Plaintiff, by its attorneys, alleges upon information and belief, based in part on the investigation conducted by its counsel, except as to those paragraphs relating to plaintiff, its transactions in the stock of Mercury Finance Co. ("Mercury" or the "Company") and its suitability to serve as a class representative, which are alleged on personal knowledge, as follows:

1. Plaintiff brings this action as a class action on behalf of itself and all other persons or entities who purchased shares of common stock of Mercury on the open market during the Class Period, as defined below, to recover damages caused by defendants' violation of the federal securities laws.

2. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. §§ 78j(b) and 78t(a)], and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission (the "SEC") [17 U.S.C. § 240.10b-5].

3. This Court has jurisdiction of this litigation pursuant to § 27 of the Exchange Act, as amended [15 U.S.C. § 78aa], and 28 U.S.C. §§ 1331, 1337, and 1367.

4. Venue is proper in this District pursuant to § 27 of the Exchange Act and 28 U.S.C. § 1391(b), (c) and (d). A substantial portion of the events and omissions complained of herein, including the preparation, issuance and dissemination of materially false and misleading information to the investing public, occurred in this District. Additionally, Mercury's principal place of business is located in this District.

5. In connection with the acts, conduct, and scheme alleged in this Complaint, defendants, directly and indirectly, used the means and instrumentalities of interstate commerce, including the mails and telephonic communications and the facilities of the national securities exchanges.

6. The Minnesota State Board of Investment (the "MSBI") is an agency created under the Constitution of the State of Minnesota for the purpose of administering and directing the investment of all state funds and pension funds. As such, it has the power and duty to undertake any action necessary to implement the responsibility entrusted to it in connection with the investment and management of such funds. Currently, the MSBI has $33.4 billion under management, including eight statewide retirement plans.

7. The MSBI purchased 496,249 shares of the common stock of Mercury during the Class period at prices ranging from $11.250 to $22.250 per share, and has been damaged thereby.

8. Specifically, the MSBI purchased shares of the common stock of Mercury during the Class Period as follows: 6,600 shares on April 6, 1994 at $16.0625 per share; 21,800 shares on April 7, 1994 at $15.4897 per share; 1,900 shares on September 21, 1994 at $14.5000 per share; 4,600 shares on November 15, 1994 at $13.7500 per share; 5,900 shares on March 15, 1995 at $15.7500 per share; 53,700 shares on April 5, 1995 at $16.0372 per share; 20,900 shares on April 5, 1995 at $16.0000 per share; 400 shares on June 6, 1995 at $18.3750 per share; 8,200 shares on June 30, 1995 at $19.2500 per share; 2,900 shares on July 1, 1995 at $19.1638 per share; 1,000 shares on July 5, 1995 at $19.2500 per share; 20,000 shares on August 23, 1995 at $21.0625 per share; 10,000 shares on August 24, 1995 at $21.3125 per share; 10,100 shares on August 25, 1995 at $21.3750 per share; 700 shares on August 25, 1995 at $21.2500 per share; 5,449 shares on August 29, 1995 at $22.2500 per share; 46,500 shares on November 30, 1995 at $13.2500 per share; 3,100 shares on March 6, 1996 at $14.3750 per share; 80,300 shares on November 6, 1996 at $12.0165 per share; 2,600 shares on November 6, 1996 at $11.7500 per share; 3,500 shares on November 21, 1996 at $11.2500 per share; 58,000 shares on December 3, 1996 at $11.3750 per share; 21,600 shares on December 4, 1996 at $11.2860 per share; 9,500 shares on December 31, 1996 at $12.3240 per share; and 97,000 shares on January 10, 1997 at $12.3750 per share.

9. Defendant Mercury is a corporation organized under the laws of the State of Delaware with its principal offices and corporate headquarters at 100 Field Road, Lake Forest, Illinois 60045. Mercury, the largest independent financier of used cars, purchases individual installment sales finance contracts from automobile dealers and retail vendors and extends short-term installment loans directly to consumers. Its lending operations are conducted through over 287 offices in 31 states. Mercury also offers credit life, accident and health, property and other insurance to its clients in conjunction with its lending services.

10. Defendant John N. Brincat ("Brincat") was, at all relevant times, the President and Chief Executive Officer of Mercury and the Chairman of the Company's Board of Directors. Brincat signed the Company's Form 10-Ks and 10-Qs containing Mercury's false financial statements. According to a Preliminary Proxy filed with the SEC on February 23, 1996, Brincat was paid a base salary and cash compensation for fiscal 1995 of $1,978,121. For fiscal 1994, Brincat was paid cash compensation of $1,738,670. In fiscal 1993, Brincat was paid cash compensation of $1,501,689. Brincat's compensation for fiscal 1995, 1994, and 1993, included a cash bonus of $1,618,121, $1,438,670, and $1,250,000, respectively. Brincat's cash bonuses were awarded on the basis of Mercury's purported ability to increase earnings per share by over 20% each year. Between June 4, and June 6, 1996, Brincat sold 443,000 shares of Mercury common stock receiving proceeds of over $5.55 million.

11. Defendant James A. Doyle ("Doyle") was, at all relevant times, the Company's Senior Vice President, Controller, Principal Accounting Officer, and Secretary. Doyle signed the Company's Form 10-Ks and 10-Qs containing Mercury's false financial statements. For fiscal 1995, 1994, and 1993, Doyle received cash compensation of $290,806, $268,617, and $241,862, consisting of base salary and cash bonuses of $135,000, $120,000, $100,000, respectively. Between June 4 and 6, 1996, Doyle sold 58,000 shares of Mercury common stock, receiving proceeds of over $720,000.

12. Recommendations for bonuses of Mercury's senior offices were made by Brincat, as CEO, to the Compensation Committee of Mercury's Board of Directors. According to Mercury's SEC filings, although there is no specific formula followed in determining those bonuses, the Committee relies heavily upon the Company's performance in determining the bonus amount. Defendants Brincat and Doyle have also been awarded valuable stock options based upon a subjective evaluation of each executive's performance and the performance of the Company.

13. Defendant John N. Brincat, Jr. ("Brincat, Jr.") is a Vice President, Administration of the Company. Between June 4 and 6, 1996, Brincat, Jr. sold 44,000 shares of Mercury common stock receiving proceeds of over $500,000.

14. Each of the defendants participated directly in the wrongs complained of herein. In addition, defendants Brincat, Doyle and Brincat, Jr. (the "Individual Defendants"), by reason of, among other things, their positions as an officer and/or a director of the Company, were "controlling persons" of the Company within the meaning of Section 20(a) of the Exchange Act for the purposes of dissemination of Mercury's financial statements and had the power and influence, and exercised the same, to cause the Company to engage in the unlawful conduct complained of herein. Because of their positions of control and authority, the Individual Defendants, throughout the Class Period, were able to, and did, directly or indirectly control the conduct of the Company's business, as well as the contents of the various reports, filings, releases, and other documents and statements issued by or on behalf of the Company.

15. Mercury and the Individual Defendants, as officers and/or directors of a publicly-held company, at all times relevant hereto, had a duty to disseminate timely, accurate, truthful, and complete information with respect to the Company's business, operations, financial condition, performance and future prospects, so that among other things, the market price of the Company's stock would be based on truthful, accurate and complete information. As hereinafter alleged, defendants violated these specific duties and obligations.

16. The Individual Defendants all participated in the drafting, preparation, and/or approval of the various public and shareholder reports and other communications complained of herein and were aware of or recklessly disregarded the misstatements contained therein and omissions therefrom, and were aware of their materially misleading nature. Because of their Board membership and/or executive and managerial positions with Mercury, each of the defendants had access to the adverse non-public information about Mercury's business prospects and financial condition as particularized herein and knew that those adverse facts rendered the positive statements made by and about Mercury and its business and future sales materially false and misleading.

