Plaintiffs have alleged the following based upon the investigation conducted by and under the supervision of plaintiffs' counsel, which included reviewing and analyzing information and financial data obtained from numerous public and proprietary sources such as, without limitation, LEXIS-NEXIS, Dow Jones and the Bloomberg wire service, including, inter alia., United States Securities and Exchange Commission ("SEC") and bankruptcy court filings by ContiFinancial Corp. ("Conti" or the "Company"), regulatory filings and reports. including filings with the Federal Trade Commission, securities analysts' reports and advisories about the Company, press releases and other public statements issued by defendants, and media reports about the Company. Plaintiffs' counsels' investigation also included investigating or consulting with numerous individuals, including former employees of Conti, who are knowledgeable about the Company's business practices and about the industry and markets in which the Company operates. Except as alleged herein, the underlying information relating to defendants' misconduct and the particulars thereof are not available to plaintiff and the public and lie within the possession and control of defendants or other insiders of Conti. Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.

This is a federal class action on behalf of all purchasers of the common stock of Conti between January 29, 2998, and July 21, 1999, inclusive (the "Class Period"), seeking to pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act"). This case principally concerns the dissemination of materially false and misleading statements concerning, among other things, the Company's deteriorating financial condition, and the effects this adverse undisclosed condition would ultimately have on the Company's operations, liquidity and stock price.

Conti is a Delaware corporation with its principal place of business located in New York, New York. The Company, now in bankruptcy, during the Class Period was a financial services company that originated, purchased, pooled, securitized and serviced real estate mortgages. The Company, through its subsidiary ContiMort gage Corporation ("ContiMortgage"), developed a network of 359 active correspondents (who purchased closed loans from independent mortgage bankers and other financial institutions), 1,766 active mortgage loan brokers (who originated loans) and 119 Company-owned retail branches or call centers.

In a succession of announcements and public filings, defendants reported that the Company generated strong revenues and positive earnings quarter after quarter, creating and sustaining the false impression, at all relevant times, that the Company was experiencing profitability and financial health.

Defendants, however, knew or recklessly disregarded that Conti's reported revenue, income, and earnings per share were artificially inflated as a result of overly-aggressive and improper accounting practices, in violation of Generally Accepted Accounting Principles ("GAAP") and other principles of fair reporting. As a result, the Company's public statements touting its growth and profitability, at all relevant times, were materially false and misleading and lacked a good faith reasonable basis. In particular, defendants knowingly or recklessly used false critical assumptions in calculating the Company's recognizable gain-on-sale revenue and the Interest-only and residual interests retained by the Company in connection with the securitization of its loan pools.

In short, defendants falsely represented to the investing public that the loan loss and prepayment rate assumptions in the Company's financial statements were based on actual experience, and that the Company had made all adjustments that were necessary for a fair presentation of its financial position. Defendants, however, knew from their on-line real time loan servicing system that prepayment rates were much higher than assumed, causing massive losses. Thus, defendants used materially false assumptions to inflate the value of the Company's assets. Utilizing the inflated asset value, defendants falsely reported the Company's equity to be $646.30 million in its Form 10-K for the fiscal year ended March 31, 1998. filed on July 29. 1998 ("1998 Form 10-K"), and thereby caused the price of the Company's stock to be artificially inflated. In its Form 10-K for the 1999 fiscal year ended March 31, 1999, filed on July 15, 1999 ("1999 Form 10-K"), the Company reported shareholder equity of only $203 million, amounting to a reduction in shareholder equity of more than $443 million from what was previously reported.

Additionally, defendants knew or recklessly disregarded the fact that the Company's loan loss assumptions, which were used to calculate gain-on-sale revenue and the value of the Company's Interest-only and residual certificate assets, were distorted by the Company's systematic practice of improperly extending credit to borrowers without sufficient collateral and without regard for the borrowers' ability to repay the loans. Defendants, who knew or recklessly disregarded the existence of this systematic practice, then caused the loans to be carried on the Company's books long after they had reason to believe they would be repaid. The effect of this systematic practice, which was never disclosed to investors, was to artificially inflate the Company's revenue, income and earnings per share. This allegation is based upon the investigation by counsel, including but not limited to interviews with former Conti underwriters and loan officers.

As a result, in July 1999 defendants were forced to report that during fiscal year 1999: (a) the Company had made unfavorable adjustments, and taken charges and writedowns totaling $644 million; (b) the adjustments included a $329 million unfavorable adjustment to the Company's interest-only and residual certificates, including an adjustment of $191 million related to credit losses and $81 million related to higher prepayment rates; (c) the Company suffered a full fiscal year 1999 loss of $426 million; (d) the Company had suffered "a critical loss of liquidity" and; (e) there was substantial doubt about the Company's ability to continue as a going concern.

On February 14, 2000, the Company filed its Form 10-Q for the third fiscal quarter ended December 31, 1999 in which it reported that the Company had lost an additional $686 million during the first three quarters of fiscal year 2000 primarily due to additional adjustments to its interest-only and residual certificates, and that stockholders' equity had been reduced to a negative balance of $477.8 million. Unable to repay bank loans due on March 31, 2000, or its senior notes, the Company on May 17, 2000, filed a Chapter 11 bankruptcy petition.

On July 25, 1999, four days after the end of the Class Period, hedge fund manager and noted securities analyst James J. Cramer. co-founder of the popular financial news and information web site The Street.com published an article which was highly critical of the Conti debacle. Mr. Cramer detailed the market's ignorance of the extent of the risk defendants had assumed and the impending Conti collapse, in part, as follows:

When we speak of tough business reporting, and how TheStreet.com believes you have to have it to make money, we very rarely define what happens when you don't have it. We rarely quantify the losses. We have had such good times for so many years that we forget what can go wrong, or what needs to be highlighted or pointed out if we are to avoid losing money.

The story of ContiFinancial Corp., a company that came public in May 1997 at 33 and now trades at around a buck is one of those stories.

I remember ContiFinancial. Merrill Lynch brought the deal. Its parent, Continental Grain, is one of those companies that people speak of with awe. It is one of those multibillion-dollar private companies we know nothing about except the owners are richer than everybody but a handful of Gateses and Buffetts.

ContiFinancial was one of those hard-to-understand "consumer and commercial finance" companies that made loans to "borrowers whose needs may not be met by traditional financial institutions" and then packaged them to others who bought these higher-yielding pieces of paper.

Now I will give that to you in English. as it was never given to the thousands of thousands of people who lost their jobs and their investment dollars to this company. ContiFinancial makes loans to deadbeats at a very high yield and then puts them all together into a bigger bond that is then bought by hedge funds who are willing to take the collective risks that these people won't stop paying.

Everything about this industry makes me sick. It is a dangerous industry. The people can default. The loans can be poorly made. Rates can go down big and people can pay off the loans, making these packages hard to value. (By the way, that's what happened.)

But not once in any of the dozens of articles that I read about ContiFinancial in its inexorable march toward a dollar indicates that any journalist saw it coming. In fact, in every story there was a sense that nothing could really go wrong here, that the company would be bailed out by the parent or bought by someone else or, as was the case when the company spoke in February of last year. be bailed out by an end to the vicious prepayments that played havoc with their end product, the packaged bonds.

