UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
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ROBERT J. FEENEY, :
individually and on behalf of : CIVIL ACTION NO.
all those similarly situated, : 1 98-CV-0593-CA
: [filed Feb. 23, 1998]
Plaintiff, :
:
v. : CLASS ACTION COMPLAINT
:
MEGO MORTGAGE CORPORATION, and :
JEFFREY S. MOORE, : JURY TRIAL DEMANDED
:
Defendants. :
-----------------------------------x
Plaintiff, by his attorneys, alleges upon information and
belief, based in part on the investigation conducted by his
counsel, except as to those paragraphs relating to plaintiff, his
transactions in the stock of Mego Mortgage Corporation ("Mego" or
the "Company") and his suitability to serve as a class represen-
tative, which are alleged on personal knowledge, as follows:
JURISDICTION AND VENUE
1. 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 C.F.R. § 240.10b-5].
2. 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.
3. Venue is properly laid in this District pursuant to § 27 of
the Exchange Act and 28 U.S.C. § 1391(b) and (c). The acts,
conduct, and scheme complained of herein, including the
preparation, issuance and dissemination of materially false
and misleading information to the investing public, occurred
in part in this District.
4. 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.
PARTIES
5. Plaintiff Robert J. Feeney purchased Mego common stock during
the Class Period, as set forth more fully on the accompanying
certification, and was damaged thereby.
6. Defendant Mego, a Delaware corporation, maintains its
principal offices and corporate headquarters at 1000 Parkwood
Circle, Atlanta, GA 30339. Defendant Mego originates,
purchases, sells and services consumer loans including home
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improvement loans. Mego became a public company when it
completed its initial public offering of 2.3 million shares of
common stock at $10 per share in November 1996. Mego's fiscal
year ends August 31.
7. Defendant Jeffrey S. Moore ("Moore") is and at all relevant
times was the President and Chief Executive Officer of the
Company and a Director of Mego.
THE FRAUDULENT SCHEME AND DEFENDANTS' ROLES
AND RESPONSIBILITIES WITH RESPECT THERETO
8. During the Class Period, the defendants, and each of them,
embarked upon and participated in a plan, scheme and a course
of conduct which was intended to and, throughout the Class
Period, did: (i) deceive the investing public, including
plaintiff and the other Class members, regarding, among other
things, the business, financial condition and performance of
Mego; (ii) artificially inflate and maintain the market price
of the Company's stock and (iii) cause plaintiff and the other
members of the Class to purchase the Company's stock at
artificially inflated prices. In furtherance of the foregoing
unlawful plan, scheme and course of conduct, defendants, among
other acts of deception, issued or caused to be issued, during
the Class Period, a series of false and misleading public
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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.
9. Each of the defendants participated directly in the wrongs
complained of herein. In addition, by reason of, among other
things, his positions as the principal executive officer and
a director of the Company, defendant Moore is a "controlling
person" of the Company within the meaning of Section 20(a) of
the Exchange Act 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 his
positions of control and authority, defendant Moore,
throughout the Class Period, was able to, and did, directly or
indirectly control the conduct of the Company's business, as
well as the contents of the public statements issued by or on
behalf of the Company.
10. As an officer and director of a publicly-held company,
defendant Moore, at all times relevant hereto, had a duty to
disseminate timely, accurate, truthful, and complete
information with respect to the Company's business,
operations, products, financial condition, performance and
future prospects, so that among other things, the market price
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of the Company's stock would be based on truthful, accurate
and complete information. As hereinafter alleged, defendant
Moore violated these specific duties and obligations.
11. As direct participants in the wrongs complained of herein,
each defendant is jointly and severally liable or propor-
tionately liable for the damages suffered by plaintiff and
other purchasers of Mego's common stock during the Class
Period.
PLAINTIFF'S CLASS ACTION ALLEGATIONS
12. 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 Mego
common stock on the open market during the period from April
11, through December 18, 1997, inclusive (the "Class Period"),
and who were damaged thereby. Excluded from the Class are:
the defendants herein; members of the immediate family of
defendant Moore; any parent, subsidiary, affiliate, officer,
or director of defendant Mego; any entity in which any
excluded person has a controlling interest; and the legal
representatives, heirs, successors and assigns of any excluded
person.
