal a return to “your grandmother’s bank,” and “no

more fumbling after Wall Street glory, no more over-the-top-risk-taking.” The Globe and Mail

further reported that, in an attempt to create the appearance that CIBC was becoming the risk-free

bank promised to investors, Defendant McCaughey reduced the economic capital that CIBC gave to

World Markets by 50%. Up to that time, World Markets had been the riskiest part of CIBC.

5. Rather than reduce risk, however, the decrease in capital provided to World Markets

only served to increase the risk taken by CIBC. Specifically, with only half as much capital to

deploy in 2006, unbeknownst to investors and despite Defendants’ prior statements to the contrary,

Defendants were forced to engage in even riskier strategies in order to chase outsized returns. Those

strategies included placing massive bets on structured finance products, particularly products such as

collateralized debt obligations (“CDOs”), and residential mortgage-backed securities (“RMBS”)

linked to the so-called non-prime and subprime sectors of the U.S. real estate market (referred to at

times as “below-prime”).

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6. At or around this same time, in 2006, real estate appreciation began to decline and

interest rates started to rise. Shortly thereafter, the U.S. housing market began to suffer rising

defaults among non-prime and subprime borrowers, i.e., people either with weak credit histories or

who did not otherwise qualify for traditional prime mortgages. These borrowers purchased homes

with a variety of concocted mortgage products, most of which were at variable interest rates. By the

second half of 2006 and into early 2007, Defendants were well aware, through the financial press

and industry reports, that there was an impending “bloodbath” for mortgage-backed securities, in

particular, those mortgage-backed securities secured by the below-prime loans.

7. Indeed, by March 2007, there was so much information concerning the impending

market collapse that there was no longer any question about risk. Instead, the only question was

which institutions happened to be holding these structured securities? Unbeknownst to CIBC

investors at the time, World Markets had exposed CIBC to almost $12 billion in potential losses

from its investment in securities dependant on the riskiest sectors of U.S. real estate market. The

exposure included a high-concentration in securities collateralized by the non-prime and subprime

sectors of the U.S. real estate market.

8. From the time of CIBC’s initial investments in these mortgage-backed securities in

2006, 1 Defendants knew that these investments exposed CIBC to enormous risk, and either knew or

were extremely reckless in not knowing (based on the information readily available to them) that

CIBC’s mortgage-backed securities were in substantial and imminent danger of impairment.

Nonetheless, Defendants repeatedly told investors prior to and even after CIBC was forced to reveal

1 Defendant McCaughey’s knowledge of the true risks facing CIBC is without question as of atleast June 2007, based on the investigation he conducted of the situation, and the report he made toCIBC’s Board thereon.

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that it was exposed to some mortgage-backed securities risk, that the Company’s exposure was “not

a major risk issue” and that management had taken “conservative” provisions in this regard. As

CIBC’s investors would eventually learn, Defendants’ representations were blatantly false and

misleading.

9. This lawsuit alleges that Defendants misled investors by falsely representing that

CIBC had “de-risked” the bank following Enron and other scandals, and that CIBC’s exposure to

securities backed by the below-prime sectors of the U.S. real estate market was not a major risk

issue. Moreover, Defendants misrepresented and failed (refused) to accurately disclose CIBC’s total

exposure to those types of structured securities. Defendants’ false and misleading statements were

repeated throughout the Class Period in order to artificially inflate CIBC’s stock price in the midst of

rapidly rising mortgage defaults and a U.S. real estate market that continued to weaken.

10. The representations contained in CIBC’s press releases, SEC filings, conference calls,

news reports and presentations during the Class Period, as set forth in more detail herein, were

materially false and misleading when made because:

(a) Defendants placed a huge bet on very risky securities backed by the non-

prime and subprime sectors of the U.S. real estate market, exposing CIBC to almost $12 billion in

potential losses;

(b) Defendants did not accurately or timely disclose the amount of CIBC’s

investments in this arena or CIBC’s true exposure thereto;

(c) Defendants did not accurately or timely describe the nature of CIBC’s

investments in this arena;

(d) when outside forces eventually forced some disclosure, Defendants reluctantly

revealed (inadequately, and in a false and misleading manner), that CIBC had some unhedged

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exposure to securities related to the non-prime and subprime sectors of the U.S. real estate market.

However, Defendants still did not reveal that: (i) CIBC also had hedged exposure to other securities

in this arena that was nearly four times larger than its unhedged exposure; (ii) 35% of the

Company’s “hedged” exposure was entrusted with a “single A” rated and substantially

undercapitalized financial guarantor named ACA Financial Guaranty Corp. (“ACA”), which

Defendants knew or should have known could never – and did not – cover the risks it purportedly

“insured”; and (iii) a substantial portion of the remaining hedges were made with various other

guarantor counterparties, who were also in poor financial condition; and

(e) Defendants did not accurately or timely disclose material changes affecting

the valuation of the Company’s investments in U. S. mortgage-backed securities. When Defendants

did make disclosures, they misrepresented the then-current market values of the securities, and the

amount of impairment thereof. By failing to take the write-downs and charges it was required to

take, CIBC’s reported earnings were artificially inflated and CIBC’s Class Period financial

statements were misstated in violation of Generally Accepted Accounting Principles (“GAAP”).

11. On December 6, 2007, Defendants revealed for the first time that CIBC’s exposure to

structured securities backed by the below-prime sectors of the U. S. real estate market might be much

larger than they previously represented. On that date, CIBC issued a news release announcing its

2007 fourth quarter financial results, which stunned the financial markets. CIBC said its write-

downs related to unhedged structured securities backed by the troubled U.S. housing market had

already reached $1 billion, and revealed for the first time that CIBC had an additional $9.8 billion2 in

2 As a result of CIBC being a Canadian based company with U.S. offices, at times variousanalyst reports, articles, filings, complaints and other documentation on which the Complaint’sallegations are based may include either Canadian and/or U.S. dollar valuations.

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purportedly hedged exposure to structured securities related to the U.S. real estate market.

Notwithstanding, the Company continued to misrepresent that, because of the hedges, no significant

write-downs were foreseen because CIBC had adequate counterparty protection for the $9.8 billion

in mortgage-backed securities.

12. The December 6th announcement particularly came as a surprise in light of

Defendants’ repeated assurances on May 31, 2007 and thereafter that CIBC’s exposure to U.S.

mortgage-backed securities was “not a major risk issue.” CIBC’s shares fell 8.4% over the next two

trading days, from $85.83 to $78.59, on the news. This one in a series of revelations erased

approximately $2.5 billion of CIBC’s $30 billion in total market capitalization.

13. The Company made a series of additional announcements over the subsequent

months, revealing new write-downs from additional impairment to its mortgaged-backed securities

investments, and trickling out facts relating to its mortgage-backed securities positions and

counterparties. However, Defendants continued to misrepresent the true values of CIBC’s

investments in these structured securities, and misrepresented the true impairment thereof. Thus,

CIBC’s reported earnings and stock price remained artificially inflated, as the market, relying on

Defendants’ misrepresentations, believed that CIBC’s true financial condition was not as bad as it

actually was.

14. Indeed, it was not until May 29, 2008, that Defendants revealed the extent of CIBC’s

exposure and the true nature of CIBC’s investments in securities related to the U.S. real estate

market. On that date, CIBC announced its 2008 second quarter financial results. On top of the

billions of dollars in losses already incurred beginning in December 2007, CIBC announced an

additional $2.48 billion loss on its structured securities portfolio, and that more losses were yet to

come. The Company’s stock dropped to $70.20 from the prior day’s close of $71.59 on the news,

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despite a strong overall market day. CIBC’s stock continued to plummet, closing at $63.93 per share

on June 6, 2008 – a drop of more than 40% from CIBC’s Class Period high.

JURISDICTION AND VENUE

15. The claims asserted herein arise under and pursuant to Sections 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].

16. This Court has jurisdiction over the subject matter of this action pursuant to 28 U. S.C.

§1331 and Section 27 of the Exchange Act [15 U.S.C. §78aa].

17. Venue is proper in this District pursuant to Section 27 of the Exchange Act, and

28 U.S.C. §1391(b), as many of the acts and practices complained of herein occurred in substantial

part in this District, the public securities of CIBC are traded on a national securities exchange located

in this District. Moreover, CIBC’s World Markets U. S. Corporate Headquarters was located at 300

Madison Avenue, New York, New York, 10017, during the Class Period.

18. In connection with the acts alleged in this complaint, Defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to,

the mails, interstate telephone communications and the facilities of the national securities markets.

PARTIES

19. Plaintiff Plumbers & Steamfitters Local 773 Pension Fund (“Plumbers & Steamfitters

773 Pension Fund” or “Lead Plaintiff”) is the Court appointed Lead Plaintiff in this action. As set

forth in the certification previously filed with the Court, Lead Plaintiff purchased CIBC common

stock during the Class Period and was damaged thereby.

20. Defendant CIBC is a Canadian corporation, headquartered in the City of Toronto,

Province of Ontario. CIBC is a chartered Canadian Bank and a leading North American financial

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institution. Its registered head office is Commerce Court in the City of Toronto, Canada, and its

securities are traded on the NYSE and the TSX.

21. Defendant McCaughey is, and was during the Class Period, the President and CEO of

CIBC since August 2005 to the present. He briefly served as Chairman and CEO of CIBC World

Markets from February 2004, until December 2004, when he was appointed President and Chief

Operating Officer of CIBC. Prior to that, he was the Senior Executive Vice President, responsible

for Wealth Management in the Retail Markets division. As CEO, Defendant McCaughey certified

the accuracy, and Sarbanes-Oxley compliance, of CIBC’s Class Period financial reports, including:

the quarterly report for the period ended April 30, 2007, filed with the SEC on Form 6-K, the

quarterly report for the period ended July 31, 2007, filed with the SEC on Form 6-K, the 2007 annual

report, filed with the SEC on Form 40-F, the quarterly report for the period ended January 31, 2008,

filed with the SEC on Form 6-K, and the quarterly report for the period ended April 30, 2008, filed

with the SEC on Form 6-K.

22. Defendant Thomas D. Woods (“Woods”) was, during the Class Period, Senior

Executive Vice-President and Chief Financial Officer (“CFO”). While he continues to be Senior

Executive Vice-President, he was transferred from his position as CFO to Chief Risk Officer of

CIBC in January 2008. As CFO, Defendant Woods certified the accuracy, and Sarbanes-Oxley

compliance, of CIBC’s Class Period financial reports, including: the quarterly report for the period

ended April 30, 2007, filed with the SEC on Form 6-K, the quarterly report for the period ended July

31, 2007, filed with the SEC on Form 6-K, the 2007 annual report, filed with the SEC on Form 40-F,

the quarterly report for the period ended January 31, 2008, filed with the SEC on Form 6-K, and the

quarterly report for the period ended April 30, 2008, filed with the SEC on Form 6-K. As CFO,

Woods had overall responsibility during the Class Period for CIBC’s financial and regulatory

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reporting; maintenance of accounting records and internal controls; and financial analysis and

planning.

23. Defendant Brian G. Shaw (“Shaw”) was, during the Class Period, Senior Executive

Vice President and Chairman and CEO of CIBC World Markets. After the public disclosure

concerning the extent of CIBC’s total hedged and unhedged CDO and RMBS subprime mortgage

related exposure was revealed, Shaw was relieved from his duties and is no longer employed by

CIBC.

24. Defendant Ken Kilgour (“Kilgour”) was, during the Class Period, the Senior

Executive Vice-President and Chief Risk Officer, Risk Management, of CIBC. After the public

disclosure concerning the extent of CIBC’s total hedged and unhedged CDO and RMBS subprime

mortgage related exposure was revealed, Kilgour was relieved from his duties and is no longer

employed by CIBC.

25. Defendants McCaughey, Woods, Shaw and Kilgour are collectively referred to as the

“Individual Defendants” and, along with CIBC, as the “Defendants.”

26. Because of the Individual Defendants’ positions with the Company, they had access

to the adverse undisclosed information about the Company’s business, operations, operational

trends, financial statements and markets via access to internal corporate documents (including the

Company’s operating plans, budgets, forecasts and reports of actual operations compared thereto),

conversations and connections with other corporate officers and employees, attendance at

management and Board of Directors meetings and committees thereof and via reports and other

information provided to them in connection therewith.

27. It is appropriate to treat the Individual Defendants as a group for pleading purposes

and to presume that the false, misleading and incomplete information conveyed in the Company’s

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public filings, press releases and other publications as alleged herein are the collective actions of the

narrowly defined group of Defendants identified above. Each of the above officers of CIBC, by

virtue of their high-level positions with the Company, directly participated in the management of the

Company, was directly involved in the day-to-day operations of the Company at the highest levels

and was privy to confidential proprietary information concerning the Company and its business,

operations, growth, financial statements, and financial condition, as alleged herein. Said Defendants

were involved in drafting, producing, reviewing and/or disseminating the false and misleading

statements and information alleged herein, were aware, or recklessly disregarded, that the false and

misleading statements were being issued regarding the Company, and approved or ratified these

statements, in violation of the federal securities laws.

28. As officers and controlling persons of a publicly-held company whose common stock

was, and is, registered with the SEC pursuant to the Exchange Act, and was, and is, traded on the

NYSE, and governed by the provisions of the federal securities laws, the Individual Defendants each

had a duty to disseminate prompt, accurate and truthful information with respect to the Company’s

financial condition and performance, growth, operations, financial statements, business, markets,

management and earnings, and to correct any previously issued statements that had become

materially misleading or untrue, so that the market price of the Company’s publicly-traded common

stock would be based upon truthful and accurate information. The Individual Defendants’

misrepresentations and omissions during the Class Period violated these specific requirements and

obligations.

29. The Individual Defendants participated in the drafting, preparation, and/or approval

of the various public, shareholder and investor reports and other communications complained of

herein and were aware of, or recklessly disregarded, the misstatements contained therein and

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omissions therefrom, and were aware of their materially false and misleading nature. Because of

their executive and managerial positions with CIBC, each of the Individual Defendants had access to

the adverse undisclosed information about CIBC’s financial condition and performance as

particularized herein and knew (or recklessly disregarded) that these adverse facts rendered the

positive representations made by or about CIBC and its business, issued or adopted by the Company,

materially false and misleading.

30. The Individual Defendants, because of their positions of control and authority as

officers of the Company, were able to and did control the content of the various SEC filings, press

releases and other public statements pertaining to the Company during the Class Period. Each

Individual Defendant was provided with copies of the documents alleged herein to be misleading

prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent their

issuance or cause them to be corrected. Accordingly, each of the Individual Defendants is

responsible for the accuracy of the public reports and releases detailed herein and is therefore

primarily liable for the representations contained therein.

31. Each of the Defendants is liable as a participant in a fraudulent scheme and course of

business that operated as a fraud or deceit on purchasers of CIBC securities by disseminating

materially false and misleading statements and/or concealing material adverse facts. The scheme:

(i) deceived the investing public regarding CIBC’s business, operations, management and the

intrinsic value of CIBC securities; and (ii) caused Plaintiff and other members of the Class to

purchase CIBC securities at artificially inflated prices.

PLAINTIFF’S CLASS ACTION ALLEGATIONS

32. 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, consisting of all purchasers of the securities of

CIBC on the NYSE, and all U.S. citizens who purchased or otherwise acquired the securities of

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CIBC, between May 31, 2007 and May 29, 2008, inclusive, and who were damaged thereby.

Excluded from the Class are Defendants, 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 have or had a controlling interest.

33. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, CIBC had more than 47.6 million shares of common

stock outstanding that traded on the NYSE, and 381 million shares of common stock outstanding

that traded on the TSX. While the exact number of Class members is unknown to Plaintiff at this

time and can only be ascertained 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 CIBC 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.

34. 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.

35. 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.

36. 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:

(a) whether Defendants violated the federal securities laws by their acts as alleged

herein;

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(b) whether statements made by Defendants to the investing public during the

Class Period misrepresented material facts about the business, operations and management of CIBC;

and

(c) to what extent the members of the Class have sustained damages and the

proper measure thereof.

37. 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.

SUBSTANTIVE ALLEGATIONS

Background Facts

38. This case arises from Defendants’ actions that immersed CIBC into the below-prime

asset backed securities market, their false and misleading statements that hid and failed to adequately

disclose the nature thereof, the true exposure resulting therefrom, and the resulting losses associated

with Defendants’ wrongful conduct.

The U.S. Mortgage Crisis

39. The current crisis in the U.S. residential mortgage market is rooted in the massive

volume of mortgage loans given to higher credit risk consumers in recent years, and the subsequent

bundling of those loans into various security and debt obligations, or fixed income products (so

called “structured securities”), which were then marketed and sold by investment banks to investors.

40. Generally, after a homeowner gets a mortgage loan, the lending institution sells the

mortgage to third-parties in the secondary market. These secondary market participants include

quasi-government institutions such as Fannie Mae and Freddie Mac (or “agency” institutions), who

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purchase only certain mortgages that conform to specific underwriting standards, and private

institutions, including many Wall Street firms (or “non-agency” institutions).

41. During the late 1990s, mortgage interest rates declined, more and more individuals in

the U. S. were afforded access to residential mortgage loans. The increase in origination and lending

to new homeowners spurred a rapid increase in the residential mortgage industry. Demand for

homes amid lower interest rates fueled a rise in home prices. Rising home prices fueled a building

boom in new homes. Inevitably, as lenders attempted to reach ever more potential homebuyers,

aggressive, and oftentimes predatory, lending practices by lenders spurred ever increasing loans to

U.S. borrowers, whose ability to repay their loans became particularly sensitive to interest rate

changes. Lenders were willing to take on riskier loans because there were always mortgage

purchasers in the secondary market willing to relieve the lender of the risk associated with these

loans.