17. Throughout the Class Period, because of their positions of control and authority, the Individual Defendants were able to, and did, control the content of the various reports, filings, press releases, and other statements and documents issued by or on behalf of the Company. Defendants were provided, for their approval or otherwise, with copies of the Company's reports, filings, releases, and statements herein alleged to have been materially false and misleading prior to or shortly after their issuance by the Company, and had the ability and opportunity to prevent their issuance or to cause them to be corrected.

18. Defendant KPMG is, and at all relevant times was, a firm of certified public accountants engaged by Mercury to provide independent accounting, consulting and auditing services. Prior to and during the Class Period, KPMG gave Mercury accounting advice and consultation regarding Mercury's annual and quarterly reports filed with the SEC.

19. (a) Defendant KPMG caused and allowed its opinions to be included in the Forms 10-K that Mercury filed with the SEC on or about March 31, 1994. Further, KPMG caused and allowed its opinions to be included in Mercury's 1993, 1994 and 1995 Annual Reports filed with the SEC on or about March 21, 1994, March 21, 1995 and March 19, 1996, respectively. As a result, KPMG rendered materially false and misleading reports on the financial statements of Mercury for the fiscal years ended December 31, 1993, December 31, 1994 and December 31, 1995, respectively.

(b) In the course of rendering services to Mercury, KPMG became aware (or recklessly disregarded) that Mercury was improperly reporting revenues and improperly recording earnings as part of a plan and scheme to inflate reported net income during fiscal 1993, 1994, 1995 and 1996. KPMG knew (or recklessly disregarded) that the financial statements of Mercury suffered from serious reporting deficiencies that made the Company's reporting improper under Generally Accepted Accounting Principles ("GAAP"). KPMG's issuance of an unqualified "clean" opinion with respect to Mercury's fiscal 1993, 1994 and fiscal 1995 financial statements did not comport with GAAP or Generally Accepted Auditing Standards ("GAAS").

20. Each of the defendants is liable as a participant in the fraudulent scheme and course of business alleged herein which operated as a fraud or deceit on purchasers of Mercury common stock during the Class Period.

21. Plaintiff brings this action as a class action pursuant to Federal Rules of Civil Procedure 23(a) and 23(b)(3) on behalf of a class (the "Class") of all persons who purchased Mercury common stock on the open market during the period January 30, 1994 through January 29, 1997, inclusive (the "Class Period"), and who were damaged thereby. Excluded from the Class are: the defendants herein; members of the immediate families of defendants Brincat, Brincat, Jr., and Doyle; any parent, subsidiary, affiliate, partner, officer, executive or director of any defendant; any entity in which any excluded person has a controlling interest; and the legal representatives, heirs, successors and assigns of any excluded person or entities.

22. The members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to plaintiff at the present time and can only be ascertained from books and records maintained by Mercury and/or its agent(s), plaintiff believes that there are, at a minimum, thousands of members of the Class located throughout the United States. The Company has in excess of 177 million of its common stock outstanding.

23. Mercury shares are listed and trade on the New York Stock Exchange, an efficient and developed securities market. Thousands of brokers nationwide have immediate access to trading information about Mercury through the NYSE National Market System. This system displays, within minutes of the transactions taking place, the most recent trades and practices.

24. Plaintiff will fairly and adequately represent and protect the interests of the members of the Class. Plaintiff has retained competent counsel experienced in class and securities litigation and intends to prosecute this action vigorously. Plaintiff is a member of the Class and does not have interests antagonistic to, or in conflict with, the other members of the Class.

25. Plaintiff's claims are typical of the claims of the members of the Class. Plaintiff and all members of the Class purchased Mercury's common stock during the Class Period at artificially inflated prices and have sustained damages arising out of the same wrongful course of conduct.

26. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. Since the damages suffered by individual class members may be relatively small, the expense and burden of individual litigation make it virtually impossible for the Class members individually to seek redress for the wrongful conduct alleged. Plaintiff knows of no difficulty which will be encountered in the management of this litigation which would preclude its maintenance as a class action.

27. 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 the federal securities laws were violated by defendants' acts and omissions as alleged herein;

(b) Whether defendants participated in and pursued the common course of conduct and fraudulent scheme complained of herein;

(c) Whether the documents, reports, filings, releases, and statements disseminated to the investing public, including purchasers of Mercury stock, during the Class Period omitted and/or misrepresented material facts about the business, performance, and financial condition of Mercury;

(d) Whether defendants acted knowingly, willfully or recklessly in omitting to state and/or misrepresenting material facts;

(e) Whether the market price of Mercury's common stock during the Class Period was artificially inflated due to the non-disclosures and/or misrepresentations complained of herein; and

(f) Whether plaintiff and the other members of the Class have sustained damages and, if so, the appropriate measure thereof.

28. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false and misleading statements pleaded in this Complaint. None of the allegedly false and misleading statements pleaded herein was a forward-looking statement nor were any statements identified as "forward-looking statements" when made. Nor did meaningful cautionary statements identifying relevant important factors that could cause actual results to different materially from those in the forward-looking statements accompany those forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein, the defendants are liable for those false forward-looking statements because, at the time each of those forward-looking statements was made, the speaker knew the forward-looking statements were authorized and/or approved by an executive officer of Mercury who knew or was reckless in not knowing those statements were false when made.

29. 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 Mercury common stock, including false and misleading statements and/or concealed material adverse facts. The scheme: (i) deceived the investing public, including plaintiff and the other Class members, regarding, among other things, the financial condition and performance of Mercury; (ii) artificially inflated and maintained the market price of the Company's stock; (iii) caused plaintiff and the other members of the Class to purchase the Company's stock at artificially inflated prices; and (iv) permitted the individual defendants to sell shares of Mercury common stock at artificially inflated prices, pocketing over $6.8 million for themselves. In furtherance of the foregoing unlawful scheme and course of business, defendants, among other acts of deception, issued or caused to be issued, during the Class Period, a series of false and misleading public statements, as described herein, which operated as a fraud and deceit upon the market for the Company's stock, plaintiff and the other members of the Class.

30. Mercury is one of the nation's largest independent consumer finance concerns engaged in the business of purchasing individual installment sales finance contracts from automobile dealers and retail vendors, extending short-term installment loans directly to consumers and selling credit insurance and other related products. Since 1990, the Company's loans outstanding have more than doubled to $1.3 billion.

31. Throughout the Class Period, defendants issued false and misleading financial statements purporting to be accurate representations of Mercury's financial condition. In fact, however, each of Mercury's fiscal year 1993, 1994 and 1995 year end financial statements issued during fiscal years 1994, 1995 and 1996 were materially false and misleading by overstating Mercury's revenues and profits and by understating Mercury's expenses.

32. On January 30, 1994, Mercury released its financial results for the fiscal year ending December 31, 1993. The Company reported that net income rose 41% to $64.9 million, or $0.56 per share, from $45.7 million, or $0.39 per share, for fiscal 1992. For the 1993 fourth quarter, Mercury reported that net income rose to $18.6 million, or $0.16 per share, from $12.8 million, or $0.11 per share, for the period of a year earlier. The Company announced that it was "confident that the company's growth and record earnings will continue in 1994."

33. On February 23, 1994, defendant Brincat wrote a letter to shareholders reporting results for the 1993 fiscal year ended December 31, 1993, which was included in the Company's 1993 Annual Report. The letter reported that net income had increased 42% to $64.9 million from $45.7 million for fiscal 1992. Defendant Brincat further wrote that earnings per share had increased to 56 cents from 39 cents in fiscal 1993. In his letter, defendant Brincat stated: "Mercury continues its commitment to enhance shareholder value. During 1993, the price of a share of a share of Mercury's common stock increased 71.4%."

