UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF MICHIGAN
EDWIN MILLER, individually and on ) Case No. 98-70417
behalf of all others similarly )
situated, )
) CLASS ACTION COMPLAINT
Plaintiff, ) [filed Jan. 29, 1998]
)
v. ) JURY TRIAL DEMANDED
)
CREDIT ACCEPTANCE CORPORATION, )
DONALD A. FOSS, and RICHARD E. )
BECKMAN, )
)
Defendants. )
)
____________________________________)
Plaintiff, by his attorneys, for his Class Action
Complaint (the "Complaint") alleges the following upon personal
knowledge as to himself and his own acts, and upon information
and belief based upon the investigation of plaintiff's
attorneys as to all other matters. The investigation includes
the thorough review and analysis of public statements,
publicly-filed documents of Credit Acceptance Corporation
("Credit Acceptance" or the "Company"), press releases, news
articles and the review and analysis of accounting rules and
related literature. Plaintiffs believe that further
substantial evidentiary support will exist for the allegations
set forth below after a reasonable opportunity for discovery.
SUMMARY OF ACTION
1. This is a securities class action on behalf
of public investors who purchased the common stock of Credit
Acceptance during the period from September 29, 1995 through
October 22, 1997 (the "Class Period"). Plaintiffs complain
that Credit Acceptance's financial results, as reported by
defendants, did not accurately reflect the Company's true
financial position and results of operations during the Class
Period.
2. Credit Acceptance, a corporation whose
headquarters are in Southfield, Michigan, is a specialized
financial services company which provides funding, receivables
management, collection, sales training and related products and
services to automobile dealers selling vehicles to customers
with limited access to traditional sources of consumer credit.
3. Throughout the Class Period, Credit Acceptance's
results, as reported by defendants, did not accurately reflect
the Company's true financial position and results of
operations. The financial results which defendants issued
failed to be reported in accordance with generally accepted
accounting principles. Such results contained material
accounting irregularities in that they failed to reflect
adequate reserves for credit losses. Moreover, defendants
issued public statements during the Class Period which
fraudulently created the false impression that the Company's
accounting practices were proper.
4. From the time the truth concerning Credit
Acceptance's financial condition began to leak out until the
full extent of Credit Acceptance's improper accounting was
revealed at the end of the Class Period, the price of the
Company's common stock fell from a high range of $27-$26 at
which it sold during late July through late November 1996, to a
$3.00 close on October 28, 1997. On October 22, 1997, the last
day of the Class Period, the company reported a net loss for
the quarter ended September 30, 1997 of $(27,708,000) or $(.59)
per share and that credit losses in the amount of $60 million
was recorded. Credit Acceptance stock plunged upon the
disclosure of the true nature of the company's financial
position and results of operations, and the Class has been
damaged thereby.
JURISDICTION AND VENUE
5. This Court has jurisdiction over this
action pursuant to Section 27 of the Securities Exchange Act of
1934 (the "1934 Act"), 28 U.S.C. §§ 1331 and 1337. The claims
asserted herein arise under, Sections 10(b) and 20(a) of the
1934 Act, 15 U.S.C. §§78j(b), 78(n), and 78t(a), and Rule 10b-
5, 17 C.F.R. §240.10b-5, promulgated thereunder by the SEC.
6. Venue is proper in this District pursuant
to Section 22 of the 1933 Act, Section 27 of the 1934 Act, 15
U.S.C. §78aa, and 28 U.S.C. §1391(b). Many of the defendants
reside in this District. Many of the acts giving rise to the
violations complained of, including the dissemination of false
and misleading public statements and financial information,
occurred in this District.
7. In connection with the wrongs alleged
herein, defendants used the instrumentalities of interstate
commerce, including the United States mails, interstate wire
and telephone facilities, and the facilities of the national
securities markets.
THE PARTIES
8. Plaintiff Edwin Miller purchased shares of
Credit Acceptance common stock during the Class Period and was
damaged thereby, as set forth in the Certification filed with
the initial pleading in this action.
9. (a) Defendant Credit Acceptance is a Michigan
corporation with Business Headquarters at 25505 W Twelve Mile
Rd., Suite 3000, Southfield, Michigan 48034. Credit
Acceptance, incorporated in Michigan in 1972, is a specialized
financial services company which provides funding, receivables
management, collection, sales training and related products and
services to automobile dealers located in the United States,
the United Kingdom, Canada and Ireland. Credit Acceptance
assists such dealers with the sale of used vehicles by
providing an indirect financing source for buyers with limited
access to traditional sources of consumer credit ("Non-prime
Consumers"). As of December 31, 1996, Credit Acceptance had
relationships with 5,385 automobile dealers and aggregate gross
installment contracts receivable of approximately $1.25
billion. Credit Acceptance has developed special-purpose
management information and operating systems, utilizing
sophisticated computer and telephone interface capabilities,
which allow it to efficiently accept, manage and collect
installment contracts written by participating dealers.