42. When the housing price increases began to stall and interest rates began to rise in

mid-2005, homeowners who over-extended themselves by relying on “teaser loans,” 3 and those with

poor credit and unstable income, began to default on their loans. These default rates began to rise

dramatically in 2005, leading to a cascading effect on the credit markets due to the correlation of the

rising rate of default for subprime and Alt-A mortgages (defined below) with the decline in value of

the securities backed by these mortgages.

43. CIBC was an active participant in these complex financial instruments, which were

based on underlying U.S. residential mortgages. To understand CIBC’s fraud, it is necessary to

briefly explain how these financial instruments were created and how they were valued.

3 Teaser loans give a mortgagor an artificially low interest rate for an introductory period oftime.

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The Explosion of Fixed Income InstrumentsCollateralized by U.S. Residential Mortgages

44. Broadly speaking, in the U. S. residential mortgage market, borrowers are classified as

being either “prime,” “nonprime” or “subprime.” A subprime borrower is one who has a high debt-

to-income ratio, an impaired or minimal credit history, or other characteristics that are correlated

with a high probability of default relative to borrowers with good credit history. It is generally

accepted that mortgage loans made to borrowers with a FICO [Fair Isaac Corporation] score of less

than 620 are considered subprime. Compounding their risk, subprime mortgage loans typically have

a loan-to-value (“LTV”) ratio in excess of the 80% required for a prime loan. In other words, not

only were those loans made to borrowers with low credit scores, the borrowers had less equity

invested in their homes from the outset.

45. In addition to subprime mortgages, another product that gained prominence in the

U. S. residential mortgage industry was the “no income/no asset verification” loan, otherwise known

as a “NINA” or “no-doc” loan. This product allowed borrowers with a purportedly satisfactory

credit rating to borrow money without providing any income verification. This type of mortgage

was classified as a nonprime or Alt-A mortgage, a category which included all mortgages that fell

below prime status, but above subprime status, because they were deficient in one or more of the

following categories: LTV Ratio, loan documentation, debt-to-income ratio (“DTI ratio”), occupancy

status or property type. Any one of these factors could prevent the loan from qualifying for prime

status under standard underwriting programs.

46. To create an RMB S, an originator or underwriter would purchase a large number of

individual residential mortgages (often numbering in the thousands) from bank and/or non-bank

mortgage lenders (e.g., Washington Mutual or Countrywide). Generally, the purchased mortgages

underlying an RMBS possessed similar characteristics with respect to the quality of the borrower

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(prime, Alt-A or subprime), so that they could be pooled together and rated accordingly.

47. Once the originator or underwriter purchased a sufficient number of mortgage loans,

it would then pool the mortgages together and sold them to a “special purpose vehicle” (“SPV”). 4

An SPV is a separate, bankruptcy-remote legal entity created by the originator in order to transfer the

risk of the underlying mortgages off the originator’s balance sheet. The SPV takes title of the

individual mortgages and issues bonds or RMBS collateralized by the transferred mortgage pool.

RMBSs are issued in tranches, ranging from “High Grade” (AAA- and AA-rated bonds),

“Mezzanine” (BBB- to B-rated bonds), or an unrated equity tranche sometimes called the “residual.”

48. The SPV is able to issue AAA-rated paper out of a pool of subprime mortgages

through the prioritization of payments and the apportionment of losses among the different classes of

bonds. Typically, the AAA-rated tranche of the RMBS received first priority on cash flows from the

borrowers on the underlying mortgages (otherwise known as “remittance payments”), but received a

lower yield on the investment, reflecting less reward for less presumed risk. Conversely, the equity

tranche holders received the highest return on their investment because the equity tranche is the first

tranche to experience losses in the event that the underlying pool of mortgages experienced defaults.

Under the typical payment structure, the AAA-rated RMBS-holder would only experience losses if

both the equity and mezzanine tranches were exhausted as a result of credit events, such as defaults,

in the underlying mortgage collateral.

49. In most instances, an RMBS originator or underwriter worked closely with one of the

three rating agencies, Moody’s Corp. (“Moody’s”), Standard & Poor’s (“S&P”) or Fitch, to

determine the right combination of mortgages to include as collateral for a given RMBS. The goal

4 CIBC generally refers to its SPVs as Variable Interest Entities, or VIEs.

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for an originator or underwriter was to fill each mortgage pool with high interest paying, but riskier,

collateral that would still allow for an AAA-rated class of RMBS. As set forth above, riskier Alt-A

and subprime borrowers typically paid higher interest rates on their loans. By securing an RMBS

with riskier loans that carried higher interest rates, an originator theoretically maximized the amount

of interest payments that were paid into the SPV. This, in turn, allowed the SPV to issue RMBS

bonds that paid higher interest rates, which placed the SPV at a competitive advantage in attracting

investors.

50. Once a payment schedule was agreed upon and the rating agency assigned ratings to

the various RMBS tranches, the SPV sold the resulting RMBS to investors. The SPV transferred

proceeds from the sale of the bonds to the originator in consideration for the underlying collateral.

Additionally, the SPV passed on the remittance payments from the individual mortgagees to the

RMBS-holders by the priority dictated in the RMBS agreement.

51. The following chart, created by the Commercial Mortgage Securities Association

(“CMSA” ), illustrates the creation and structure of a typical RMBS issuance:

Different Risk and Return for Different InvestorsLower

01 Borrowers Expected^ Last Loss Lowest Risk Yield

o^► Pool of

N^N (^

B MortgageB ^.l`• Loans

1

^rFirst Loss Highest Risk Expect

ed

Higher

J' Yield

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Cash CDOs

52. Structurally, the Cash CDO resembles the RMBS in many ways. Both involve the

transfer of assets to an SPV, and both involve the issuance of bonds by an SPV collateralized by the

transferred assets. The major difference between an RMBS and CDO is that while an RMBS is

collateralized by a pool of residential mortgages, the bonds issued by a CDO are collateralized by a

pool of RMBS tranches ( i.e., bonds backed by bonds, backed by residential mortgages).

53. CDO originators typically financed the creation of the CDO and contracted with a

collateral manager to manage the distribution of the CDO assets and operations of the CDO

thereafter.

54. At the CDO’s inception, much like the creation of an RMBS, CDO originators

amassed a collection of assets for inclusion in the CDO, a process known as “warehousing” or

“ramping up” the CDO. Instead of warehousing residential mortgages, however, a CDO originator

amassed and warehoused tranches of RMBS.

55. CIBC served as structuring and placement agent for CDOs. According to CIBC, it

would lend to, or invest in, the debt or equity tranches of the CDOs, and would act as a counterparty

to derivative contracts. CIBC would also warehouse the RMBS until the CDO transaction was

completed. During the warehousing process, which typically took between one and four months to

complete, the originator assumed 100% of the credit risk ( i.e., the risk of default of the security) and

the market risk ( i.e., the risk of devaluation of the security) associated with holding the RMBS

tranches in their warehouse and, thus, on their balance sheet.

56. Prior to sourcing and warehousing the RMBS collateral for the CDO, however, the

originator and the CDO’s collateral manager had to make a series of decisions regarding the quality

of RMBS tranches used to collateralize a CDO. Specifically, the originator had to determine

whether to create a “Mezzanine CDO” or a “High Grade CDO.” High Grade CDOs were typically

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collateralized by AAA/AA-rated RMBS tranches, while Mezzanine CDOs were collateralized by

lower, BBB/BB-rated RMBS tranches.

57. Once the necessary RMBS collateral was acquired, it was transferred to a bankruptcy-

remote SPV. As with the creation of RMBS, the SPV housing the CDO then issued CDO bonds

backed by the pool of RMBS.

58. Just as the CDO was collateralized by RMBS that had previously been divided into

tranches, i.e., Mezzanine or High Grade RMBS, the CDO bonds that the SPV issued were also

divided into tranches. In general, the bonds issued by a CDO were divided into at least three

tranches: senior, mezzanine, and equity.

59. Similar to an RMBS, the CDO was able to issue AAA-rated paper based on a pool of

lower rated securities based on the prioritization of payments and the apportionment of potential

losses suffered by the underlying RMBSs, or more specifically, defaults in the mortgages underlying

the RMBS. Thus, the super senior tranche of the CDO received the first dollars paid into the CDO,

but received the lowest yield on its investment, while the equity tranche (which often was not even

rated) received the highest return on the investment, but absorbed the first mortgage default losses.

Once the equity tranche has absorbed its maximum amount of losses, then the mezzanine tranche

begins absorbing losses, up to a predetermined level, and so on up the tranches of the CDO.

60. The percentage of total losses at which a particular tranche begins absorbing losses in

the event of default in the underlying collateral is called its “attachment point.” The percentage of

total losses at which a particular tranche stops absorbing losses and the next-highest tranche begins

absorbing losses is called its “detachment point.” The equity tranche’s attachment point is 0%, while

the super senior tranche will always have the highest attachment point.

- 19 -


61. Again, in most instances, the CDO originator works closely with a rating agency to

determine the right mix of RMBS such that AAA-rated bonds can be issued. As with RMBS

creation, the goal for the CDO originator is to fill each pool with the lowest quality RMBS because,

as set forth above, lower-rated RMBS carry higher interest rates, allowing the CDO investor to earn

a higher yield on his or her investment. Notably, each individual RMBS included in the CDO is

backed by the lowest quality mortgages that would support an AAA/AA rating for High Grade

CDOs or a BBB/BB rating for Mezzanine CDOs. Thus, by also striving to include the lowest

quality RMBS in the CDO, the risk associated with holding a CDO position over an RMBS position

is magnified exponentially.

62. Finally, the SPV sold the tranched bonds to investors. The SPV transferred the

proceeds received from the sale of the bond to the originator, while the cash flows received by the

underlying RMBS were passed through to the CDO investors in accordance with the CDO’s

payment structure. In many instances, the CDO originator retained a tranche of the CDO to facilitate

the sale and liquidity of the CDO tranches.

Credit Default Swaps

63. A credit default swap (“CDS”) is an insurance-type instrument used to transfer credit

risk from the owner of an asset to another party. More specifically, a CDS is a contractual

agreement between two parties whereby the owner of an asset (such as a residential mortgage), an

RMBS tranche or a Cash CDO tranche agrees to make periodic payments to a counterparty in

exchange for the counterparty’s willingness to assume the risk of default associated with the

underlying asset (sometimes known as the “referenced asset”).

64. For example, a buyer of this type of protection may own an RMBS bond. Since the

value of the bond could decrease if a substantial number of borrowers default in the underlying pool

of mortgages, the bondholder seeking to hedge against this potential loss could do so by entering into

- 20 -


a CDS with a counterparty who would agree, in exchange for annual premium payments, to accept

the risk of loss associated with the bond.

65. In this regard, a CDS operates like an insurance policy. The “protection seller”

provides the “protection buyer” with insurance against the risk of loss in the referenced asset, while

the protection buyer agrees to provide the protection seller with regular premium payments.

66. In the event of default, the protection seller usually agrees to either take possession of

the insured asset at face value or to pay the protection buyer the difference between the bond’s par

value and the recovery amount on the bond.

67. The protection seller is, thus, taking a long position with respect to the referenced

asset, since the protection seller is betting that the default rate will be low and that the losses suffered

by the holder of the mortgage, RMBS or Cash CDO position will be minimal. The protection buyer

is, accordingly, shorting the referenced asset in order to hedge against the risk of loss, since the

protection buyer is betting that the asset will experience at least some amount of losses.

68. Notably, CDSs offer protection sellers the ability to take a long position with respect

to residential mortgages, RMBS and/or CDO tranches without having to take possession of any

underlying asset. Moreover, CDSs also allowed originators to hedge the credit risk associated with

assets held in their mortgage warehouse.

69. The combination of subprime loans collateralizing exotic mortgage products, such as

CDOs, decreasing housing values and rising interest rates created a ticking time bomb for holders of

those CDOs by no later than the end of 2006.

- 21 -


An Overview of CIBC’s Exposure to the CDO/Below-Prime Market

CIBC’s Emergence from the Enron Scandal

70. In 2005, CIBC agreed to pay a $2.4 billion settlement related to its fraudulent

activities involving Enron. These same activities had previously resulted in a regulatory penalty for

CIBC in the amount of $80 million.

71. As a result of this and a series of other scandals, in 2005, CIBC purportedly embarked

upon a strategy to “de-risk” the Company, including appointing Defendant McCaughey as CEO on

August 1, 2005 – one day before it announced its $2.4 billion settlement with Enron’s investors.

According to various news articles, Defendant McCaughey’s mission was to “clean house”

following Enron and to “erase[] the taint of previous scandals.” In fact, as reported in The Toronto

Star recently, Defendant McCaughey had boasted that he and his team had made “significant

progression in de-risking the bank” since the Enron debacle.

72. As reported by The Globe and Mail, one way Defendant McCaughey claimed to “de-

risk” CIBC was to reduce the amount of economic capital in CIBC’s World Markets unit (which

housed the investment banking at CIBC) by 50%. This move was publicly touted by the Company

as a way in which to signal to investors and the public at large of a “return to your grandmother’s

bank,” with no more over the top risk taking. In practice, something else happened entirely: CIBC

World Markets, led by Defendant Shaw, could only chase higher profits with less capital by taking a

risky dive into structured securities backed by the below-prime sector of the U. S. real estate market.

CIBC’s Shift to Riskier Securitization Instruments

73. According to a recent Globe and Mail article, CIBC accumulated much of its

approximately $12 billion in subprime and non-prime mortgage loan exposure starting in or around

July 2006. This exposure came by way of CIBC structuring CDO or RMBS deals, acting as

guarantor, or as buyer. However, as the press noted, “taking unprotected positions in complex

- 22 -


derivatives was antithetical to the strategy” that Defendant McCaughey publicly touted he would

implement, including exiting more risky and exotic areas.

74. In connection with these investments, CIBC purportedly purchased CDS with a

notional principal value of $9.8 billion, as insurance or hedges, from a number of financial

guarantors. The hedged exposure and the identities of the hedge counterparties were not revealed by

CIBC until late in the Class Period. According to a CIBC Equity Research analyst report, dated

February 29, 2008, CIBC’s hedge counterparties were later learned to be ACA (Security Capital),

XL, CIFG, Financial Guaranty Insurance Co. (“FGIC”), MBIA, and AMBAC. CIBC purchased a

substantial portion of these hedges – $3.5 billion – from ACA, notwithstanding that at the time of

these purchases, ACA was vastly undercapitalized and was only single A-rated, making it poor

choice for any part of the hedged protection against the risk of default purchased by CIBC, let alone

such a large portion.

75. As such, from middle to late 2006, CIBC amassed huge amounts of undisclosed CDO

and RMBS risk. To the extent that exposure was hedged, a large percentage of that risk was hedged

with ACA, making the hedge virtually meaningless, and the rest was hedged with a number of other

counterparties facing substantial and known financial difficulties.

Obvious Red Flags in the Subprime and Non-Prime RMBS Market

76. Prior to the start of the Class Period, key indicators signaled a significant increase in

risk related to subprime and non-prime mortgage loans and the U.S. mortgage market in general.

77. While the value of an RMBS or CDO is primarily derived from the value of the

collateral underlying the RMBS or CDO and the prevailing interest rates, any downgrades in the

investment grade rating and market indices can also affect the value of an RMBS or CDO tranche.

78. First and foremost, the value of RMBSs and CDOs referencing U.S. residential

mortgages is dependent upon the mortgage borrower’s ability to repay the mortgage loan. If

- 23 -


borrowers are unable to make their mortgage payments or remittances, the RMBS or CDO will

suffer losses that will reduce the overall value of the RMBS or CDO bonds.

79. Interest rates also effect the value of a security to the extent that the underlying loans

were adjustable-rate mortgages (“ARM”), meaning that the interest rate paid by the borrower

changes along with the prevailing market interest rates. For example, if an RMBS or CDO is backed

by a pool of subprime ARMs, a rise in interest rates could cause the borrower’s monthly payment to

balloon, increasing the likelihood that the borrower will default on his or her mortgage, thereby

affecting the value of the security.

80. Additionally, if a rating agency downgrades the RMBS or CDO tranche, the value of

the tranche is reduced.

81. Finally, indices like the ABX Index are also probative of the market value of

subprime RMBSs and CDOs. The ABX Index measures the cost of purchasing protection for a

subprime RMBS. Thus, if the cost of “insuring” an RMBS increases, that suggests that the market

anticipates that the RMBS will suffer future losses in value. Alternatively, a reduction in the cost of

protection suggests that the market views the investment as becoming less risky. Significantly, the

American Institute of Certified Public Accountants’ Center for Audit Quality has affirmed the

relationship between the level of the ABX Index and the value of securities backed by subprime

mortgage loans.

Indicators that Mortgage Markets Were Deteriorating by Early 2006

82. There are three main indicators that are used by industry experts to assess the current

state of, and future prospects for, the mortgage market: (1) the Housing Price Index, which measures

changes in home prices; (2) interest rates; and (3) delinquency rates, which monitor the percentage

of mortgagors who default on their mortgage obligations.