34. The 1993 Annual Report contained financial statements reflecting the information contained in defendant Brincat's letter to shareholders. In addition, the 1993 Annual Report contained an independent auditors' report to the Company's Board of Directors from KPMG. In its report dated January 21, 1994, KPMG stated:

We have audited the accompanying consolidated balance sheets of Mercury Finance Company and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1993.

* * * *

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mercury Finance Company and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles.

35. On or about March 31, 1994, Mercury filed a form 10-K for the fiscal year ended December 31, 1993 ("1993 Form 10-K") with the SEC. The Form 10-K was signed by defendants Brincat and Doyle on March 29, 1994. The 1993 Form 10-K incorporated by reference the Consolidated Balance Sheets and Statements of Income contained in the 1993 Annual Report. The 1993 Form 10-K also contained a difference Independent Auditors' Report from KPMG dated January 21, 1994. In this Report, KPMG stated:

Under date of January 21, 1994, we reported on the consolidated balance sheets of Mercury Finance Company and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1993, as contained in the 1993 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1993. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related financial statement schedule included in Item 14 to Part IV of the annual report on Form 10-K for the year 1993.

* * * *

In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

36. The foregoing announcement of the Company's financial position and results in the 1993 Annual Report, and the financial statements contained in the 1993 Annual Report, and incorporated by reference in the Company's 1993 Form 10-K, and otherwise publicly disseminated by defendants, were materially false and misleading because the Company materially overstated its revenues and net income, thus materially overstating earnings per share, as defendants violated GAAP and the Company's revenue recognition policy by improperly recording revenues and earnings in fiscal 1993. Moreover, KPMG falsely certified that the results of Mercury for fiscal 1993 were accounted for in conformity with GAAP, and falsely misrepresented that KPMG had examined Mercury's 1993 financial statements in accordance with GAAS.

37. On April 4, 1994, Mercury reported that its net income for the first quarter of fiscal 1994 rose to $19.6 million, or $0.17 per share, from $14 million, or $0.16 per share, in the corresponding period for fiscal 1993.

38. Thereafter, on or about May 17, 1994, the Company filed its report on Form 10-Q for the quarterly period ending March 31, 1994. In the Form 10-Q, the Company repeated the results announced on April 4, 1994 and incorporated unaudited financial statements. The Notes to Consolidated Financial Statements stated with respect to these financial statements:

The consolidated financial statements of Mercury Finance Company and Subsidiaries are unaudited, but in the opinion of management reflect all necessary adjustments, consisting only of normal recurring accruals, for a fair presentation of results as of the dates and for the periods covered by the financial statements.

* * * *

39. On July 6, 1994, Mercury reported that its net income for the second quarter of fiscal 1994 rose to $21.0 million, or $0.18 per share, from $15.3 million, or $0.13 per share, in the corresponding period for fiscal 1993.

40. Thereafter, on or about August 15, 1994, the Company filed its report on Form 10-Q for the quarterly period ending June 30, 1994. In the Form 10-Q, the Company repeated results announced on July 6, 1994 and incorporated unaudited financial statements. The Notes to Consolidated Financial Statements stated with respect to these financial statements:

The consolidated financial statements of Mercury Finance Company and Subsidiaries are unaudited, but in the opinion of management reflect all necessary adjustments, consisting only of normal recurring accruals, for a fair representation of results as of the dates and for the periods covered by the financial statements.

41. On October 4, 1994, Mercury reported that its net income for the third quarter of fiscal 1994 rose 32% to $22.5 million, or $0.19 per share, from $17.1 million, or $0.15 per share, in the corresponding period for fiscal 1993. In reporting the results for the third quarter, the Company indicated that it "is confident that Mercury's growth and record earnings will continue throughout the remainder of 1994."

42. Thereafter, on or about November 15, 1994, the Company filed its report on Form 10-Q for the quarterly period ending September 30, 1994. In the Form 10-Q, the Company repeated the results announced on October 4, 1994 and incorporated unaudited financial statements. The Notes to Consolidated Financial Statements stated with respect to these financial statements:

The consolidated financial statements of Mercury Finance Company and Subsidiaries are unaudited, but in the opinion of management reflect all necessary adjustments, consisting only of normal recurring accruals, for a fair presentation of results as of the dates and for the periods covered by the financial statements.

43. Each of the Form 10-Qs filed by the Company with the SEC during fiscal 1994 contained a report by KPMG regarding the unaudited financial statements.

44. On January 10, 1995, Mercury reported its results for the fourth quarter and fiscal year ending December 31, 1994. The Company reported that net income rose 34% to $86.5 million, or $0.74 per share, from $64.9 million, or $0.56 per share, for fiscal 1993. For the fourth quarter, Mercury reported that the net income rose to $23.5 million, or $0.20 per share, from $18.6 million, or $0.16 per share, reported in the fourth quarter of fiscal 1993. The Company announced that it was "confident that Mercury's growth and record earnings will continue in 1995."

45. On February 28, 1995, defendant Brincat wrote a letter to shareholders reporting results for the 1994 fiscal year ended December 31, 1994, which was included in the Company's 1994 Annual Report. The letter reported that 1994 net income had purportedly increased 33.3% to $86.5 million from $64.9 million for fiscal 1993. Defendant Brincat further wrote that earnings per share had purportedly increased to 74 cents from 56 cents in fiscal 1993. In his letter, defendant Brincat stated: "Our focus for the future will be continued earnings growth that will build value for our shareholders."

46. The 1994 Annual Report contained financial statements reflecting the information contained in defendant Brincat's letter to shareholders. In addition, the 1994 Annual Report contained in independent auditors' report to the Company's Board of Directors from KPMG. In its report dated January 31, 1995, KPMG stated:

We have audited the accompanying consolidated balance sheets of Mercury Finance Company and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1994.

* * * *

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mercury Finance Company and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles.

47. On or about March 30, 1995, Mercury filed a form 10-K for the fiscal year ended December 31, 1994 ("1994 Form 10-K") with the SEC. The Form 10-K was signed by defendants Brincat and Doyle on March 30, 1995. The 1994 Form 10-K incorporated by reference the Consolidated Balance Sheets and Statements of Income contained in the 1994 Annual Report, as well as the Independent Auditors' Report from KPMG.

48. The foregoing announcement of the Company's financial position and results in the 1994 Annual Report, and the financial statements contained in the 1994 Annual Report, and incorporated by reference in the Company's 1994 Form 10-K were materially false and misleading because the Company overstated its revenues and net income, thus materially overstating reported earnings per share, as defendants violated GAAP and the Company's revenue recognition policy by improperly recording revenues and earnings in fiscal 1994. Moreover, KPMG falsely certified that the results of Mercury for fiscal 1994 were accounted for in conformity with GAAP, and falsely misrepresented that KPMG had examined Mercury's 1994 financial statements in accordance with GAAS.

49. On April 10, 1995, during the Company's 1995 Annual Meeting, defendant Brincat reported that Mercury's net income for the first quarter of fiscal 1995 rose 28% to $25.0 million, or $0.22 per share, in the corresponding period for fiscal 1994.

50. Thereafter, on or about May 11, 1995, the Company filed its report on Form 10-Q for the quarterly period ending March 31, 1995. In the Form 10-Q, the Company repeated the results announced on April 10, 1995 and incorporated unaudited financial statements. The Notes to Consolidated Financial Statements started with respect to these financial statements:

The consolidated financial statements of Mercury Finance Company and Subsidiaries are unaudited, but in the opinion of management reflect all necessary adjustments, consisting only of normal recurring accruals, for a fair presentation of results as of the dates for the periods covered by the financial statements.