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13. 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 Mego
and/or its agent(s), plaintiff believes that there are, at a
minimum, hundreds of members of the Class located throughout
the United States. As of October 15, 1997 there were
12,300,000 shares of Mego common stock outstanding. During
the Class Period, approximately 8.5 million shares of Mego
common stock were actively traded on the NASDAQ National
Market.
14. 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 litiga-
tion 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.
15. Plaintiff's claims are typical of the claims of the members of
the Class. Plaintiff and all members of the Class purchased
Mego's common stock during the Class Period at artificially
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inflated prices and have sustained damages arising out of the
same wrongful course of conduct.
16. 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 statements disseminated to the
investing public, including purchasers of Mego stock, during the
Class Period omitted and/or misrepresented material facts about the
business, financial condition, performance, and prospects of Mego;
(d) Whether defendants acted knowingly or reckless-
ly in omitting to state and/or misrepresenting material facts;
(e) Whether the market price of Mego's common stock
during the Class Period was artificially inflated due to the non-
disclosures and/or misrepresentations complained of herein; and
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(f) Whether plaintiff and the other members of the
Class have sustained damages and, if so, the appropriate measure
thereof.
17. A class action is superior to other available methods for the
fair and efficient adjudication of this controversy since,
among other things, joinder of all members of the Class is
impracticable. Furthermore, as the damages suffered by
individual Class members may be relatively small, the expense
and burden of individual litigation make it virtually
impossible for many Class members individually to seek redress
for the wrongful conduct alleged. Plaintiff does not foresee
any difficulty in the management of this litigation that would
preclude its maintenance as a class action.
18. Plaintiff will rely, in part, upon the presumption of reliance
established by the fraud-on-the-market doctrine in that, among
other things:
(a) Defendants made public misrepresentations or
failed to disclose material facts during the Class Period;
(b) The omissions and misrepresentations were
material;
(c) The common stock of the Company traded in an
efficient market;
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(d) The misrepresentations alleged would tend to
induce the market to misjudge the value of the Company's common
stock; and
(e) Plaintiff and the other members of the Class
purchased Mego's common stock between the time the defendants
failed to disclose or misrepresented material facts and the time
the true facts were disclosed, without knowledge of the omitted or
misrepresented facts.
19. Based upon the foregoing, plaintiff and the other members of
the Class are entitled to a presumption of reliance upon the
integrity of the market for, at least, the purpose of class
certification, as well as for ultimate proof of their claims
on the merits. Plaintiff will also rely, in part, upon the
presumption of reliance established by a material omission.
20. The names and addresses of the record owners of the shares of
Mego common stock purchased during the Class Period are
available from Mego and/or its transfer agent(s). Notice can
be provided to purchasers of Mego common stock by a
combination of published notice and first class mail using
techniques and forms of notice similar to those customarily
used in class actions arising under the federal securities
laws.
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STATUTORY SAFE HARBOR
21. 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.
The statements are historical or present tense statements. To
the extent that any of the statements were "forward-looking
statements," none of the statements was accompanied by
meaningful cautionary statements identifying important factors
that could cause actual results to differ materially from the
statements made. To the extent that the statutory safe harbor
might otherwise apply to any statements pleaded herein because
they are "forward-looking," the defendants are liable for
those statements because at the time each of those statements
was made, the speaker knew the statement was false and the
statement was authorized and/or approved by an executive
officer of Mego who knew that those statements were false when
made.
DEFENDANTS' SCHEME
22. Historically, since its formation in 1992 and up until May
1996, Mego originated and securitized only home improvement
loans insured under the Title I credit insurance program of
the Federal Housing Administration ("Title I Loans"). Title
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I Loans offered virtually no risk of loss to Mego because 90%
of the principal balance of the loans and certain other costs
are insured under the Title I program. Thus, profit margin
earned on Title I Loans are high relative to uninsured loans.
23. Commencing in May 1996, Mego began to offer conventional
(125LTV) loans ("Conventional Loans"), primarily because the
cash flows of Conventional Loans are better than Title I Loans
and the origination potential of high Conventional Loans is
much greater than Title I Loans. Mego sells substantially all
of the Conventional Loans it originates either through
securitizations at a yield below the stated interest rate on
the loan or through whole loan sales to third party
institutional purchasers. Through August 1997, Mego completed
seven securitizations and, as stated in its Form 10-K for
fiscal 1997, ended August 31, 1997 ("1997 10-K"), expects to
sell a "substantial portion of its loan production through
securitizations in the future."