- 24 -


83. As illustrated in the following chart, U.S. housing prices began to collapse in early

2006:

OFHEO HOUSE PRICE INDEX HISTORY FOR USASeasonally-Adjusted Price Change Measured in Purchase-Only Index

10.0%

+Quarterly Price Change —Four-Quarter Price Change

m B0%

Uv 6.0%a`

a40%

_a2

2.0%

a a a a a a a O O 2 a a a a a a a a a U a a a a a a a a

84. As U.S. housing prices fell, interest rates increased dramatically between 2006 and

2007:

Rate Trends

RATE

6.30

6.00

5.70 #. A 1

5.40

5.10

4.80 1

4.50 2005 I 2006 I 2007 12008

— National, 30 yr fixed mkg

— National, 511 ARM

<>

- 25 -


85. This combination was devastating for U. S. borrowers who over-extended themselves

by purchasing homes that they could not afford without low initial interest rates, called “teaser”

rates, and on ARMs that increased substantially in 2006 and 2007. In the early 2000s, home values

were rising and the presumption was that they would continue to rise in the future. Accordingly,

during the early 2000s, buyers could refinance their three, five or seven-year ARMs at the time the

teaser rate expired, using the additional equity in the homes to support the refinancing.

86. Beginning in 2005, home values began to decline, interest rates began to rise, and

ARM teaser rates expired. As a result, the American homeowners who over-extended themselves

were faced with new, higher mortgage payments that they could not afford and could not refinance.

The result – beginning in the first quarter of 2005 – was that mortgage default rates rose

dramatically, particularly for subprime loans:

Figure 11: Comparison of Prime Versus Subprime Delinquency Rates, Total US 1998-2007

180

Subprinie Adjustable16.0 Rate

14.0

12.0

10.0 Subpritm Fixed^

Rate8_0P?nmeAdJustable

rRate Prone Fixed

6.0 ^ Rate

40

2.0

0.0 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 7006 2006 P007

Sottroes: Mortga_W Satticers Association.

87. The increase in mortgage defaults in the U.S. residential mortgage market between

2005-2008 completely compromised the value of U.S. mortgage-backed securities, by eroding the

- 26 -


supposedly secure revenue streams that supported the highly rated tranches of RMBSs and CDOs.

This erosion materially reduced the value of these assets and diminished their marketability.

88. The market signals that RMBS and CDO values were being eroded by increasing

defaults of U.S. mortgages were rendered even clearer by the trading platforms that monitored

pricing of RMBSs.

89. For example, in January 2006, several banks collaborated with Markit to create an

exchange known as the ABX Index in order to provide some purported value transparency within the

RMBS and CDO market. The ABX Index showed that, by no later than October 2006, subprime

mortgage derived fixed income instruments were being adversely affected by the subprime mortgage

crisis.

90. During the Class Period, the ABX Index tracked the performance of 15 to 20 equally-

weighted RMBS tranches backed by subprime collateral and was used as a barometer for assessing

how subprime loan related assets were performing in the marketplace. As noted above, the ABX

Index tracked the cost of buying and selling CDS protection on selected RMBS tranches. Each of

the 15-20 RMBS tranches had a different rating, from AAA to BBB-, and was considered a

representative sample of other RMBS tranches backed by subprime collateral with the same rating.

91. The various components of the ABX Index were classified by vintage ( i.e., the year

that the underlying subprime collateral was issued). For example, the ABX Index 07-1 references

subprime mortgage-backed RMBS tranches that were originated in the second half of 2006.

Likewise, ABX Index 07-2 references subprime mortgage-backed RMBS tranches that were

originated in the first half of 2007. As the trend suggests, new indices are rolled out every six

months.

- 27 -


92. For example, below is the complete ABX Index table as of February 23, 2007:

Index Series Version Coupon RED ID Price High LowABX-HE-AAA 07-1 7 1 9 0A08AHAC6 99.15 100.09 99.15ABX-HE-AA 07-1 7 1 15 0A08AGAC8 99.15 100.09 99.15ABX-HE-A 07-1 7 1 64 0A08AFAC0 92.50 100.01 92.50ABX-HE-BBB 07-1 7 1 224 0A08AIAC4 75.21 98.35 75.21ABX-HE-BBB- 07-1 7 1 389 0A08AOAC1 68.50 97.47 68.50ABX-HE-AAA 06-2 6 2 11 0A08AHAB8 99.15 100.12 99.15ABX-HE-AA 06-2 6 2 17 0A08AGAB0 99.15 100.12 99.15ABX-HE-A 06-2 6 2 44 0A08AFAB2 92.69 100.12 92.69ABX-HE-BBB 06-2 6 2 133 0A08AIAB6 76.80 100.58 76.80ABX-HE-BBB- 06-2 6 2 242 0A08AOAB3 69.39 100.94 69.39ABX-HE-AAA 06-1 6 1 18 0A08AHAA1 99.54 100.38 99.54ABX-HE-AA 06-1 6 1 32 0A08AGAA9 99.76 100.73 99.76ABX-HE-A 06-1 6 1 54 0A08AFAA7 96.20 100.51 96.20ABX-HE-BBB 06-1 6 1 154 0A08AIAA4 88.50 101.20 88.50ABX-HE-BBB- 06-1 6 1 267 0A08AOAA2 85.17 102.19 85.17

93. In the table above, “Series” refers to the type of loan (“HE” or Home Equity), the

bond’s credit rating (e.g., BBB), and the vintage of the referenced mortgage-backed securities (e .g.,

06-2). “Coupon Rate” sets the annual premium payment (measured in basis points) that a protection

buyer agrees to pay a protection seller over the life of the CDS. For example, assuming a CDS

notional value of $100 million, a Coupon Rate of 224 on the ABX-HE-BBB 07-1 means that

protection on a BBB-rated RMBS tranche issued during the second half of 2006 would cost roughly

$2.24 million over the life of the CDS contract.

94. “Price” is the cost of buying the specific bond protection. Essentially, the “Price” is

an expression of the par value of the referenced tranche. The price is set to 100 on the day the

particular ABX Index is launched and equal to 100 cents on the dollar. At 100, the only payment

made by the protection buyer to the protection seller is the Coupon Rate. If the ABX Index drops

below 100, however, it means that protection is becoming more expensive and that protection sellers

are demanding an additional premium payment. The amount of the additional premium is expressed

by the amount by which the ABX Index drops below 100.

- 28 -


95. By way of example, as of February 23, 2007, the ABX-HE-BBB 07-1 was trading at

76.80, a 23.20% discount from its 100 par value. This means that, in addition to the Coupon Rate,

protection sellers were also demanding an up-front fee from protection buyers equal to 23.20% of

the bond’s face value. In the $100 million example above, this would translate into an up-front fee

of $23.2 million, in addition to the $2.24 million Coupon Rate that will be made over the life of the

contract.

96. Thus, by tracking the level of additional premiums required by protection sellers, the

level of the ABX Index indicates market sentiment as to the likelihood that certain assets backed by

subprime mortgages will experience future losses.

97. The ABX Index is important not only because it added some visibility to the

subprime market during the Class Period, but also because many banks and CDO investors, such as

CIBC, used the ABX Index to hedge against the risks associated with holding subprime assets.

98. Significantly, the American Institute of Certified Public Accountants’ Center for

Audit Quality has stated that “the pricing indicated by the ABX credit derivative index for subprime

mortgage bonds may be a Level 2 input when used as an input to the valuation of a security backed

by subprime mortgage loans.”

99. As set forth in the chart below, during the fourth quarter of 2006 and the first half of

2007, the value of the ABX Indices plummeted, evidencing that the cost of insuring subprime

RMBS and CDO bonds had increased dramatically. Investors thus anticipated that the risks

associated with subprime RMBS and CDO tranches would almost certainly cause large losses.

Therefore, the collapse of the ABX Index during the Class Period was yet another indicator in the

marketplace that indisputably revealed that the value of RMBSs and CDOs backed by subprime

mortgages was deteriorating at a near-historic pace during late 2006 and 2007:

- 29 -


Figure 5: ABX.BBB 06-2

markrno--

as

46-

aS -

a6-

WTS -

T6-

55 -

ao--

SS-

LD i r I I iA A A A fti AO O

OaO O 8

X Q'y m

N W.N ^— AM-HE-BBB 46-2

Source: Markit

100. Indeed, the combination of higher interest rates and the dramatic slowing of U.S. real

estate appreciation was devastating, particularly to certain borrowers who over-extended themselves

by purchasing homes that they could not afford without low initial “teaser” mortgage interest rates.

During the time when property values were increasing, non-prime or subprime borrowers were

simply able to refinance loans as mortgages adjusted to higher interest rates. As interest rates rose

and property prices leveled, many non-prime U.S. borrowers were unable to refinance their existing

loans when they could not meet their payment obligations. The result – beginning in 2005 – was a

significant increase in U.S. mortgage default rates, particularly for subprime mortgage loans.

101. For example, in August 2005, HSBC Holdings PLC (“HSBC”) issued a memo to

companies from which it bought mortgage loans. The paper, entitled “Threads of Early Payment

Default,” reported that mortgage delinquencies were rising. HSBC said mortgage lenders had seen

“a wealth of surprising data” on loans originated in 2005, including “surges” in 60-day-past-due

delinquencies, particularly on “borrower-friendly” second lien loans, and “heightened fraud

- 30 -


incidents.” According to the report, when borrowers did not have to verify their incomes, they were

overstating them, and they bolstered their false claims by overstating their job positions.

102. Problems in the mortgage market intensified over the following year, prompting a

series of well-publicized news reports. For example, on August 23, 2006, CBS MarketWatch

reported: “July was dry for the U. S. real estate market, as sales of existing homes plunged 4.1 % to a

two-year low, prices stagnated and the number of homes on the market soared to a 13-year high,

according to a report from the National Association of Realtors released Wednesday.”

103. On August 29, 2006, Dow Jones Newswires reported “[m]ore subprime borrowers are

defaulting in the early months of their home loans, a trend that has led to greater fear among

investors and lenders of rising delinquencies and losses.”

104. On September 13, 2006, CNNMoney.com noted:

In August, 115,292 properties entered into foreclosure, according to RealtyTrac, anonline marketplace for foreclosure sales. That was 24 percent above the level in Julyand 53 percent higher than a year earlier.

It was the second highest monthly foreclosure total of the year; in February, 117,151properties entered foreclosure.

Some of the bellwether real estate market states are among the leading foreclosuremarkets. Florida had more than 16,533 properties in foreclosure in August. That ledall states and was 50 percent higher than in July and 62 percent higher than in August2005.

California foreclosures are increasing at an even faster annual rate, up 160 percentsince last year to 12,506. And the formerly red-hot Nevada market recorded a spikeof 24 percent compared with July and a whopping 255 percent increase from August2005.

* * *

Usually, foreclosures are a lagging [market] indicator [ ] But we’ve never had asituation like this with adjustable-rate mortgages amounting to $400 billion to $500billion coming up for adjustment over the rest of the year.

* * *

- 31 -


These exotic mortgages, which have been issued by lenders at much higher numbersthe past few years, default at a higher rate than do fixed-rate mortgages. And sub-prime loans, which are much more common than in the past, have a higher defaultrate as well.

105. On November 13, 2006, American Banker reported:

UBS Securities issued a report last week that found that subprime loans made thisyear are “going bad” at a rate that is 50% faster than the rate for those made last year.About 2.4% of subprime loans originated this year were more than 60 daysdelinquent by the sixth month, compared with 1.6% for 2005 loans and 0.9% for2004 loans, the report said.

106. On November 27, 2006, the National Mortgage News reported:

“How bad is 2006 subprime collateral is a question I think most of you have anopinion on already,” said Mr. Zimmerman [the Executive Director of UBSSecurities]. “We were a bit surprised at the magnitude and speed at which thisvintage year deteriorated.”

Mr. Liu [a Director at UBS Securities] pointed out at the conference that the industryis seeing “a steady increase of delinquencies and that rate has been accelerating overthe past two to three months.” Not only have there been higher delinquencies butalso the delinquency numbers have been showing up earlier in 2006 than they hadbeen in 2005. “2006 is tapped to be the worst vintage ever,” he said.

Foreclosures have also risen. And the foreclosures, like the delinquency rates, arealso happening at earlier dates.

107. On December 13, 2006, the Associated Press reported:

U.S. mortgage delinquency rate rises sharply

Late Mortgage Payments Jump in Summer

Late mortgage payments shot up in the third quarter as higher interest rates squeezedbudgets and made it harder for homeowners – especially those with weaker creditrecords – to keep up with their monthly obligations.

The Mortgage Bankers Association, in its quarterly snapshot of the mortgage marketreleased Wednesday, reported that the percentage of mortgage payments that were 30or more days past due for all loans tracked jumped to 4.67 percent in the July-to-September quarter.

That marked a sharp rise from the second quarter’s delinquency rate of 4.39 percentand was the worst showing since the final quarter of last year, when delinquentpayments climbed to a 2 1/2-year high in the aftermath of the devastating Gulf Coasthurricanes.

- 32 -


The association’s survey covers 42.6 million loans.

Delinquency rates in the third quarter were considerably higher for “subprime”borrowers – people with weaker credit records who are considered higher risks –especially those who have adjustable-rate mortgages.

Subprime borrowers had a delinquency rate of 12.56 percent in the third quarter, thehighest in more than three years. The delinquency rate for these borrowersholding adjustable-rate mortgages was even higher – at 13.22 percent in the thirdquarter, also the worst reading in more than three years. 5

108. Turmoil in the U.S. subprime mortgage market continued, as mortgage lenders such

as Countrywide Financial and Washington Mutual reported huge losses. According to a February 9,

2007 article published by The Wall Street Journal, foreclosure rates on subprime mortgage loans in

2006 more than doubled from 2005.

109. In early April 2007, New Century, one of the largest U. S. subprime mortgage lenders,

filed for bankruptcy.

110. On April 27, 2007, Moody’s reduced the ratings of 27 Lehman Brothers’ CDOs,

wiping out $348 million in assets.

111. On April 27, 2007, Bloomberg News quoted a Merrill Lynch analyst, who said that

“[s]ome of the $450 billion in sub-prime mortgage debt sold last year [2006] has lost 37 percent of

its value.” According to the article, “bondholders are forecast to lose as much as $75 billion on sub-

prime mortgage securities.”

112. On May 3, 2007, UBS closed down its severely impaired hedge fund, Dillon Read

Capital Management (“Dillon Read”). Dillon Read had invested capital of over $1.3 billion, largely

in CDOs containing subprime mortgage-backed securities. UBS took a loss of $345 million in

closing Dillon Read and, later in 2007, wrote-down the fund’s CDO assets to nothing.

5 All emphasis is added unless otherwise noted.

- 33 -


113. It is in this environment – defined by: (i) the increase in mortgage defaults; (ii) the

decline in home values; (iii) the decrease in remittance payments; (iv) the decline in the ABX Index;

(v) severe financial difficulties experienced by mortgage originators and other investment banks

(discussed infra), including the uptick in repurchase requests for early payment default (“EPD”)

loans, write-downs of subprime loans and subprime-backed assets and bankruptcies, and

(vi) distressed asset sales and write-downs (discussed infra) – that CIBC chose to amass and not

disclose the true value of its portfolio of CDOs backed by risky U. S. residential mortgages, including

Alt-A and subprime loans and then concealed the deterioration of these assets when these

impairments became obvious. CIBC’s accumulation of a portfolio of risky and illiquid assets

(chasing higher returns) contradicted Defendants’ numerous representations that CIBC was avoiding

risk. Defendants’ efforts to conceal the value of CIBC’s assets in a deteriorating market inflated the

Company’s financial results and contradicted Defendants’ assurances about CIBC’s minimal

exposure to the ailing U.S. residential mortgage market. These false statements and assurances to

the market involved the knowing and/or reckless participation of each of the Individual Defendants,

as set forth herein.

114. Each of the clear red flags was a strong indicator to Defendants that the problems

being experienced in the subprime and non-prime mortgage markets exposed CIBC to potentially

huge losses.

CIBC’s Subprime Portfolio

115. Unbeknownst to shareholders and notwithstanding the red flags listed above, by the

start of the Class Period, CIBC held approximately $12 billion of undisclosed mortgage-backed

securities secured by subprime and non-prime real estate loans in the U.S., concentrated as follows:

• Unhedged Exposure: CIBC accumulated approximately $1.7 billion of notionalexposure to CDOs and RMBSs. As later revealed by CIBC, approximately 60% ofthe unhedged exposure related to underlying subprime mortgages, and the remaining

- 34 -


40% were “mid-prime with higher grade assets,” which appear to have been Alt-A(considered to be higher risk loans because they are originated with reduced or noinformation verification or borrower documentation).

• Purportedly Hedged Exposure: CIBC accumulated approximately $9.8 billion ofnotional exposure to CDOs and RMBSs. As later revealed by CIBC, approximately60% of the hedged exposure related to subprime mortgages, and a “fair bit” of theremaining 40% were no better and were in large part Alt-A, which the Companyrepresented to be mid-prime (“better than subprime”), but which instead areconsidered to be higher risk loans because they are originated with reduced or noinformation verification or borrower documentation.

116. Despite the almost $12 billion in exposure to the U.S. subprime and non-prime

mortgage markets, Defendants misrepresented or omitted: (1) that they were “de-risking” the bank

and returning it to a safe and secure institution; (2) that they placed a huge bet on very risky

securities backed by the subprime and non-prime sectors of the U.S. real estate market; (3) the full

extent of CIBC’s exposure to these risky securities; (4) the true nature of these risky investments;

(5) to the extent that CIBC was employing hedges, that a significant portion of the $9.8 billion of the

so-called hedged exposure was guaranteed by ACA, a highly-leveraged and seriously under-

capitalized insurer, and that various other of CIBC’s guarantor counterparties were also on shaky

financial footing; and (6) that they were not accurately or timely disclosing material changes

affecting the valuation of its investments in U.S. mortgage-backed securities, which in turn

misrepresented the then-current market values of the securities, and the amount of impairment

thereof.