51. On July 11, 1995, Mercury announced that its net income for the second quarter of fiscal 1995 rose 29% to $26.8 million, or $.023 per share, from $21.0 million, or $0.18 per share, in the corresponding period for fiscal 1994. In announcing its results, the Company stated that "management is confident that this trend will continue throughout the remainder of 1995."

52. On August 8, 1995, Mercury announced that it had agreed to purchase from the IT Corporation two companies, ITT Lyndon Life Insurance and ITT Lyndon Property Insurance (collectively "ITT Lyndon"), for a payment of $72.5 million. On August 9, 1995, defendant Doyle told the Chicago Tribune that the purchase "will give Mercury a direct link to the insurance business."

53. Thereafter, on or about August 11, 1995, the Company filed its report on Form 10-Q for the quarterly period ending June 30, 1995. In the Form 10-Q, the Company repeated the results announced on July 11, 1995 and incorporated unaudited financial statements. The Notes to Consolidated Financial Statements stated with respect to these financial statements:

The consolidated financial statements of Mercury Finance Company and Subsidiaries are unaudited, but in the opinion of management reflect all necessary adjustments, consisting only of normal recurring accruals, for a fair presentation of results as of the dates and for the periods covered by the financial statements.

54. On September 18, 1995, Mercury announced that its Board of directors had approved a three-for-two common stock split to be distributed on October 31, 1995.

55. On October 10, 1995, Mercury announced that its net income for the third quarter of fiscal 1995 rose to $28.5 million, or $0.24 per share, from $22.5 million, or $0.19 per share, in the corresponding period for fiscal 1994.

56. Thereafter, on or about November 10, 1995, the Company filed its report on Form 10-Q for the quarterly period ending September 30, 1995. In the Form 10-Q, the Company repeated the results announced on October 10, 1995, except that the earnings per share was adjusted for the stock split authorized by the Company. The Form 10-Q incorporated within unaudited financial statements. The Notes to Consolidated Financial Statements stated with respect to these financial statements:

The consolidated financial statements of Mercury Finance Company and Subsidiaries are unaudited, but in the opinion of management reflect all necessary adjustments, consisting only of normal recurring accruals, for a fair presentation of results as of the dates for the periods covered by the financial statements.

57. Each of the Form 10-Qs filed by the Company with the SEC during fiscal 1995 contained a report by KPMG regarding the unaudited financial statements.

58. On or about November 10, 1995, Mercury filed a Form 8-K with the SEC attaching a press release dated October 23, 1995 announcing that Mercury had acquired all of the stock of IT Lyndon for the payment of $72.5 million.

59. On January 10, 1996, Mercury announced its results for the fourth quarter and fiscal year ending December 31, 1995. The Company reported that net income rose 29% to $110.9 million, or $0.64 per share, from $86.5 million, or $0.49 per share, for fiscal 1994. For the fourth quarter, Mercury reported that net income rose to $30.6 million, or $0.18 per share, from $23.5 million, or $0.14 per share, for the period of a year earlier. The Company said in a statement that "management is confident that this trend will continue throughout 1996."

60. On February 28, 1996, defendant Brincat wrote a letter to shareholders reporting results for the 1995 fiscal year ended December 31, 1995, which was included in the Company's 1995 Annual Report. The letter reported that net income had purportedly increased 28% to $110.9 million from $86.5 million for fiscal 1994. Defendant Brincat further wrote that earnings per share had purportedly increase to 64 cents from 49 cents (after reflecting the three-for-two split) in fiscal 1995. In his letter, defendant Brincat stated:

Since inception, results at Mercury have been extraordinary. Our consistent earnings improvement has been supported by controlled expansion. We have and will continue to target quality growth, not just growth for growth's sake.

* * * *

Since becoming a public company in 1989, Mercury has recognized the importance of its commitment to its shareholders. The Company strives to provide the highest possible return on investment while enhancing shareholder value through dividend increases and stock splits.

61. The 1995 Annual Report contained financial statements reflecting the information contained in defendant Brincat's letter to shareholders. In addition, the 1994 Annual Report contained an independent auditors' report to the Company's Board of Directors from KPMG. In its report dated February 12, 1996, KPMG stated:

We have audited the accompanying consolidated balance sheets of Mercury Finance Company and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995.

* * * *

We conducted our audits in accordance with generally accepted auditing standards. Those standard require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mercury Finance Company and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles.

62. On or about March 29, 1996, Mercury filed a form 10-K for the fiscal year ended December 31, 1995, ("1995 Form 10-K") with the SEC. The Form 10-K was signed by defendants Brincat and Doyle on March 29, 1996. The 1995 Form 10-K incorporated by reference the Consolidated Balance Sheets and Statements of Income contained in the 1995 Annual Report, as well as the Independent Auditors' Report from KPMG.

63. The foregoing announcement of the Company's financial position and results in the 1995 Annual Report, and the financial statements contained in the 1995 Annual Report, and incorporated by reference in the Company's 1995 Form 10-K were materially false and misleading because the Company materially overstated its revenues and net income, thus materially overstating reported earnings per share, as defendants violated GAAP and the Company's revenue recognition policy by improperly recording revenues and earnings in fiscal 1995. Moreover, KPMG falsely certified the results of Mercury for fiscal 1995 were accounted for in conformity with GAAP, and falsely misrepresented that KPMG had examined Mercury's 1995 financial statements in accordance with GAAS.

64. On April 15, 1996, during the Company's Annual Meeting, defendant Brincat for the quarterly period ending March 31, 1996. In the Form 10-Q, the Company repeated the results announced on April 15, 1996 and incorporated unaudited financial statements. The Notes to Consolidated Financial Statements stated with respect to these financial statements:

The consolidated financial statements of Mercury Finance Company and Subsidiaries are unaudited, but in the opinion of management reflect all necessary adjustments, consisting only of normal recurring accruals, for a fair presentation of results as of the dates and for the periods covered by the financial statements.

65. On June 3, 1996, defendant Brincat gave a presentation at an investment conference in Minneapolis, Minnesota sponsored by Piper Jaffray. During his presentation, defendant Brincat stated that, "[Mercury's] net income would increase at least 25 percent in 1996," and later clarified this statement to say that the 25% figure was a minimum goal.

66. On June 6, 1996, defendants Brincat, Brincat, Jr. and Doyle filed forms with the SEC of the intention to sell Mercury common stock in the amounts of 443,000 shares, 44,000 shares, and 58,000 shares, respectively. Defendants Brincat, Brincat, Jr. and Doyle sold these shares between June 4 and 6, realizing proceeds of over $6.8 million.

67. On July 18, 1996, Mercury reported that its net income for the second quarter of fiscal 1996 rose 28% to $34.4 million, or $0.20 per share, from $26.8 million, or $0.15 per share, in the corresponding period for fiscal 1995.

68. Thereafter, on or about August 12, 1996, the Company filed its report on Form 10-Q for the quarterly period ending June 30, 1996. In the Form 10-Q, the Company repeated results announced on July 18, 1996 and incorporated unaudited financial statements. The Notes to Consolidated Financial Statements stated with respect to these financial statements:

The consolidated financial statements of Mercury Finance Company and Subsidiaries are unaudited, but in the opinion of management reflect all necessary adjustments, consisting only of normal recurring accruals, for a fair presentation of results as of the dates and for the periods covered by the financial statements.