(b) Credit Acceptance also provides dealers with
enhancements to the Company's program which provide the Non-
prime Consumer with the opportunity to purchase a number of
ancillary products, including point-of-sale dual interest
collateral protection insurance provided by third-party
insurance carriers, credit life and disability insurance and
vehicle service contracts offered by dealers. Through a
wholly-owned subsidiary, the Company also reinsures credit life
and accident and health insurance policies issued in
conjunction with installment contracts originated by dealers.
To a significantly lesser extent, Credit Acceptance assists
dealers in financing their inventories and businesses by
providing floor plan financing and secured working capital
loans. As of December 31, 1996, floor plan receivables
represented 1.4% of total assets while notes receivable
(representing working capital loans) represented 0.2% of total
assets.
(c) During October 1994, the Company commenced
operations in the United Kingdom through a subsidiary, offering
essentially the same services to dealers in the United Kingdom
as the Company offers in the United States. In November 1996,
the Company began operating on a similar basis through
subsidiaries in Canada and Ireland.
(d) Credit Acceptance derives its revenues from
four principal sources: (i) servicing fees (which are
accounted for as finance charges) earned as a result of
servicing and collecting installment contracts originated and
assigned to the Company by dealers; (ii) fees charged to
dealers at the time they enroll in the Company's program; (iii)
interest and other income earned primarily in connection with
loans made directly to dealers for floor plan financing and
secured working capital purposes and commissions related to the
Company's dual interest collateral protection insurance
program; and (iv) premiums earned from the Company's insurance
and service contract programs.
10. Defendant Donald A. Foss ("Foss") is
and was at all relevant times Chairman of the Board and Chief
Executive Officer of Credit Acceptance. In 1996 Foss held the
286 spot on Forbes' national list of 400 wealthiest as a result
of his ownership interest in Credit Acceptance. Defendant Foss
was quoted in and/or responsible for the preparation, approval
or release of each statement plaintiffs allege was false and
misleading, including all press releases and regulatory
filings. In addition, by virtue of his positions as Chairman
and Chief Executive Officer, Foss was under a continuing duty
to direct and control the operations of Credit Acceptance, to
exercise due care and diligence in those operations, and to
oversee and review all corporate operations, including the
filing of documents with the SEC and the making of public
statements. During the Class Period, defendant Foss sold
approximately 2,425,000 shares of Credit Acceptance common
stock at artificially inflated prices, while in possession of
undisclosed, materially adverse information about the Company.
Defendant Foss yielded total proceeds of approximately $60
million dollars from these insider sales of Credit Acceptance
stock. The financial misrepresentations disseminated by
defendants during the Class Period created the illusion that
Credit Acceptance was experiencing revenue growth. By
misrepresenting Credit Acceptance's financial condition,
defendants were able to portray more attractive earnings to
investors, enabling defendant Foss to sell a large portion of
his holdings in the Company at a profit.
11. Defendant Richard E. Beckman ("Beckman")
is and was at all relevant times the President and Chief
Operating Officer of Credit Acceptance. During the Class
Period, defendant Beckman sold approximately 80,000 shares of
Credit Acceptance common stock at artificially inflated prices,
while in possession of undisclosed, materially adverse
information about the Company. Defendant Foss yielded total
proceeds of approximately $2 million dollars from these insider
sales of Credit Acceptance stock.
12. By virtue of their positions as officers and/or
directors of the Company, the defendants named in paragraphs
10-11 above (the "Individual Defendants") had the authority and
ability to and, in fact, controlled the contents of the
Company's annual and quarterly reports filed with the SEC, and
press releases. Further, the actions of the Individual
Defendants during the Class Period caused the material
misstatement of the Company's financial condition and results
as alleged herein. The Individual Defendants were aware of the
contents of the Company's publicly disseminated reports and
press releases alleged herein to be misleading prior to their
issuance and had the ability and opportunity to prevent their
issuance or cause them to be corrected, but failed to do so.
Each of the Individual Defendants were signatories to the
Registration Statement and some, if not all, of the other
filings described herein.
CLASS ACTION ALLEGATIONS
13. Plaintiff brings this action as a
class action pursuant to Rules 23(a) and 23(b)(3) of the
Federal Rules of Civil Procedure, individually and on behalf of
all other persons or entities who purchased or acquired Credit
Acceptance during the Class Period and were damaged thereby,
excluding the defendants herein, their affiliates and any
officers or directors of Credit Acceptance or its affiliates,
and any members of immediate families and their heirs,
successors and assigns (the "Class").
14. The Class is so numerous that joinder
of all the members of the Class is impracticable. Plaintiff
believes there are hundreds of record holders of the Company's
common stock located throughout the United States.
15. Plaintiff's claims are typical of the
claims of absent Class members. Members of the Class have
sustained damages arising out of defendants' wrongful conduct
in violation of the federal securities laws in the same way as
the plaintiff sustained damages from the unlawful conduct.
16. Plaintiff will fairly and adequately
protect the interests of the Class. He has retained counsel
competent and experienced in class and securities litigation.