CIBC’s CDO Subprime Portfolio:Failures in Value at Risk Analysis and Violations of GAAP

Value at Risk

117. In each of its Class Period financial reports, CIBC included an extensive discussion of

how carefully CIBC measured and managed different types of risk. One of CIBC’s key risk

- 35 -


management areas was market risk. According to CIBC’s 2006 Annual Accountability Report, filed

with the SEC on Form 40-F on December 10, 2007:

Market risk arises from positions in securities and derivatives held in our tradingportfolios, and from our retail banking business, investment portfolios and other non-trading activities. Market risk is defined as the potential for financial loss fromadverse changes in underlying market factors, including interest and foreignexchange rates, credit spreads, and equity and commodity prices.

118. A key metric CIBC used to measure market risk during the Class Period is termed

VaR, or Value at Risk. According to CIBC’s 2006 Annual Accountability Report, “VaR . . . enables

the meaningful comparison of the risks in different businesses and asset classes.” CIBC further

describes VaR, as follows:

Our VaR methodology is a statistically defined, probability-based approach that usesvolatilities and correlations to quantify risk in dollar terms. VaR measures thepotential loss from adverse market movements that can occur overnight with lessthan a 1% probability of occurring under normal market conditions, based onhistorical data and recent market experience. VaR uses numerous risk factors asinputs and is computed through the use of historical volatility of each risk factor andthe associated historical correlations among them, updated on a regular basis.Aggregate VaR is determined by the combined modelling of VaR for each of interestrate, credit spread, equity, foreign exchange and commodity risks, along with thereduction due to the portfolio effect arising from the interrelationship of the differentrisks.

119. VaR is a critically important measure to financial institutions because it is a key

component of determining capital requirements. VaR has become popular with certain financial

institutions because it allows them to represent purported market risk to the market as a simple

numeral. In that regard, each of CIBC’s Class Period financial reports contained a table showing the

mix of market risks by risk type and in aggregate represent VaR.

120. Unbeknownst to investors, CIBC repeatedly misrepresented its VaR analyses and the

fair value of its CDO and RMBS assets during the Class Period. Because VaR measures the

potential loss in value of an asset or portfolio over a defined period of time for a given confidence

interval, VaR requires correlation analyses for market instruments from the actual portfolio profiled.

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If the portfolio analyzed is not the actual entire portfolio, the resulting VaR does not have the mix of

risk factors required to give accurate data, nor does it serve the purpose of estimating the magnitude

of losses that threaten liquidity. If the model’s inputs are skewed, the output will be skewed as well.

121. Comparing the miniscule size of the CIBC VaR numbers during the Class Period,

with other financial institutions with RMBS exposure, leads to the obvious conclusion that CIBC

simply excluded all of the CDO and RMBS assets from its VaR analyses. For example, CIBC’s

CDO retained portfolio was 1/3 the size of certain other CDO dealers (i.e., Merrill Lynch, UBS and

Citigroup). Accordingly, CIBC’s VaR and credit risk numbers should have been roughly 1/3 the

size of those banks’. Instead, CIBC’s stated numbers were only 1/100 the magnitude of the UBS

VaR numbers and 1/50 the magnitude of the Citigroup and Merrill Lynch reported VaR numbers. It

is therefore apparent that CIBC simply excluded the extremely high risk exposures of the CDOs and

RMBS, resulting in VaR numbers that were less than 1% of what they should have been.

122. CIBC also based its VaR analysis on bond default rates that could not be supported.

Specifically, the CIBC modelers of CDO and RMBS risk used loan and bond default rates of 3% and

4% in order to calculate the high coupons on the equity tranches of the CDOs and RMBS. A

meaningful stress test or VaR for interest rate and credit spread exposures, assuming weighted

average default rates of even 20%, would have produced a risk profile of billions of dollars of losses.

It is believed that the actual loan default rates of the subprime assets in the CDO and RMBS

collateral were four and five times higher than the default assumptions of 3% and 4% used by CIBC

throughout the Class Period. 20% default rates would have created risk profile losses of well into

the hundreds of millions of dollars for a one standard deviation movement in credit spreads (the most

adverse credit market movement in twenty trading days). Throughout the Class Period, CIBC

released VaR credit exposure numbers of under $10 million for a three standard deviation movement

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in credit markets (CIBC would lose under $10 million from a one in 100 trading day adverse credit

market movement). However, that figure was materially false and misleading because of: (i) the

extremely high risk of defaults in the equity tranches of the CDOs and RMBS; (ii) the triggers from

one tranche to the next in the reverse waterfall from the equity tranche to the senior tranches; and

(iii) the extreme leverage of the structured securities. In truth and fact, had CIBC used proper inputs

concerning the core risks of the credit markets, CIBC would have reported a VaR throughout the

Class Period that was several hundred million dollars for the worst trading day in 100 trading days.

123. Notwithstanding the wide array of risk measurement tools at hand, CIBC failed to

disclose meaningful results of stress tests, scenario analysis loss exposures and VaR exposures the

bank claimed it used for analyzing possible losses. The result was that CIBC’s VaR numbers were

misstated and grossly understated the much greater credit spread risk and interest rate risk that CIBC

carried in its CDO and RMBS portfolio.

GAAP

124. Accounting rules from GAAP (FASB and SFAS) required CIBC to consolidate the

impaired assets in the CDO and RMBS special purpose entities (“SPEs”) off-balance sheet, through

which CIBC structured CDOs and RMBS when there was a “reconsideration event,” when CIBC

would assume “the majority of the variability of expected losses” and when CIBC held the

“controlling interests” in the SPEs. CIBC did not consolidate the impaired assets in a timely

manner, as required by GAAP.

125. CIBC did not begin to consolidate off-balance sheet CDO and RMBS retained

interests and CDO and RMBS secondary market trading assets until after the filing of its Annual

Report for 2007. Instead, for more than a year, CIBC hid the impairment of its CDO and RMBS

retained interests and CDO and RMBS secondary market activities.

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126. For example, CIBC’s 2006 Annual Accountability Report states, as follows:

There are two key accounting determinations to be made relating to securitizations.First, accounting rules require a determination to be made as to whether a transfer ofa group of loans or receivables should be considered a sale or a secured borrowingfor accounting purposes. Second, if considered a sale, a further decision is requiredas to whether or not a securitization VIE should be consolidated into our financialstatements. If the activities of the VIE are sufficiently restricted to meet theaccounting requirements for it to be considered a QSPE, the entity is not consolidatedunder the requirements of the CICA AcG-15, “Consolidation of Variable InterestEntities.”

On November 1, 2004, we adopted AcG-15, which provides guidance on applyingconsolidation principles to certain entities (other than QSPEs) [qualifying specialpurpose entity] that are subject to control on a basis other than ownership of votinginterests. To determine which VIEs require consolidation under AcG-15, weexercise judgment by identifying our variable interests and comparing them withother variable interests held by unrelated parties to determine if we are exposed to amajority of each of these entities’ expected losses or expected residual returns. Inapplying the guidance for AcG-15, we consolidated certain VIEs in which wedetermined that we were exposed to a majority of the expected losses or residualreturns. . . .

In applying the above noted guidelines for sale accounting and VIE consolidations,we have determined that all our securitizations qualify as sales, and the related VIEsare not consolidated because they are QSPEs or we are not the primary beneficiaryunder AcG-15.

127. Here, CIBC held the “controlling interests” (SFAS 94) of the structured security SPEs

soon after the offering of the assets, when the majority of the CDO and RMBS securities and the

CDO and RMBS tranches were sold to investors. Using the GAAP “controlling interests” standard,

all of the off-balance sheet retained interests of each CDO and RMBS should have been consolidated

at the end of the quarter when the security was issued or upon the “reconsideration event” of the

security’s impairment (by the first quarter of 2007). Moreover, the CIBC CDOs and RMBS were

substantially impaired by the beginning of the Class Period. CIBC’s on-balance sheet CDS and total

return swaps provided partial, but ineffective, guarantees of the retained interests in the structured

security SPEs – so each CDO and RMBS should have been consolidated by the beginning of the

Class Period.

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DEFENDANTS’ FALSE AND MISLEADING STATEMENTS

128. The Class Period begins on May 31, 2007. On that date, CIBC issued a news release,

which was attached to and incorporated in the Company’s Form 6-K filed with the SEC on the same

date. The news release announced CIBC’s 2007 second quarter financial results for the quarter

ending April 30, 2007. 6 Defendant McCaughey was quoted in the news release, stating “[o]ur

second quarter results were strong, and reflect continued progress against our priorities and

objectives of consistent and sustainable performance.” Under the heading “Business Strengths,” the

news release noted that “CIBC World Markets reported another strong quarter . . . “CIBC World

Markets’ solid performance reflects the strength of its client relationships combined with continued

balance and discipline in the area of risk.”

129. CIBC’s news release further noted that World Markets’ net income and revenues

increased substantially from the same quarter in the prior year, “largely as a result of higher revenue

in U.S. real estate finance which completed its largest commercial mortgage-backed securities

offering, and Canadian investment banking.” Although net income and revenue were down from the

prior quarter, the decrease was attributed to lower capital markets revenue, whereas the strong

performance in U.S. real estate finance and investment banking partially offset the decline.

130. The May 31, 2007 news release contained an extensive discussion of CIBC’s

purportedly careful approach to managing risk and capital resources, describing in detail how CIBC

managed market risk, liquidity risk, and capital resources, and provided a brief discussion of

“[o]ff-balance sheet arrangements,” noting “[w]e enter into several types of off-balance sheet

6 Also on May 31, 2007, CIBC issued a news release announcing a reorganization of itsTreasury and Risk Management departments. In the news release, CIBC reported that Chief RiskOfficer Steven McGirr would be leaving the Company effective July 1, 2007, and it appointedDefendant Kilgour to oversee all aspects of Risk Management.

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arrangements in the normal course of our business. These include transactions with VIEs [variable

interest entities], derivatives, credit-related arrangements and guarantees.”

131. The May 31, 2007 news release was silent regarding CIBC’s total exposure related to

the U.S. real estate market as of that date. Instead, it referred investors to pages 67 to 69 of CIBC’s

2006 Annual Accountability Report for “[d]etails of our off-balance sheet arrangements,” and

further represented that “[tjhere were no other significant changes to off-balance sheet

arrangements for the three and six months ended April 30, 2007.”

132. The referenced section (pages 67 to 69) of the 2006 Annual Accountability Report

states:

We act as structuring and placement agent for certain asset-backed investmentvehicles known as CDOs. We receive market-rate fees for these activities. Inaddition, we may lend to, or invest in, the debt or equity tranches of these CDOs, andmay act as counterparty to derivative contracts. In a number of transactionsstructured on behalf of clients, we first purchase the collateral at their request andwarehouse them until the CDO transaction is completed. CIBC or a third-partymanager typically manages the CDOs collateral, which generally consists of rateddebt securities on behalf of equity and debt investors. Any net income or loss isallocated to the CDOs equity investors; further losses, if any, are allocated to the debtinvestors in order of seniority. The creditors of the CDOs have no recourse to ourgeneral credit. Although actual losses are not expected to be material, as ofOctober 31, 2006, our maximum exposure to loss as a result of involvement withthe CDOs was approximately $729 million (2005: $418 million). For this purpose,maximum exposure to loss is considered to be the amount of liquidity facilitiesprovided to, and investments in, the CDOs.

133. By referring investors to CIBC’s 2006 Annual Accountability Report for “[d]etails”

of CIBC’s off-balance sheet arrangements, which represented that CIBC’s maximum exposure to

loss was approximately $729 million, and by stating “ there were no other significant changes to

off-balance sheet arrangements for the three and six months ended April 30, 2007,” the news

release was blatantly false and misleading in that it represented CIBC’s exposure to the U.S. real

estate market to be much smaller than it actually was. In reality, CIBC had accumulated almost

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$12 billion – not $729 million – in exposure to structured securities related to the U.S. real estate

market as of that date.

134. Moreover, due to the deterioration in the RMBS and CDO markets, by April 30,

2007, CIBC’s structured securities portfolio was impaired by approximately 20%. Accordingly, in

addition to disclosing the true amount of its holdings, CIBC should have recorded a write-down of

$2.15 billion on this portfolio. However, CIBC failed to record any such write-down in its 2007

second quarter financial results announced on May 31, 2007. Thus, CIBC’s reported financial

results were false and misleading in that they did not reflect any charge or write-down of CIBC’s

CDO and RMBS portfolio.

135. The May 31, 2007 news release also contained an extensive discussion of CIBC’s

VaR purporting to quantify, in mathematical terms, CIBC’s market risk, which CIBC defines as “the

potential for financial loss from adverse changes in underlying market factors, including interest and

foreign exchange rates, credit spreads, and equity and commodity prices.” The news release

contained a table setting forth, in numeric terms, CIBC’s VaR, by risk type and in the aggregate, for

CIBC’s Trading Portfolio, and further stated that:

Total average risk was down from the same quarter last year primarily due to lowerlevels of credit spread risk, partially offset by higher levels of interest rate risk. Riskchanges have not been significant and do not reflect any material change in businessactivity.

136. The statements about VaR and the VaR numbers presented in the news release were

false and misleading and misrepresented CIBC’s true market risk profile. Moreover, the VaR

numbers were far below CIBC’s true VaR numbers in that they excluded CIBC’s mortgage-backed

securities from the calculation and used artificially low mortgage default rates in the calculations to

create the appearance that CIBC’s VaR was much lower than it actually was.

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137. During an earnings conference call following the news releases, the Individual

Defendants were asked very specific and direct questions about CIBC’s potential exposure to losses

from structured securities backed by the U.S. real estate market. In response to those questions,

Defendant Shaw, Chairman and CEO of CIBC World Markets, falsely assured investors that CIBC’s

CDO exposure was minor and blatantly misrepresented that CIBC’s purchase of a certain CDO,

Tricadia, was not “a 2006 vintage,” which was the most toxic vintage of subprime loans, and

Defendants McCaughey and Woods (CFO), despite being directly asked, side-stepped the question

and refused to disclose (omitted) the actual amount of CIBC’s exposure to structured securities,

which continued to reaffirm Defendants’ prior false statement that the exposure was limited to just

$729 million:

Mark Ciccerelli, Elliott – Analyst

I actually have two questions. The first is that we understand that in late 2006 yourprop desk purchased a $330 million super senior tranche of a mezzanine structureand the performance of 2006 vintage mortgages, it is not impossible that this kind ofexposure could be a complete loss.

So my first question is, do you have other exposures like this, and if so how manytransactions, what is the total exposure, and what is the magnitude of the mark-to-market loss that you recognized on these exposures in the first quarter or the secondquarter?

And then my second question is, today’s announced departure of Steve McGirr asChief Risk Officer and the addition of Leslie Rahl a couple of days ago to the Board,would her expertise in structured securities have anything to do with your exposureto these mezzanine CDOs?

Brian Shaw, Canadian Imperial Bank of Commerce – Chairman & CEO, WorldMarket

* * *

I guess I would probably say to the extent we have exposure in this space it tends tobe more synthetic than direct CDO exposure. We don’t see this as a major revenuecontributor currently to CIBC. We are fairly – as I think I indicated in my earliercomments, we’re actually looking to end value the credit structuring area of our

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capability. I guess I would just conclude by saying in summary our risks in thisspace is not at all major.


I guess my question is not so much to the revenue contribution but to the creditexposure. For example, on this Tricadia transaction [mezzanine CDO], the supersenior tranche is $330 million, and that could become a liability of CIBC where thereferenced mortgage-backed securities to sell as seems possible given theperformance of subprime in the US.

Brian Shaw, Canadian Imperial Bank of Commerce – Chairman & CEO, WorldMarkets

Well, I guess I would just make a couple of observations. First of all, to the extentthat the US subprime market has been a featured topic in the financial press, I think ifyou look carefully, you will find that in the RMBS space, it has been pre-06 andpost-06 deals that have fared better than ‘06 vintages. The one you reference is notan ‘06 vintage.

Secondly, the way we get to a Tricadia, is we amalgamate a variety of CDOs that arereasonably well rated, and the ultimate position we have is a highly rated security.So, as I said, we don’t view this as a major credit item at all for us, and the results arevery much normal course.


Okay. So my understanding was that deal priced December 22 of 2006, andtherefore, the collateral was, in fact, kind of right in the second half of 2006.

Brian Shaw, Canadian Imperial Bank of Commerce – Chairman & CEO, WorldMarkets

Okay. What I will do after the call is I will send you what I have on the deal, whichis a research report from a provider that somebody had sent me. So, as I say, it is nota major issue for us in either a revenue area but certainly not a major risk issue.

138. Mr. Ciccerelli apparently recognized that the question he asked twice in the prior

exchange regarding CIBC’s total exposure to the CDO market had still not been answered, so he

asked it again:


Great. Okay. I’m sorry, you did not give a number on the total exposure of thiskind. Is there a number available on that?

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139. Notwithstanding that this same question had been asked for yet a third time,

Defendant McCaughey continued to dodge the question:

Gerry McCaughey, Canadian Imperial Bank of Commerce – President & CEO

Which exposure are you referring to? I’m sorry.


For the mezzanine CDO kind of super senior mezzanine CDO exposure with anunderlying subprime real estate collateral.

Gerry McCaughey, Canadian Imperial Bank of Commerce – President & CEO

We will talk about our disclosure that we make in normal course.

140. When the question would not go away, Defendant Woods made the outrageous claim

that CIBC does not disclose items like that:

Tom Woods, Canadian Imperial Bank of Commerce – CFO

Yes, we have not disclosed items like that, but what I would suggest is Brian and Iwill give you a call after this meeting and see if we can help.

141. Defendant Woods’ statement that CIBC did not disclose such figures was false, as the

Company had disclosed its purported CDO exposure at the end of 2005 and 2006, when those

numbers were just $418 and $729 million, respectively. To be sure, Defendant Woods’ false and

misleading statements and omissions were designed to downplay the fears among analysts that CIBC

was exposed to potential losses due to structured securities collateralized by subprime real estate

loans.