Each time the company was interviewed, everything sounded just fine. As the stock worked its way all the way down to the low single digits, we had no doubt that everything would come out all right. We were told repeatedly by everyone at the company that there would never be a problem with debt when it came due, or with more securitizations (meaning that it would continue to be able to rely on the public bond markets for additional money).

In fact, these guys were done from the moment Long Term Capital Management and others of its ilk could no longer borrow a lot of money to take down Conti's paper. The writing was on the wall for months during the shameless period when we were reassured.

The de facto backstop of Continental Grain also allowed us to believe that a white knight would be found to get us out of a jam. And when one was found, General Motors, we had every reason to believe that the acquisition was a layup and we would be bailed out as shareholders. Nah, the deal fell through. And Continental Grain walked away from this like it had nothing to do with it. [Emphasis added.]

As a result of the fraudulent scheme alleged herein, the prices of Conti equity securities and the Company's reported profits and net income, were artificially inflated and the defendants were able to reap more than $2 million of performance-based bonuses.

Defendants knowingly or recklessly directly participated in the fraudulent acts and misconduct for which damages are sought against each of them and/or are charged with liability as controlling persons. Defendants at all relevant times knew or recklessly disregarded that the Company's financial condition was public lv misrepresented and that its assets, revenue, net income, earnings per share and stockholders' equity were materially overstated in its public statements. Defendants culpably participated in the commission of the wrongs alleged herein.

The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the Exchange Act [15 U.S.C. §§78j(b) and 78t(a)] and Rule 10b-5 promulgated under Section 10(b) by the SEC [17 C.F.R. § 240.10b-5].

This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. §§ 1331 and 1337 and Section 27 of the Exchange Act [15 U.S.C. § 78aa].

Venue is proper in this District pursuant to Section 27 of the Exchange Act, and 28 U.S.C.§ 1391(b).

Many of the acts charged herein, including the dissemination of materially false and misleading information, occurred in substantial part in this District. Additionally, defendants conduct significant business within this District and have consistently disseminated official Company communications, such as proxy statements and other information directly within and into this District.

In connection with the acts alleged in this complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of the national securities markets.

At all times relevant to this Complaint Conti was a Delaware corporation with its principal executive offices located at 277 Park Avenue, New York, NY. According to the Company's press releases. Conti purported to be a consumer and commercial finance company which is also a leading originator, purchaser. securitizer and servicer of home equity loans made to borrowers whose needs may not be met by traditional financial institutions. Conti is liable for the violations of the securities laws set forth herein but is not named as a defendant as a result of its May 17, 2000 voluntary petition in bankruptcy.

(a) Defendant James E. Moore ("Moore") served as President and CEO of Conti throughout the Class Period and until July 21, 1999, when he resigned from the Company. By July 21, 1999, the price of Conti stock was trading at approximately $1.25 per share, a decline of approximately 97% from the Class Period high of $38.56 per share reached on April 15, 1998. In fiscal year 1998, Moore received a salary of $275,000 and a bonus, pegged to the Company's reported net profit. of $2,380,000.

(b) Defendant Daniel J. Willett ("Willett") served as CFO and Sr. V.P. of Conti throughout the Class Period, until the time, on June 2, 1999, when he resigned from the Company. By June 2, 1999, the price of Conti stock was trading at approximately $6.00 per share. In fiscal year 1998, Willett received a salary of $205,000 and a bonus, pegged to the Company's reported net profit of $300,000.

Because of Moore's and Willett's (the "Individual Defendants") positions of control and authority as officers of the Company, they had access to the adverse undisclosed information about its business, operations, products, operational trends, financial statements, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and board of directors meetings and committees thereof and via reports and other information provided to them in connection therewith. Additionally, the Individual Defendants at all time had access to Company reports and to the Company's computer data bases from which they could obtain the data underlying the Company's financial and accounting assumptions at any time, and which they did obtain on an ongoing basis.

It is appropriate to treat the Individual Defendants as a group for pleading purposes. The Individual Defendants, because of their positions of control and authority as officers of the Company, were able to and did control the contents of the false, misleading and incomplete information conveyed in the Company's various quarterly reports. SEC filings, press releases and other publications as alleged herein. Moreover, the Individual Defendants were provided with copies of the Company's press releases and SEC filings either prior to, and/or after their issuance, and had the opportunity to cause them to be corrected. Furthermore, by virtue of their high-level positions with the Company, the Individual Defendants directly participated in the management of the Company, were directly involved in the day-to-day operations of the Company at the highest levels and were privy to confidential proprietary information concerning the Company and its business. operations, products, growth, financial statements, and financial condition, as alleged herein.

As officers and controlling persons of a publicly-held company whose common stock was, and is, registered with the SEC pursuant to the Exchange Act, traded on the New York Stock Exchange (the "NYSE"), and governed by the provisions of the federal securities laws, the Individual Defendants each had a duty to disseminate promptly, accurate and truthful information with respect to the Company's financial condition and performance, growth, operations, financial statements, business, products, markets, management, earnings and present and future business prospects, 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 individual Defendants' misrepresentations and omissions during the Class Period violated these specific requirements and obligations.

Continental Grain, because of its position of control and authority over the Company's board of directors, its ability to elect the members of the board of directors, and as majority shareholder of the Company. was able to and did control the contents of the Company's various quarterly reports. SEC filings and press releases. Because of Continental Grain's position of majority control. Continental Grain had access to the adverse non-public information about the Company's business and finances particularized herein, through, inter a/ia, contact with and access to internal corporate officers and employees and access to Conti's board of directors meetings and committees thereof. Additionally, by virtue of their majority interest in the Company and position of control, Continental Grain at all times had access to the Company's internal company reports and computer databases from which they could obtain the data underlying the Company's accounting assumptions at any time.

Continental Grain's control over the Company is further supported by the statements made by Conti in its 1998 Form 10-K, filed with the SEC on or about July 29, 1998:

In fiscal 1998, the Company acquired a 24% interest in Empire Funding Holding Corp., ("Empire") a long-term strategic alliance that is one of the largest high loan-to-value and F.H.A. Title I lenders in the United States. Upon closing, the Company's majority shareholder, Continental Grain Company ("Continental Grain"), exchanged a warrant for a 25% equity interest in Empire. [page 4]

The Company's principal executive offices are located at 277 Park Avenue, New York, New York, 10172 and are occupied under a sublease with Continental Grain. [page 19]

In previous fiscal years. the Company sold ESR, with limited recourse, to provide cash to fund the Company's securitization program. Under the recourse provisions of the agreements, the Company is responsible for losses incurred by the purchaser within an agreed-upon range. At March 31, 1998 $100.9 million of these sales were outstanding. The Company's performance obligations in these transactions are guaranteed by Continental Grain for an agreed-upon fee. [page 37]

For the year ended March 31, 1996, Continental Grain Company forgave intercompany debt of $10,000 and such amount was capitalized as a capital contribution. [page 46]

Continental Grain incurs certain general and administrative expenses on behalf of the Company. Expenses directly attributable to the Company, such as occupancy and communication charges are directly charged to the Company.... The determination of other general and administrative expenses incurred by Continental Grain and applicable to the Company is based first, on identifying specific expenses that are directly attributable to its operations and second, on estimating that portion of general and administrative expenses of Continental Grain used to support the operations of the Company based on the service hours attributable to the Company and the asset base of the Company. Management believes that the method of allocation of general and administrative expenses is reasonable. The amount of such indirect expenses charged to the Company was $2,138, $1,749 and $1,907 for the years ended March 31, 1998, 1997 and 1996, respectively. [page 58-9]

