6. Plaintiffs, on behalf of themselves and all others similarly situated, by their attorneys, for their Class Action Complaint, allege the following facts upon the investigation conducted by their attorneys, including, among other things, a review and analysis of press releases, news reports, public filings with the United States Securities and Exchange Commission (the "SEC") by Erly Industries Inc. ("Erly", or the "Company") and American Rice, Inc., the contents of court documents filed in actions against Erly, court testimony, interviews with prospective witnesses, and consultation with accounting experts.

7. This is a class action on behalf of all persons or entities that purchased the common stock of the Company from November 14, 1996 to September 28, 1998, inclusive (the "Class Period"), exclusive of Defendants, Gerald Murphy, members of the Defendants' families (including Gerald Murphy and his family), any entity in which any Defendant, Gerald Murphy and/or Erly has a controlling interest, and the legal representatives, heirs, successors or assigns of any such excluded person (the "Class"). Throughout the Class Period, Defendants, Gerald Murphy and Erly intentionally and recklessly made material misrepresentations (misstatements and/or omissions) concerning (i) the financial condition of the Company, (ii) litigation against the Company, (iii) the impact on the Company and its business of the cessation of an agreement with a rice processor in Saudi Arabia and (iv) related party transactions, all in order to artificially inflate and maintain the price of the Company's stock. As a result of these misrepresentations, the price of the Company's stock was artificially inflated throughout the Class Period. Plaintiffs and the members of the Class purchased the Company's stock at artificially inflated prices, in reliance upon these representations and upon the integrity of the market for the Company's stock, and suffered damages as a direct and proximate result of these misrepresentations.

8. This Court has jurisdiction over this action pursuant to Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa (the "Exchange Act") and 28 U.S.C. §§ 1331 and 1337.

9. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28 U.S.C. § 1391(b). Throughout the Class Period, the Defendants transacted business in this District, and a substantial part of the events or omissions giving rise to the claims complained of herein occurred in this District.

10. In connection with the wrongs alleged herein, Defendants used the means and instrumentalities of interstate commerce, including the United States mails, interstate wire and telephone facilities, and the facilities of the national securities markets, including with respect to the reports, press releases and financial statements which are the subject of this Complaint.

11. Plaintiffs Kenneth Blau, Michael Portnoy, Wendell Strahan, and Dean Harvey purchased shares of the Company's common stock during the Class Period, as set forth in the Certifications of Named Plaintiff signed by each of the Plaintiffs attached hereto.

12. Erly is a corporation organized under the laws of the State of California which has had principal offices in this District and in California. At all times relevant to this Complaint, Erly was in the business of, among other things, (i) processing, packaging and marketing rice and olives, largely through its eighty-one (81%) percent ownership of American Rice, Inc. ("ARI"), a processor and marketer of food products, (ii) consulting, through its Chemonics subsidiary, and (iii) production and sale of fire retardant products through Fire Trol, a division of Erly's Chemonics subsidiary. Although ARI was an independent publicly traded company, as it was more than 80% owned by Erly, Erly was required to consider ARI as consolidated with Erly for reporting purposes and included ARI's results within Erly's filings. Erly also controlled all the activities of ARI and placed directors and officers of Erly in management of ARI. ARI is a corporation organized under the laws of the State of Texas, with its principal place of business in this District. On August 12, 1998, ARI filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy laws. On September 28, 1998, Erly filed for bankruptcy protection under Chapter 11 of the U. S. Bankruptcy laws, and, due to the operation of the automatic stay provisions of the U.S. Bankruptcy laws, Erly has not been named as a Defendant in this action.

13. At all times relevant to this Complaint, Gerald D. Murphy ("Gerald Murphy") was Chairman of the Board of Directors and Chief Executive Officer of Erly and was Chairman of ARI's Board of Directors. Gerald Murphy was a signatory to Erly's annual report for the fiscal year ending March 31, 1997, filed with the SEC on Form 10-K on or about July 1, 1997 (the "1997 10-K"). During the Class Period, Gerald Murphy owned and/or controlled as much as approximately 30% of the Company's common stock. On or about January 15, 1999, an involuntary bankruptcy petition was filed against Gerald Murphy under Chapter 7 of the U.S. Bankruptcy laws, and, due to the operation of the automatic stay provisions of the U.S. Bankruptcy laws, Gerald Murphy has not been named as a Defendant in this action at this time.

14. At all times relevant to this Complaint, Defendant Douglas A. Murphy ("Douglas Murphy") was President and Chief Operating Officer of the Company, a member of the Company's Board of Directors, President and Chief Executive Officer of ARI, and a member of ARI's Board of Directors. Douglas Murphy was also a signatory to the 1997 10-K. During the Class Period, Douglas Murphy owned and/or controlled as much as approximately 20% of the Company's common stock. Douglas Murphy and Gerald Murphy are collectively sometimes referred to herein as the "Murphys".

15. At all times relevant to this Complaint, Defendant William H. Burgess ("Burgess") was a member of the Company's Board of Directors, was a member of ARI's Board of Directors, and was a close and long-time friend of Gerald Murphy. Burgess was also a signatory to the 1997 10-K.