17. A class action is superior to other
available methods for the fair and efficient adjudication of
the controversy. The Class is numerous and geographically
dispersed. It would be impracticable for each member of the
Class to bring a separate action. The individual damages of
any member of the Class may be relatively small when measured
against the potential costs of bringing this action, and thus
make the expense and burden of this litigation unjustifiable
for individual actions. In this class action, the Court can
determine the rights of all members of the Class with judicial
economy. Plaintiff does not anticipate any difficulty in the
management of this suit as a class action.
18. Common questions of law and fact exist
as to all members of the Class and predominate over any
questions affecting solely individual members of the Class.
These questions include, but are not limited to, the following:
a. whether defendants' conduct as alleged
herein violated the federal securities laws;
b. whether the SEC filings, press
releases and statements disseminated to the investing public
during the Class Period misrepresented Credit Acceptance's
financial condition and results;
c. whether defendants acted knowingly or
recklessly in omitting and/or misrepresenting material facts;
d. whether the market price of Credit
Acceptance common stock during the Class Period was artificially inflated; and
e. whether the members of the Class have
been damaged, and if so, what is the proper measure of damages.
19. 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. To the extent that the Complaint alleges that any
forward-looking statements were materially misleading, the
defendants made no meaningful cautionary statements identifying
important factors that could cause actual results to differ
materially from those in the purportedly forward-looking
statements and in fact, defendants had no reasonable basis for
their forward looking statements.
FACTUAL BACKGROUND
20. It is well noted that Credit Acceptance is one
the leading competitors in the high risk auto loan industry.
On August 15, 1994 in Barron's article entitled Used Car Loans:
Suddenly Sexy, Andrew Bary noted:
"The rising star in the group, and the one
mentioned most often as the `next Mercury,'
is Credit Acceptance, which makes money by
dealing with the worst credit risks. `If
Mercury says it rejects three of every four
borrowers, we're interested in those other
three,' says Donald Foss, the company's
chief executive, founder and largest
shareholder. Credit Acceptance has
succeeded despite dealing with delinquency
rates that run 50% or more, levels that
would drive bankers crazy. `Collection is
our specialty,' Foss says.
"Credit Acceptance, based in Southfield,
Mich., insulates itself from losses by
buying loans from car dealers at about half
their face value. As the borrower pays off
full value of the loan, Credit Acceptance
gets its principal back first, and then the
remaining payments are split 80-20, with
the larger share going to the dealer."
21. Other financial periodicals noted Credit
Acceptance's aggressive business style. In the June 28, 1995
Wall Street Journal article by staff reporter Michael Selz
entitled, Last-Ditch Loans: Bankrupts Who Drive Are Lucrative
Market To a Growing Lender -- Credit Acceptance Corp. Uses High
Rates of Interest And Plenty of Repo Men -- A Deal for Used-Car
Dealers, he stated:
"Few enterprises go after such borrowers
more zealously than Credit Acceptance.
Some critics assail its aggressive
collection methods. Others question the
company's low level of reserves against
loan defaults and the way it claims to
protect itself against them -- a two-step
system of initially paying car dealers for
only part of loans it buys from them, and
then pooling these loans.
* * *
"Other critics say Credit Acceptance's
accounting practices may be as aggressive
as its bill collection. The company has
reserves for potential losses equal to only
1% of its loan portfolio. That is one-
seventh the level of reserves at Mercury
Finance Co., Northbrook, Ill., the largest
used-car finance company. Yet Mercury
makes much more conservative loans and says
only 0.8% of them are 60 days or more past
due. At Credit Acceptance, where more than
25% of loans are at least 120 days overdue,
the lower reserves boost reported earnings,
but possibly expose the company to future
write-offs.
"Credit Acceptance says its reserves are
sufficient because it obligates dealers to
accept much of the risk for loan defaults.
Like many other auto-finance companies,
Credit Acceptance buys loans from dealers
at a discount. But unlike companies such
as Mercury, it initially hands over to the
dealer only part of the loan's discounted
purchase price, in the form of a so-called
advance.
"Credit Acceptance says it combines the
debt it buys from each dealer into pools of
100 or more loans. It pays dealers the
rest of their money only after recovering
enough from borrowers to cover a pool's
dealer advances. The pooled money it
withholds mitigates the risk that borrowers
will default before Credit Acceptance
recovers all of its up-front payments, says
Richard Beckman, vice chairman and chief
financial officer. In such a case, Credit
Acceptance doesn't have to pay the dealer
the balance of the loan purchase price.
And it can make up its loss on the advance
out of loan repayments it otherwise would
have handed over. The dealer, of course,
commonly mitigates its risk by charging a
high price for the car."