24. The Conventional Loans originated and securitized by Mego are
not insured and, consequently, Mego faced the prospect of
losses associated with these loans - either through default or
prepayment. Defaults will lead to losses on the loans
defaulted because the Conventional Loans typically are not
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sufficiently collateralized to cover the principal balance of
the loan. Prepayment of the Conventional Loans at rates above
the prepayment rate assumed by Mego will lead to losses
because, in that event, the carrying value of Mego's mortgage
related securities (i.e., the securitizations of the
Conventional Loans) are required to be written down through a
current charge against earnings. In fact, prepayments are so
critical to the proper carrying value of the mortgage related
securities that Mego is required to periodically revalue
(i.e., mark to market) the mortgage related securities and,
based on actual payments by the obligors on the loans and any
resulting needed adjustments to the rate of prepayment assumed
by Mego, take a charge to income. The charge is recorded on
the line item "Net Unrealized Gain" in Mego's financial
statements. This accounting treatment is dictated by
generally accepted accounting principles ("GAAP"), including
SFAS 125, which requires that mortgage related securities be
carried at fair market value and periodically marked to
market, and requests by Mego's auditor, Deloitte & Touche.
Thus, Mego nets the provision for losses on securitized loans
against its gains on sales rather than including the loan loss
provision in the "Loan Loss Provision" line item in its
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financial statements. As Mego shifts its operations toward
securitizations of Conventional Loans and away from insured
Title I Loans, the loan loss provision made by Mego and the
assumed prepayment rate used by Mego become increasingly
material to the fair presentation of Mego's financial
condition.
25. As the result of Mego's shift to securitizations of
Conventional Loans and the requirements of GAAP, including
SFAS 125, defendants continually were under the obligation to
review: (a) the actual prepayment experience of the
Conventional Loans; (b) the prepayment assumptions defendants
assumed in determining the carrying value of the mortgage
related securities; and (c) the value of the mortgage related
securities carried on its financial statements, and then to
charge to income any and all losses resulting from those
analyses.
26. Mego's shift in business away from insured Title I Loans to
uninsured Conventional Loans with the attendant risk of loss
is very dramatic:
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27.
_______________________________________________________________
| | 4th Q Fiscal | % of | 4th Q Fiscal | % of |
|Loan | Year 1996 | total | Year 1997 | Total |
|Originations | (Aug 31, 1996) | Loans | (Aug 31, 1997) | Loans |
|_____________|________________|_______|________________|_______|
|Title I | $38.7 million | 77% | $21.5 million | 12% |
|Loans | | | | |
|_____________|________________|_______|________________|_______|
|Conventional | $11.2 million | 22% | $157.8 million | 88% |
|Loans | | | | |
|_____________|________________|_______|________________|_______|
| Total | $50 million | | $179.3 million | |
|_____________|________________|_______|________________|_______|
28. However, Mego was not generating sufficient cash flow from
operations to meet the demand for loans. Thus, in order for
defendants to continue to increase the rate and volume of
Mego's Conventional Loan originations, Mego needed additional
cash. For sources of cash, Mego became dependent upon its
ability to continue to securitize the Conventional Loans it
originated, to place additional stock or debt offerings or to
secure other financings. Accordingly, it was critical for
defendants to continue to present Mego's financial condition
as increasingly profitable and its Conventional Loan
operations as healthy.
29. Commencing at least as early as the release of Mego's second
quarter fiscal 1997 results on April 11, 1997, defendants
began to portray falsely the financial condition of Mego's
Conventional Loan portfolio, the carrying value of the
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mortgage related securities resulting from the securitization
of those loans and what defendants described as the increase
in Mego's earnings on a "consecutive quarter basis." In the
quarterly release, defendants highlighted the facts that
Mego's six month net income was up 51%, that second quarter
revenues jumped 157% and net income rose 113%, and that the
gain on sale of loans plus the net unrealized gain on mortgage
related securities for the six months was up 112%. Defendants
also touted the success of Mego's March 1997 $89.7 million
securitization of its Conventional Loans. Defendant Moore
stated:
We are pleased that earnings are up on a
consecutive quarter basis, notwithstanding the
impact of additional outstanding shares from
the public offering in November 1996, and the
interest cost of the subordinated debt issued
at that time.
* * *
We are also pleased with the fact that we have
been able to increase our latest six months'
loan originations by 109% over the previous
six months and at the same time raising
weighted average FICO scores, resulting in
overall improved credit quality. While our
product mix has affected our gain on sale
margins, with conventional loans increasing
from 14% in the prior six month period to 70%
in this six month period, the improvement in
credit quality allowed us to achieve an
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excellent execution in our March
securitization.