16. At all times relevant to this Complaint, Defendant William J. McFarland ("McFarland") was employed as a Vice President of the Company, was a member of the Company's Board of Directors, and was employed as ARI's Senior Vice President and President of ARI's Comet American Marketing Division. McFarland was also a signatory to the 1997 10-K.

17. At all times relevant to this Complaint, Defendant Thomas A. Whitlock ("Whitlock") was employed by the Company as its Vice President and Corporate Controller, and was a signatory to each of the Company's filings with the SEC on Form 10-Q and Form 10-K during the Class Period.

18. Gerald Murphy, Douglas Murphy, McFarland, Burgess and Whitlock are sometimes hereinafter collectively referred to as the "Officers/Directors".

19. Defendant Deloitte & Touche LLP ("Deloitte") is a certified public accounting firm with offices throughout the country. Deloitte acted as the Company's official independent public auditor throughout the Class Period, and, as further alleged below, made materially false and misleading representations in the Company's annual report for the fiscal year ending March 31, 1997, filed with the SEC on Form 10-K on July 1, 1997.

20. By virtue of the positions which the Officers/Directors had with the Company, they had actual knowledge of the adverse undisclosed information concerning the Company's business, operations, financial condition and litigation from their receipt and review of internal corporate documents, communications with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereof and reports and other information provided to them in connection therewith.

21. It is appropriate to treat the Officers/Directors as a group for pleading purposes and to presume that the false, misleading and incomplete information conveyed in the Company's public filings and press releases alleged herein are the collective actions of the narrowly defined group of directors and officers identified above. Each of the Officers/Directors, by virtue of his high-level position with the Company, was directly involved in the day-to-day operations of the Company at the highest levels and had actual knowledge of the undisclosed information alleged herein concerning the Company and its business, operations, financial condition and litigation. The Officers/Directors were involved in drafting, producing, reviewing, and/or disseminating the false and misleading statements and information alleged herein, were aware or recklessly disregarded that the false and misleading statements were being issued regarding the Company and approved or ratified these statements, in violation of the federal securities laws.

22. As officers and/or directors and controlling persons of a publicly-held company whose common stock was, and is, registered with the SEC pursuant to the Exchange Act, traded on the NASDAQ National Market, and governed by the provisions of the federal securities laws, the Officers/Directors each had a duty to disseminate promptly accurate and truthful information with respect to the Company's business, operations, financial condition, litigation and performance and to correct any previously issued statements that had become materially misleading or untrue, so that the market price of the Company's publicly traded securities would be based upon truthful and accurate information. The Officers/Directors' misrepresentations and omissions during the Class Period violated these specific requirements and obligations.

23. Due to their positions of control and authority as officers and/or directors of Erly and ARI, the Officers/Directors were able to control, and did control, Erly and ARI, and the content of the various SEC filings, press releases and other public statements pertaining to the Company and ARI during the Class Period. Each Officer/Director was provided with copies of the documents alleged therein to be misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the Officers/Directors is responsible for the accuracy of the public reports and releases detained herein and is therefore primarily liable for the representations contained therein.

24. Each of the Officers/Directors is liable as a participant in the fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of the Company's common stock, by disseminating materially false and misleading statements and/or concealing material adverse facts. The scheme deceived the investing public and caused Plaintiffs and other members of the Class to purchase the Company's common stock at artificially inflated prices.

25. At all relevant times, the market for the Company's stock was an efficient market for the following reasons, among others:

a. The Company's common stock met the requirements for listing, and were listed and actively traded, on the NASDAQ, an efficient and automated market;

b. As a regulated issuer, the Company filed periodic public reports with the SEC and the NASD;

c. The Company regularly communicated with public investors via established market communication mechanisms, including through regular disseminations of press releases on the major newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services; and

d. The Company was followed by securities analysts employed by major brokerage firms who wrote reports which were distributed to the sales force and certain customers of their respective brokerage firms and were publicly available and entered the public marketplace.

26. The market for the Company's common stock digested current information regarding the Company from the sources described above, and reflected such information in the Company's stock price. Under these circumstances, all purchasers of the Company's common stock during the Class Period suffered similar injury through their purchase of common stock at artificially inflated prices, and a presumption of reliance applies.

27. Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure, individually and on behalf of the Class.

28. The members of the Class are so numerous that joinder of all members of the Class is impractical. While the exact number of the Class Members is unknown to the Plaintiffs at this time and can only be ascertained through appropriate discovery, Plaintiffs reasonably believe that there are hundreds, if not thousands, of members of the Class located throughout the United States. As of December 31, 1997, approximately 5,753,007 shares of the Company's common stock were issued and outstanding. During the Class Period, the shares of the Company's common stock were actively traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market System under the designation "ERLY".

29. Plaintiffs' claims are typical of the claims of the other members of the Class because the damages suffered by Plaintiffs and all Class Members arise from and were caused by the same misrepresentations and omissions made by or chargeable to Defendants as alleged herein. Plaintiffs do not have interests antagonistic to, or in conflict with, the Class.