22. Until the most recent quarter, Credit Acceptance
had five years of successive and progressive, incremetally
managed quarterly earnings increases as exemplified in the
chart below:
Sales Date Primary (MIL) Shares EPS
97Q3 (09/97) 40.9 -.60
97Q2 (06/97) 44.9 .26
97Q1 (03/97) 41.8 .26
96Q4 (12/96) 35.7 .25
96Q3 (09/96) 32.5 .23
96Q2 (06/96) 29.3 .22
96Q1 (03/96) 26.6 .20
95Q4 (12/95) 24.0 .19
95Q3 (09/95) 22.6 .18
95Q2 (06/95) 20.7 .17
95Q1 (03/95) 17.7 .15
94Q4 (12/94) 16.3 .14
94Q3 (09/94) 15.1 .14
94Q2 (06/94) 12.8 .12
94Q1 (03/94) 10.1 .10
93Q4 (12/93) 8.7 .09
Furthermore the analyst expected $.27 earnings per share
in 97Q3.
From 1992 to 1996, Credit Acceptance's revenues soared
from $* million to almost $* million.
23. In order to continue portraying themselves as a
successful growth company and maintain their expected growth,
Credit Acceptance resorted to utilizing misleading accounting
practices.
24. In each quarter during the class period the
Company reported its credit reserves ("ALLOWANCE FOR CREDIT
LOSSES"). The amounts reported as reserves for credit losses
were false and misleading in that they were not reported in
accordance with general accepted accounting principles,
specifically, Statement of Financial Accounting Standard No. 5
and the principles described at paragraph *, below. As a
result, Credit Acceptance quarterly reported results, including
its net income and earnings, were materially overstated.
25. Prior to the Company's October 22, 1997 press
release reporting the huge credit loss reserve, Credit
Acceptance's May 15, 1997 10-Q states its credit policy and
experience as the following:
"The Company maintains an allowance for
credit losses which, in the opinion of
management, adequately reserves against
expected future losses in the portfolio of
receivables. The risk of loss to the
Company related to the installment
contracts receivable balance relates
primarily to the earned but unpaid
servicing fee or finance charge recognized
on contractually delinquent accounts. To
the extent that the Company does not
collect the gross amount of the contract,
the remaining gross installment contracts
receivable balance is charged off against
dealer holdbacks, unearned finance charges,
and the allowance for credit losses. The
Company also maintains a reserve against
advances to dealers that are not expected
to be recovered through collections on the
related installment contract receivable
portfolio. Advance balances are reviewed
by management on a monthly basis, and those
which are deemed to be unrecoverable are
charged against the reserve. Credit loss
experience, changes in the character and
size of the receivables portfolio, the
advance balance and management's judgment
are primary factors used in assessing the
overall adequacy of the allowance and
advance reserve and the resulting
provisions for credit losses. Ultimate
losses may vary from current estimates and
the amount of the provision, which is a
current expense, may be either greater or
less than actual charge offs."
26. Also, in the Company's May 15, 1997 10-Q the
Company states:
"The Company's relatively low level of
amounts charged against the allowance for
credit losses is due to, among other
factors:
"(i) the requirement that each installment
contract accepted must meet established,
formula-based criteria prior to the Company
making an advance on such contract;
"(ii) experienced personnel, using
computer-assisted accounts receivable
management and collection systems;
"(iii) the security interest the Company
receives in the vehicle at the time it
accepts an installment contract; and
"(iv) the high level of dealer holdbacks,
relative to the amount of installment
contracts."
27. Subsequent to the Company's October 22, 1997
press release reporting the Company's poor financial health in
the November 14, 1997 10-Q Credit Acceptance states the
following provision for credit losses:
"The amount provided for credit losses, as
a percent of total revenue, increased from
10.5% and 10.0% for the three and nine
months ended September 30, 1996 to 156.7%
and 61.8% for the same periods in 1997.
These increases are primarily the result of
a non-cash charge recorded to reflect an
enhancement in the Company's methodology
for estimating its reserve for advances
made possible by a new loan servicing
system implemented at the Company's U.S.
and Canadian operations during the three
months ended September 30, 1997. Utilizing
the new information made available upon the
successful implementation of this new
system, the Company undertook an extensive
review of its exposure related to dealer
advances using a static pool analysis on a
per dealer basis. In order to reflect the
impact of this analysis on the Company's
advance reserve, a provision for credit
losses in the amount of $60.0 million was
recorded. In electing to take a charge of
this magnitude, the Company believes that
it has reflected the full impact of
implementing the new loan servicing system
and the information now available.
Consistent with Statement of Financial
Accounting Standards No. 114 `Accounting by
Creditors for Impairment of a Loan', one
component of this charge, approximately
$30.0 million, results from the present
valuing of future cash flows used to
determine the advance reserve in order to
achieve a level yield over the remaining
term of the advance equal to the expected
yield at the origination of the impaired
advance.