30. In the quarterly release, defendants further stated that for
purposes of calculating gain on sale for Conventional Loans,
Mego used a prepayment assumption that begins at a 1% annual
rate in the first month, rises to 12% at the 18th month, and
remains at that rate for the life of the portfolio. With
respect to prospective losses on Conventional Loans,
defendants stated that Mego used a formula that grows to an
annualized rate of 1.75% from the 7th to the 24th month and
remains at that rate for the life of the portfolio.
31. On April 14, 1997, defendants filed Mego's Form 10-Q for the
quarter ended February 28, 1997 with the SEC. Defendants
reported that Mego's net income for the quarter was
$3,371,000, its gain on sale of loans was $20,029,000 and that
its net unrealized gain on mortgage related securities was
$2,908,000. For the quarter, 79% of all loans originated by
Mego were Conventional Loans. Defendants stated that Mego was
obligated under its agreement with its lender providing a $20
million warehouse line of credit expiring August 6 1997, upon
which funds Mego relies to originate loans, to maintain a
minimum tangible net worth, which, at February 28, 1997, was
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$37.1 million. Defendants further stated that Mego's
financial statements were in full compliance with GAAP,
including SFAS 125.
32. On May 2, 1997, defendants announced that Mego completed a
$63.5 million securitization of loans and on June 30, 1997,
defendants announced that Mego completed a $104.6 million
senior subordinated securitization. Defendant Moore stated:
We are extremely pleased with the execution and
cash economies of our first senior
subordinated securitization. Going forward,
we fully intend to pursue similar
securitization structures, thereby providing
greater capital to be used toward increased
originations.
33. On July 9, 1997, defendants released Mego's third quarter
fiscal 1997 results. Defendants continued to portray falsely
the financial condition of Mego's Conventional Loan portfolio,
the carrying value of the mortgage related securities
resulting from the securitization of those loans and what
defendants described as the "continued positive trend" in
Mego's financial results. In its release, defendants
highlighted the facts that Mego's nine month net income was up
119%, that the gain on sale of loans plus the net unrealized
gain on mortgage related securities for the nine months was up
200% and that quarterly net income was $4,272,000, up from
-17-
$764,000 for the quarter ended May 31, 1996. Defendants also
touted the success of Mego's securitizations of its
Conventional Loans (totaling more than $168 million) and the
act that Mego secured a new $40 million expandable revolving
line of credit with first Chicago. Defendant Moore stated:
We are pleased with our solid performance and
the continuation of the company's positive
growth trend as reflected by significant
increases in third quarter and nine month
results. Our success is due, in part, to our
ability to meet the needs of our growing loan
source network by providing value-added loan
products while maintaining our high standard
of customer service. For example, since its
introduction in May 1996, our conventional
loan program, including High Loan-to-Value
("High LTV") loans, targeted to the high credit
quality borrower, has grown to represent over
50% of the company's outstanding serviced
portfolio. All of these elements, together,
have enabled Mego Mortgage to achieve
successful securitizations, as well as whole
loan sales -- which have boosted the Company's
liquidity -- thereby allowing us to fund a
record number of loan originations and realize
significantly improved financial results."
34. On July 15, 1997, defendants filed Mego's Form 10-Q for the
quarter ended May 31, 1997 with the SEC. Defendants reported
that Mego's net income for the quarter was $4,272,000, its
gain on sale of loans was $16,204,000 and that its net
unrealized gain on mortgage related securities was $2,305,000.
For the quarter, 83.1% of all loans originated by Mego were
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Conventional Loans. Defendants stated that Mego was obligated
under "certain agreements" for the sale of loans and certain
loan agreements to maintain various minimum net worth
requirements. Defendants further stated that Mego's financial
statements were in full compliance with SFAS 125.
35. Following on the heels of defendants' report of increased
Third Quarter earnings and positive trends and momentum,
defendants announced on September 22, 1997 Mego's proposed
private placement of $40 million of senior subordinated notes
to provide capital to, inter alia, originate and securitize
loans. On October 15, 1997, defendants announced the pricing
of the private placement which Mego expected to consummate on
October 20, 1997.