30. 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. Among the questions of law and fact common to the Class are:

a. whether the federal securities laws were violated by Defendants' acts as alleged herein;

b. whether the Defendants misrepresented and/or failed to disclose material facts in the Company's press releases, annual reports and quarterly reports, as more particularly described below;

c. whether the market price of the Company's common stock was artificially inflated during the Class Period due to the material misrepresentations and/or nondisclosures complained of herein; and

d. whether the members of the Class have sustained damages, and, if so, the proper measure of such damages.

31. Plaintiffs will fairly and adequately protect the interests of the other members of the Class. Plaintiffs have retained counsel competent and experienced in class and securities litigation to further ensure such protection, and Plaintiffs intend to prosecute this action vigorously.

32. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. The Class is so numerous and geographically dispersed that it would be impracticable for each member of the Class to bring a separate action or to be joined in an individual 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.

33. There will be no difficulty in the management of this litigation which would preclude its maintenance as a class action. The names and addresses of the record owners of the shares of the Company's common stock purchased during the Class Period are available from the Company's transfer agent. Notice can be provided to such record owners and all Class Members by a combination of published notice and first-class mail, using techniques and a form of notice similar to those customarily used in class actions arising under the federal securities laws.

The Material Misrepresentations Concerning
Litigation Against The Company By Sandburg Financial.

34. On October 15, 1996, Sandburg Financial (a California corporation, formerly doing business as Barrington Capital Corporation), and Michael Coal (the "Sandburg Plaintiffs") filed a complaint against the Company in the Superior Court of the State of California for the County of Los Angeles (hereinafter, the "Sandburg Suit"). The Sandburg Suit alleged, among other things, that:

a. In 1988, the Company had agreed to indemnify the Sandburg Plaintiffs for any liabilities, costs, damages and attorneys' fees incurred by the Sandburg Plaintiffs in connection with the Sandburg Plaintiffs' agreement to purchase certain real property located in City of Industry, California (the "City of Industry Property") from Hansen Foods, Inc. (hereinafter, "HFI"), as Erly had loaned money to HFI and had a security interest in the City of Industry Property and thereby benefitted from the sale (hereinafter, the "Indemnity");

b. Later in 1988, HFI refused to comply with its agreement to sell the City of Industry Property to the Sandburg Plaintiffs;

c. As Erly had agreed to permit the sale of the City of Industry Property to another entity knowing that the Sandburg Plaintiffs had a firm and binding agreement to purchase the City of Industry Property with HFI, Erly and the Murphys were aware beginning in 1988 that Erly were liable to the Sandburg Plaintiffs for any loss sustained by the Sandburg Plaintiffs in connection with the failed purchase of the City of Industry Property; and

d. On or about April 27, 1988, the Sandburg Plaintiffs brought suit in the Los Angeles Superior Court against HFI in connection with the alleged breach of the agreement to sell the City of Industry Property to the Sandburg Plaintiffs (hereinafter, the "HFI Suit");

e. On February 15, 1996, the court in the HFI Suit awarded Judgment in favor of the Sandburg Plaintiffs in the amount of $7,414,677.00, and on March 29, 1996, the court awarded the Sandburg Plaintiffs an additional Judgment in the amount of $211,378.00 (of which $90,000.00 was a part of the $7,414,677.00 Judgment);

f. On or about October 7, 1996, the Sandburg Plaintiffs made written demand upon Erly for payment to the Sandburg Plaintiffs in the total amount of $7,536,055.00 in accordance with the Indemnity;

g. Erly refused to pay the Sandburg Plaintiffs the amount demanded on October 7, 1996 in accordance with the Indemnity;

35. As a result, the Sandburg Plaintiffs filed suit against Erly, alleging that Erly was liable to Plaintiffs for refusing to pay the $7,536,055.00 in accordance with the Indemnity, under common law theories of express indemnity, breach of written contract, breach of implied contract, breach of implied covenant of good faith and fair dealing, fraud and deceit, and interference with contractual relationship.

36. Erly was served with the Sandburg Suit before November 14, 1996, and thereafter retained counsel which appeared and litigated the Sandburg Suit vigorously. During the course of the Sandburg Suit, several motions for summary judgment were filed, and summary judgment was ordered against Erly on March 13, 1998, which judgment was formally entered on April 24, 1998 for $9,118,626.00.

37. Although Erly continually litigated the Sandburg Suit after being served in 1996, Erly and the Officers/Directors refused to disclose the existence of the Sandburg Suit in any of the Company's filings with the Securities and Exchange Commission or in any of the Company's press releases until, in a Company press release dated April 29, 1998, Erly and the Officers/Directors finally disclosed -- for the first time -- the existence of the Sandburg Suit, and stated that the court in the Sandburg Suit had granted a motion for summary judgment and signed a judgment for $7.6 million, plus $1.6 million prejudgment interest against Erly (the "Sandburg Judgment").

38. Not only did Erly and the Officers/Directors refuse to disclose the existence of the Sandburg Suit from October 15, 1996 to April 29, 1998, but they also successfully concealed the existence of the Sandburg Suit by issuing a series of material misrepresentations throughout that period designed to mislead the investing public into believing that the Company faced no material liability such as the Sandburg Suit.