28. Credit Acceptance's reported financial
statements and reported results for each quarter of the class
period violated GAAP for the following reasons, among others:
a. The principle of fair presentation
("presents fairly") was violated;
b. The principle of adequacy and fairness of
disclosure was violated;
c. The principle of materiality concerning
information that is significant enough to affect evaluation or
decisions was violated (FASB Statement of Concepts No. 1 and
No. 2);
d. The principle that the financial
information presented should be complete was violated (FASB
Statement of Concepts No. 2);
e. The principle that the substance rather
than the form of a transaction should be reflected was violated
(FASB Statement of Concepts No. 2);
f. The principle that items included in the
financial statements be reliably corroborated by outside
evidence (verifiability) was violated (FASB Statement of
Concepts No. 2);
g. The principle that the financial statement
should contain and disclose relevant, understandable and timely
information for the economic decisions of the user was violated
(FASB Statement of Concepts No. 2);
h. The principle that the financial statement
provide reliable financial information about the enterprise for
the economic decisions of the user was violated (FASB Statement
of Concepts No. 1 and No. 2);
i. The principle that estimated losses should
be accrued was violated (FASB Statement No. 5);
j. The principles governing interim reporting
was violated (Accounting Principles Board Opinion No. 28).
29. As a result of the improper and misleading
accounting practices set forth above, Credit Acceptance's
financial statements which were publicly disseminated during
the class period were materially false and misleading because
its financial statements were not prepared in accordance with
generally accepted accounting principles and were not prepared
pursuant to the rules and regulations of the SEC. These
financial statements did not reflect all reserves and
adjustments necessary to present fairly the financial condition
of Credit Acceptance. For all of these reasons, and those set
forth above, Credit Acceptance's net income and net assets were
overstated in material amounts throughout the Class Period.
30. On October 22, 1997 Credit Acceptance reported
the following in a press release:
"Credit Acceptance Corp. Reports Financial
Results.
"SOUTHFIELD, Mich. -- Oct. 22, 1997 --
Credit Acceptance Corporation (Nasdaq/ NMS:
CACC) today reported a net loss for the
quarter ended September 30, 1997 of
$(27,708,000) or $(.59) per share compared
to net income of $10,643,000 or $.23 per
share for the same period in 1996. The
loss for the quarter was generated as a
direct result of a non-cash charge recorded
to reflect an enhancement in the Company's
methodology for estimating its reserve for
advances made possible by a new loan
servicing system implemented during the
quarter. Utilizing the new information
made available upon the successful
implementation of this new system, the
Company undertook an extensive review of
its exposure related to dealer advances
using a static pool analysis on a per
dealer basis. In order to reflect the
impact of this analysis on the Company's
advance reserve, a provision for credit
losses in the amount of $60 million was
recorded. In electing to take a charge of
this magnitude, the Company believes that
it has reflected the full impact of
implementing the new loan servicing system
and the information now available.
Consistent with Statement of Financial
Accounting Standards No. 114 `Accounting by
Creditors for Impairment of a Loan', one
component of this charge, approximately $30
million, results from the present valuing
of future cash flows used to determine the
advance reserve in order to achieve a level
y unpaid revenue on installment
contracts receivable and a lower finance
charge yield. The Company implemented this
change in an effort to more quickly
identify unprofitable dealer relationships.
"The Company stated that it has obtained
waivers from its lenders, including the
holders of its senior notes and the banks
under its credit agreement, of compliance
with the fixed charge coverage ratio
covenant in agreements relating to the
Company's indebtedness. Such waivers will
be effective through December 15, 1997, and
the Company intends to use this time to
negotiate longer term amendments.
"Donald A. Foss, Chairman and Chief
Executive Officer of the Company, stated
that `the enhancement to the Company's
reserve methodology results from the
Company's efforts to improve the level of
operating information available to senior
management to more effectively manage the
business and its growth. in that
connection, the Company has recently
deployed proprietary management information
and reporting software which allows for the
detailed analysis of the Company's
portfolio on a dealer-by-dealer basis,
replacing technology which, while
sophisticated in the consumer finance
industry, did not allow for the level of
analysis that is now possible.
"Richard E. Beckman, President of the
Company, commented that `the new level of
information available to us will allow us
to better identify dealers that have not
provided us with profitable business,
allowing us to focus our resources to
enhance our services to our remaining
dealers. We believe that this presents
opportunities for the Company to grow while
mitigating risk that is inherent in our
business. At the same time it allows us to
manage our cash more efficiently without as
much dependence on borrowings to support
contract originations.'
"In an unrelated matter, the Company stated
that Mr. Thomas A. FitzSimmons, formerly a
partner in William Blair & Company, LLC,
the investment banking firm that took the
Company public in 1992 and a Director of
the Company since 1994, has been appointed
an Executive Vice President of the Company
and Managing Director of Credit Acceptance
Corporation UK Limited, effective October
1, 1997. Mr. FitzSimmons will continue to
serve as director of the Company.
"The statements made above with respect to
expected provision levels, profitability
and expected reductions in the Company's
dependence on borrowings are `forward
looking statements' within the meaning of
the Securities Exchange Act of 1934 and are
subject to a number of risks and
uncertainties. These include the potential
for greater then expected increase in non-
accrual contracts, the potential for lower
than expected contract originations, the
availability of financing to support the
Company's operations and the various other
factors discussed in the Company's annual
and quarterly reports filed with the
Securities and Exchange Commission.