36. On October 16, 1997, just prior to consummation of the $40
million private placement, defendants released Mego's fourth
quarter and fiscal 1997 year end results. In the press
release, defendants reported that, for the year, Mego's net
income jumped to $14,748,00, from $6,920,000 reported in
fiscal 1996, and that for the quarter, net income rose to
$4,626,000, up from both the fourth quarter of fiscal 1996 and
the third quarter of fiscal 1997. In the press release,
defendants further stated that:
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Loan originations for the fiscal year ended
August 31, 1997 rose 278%, to $526.9 million,
compared to $139.4 million last year. Of the
loans originated in fiscal 1997, approximately
$428.8 million, or 81.3%, were high credit
quality conventional loan originations, with
Title I loans accounting for the remaining
18.7%. This loan mix represents a significant
shift from the mix of loans originated in
fiscal 1996, when the Company originated $11.6
million of conventional loans, or 8.3% of the
total, with FHA Title I loans accounting for
91.7% of total loan originations. For the
fiscal year ended August 31, 1997, loans
originated by the Company had a weighted
average interest rate of 13.92%, as compared
to loans originated during fiscal 1996, which
had a weighted average interest rate of
14.03%.
Defendants specifically highlighted the credit quality of Mego's
Conventional Loans and the increased gain on sale and net
unrealized gain on mortgage related securities, stating that:
For the fourth quarter ended August 31, 1997,
Mego Mortgage originated a total of $179.3
million of loans, a 259% increase over last
year's fourth quarter. Of the loans
originated during the fourth quarter of fiscal
1997, 88.4% represented high credit quality
conventional loan originations.
* * *
During fiscal 1997, the Company sold a total
of $521.6 million of loans, recognizing a gain
on sale and net unrealized gain on mortgage
related securities of $48.6 million, compared
to $137.9 million of loans sold and gains of
$19.2 million in fiscal 1996.
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37. On October 20, 1997, defendants announced that Mego closed the
$40 million private placement of notes.
38. On November 4, 1997, defendants filed Mego's 1997 10-K, signed
by defendant Moore on October 30, 1997. In the 1997 10-K,
defendants touted the fact that the profile of Mego's
borrowers (with respect to Conventional Loans) is typified by
sophisticated young borrowers who are willing to pay higher
interest rates to get the personalized services and prompt
response time offered by Mego and that Mego had developed a
"proprietary credit index file" to identify and classify these
borrowers, all designed to further assure the high quality of
Mego's Conventional Loan portfolio. Defendants stated that
Mego's strategic plan was to continue to expand its lending
operations while maintaining credit quality and that pursuant
thereto, Mego developed a nationwide network of correspondents
to offer a diversified product line. Consequently, defendants
stated that Mego anticipated expanding its lending operations
and maximizing loan originations.
39. In the 1997 10-K, Mego reported a gain on sales of loans of
$45,123,000 and a net unrealized gain on mortgage related
securities of $3,518,000. Defendants also reported that
Mego's net income for fiscal 1997 was $14,748,000.
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40. Continuing to take advantage of its reported increasing
profitability and success of the securitizations of its
Conventional Loans, defendants announced on November 11, 1997
n December 8, 1997 material facts that defendants had
previously withheld from or misstated to the market during the
Class Period, that is, that: (a) Mego would be required to
take a $16 million charge to earnings in the first quarter of
fiscal 1998, ended November 30, 1997 to writedown the value of
its securitized Conventional Loans; (b) Mego had been
experiencing actual loan prepayments in amounts materially
higher than the rate defendants assumed for purposes of
calculating the carrying value of its securitized Conventional
Loans; and (c) that, consequently, Mego may be restricted in
its ability to borrow additional amounts on its mortgage
related securities until it can increase equity. Defendants
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virtually admitted in the press release that they knew, prior
to the filing of Mego's 1997 10-K with the SEC on November 4,
1997 and prior to the release of Mego's fourth quarter and
year end earnings on October 16, 1997, that in both September
and October of 1997, prepayments of its securitized
Conventional Loans, a critical determinant of the carrying
value of the mortgage related securities, had risen materially
above the assumed prepayment rate defendants used to value
those securities.
42. The market's reaction was swift. On extraordinary volume of
2,237,000 shares Mego's stock price fell 36% from $6-5/8 on
December 8, 1997 to close at $4-3/8 on December 9, 1997. In
the days before defendants, December 8, 1997 press release,
Mego's stock price had closed at $10 per share.