39. Specifically, in each and every one of the Company's filings with the Securities and Exchange Commission of Form 10-Q and 10-K, beginning with the Company's quarterly report for the period ended September 30, 1996 (filed with the SEC on or about November 14, 1996), and continuing through the filing of the Company's quarterly report for the period ending December 31, 1997 (filed with the SEC on February 19, 1998), Erly and the Officers/Directors falsely represented that the only "Commitments or Contingencies" or "Legal Proceedings" involving the Company related to:

a. A lawsuit filed in April, 1995, in the District Court of Harris County, Texas, by Kingswood Lakes South, L.P. and Tenzer Company, Inc., as plaintiffs, against G. D. Murphy and D. A. Murphy, ARI and the Company, in which the plaintiffs alleged, inter alia, that Erly and ARI had engaged in fraud and civil conspiracy with Gerald Murphy and Douglas Murphy in connection with real estate development project (the "Tenzer Suit");

b. A lawsuit filed against ARI and others in February 1997 in U.S. District Court in Houston, Texas by Rice Milling & Trading Investments, LTD., an Isle of Man Company (the "RMTI Suit"); and

c. A derivative suit filed on July 24, 1997 by Farmers Rice Milling Company against Gerald D. Murphy, Douglas A. Murphy, the Company and ARI in the U.S. District Court, Central District of California (the "Derivative Suit").

40. In addition, (i) in the Company's annual report for the fiscal year ended March 31, 1997 on Form 10-K (filed with the SEC on July 1, 1997) (the "1997 10-K"), Erly and the Officers/Directors falsely stated that the Tenzer Suit and the RMTI Suit were the only two lawsuits against the Company that were not "routine in nature" and (ii) in the Company's amended annual report for the fiscal year ended March 31, 1997 on Form 10-K/A (filed with the SEC on August 8, 1997), Erly and the Officers/Directors again falsely stated that the Tenzer Suit, the RMTI Suit and the Derivative Suit were the only lawsuits that were not "routine in nature"

41. Although Erly disclosed the existence of the Sandburg Suit and the Sandburg Judgment in the April 29, 1998 press release, Erly and the Officers/Directors continued to conceal the truth about the Sandburg Suit and its devastating impact upon the financial condition and viability of Erly and its business, as the April 29, 1998 press release stated that Erly and its attorneys had not seen any the documentation of the Indemnification prior to September 1997, and that Erly was going to seek to have the Sandburg Judgment vacated due to the "facts" that (i) the Sandburg Judgment was improper "based on the veracity of the alleged documents supporting Sandburg's purported guarantee" (i.e., that the Indemnification was a forgery), and (ii) "Erly was never notified that it was being held liable for any possible judgment when Sandburg sued Hansen Foods and therefore never had a chance to participate in the defense".

42. The "facts" set forth in the April 29, 1998 press release to show that Erly was not liable, that the Sandburg Judgment was a surprise, and that the Sandburg Judgment would be reversed, were not true, and remained uncorrected by Erly and the Officers/Directors, who failed to disclose (i) that the Sandburg Suit had been initiated in October 1996, and that the Company had been continually litigating the Sandburg Suit since that time, (ii) that on several occasions, the court in the Sandburg Suit had made clear to counsel for the parties that it viewed the language of the Indemnification as suggesting that Erly could have significant liability, (iii) that the Sandburg Judgment would have a materially adverse effect upon the financial condition of Erly, (iv) that instead of appealing the Sandburg Judgment, the Murphys had Erly pay the Sandburg Plaintiffs $1 million in return for staying execution of the judgment, and (v) that the Murphys had decided to attempt to profit further from Erly and ARI at the expense of Erly's shareholders by selling large portions of their stock and using the balance of their stock to buy Erly's only valuable assets at unfair prices, as set forth in detail below.

43. Also included in the 1997 10-K was Deloitte's Independent Auditors' Report, dated as of June 20, 1997 (the "Auditors' Report"), which falsely represented that Erly's financial statements were presented in accordance with generally accepted accounting principles ("GAAP") and that Deloitte's audit had been conducted in accordance with generally accepted auditing standards ("GAAS"). Specifically, in the Section of the financial statements entitled, "Commitments and Contingencies", Erly, the Officers/Directors and Deloitte falsely represented that the Tenzer Suit and the RMTI Suit were the only two lawsuits against the Company that were not "routine in nature", and failed to disclose the existence of the Sandburg Suit. Deloitte was aware of the Sandburg Suit as a result of communications by the law firm of Epman, Dwyer, Singer & Wohrle, LLP, counsel for Erly in the Sandburg Suit.

The Material Misrepresentations Concerning
The Effect Of The Cessation Of The Agreement With RMTI

44. On August 11, 1998, ARI filed for bankruptcy protection. In a press release dated August 12, 1998, it was disclosed that ARI was forced to file bankruptcy because of problems caused by the 1997 cessation of a rice processing agreement with RMTI, which prevented ARI from being able to pay its growers and debtors. However, between January 1997 and August 12, 1998, Erly and the Officers/Directors concealed the devastating effect that the January 1997 cessation of the agreement with RMTI was having upon the financial condition of ARI and Erly, and, instead, falsely represented that ARI had entered into new arrangements with other rice processors and that the RMTI cessation was not materially adversely affecting ARI's financial condition.