"Credit Acceptance Corporation is a
specialized financial services company
which provides funding, receivables
management, collection, sales training and
related products and services to automobile
dealers selling vehicles to consumers with
limited access to traditional sources of
consumer credit."
31. Following the October 22, 1997 press release,
market analysts lowered their ratings on Credit Acceptance.
For example, Standard & Poor's lowered the Company's ratings
outlook to "negative from stable".
32. Furthermore, Standard & Poor's stated that it,
"[L]owered its counterparty credit rating of Credit
Acceptance Corp. (CAC) to double-`B' from triple-`B'-
minus. The rating on the company's $300 million
shelf registration was lowered to preliminary double-
`B' from preliminary triple-`B'-minus. No debt has
been drawn down from the shelf.
"The ratings outlook was revised to
negative from stable.
"The downgrade and outlook change are based
on the company's announcement that losses
were greater than expected, as well as the
industry's increased competitive dynamics.
CAC also announced that it would be adding
approximately $60 million to reserves in
the third quarter of 1997. This provision
consists of three parts. First, the
company will be adding approximately $25
million to reserves of $19 million after a
re-evaluation of the company's losses upon
implementation of a new loan loss
monitoring system. Second, the company
will add another #30 million to reserves
based on CAC's accountants' determination
that the company is subject to FAS 114
regulations, which states that impaired
assets should be accounted for on a
discounted basis. This $30 million
adjustment will be earned back into income
over time. Finally, the company is adding
a standard quarterly provision of $5
million. In addition, the company's U.K.
operation has performed below expectations
and the company announced that is will cut
back on production in that unit.
"While these adjustments result in CAC's
violation of certain fixed-charge coverage
dbt covenants, the company has received
waivers from a sufficient percentage of its
lenders so that this technical violation
does not result in any debt acceleration.
The company is expected to be able to fund
its ongoing operations through its internal
cash flows, as well as though continued use
of its revolving debt facilities.
"OUTLOOK: NEGATIVE
"Although the announced writedowns are on-
time events, Standard & Poor's is concerned
over the general deterioration of the
company's loan portfolio, as well as the
industry's increased competitive dynamics,
Standard & Poor's said. -- Credit Wire."
33. Other analysts also had negative views on the
Company:
"Analyst Lewis said his view is that Credit
Acceptance, a hot growth stock for much of
its history, tried to grow too fast.
"`I think they had this pressure to grow
. . . and they just went ahead and did that
and probably compromised some basic tenets
they had been using before in terms of the
quality of the loans and the quality of the
dealers they were lending to,' he said.
"`It's not uncommon for finance companies
to do this, to go out and originate a ton
of assets so they can show a lot of growth,
and then several quarters down the line
have these huge losses. It's a pretty old
story'.
"Lewis said Credit Acceptance's growth path
probably will be muted from now on: `Their
focus now is clearly on survival, not
growth.'"
Defendants' False and Misleading Information
34. During the Class Period, defendants
materially misled the investing public, thereby inflating the
price of Credit Acceptance securities, 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.
35. Credit Acceptance's January 24, 1997
announcement that it has, "entered into a strategic
alliance with Capricorn where Credit Acceptance will
offer its core services, including call center support to
clients of Capricorn," was a false and misleading statement.
It was subsequently revealed in the Barron's article that the
true nature of the agreement between Credit Acceptance and
Capricorn was for Capricorn to pay for the licensing of Credit
Acceptance's software. The licensing of software has never
been considered part of Credit Acceptance's "core service".
These problems were operative throughout the Class Period and
contrary to and/or discredited by defendants' statements
disseminated to the investing public.
Credit Acceptance's Guidance To Securities Analysts And Use Of
Them As A Conduit To Provide False Information To The
Securities Markets
36. As described below, among other wrongful
conduct, defendants used communications with securities
analysts to promote the Company and to artificially inflate the
price of Credit Acceptance stock during the Class Period.
37. At all relevant times, Credit Acceptance was
followed by securities analysts employed by brokerage houses
which issue reports and make recommendations concerning Credit
Acceptance's common stock to their clients. Among the several
securities firms that followed the Company during the Class
period were Robert Baird & Co. and Saloman Brothers.
38. In writing their reports, these analysts relied
in substantial part upon information provided by the Company,
public statements and reports of the Company, information
provided to them privately by defendants and assurances by
defendants and the Company that information in the analysts'
reports did not materially vary from the Company's internal
knowledge of its operations and prospects.
39. Defendants used their communications with
analysts to assure them that their analysis and estimates of
Credit Acceptance's business were accurate and repeatedly
advised securities analysts that the Company was on track to
achieve strong earnings and earnings growth.
40. Prior to and during the Class Period, it was the
Company's practice to have its top officers and key members of
its management team communicate regularly with securities
analysts at the firms identified above (and others), on a
regular basis, to discuss, among other things, the Company's
operating results and anticipated revenues and to provide
detailed "guidance" to these analysts with respect to the
Company's business and anticipated revenues and earnings.