69. On October 28, 1996, Mercury announced that it was restating its 1995 financial statements with the concurrence of KPMG because "in conducting its comprehensive review of reserve methodology, certain 1995 fourth quarter accounting transactions associated with single interest insurance, previously reviewed by the Company and [KPMG], were determined to have been incorrectly classified." The result of the reclassification was an increase in the allowance for loan losses of $17 million, and a reduction to net income after taxes of $12 million, or $0.07 per share. Mercury therefore decreased its 1995 results for net income from the previous results of $110.9 million, or $0.64 per share, to $98.9 million, or $0.57 per share. This partial disclosure masked the full extent of the Company's misreporting and misstatement of financial results through the Class Period herein.

70. In the same announcement, Mercury stated that its net income for the third quarter of fiscal 1996 was $15.9 million, or $0.09 per share, after taking an after tax charge of $20.5 million related to the implementation of a new "static pooling" reserve methodology.

71. On October 29, 1996, Mercury announced that its Board had authorized the repurchase of up to nine (9) million shares, either in the open market or in privately negotiated transactions over the next two years.

72. Thereafter, on or about November 11, 1996, the Company filed its report on Form 10-Q for the quarterly period ending September 30, 1996. In the Form 10-Q, the Company repeated the results announced on October 28, 1996. The Form 10-Q incorporated within unaudited financial statements. The Notes to Consolidated Financial Statements stated with respect to these financial statements:

The consolidated financial statements of Mercury Finance Company and Subsidiaries are unaudited, but in the opinion of management reflect all necessary adjustments, consisting only of normal recurring accruals, for a fair presentation of results as of the dates and for the periods covered by the financial statements.

73. On November 13, 1996, defendant Doyle participated in an investment conference sponsored by Piper Jaffray. During the conference, Doyle gave an interview to the Canadian Financial Report in which he stated that he was "comfortable with the First Call consensus earnings estimates of $0.81 per share in 1996, $0.98 per share in 1997 and $1.21 per share in 1998."

74. On January 10, 1997, Mercury announced that it had signed an agreement to purchase the consumer finance subsidiary of BankBoston Corporation for 32.7 million shares of Mercury common stock.

75. On January 23, 1997, Mercury reported its results for the fourth quarter and fiscal year ended December 31, 1996. Mercury reported that its net earnings purportedly rose 23% to $120.7 million, or $0.70 per share, compared to the fiscal 1995 restated results of $98.9 million, or $0.57 per share. Further, Mercury reported that fourth quarter results rose to $38.2 million, or $0.22 per share, compared to $18.6 million, or $0.11 per share, for the same period in fiscal 1995. Mercury, in announcing fiscal 1996 operating results, had proudly stated that fiscal year 1996 earnings "represents the 13th consecutive year of record earnings by Mercury."

76. On January 29, 1997, Mercury stunned the financial markets by disclosing that it would restate earnings from fiscal year-ended December 31, 1993 through fiscal year ended December 31, 1996, as a result of accounting irregularities that had caused an overstatement of its previously released earnings. In a press release, Mercury said the accounting irregularities were due to unauthorized entries made to the company's accounting records by defendant James A. Doyle, Mercury's principal accounting officer. Mercury said the disappearance of Doyle, whom the Company relieved of his duties, had hampered analysis of the irregularities. At the Board's direction, the Company said, a special committee is investigating these matters with the assistance of legal counsel and accounting experts retained by the special committee. Mercury said it restated earnings for 1996 to $56.7 million, or 33 cents a share; for 1995 to $76.9 million, or 44 cents a share; for 1994 to $83 million, or 47 cents a share; and for 1993 to $64.2 million, or 37 cents a share. The Company had previously reported earnings of $120.7 million, or 70 cents a share, for 1996; $98.9 million, or 57 cents a share, for 1995; $86.5 million, or 49 cents a share, for 1994; and $64.9 million, or 37 cents a share, for 1993.

77. In the aftermath of the announcement, the common stock of Mercury did not open for trading on the NYSE, although the stock was trading as low as $4 per share on the London Exchange on January 29, down from $15 before the announcement.

78. On January 29, 1997, Moody's Investor Service lowered the commercial paper rating of Mercury to Not Prime from Prime-2. Moody's said the rating action followed Mercury's announcement of a restatement of earnings for the fiscal years 1993-1996 after discovering accounting irregularities. Moody's said the downgrade reflects concern that the Company's available alternate liquidity will be insufficient to meet its outstanding and maturing obligations, particularly given apparent covenant violations under the Company's bank agreements. Moody's stated that uncertainties regarding the circumstances leading to the restatement, as well as concerns over the depth of management, and quality controls in a decentralized lending environment, also contributed to the downgrade.

79. Standard & Poor's also stated on January 29, 1997 that it had placed its "A-2" commercial rating of Mercury on CreditWatch with negative implications after the Company's announcement of accounting irregularities that will have a material impact on its earnings and equity position. Standard & Poor's said that "[t]he errors could also have significant implications on the Company's recently announced acquisition of Fidelity Acceptance Corp. from Bank of Boston. Mercury intended to issue 32.7 million shares to Bank of Boston, but considering the material impact this event will likely have on Mercury's equity value, Standard & Poor's believes the deal will be re-evaluated."

80. On January 30, 1997, Bank of Boston announced that it had informed Mercury that recent events regarding Mercury constituted a breach of the provisions of the agreement for the exchange of shares of Fidelity Acceptance Corp. for shares of Mercury Finance. As a result, Bank of Boston sent notice of breach and termination of the agreement to Mercury.

81. On January 31, 1997, as a result of the January 29 announcement, Mercury's stock price collapsed, falling over 85% to close at $2.125 on volume of over 42 million shares. The stock price continued to decline as additional adverse facts were disclosed, reaching a low of $1.375 per share.

82. On January 31, 1997, Duff & Phelphs Credit Rating Co. downgraded Mercury's senior debt to "CCC" (Triple-C) from "BB+" (Double-B Plus) and commercial paper to "D-5" (D-Five) from "D-4" (D-Four). The rating action on the commercial paper responded to Mercury's announcement that it would be unable to pay $17 million of commercial paper due that day.

83. Also on January 31, 1997, Fitch Investors Service downgraded Mercury's "F-S" commercial paper rating to "D" (default) following the Company's inability to fund or roll over approximately $17 million of commercial paper.

84. On February 13, 1997, the Company announced that defendant Brincat had resigned from the positions of president and chief executive officer but would remain as an employee and director of the Company. Mercury replaced defendant Brincat with William Brandt, Jr., a corporate turnaround and bankruptcy specialist.

85. Defendant, Doyle, who disappeared at the time of January 29 announcement, has accused the Company of engaging in a "charade" and is said to be cooperating with federal authorities.

86. On February 18, 1997, Mercury announced that it had replaced KPMG as its auditor for the Company.

87. The January 30, 1994, release of Mercury's financial results for fiscal year ended December 31, 1993, which were certified by KPMG, falsely inflated Mercury's net profits by $700,000 by reason of overstating Mercury's premium income and understating claims expenses from its insurance unit and by overstating interest income from its main lending business. Thereafter, for each quarter in fiscal 1994, 1995 and 1996 and for each fiscal year ended December 30, 1994, and 1995, defendants continued with their scheme to inflate Mercury's earnings by overstating premium revenues and understating claims expenses. With each subsequent fiscal year the amount of the overstatement of Mercury's income grew dramatically. The materially misleading statements of Mercury's financial condition were disseminated by defendants during the Class Period in Mercury's year end financial statements contained in Mercury's SEC Forms 10-Qs and 10-Ks and in earnings releases disseminated during the Class Period. KPMG specifically certified Mercury's year end financial statements contained in Mercury's Form 10-K and reviewed and cleared Mercury's quarterly earnings releases prior to their public dissemination.