142. Defendant Woods’ play succeeded, as soon thereafter, analyst Mario Mendonca of

Genuity Capital Markets noted that he discussed the issue of CIBC’s subprime CDO market risk

with management, “ and the bank is not concerned with the issue as management has taken

‘ conservative’ provisions and believes that the bank has other forms of protection that would

limit the loss.”

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143. According to an article in the Globe and Mail released toward the end of the Class

Period, immediately following the May 31, 2007 earnings conference call, Defendant McCaughey

was unsettled by Defendant Shaw’s remarks that CIBC’s risk in the CDO market was “not major at

all,” and questioned the veracity of the statement. The Globe and Mail reported that, over the few

weeks following the conference call, Defendant McCaughey made himself an expert on the subject

of CIBC’s CDO risk levels and its exposure to the worsening subprime market. As such, he

purportedly pulled all relevant deal files and began a process of questioning “everyone, from

department heads to front-line traders.” He then gave a briefing on the subject to CIBC’s Board of

Directors on or in the middle of June 2007. Accordingly, by no later than the middle of June, there

can be no credible dispute that Defendant McCaughey and CIBC’s Board knew and understood the

true risks to CIBC from the subprime exposure was much higher than publicly stated. 7

Notwithstanding his knowledge, Defendant McCaughey failed to correct the blatant misstatements

made by Defendant Shaw on May 31, 2007 that “it is not a major issue for us in either a revenue area

but certainly not a major risk issue,” which made him uncomfortable enough to investigate the

matter for himself.

144. In fact, in addition to the reasons set forth above, the statements made by CIBC

executives, as set forth in ¶¶128-132, 135, 137, 139-140, were materially false and misleading,

because Defendants failed to disclose: (1) CIBC’s true exposure to these risky subprime and non-

prime CDOs and other mortgage-backed securities was almost $12 billion; and (2) to the extent that

the Company’s exposure was “hedged,” a significant percentage of the hedged risk was concentrated

7 There is little doubt that Defendant McCaughey knew, or was reckless in not knowing, thisinformation before that date as Defendant Shaw and other World Markets executives knew about theinformation.

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in one “single A” rated, undercapitalized insurance company that was woefully over-extended in the

subprime arena, and various other guarantor counterparties who were also on shaky financial

footing.

145. On June 15, 2007, Grant’s Interest Rate Observer published an article about

subprime mortgages and “the gingerbread Victorian asset-backed structures that house them,” posing

“everybody’s favorite question,” “who owns this stuff?” The article focused on CIBC’s investment

in Tricadia, particularly on the back-and-forth questioning between Defendant Shaw and analyst

Mark Ciccerelli during the May 31, 2007 earnings conference call. Specifically, Grant’s questioned

the accuracy of Defendant Shaw’s false statements that Tricadia was not a “2006 vintage,” and noted

that “Shaw’s interlocutor must have known at once that he was on to something.” The article went

on to state:

Shaw seemed not to be in possession of every single fact. Tricadia was priced onDec. 22, 2006, and settled on Jan. 23 of this year [2007]. It was certainly a plague-year mortgage deal. And if Tricadia is only “one of the names,” [CIBC washolding], it must have company. How much? . . . Add Tricadia to the volumeinferred and you get a hypothetical $2.6 billion. For perspective, CIBC has $12.9billion of stockholders’ equity.

Some may say – Shaw did say – that there is nothing much to worry about becauseTricadia is rated according to its superior, or super-senior, place in the CDO capitalstructure. Triple-A is triple-A, is it not? In fact, if the bear market in houses playsout, it might become something else.

Tricadia is a kind of CDO known as a “mezzanine CDO.” Which is to say that itowns–or, if it doesn’t own, it references or mirrors the performance of – themezzanine portions of residential mortgage-backed securities. These mezzanineportions are rated triple -B or triple -B-minus. The thing to know about tranches ofthis quality is that they aren’t Fort Knox. What protects them are the mortgagetranches still more junior than they. But in the typical RMBS, there’s not muchbelow them. As a rule, cumulative losses of 3% to 4.5% would destroy the insulationunder the triple-B tranche; losses of just 2% to 3% would expose the triple-B-minustranche to impairment. So if credit losses get severe enough, mezzanine tranchescould be a wipeout–not some of them, but most or all of them. And CDOs built ofmezzanine tranches could also be a wipeout – even the triple-A rated, “super-senior”structure.

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146. On July 10, 2007, CIBC issued a news release responding to the Grant’s newsletter

and falsely denying that it had $2.6 billion in subprime exposure. Instead, CIBC said its unhedged

investments in the U.S. subprime mortgage market were “well below” the $2.6 billion cited in the

newsletter. The news release specifically noted that “CIBC does not disclose individual securities

positions but confirms its previous statement to the media that its unhedged exposure to this sector is

well below U.S. $2.6 billion.”

147. The Company’s representations in ¶146 were materially false and misleading,

because the Company misrepresented or failed to disclose that: (1) CIBC’s true exposure to these

risky structured securities was almost $12 billion; and (2) to the extent that the Company’s exposure

was “hedged,” the hedge was at-risk because a significant percentage of the hedged risk was

concentrated in one “single A” rated, substantially undercapitalized financial guarantor, and various

other guarantor counterparties who were also on shaky financial footing.

148. In fact, investors had no idea of the precarious position that Defendants had placed

them in because investors had no way of knowing that the counterparty for 35% of the purportedly

hedged exposure was ACA, which was facing financial collapse. Defendants were well-aware,

however, that one of CIBC’s largest hedge counterparties was ACA. They were also well-aware of

facts concerning ACA that put the hedge at-risk. For example, by July 2007, ACA shares lost three-

quarters of their market value in just over one month, falling from just over $15.00 on June 19, 2007,

to $5.17 on July 24, 2007.

149. At or about that time, The Market Traders published an article entitled “Subprime’s

Ultimate Time Bomb.” The article forecast ACA’s eventual demise and the devastating

consequences for companies and banks that bought protection from ACA to safeguard their CDO

investments, particularly with respect to mezzanine CDOs backed by subprime mortgages.

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150. These readily apparent factors demonstrated that CIBC’s hedged investment was in

serious jeopardy and required CIBC to take additional write-downs by the end of the second quarter

of 2007, but Defendants failed to do so.

151. Because CIBC had not disclosed that ACA was a counterparty to any of its mortgage-

backed securities exposure, CIBC investors had no reason to link this information to CIBC.

152. Without this information concerning the counterparty, investors were forced to rely

on Defendants’ misrepresentations, which prompted a flurry of news reports regarding the

Company’s potential MBS exposure and its risk management practices in general. For example, on

July 10, 2007, The Globe and Mail published an article under the headline “More questions about

exposure to U.S. lending woes.” The article noted that CIBC’s “exposure to the U.S. subprime

mortgage market continues to attract more attention, although the bank has not changed its position

that the risk is much lower than the market speculates.” According to the article, “[t]he bank has

acknowledged exposure of about $330 million, but told The Globe and Mail last month that its

‘direct exposure’ is well below a figure of $2.6 billion that had been summarized by one industry

newsletter. The bank has declined to quantify its exposure and declined to comment yesterday.”

153. The July 10, 2007 Globe and Mail article referred to a “note to clients” published by

Genuity Capital Markets’ analyst Mario Mendonca, who previously worked for CIBC World

Markets. According to the article, Mr. Mendonca said he discussed the speculation with CIBC’s

senior management, and “ while management was not dismissive, we came away with the

impression that the hypothesized potential loss of $2.6 billion is a gross overestimate of the bank’s

actual exposure.” According to the article, Mr. Mendoca’s report pointed out that CIBC bought

back shares recently, “suggesting that management’s perception of potential loss is well below the

amounts recently hypothesized.”

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154. The July 10, 2007 Globe and Mail article also referred to a July 9, 2007 report by

Bank of Montreal analyst Ian de Verteuil, in which he wrote that “management has been limited in

its comments except to reiterate its previous media statements that exposure is ‘well below’ the

$2.6 billion (U.S.) level mentioned.”

155. The July 10, 2007 Globe and Mail article concluded with a discussion of a recent

article in Barron’s, speculating that “banks, brokerages and other financial firms could be facing

‘financial Armageddon’ because of subprime mortgages.” However, The Globe and Mail article

also noted that “[l]ast month, CIBC spokesperson Stephen Forbes told The Globe and Mail that an

article in Grant’s Interest Rate Observer . . . speculating that CIBC could have exposure of up to

$2.6 billion (U. S.) was ‘ simply not true.’” The article quotes Forbes, which said, “‘ [a] s we have

commented previously, our exposure to the subprime market is indirect through our participation in

structured credit transactions. . . The majority of this exposure is rated Triple-A. Our direct

exposure is well below what the report suggests.’”

156. On August 1, 2007, RBC Capital Markets issued a research report, noting it took

“comfort” in the fact that “CIBC has stated [on July 10, 2007] that its unhedged exposure to this

[below-prime real estate] sector is well below the US$2.6 billion exposure that media reports have

estimated.”

157. On August 13, 2007, CIBC took the very unusual step of pre-announcing its third-

quarter 2007 financial results. On that date, CIBC issued a news release, which was incorporated

into the Company’s Form 6-K filed with the SEC on the same date, headlined “CIBC expects strong

third quarter earnings.” CIBC said it expected to report earnings “above previous analyst

expectations” when it reported its third quarter financial results on August 2007. The news release

noted that the expected results included “good revenue, expense and loan loss performance in most

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business groups, as well as higher than normal gains on securities and credit derivative hedges . . .,”

and also noted that the expected positive results included mark-to-market write-downs of

approximately $290 million in CIBC’s Structured Credit business, on CDOs and RMBS related to

the U. S. mortgage market. The August 13, 2007 news release quoted Defendant McCaughey, who

said “‘ [w]e had positive financial results in many areas which more than offset the Structured Credit

write-downs.’”

158. Having couched the news in the positive glow of expected strong earnings and

revenues that “more than offset” the write-downs in the Structured Credit business, the August 13,

2007 news release provided the first details – although incomplete and misleading – about CIBC’s

unhedged position in securities tied to the U.S. residential real estate market:

CIBC’s exposure to the [US residential mortgage market] before write downs isapproximately US $1.7 billion (excluding exposure directly hedged with othercounterparties).

159. However, the news release emphasized the quality of the assets underlying CIBC’s

unhedged exposure, stating:

CIBC estimates that less than 60% of this exposure relates to underlying subprimemortgages, while the remainder is midprime and higher grade assets. The majorityof the US$1.7 billion exposure continues to be AAA-rated, the highest ratingcategory.

160. The August 13, 2007 news release was false and misleading and reinforced the

misleading impression that the “total extent” of CIBC’s exposure to mortgaged-backed securities

was much smaller than it actually was. Moreover, Defendants still failed to disclose the true amount

of CIBC’s exposure to mortgage-backed securities secured by subprime and non-prime real estate

loans, specifically its $9.8 billion in hedged exposure, and that a large percentage of the Company’s

hedged exposure was through insurance purchased from one “single A” rated, substantially

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undercapitalized financial guarantor, and various other guarantor counterparties who were also on

shaky financial footing.

161. The August 13, 2007 news release was also false and misleading in that it materially

understated the true impairment in CIBC’s structured securities portfolio as of July 31, 2007. In

reality, CIBC’s CDO and RMBS portfolios were 40% impaired as of that date. Accordingly, CIBC

should have recorded a cumulative write-down of $5.65 billion ($3.5 billion more than the write-

down it should have recorded as of April 30, 2007), instead of the $290 million write-down reported.

The August 13, 2007 news release also had the effect of calming analysts’ fears about CIBC’s true

exposure to these structured securities, and continued the false and misleading impression that

CIBC’s true exposure was much less that it really was.

162. On August 14, 2007, The Toronto Star published a story headlined “CIBC previews

stellar results; In unusual move that boosts shares, early unveiling shows bank’s subprime write-

downs, rise in profit.” The article went on to state:

[CIBC] assured nervous investors yesterday that third-quarter profit will handily beatBay Street’s expectations despite $290 million in writedowns related to turmoil in theUnited States residential-mortgage market.

The country’s fifth-largest bank, which has endured nearly two months of intensespeculation about subprime exposure, took the unusual step of giving an earningspreview. And the news immediately breathed life into the bank’s withering stock.

* * *

Investors who have pummeled financial stocks in recent weeks amid growingsubprime-loan troubles arising in the U.S., bid up CIBC’s stock $1.15, or 1.3%, to$88.66 on the [Toronto Stock Exchange].

* * *

“I think what they wanted to do was try to stem the bleeding, if you want to put itthat way, and that’s what caused them to come early with this,” says John Kinsey,portfolio manager at Caldwell Securities.

“It really was a matter of their stock was being hit more than the others.”

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Earnings previews are fairly common for other companies, but are rare for big banks.

CIBC’s preview was probably meant to calm investors who are still fuming over thebank’s $2.4 billion (U. S.) settlement of Enron-related litigation in 2005, Kinsey said.

Eliminating some doubt surrounding CIBC’s subprime exposure can only be apositive, John Aiken of Dundee Securities said in a note to clients: “Given the factthat the pre-announcement provides a much greater degree of certainty surrounding(CIBC’s) potential losses and the fact that its valuation has experienced a significantdowndraft, we are raising our rating on CIBC to market outperform.”

163. On August 14, 2007, the Edmonton Journal (Alberta), published an article headlined,

“CIBC clears the air on exposure to subprime market.” According to the article, CIBC’s August

13, 2007 pre-release sent “the stock up more than 5 percent before it settled at $88.66, up $1.15 on

the TSX amid a broader market downturn.” The article went on to state:

“CIBC has become a target every time there is a problem in the market out there,”said Michael Sprung, president of Sprung & Co. Investment Counsel, which ownsCIBC shares. “To that extent, I think management is really trying to say: ‘We’vecleaned up our act and are monitoring everything we can see. And we’re no worseoff than the next guy. ’”

CIBC said its exposure to holdings connected to the U. S. residential mortgage marketis about $1.7 billion US (excluding that hedged with counter-parties), the majority ofwhich is highly rated. The bank estimates less than 60 percent of this, or about $1billion, is linked to subprime mortgages.

The subprime portion works out to less than 0.5 per cent of the company’s totalassets, said Genuity Capital analyst Mario Mendonca, who described the bank’sdisclosure as a good move that could have contained more information.

“It would be good to know what the total exposure is hedged and unhedged,” he said.

He was also looking for some idea of who CIBC has hedged the investments with,“Maybe they could tell us these are very highly rated financial institutions.”

164. In response to this press release, CIBC World Markets Equity Research Company

issued an analyst report on August 13, 2007, which reported:

Most importantly, CM disclosed its total exposure to U.S. residential mortgages atapproximately US$1.7 billion (before write-downs and net of direct hedges), withless than 60% (US $1 billion) relating to underlying U.S. sub-prime mortgages . . .CM holds sub-prime index hedges of US$300 million (in addition to the directhedges) to mitigate its exposure. On a net basis, CM appears to have remaining

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exposure to securities underpinned by U.S. sub-prime mortgages of less than US$700million, and remaining exposure to U.S. residential mortgages of US$ 1.1 billion (ifwe net the Q3/07 write-down and the sub-prime index hedge). We believe that thisdisclosure is a positive for the stock since it limits the uncertainty regarding CM’soverall exposure to U.S. residential mortgages.

165. On August 30, 2007, CIBC issued a news release announcing its 2007 third quarter

financial results, which was later incorporated into the Company’s Form 6-K filed with the SEC.

According to the news release, net income rose 26% from the same period in the prior year, despite

the previously announced $290 million mark-to-market losses from CDOs and RMBSs related to the

U.S. residential mortgage market. CIBC also announced that it increased its dividend by 13%, or 10

cents per share (to 87 cents per share). The news release also contained a discussion of “[E]xposures

to U.S. residential mortgage market,” stating:

During the quarter, we had mark-to-market losses, net of related hedges of $290million ($190 million after-tax) on CDOs and RMBS related to the U.S. residentialmortgage market. As of July 31, 2007, our exposure to the U. S. residential mortgagemarket was approximately US$1.7 billion (excluding exposure directly hedged withother counterparties). We estimate that less than 60% of this exposure related tounderlying sub-prime mortgages, while the remainder was mid-prime and highergrade assets. The exposure has been mitigated by sub-prime index hedges ofapproximately US$330 million.

166. The news release also noted that:

CIBC has not yet completed the August month-end mark-to-market process for itsCDOs and RMBS and related hedges. However, based on indicative dealerquotations and the ABX indices as proxies, the mark-to-market write-downs areapproximately $90 million ($60 million after-tax) for the month-to-date.

167. The August 30, 2007 news release contained substantially the same discussion of

CIBC’s purportedly careful approach to managing risk and capital resources to the discussion in the

May 31, 2007 news release, describing in detail how CIBC managed market risk, liquidity risk, and

capital resources. The news release also contained a similar discussion of “[o]ff-balance sheet

arrangements,” again noting, “[w]e enter into several types of off-balance sheet arrangements in the

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normal course of our business. These include transactions with VIEs, derivatives, credit-related

arrangements and guarantees.”

168. The August 30, 2007 news release, like the May 31, 2007 news release, referred

investors to pages 67 to 69 of CIBC’s 2006 Annual Accountability Report for details of its

off-balance sheet arrangements, and instructed, “[t]here were no other significant changes to off-

balance sheet arrangements for the three and nine months ended July 31, 2007 . . .” The referenced

section of the 2006 Annual Accountability Report states: “Although actual losses are not expected to

be material, as of October 31, 2006, our maximum exposure to loss as a result of involvement with

the CDOs was approximately $729 million (2005: $418 million). For this purpose, maximum

exposure to loss is considered to be the amount of liquidity facilities provided to, and investments in,

the CDOs.”