45. For example, in the Company's quarterly report for the period ended December 31, 1996, filed on Form 10-Q with the SEC on February 19, 1997, Erly and the Officers/Directors refused to even disclose that RMTI had ended its agreement with ARI in January 1997, and, instead, falsely stated that ARI had experienced merely a "disruption" in its Middle Eastern rice processing and shipments:

In late January 1997, ARI experienced a disruption of shipments to its customers in Saudi Arabia due to contractual difficulties with a third-party processing facility in Saudi Arabia, and alternative processing and distribution means may be employed.

46. Although Erly and the Officers/Directors disclosed in both the 1997 10-K and ARI's annual report for the year ended March 31, 1997 filed with on Form 10-K with the SEC on June 30, 1997 (the "ARI 1997 10-K"), that RMTI had started a lawsuit against ARI for breach of contract and that ARI had obtained a temporary restraining order against RMTI purchasing U.S. rice from other than ARI, Erly and the Officers/Directors continued to conceal the fact that the cessation of the RMTI agreement had already had and would continue to have a materially adverse and devastating effect upon the financial condition of ARI and its ability to continue to sell rice profitably in its historically most profitable market. Specifically, Erly and the Officers/Directors represented in the Form 10-Ks that:

Saudi Arabia has been the largest market for U.S. grown rice, annually importing an average of approximately 750,000 metric tons from all sources, and is currently the largest branded parboiled rice market in the world. ARI's Abu Bint brand is considered to be one of the best recognized food products in Saudi Arabia leading all U.S. grown rice imports with approximately 60% of the market for this rice. Overall, Abu Bint is the number one brand with a market share of approximately 13% of the total Saudi Arabian market. Rice products exported to Saudi Arabia by ARI are marketed to various wholesalers and retailers through a number of major distributors. Historically, the rice ARI sold in Saudi Arabia was shipped from the United States in packaged form. In 1994, ARI began shipping rice in bulk form to the Middle East region and packing it under strict quality supervision in order to reduce vessel loading and freight costs while providing enhanced market competitiveness, improved customer service and product freshness. Until January 1997, products were packed at a facility in Jeddah, Saudi Arabia (see Item 3 - Legal Proceedings). Since January 1997 other Middle East facilities with similar advantages have been utilized. (emphasis added).

47. Similarly, in a Company press release dated July 1, 1997, which discussed, inter alia, the excellent performance of ARI, Douglas Murphy stated that in "the international markets, the growth in revenues continue to be volume-driven, with sales especially strong in the Middle East and Africa"; there was no mention, however, of the devastating financial problems that ARI was experiencing due to the cessation of the agreement with RMTI.

48. In a press release dated November 19, 1997, Gerald Murphy represented that ARI had entered into an agreement with a new processor of rice for Saudi Arabia, and that any disruption in shipments to ARI's customers in Saudi Arabia that ARI may have previously experienced had been eliminated. Specifically, Gerald Murphy stated that:

a dispute with our processor in Saudi Arabia has disrupted our shipments to Saudi Arabia. However, we now have an agreement with another processor in Jordan, and we are again providing full service to our customers in Saudi Arabia.

49. In the Company's quarterly report for the period ended September 30, 1997 filed on Form 10-Q with the SEC on November 19, 1997, Erly and the Officers/Directors elaborated on the statement by Gerald Murphy in the November 19, 1997 press release concerning ARI's August 1997 agreement with a new rice processor to perform the services that were previously performed by RMTI:

In August 1997, ARI reached an agreement with Aqaba Packaging Company ("APC") whereby APC will purchase, receive, store, process and bag rice shipped in bulk to APC's rice terminal at Aqaba, Jordan. Additionally, the agreement provides that ARI can purchase rice from this facility for delivery to ARI's customers in the Middle East, primarily Saudi Arabia. ARI is currently discussing various financing arrangements to insure that sufficient levels of inventories are maintained by APC to meet ARI's and APC's sales requirements in Middle East markets.

50. In a press release date April 20, 1998, Erly and the Officers/Directors represented that ARI had adopted a new plan to restructure its operations, and was going to launch a "renewed emphasis on its core business of branded rice products in the U.S. and certain international markets such as Saudi Arabia and Japan". Commenting on these events, Douglas Murphy stated that:

such action will allow ARI the opportunity to return to the profitability it has enjoyed in prior years. ARI's strength has always been in branded, rice products and it is solely within this area that we will focus our efforts.