88. In knowing or reckless disregard of the truth and/or as part of their ongoing efforts to continue the illusion of Mercury's financial success, defendants issued and/or participated in the issuance of Mercury's materially false and misleading financial statements to the investing public as particularized above. These representations were materially false and misleading when made for the reasons set forth above and in that they falsely stated and/or failed to disclose the following material, adverse facts about Mercury's operations and financial condition, which facts were know to or recklessly disregarded by defendants that:

(a) They falsely overstated the Company's financial condition, and materially overstated revenues, shareholders' equity, income and earnings per share.

(b) They falsely failed to disclose that Mercury would be in violation of its debt covenants and that planned acquisitions would be jeopardized if its true financial condition were disclosed.

(c) They falsely represented that Mercury's financial statements were prepared in accordance with generally accepted accounting principles, audited in accordance with generally auditing standards and in accordance with federal securities laws and SEC regulations concerning fair reporting.

(d) They falsely represented that the Company's internal controls and management systems were sufficient to insure that the Company's financial statements would be accurate.

89. All of the reported financial statements and the related discussions contained therein, which defendants caused the Company to file and issue during the Class Period, and in public reports about and press releases issued by the Company, were false products of financial manipulations which deceived members of the investing public who purchased common stock based upon those representations.

90. During the Class Period, defendants materially misled the investing public, thereby inflating the price of Mercury common stock, by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants' statements, as set forth herein, not false and misleading. Said statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Company, its financial performance, accounting, reporting and condition, including, inter alia:

(a) During the Class Period, the Company's revenues were materially overstated;

(b) The Company's shareholders' equity, profits and earnings per share were likewise each materially overstated;

(c) The Company's financial statements did not present, in all material respects, the Company's true financial condition, and did not reflect all adjustments which were necessary for a fair statement of the interim and full year periods presented;

(d) The Company's internal controls were grossly inadequate and, as a result, the Company's ability to record, process, summarize, and report financial data in its financial statements was significantly deficient;

(e) The Company's audited financial statements for the fiscal years 1993, 1994 and 1995 (ending December 31, 1993, 1994 and 1995) were not presented in conformity with GAAP, GAAS or principles of fair reporting; and

(f) The Company's interim financial statements for each quarterly period during the Class Period were not presented in conformity with GAAP or principles of fair reporting.

91. In addition, the defendants falsely and materially overstated the Company's net income and earnings per share for each of the Company's quarterly periods during the Class Period. Moreover, by failing to file financial statements with the SEC which conformed to the requirements of GAAP, such financial statements were presumptively misleading and inaccurate pursuant to Regulation S-X, 17 CFR 210.4-01(a)(1).

92. As a result of its accounting improprieties, the Company's reported financial results (and all defendants) also violated at least the following provisions as recognized by the Financial Accounting Standards Board for which each defendant is necessarily responsible:

(a) The principle that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions was violated (FASB Statement of Concepts No. 1, ¶ 34);

(b) The principle that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and the effects of transactions, events and circumstances that change resources and claims to those resources was violated (FASB Statement of Concepts No. 1, ¶ 40);

(c) The principle that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it was violated. To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and to the public in general (FASB Statement of Concepts No. 1, ¶ 50);

(d) The principle that financial reporting should provide information about an enterprise's financial performance during a period was violated. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors' expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance (FASB Statement of Concepts No. 1, ¶ 42);

(e) The principle that financial reporting should be reliable in that it represents what it purports to represent was violated. That information should be reliable as well as relevant to a notion that is central to accounting (FASB Statement of Concepts No. 2, ¶¶ 58-59);

(f) The principle of completeness, which means that nothing is left out of the information that may be necessary to ensure that it validly represent underlying events and conditions, was violated (FASB Statement of Concepts No. 2, ¶ 79);

(g) The principle that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered was violated. The best way to avoid injury to investors is to try to ensure that what is reported represents what is purports to represent (FASB Statement of Concepts No. 2, ¶¶ 95, 97);

93. The January 29, 1997 announcement revealed problems relating to Mercury's business and financial operations which by their nature were ongoing and severe. These problems were operative throughout the relevant time period and contrary to and/or discredited by defendants' statements disseminated to the investing public.

94. Defendant KPMG, a firm of certified public accountants, was engaged by Mercury to provide independent auditing, accounting and consulting services throughout the Class Period.

95. In the course of rendering these services to Mercury, as more fully alleged herein, KPMG obtained knowledge of, or recklessly disregarded, the true facts regarding Mercury's financial condition and performance. Defendant KPMG participated in the wrongdoing alleged herein in order to maintain its competitive position as to other large accounting firms by obtaining and retaining Mercury as a client; protect and enhance the substantial fees which it received from Mercury; and to maintain and increase its market share for auditing, accounting and consulting services.

96. KPMG audited and approved Mercury's financial statements for the years ended December 31, 1993, December 31, 1994 and December 31, 1995. KPMG stated in its "Independent Auditors Reports" contained in the 1993, 1994 and 1995 Annual Reports and 10-K's filed by Mercury with the SEC in or about March 1994, 1995 and 1996, respectively, that its audits of Mercury had been conducted in accordance with GAAS and that those financial statement fairly presented Mercury's financial position and results of operations in conformity with GAAP. KPMG consented to the issuance, publication and filing of Mercury's 1993, 1994 and 1995 financial statements and the use of its "clean" audit opinions in connection therewith.

97. KPMG audited and approved Mercury's financial statements for the years ended December 31, 1993, December 31, 1994 and December 31, 1995. KPMG stated in its "Independent Auditors Reports" incorporated by reference in the 1993 Form 10-K, 1994 Form 10-K and 1995 Forms 10-K filed by Mercury with the SEC in or about March 1994, 1995 and 1996, respectively, that its audits of Mercury had been conducted in accordance with GAAS and that those financial statements fairly presented Mercury's financial position and results of operations in conformity with GAAP as of and for the relevant fiscal period. In addition, KPMG consented to the issuance and publication of its audit reports with the SEC for purposes of Mercury's Stock Ownership Plan registration and prospectus.

98. As a result of the services it rendered to Mercury, KPMG's personnel were frequently present at Mercury's corporate headquarters and had continual access to, and knowledge of, Mercury's private and confidential corporate financial and business information and thus knew of the true facts or recklessly disregarded facts as alleged herein concerning Mercury's actual financial condition and internal control deficiencies, which were concealed from the investing public at all relevant times.

99. (a) Defendant KPMG conducted audit examinations and participated in investigations into the business operations, financial, accounting and management control systems of Mercury;

(b) KPMG falsely certified that Mercury's year-end 1993, 1994 and 1995 consolidated financial statements presented fairly, in all material respects, the financial position of Mercury and its subsidiaries as of December 31, 1993, December 31, 1994 and December 31, 1995, respectively, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, December 31, 1994 and December 31, 1995, respectively, in conformity with GAAP, and falsely represented that KPMG had examined Mercury's 1993, 1994 and 1995 financial statements in accordance with GAAS, which it had not; and

(c) KPMG furthered the fraud complained of herein by permitting Mercury to circulate Mercury's financial statements during the Class Period which KPMG had certified, even though it knew and understood that those financial statements had not been prepared in conformity with GAAP or GAAS.