169. The statements made in the August 30, 2007 news release were blatantly false and

misleading, and still failed to reveal CIBC’s true exposure to securities tied to the subprime and non-

prime U. S. real estate market. Moreover, in light of the recent revelation that CIBC’s total unhedged

exposure to securities tied to the U.S. residential real estate market was $1.7 billion, it falsely

suggested that the additional $971 million in unhedged exposure ($1.7 billion less $729 million),

was due to other types of mortgage-backed securities.

170. The August 30, 2007 news release also contained an extensive discussion of CIBC’s

VaR purporting to quantify, in mathematical terms, CIBC’s market risk, that CIBC defines as “the

potential for financial loss from adverse changes in underlying market factors, including interest and

foreign exchange rates, credit spreads, and equity and commodity prices.” The news release

contained a table setting forth, in numeric terms, CIBC’s VaR, by risk type and in the aggregate, for

CIBC’s Trading Portfolio, and further stated that:

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Total average risk was down from the same quarter last year primarily due to lowerlevels of credit spread risk, partially offset by higher levels of interest rate risk.Credit spread risk increased during the quarter primarily due to higher spread levelsfor structured credit assets.

171. The statements about VaR and the VaR numbers presented in the news release were

false and misleading and misrepresented CIBC’s true market risk profile. Moreover, the VaR

numbers were far below CIBC’s true VaR numbers in that they excluded CIBC’s mortgage-backed

securities from the calculation and used artificially low mortgage default rates in the calculations to

create the appearance that CIBC’s VaR was much lower than it actually was.

172. The August 30, 2007 news release was also false and misleading in that it still

materially understated the true impairment in CIBC’s structured securities portfolio as of July 31,

2007. In reality, CIBC’s CDO and RMBS portfolios were 40% impaired as of that date.

Accordingly, CIBC should have recorded a cumulative write-down of $5.65 billion ($3.5 billion

more than the write-down it should have recorded as of April 30, 2007), instead of the $290 million

write-down reported. Like the August 13, 2007 news release, the August 30, 2007 news release also

had the effect of calming analysts’ fears about CIBC’s true exposure to these structured securities,

and continued the false and misleading impression that CIBC’s true exposure was much less than it

really was.

173. On the same day, during an earnings conference call, Defendant Kilgour, CIBC’s

Chief Risk Officer, along with Defendants Shaw and Wood, all of which had authority to speak for

CIBC, made additional false and misleading statements, again understating the extent of CIBC’s

exposure to losses from structured securities. The following material exchanges occurred, in which

Defendant Kilgour reported that CIBC’s exposure was closely watched, actively managed, including

mark-to-market valuations, and was both minimal and collateralized ( i.e., secured):

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Tom Woods (Senior Executive Vice President and Chief Financial Officer):

Turning now to CIBC World Markets Corporation, revenue was down from recentquarters due to the 290 million mark-to-market write-downs net of gains on relatedhedges in the US CDO and RMBS portfolio that we announced on August 13.

* * *

As we said in our press release this morning, we’ve not yet completed the August 31month-end marks on our CDO/RMBS exposures. But using dealer quotes in theABX indices as proxies, we would expect additional write-downs of about $90million so far in the fourth quarter.

I would point out, however, that these indices have recently begun to recover afterbeing down a greater amount earlier in the month.

Ken Kilgour (Senior Executive Vice President and Chief Risk Officer, RiskManagement):

Turning to market risk, slide 53 displays Q3 daily trading revenues against the valueat risk in our trading portfolio. Risk levels averaged $9.9 million, slightly above thelevel of Q2. The material negative revenue days were due to write-downs in thevalue of a number of structured credit assets as Tom has already discussed.

* * *

Turning to slide 55, I would like to make some brief remarks regarding certaintopical risks. As a reminder, our exposure to the US residential mortgage marketthrough residential mortgage-backed securities and collateralized debt obligations isas described in our August 13 press release. CIBC’s underwriting exposure in theleveraged buyout areas is minimal and actively managed. Our pre-correctionunderwriting commitment to this space amounts to less than 0.6% of the bank’sassets with no covenant light exposure. Our exposure to hedge funds is minimal andcollateralized.

Brian Shaw (CIBC World Markets Chairman and Chief Executive Officer):

Revenue in the most recent quarter was down, primarily due to the mark-to-marketwrite-down net of related hedges on structured credit positions related to the USresidential mortgage market.

The majority of the write-down occurred in the latter stages of July and coincidedwith the rapid deterioration in the market during that period. In light of theunprecedented volatility and deterioration in the US residential real estate market, wehave not initiated any new activity in this segment of our structured credit business.We will continue to review the overall conditions and risks in this market on anongoing basis to ensure that any future activities remain consistent with CIBC’soverall goal of delivering sustainable performance over the long term.

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Mario Mendonca (Genuity Capital Markets Analyst):

That’s very helpful. Just going back to the CDO, the write-down – the 290 and thenthe 90 that’s coming up, it would be helpful to understand of the $1.7 billion inexposure, was the 290 write-down related to one security, or was that more of a sortof general type write-down that you would say, well, there are several securities inthere, and all of them should be written down by a small percentage. Was it reallyjust one that really went to zero?

Tom Woods

Mario, the $1.7 billion consists of a relatively small number of positions but morethan a couple. RMBS warehouses, some CDO – one CDO structure and some otherCDO exposures. So, think of it as being five or six positions in that vicinity. Eachone we do a very detailed fair value calculation, because all of this is in mark-to-market books, unlike many of the – well, virtually all of the American investmentbanks who have them in accrual books.

As you know, these have traded very rarely in the last couple of quarters. So themarking exercise is a very rigorous process using independent dealer quotes to theextent we can get them. We have our own models which are market-driven, likeABX input models, and to the extent there are relevant ABX indices on the RMBSportions, we use those as well and really triangulate in on values. We have appliedsome liquidity discounts where applicable and worked through all that with ourauditors. So, it’s certainly quite a rigorous process.

174. As fully known to Defendants, the suggestion that CIBC’s hedged exposure was

minimal was false. CIBC’s exposure was roughly the equivalent of CIBC’s entire equity at that

time, and, unbeknownst to investors, 35% of its hedged investments were insured by ACA.

Furthermore, Defendants failed to disclose that CIBC’s structured securities portfolio had suffered a

material loss in value well beyond what was disclosed in this call and the accompanying financial

statement for the 2007 third quarter.

175. On August 30, 2007, Defendant Woods was also interviewed on the Business News

Network with respect to CIBC’s 2007 third quarter interim report. Defendant Woods characterized

CIBC’s RMBS exposure as “very low” – a knowingly false and misleading statement, and continued

to conceal material information regarding the total exposure of CIBC to U.S. residential mortgage

market investments. Moreover, he referred to a hedge of $300 million, which was ambiguous in

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terms of whether he was referring to CIBC’s hedged investments, unhedged investments, or total

investments in the U. S. residential mortgage market. If it was meant to describe the total investment

in hedged investments or total investments, it was false and deceptive and constituted a

misrepresentation. In addition, Defendant Woods stated that, one year earlier (2006), the U.S.

residential mortgage market was considered to be an average risk business. He specifically stated, as

follows:

BNN:

How are you positioned if there is an economic downturn because of these creditcrunch related issues?

Woods:

Yeah. We’ve cut back our risk quite a bit – particularly in the world markets area.So, we are pretty close to shore in most of our risk positions. We have what’s turnedout to be an unfortunately large exposure, as you know, in the U.S. residential realestate mortgage business. We’ve hedged up $300 million of that – so, our mainchallenge is to mitigate that risk over the next little while. But, apart from that, weare running very low value at risk numbers and feeling pretty good about thosepositions.

BNN:

On that subprime issue you announced today after one month here another $90million – $60 million after tax – can you give us a sense of how much more theremight be?

Woods:

Well, Howard, it’s hard to know – it really depends on, you know, how bad thesubprime residential real estate market gets in the U.S. We are marking these tomarket. You know, a number of U. S. financial institutions are able to put these in theaccrual books – so, you know, these are all mark-to-market. It imputes a relativelyhigh ultimate delinquency default loss rates if those don’t materialize and some ofthe rating agencies don’t think they will. You know, some of that PNL may comeback, but, it’s hard to know. The good news is the ABX index which is the bellweather for that business bounced back this week. It’s hard to know if there is a turnthere – but, you know, we have got our risk down as low as we can in that area andwe will just have to watch and see what happens fundamentally in that market.

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BNN:

But, given that it is $60 million after tax for this one month, could one extrapolatethat over three months it might be three times that – or, is that too simplistic?

Woods:

No. I don’t think that’s fair. It really depends on the ABX index which, as I say, diddecline a fair bit in August – down about 7%. But, it’s bounced back right now.You know, some observers say it’s oversold – but, you know, the market is themarket. It’s hard to second guess that. But, it’s not reasonable just to extrapolatethat. As I say, those are already imputing pretty high loss rates which fundamentally,you know, many people question – but, it’s not reasonable to extrapolate off that $60million number.

BNN:

What about the transparency of collateralized debt obligations? Are you reviewingthat issue within the Bank? Are you reviewing any exposure at all to structuredproducts?

Woods:

Well, we’ve reviewed it. We’ve been involved in the CDO market for about 10years where for clients we structure these deals. When the residential real estatemarket in the U.S. started to decline in June – July, we upped our efforts atlooking at all of the CDO books. We have very low exposure right now.Certainly, because this is very topical, we will enhance the disclosure as all bankswill. But you know, a year or so ago, this product was viewed as no higher risk thanmany other products, but certainly, this has been a wake up call for anybody involvedin the more complex parts of the CDO business.

BNN:

I realize that it is a relatively small amount given your earnings – but, it is the issueof the day. Does it raise questions about risk management at the bank again eventhough this is a relatively small amount of money for you?

Woods:

Well, as I say, we have looked extensively at all of our positions. You know, inhindsight, should we have seen signals that that part of the market was going todeteriorate? Sure, anyone in the business could have done a better job in that area.But to be frank, a year ago this was no higher a risk business from the riskmanagement assessment as many other businesses. In fact, it was less than many ofthe equity businesses we have – but, certainly, it’s a wakeup call for everybody thatyou’ve got to be extremely vigilant on what’s known as the “tail risk.” You know,

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the 1 % probability that liquidity or markets will deteriorate. So, it’s something, youknow, we’re certainly going to focus on.

176. In addition to the reasons set forth above, Defendants’ representations in ¶¶157-159,

165-168, 170, 173 and 175, were materially false and misleading and still failed to disclose: (1) the

extent of CIBC’s exposure to the securities related to the U.S. residential real estate market,

specifically including its $9.8 billion in additional hedged exposure; (2) that a large part of the

Company’s hedged exposure was insured as guaranteed by one “single A” rated, substantially

undercapitalized financial guarantor, and various other guarantor counterparties who were also on

financially shaky footing; and (3) that a sizable amount of the exposure related to the $1.7 billion in

unhedged CDOs and RMBSs that was not subprime was related to equally risky, Alt-A mortgages

originated with reduced or no information verification or borrower documentation.

177. Defendants’ false and misleading statements regarding CIBC’s true exposure to the

U.S. real estate market had a positive impact on CIBC’s stock price. For example, on August 30,

2007, The Globe and Mail published a story under the headline “CIBC stock follows profit higher,”

noting “[s]hares of [CIBC] jumped Thursday after the bank reported strong earnings despite

continuing troubles from investments related to the U.S. subprime mortgage market.” The article

further noted that “CIBC said earlier this month that its total exposure to these subprime-related

investments was about $1 billion (U. S.). The announcement lifted the bank’s share price at the time,

partly because some investors were relieved the figure wasn’t higher.”

ACA’s Financial Condition Continues to Deteriorate

178. Beginning in or around the fall of 2007, a new series of news articles was published

regarding the precarious financial condition of ACA Capital Holdings, Inc., the holding company for

ACA. Still unbeknownst to CIBC investors, ACA provided the “hedge” for a large percentage of

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CIBC’s still undisclosed “hedged portfolio” of mortgage-backed securities relating to the U.S. real

estate market. For example:

a On October 23, 2007, The Motley Fool’s Brian D. Pacampara reported:

ACA’s stock has come down a lot recently, but bankruptcy is just a matter of time.Its portfolio of [guaranteed] commercial debt obligations (CDOs) is more than 180times larger than its capital base ($61 [billion] vs. $326 [million]). A collateralimpairment of 7% spread across the pool underlying its mezzanine CDOs would beenough to [send] this firm packing . . . . ACA would be on the hook for its entire$9.3 [billion] mezzanine risk exposure, i.e., game over. The New York-basedprovider of credit protection products is down 47% since the call and off a depressing71 % since last November . . . Companies with insane debt levels ... leave virtually nomargin of safety. For businesses with overleveraged – and in ACA’s case, hyper-leveraged – capital structures, even the slightest downturn can wipe outshareholders’ entire equity stake.

a In October 2008, IronBridge Capital Management, L.P. reported:

Bust: By the end of 2006, home prices topped out, and started to fall. Default ratesrose above investment bank models’ predictions. Radian, MGIC, and ACA backedbonds started to blow up; and it was clear that they were sitting on low quality debt,and solvency came into question.

179. Despite the public knowledge regarding ACA’s “hyper-leveraged” structure and its

imminent danger of bankruptcy, CIBC still remained silent regarding its hedged portfolio and that

ACA was one of its largest mortgage-backed securities counterparties – or that it was a counterparty

at all.

180. To the contrary, on November 5, 2007, during an earnings conference call, Defendant

Woods, CIBC’s CFO, refused to disclose CIBC’s hedged exposure to the U.S. real estate market,

and falsely assured analysts that its mortgage-backed securities counterparty quality was good:

Andre Hardy, analyst (RBC Capital)

The other [question] relates to the residential mortgage-backed securities in the U.S.You have talked about a nonhedged exposure or a net exposure by the sounds of it.Are you willing to talk about how big the gross exposure is or how comfortable youare with the counterparty quality, given the disastrous weeks that some of themortgage insurers have had in the U.S.?

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Tom Woods (CFO)

It is Tom. No, we’re not going to go any further than we have already gone. Wehave provided a fair bit of detail on the unhedged positions, the hedges we havegood counterparties, and we are not going to go any further than that.

181. Defendant Woods’ representations in ¶180 were materially false and misleading,

because he failed to disclose: (1) the extent of CIBC’s true exposure the U.S. real estate market,

specifically including its $9.8 billion in hedged exposure; and (2) that 35% of the Company’s hedged

exposure was insured by ACA, a “single A” rated, substantially undercapitalized financial guarantor

already identified by the financial press as being at risk for bankruptcy, and various other guarantor

counterparties who were also on shaky financial footing.

THE TRUTH BEGINS TO EMERGETHROUGH A SERIES OF PARTIAL DISCLOSURES

182. Consistent with their recently-adopted practice of pre-releasing financial results to

soften the market impact of ever increasing mortgage-backed securities losses, on November 9,

2007, CIBC issued a news release announcing that it expected an additional write-down of

$463 million ($302 million after tax) for the fourth quarter of 2007 relating to its exposure to the

U.S. real estate market.

183. The November 9, 2007 news release was false and misleading in that it materially

understated the true impairment in CIBC’s structured securities portfolio as of the end of the 2007

fourth quarter on October 31, 2007. In reality, CIBC’s CDO and RMBS portfolios were now 60%

impaired as of that date. Accordingly, CIBC should have recorded a cumulative write-down of

$7.15 billion ($1.5 billion more than the write-down it should have recorded as of July 31, 2007),

instead of the $463 million write-down reported.

184. On December 6, 2007, CIBC issued a news release, incorporated into its Form 6-K

filed with the SEC on the same date, announcing its 2007 fourth quarter and fiscal 2007 results. This

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news release stunned the investing community by revealing a surprisingly large exposure to the

troubled U.S. housing market. CIBC said its write-downs had already reached $1 billion, and

warned of the possibility of higher losses in the future related to its newly revealed $9.8 billion in

hedged exposure to the subprime mortgage and CDO market. The news release stated:

In the U.S., real estate finance and merchant banking reported good results, withother areas showing improvement. The good performance in these areas was offsetby the mark-to-market write-downs CIBC recorded in its structured credit businessrelated to the U.S. residential mortgage market.

As at October 31, 2007, CIBC’s net unhedged exposure to CDOs and RMBS relatedto the U.S. residential mortgage market was approximately $741 million. Mitigatingthis exposure are subprime index hedges of notional $283 million, with a fair value$119 million. Conditions in the U. S. residential mortgage market have continued todeteriorate since year-end. We estimate that mark-to-market write-downs will beapproximately $225 million ($150 million after-tax) for November. Partiallyoffsetting this were gains on credit derivative hedges of approximately $45 million($30 million after-tax).

In addition we have exposures to the U.S. subprime residential mortgage marketthrough derivative contracts which are hedged with investment-grade counterparties.As of October 31, 2007, the notional amount of these hedged contracts was$9.3 billion and the related on-balance sheet fair value was $4.0 billion.Management has assessed the counterparty credit exposure relating to these contractsin determining fair value. Market and economic conditions relating to thesecounterparties may change in the future, which could result in significant futurelosses.