These communications included, but were not limited to,
conference alls, meetings, and analyst briefings where the
defendants discussed relevant aspects of the Company's
operations and financial prospects. Additionally, as described
below, Credit Acceptance representatives -- including certain
of the Individual Defendants -- also attended "conferences"
sponsored by different organizations throughout the Class
Period and sponsored "conference calls" with securities
analysts and institutional investors in connection with
releases of earnings announcements and other major corporate
events during which they promoted the Company's stock by
disseminating materially misleading information about the
Company.
41. The defendants knew that by participating in
these regular and periodic direct communications with analysts,
the Company could disseminate information to the investment
community and that investors and the market would rely and act
upon such information (i.e., make purchases of the Company's
securities). The Individual Defendants had these
communications with analysts in order to cause or encourage
them to issue favorable reports concerning Credit Acceptance --
which the analysts did -- and defendants used these
communications to falsely present the operations and allegedly
successful prospects of Credit Acceptance to the marketplace in
order to artificially inflate the market price of Credit
Acceptance's common stock. Despite their duty to do so, the
Individual Defendants failed to correct these statements (of
which they were the sources of which they had caused or
facilitated) during the Class Period.
42. The investment community and, in turn,
investors, relied and acted upon the information communicated
in these written reports that repeatedly recommended that
investors purchase Credit Acceptance common stock. Defendants
manipulated and inflated the market price of Credit Acceptance
stock by falsely presenting to analysts, through regular
meetings and during both telephonic and written communications,
the prospects of the Company and by failing to disclose the
true adverse information about the Company that was known only
to them.
43. During the Class Period, each Individual
Defendant occupied a position that made him privy to non-public
information concerning Credit Acceptance. Because of this
access, each of these defendants knew that the adverse facts
specified herein were being concealed and that the public
statements being made by the Company were false.
44. The market for Credit Acceptance's activities
was open, well-developed and efficient at all relevant times.
As a result of these materially false and misleading statements
and failures to disclose the full truth about Credit Acceptance
and its business, earnings momentum and future prospects,
Credit Acceptance common stock traded at artificially inflated
prices during the entire Class Period, reaching a Class Period
high of $27.00 per share, until the time the adverse
information described above was finally provided to and
digested by the securities markets. Plaintiffs and other
members of the Class purchased or otherwise acquired Credit
Acceptance securities relying upon the integrity of the market
price of Credit Acceptance stock and market information
relating to Credit Acceptance, or in the alternative, upon
defendants' false and misleading statements, and in ignorance
of the adverse, undisclosed information known to defendants,
and have been damaged thereby.
Defendants' Knowing or Reckless Disregard of the
False and Misleading Financial Statements
45. Defendants' false representations and
material omissions were made with scienter in that: defendants
knew or recklessly disregarded that the public documents and
statements issued or disseminated by Credit Acceptance were
materially false and misleading as described above; knew or
were reckless in not knowing that the false financial results
would be issued or disseminated to the investing public; and
knowingly and substantially participated in the preparation
and/or issuance or dissemination of such statements or
documents. The following factors indicate that defendants made
the misrepresentations knowingly or with reckless disregard for
the truth:
a. Throughout the Class Period, Defendant Foss
sought to maintain the price of Credit Acceptance common stock
so that he could, at the same time, sell approximately
2,425,000 thousand shares for net proceeds of approximately $60
million.
Inapplicability of Statutory Safe Harbor
46. 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 statements pleaded herein were not
specifically identified as "forward-looking statements" when
made. To the extent there were any forward looking statements,
there were no meaningful cautionary statements identifying the
important then-present factors that could and did cause actual
results to differ materially from those in the purportedly
forward-looking statements. Alternatively, to the extent that
the 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 or misleading, and/or the forward-looking statement was
authorized and/or approved by an executive officer of Credit
Acceptance who knew that those statements were false when made.
47. Any warnings contained in the press releases and
the financial statements quoted herein were generic statements
of the kind of risks that affect any high-tech computer company
and misleadingly contained no specific factual disclosure of
any of the looming problems with Credit Acceptance which placed
Credit Acceptance's profitability and growth at risk.
COUNT I
VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT
AND RULE 10b-5 PROMULGATED THEREUNDER
AGAINST ALL DEFENDANTS
48. Plaintiff repeats and realleges each and
every allegation contained in paragraphs 1 through 43 above
as if fully set forth herein except for those allegations
alleging fraud.
49. At all relevant times, the defendants,
individually and in concert, directly and indirectly, by the
use and means of instrumentalities of interstate commerce
and/or of the mails, engaged and participated in a continuous
course of conduct whereby they knowingly and/or recklessly made
and/or failed to correct public representations which were or
had become materially false and misleading regarding Credit
Acceptance's financial results and operations. This continuous
course of conduct resulted in the defendants causing Credit
Acceptance to publish public statements which they knew, or
were reckless in not knowing, were materially false and
misleading, in order to artificially inflate the market price
of Credit Acceptance stock and which operated as a fraud and
deceit upon the members of the Class.