100. In connection with the work it performed for Mercury, KPMG:

(a) Examined, reviewed and/or participated in reviews, investigations and audit procedures regarding Mercury's financial condition, business operations and financial, accounting and management control systems. In the course of performing such services, KPMG either obtained, or recklessly disregarded, certain evidential matter revealing the adverse facts about Mercury's business and finances and improperly failed to require, or make disclosure of such facts. As a result of this investigations and audit work, KPMG knew that the reports and financial statements described in this Complaint were materially misleading or recklessly disregarded facts which showed that all such statements were materially misleading;

(b) Knew or recklessly disregarded facts which indicated that it should have (i) qualified its opinion on Mercury's financial statements for the fiscal years ended December 31, 1993, December 31, 1994 and December 31, 1995, or (ii) withdrawn, corrected or modified its opinion in light of the lack of adequate internal financial and accounting controls and the material misstatements in the financial statements, or (iii) not have given an opinion in light of the potentially materially adverse effects of the undisclosed facts concerning Mercury's revenue and net income. The failure to make such a qualification, correction, modification and/or withdrawal was a violation of GAAS, including the Fourth Standards of Reporting; and

(c) Failed to require Mercury to disclose material facts and allowed Mercury to make material misrepresentations regarding the Company to its shareholders and to the investing public during the Class Period.

101. In certifying Mercury's financial statements for the years ended December 31, 1993, December 31, 1994 and December 31, 1995, KPMG stated that its examinations were made "in accordance with Generally Accepted Auditing Standards." This statement was false and misleading in that the audits conducts by KPMG were deliberately or recklessly not performed in accordance with GAAS in the following respects:

(a) KPMG violated GAAS General Standard No. 3 that requires that due professional care must be exercised by the auditor in the performance of the examination and the preparation of the report;

(b) KPMG violated GAAS Standard of Field Work No. 2 that requires the auditor to obtain a sufficient understanding of the internal control structure including accounting, financial and managerial controls, to determine whether reliance thereon was justified, and if such controls are not reliable, to expand the nature and scope of the auditing procedures to be applied. KPMG, knowing that the internal controls were insufficient, failed to expand its auditing procedures;

(c) KPMG violated Standard of Field Work No. 3 that requires sufficient, competent evidential material to be obtained through inspection, observation, inquiries and confirmations to afford a reasonable basis for an opinion to be issued on the subject financial statements. As described above, KPMG failed to obtain sufficient, competent evidential materials as to the amounts of Mercury's revenues and earnings and as to the correct valuation and carrying value of Mercury's loans and other assets;

(d) KPMG violated GAAS Standard of Reporting No. 1 that requires the audit report to state whether the financial statements are presented in accordance with GAAP. KPMG's opinion inappropriately represented that Mercury's financial statements complied with GAAP, when they did not for the reasons alleged herein;

(e) KPMG also violated GAAS Standard of Reporting No. 3 that requires informative disclosures in the financial statements to be regarded as adequate unless otherwise stated in the audit report. Here, the disclosures were not adequate. The Notes to the financial statement failed to set forth appropriate disclosures relating to Mercury's method of recognition of revenues and income. The disclosures were further inadequate with respect to the overstatement of Mercury's earnings, assets and net worth. The audit report of KPMG failed to disclose that such disclosures or omissions of material information, as heretofore alleged, rendered the respective financial statements false and misleading;

(f) KPMG violated GAAS Standard of Reporting No. 4 that requires, when an opinion on the financial statements as a whole cannot be expressed, that the reasons therefor be stated. KPMG should have stated that no opinion could be issued by it on Mercury's financial statements or issued a modified opinion stating that the financial statements were not fairly presented;

(g) KPMG violated GAAS Standard of Field Work No. 1 and the standards set forth in AICPA Auditing Standard ("AU") §§ 310, 320 and 327 by, among other things, failing to adequately plan its audit and properly supervise the work of assistants so as to establish and carry out procedures reasonably designed to search for and detect the existence of errors and irregularities which would have a material effect upon the financial statements;

(h) KPMG violated Statement on Auditing Standards ("SAS") No. 53 and AU § 316, in that KPMG failed to plan and perform its examination with an attitude of professional skepticism and, in connection with its 1993, 1994 and 1995 audits of Mercury, ignored numerous "red flags" which would reasonably have led to the discovery of the fraud;

(i) KPMG violated AU § 316.25 which sets forth the steps an auditor should take upon suspecting accounting irregularities. AU § 316.25 states:

If the auditor has determined that an audit adjustment is, or may be, an irregularity and has either determined that the effect could be material or has been unable to evaluate the potential materially, the auditor should:

a. Consider the implications for other aspects of the audit.

b. Discuss the matter and the approach to further investigation with an appropriate level of management that is at least one level above those involved.

c. Attempt to obtain sufficient competent evidential matter to determine whether, in fact, irregularities exist and, if so, their effect.

As part of its testing and audit procedures, KPMG became aware of (or willfully blinded itself to) Mercury's procedures for recording revenues and income; and KPMG failed to sufficiently expand its testing or obtain competent evidential matter to ensure that the Company had properly recorded authentic transactions as revenues. KPMG failed to report this condition to the Audit Committee even though it represented a possible irregularity involving senior management;

(j) KPMG violated AU § 316.28 which requires that auditors communicate "reportable conditions to the audit committee of companies" when the auditor becomes aware of irregularities. AU § 316.28 states:

For the audit committee to make the informed judgments necessary to fulfill its responsibility for the oversight of financial reporting, the auditor should assure himself that the audit committee is adequately informed about any irregularities of which the auditor becomes aware during the audit unless those irregularities are clearly inconsequential. For example, a minor defalcation by an employee at a low level in the organization might be considered inconsequential. However, irregularities involving senior management of which the auditor becomes aware should be reported directly to the audit committee. Irregularities that are individually immaterial may be reported to the audit committee on an aggregate basis, and the auditor may reach an understanding with the audit committee on the nature and amount of reportable irregularities.

KPMG knew, or willfully blinded itself to the fact, that Mercury was improperly recording revenues and earnings. KPMG, however, failed to fully communicate these matters to the audit committee (and investors) in violation of GAAS; and

(k) KPMG violated the second general auditing standard which requires the auditor maintain independence in mental attitude in all matters related to an assignment. AU § 220.01. KPMG over-relied on management representations and failed to obtain sufficient competent evidence to test management assertions.

102. KPMG did not exercise due professional care in the performance of its examination of Mercury's financial statements for the years December 31, 1993, December 31, 1994 and December 31, 1995 and failed to obtain, through inspection, observations, inquiries, confirmations, and other audit procedures, sufficient competent evidential matter to afford a reasonable basis for its unqualified opinion or to opine that the report of other auditors regarding the financial statements of Mercury provided a reasonable basis for KPMG's opinion.

103. In the course of rendering its unqualified audit certification on the fiscal years 1993, 1994 and 1995 financial statements of Mercury, and in reviewing and authorizing or permitting the issuance of Mercury's quarterly reports during the Class Period, KPMG knew it was required to adhere to each of the herein described standards and principles of GAAS, including the requirement that the financial statements comply in all material respects with GAAP. KPMG, in issuing its unqualified opinion, knew that by doing so it was engaging in extreme departures from GAAS, thus making its opinion false and misleading, and issued such certification with reckless disregard whether or not GAAP was being complied with.

104. As a result of the dissemination of the false and misleading statements described herein, the market price of Mercury stock was artificially inflated during the Class Period. In ignorance of the true, adverse facts which were concealed by defendants and in reliance upon the integrity of the market, plaintiffs and the Class purchased Mercury stock at artificially high prices and were damaged thereby. Had plaintiffs and the members of the Class known the true facts, they would not have taken such action or suffered such damage.

105. As alleged herein, defendants acted with scienter in that defendants knew or recklessly disregarded that the public documents and statements issued or disseminated in the name of the Company were materially false and misleading; knew or recklessly disregarded that such statements or documents would be issued or disseminated to the investing public; and knowingly or recklessly 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 or reckless disregard of information reflecting the true facts regarding Mercury, their control over, and/or receipt and/or modification and/or audit of Mercury's allegedly materially misleading financial statements and/or their associations with the Company which made them privy to confidential proprietary information concerning Mercury, participated in the fraudulent scheme alleged herein.