185. The December 6, 2007 news release was the first suggestion by Defendants that

CIBC’s true exposure to structured securities secured by the U.S. real estate market was almost

$12 billion, in stark contrast to Defendants’ earlier Class Period statements that it was much smaller

and inconsequential. It was also the first indication of the magnitude of the potential losses of both

its hedged and unhedged investments, with estimated fair market values of the underlying collateral

at less than one half of the (original) notional value. However, the news release was false and

misleading because, even at this stage, CIBC insisted that its hedged investments were sound, and

that no significant write-downs were foreseen as it was still relying on the hedges to make up the

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forecasted deficit of $5.3 billion, when, in fact, it knew that at least one of its counterparties to the

hedge, ACA, was in serious financial trouble.

186. The December 6, 2007 news release continued to materially understate the true

impairment in CIBC’s structured securities portfolio as of the end of the 2007 fourth quarter, and

repeated the statements made in the November 9, 2007 news release that CIBC recorded a write-

down of $463 million at quarter-end. In reality, CIBC’s CDO and RMBS portfolios were now 60%

impaired as of October 31, 2007. Accordingly, CIBC should have recorded a cumulative write-

down of $7.15 billion ($1.5 billion more than the write-down it should have recorded as of July 31,

2007), instead of the $463 million write-down reported. The news release was false and misleading

in that it materially understated the true impairment of CIBC’s structured securities portfolio, and

materially understated the write-down required to be taken at quarter-end.

187. On December 6, 2007 CIBC held an analyst conference call to discuss the fourth

quarter financial results. On that call, certain of the Individual Defendants made further false and

misleading statements regarding the full extent and true nature of CIBC’s mortgage-backed

securities exposure. The following material exchanges occurred on the call:

Mr. McCaughey, Canadian Imperial Bank of Commerce – (President and ChiefExecutive Officer)

Let me start with our unhedged exposure. As we have disclosed today, our growthunhedged exposure at October 31 was approximately US$1.6 billion. Against thisamount we have recorded mark-to-market write-downs of US$860 million, offset bywrite-downs on assets sold of US $41 million, leading us to a remaining unhedgedexposure of US$784 million as of October 31, 2007. This remaining unhedgedexposure is directionally mitigated by the remaining value of the ABX hedges ofUS$174 million.

Conditions in the US residential mortgage market have continued to deteriorate in thenew year and the month of November, and we estimate that we would incur furthermark-to-market write downs on this portfolio in the first quarter. . . In addition toour unhedged exposure, we have also disclosed today US$9.8 billion of hedgedcredit derivatives exposure to the US subprime residential mortgage market. Over

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90% of the rated underlying assets are AAA-rated securities, and the averagesubprime component is about 60%.

We have protection offsetting the US$9.8 billion through credit default swaps. 47%of our hedged exposure is spread across five AAA-rated financial guarantors.Although the financial performance of these guarantors has received some scrutiny,all five have maintained their AAA rating, none have been downgraded, one hasbeen recapitalized by its parent banks, and many of the others are partially or fullyowned by other financial institutions. These financial guarantors represent a veryimportant part of the US and global financial system, and we believe they willcontinue to play an important role in the future.

* * *

The rest of our hedged exposure is to one A rated financial guarantor that hasrecently been placed on credit watch. This institution is working closely withadvisors and its shareholders and its maintaining an active dialog with itscounterparties including ourselves. One possible outcome is a recapitalization of thecompany. Ultimately, if there are losses, the probability is that these losses wouldplay out over a period of time. Although we would continue to access thecounterparties’ ability to pay and possibly incur counterparties’ ability to pay andpossibly incur counterparty credit reserve charges in events of losses actuallyoccurring. If that were to happen, CIBC has the capital strength to observe any suchloss. . . .

In our risk assessments, we underestimated the extent to which the subprimemarket might deteriorate and the degree to which that would impact securitiesthat were structured to be very low-risk. This, coupled with an overdependenceon the extremely high ratings of these securities, resulted in the buildup (sic) ofexposures that are too large for CIBC’s risk appetite.

Let me now review the steps we have taken to date to address our exposure in theseareas. First, we halted new business activities in structured credit. Second, we haveput on hedges against our unhedged position, and for our hedged positions, as Imentioned, we have continued to take steps to mitigate extreme tail risk. Third, wehave changed leadership of our debt Capital Markets area, and our structured creditbusiness is being managed directly by Brian Shaw, the head of our Capital Marketsbusiness.

In addition to these specific, actions, we are also strategically examining all of ourbusiness activities to ensure that they are aligned with our imperative of deliveringconsistent and sustainable performance.

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188. During the same earnings conference call on December 6, 2007, CIBC announced

that “all but US$3.5 billion notional [CDO/RMBS positions are] hedged with AAA and AA

counterparties.” Also on this call, Defendant Woods failed to identify the A-rated counterparty.

189. Defendant McCaughey admitted in response to a question posed by Blackmont

Capital Report analyst Brad Smith during the December 6, 2007 call, that CIBC recklessly

disregarded the risks posed by concentrating more than one-third of its hedges-purported designed to

guarantee already risky subprime mortgage-backed CDOs – with an A-rated financial guarantor,

later known to be ACA:

The transaction question on the A [rated counterparty] were intermediationtransactions, and essentially those are back-to-back derivative transactions. It is nowclear that the combination of having a concentrated exposure to an A-ratedcounterparty in a significantly stressed market is not a position we would choose tobe in.

190. During this same conference call, Defendant Woods responded to a question by

admitting that CIBC’s new disclosed hedged exposure related to roughly 60% subprime mortgages,

with a “fair bit” of the remaining exposure related to “Alt-A” mortgages, which have “inferior

documentation.”

191. The news was a shock to the stock market analysts that covered CIBC. On December

6, 2007, Blackmont Capital Report analyst Brad Smith reported that the $9.3 billion [$9.8 billion

U.S.] disclosure confirmed that the “potential loss exposure could be materially higher than

previously thought.” CIBC World Markets analyst added that CIBC’s stock goes back into the

“penalty box” for “poor risk management,” as related to the disclosure regarding the $9.3 billion

[$9.8 billion U.S.], of which $3.4 billion was finally disclosed as insured by a single A-rated

counterparty (believed, but not known, to be ACA).

192. On December 7, 2007, analyst Brad Smith at Blackmont Capital Report reported

“disclosure of the extent of the bank’s gross U.S. non-prime mortgage exposure can only be

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described as worst-case scenario confirmation, reflecting a failure in certain internal risk control. . .

.” National Bank Financial elaborated in its Analyst Report that “what we find most troubling is the

breakdown of the counterparties hedging these assets . . . In fact, $3.5 billion is hedged with just

one single-A rated counterparty. . . .” This report added that “ the quality of the hedges is much

weaker than we had anticipated.” On this same date, Credit Suisse’s Analyst Report also expressed

dismay at these disclosures:

CDO Exposure: The most relevant disclosure was an update on the Bank’s hedgedand unhedged exposure to CDO and RMBS conduits. As at October 31, 2007, thenotional amount of these hedged contracts was US$9.86 billion . . . Incredibly, thebulk of the CDO contracts were entered into during the last 12-18 months. Howdid this happen? A combination of zealousness to compete with the large USmoney-centre banks, faulty risk management systems, and questionable judgmentregarding its outlook of the US sub -prime real-estate market. . . . The largest riskis with a ‘single A’ counterparty which represents 35% ($3.4 billion) of thenotional value of these contracts.

193. CIBC’s shares fell 8.4% over the next two trading days, from $85.83 to $78.59, on

the news. The announcement particularly came as a surprise in light of CIBC’s assurances on May

31, 2007 that its exposure to mortgage-backed securities secured by subprime and non-prime loans

was “not a major risk issue,” and on November 5, 2007 that its mortgage-backed securities

counterparty quality was good, and the lack of qualification of those reassurances in the ensuing

months as the U.S. mortgage tsunami continued to grow. The events erased approximately $2.5

billion of CIBC’s market capitalization from a total of $30 billion.

194. Also on December 6, 2007, CIBC issued its 2007 Annual Accountability Report,

which was filed with the SEC on Form 40-F on December 10, 2007. In the Management’s

Discussion and Analysis (“MD&A”) section of the report, CIBC again misrepresented and omitted

the true and accurate mark-to-market values of both its hedged and unhedged investments in

mortgage-backed securities, stating only that CIBC had exposure, which might result in future losses

depending on future market and economic conditions relating to the counterparties.

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Notwithstanding, CIBC continued to misrepresent and overvalue its mortgage-backed securities

investments in recording mark-to-market losses of only $777 million on CDO and RMBS

investments. Accordingly, Defendants failed to make a timely disclosure of the material impairment

to its CDO and RMBS related hedged and unhedged assets.

195. The December 6, 2007 Annual Accountability Report also contained a detailed

discussion of and table depicting “risk-weighted assets” in numeric terms, purportedly “reflecting

market risk in the trading portfolio . . . calculated based on . . . VaR models approved by OSFI.”

The Annual Accountability Report also included an extensive discussion of CIBC’s VaR purporting

to quantify CIBC’s market risk, by risk type and in the aggregate, and a table depicting the same in

numeric terms.

196. The statements about VaR and the VaR numbers presented in the Annual

Accountability Report were false and misleading and misrepresented CIBC’s true market risk

profile. Moreover, the VaR numbers were far below CIBC’s true VaR numbers in that they

excluded CIBC’s mortgage-backed securities from the calculation and used artificially low mortgage

default rates in the calculations to create the appearance that CIBC’s VaR was much lower than it

actually was.

197. On December 13, 2007, Bloomberg.com published an article by Jonathan Weil

entitled “CIBC’s Big Subprime Secret Might Cost Billions.” According to the article:

It’s unclear why CIBC thought it made sense to have a small A-rated insurerguarantee a third of its AAA-rated “super senior” CDO holdings. This would belike paying your middle– class friend to insure your 100-foot yacht. Perhaps it justwanted to say it was hedged, and didn’t think about needing to file a claim someday.

198. On December 13, 2007, after the market close, the NYSE issued a press release

stating that it determined that the common stock of ACA “should be suspended prior to the market

opening on Tuesday, December 18, 2007.” By this time, it was widely speculated that ACA was the

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financial counterparty from which CIBC purchased default security against 35%, or $3.5 billion, of

its subprime investments – although CIBC still refused to confirm this fact.

199. On this news, CIBC’s common shares fell an additional 3.9% on December 14, 2007.

200. On December 17, 2007, after the market close, S&P downgraded CIBC from stable to

negative amid reports of possible additional write-downs of $2 billion from CIBC’s mortgage-

backed securities investments.

201. On this news, CIBC’s common shares declined an additional 2.5% on December 18,

2007.

202. On December 19, 2007, ACA publicly revealed that it had entered into a Forbearance

Agreement with its Structured Credit and other similarly situated counterparties (which effectively

meant it was bankrupt). It is highly probable and reasonable to infer that Defendants were aware of

the Forbearance Agreement well-before it was publicly announced, since CIBC was one of ACA’s

largest counterparty customers, was likely a party to the Agreement, and would have participated in

the negotiation and drafting process.

203. On this date, in the face of ACA’s continued stream of bad news, Defendants were

forced to finally disclose that ACA was in fact one of CIBC’s largest counterparties for its hedged

exposure to the U.S. mortgage-backed securities market.

204. On December 19, 2007, CIBC issued a news release, incorporated in the Company’s

Form 6-K filed with the SEC on the same date, entitled “CIBC Provides Update to Previous

Disclosure on U.S. Subprime Real Estate CDO / RMBS including Likely Large Write-down in First

Quarter 2008 Financial Results.” In this news release, the Company disclosed:

Following Standard and Poor’s announcement today that it had reduced the creditrating of ACA Financial Guaranty Corp. from “A” to “CCC,” CIBC confirmed thatACA is a hedge counterparty to CIBC in respect of approximately U.S. $3.5 billionof its U.S. subprime real estate exposure.

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It is not known whether ACA will continue as a viable counterparty to CIBC.Although CIBC believes it is premature to predict the outcome, CIBC believes thereis a reasonably high probability that it will incur a large charge in its financial resultsfor the First Quarter ending January 31, 2008.

As CIBC disclosed on page 52 of its Investor Presentation dated December 6, 2007,the mark of the hedge protection from the “A-rated” counterparty (ACA) as atOctober 31, 2007 was U.S. $1.71 billion. As at November 30, 2007, this mark wasUS$2.0 billion. If the charge in the First Quarter were to be U.S. $2.0 billion(US$1.3 billion after tax) CIBC currently projects its Tier 1 capital ratio to remain inexcess of 9% as at January 31, 2008.

205. In response to this news, on December 21, 2007, analyst Brad Smith of Blackmont

Capital Reports inquired: “[a] more important (and still unanswered) question in our view is how

[CIBC], which prior to 2004 was a limited participant in the credit derivative business, came to have

a $3.5 billion hedge position with ACA representing over 20% of ACA’s entire $15.8 billion

subprime CDS counterparty exposure.”

206. Also in response to CIBC’s disclosure, the Dominion Bond Rating Service (“ DBRS”)

placed all of CIBC’s short-term and long-term debt ratings “under review with negative

implications” due to its observation that CIBC’s higher than expected concentration risk of

counterparty exposure did not reflect positively on the overall risk management ability of the bank.

207. CIBC’s common shares decreased another 2.5% on the news. However, Defendants

still did not reveal the truth about its other hedge counterparties, and continued to misrepresent the

true value of CIBC’s investments in mortgage-backed securities related to the U.S. subprime and

non-prime real estate markets.

208. On January 7, 2008, CIBC issued a news release announcing sweeping organizational

changes. Defendant Woods was moved from CFO to Chief Risk Officer effectively immediately.

David Williamson joined CIBC as CFO, and Richard Nesbitt joined CIBC and CEO of World

Markets.

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209. At that time, armed with the knowledge that CIBC had not taken the appropriate

amount of write-downs to reflect the true impairment in its structured securities portfolio, and that

further write-downs would either bring the Company’s holdings precariously close to the minimum

capital requirements prescribed for banks, or, at a minimum, lower its Tier 1 capital level (which

would have an adverse impact on share prices), Defendants and the Board of Directors agreed that,

prior to taking the proper write-downs, the Company needed to raise additional capital. They

decided to do that through a sale of $3 billion in common shares to public and private investors. Key

executives from CIBC approached prospective large private investors with a proposal to raise the

requisite capital in late 2007 and early 2008. CIBC was successful in raising additional capital in the

first quarter 2008 by issuing 23.9 million common shares for net proceeds of $1.5 billion through a

private placement to the following group of investors: ManuLife Financial Corporation, Caisse de

depot et placement du Quebec, Cheung Kong (Holdings) Ltd. and OMERS Administration

Corporation. In addition, CIBC issued 21.4 million common shares for net proceeds of $1.4 billion

by way of a public offering.

210. On January 14, 2008, CIBC issued a news release and Investor Presentation

announcing the equity offering and incorporated into the Company’s Form 6-K filed with the SEC

on January 15, 2008. According to the news release, CIBC recorded an additional write-down of

$462 million of its unhedged CDO/RMBS portfolio, and that it made a “fair value adjustment” of

$2 billion to its hedged portfolio related to ACA. According to the new release, CIBC’s remaining

receivable from ACA was valued at $70 million. The news release further stated:

CIBC has residential real estate exposure with protection purchased from otherfinancial guarantors against which no additional fair value adjustments have beenmade.

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211. While the news release stated that further write-downs are possible if the financial

guarantors are downgraded or the credit status of the guarantors deteriorates significantly, it

emphasized that “no additional material fair value adjustments are currently contemplated.”

212. The news release and Investor Presentation were false and misleading and continued

to materially understate the impairment of CIBC’s structured securities portfolio.

213. On this news, CIBC’s common shares fell another 2.1%.

214. On January 24, 2008, RBC Capital Markets issued a report speculating that CIBC’s

hedged exposure was with the following six monoline counterparties: MBIA, Ambac, SCA

(subsidiary XL), FGIC, CIFG and ACA. In the course of this report, RBC pointed out that of these

guarantors, four were currently under negative watch by credit rating agencies and two were under

negative outlook. With respect to SCA, RBC further offered that its subprime exposure was double

the relative subprime exposure and 50%, it had more relative subprime/CDO exposure when

compared to its peers, and its claims paying resources to total subprime exposure was just over half

in peer average.

215. CIBC’s financial guarantor credit hedges were severely impaired by the end of

CIBC’s 2007 fourth quarter and substantially impaired before then. However, CIBC did not even

begin to write-down the value of its financial guarantor credit hedges until the failure of ACA, which

was revealed in CIBC’s 2008 first quarter financial report, issued on February 28, 2008.

216. On February 28, 2008, CIBC issued a news release announcing its first quarter 2008

financial results, which was incorporated into the Company’s Form 6-K filed with the SEC on the

same date. The February 28, 2008 news release contained further revelations regarding the total

exposure CIBC faced with respect to unhedged and hedged CDO and RMBS investments,

announcing a net loss of $1.456 million for the first quarter 2008 (which ended January 31, 2008),

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contrasted with net income of $770 million for the same period the prior year. Diluted loss per share

was $4.36, compared with $2.12 diluted earnings per share (EPS) one year earlier.

217. CIBC made the following revelations in the news release:

• A $2.28 billion (or $4.51 per share) charge related to the credit protection purchasedfrom ACA regarding its hedged investment with a notional value of $3.5 billion;

• A $626 million ($1.24 per share) charge related to credit protections purchased fromfinancial guarantors other than ACA; and

• $473 million ($0.93 per share) mark-to-market losses, net of gains on related hedges,on CDOs and RMBSs related to U.S. residential mortgage market.