51. Contrary to the positive statements and only mild concerns expressed by Erly and the Officers/Directors throughout 1997 and 1998, in an evidentiary hearing on April 15, 1997, in the United States District Court for the Southern District of Texas in connection with ARI's motion for a preliminary injunction (the "ARI Hearing"), counsel for ARI stated to the Court, and Douglas Murphy testified, that the cessation of the agreement between ARI and RMTI had caused and would continue to cause severe problems and likely would force ARI into insolvency and bankruptcy. Douglas Murphy testified at the ARI Hearing that, inter alia, (i) Saudi Arabia had been ARI's most profitable market, (ii) as a result of the cessation of the agreement between ARI and RMTI, ARI was unable to deliver rice to fill all of ARI's orders to Saudi Arabia, (iii) the processors available to ARI other than RMTI were not and would not be as profitable to ARI as RMTI, (iv) without the RMTI agreement, the cost of supplying the Saudi Arabian market would increase substantially, (v) the processed rice being shipped as a result of the cessation of the agreement between ARI and RMTI was of inferior quality and materially more expensive for ARI to ship, (vi) as a result of the cessation of the agreement between ARI and RMTI, ARI had lost at least twelve percent of its market share in just three months, as well as approximately 15,000 tons of orders, (vii) the cessation of the agreement between ARI and RMTI was shutting down ARI's delivery system, (viii) the cessation of the agreement between ARI and RMTI would ultimately result in ARI being completely shut out of the rice market in Saudi Arabia, and (ix) as a result of the cessation of the agreement between ARI and RMTI, ARI would soon be unable to pay ARI's rice growers and employees. In addition, Douglas Murphy admitted in his testimony on April 15, 1997 that the contents of the quarterly report for the period ended December 31, 1996, filed by the Company and ARI on Form 10-Q with the SEC on or about February 19, 1997, failed to disclose these facts.

52. Erly and the Officers/Directors failed to disclose that although Erly had obtained the restraining order preventing RMTI from purchasing U.S. rice from other than ARI, RMTI did not thereafter continue to purchase rice from or do business with ARI, and the devastating consequences of the termination of the relationship with RMTI were continuing.

53. At the time of the issuance of the Auditors' Report, Deloitte was also aware of the RMTI Suit and was aware of, or recklessly ignored, the testimony given by Douglas Murphy in the RMTI Suit on April 15, 1997, and that the cessation of the agreement between RMTI and ARI would, inter alia, have a materially adverse effect upon ARI's business and financial condition and likely render ARI insolvent and/or force ARI into bankruptcy. Accordingly, the failure by Erly, the Officers/Directors and Deloitte to disclose the true materially adverse consequences of the loss of the RMTI relationship violated GAAP, and rendered the 1997 10-K and the Auditors' Report knowingly or recklessly materially misleading. In addition, the Auditors' Report was knowingly or recklessly materially misleading in representing that Deloitte had conducted its audit in accordance with GAAS whereas Deloitte had knowingly or recklessly failed to conduct a proper audit.

54. As discussed above, on August 12, 1998, Erly and the Officers/Directors finally disclosed the devastating effect that the cessation of the agreement with RMTI had continually had on ARI's financial condition from January 1997 to August 12, 1998. On that date, Erly and the Officers/Directors admitted that, despite their repeated representations to the contrary, the cessation of the agreement with RMTI had a devastating adverse effect on ARI, including that ARI had been unable to pay its growers and debtors, ultimately forcing ARI to file for bankruptcy protection.

The Material Misrepresentations Concerning The Company's
Financial Results For The Period Ended September 30, 1997

55. In the Company's quarterly report for the period ended September 30, 1997, filed on Form 10-Q with the SEC on November 19, 1997 (the "September 30, 1997 10-Q"), and in a Company press release dated November 19, 1997 (the "November 19, 1997 Press Release"), Erly and the Officers/Directors reported on the Company's financial results for the three months ended September 30, 1997. In both the September 30, 1997 10-Q and the November 19, 1997 Press Release, Erly and the Officers/Directors reported net sales of $116,302,000, a net loss of $1,021,000, a loss per share of $0.20, net accounts receivable of $82,509,000, and inventories of $122,396,000 for the three months ended September 30, 1997.

56. In the September 30, 1997 10-Q, Erly and the Officers/Directors also represented that:

In August 1997, ARI reached an agreement with Aqaba Packaging Company ("APC") whereby APC will purchase, receive, store, process and bag rice shipped in bulk to APC's rice terminal at Aqaba, Jordan. Additionally, the agreement provides that ARI can purchase rice from this facility for delivery to ARI's customers in the Middle East, primarily Saudi Arabia. ARI is currently discussing various financing arrangements to insure that sufficient levels of inventories are maintained by APC to meet ARI's and APC's sales requirements in Middle East markets.

57. In an amended quarterly report for Erly for the period ended September 30, 1997 filed on Form 10-Q/A with the SEC on February 19, 1998 (the "10-Q/A"), Erly disclosed that the Company's financial results for the period ended September 30, 1997 had to be restated, thereby admitting that the financial results for that period previously reported on November 19, 1997 had been materially false and misleading at the time that they were issued. Moreover, in the 10-Q/A and a press release also issued on February 19, 1998, Erly and the Officers/Directors disclosed that ARI had not actually entered into any binding contracts in August 1997 for the purchase of the rice previously recognized as revenue. In the 10-Q/A, Erly and the Officers/Directors also admitted that for the three months ended September 30, 1997, the Company's (i) net sales were $96,430,000, and had been overstated by approximately $19,872,000, (ii) net loss was $3,099,000, and had been understated by approximately $2,078,000, (iii) loss per share was $0.61, and had been understated by $0.41 per share, (iv) net accounts receivable were $62,637,000, and been overstated by $19,872,000 and (v) inventories were $137,880,000, and had been understated by $15,484,000.