50. Defendant Credit Acceptance is a direct
participant in the wrongs complained of herein. The
Individual Defendants are liable as direct participants in and
as controlling persons of the wrongs complained of herein. By
virtue of their positions of control and authority as officers
and directors of Credit Acceptance, the Individual Defendants
were able to and did, directly or indirectly, control the
content of the aforesaid statements relating to the Company,
and/or the failure to correct those statements in timely
fashion once they knew or were reckless in not knowing that
those statements were no longer true or accurate. The
Individual Defendants caused or controlled the preparation
and/or issuance of public statements and the failure to correct
such public statements containing misstatements and omissions
of material facts as alleged herein.
51. The Individual Defendants had actual
knowledge of the facts making the material statements false and
misleading, or acted with reckless disregard for the truth in
that they failed to ascertain and to disclose such facts, even
though same were available to them.
52. In ignorance of the adverse facts
concerning Credit Acceptance's business operations and
earnings, and in reliance on the integrity of the market,
plaintiff and the members of the Class acquired Credit
Acceptance common stock at artificially inflated prices and
were damaged thereby.
53. Had plaintiff and the members of the
Class known of the materially adverse information not disclosed
by the defendants, they would not have purchased Credit
Acceptance common stock at all or not at the inflated prices
paid.
54. By virtue of the foregoing, defendants
have violated Section 10(b) of the 1934 Act and Rule 10b-5
promulgated thereunder.
COUNT II
VIOLATION OF SECTION 20(a) OF THE EXCHANGE
ACT AGAINST THE INDIVIDUAL DEFENDANTS
55. Plaintiff repeats and realleges each and
every allegation contained in paragraphs 1 through 54 above
as if fully set forth herein except for those alleging fraud.
56. This count is asserted against the
Individual Defendants and is based upon Section 20(a) of the
1934 Act.
57. The Individual Defendants, by virtue of
their offices, directorships, stock ownership and specific
acts were, at the time of the wrongs alleged herein and as set
forth in Count I, controlling persons of Credit Acceptance
within the meaning of Section 20(a) of the 1934 Act. The
Individual Defendants had the power and influence and exercised
the same to cause Credit Acceptance to engage in the illegal
conduct and practices complained of herein by causing the
Company to disseminate the false and misleading information
referred to above. Moreover, the Individual Defendants owned
or controlled substantial amounts of the Company's stock.
58. The Individual Defendants' position made
them privy to and provided them with actual knowledge of
the material facts concealed from plaintiff and the Class.
59. By virtue of the conduct alleged in
Count I, the Individual Defendants are liable for the aforesaid
wrongful conduct and are liable to plaintiff and the Class for
damages suffered.
PRAYER FOR RELIEF
WHEREFORE, plaintiff demands judgment:
1. Determining that the instant action is a proper
class action maintainable under Rule 23 of the Federal Rules of
Civil Procedure;
2. Awarding compensatory damages and/or rescission
as appropriate against defendants, in favor of plaintiff and all
members of the Class for damages sustained as a result of
defendants' wrongdoing;
3. Awarding plaintiff and members of the Class the
costs and disbursements of this suit, including reasonable
attorneys', accountants' and experts' fees; and
4. Awarding such other and further relief as the
Court may deem just and proper.
Dated: January 28, 1998 MANTESE MILLER AND MANTESE, P.L.L.C.
_______________________________
Gerard Mantese, Esq.
2855 Coolidge Highway
Suite 107
Troy, Michigan 48084
Phone: (248) 649-1300
Fax: (248) 649-1337
LAW OFFICES OF LIONEL Z. GLANCY
_______________________________
Lionel Z. Glancy, Esq.
Peter A. Binkow, Esq.
Michael Goldberg, Esq.
1801 Avenue of the Stars #308
Los Angeles, California 90067
Phone: (310) 201-9150
Fax: (310) 201-9160
KAUFMAN, MALCHMAN KIRBY & SQUIRE
Ira Press, Esq.
919 Third Avenue
New York, New York 10022
Phone: (212) 371-6600
Fax: (212) 751-2540
Attorneys for Plaintiff
JURY DEMAND
Plaintiff hereby demands a trial by jury.
Dated: January 28, 1998 MANTESE MILLER AND MANTESE, P.L.L.C.
_______________________________
Gerard Mantese, Esq.
2855 Coolidge Highway
Suite 107
Troy, Michigan 48084
Phone: (248) 649-1300
Fax: (248) 649-1337
LAW OFFICES OF LIONEL Z. GLANCY
_______________________________
Lionel Z. Glancy, Esq.
Peter A. Binkow, Esq.
Michael Goldberg, Esq.
1801 Avenue of the Stars
Suite 308
Los Angeles, California 90067
Phone: (310) 201-9150
Fax: (310) 201-9160
KAUFMAN, MALCHMAN KIRBY & SQUIRE
Ira Press, Esq.
919 Third Avenue
New York, New York 10022
Phone: (212) 371-6600
Fax: (212) 751-2540
Attorneys for Plaintiff
Source: File to scac@law.stanford.edu from Law Offices of Lionel Z. Glancy