On February 14, 1996, Continental Grain and the Company entered into an employee benefits allocation agreement (the "Employee Benefits Allocation Agreement") which permitted the Company's employees to continue to participate in the Continental Grain employee benefit plans. The cost of the Company's employees' participation in these programs was allocated to the Company based on the actual cost of benefit accruals and an allocated cost of administration of the plans and overhead. Effective April 1, 1998, the Company discontinued its participation in the Continental Grain health care plan and obtained independent coverage. Effective July 1, 1998, the Company will discontinue participation in the pension plan. [page 59]

The Company's employees were previously included in Continental Grain's various employee benefits programs. and the Company reimbursed Continental Grain for the actual cost of benefit accruals and an allocable cost of administration and overhead. Effective April 1, 1998, the Company discontinued its participation in Continental Grain's health care plan and obtained independent coverage. Effective July 1, 1998, the Company will discontinue participation in Continental Grain's pension plan and will institute the ContiFinancial Employee Savings Plan. [page 61]

Moreover, the following statements made by Conti in its 1999 Form 10-K, filed with the SEC on or about July 15, 1999, are further indicia of Continental Grain's control over the Company:

The Company has taken steps to reduce its financing needs and to provide continued access to liquidity. Continental Grain, which owns approximately 78% of the Company's outstanding common stock, provides monthly servicer advances, up to an aggregate outstanding of $85 million, to certain REMICs for which ContiMortgage, a wholly-owned subsidiary, is the servicer. Continental Grain has agreed to make these advances, for a fee, through October 15, 1999. Although the advances have been made to. and repaid by. the REMICs, and not by the Company or ContiMortgage. Continental Grain's advances improve the liquidity of the Company by relieving it of the significant portion of its obligation to make these advances itself. [page 46]

In May 1999, Continental Grain extended a short-term warehouse financing facility to the Company for the maximum amount of $60 million. Availability under the facility is subject to a combined maximum amount of $85 million of this facility and the servicer advances facility, and terminates upon the earlier of October 1, 1999 or a change in control of the Company. [page 46]

In previous fiscal years, the Company sold ESR. with limited recourse, to provide cash to fund the Company's securitization program. Under the recourse provisions of the agreements, the Company is responsible for losses incurred by the purchaser within an agreed-upon range. At March 31, 1999 $22.6 million of these sales were outstanding. The Company's performance obligations in these transactions are guaranteed by Continental Grain for an agreed-upon fee.

[page 47] [emphasis added]

Given the level of involvement in the Company's affairs and control over those affairs, there exists a strong inference that a company of Continental Grain's size and sophistication would have performed due diligence and been aware of the Company's travails.

As alleged herein, defendants knowingly or recklessly engaged in a fraudulent scheme designed to misrepresent the financial condition of Conti, and overstate its assets, revenue, net income, earnings per share, stockholders' equity, and current business prospects, as well as the credit quality of the loans originated by the Company, and the performance statistics regarding these loans. As a result of this scheme, the prices of Conti securities were artificially inflated throughout the Class Period.

The Individual Defendants participated in the drafting, preparation, and/or approval of the various public and shareholder and investor reports and other communications complained of herein and were aware of, or recklessly disregarded, the misstatements contained therein and omissions therefrom, and were aware of their materially false and misleading nature. Because of their Board membership and/or executive and managerial positions with Conti, each of the Individual Defendants had access to the adverse undisclosed information about Conti's business prospects and financial condition and performance as particularized herein and knew (or recklessly disregarded) that these adverse facts rendered the positive representations made by or about Conti and its business issued or adopted by the Company' materially false and misleading.

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

Each defendant is liable as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Conti common stock by disseminating materially false and misleading statements and/or concealing material adverse facts. The scheme: (i) deceived the investing public regarding Conti's business and capabilities, product demand, growth, operations and the intrinsic value of Conti common stock; and (ii) caused plaintiffs and other members of the Class to purchase Conti common stock at artificially inflated prices.

At all times relevant to this complaint. Conti was followed by securities analysts employed by brokerage houses and/or broker/dealers which issued reports and made recommendations to their clients concerning Conti's equity securities. Among the securities firms that followed the Company during the Class Period were SBC Warburg Dillon Read, Inc., Bear Steams & Co., Inc. CIBC Oppenheimer Corp., Credit Suisse First Boston, Merrill Lynch, and Wheat First Union Corp.

In writing their reports and making recommendations concerning investments in the Company's equity securities, these securities analysts relied in substantial part upon information provided by defendants.

The investment community relied and acted upon information communicated in securities analysts' reports, as well as Company-published data, that presented the Company's performance and prospects in a favorable light and recommended that investors purchase the Company's equity securities. Defendants manipulated and inflated the market price of Conti equity securities by falsely presenting to analysts the performance and prospects of the Company arid by failing to disclose true adverse information about the Company.

According to statements made by the Company and filed with the SEC. Conti together with its subsidiaries purported to engage in the consumer and commercial finance business by originating home equity loans, commercial real estate loans and non-prime auto loans. The Company also purported to provide financing and asset securitization structuring and placement services to originators of a broad range of loans, leases, receivables and other assets. In its public filings, the Company claimed to be a leading originator, purchaser, seller and servicer of home equity loans "made to borrowers whose needs may not be met by traditional financial institutions due to credit exceptions or other factors."

According to the Company. loans are primarily for debt consolidation, home improvements, education or refinancing and are primarily secured by first mortgages on one-to four-family residential properties. For the years ended March 31, 1998 and 1997, the Company reported originations of $6.8 billion and $4.0 billion respectively, of home equity, home improvement and other residential mortgage loans, and securitized or sold $6.7 billion and $3.8 billion, respectively, of such loans. For the same periods, the Company reported originations of $1.9 billion and $632.5 million, respectively, and securitized or sold $1.5 billion and $742.3 million, respectively, of commercial real estate loans, and originated $192.0 million and $47.0 million, respectively, of non-prime auto loans through its subsidiary, Triad Financial Corporation ("Triad"), and securitized $178.0 million and $43.5 million, respectively, of Triad auto loans. Through ContiMortgage and Conti West Corporation ("Conti West"), the Company purports to originate, purchase, sell and service home equity loans. The home equity loans are sold to whole-loan investors br securitized in the form of Real Estate Mortgage Investment Conduits ("REMICs"). owner trusts or grantor trusts. All of the securitized loans are sold on a servicing retained basis.

The Company's principal loan product is a "non-conforming" home equity loan with a fixed principal amount and term to maturity, which can have a fixed or adjustable interest rate and is typically secured by a first mortgage on the borrower's residence. Non-conforming home equity loans are home equity loans made to borrowers whose borrowing needs may not be met by traditional financial institutions due to credit exceptions or other factors and that cannot be marketed to agencies.

The largest component of the Company's revenues comes from the gain on sale of its securitized home equity loans originated and serviced by the Company. The primary funding strategy of the Company is to securitize loans purchased or originated. Through the beginning of the Class Period and up to March 31, 1998, the Company had completed 31 securitizations.