58. Erly and the Officers/Directors admitted in the 10-Q/A that the Company's financial results were restated because there was not a proper basis to have recognized revenue from shipments of rice by ARI to the Aqaba Packaging Company ("APC"), and, as a result, the rice shipped by ARI to APC should have previously been classified as inventory.

The Material Misrepresentations Concerning The
Amount Of The Judgment In The Tenzer Suit

59. In a Company press release dated January 16, 1998, Erly and the Officers/Directors represented that a final judgment had been entered against the Company in the Tenzer Suit in the amount of $5,300,000, as well as punitive damages of $100,000. The representation in this press release concerning the amount of the final judgment in the Tenzer Suit was materially false and misleading because, as Erly and the Officers/Directors later admitted in a Company press release dated April 3, 1998, the final judgment in the Tenzer Suit also required the Company to pay an additional $1,000,000 of prejudgment interest; as a result, the amount of the final judgment in the Tenzer Suit was not $5,300,000 (plus punitive damages of $100,000), but was $6,300,000 (plus punitive damages of $100,000).

The Failure To Disclose
Related Party Transactions With The Murphys

60. Beginning before the start of the Class Period, and continuing throughout the Class Period, the Murphys engaged in many transactions with Erly which were not disclosed, including at least the following:

a. A highly profitable rice mill in Korea (where Erly had conducted business) had been purchased by Gerald Murphy after Gerald Murphy had convinced Erly's Board of Directors not to buy the mill because it was purportedly not profitable, all of which Gerald Murphy admitted to Michael Tenzer, but none of which was ever reported by Erly or the Officers/Directors in the filings with the S.E.C.

b. Erly and the Officers/Directors failed to disclose material amounts received by Douglas Murphy from payments made by Erly/ARI to processors of rice for ARI in Haiti.

c. Although Erly and the Officers/Directors represented that Erly owned Rice Corporation of Haiti, that company was owned by - and profited - Douglas Murphy, according to testimony of Douglas Murphy himself in the ARI bankruptcy proceedings.

d. According to employees of Erly, Douglas Murphy had a relationship with Erly's agent for sales to the Middle East to split the exorbitant fee which Erly paid to the agent in connection with all of the sales to the Middle East.

e. The Murphys paid themselves large undisclosed bonuses.

f. The rental rates which the Murphys charged for the lease of an office building to Erly were above market rates.

The Murphys Misrepresentation Of The Financial Status of Erly And Their
Undisclosed Scheme To Profit Themselves At The Expense of Erly and ARI

61. Knowing the devastating effects that the cessation of the RMTI agreement was having upon ARI and Erly, following entry of the judgment against the Company in the Sandburg Suit in April 1998, the Officers/Directors understood that ARI and Erly would not survive and avoid bankruptcy.

62. The Murphys' conclusion that ARI and Erly - and the Murphys' own substantial stock interests - would not survive caused the Murphys to embark on two courses of action designed to further enrich themselves at the expense of the shareholders of Erly.

a. The Murphys realized that if ARI and the Company went bankrupt, the Murphys' substantial holdings of stock would be rendered worthless. By falsely representing that (i) claims in the Tenzer Suit and the Sandburg Suit were meritless and would be appealed, and (ii) any past problems or disruptions caused by the cessation of the RMTI agreement were over, and that ARI would therefore return to profitability, the Murphys were able to maintain the price of the Company's stock at artificial levels while the Murphys sold substantial blocks of stock. For example, Douglas Murphy sold 620,980 shares of Erly stock between June 3, 1998 and June 23, 1998 (almost 50% of his holdings at that time), and Gerald Murphy sold 625,980 shares of Erly stock between June 3, 1998 and June 24, 1998 (approximately 75% of his holdings at that time). Moreover, the Murphys delayed informing the market of the sales; the report of the sale of 620,980 shares of stock by Douglas Murphy during June 3 - June 26, 1998, was not reported until July 15, 1998, and the report of the 625,980 shares sold by Gerald Murphy during June 3 - 24, 1998, was not reported until July 24, 1998.

b. Not only did the Murphys look to protect their own assets when they realized that bankruptcy of Erly and ARI was inevitable, but when the Murphys realized that ARI's bankruptcy was inevitable, the Murphys also undertook undisclosed and improper measures to try to obtain the value of ARI for themselves and to deny that value to Erly and its shareholders, including at least (i) the Officers/Directors prevented potential buyers of the olive division from making bids by, inter alia, requiring potential buyers to pay nonreturnable deposits of several million dollars just to be able to do due diligence (thereby effectively preventing anyone from making a substantial offer to purchase the olive division), and (ii) the Murphys sought to have Erly sell ARI or the olive business to them on terms which were not arms length, including low prices and the use of the Murphys remaining Erly stock valued at prices 50% above the then current market price of Erly stock.