COUNT I
AGAINST ALL DEFENDANTS FOR VIOLATION OF
SECTION 10(b) OF THE EXCHANGE ACT AND SEC RULE 10b-5
43. Plaintiff repeats and realleges each and every allegation
contained in each of the foregoing paragraphs as if fully set
forth in full herein.
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44. This Count is asserted against all defendants and is based
upon Section 10(b) of the Exchange Act, 15 U.S.C. §78j(b), and
Rule 10b-5 promulgated thereunder by the SEC.
45. 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 Mego common
stock during the Class Period at artificially inflated prices.
46. 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
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statements to the investing public as particularized above in
paragraphs 28-39.
47. Such statements were materially false and misleading in that,
among other things, they misrepresented or omitted the
following material facts during the Class Period: (a) that the
net income reported by Mego was artificially inflated due to
artificially high carrying values recorded on Mego's financial
statements for its mortgage related securities; (b) that Mego's
ability to borrow funds based on its mortgage related
securities would be jeopardized due to Mego's reduced equity
which would result from Mego reducing the carrying value of
its mortgage related securities; (c) that Mego was
experiencing actual prepayments by obligors on its
Conventional Loans at rates materially higher than the assumed
rate of prepayment that defendants used in valuing Mego's
mortgage related securities; and (d) that defendants failed to
book adequate provisions for loan losses on Mego's securitized
Conventional Loans in light of the material increases in
actual loan prepayments in excess of the assumed rate of loan
prepayments defendants used in determining the provision for
loan losses.
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48. At all relevant times, defendants had actual knowledge that
the statements complained of herein in paragraphs 28-39 were
materially false and misleading as set forth in paragraph 46
herein and intended to deceive plaintiff and the other members
of the Class. In the alternative, the defendants acted in
reckless disregard for the truth in that they failed or
refused to ascertain and disclose such facts as would have
revealed the materially false and misleading nature of the
statements complained of herein in paragraphs 28-39 although
such facts were readily available to defendants. Said facts
and omissions of defendants were committed willfully or with
reckless disregard for the truth. In addition, defendants knew
or recklessly disregarded that material facts were being
misrepresented or omitted as alleged herein.
49. Information showing that the defendants acted knowingly or
with reckless disregard for the truth is peculiarly within
defendants' knowledge and control. However, the following
facts, among others, indicate a strong inference that
defendants acted with scienter:
(a) Defendants had full knowledge of both the
assumed rate of loan prepayments they used in determining the
carrying value of and provision for loan losses on Mego's
-26-
securitized Conventional Loans and the actual rate of loan
prepayments. Defendants were required to review the carrying value
and mark to market Mego's mortgage related securities, under SFAS
125 and other accounting rules. As defendants admitted in their
statements made in Mego's December 8, 1997 press release, alleged
in paragraph 40 herein, defendants knew that actual loans
prepayments were materially higher than the assumed prepayment
rates which, therefore, caused defendants to overstate the carrying
value of Mego's securitized Conventional Loan portfolio, to
understate the reserve for losses thereon and to overstate Mego's
net income. Defendants also knew, based on their professed
experience in the industry, that as interest rates decline,
customers of the profile Mego had for its Conventional Loans will
increase the rate of their actual loan prepayments as they
refinance their loans to take advantage of lower interest rates.
At year end August 31, 1997, Mego's loans had a weighted average
rate of 13.92% which became increasingly high relative to the
declining interest rates throughout calendar year 1997.
(b) Defendants had the motive to misrepresent
Mego's net worth, net income, and the provision for losses on and
carrying value of Mego's securitized Conventional Loan portfolio
because they wanted to complete various offerings and
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securitizations including, inter alia, the $40 million private
placement and the 3.5 million share offering described
hereinbefore, without which Mego would not be ale to continue to
grow the volume and dollar amount of its loan originations which
served as the basis for Mego's operations. These offering and
securitizations, defendants knew, would be severely jeopardized if
the true value of the securitized Conventional Loan portfolio were
known to the market;
(c) Defendants had the motive to misrepresent
Mego's net worth, net income, and the provision for losses on and
carrying value of Mego's securitized Conventional Loan portfolio
because defendants knew that under the tangible net worth
requirements of Mego's lines of credit, Mego would not be able to
expand and draw upon its lines of credit, which activity was
essential to fuel Mego's growth, if it properly accounted for its
Conventional Loans and mortgage related securities, the effect of
which would cause Mego's tangible net worth to fall below the
amount required by its loan agreements.