In connection with securitized pools of loans, the Company recorded revenue using "gain-on-sale" accounting. The Company recorded a gain on each separate securitization equal to the present value of the anticipated excess future cash flows (equal to the interest the Company anticipated earning on the pool of loans, minus the interest required to be paid to the purchasers of the securitization over the life of the securitization pool, minus servicing fees and estimated credit losses). Thus the Company recorded a gain on each securitization when each pool of loans was securitized, even though the "gain" consisted of the supposed pre-set value of cash flows which might (or might not) occur in the future. At all relevant times, such gain-on-sale accounting drove the Company's reported earnings.

Importantly, under gain-on-sale accounting, the ESR is given a carrying value by using three important assumptions: (1) cumulative credit loss rate; (2) the effective discount rate applied to expected future cash releases from the securitization trusts ("discount rate"); and (3) prepayment speeds. For companies like Conti that use gain-on-sale accounting, the quality of the company's recorded earnings is only as good as the company's assumptions concerning these factors, and if the company uses assumptions that differ moderately from actual experience and current economic conditions, revenue and earnings will be materially affected.

Within each loan pool, it is inevitable that some loans will become delinquent and losses will be incurred. As the gain-on-sale methodology is based on projected cash flows, the level of losses for each securitization must be estimated. Such estimations should be based on the loan loss history and underwriting guidelines, as well as the current economic environment. The estimation of such credit losses can have a material effect on a company's net income for a given period. In this case, the Company used understated assumptions to estimate its loan-loss rate, resulting in materially overstated net income and assets during the Class Period.

In calculating the value of its Interest-only and residual certificates, the Company purported to calculate the present value of future net cash flows it anticipated receiving from its home equity loan securitization transactions (net of the related allowance for loan losses). The discount rate applied to calculate the present value of the future net cash flows can have a material effect on a company's net income for a given period.

The Company calculated the present value of anticipated excess cash flows over an assumed weighted average life of each loan pool. The assumed weighted average life was determined by taking the weighted average maturity of a securitization's underlying loans, taking into account the underlying loans' assumed prepayment speeds. Prepayment speeds ("CPR" or "constant prepayment rate") are determined by calculating the rate of voluntary and involuntary prepayments. A borrower could prepay his liability either on his own accord or through default (when the loan is paid or a loss is incurred after foreclosure). If a borrower prepaid or defaulted, the expected future interest earned by the issuer over the remaining life of the loan is terminated and the Company is required to reflect this on its balance sheet by adjusting the associated interest-only and Residual Certificate. Prepayment also terminates the Company's expected income from servicing the loan and the Company is required to reflect this by reducing the associated capitalized mortgage servicing rights asset. The Company's prepayment speed assumption can materially affect its net income for a given period, as well as the carrying value of the Interest-only and residual certificates. In the Company's asset-backed loan pool, rising prepayments decreased the life of its securitizations. Thus, rising prepayments reduced the amount of expected future interest earned and the present value of the gain-on-sale. During the Class Period, defendants applied significantly lower prepayment assumptions than they knew or recklessly disregarded that actual experience required, which also contributed to the material overstatement of the Company's income and the carrying value of its interest-only and residual certificates.

The assumptions were material to Conti investors because, even though the Company sold its loans in securitization transactions, the Company retained the risks associated with the loans. This was because the Company "credit enhanced" its securitizations, which required the Company to subordinate cash deposits and the excess interest spread up to a specified amount, to the payment of scheduled principal and interest on the pass-through certificates issued in the securitization transactions. Consequently, the Company was required to apply excess interest to make up shortfalls in collections of borrowers' monthly mortgage payments. Thus, even after the Company securitized and sold its loans, the Company generally retained the risk of loss until the loans were paid in full.

Each pooling and servicing agreement required the establishment of a reserve account into which the Company was required to deposit a portion of the excess interest spread. When principal or interest was not paid on underlying mortgages, losses had to be paid out of the related reserve account. The Company was required to add to the reserves if the reserve balances fell below certain levels. The Company thereby retained the risk of prepayment and credit loss. Consequently, realization of the value of interest-only and residual certificates in cash depended on the prepayment and loss performance of the underlying loans as well as the timing and ultimate stream of cash flows from the underlying loans.

Thus, if a mortgage were prepaid, or went into default, its cash flow ended and the unamortized balance of the associated interest-only and residual certificate had to be written off. Similarly, servicing income on the mortgage ended and the related asset had to be written off.

Reported earnings derived from gain-on-sale accounting for securitization are highly sensitive to changes in assumption calculations. Seemingly moderate changes in any assumption can materially alter the gain-on-sale to be recorded and the carrying value of Interest-only and residual certificates. If actual rates differ from assumed rates on current securitizations. the Company, using its gain-on-sale accounting method, must alter its assumed rates when it accounts for future securitizations. as well as write down the value of its retained interest from prior securitizations. Additionally, if actual rates exceed the Company's assumptions. the Company must write down the carrying value of its Interest-only and residual certificates and servicing assets and augment reserves on the affected loans in order to ensure that the senior holders are protected. This, in turn, lowers income.

Another unique attribute of the Company's business is that home equity securitizations are cash flow negative upon their initial execution. primarily as a result of premiums paid to acquire loans from wholesale sources. Therefore, in order to raise much needed cash to fund operations. especially at the inception of a securitization. the Company has, from time to time, completed sales of a portion of its Excess Spread in the form of interest-only ("IO") securities, or Net Interest Margin certificates ("NIMs"). which are not exposed to the risk of credit losses.

The sale of NIMs and IO Strips has compounded the irnportance and effects of the Company's gain-on-sale assumptions. This is so because when Conti securitizes the residual cash flows in the form of NIMs it has, in essence, "sold" for cash its right to receive the stream of residual cash flows from a trust. To the extent that the ESR will be affected by prepayments, the NIMs will also be adversely affected. This is true because in order to provide support for the NIM, the trust is structured as a senior/subordinated note where the issuer, here Conti, retains the subordinated piece. Thus, the primary purpose behind the sale of the NIMs is that it allowed Conti to raise operating cash, while avoiding the need to return to the capital markets. The sale of NIMS and IO strips does not limit the Company's liabilities on the underlying collateral, and in addition to the risk of loss associated with the collateral, the Company is now subject to the risk of loss that prepayments will adversely effect the NIMS value.

Thus, despite the fact that the NIMs provide Conti with access to operating revenues, the Company still retains substantial risk, even though the residual cash flow from the trust has effectively been sold. This is true because, in practice. an issuer retains all the credit and prepayment risk associated with the underlying collateral. Thus, a NIM improves the cash flow of a company but does not reduce its actual credit and prepayment risk.

The assumed prepayment rate is so central to the Company's earnings and net income that at all times during the Class Period the Company claimed to have continuously monitored the fair value of its ESR, and reviewed the factors expected to influence future CPR and credit losses. Thus, if changes in assumptions regarding expected future CPR or credit losses were necessary, investors were led to believe that Conti had the technology to discover these changes well enough in advance to allow the Company to adjust its prepayment assumptions and that the Company had sufficient management experience and expertise which would allow it to recognize such market changes and to act accordingly, by adjusting the fair value of Conti's ESR.

The allegations in paragraphs 56 to 66 are based on the investigation of counsel, including but not limited to interviews with former Conti underwriters and loan officers.