63. The material misrepresentations (misstatements and omissions) particularized in this Complaint directly and proximately caused the damages sustained by Plaintiffs and other members of the Class. As described herein, Erly and the Officers/Directors made or caused to be made a series of materially false or misleading statements about the Company's business, operations, financial condition and litigation during the Class Period. The Erly and the Officers/Directors' material misrepresentations created in the market an unrealistically positive assessment of the Company and its business, operations and financial condition and results, thus causing the Company's common stock to be overvalued and artificially inflated at all relevant times. Erly and the Officers/Directors' material misrepresentations during the Class Period resulted in Plaintiffs and other members of the Class purchasing the Company's common stock at artificially inflated prices throughout the Class Period, thus causing the damages complained of herein.

64. Plaintiffs and the Class relied upon the representations by Erly and the Officers/Directors or upon the integrity of the market system in setting the price of the Shares based upon the disclosures made by Erly and the Officers/Directors.

65. This action was brought within three years from the date of any of the sales of the Company's common stock for which recovery is sought and within one year of the first date on which there could be deemed to be any notice of the claims set forth herein.

66. As alleged herein, Erly and the Officers/Directors acted with scienter in that they knew that the statements issued or disseminated concerning the Company were materially false and misleading; knew that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated in the issuance or dissemination of such statements or documents as primary violations of the federal securities laws. Erly and the Officers/Directors had actual knowledge at the time that the misrepresentations were made that (i) since October 1996, the Company had been named as a Defendant in, and had been continuously litigating, the Sandburg Suit, (ii) the Company's reported sales, earnings, accounts receivable and inventory for the quarter ended September 30, 1997 were materially false and misleading, because there was no proper basis to have recognized revenue and earnings from ARI's shipment of rice to APC and (iii) the judgment in the Tenzer Suit was not in the amount of $5,300,000, but included an additional $1,000,000 of prejudgment interest.

67. The Officers/Directors also had motives to intentionally or recklessly mislead the investing public, including the following:

a. Throughout the Class Period, the Officers/Directors had the motive to maintain the price of the Company's common stock as high as possible because they were actively seeking to sell the Company throughout the Class Period, and, given their significant amount of stock holdings, would be able to obtain significantly more money for their holding if they were successful in seeking a buyer for ARI or Erly.

b. During the Class Period, a group of shareholders had undertaken an intense proxy battle with the expressed purpose of removing the Murphys and Burgess from the Company's Board of Directors on the ground that, among other things, they were mismanaging the Company and wasting the Company's assets. As a result, the Officers/Directors were motivated to conceal the materially adverse facts concerning the Company in order to maintain their control of the Company and executive positions.

c. The Officers/Directors also engaged in the scheme described above to inflate the price of the Company's common stock in order to enhance the value of their stock ownership in the Company and allow for profitable insider sales generating insider trading profits during the Class Period, as set forth below.

d. The Officers/Directors' insider selling infers the Officers/Directors' scienter and is part of the Officers/Directors' scheme, artifice to defraud or acts, practices or course of business in violation of Section 10(b) and Rule 10b-5. While the Officers/Directors were issuing the false and misleading statements described above, they were benefitting from the course of conduct described in this Complaint by selling the Company's common stock at artificially inflated prices without disclosing the material adverse facts about the Company to which they were privy. Such sales were unusual in the number of shares sold and in the timing of the sales. The following table shows the insider selling of these officers during the Class Period:

A. First Claim for Relief: (Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 Promulgated Thereunder)

68. Plaintiffs incorporate by reference all preceding paragraphs as if set forth fully herein.

69. Erly, each of the Officers/Directors and Deloitte knowingly or recklessly used and employed devices, schemes or artifices to defraud, made untrue statements of material fact or omitted to state facts necessary to make the statements made, in the light of the circumstances under which they were made, not misleading, or engaged in acts, practices or a course of business which operated as a fraud or deceit upon the Plaintiff in connection with the purchase of the Company's common stock, all as further set forth herein, in violation of Section 10 (b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) and Rule 10b-5 promulgated thereunder by the SEC (17 C.F.R. § 240.10b-5).

B. Second Claim for Relief: (Section 20 of the Securities Exchange Act of 1934)

70. In addition to the liability of the Officers/Directors as set forth above, by reason of their positions as senior management and/or directors and/or ownership of a significant amount of the stock of Erly, the Officers/Directors had the power to control, and did control, Erly, and the Officers/Directors are therefore liable jointly and severally for the violations by Erly of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, pursuant to Section 20 of the Exchange Act.

WHEREFORE, Plaintiffs pray for relief and judgment, as follows:

(a) Determining that this action is a proper class action under Rule 23 of the Federal Rules of Civil Procedure;

(b) Awarding compensatory damages in favor of Plaintiffs and the other Class members against all Defendants, jointly and severally, for all damages sustained as a result of Officers/Directors' wrongdoing, in an amount to be proven at trial, including interest thereon;

(c) Awarding Plaintiffs and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and

(d) Granting such other and further relief as the Court may deem just and proper.

Plaintiffs hereby demand a trial by jury.

C:\PUBLIC\WPDOCS\~CLIENTS\ERLY\ERLY2SH.WPD

Source: File to scac@law.stanford.edu from Schatz & Nobel, P.C.