106. Defendants engaged in such a scheme to artificially inflate the price of Mercury common stock, in part, to facilitate business transactions involving the Company, including acquisitions and borrowings.

107. Moreover, the individual defendants engaged in such a scheme to inflate the price of Mercury common stock in order to: (i) protect and enhance their executive positions and the substantial compensation and prestige they obtained thereby; (ii) enhance the value of their personal Mercury common stock; and (iii) facilitate substantial and extremely profitable insider sales of Mercury stock. The Individual Defendants sold the following amounts of Mercury shares at artificially inflated prices during the Class Period while in possession of material non-public information:

108. The market for Mercury's common stock was open, well-developed and efficient at all relevant times. As a result of the above-described false and misleading statements and failure to disclose the full truth about Mercury and its business and future prospects, the Company's common stock traded at artificially inflated prices during the entire Class Period until the time the adverse information described above was finally provided to and digested by the securities market. Plaintiff and other members of the Class purchased Mercury common stock relying upon the integrity of the market price of Mercury stock and market information related to the Company, or in the alternative, upon Defendants' false and misleading statements, and in ignorance of the adverse, undisclosed information and false financial statements known to Defendants, and have been damaged thereby. Upon disclosure of the true facts regarding the Company, trading was halted in the sale of the common stock. Had plaintiff and other members of the Class known of the materially adverse information not disclosed by Defendants, they would not have purchased or acquired Mercury's common stock at the artificially inflated prices that they did.

109. At all relevant times, the misrepresentations and omissions particularized in this complaint directly or proximately caused or were a substantial contributing cause of the damages sustained by plaintiff and other member of the Class. As described herein, during the Class Period, Defendants made or caused to be made a series of false statements about Mercury's revenues and earnings. These misstatements and omissions had the cause and effect of creating in the market an unrealistically positive assessment of Mercury, its profitability and its future business prospects, thus causing the Company's common stock to be overvalued and artificially inflated at all relevant times. Defendants' false portrayal of Mercury, its business operations and future prospects during the Class Period resulted in plaintiff and other members of the Class purchasing the Company's common shares at a disparity between their market price and their actual value, thus causing the damage complained of herein.

110. Plaintiff repeats and realleges each and every allegation contained in each of the foregoing paragraphs as if set forth in full herein.

111. This Count is asserted against all defendants and is based upon Section 10(b) of the 1934 act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission.

112. The defendants knew, or were reckless in failing to know, of the material omissions from, and misrepresentations contained in, the statements as set forth above. Each of the defendants knew or had access to the material, adverse, non-public information about Mercury's true financial condition and then existing business conditions, which was not disclosed; and directly or indirectly participated in drafting, reviewing and/or approving the misleading statements, releases, reports and other public representations of and about Mercury.

113. During the Class Period, defendants, singly and in concert, directly or indirectly, engaged in a common plan, scheme, and unlawful course of conduct pursuant to which they knowingly or recklessly engaged in acts, transactions, practices, and courses of business which operated as a fraud and deceit upon plaintiff and the other members of the Class, and made various deceptive and untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading to plaintiff and the other members of the Class. The purpose and effect of said scheme, plan, and unlawful course of conduct was to induce plaintiff and the other members of the Class to purchase Mercury common stock during the Class Period at artificially inflated prices.

114. During the Class Period, defendants, pursuant to said scheme, plan, and unlawful course of conduct, knowingly and recklessly issued, caused to be issued, participated in the preparation and issuance of deceptive and materially false and misleading statements to the investing public which were contained in or omitted from various documents and other statements, as particularized above.

115. Defendants each knew the facts set forth herein and intended to deceive plaintiff and the other members of the Class, or in the alternative, acted with reckless disregard for the truth when they failed to disclose or cause the disclosure of the true facts to plaintiff and the other members of the Class.

116. During the Class Period, Mercury acted through the Individual Defendants, whom it portrayed and represented to the financial press and public as its valid representatives. The willfulness, motive, knowledge, and recklessness of the Individual Defendants are therefore imputed to Mercury, which is primarily liable for the securities law violations of the Individual Defendants while acting in their official capacities as Company representatives, or, in the alternative, which is liable for the acts of the Individual Defendants under the doctrine of respondeat superior.

117. As a result of the dissemination of the false and misleading statements set forth above, the market price of Mercury common stock was artificially inflated during the Class Period. In ignorance of the false and misleading nature of the representations described above and the deceptive and manipulative devices and contrivances employed by said defendants, plaintiff and the other members of the Class relied to their detriment on the integrity of the market price of the stock in purchasing Mercury common stock. Had plaintiff and the other members of the Class known of the materially adverse information misrepresented or not disclosed by defendants, they would not have purchased Mercury common stock at the artificially inflated prices that they did.

118. As a result of the inflation of the prices of Mercury common stock during the Class Period caused by defendants' material misrepresentations and omissions, plaintiff and the other members of the Class have suffered substantial damages as a result of the wrongs alleged.

119. By reason of the foregoing, defendants, directly violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder in that they: (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon plaintiff and the other members of the Class in connection with their purchases of Mercury common stock during the Class Period.

120. Plaintiff repeats and realleges each and every allegation contained in each of the foregoing paragraphs as if set forth in full herein.

121. The Individual Defendants, by virtue of their offices and specific acts described above, were, for purposes of publication of Mercury's financial statements, at the time of the wrongs alleged herein, controlling persons of Mercury within the meaning of Section 20(a) of the 1934 Act.

122. The Individual Defendants had the power and influence and exercised the same to cause Mercury to disseminate false and misleading financial statements as complained of herein.

123. By reason of the conduct alleged in Count I of the Complaint, the Individual Defendants are liable for the aforesaid wrongful conduct, and are liable to plaintiff and to the other members of the Class for the substantial damages which they suffered in connection with their purchases of Mercury common stock during the Class Period.

124. Plaintiff demands a trial by jury on all issues. WHEREFORE, plaintiff, on behalf of itself and the members of the Class, prays for judgment as follows: A.declaring this action to be a proper class action and certifying plaintiff as the lead representative of the Class under Rule 23 of the Federal Rules of Civil Procedure;

B. awarding compensatory damages in favor of plaintiff and the other members of the Class against all defendants, jointly and severally, for the damages sustained as a result of the wrongdoing of defendants, together with pre- and post-judgment interest thereon;

C. awarding plaintiff and the Class their costs and expenses incurred in this action including reasonable allowance of fees for plaintiff's attorneys, accountants and experts, and reimbursement of plaintiff's expenses; and

D. granting extraordinary equitable and/or injunctive relief as permitted by law, equity and federal and state statutory provisions sued on hereunder, including attaching, impounding, imposing a constructive trust upon or otherwise restricting the proceeds of defendants' trading activities or their other assets so as to assure that plaintiff has an effective remedy; and

E. granting such other and further relief as the Court may deem just and proper.

Dated: 3-21-97

Respectively submitted,

ROBINSON, CURLEY & CLAYTON

By_________________________________
Fay Clayton
300 South Wacker Drive
Suite 1700
Chicago, IL 60606
(312) 663-3100

HEINS MILLS & OLSON, P.L.C.
Samuel D. Heins
Stacey L. Mills
Bryan L. Crawford
700 Northstar East
608 Second Avenue
South Minneapolis, MN 55402
(612) 338-4605

Attorneys for Plaintiff Minnesota State
Board of Investment