While it is generally understood that sub-prime lenders extend credit to borrowers who are poor credit risks. Conti was extraordinary in this regard because it instituted systems and practices that inevitably resulted in the Company's extension of credit to borrowers who could not possibly repay their loans. At all relevant times, defendants knowingly or recklessly concealed these systems and practices from the public and knowingly or recklessly failed to take the inevitable effect of these systems and practices into account when they calculated the prepayment and credit loss assumptions that formed the basis of the Company's reported earnings and revenues.

Specifically, defendants fostered a corporate culture in which loan originators and underwriters were rewarded for closing loans and punished for denying approval to loans, even if the loans were unacceptably risky. Their performance was measured by monthly quotas for loan origination which brokers and underwriters were pressured by the Company to meet.

The Company purported to publish underwriting guidelines that divided borrowers into four credit grades, A, B, C and D (with A being the least and D being the most risky), based on factors including their general credit history. existing mortgage loans, existing non-mortgage credit and debt service-to-income ratio. Through the practices described herein, the Company routinely presented Grade C and D borrowers as A and B borrowers. A running joke in the Company was something to the effect that "It wasn't A, B, C or D grade paper, it was more like F." Indeed, between 5% and 10% of Conti borrowers could not make their first loan payment.

Management frequently waived the Company's debt to equity ratio requirements, and were especially likely to do so for top brokers who brought in a high volume of business. The underwriters ignored the Company's underwriting policy book, which in any event, contained internal contradictions. Instead of maintaining an arm's length relationship with a national appraisal firm, as is the industry custom and practice, Conti allowed branch officers to hire their own appraisers and brokers and customarily advised appraisers of what the appraised value of properties had to be if the potential borrowers were to qualify for loans. Additionally, when determining potential borrowers' creditworthiness, the Company counted missed monthly installment payments as a single late payment, provided that the missed payments were consecutive. Thus if a borrower was 30 days late with a payment due in March, and 30 days late again for a payment due in April, the Company counted for only one late payment. Such conduct continued throughout the Class Period.

As a result of the foregoing, at all relevant times, the Company systematically, and the defendants knowingly or recklessly, extended credit without regard to the borrowers' repayment ability, including the borrowers' current and expected income, current obligations and employment.

The Company did not stop at improperly extending credit to extraordinarily high risk borrowers; it secretly altered the terms of the loans to avoid recording delinquencies. To accomplish this, defendants engaged in numerous improper practices.

Defendants awarded bonuses for keeping delinquencies below a particular rate, which created "a climate of creativity." This in turn fostered a number of fraudulent practices. If a borrower with a payment due on February 1 called on February to say that he couldn't make his payment, the Company allowed the borrower to make a partial payment and extended the current due date to March 1. To prevent reporting delinquent accounts for as long as possible, the collections department "accepted checks over the phone." "Accepting checks over the phone" was a euphemism meaning that if a borrower called, gave certain identifying information regarding his account, and said that his check was in the mail, Conti recorded the payment, as of the date of the phone call, and then, if the check did not appear in the mail, as was often the case. fraudulently recorded the transaction as if the check had been rcceived, deposited and returned for insufficient funds.

Manipulating recorded delinquencies in this way made it appear that delinquent accounts were current. This practice was a de facto secret modification of the terms of the loans that enabled the Company to avoid loan pool triggers that would otherwise have required the Company to increase its loan loss reserves to account for the effects of the loan term modifications.

At all relevant times, defendants knew or recklessly disregarded that this practice existed, that the practice caused the Company's income to be materially overstated and that it caused the Company's delinquencies to be materially understated.

The foregoing practices were a violation of GAAP and other accounting principles, as set forth more fully in ¶¶14l-l46.

As mentioned above, adverse market conditions roiled the subprime home equity sector in early 1998 as loan prepayment speeds were rising significantly, and as investors worried about the potentially dangerous combination of gain-on-sale accounting and rising loan prepayments.

In the months preceding the Class Period, analysts at Oppenheimer compiled a database which allowed them to track the collateral performance of each static pool for several mortgage and subprime lenders. The collateral attributes monitored included delinquencies, foreclosures, losses and prepayment speeds. After examining the static pool data in late 1997 and early 1998, analysts concluded that prepayment speeds had accelerated throughout the industry. In many cases, the increase in speeds were beyond companies' assumptions. Even when examining the prepayment data of some of the stronger companies, there appeared to be little to no cushion between their assumptions and actual prepayment speeds. Moreover, while credit quality overall looked strong, the static pool delinquency data of a few companies were reaching worrisome levels such that analysts grew concerned that their loss assumptions would be insufficient.

Not surprisingly, in the months leading up to the inception of the Class Period, specialty finance companies that used gain-on-sale accounting came under attack. During this time analysts observed that investors would not accord gain on sale companies strong trading multiples unless and until investors were convinced that the gain on sale calculations and assumptions were extremely conservative. Thus, at the inception of the Class Period, companies such as Conti were under tremendous pressure to create the impression that they were making conservative gain-on-sale assumptions.

Against the background of the known risks and problems facing companies that used gain on sale accounting, and which securitized home equity loans and sold NIMs, Conti continuously conditioned the market to believe that the Company was properly reserved and had the technology and management experience necessary to enable the Company to remain profitable in the current market environment. In fact, as demonstrated below, it was the very fact that Conti portrayed itself as having these unique skills and abilities that led analysts to believe that Conti was distinguished from its peers. Moreover, it was based, in substantial part, on the Company' s "guidance" - - that Conti had adequate reserves and that it had the management skills and technological abilities to detect and respond to changing market conditions, so that Conti could, and would, remain profitable - - that, in early 1998, analysts recommended Conti stock to their clients.

Thus, despite the true risks which were known to defendants, or recklessly disregarded thereby, that existed prior to and at the beginning of the Class Period, the Company continued to "guide" analysts, conditioning them to believe that the Company was properly reserved, and well suited to capitalize on changing market conditions. In fact, however, as investors would later learn, at a huge personal cost, this was not the case. Despite the Company's statements to the contrary, the Company lacked both the systems which were supposed to detect these changes early, and the management abilities and infrastructure which was supposed to allow the Company to react properly to these changing conditions. Alternatively, if in fact the Company did maintain the systems to monitor and react to changing market conditions, defendants willfully ignored or recklessly disregarded the data provided by these systems. Thus, as demonstrated below, the Company materially misled investors until the time that defendants could no longer perpetrate the fiction that Conti was financially sound and the Company was forced to begin taking charges for its massive losses, which quickly totaled over $1 billion, and which eventually resulted in the Company declaring bankruptcy in May 2000. when it could not make required payments on its credit facilities.

On January 29, 1998, the beginning of the Class Period, the Company issued a press release published on Business Wire in which it announced that it had purportedly increased its third quarter fiscal 1998 earnings and net income to $35.1 million, a 20.1% increase over the third fiscal quarter of 1997. Additionally, in that press release, defendants claimed that earnings per share increased 12.1% to $0.74 per share.