50. As a result of the dissemination of the false and misleading
statements set forth above, the market price of Mego common
stock was artificially inflated during the Class Period. In
ignorance of the false and misleading nature of the represen-
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tations described above and the deceptive and manipulative
devices and contrivances employed by 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
Mego 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 Mego common stock at the artificially inflated
prices that they did.
51. As a result of the inflation of the prices of Mego 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.
52. By reason of the foregoing, defendants, directly or
indirectly, violated 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
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statements made, in light of the circumstances under which they
were made, not misleading; and/or
(c) engaged in acts, practices, and a course of
business which operated as a fraud and deceit and a scheme to
defraud upon plaintiff and the other members of the Class in
connection with their purchases of Mego common stock during the
Class Period.
COUNT II
AGAINST DEFENDANT MOORE FOR
VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT
53. Plaintiff repeats and realleges each and every allegation
contained in each of the foregoing paragraphs as if fully set
forth herein.
54. Defendant Moore, by virtue of his offices and specific acts
described above, was, at the time of the wrongs alleged
herein, a controlling person of Mego within the meaning of
Section 20(a) of the Exchange Act.
55. Defendant Moore had the power and influence and exercised the
same to cause Mego to engage in the conduct and practices
complained of herein in violation of Section 10(b) of the
Exchange Act and Rule 10b-5.
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56. By reason of the conduct by the Company alleged in Count I of
the Complaint, defendant Moore is liable to plaintiff and to
the other members of the Class for the substantial damages
which they suffered in connection with their purchases of Mego
common stock during the Class Period.
JURY DEMAND
57. Plaintiff demands a trial by jury on all issues.
WHEREFORE, plaintiff, on behalf of himself 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 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 for the
damages sustained as a result of the wrongdoing of defendants,
together with 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, and experts, and reimbursement of
plaintiff's expenses; and
D. granting such other and further relief as the Court
may deem just and proper.
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Dated: CARR, TABB & POPE
/s/
By: _______________________________
W. Pitts Carr
Georgia Bar No. 112100
1355 Peachtree Street, N.E.
Suite 2000
Atlanta, GA 30309
(404) 876-7790
Stuart H. Savett
Robert P. Frutkin
Barbara A. Podell
SAVETT FRUTKIN PODELL & RYAN, P.C.
325 Chestnut Street, Suite 700
Philadelphia, PA 19106
(215) 923-5400
Arnold Levin
LEVIN FISHBEIN SEDRAN & BERMAN, P.C.
510 Walnut Street, Suite 500
Philadelphia, PA 19106
(215) 592-1500
David Jaroslawicz
JAROSLAWICZ & JAROS
150 William Street
New York, NY 10007
(212) 227-2780
Deborah R. Gross
LAW OFFICE BERNARD M. GROSS, P.C.
1500 Walnut Street
Sixth Floor
Philadelphia, PA 19102
(215) 561-3600
Attorneys for Plaintiff
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CERTIFICATION
Robert J. Feeney, declares, as to the claims asserted under
the federal securities laws, that:
1. I have reviewed the Complaint and authorized its filing.
2. I did not purchase the security that is the subject of
this action at the direction of counsel or in order to
participate in this action.
3. I am willing to serve as a representative party on behalf
of the class, including providing testimony at deposition and
trial, if necessary.
4. Annexed as Exhibit A is a schedule of my transactions in
Mego Mortgage Corporation.
5. During the three year period preceding the date of my
signing this Certification, I have not sought to serve, nor have
I served, as representative party on behalf of a class in any
private action arising under the Securities Exchange Act of 1934.
6. I will not accept any payment for serving as a
representative party on behalf of the class beyond my pro rata
share of any recovery, except for such reasonable costs and
expenses (including any lost wages) directly relating to my
representation of the class as ordered or approved by the Court.
I declare under penalty of perjury that the foregoing is
true and correct. Executed this 9th day of February, 1998.
/s/
______________________________
Robert J. Feeney
EXHIBIT A
MEGO MORTGAGE CORPORATION
SCHEDULE OF PURCHASES BY ROBERT J. FEENEY
Date Of Transaction Amount Of Shares Price Per Share
------------------- ---------------- ---------------
August 20, 1997 1,000 $ 8-7/8
November 3, 1997 124 $11-3/8
December 8, 1997 1,000 $ 6-1/2
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