218. Despite the charges and write-downs, Defendants still continued to misrepresent the

true impairment in CIBC’s portfolio related to the U. S. residential real estate market. By the end of

CIBC’s 2008 first quarter, CIBC’s CDO and RMBS portfolio related to the U.S. residential real

estate market was actually impaired by 70%, in part because by this time, ACA already entered into

a Forbearance Agreement (which effectively meant it was bankrupt) and CIBC should have

recognized that the CDS provided by ACA to guarantee $3.5 billion of CIBC’s CDO assets were of

no value and should have been completely written-down.

219. Because CIBC’s CDO and RMB S portfolio related to the U. S. residential real estate

market was 70% impaired, CIBC should have recorded write-downs and charges of $9.25 billion by

the end of the quarter. Instead, CIBC recorded a cumulative write-down of $4.13 billion as of that

date. Accordingly, CIBC’s February 31, 2008 news release was false and misleading and still

understated CIBC’s true impairment in these portfolios.

220. Nonetheless, the vast majority of write-downs or charges and losses that were taken

were attributable to CIBC’s investments in the U.S. subprime mortgage investments, representing

$3.379 billion of the $3.487 billion in total write-downs, charges and losses, or 97% of the total

write-downs sustained by CIBC. Although these write-downs were still insufficient, these figures

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widely surpassed anything which CIBC had made known to date and vastly contradicted its

representations and disclosures throughout the Class Period.

221. On this news, CIBC’s common shares fell an additional 3.57%.

222. Just one day after CIBC released its first quarter 2008 results, on February 29, 2008,

Blackmont Capital released an analyst report that detailed that the second largest CIBC exposure of

$2.6 billion had now been confirmed as being guaranteed by SCA. Blackmont Capital further

discussed how this meant that CIBC shockingly had “concentrated 84% of its monoline exposure

with three counterparties who now have the lowest ratings in their industry.”

223. On March 17, 2008, FGIC reported a $1.89 billion loss in the 2007 fourth quarter,

which triggered Blackmont Capital analyst Brad Smith to note its connection with CIBC. Smith

wrote that FGIC is counterparty to about $566 million of CIBC’s subprime exposure, which could

mean that CIBC could take another write-down of $362 million. Smith added that FGIC could also

be a “sizable counterparty” to $22 billion in non-subprime monoline hedges held by the Company.

224. CIBC stock fell 5.9%, its lowest level since November 2005, in reaction to the news.

225. The Class Period ends on May 29, 2008. On that date, CIBC issued a news release

reporting its 2008 second quarter financial results, also filed with the SEC on Form 6-K on that day.

The news release revealed the full extent of CIBC’s exposure to investments related to U.S.

subprime mortgages, and the condition thereof. CIBC revealed an additional $2.48 billion loss on its

structured product portfolio.

226. On this news, CIBC’s stock fell an additional 1.94%.

ADDITIONAL SCIENTER ALLEGATIONS

227. As alleged herein, Defendants acted with scienter in that Defendants: knew that the

public documents and statements issued or disseminated in the name of the Company were

materially false and misleading; knew that such statements or documents would be issued or

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disseminated to the investing public; and knowingly and substantially -participated or acquiesced in

the issuance or dissemination of such statements or documents as primary violations of the federal

securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their receipt of

information reflecting the true facts regarding CIBC and its exposure to the CDO subprime markets,

their control over, and/or receipt and/or modification of CIBC’s allegedly materially misleading

misstatements and/or their associations with the Company which made them privy to confidential

proprietary information concerning CIBC, participated in the fraudulent scheme alleged herein.

228. Defendant Shaw was Chairman and CEO of CIBC World Markets unit, which was

ultimately in charge of all of CIBC’s activities related to its subprime exposure. Securities and other

instruments tied to subprime were core products, and a large revenue generators, for CIBC Word

Markets during the Class Period. Accordingly, as Chairman and CEO of CIBC Word Markets,

Defendant Shaw knew or should have known of the undisclosed risks and fraudulent activity

involving the CDO products at CIBC.

229. In 2006, while Defendant Shaw was CEO and Chairman of CIBC’s World Markets

unit, World Markets shifted focus to include greater exposure to CDO and RMBS instruments and

the subprime market. This sort of shift could not have taken place without the express approval and

authority of Defendant Shaw. Accordingly, this Defendant knew or should have known that

statements issued or disseminated in the name of the Company during the Class Period regarding its

MBS portfolio were false and misleading and knowingly and substantially participated or acquiesced

in the issuance or dissemination of such statements or documents.

230. According to The Globe and Mail, from no later than mid-June 2007, Defendant

McCaughey became an expert on the subject of CIBC’s activities related to structured finance

instruments and CIBC’s exposure to the subprime market. According to sources cited in the article,

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this occurred in part through his pulling of all relevant deal files and questioning of everyone from

department heads to front-line traders. In fact, Defendant McCaughey became so familiar with the

issues facing CIBC in this respect, that in mid-June, he briefed the Board of Directors on the subject.

Accordingly, by no later than the middle of June 2007, Defendant McCaughey knew the types of

risky instruments to which CIBC was exposed, and the poor quality of the counterparties

guaranteeing a large portion of CIBC’s MBS portfolio. Defendant McCaughey’s false and

misleading statements and omissions during the Class Period in the face of this knowledge suggests

that he knew or should have known that statements after mid-June 2007, issued or disseminated in

the name of the Company regarding its MBS portfolio, were false and misleading, and knowingly

and substantially participated or acquiesced in the issuance or dissemination of such statements or

documents.

231. All of the Individual Defendants who personally discussed CIBC’s CDO and RMBS

subprime exposure, its risk levels, and its counterparty protection during Class Period earnings

conference calls, including Defendants Shaw, Woods, Kilgour and McCaughey, demonstrate their

knowledge regarding this business product for CIBC, which suggests that they knew or should have

known that statements issued or disseminated in the name of the Company regarding its CDO

portfolio, its risk levels, and its counterparty quality were false and misleading and knowingly and

substantially participated or acquiesced in the issuance or dissemination of such statements.

232. Because of their positions with the Company, Defendants at all times had the

opportunity to, and did, commit the wrongdoing alleged herein.

GAAP VIOLATIONS

233. Pursuant to Statements of Financial Accounting Standards (“SFAS”) No. 115,

Accounting for Certain Investments in Debt and Equity Securities, CIBC was required, upon the

occurrence of a decline in the market value of a security deemed to be anything other than temporary

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( i. e., its value permanently impaired), to write-down the security’s carrying value to its fair value and

reflect the amount of the write-down in earnings.

234. CIBC violated GAAP by failing to write-down the Company’s investments in its

structured securities when there was a significant adverse change in the value of those investments.

At that time, the underlying assets in the RMBS portfolio were experiencing deteriorating financial

conditions, as exhibited by, among other things, record high default levels on subprime mortgages.

Not until May 29, 2008 did CIBC disclose the full extent of the negative impact of the CDOs and the

subprime market on its financial results.

235. The representations contained in CIBC’s press releases, SEC filings, conference calls,

news reports and presentations during the Class Period, as set out below, were materially false and

misleading when made because they failed to disclose the following facts:

• the Company did not make timely disclosure of material changes affecting thevaluation of its investments in CDOs consisting of U.S. subprime mortgages, inviolation of GAAP;

• the Company’s hedged subprime exposure was nearly four times larger than itsunhedged subprime exposure; and

• 35% of the Company’s hedged subprime exposure was entrusted with one “single A”(one step above “non-investment grade”), substantially undercapitalized financialguarantor ACA, and various other guarantor counterparties who were also the leastdesirable counterparties for CDS.

LOSS CAUSATION/ECONOMIC LOSS

236. Defendants’ wrongful conduct, as alleged herein, directly and proximately caused the

damages suffered by Plaintiff and the Class.

237. During the Class Period, Plaintiff and the Class purchased securities of CIBC at

artificially inflated prices. The price of CIBC common stock declined when the misrepresentations

made to the market, and/or the information alleged herein to have been concealed from the market,

and/or the effects thereof, were revealed, causing investors’ losses, as alleged above.

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APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD ON THE MARKET DOCTRINE

238. At all relevant times, the market for CIBC’s common stock was an efficient market

for the following reasons, among others:

• CIBC’s stock met the requirements for listing, and was listed and actively traded onthe NYSE and TSX, highly efficient and automated markets;

• As a regulated issuer, CIBC filed periodic public reports with the SEC and theNYSE;

• CIBC regularly communicated with public investors via established marketcommunication mechanisms, including through regular disseminations of pressreleases on the national circuits of major newswire services and through other wide-ranging public disclosures, such as communications with the financial press andother similar reporting services; and

• CIBC was followed by several securities analysts employed by major brokeragefirms who wrote reports which were distributed to the sales force and certaincustomers of their respective brokerage firms. Each of these reports was publiclyavailable and entered the public marketplace.

239. As a result of the foregoing, the market for CIBC’s common stock promptly digested

current information regarding CIBC from all publicly available sources and reflected such

information in CIBC’s stock price. Under these circumstances, all purchasers of CIBC’s common

stock during the Class Period suffered similar injury through their purchase of CIBC’s common

stock at artificially inflated prices and a presumption of reliance applies.

NO SAFE HARBOR

240. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

Many of the specific statements pleaded herein were not identified as “forward-looking statements”

when made. To the extent there were any forward-looking statements, there were no meaningful

cautionary statements identifying important factors that could cause actual results to differ materially

from those in the purportedly forward-looking statements. Alternatively, to the extent that the

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statutory safe harbor does apply to any forward-looking statements pleaded herein, Defendants are

liable for those false forward-looking statements because at the time each of those forward-looking

statements was made, the particular speaker knew that the particular forward-looking statement was

false, and/or the forward-looking statement was authorized, and/or approved by an executive officer

of CIBC who knew that those statements were false when made.

COUNT I

Violation of Section 10(b) of the Exchange Actand Rule 10b-5 Promulgated Thereunder

Against All Defendants

241. Plaintiff repeats and realleges each and every allegation contained above as if fully set

forth herein.

242. During the Class Period, Defendants carried out a plan, scheme and course of conduct

which was intended to and, throughout the Class Period, did: (i) deceive the investing public

regarding CIBC’s business, operations, management and the intrinsic value of CIBC common stock;

and (ii) cause Plaintiff and other members of the Class to purchase CIBC’s common stock 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.

243. Defendants: (a) employed devices, schemes, and artifices to defraud; (b) made untrue

statements of material fact and/or omitted to state material facts necessary to make the statements not

misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud

and deceit upon the purchasers of the Company’s common stock in an effort to maintain artificially

high market prices for CIBC’s securities in violation of Section 10(b) of the Exchange Act and Rule

1 0b-5. All Defendants are sued either as primary participants in the wrongful and illegal conduct

charged herein or as controlling persons as alleged below.

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244. Defendants, individually and in concert, directly and indirectly, by the use, means or

instrumentalities of interstate commerce and/or of the mails, engaged and participated in a

continuous course of conduct to conceal adverse material information about the business and

operations of CIBC as specified herein.

245. The Defendants employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information, and engaged in acts, practices, and a course

of conduct as alleged herein in an effort to assure investors of CIBC’s value and performance and

continued substantial growth, which included the making of, or the participation in the making of,

untrue statements of material facts and omitting to state material facts necessary in order to make the

statements made about CIBC and its business operations in the light of the circumstances under

which they were made, not misleading, as set forth more particularly herein, and engaged in

transactions, practices and a course of business which operated as a fraud and deceit upon the

purchasers of CIBC common stock during the Class Period.

246. Each of the Individual Defendants’ primary liability, and controlling person liability,

arises from the following facts: (i) the Individual Defendants were high-level executives at the

Company during the Class Period and members of the Company’s management team or had control

thereof; (ii) each of these Defendants, by virtue of his responsibilities and activities as a senior

officer of the Company was privy to and participated in the creation, development and reporting of

the Company’s internal budgets, plans, projections and/or reports; (iii) each of these Defendants

enjoyed significant personal contact and familiarity with the other Defendants and was advised of

and had access to other members of the Company’s management team, internal reports and other

data and information about the Company’s finances, operations, and sales at all relevant times; and

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(iv) each of these Defendants was aware of the Company’s dissemination of information to the

investing public, which they knew or recklessly disregarded was materially false and misleading.

247. The Defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though such facts were available to them. Such

Defendants’ material misrepresentations and/or omissions were done knowingly or recklessly and

for the purpose and effect of concealing CIBC’s operating condition from the investing public and

supporting the artificially inflated price of its common stock. As demonstrated by Defendants’

overstatements and misstatements of the Company’s business, operations and earnings throughout

the Class Period, Defendants, if they did not have actual knowledge of the misrepresentations and

omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from

taking those steps necessary to discover whether those statements were false or misleading.

248. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market price of CIBC’s securities was

artificially inflated during the Class Period. In ignorance of the fact that market prices of CIBC’s

publicly-traded securities were artificially inflated, and relying directly or indirectly on the false and

misleading statements made by Defendants, or upon the integrity of the market in which the

common stock trades, and/or on the absence of material adverse information that was known to or

recklessly disregarded by Defendants, but not disclosed in public statements by Defendants during

the Class Period, Plaintiff and the other members of the Class acquired CIBC securities during the

Class Period at artificially high prices and were damaged when the value of their securities declined

upon disclosure of the truth about Defendants false and misleading statements.

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249. At the time of said misrepresentations and omissions, Plaintiff and other members of

the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff and the other

members of the Class and the marketplace known the truth regarding CIBC’s financial results, which

were not disclosed by Defendants, Plaintiff and other members of the Class would not have

purchased or otherwise acquired their CIBC securities, or, if they had acquired such common stock

during the Class Period, they would not have done so at the artificially inflated prices which they

paid.

250. By virtue of the foregoing, Defendants have violated Section 10(b) of the Exchange

Act, and Rule 1 0b-5 promulgated thereunder.

251. 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 and sales

of the Company’s securities during the Class Period.

COUNT II

Violation of Section 20(a) of the Exchange ActAgainst the Individual Defendants

252. Plaintiff repeats and realleges each and every allegation contained above as if fully set

forth herein.

253. The Individual Defendants acted as controlling persons of CIBC within the meaning

of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions, and

their ownership and contractual rights, participation in and/or awareness of the Company’s

operations and/or intimate knowledge of the false financial statements filed by the Company with the

SEC and disseminated to the investing public, the Individual Defendants had the power to influence

and control and did influence and control, directly or indirectly, the decision-making of the

Company, including the content and dissemination of the various statements which Plaintiff

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contends are false and misleading. The Individual Defendants were provided with or had unlimited

access to copies of the Company’s reports, press releases, public filings and other statements alleged

by Plaintiff to be misleading prior to and/or shortly after these statements were issued and had the

ability to prevent the issuance of the statements or cause the statements to be corrected.

254. In particular, each of the Individual Defendants had direct and supervisory

involvement in the day-to-day operations of the Company and, therefore, is presumed to have had

the power to control or influence the particular transactions giving rise to the securities violations as

alleged herein, and exercised the same.

255. As set forth above, CIBC and the Individual Defendants each violated Section 1 0(b)

and Rule 1 0b-5 by their acts and omissions as alleged in this complaint. By virtue of their positions

as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of the

Exchange Act. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiff and other

members of the Class suffered damages in connection with their purchases of the Company’s

securities during the Class Period.

WHEREFORE, Plaintiff prays for relief and judgment, as follows:

A. Determining that this action is a proper class action, designating Plaintiff as Lead

Plaintiff and certifying Plaintiff as a Class representative under Rule 23 of the Federal Rules of Civil

Procedure and its counsel as Lead Counsel;

B. Awarding compensatory damages in favor of Plaintiff and the other Class members

against all Defendants, jointly and severally, for all damages sustained as a result of Defendants’

wrongdoing, in an amount to be proven at trial, including interest thereon;

C. Awarding Plaintiff and the Class their reasonable costs and expenses incurred in this

action, including counsel fees and expert fees; and

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D. Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

DATED: February 20, 2009 COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLP

SAMUEL H. RUDMANROBERT M. ROTHMANDAVID A. ROSENFELD

ROBERT M. ROTHMAN

58 South Service Road, Suite 200Melville, NY 11747Telephone: 631/367-7100631/367-1173 (fax)

Lead Counsel for Plaintiff

LABATON SUCHAROW LLPCHRISTOPHER FELLERJONATHAN GARDNERPAULSCARLATOSERENA RICHARDSON140 BroadwayNew York, NY 10005Telephone: 212/907-0700212/818-0477 (fax)

Additional Plaintiffs Counsel

-85-


CERTIFICATE OF SERVICE

1, Robert M. Rothman, hereby certify that on February 20, 2009, I caused a true

and correct copy of the attached:

Consolidated Class Action Complaint for Violations of Federal SecuritiesLaws

to be served by email and first-class mail to all counsel on the attached service list.

ROBERT M. ROTHMAN


CIBC 08Service List - 1/30/2009 (08-0192)

Page 1 of 1

Counsel For Defendant(s)

Lawrence Jay Zweifach Jay B. KasnerGibson, Dunn & Crutcher LLP Scott D. Musoff

200 Park Avenue, 47th Floor Skadden, Arps, Slate, Meagher & Flom LLP

New York, NY 10166-0193 Four Times Square

212/351-4000 New York, NY 10036212/351-4035(Fax) 212/735-3000

212/735-2000 (Fax)

Counsel For Plaintiff(s)Samuel H. Rudman Christopher J. KellerDavid A. Rosenfeld Alan I. EllmanMario Alba, Jr. Labaton Sucharow LLPCoughlin Stoia Geller Rudman & Robbins LLP 140 Broadway, 34th Floor58 South Service Road, Suite 200 New York, NY 10005Melville, NY 11747 212/907-0700

631/367-7100 212/818-0477 (Fax)631/367-1173(Fax)

case 1:08-cv-08143-whp document 24 filed 02/20/2009 page 1...

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