By announcing the purportedly stellar results, defendants used this press release as an opportunity to condition the market to believe that Conti was operating profitably and according to the market's expectations. Most importantly, defendants used the press release to distinguish Conti from its peers by claiming that the Company was not being directly affected by known adverse market conditions. In this regard, defendant Moore boasted of the Company's ability to outperform competitors by utilizing its innovative loss mitigation and prepayment reduction techniques, in part, as follows:

The quality of the Company's interest-only and residual certificates ("ESR") is based upon our ability to meet or better the prepayment and loss assumptions made upon securitization." added [defendant] Moore. We have focused on the ContiMortgage portfolio pools securitized after 1993, as these encompass approximately 97% of the ContiMortgage's ESR (including sales) and are most relevant to this analysis. From 1994 to present. the Company has received $177.5 million in cash on this portfolio compared with $173.4 million representing the cash receipts projected at the dates of the securitizations. The actual cash receivables in 1994 and 1995 deals has been less than initially projected, primarily due to faster prepayment speeds of ARMS Iadiustable rate mortgagesl, the impact of which was fully offset by the excess of actual cash receipts on 1996 and 1997 deals over initial projections. [Emphasis added.]

 

 

 

In its Form 10-Q for the third quarter ending December 31, 1997, the Company reported the assumptions upon which its quarterly earnings were based:

What defendant Moore failed to reveal in the materially false and misleading January 29, 1998, press release was that the Company' had no ability to continue to operate profitably if prepayments continued at present rates, as these prepayments were already exceeding the Company's assumptions. such that the 1996 and 1997 loans were no longer producing excess receipts over initial projections. Moreover, the assumptions defendants reported regarding prepayments and credit losses were far worse then the Company's actual experience. Defendants knew this because, according to Form 10-Ks filed during the Class Period, the Company retained the servicing rights to the loans and therefore, monitored delinquencies and prepayments on an ongoing basis. Moreover, defendants boasted of the Company's sophisticated database which, they claimed, allowed them to spot prepayment trends in time to make the necessary adjustments. Nonetheless, in violation of the GAAP principles for gain-on-sale revenue recognition. defendants maintained the Company's previous assumptions despite skyrocketing prepayments and loan losses which were known to or recklessly disregarded by defendants.

As defendants knew, or recklessly disregarded, if payment rates remained at then current levels, which were already well beyond the Company's assumptions, the Company could not. and would not remain profitable. Rather than disclose this fact, the Company instead created the materially false and misleading impression that the Company was operating, and was likely to continue to operate, profitably, and that the Company had the ability to mitigate and offset certain losses since cash flows from its securitized loan pools were expected to support the current value of its interest-only securities.

The materially false and misleading statements issue by defendants had the intended effect. As evidence of this, immediately following the Company's announcement that its fiscal third quarter results were in line with analysts' expectations. and that the Company was not experiencing the materially adverse effects of recent known trends in the mortgage industry, several analysts issued reports which encouraged their respective clients to purchase Conti stock. Excerpts of the analysts recommendations include the following:

ANOTHER PAINFUL MONTH IN THE SUBPRIME HOME EQUITY SECTOR.

In addition to the January 29, 1998 press release, defendants took other extraordinary measures to condition the market to believe that the Company's prepayment and loss assumptions were accurate. were not in need of adjustment and that therefore the Company was likely to continue to operate according to expectations. As evidence of defendants calculated behavior, on February 9, 1998, the Company issued a press release published on Business Wire in which it announced that it would meet with investors and analysts the next day to "discuss its prepayment speed assumptions and the actual performance of prepayment speeds for ContiMortgage's securitizations." For those who would not be able to attend the meeting. the Company' stated unequivocally that, "The detailed information to be provided at the meeting is consistent with the Company's previously announced financial results and does not represent any change in the Company's valuation of its excess spread receivable portfolio." [Emphasis added.]

The statements made by, or caused to be made by the defendants and reproduced in paragraphs 72-74 and 78 were materially false and misleading when made, and were known by defendants at the time they were made to be materially false and misleading for the reasons stated supra in paragraphs 75-76, and infra in paragraphs 89-90.

The false and misleading statements issued by defendants regarding the valuation of the Company's excess spread receivable portfolio had the intended effect. As evidence of this, on February 19, 1998, based substantially upon the Company's representations regarding its purported stellar record and guidance concerning the Company's continuing growth prospects, Warburg Dillon Read Inc. ("Dillon Read") issued an analyst report on Conti in which it rated Conti common stock a "Buy," and encouraged its customers to purchase Conti stock. In making their recommendations, the analysts stated, in part, the following:

Based on a review of the information provided in part by the Company, and its analysis of the Company's reported record results and its stated growth prospects, Dillon Read estimated the following quarterly and year-end earnings per share:

The materially false and misleading statements issue by defendants regarding the valuation of its excess spread receivables had the intended effect. As evidence of this, on March 2, 1998, Cram's New York Business published an article entitled, "THE PRIME MOVER IN SUBPRIME LENDING: CONTIFINANCIAL STAYS PROFITABLE, PLOTS GROWTH AS RIVALS FOUNDER." In this article, Moore boasted of the Company's unique ability to monitor market conditions, such that Conti could, and would, identify adverse market conditions and react to changes prior to those conditions having a devastating effect on the Company. In this regard. the article stated, in part, the following:

[Defendant] Moore... the little-known millionaire, whose 1997 compensation of $10.7 million was more than the pay for the top executives of Chase Manhattan Bank, is a close friend of president Bill Clinton's...

When prepayments accelerated, the losses incurred by such industry leaders as Green Tree Financial Corp. and United Companies Financial Corp. shook investor confidence.

"The water was bloodied," said E. Gareth Plank, an analyst with USB Securities. "This is a far more complicated industry than the Street thought."

[Defendant] Moore avoided these problems. Conti made more conservative assumptions about loan prepayments, which have risen to 27% of all subprime loans compared with 20% two years ago. [Defendant] Moore also says that Conti's sophisticated database allowed it to spot the situation sooner and adjust projections.

"It may be we were a little more conservative. [defendant Moore] said of Conti's accounting assumptions. "But the more important thing is we were well-informed enough to see it coming six months to a year earlier than our competitors. [Emphasis added.]

The statements made by, or caused to be made by the defendants and reproduced in paragraph 82, were materially false and misleading when made, and were known by defendants at the time they were made to be materially false and misleading for the reasons stated supra in paragraph 75-76. and infra in paragraphs 89-90.

On March 6, 1998, and between April 7, 1998 and June 9, 1998, Jackson National acquired approximately $30 Million of ContiMortgage Certificates.

On April 2, 1998, the Company issued $200 million of 8-1/8% unsecured senior notes due April 1, 2008. Proceeds to the Company, net of underwriting fees, market discount and other costs, were $188,264,200. The Company already had outstanding $300 million of 8-3/8% unsecured senior notes due August 15, 2003 and $200 million of 7-1/2% unsecured senior notes due March 15, 2002 (collectively the "Senior Notes").

Together with Keystone [a majority held subsidiary], we anticipate that originations will grow from $1.9 billion in fiscal 1999, firmly establishing the Company among the top ten commercial real estate mortgage conduits in the United States.

Most significantly, the press release conditioned the market to believe that, while prepayment speeds were increasing at a rate unforseen by the Company, Conti was adequately reserved and was increasing its gain on sale prepayment assumptions in such a way as to accommodate these rising rates. In its effort to condition the market to believe that the Conti had taken necessary steps to enable it to maintain operations according to expectations the ress release stated, in part, the following:

The statements made by, or caused to be made by defendants and reproduced in the preceding paragraphs, were materially false and misleading when made, and were known by defendants at the time they were made to be materially false and misleading for the following reasons among others:

(i) As a result of the Company's analysis of prepayment rates for its securitized loans. which according to Conti were reviewed consistently and on a real-time basis (See ¶98 infra) defendants knew or recklessly disregarded that by the beginning of the Class Period, prepayment rates were running well above the Company's assumptions, which required the Company to increase its reserves, and which would result in a material adverse effect on net income and earnings per share;

(iii) As investors would ultimately learn, despite defendants' claims to the contrary. the Company did not possess either the technology or the management experience to efficiently process or manage its loans in a manner which would enable the Company to continue to perform in line with market expectations. If in fact the Company did maintain its purported sophisticated database." the information provided by this advanced system was either willfully ignored or recklessly disregarded by defendants;

(iv) Defendants' statements were materially false and misleading, and were known by defendants to be materially false and misleading at the time of their publication, since, as investors would ultimately learn, the Company had not properly reviewed changes in assumptions regarding expected future CPR or credit losses which were necessary, in order to adjust ESR to reflect its present fair value. In violation of the Statement of Financial Accounting Standards rules for gain-on-sale revenue recognition (discussed in detail below), the Company maintained its previous assumptions despite skyrocketing prepayments which were known to, or recklessly disregarded by, defendants.

Defendants' statements regarding the Company's prepayment and credit losses, and its earnings revenues, were materially false and misleading, and were known by defendants to be materially false and misleading at the time of their publication, since as set forth in ¶¶56-61, defendants had instituted practices whereby the Company systematically extended credit to borrowers who could not possibly repay their loans, and these practices had a materially adverse and undisclosed effect on prepayment and credit loss rates.

The false and misleading statements issue by defendants had the intended effect. As evidence of this, on May 7, 1998 based substantially upon the Company's representations regarding its purported stellar results and continuing growth prospects. Dillon Read issued an analyst report on Conti in which it encouraged its customers to purchase Conti stock. In making its recommendations, the analysts stated, in part, the following:

ContiFinancial reported fiscal 1998 fourth-quarter results of $0.79 versus $0.72 last year a 10 percent gain. This was a penny below consensus and two cents above our estimate of$0.77. Loan volume continued to be very strong. although expenses from the newer retail home equity business compressed operating profit margins. Credit quality improved with delinquencies declining on a sequential basis. In light of slightly narrower spreads than our estimate, we are lowering our fiscal 1999 earnings estimate by $0.02 to $3.40 and maintaining our fiscal 2000 earnings estimate.

Business Outlook

ContiFinancial continues to demonstrate very strong loan volume and has now positioned itself as one of the. top players in its industry. Although the prevalence of problems among several of its peers suggests some probability of trouble ahead, none is visible at this point: the company has a strong management team, credit quality measures are within expected ranges, and the reserves utilized for the company's gain on sale accounting appear reasonable.

Recommendation

ContiFinancial continues to demonstrate very strong loan volume and has now positioned itself as a clear leader in its industry. The shares trade at a low valuation, reflecting the prevalence of problems among several of its peers. Although this continues to be a risk for the shares, a number of factors suggest that current earnings estimates (and hence the underlying accounting assumptions) will be at least met. The company has a strong management team, credit quality measures are within expected ranges, and the reserves utilized for the company's gain on sale accounting appear reasonable. The recent share repurchase announcement seems to signal management's confidence that no significant accounting revisions are forthcoming. In addition, First Union's move to purchase The Money Store may encourage potential suitors of ContiFinancial. [Emphasis added.]

In an effort to further condition the market to believe that the Company was performing according to investors' expectations on June 15, 1998, defendant Moore provided an interview to the National Mortgage News a leading mortgage trade publication, in which he stated, in part, the following:

Subprime leader ContiFinancial Corp. here will continue to take an active interest in the commercial real estate mortgage sector, according to Conti president James E. Moore. With the help of its recent acquisitions. the company plans to originate $3 billion worth of commercial mortgages this year.

The title of the National Mortgage News article was "Subprime Firm Continues its Commercial Mortgage Strategy," and as such, this article transmitted the Company's position that Conti was in the process of expanding its commercial real estate mortgage division due, in substantial part, to the Company's "tremendous success" in this industry. In part, the National Mortgage News article reported the following:

... ContiFinancial has been steadily building up its commercial mortgage lending business.

Together. ContiFinancial's commercial mortgage investments will allow it to originate about $3 billion in 1998 [defendant] Moore said. He added that the companies that Conti has invested in will ensure diversification, both in product mix and geography.

It would seem that with this commercial mortgage originations machine, its ContiMAP conduit, its new REIT and its formidable capital markets group, ContiFinancial has all the required pieces on the game board. But [defendantl Moore said his company may not be out of the acquisition mode yet. [Emphasis added.]

The statements made by, or caused to he made by the defendants and reproduced in paragraph 92, were materially false and misleading when made, and were known by defendants at the time they were made to be materially false and misleading for the reasons stated in paragraphs 75-76 and 89-90 supra.

On June 18, 1998, the Company issued a press release, published on Business Wire in which it announced that the Company had implemented a "Strategic Loss Mitigation Program." The sole purpose of this announcement was to condition investors to believe that the Company had systems in place to effectively monitor recent market developments, and that the Company was increasing its reserves appropriately in light of these market developments and admitted prepayment increases. In this regard the press release acted to mollify investors, by stating, among other things, the following:

As previously disclosed during ContiFinancial Corporation's quarterly conference calls, ContiMortgage Corporation, its wholly-owned subsidiary, has devoted significant resources to the development and implementation of a long term loss mitigatiin strategy for its REMIC servicing portfolio.

Robert A. Major, ContiMortgage's President and Chief Executive Officer, stated, "Our long term objective is to reduce projected loan losses by a minimum of $10 million annually, resulting in annual portfolio losses of 60 basis points or less... We are very pleased that we have already seen a reduction in loan loss severity." [Emphasis added.]

The press release went on to quote defendant Moore. who stated emphatically that the Company had both the technology in place to monitor changing market conditions and the management experience necessary to properly and adequately respond to these changes. In fact, Moore bragged about the purported advanced strategies that were allegedly employed by the Company to mitigate losses and which would rapidly become the "industry standard" in part as follows:

[Defendant, James E. Moore], stated, "I am confident that the combined team from ContiMortgage and ContiFinancial Services has the technological and managerial expertise in portfolio analysis. asset management and portfolio sales to achieve long term loss reduction through our aggressive mitigation in addition to the traditional foreclosure and liquidation process. We are convinced that our proactive approach will rapidly become an industry standard for those companies with the necessary technology and management capabilities." [Emphasis added.]

Defendants' statements regarding the Company's prepayment and credit losses, and its earnings revenues, also were materially false and misleading, and were known by defendants to be materially false and misleading at the time of their publication, since, as set forth in ¶¶56-61, defendants had instituted practices whereby the Company systematically extended credit to borrowers who could not possibly repay their loans and these practices had a materially adverse and undisclosed effect on prepayment and credit loss rates.

Certain statements contained in this Annual Report Form 10-K which are not historical fact, may be deemed to be forward-looking statements under the federal securities laws. There are many important factors that could cause the Company's actual results to differ materially from those indicated in the forward-looking statements. Such actors include, but are not limited to, general economic conditions, interest rate risk, prepayment speeds, delinquency and default rates, changes (legislative and otherwise) in the asset securitization industry, demand for the Company's services, the impact of certain covenants in loan agreements of the Company, the degree to which the Company is leveraged, its needs for financing, the Net Interest Margin Notes market and other risks identified in the Company's Securities and Exchange Commission filings. In addition, it should be noted that past financial and operational performance of the Company is not necessarily indicative of future financial and operational performance. [Emphasis added.]

The preceding statement, which purports to identify the existence of forward-looking statements, is in itself materially false and misleading, since, at the time the above-statement was made, defendants were aware, or had recklessly disregarded. that prepayment speeds had already accelerated well beyond the Company's ESR assumptions, such that the defendants knew, or recklessly disregarded, that the Conti had inadequate loan loss reserves to continue to operate profitably under current market conditions. Defendants' identification of prepayment speeds as a "factor" which "could cause the Company's actual results to differ materially from those indicated in the forward-looking statements" was in itself materially false and misleading since prepayment speeds were already having a materially adverse, impact on the Company. which defendants had failed to disclose, or recklessly disregarded.

The 1998 Form 10-K also contained materially false and misleading statements concerning the Company's purported "Quality Control" and "Loan Servicing" abilities. According to the materially false and misleading statements made by defendants, Conti purportedly had internal guidelines for monitoring loan prepayments and sophisticated technology which enabled Conti to meet its guidelines. In this regard, the 1998 Form 10-K stated, in part, the following:

The statements reproduced above were materially false and misleading since, as investors would ultimately learn, despite the Company's claims to the contrary, it had no ability to improve the overall quality of its securitizations in the current market conditions, which were known to or recklessly disregarded by defendants. In fact, the Company did not possess both the technology and management experience to efficiently process its loans and manage its ESRs in a manner which would enable the Company to continue to perform in line with market expectations. To the extent that the Company did maintain its purported "on-line real time system" to service its loans, the information provided by this system was either willfully ignored or recklessly disregarded by defendants.

The 1998 Form 10-K also contained materially false and misleading statements concerning the Company's purported "Loss mitigation Program," which, according to the materially false and misleading statements made by defendants, would allegedly allow Conti to monitor its loans in order to make the necessary adjustments in the Company's business to mitigate and avoid losses. In this regard, the Form 10-K stated, in part. the following:

The statements reproduced above were materially false and misleading since, as investors would ultimately learn, despite the Company's claims to the contrary, it had not properly reviewed changes in assumptions regarding expected future CPR or credit losses which were necessary, in order to adjust ESR to reflect its present fair value. In violation of the Statement of Financial Accounting Standards rules for gain-on-sale revenue recognition, the Company essentially maintained its previous assumptions despite skyrocketing prepayments which were known to, or recklessly disregarded by, defendants.

Instead of making all the adjustments in its ESR assumptions that defendants knew or recklessly disregarded were necessary, the Company instead made a mere token adjustment which was designed to buy time for the Company -- time in which defendants recklessly and/or knowingly sat by and merely prayed that known market trends would reverse -- instead of making the appropriate prepayment adjustments which the Company previously assured investors would be taken if ESR prepayment assumptions needed to be changed. In this regard, the 1998 Form 10-K stated, in part. the following:

Projected for the

remaining pool

over its estimated

remaining life 23.8% 27.9% 28.2% 28.3% 27.0% 27.3%

[Emphasis added.]

The statements reproduced above were materially false and misleading since, as investors would ultimately learn, despite the Company's claims to the contrary, it had not properly reviewed changes in assumptions regarding expected future CPR or credit losses which were necessary, in order to adjust ESR to reflect its present fair value. In violation of the SEAS rules for gain-on-sale revenue recognition, the Company essentially maintained its previous assumption of a 28.3% prepayment rate for the 1997 pool despite skyrocketing prepayments which, because of the Company's much-touted computer system were known to or recklessly disregarded by, defendants. As to the 1998 pool, defendants' manipulation of the average prepayment rates to create the impression that a 27% prepayment assumption was in itself sufficient was materially misleading since as defendants knew, or recklessly disregarded, prepayment rates had already escalated beyond the point where this would have been a reasonable prepayment assumption. As such, defendants materially mislead investors by pretending that a 27% prepayment assumption was adequate, and that based on this revised assumption, the Company would operate according to market expectations.

The false and misleading statements issue by defendants had the intended effect. As evidence of this, on June 30, 1998, based substantially upon defendants' representations regarding Conti's purported outstanding results and continuing growth prospects, Bear Stearns issued an analyst report on Conti in which it continued to rate Conti common stock a "Buy," and encouraged its customers to purchase Conti stock. In making its recomrneiidations, the analyst stated:

Our calendar-year 1998 and 1999 EPS estimates for ContiFiparcial are $3.35 and S4.O5, respectively; we are leaving these unchanged.

Our existing EPS estimate for the quarter ending today (Conti's Fiscal 1Q99) is $0.75, which includes the gain from an assumed commercial mortgage securitization; However, Conti's management has decided not to undertake such a securitization in this quarter. so we are changing our quarterly EPS estimates; the new EPS estimate for fiscal 1Q99 is $0.55

We continue to regard Conti as a top-tier company in the home equity sector that deserves a top-tier valuation; at 7.2x our calendar-year 1998 EPS estimate and 6.Ox our calendar-year 1999 eps estimate, we believe that Conti is very cheap. [Emphasis added.]

Based on a review of the information provided in part by the Company, and its analysis of the Company's reported impressive results and its stated growth prospects, Bear Steams estimated the following quarterly and year-end earnings per share:

1998A $0.59 $0.73 $0.74 $0.79 $2.86

2000E $0.99 $1.04 $1.08 $1.09 $4.20

On July 2, 1998, Conti issued a press release, published on Business Wire, in which it announced quarterly results for the first quarter, the period ended June 30, 1998. According to the press release, Conti stated that it expected to report net income for the first quarter of a mere $6 million, and earnings per share of only $0.13. While the Company stated that these were preliminary estimates only. these results were far below the $27 million in net income and earnings per share of $0.59 reported in the first quarter of the prior year.

The Company explained away the earnings shortfall as an anomaly stating, in part, the following:

Despite the fact that the Company had made only the most minimal adjustrnents which defendants knew, or recklessly disregarded, would not counteract the effects of the recent interest rate environment, defendants used this press release to mislead investors by stating that the costs taken were a one-time event, and that the Company remained comfortable with earnings forecasts and prospects for the remainder of the year. In this regard, defendant Moore conditioned investors to believe the following:

[Defendant] Moore continued, "This quarters earnings are a disappointment, approximately $0.45 below our previous expectations. However, we remain comfortable regarding our prospects for the rest of the year. Our confidence stems from the fact that the June quarter was the best production quarter in the Company's history. Home equity production exceeded $2.1 billion and commercial mortgage conduit production exceeded $700 million, both on a pace to exceed our full year production expectations of $8.2 billion and $2.5 billion, respectively." [Emphasis added.]

The following trading day July 6, 1998, the price of Conti common stock

nevertheless fell from a close of $25.25 on July 2, 1998, to close on, July 6, 1998, at $19.25 per share, this was still almost $18.00 per share more than investors would be able to receive for their shares on the final day of the Class Period, July 21, 1999, when the price of Conti common stock traded as low as $1.13 per share.

The statements contained in the July 2, 1998 press release, reproduced herein in paragraph 104 above, were materially false and misleading, and were known by defendants to be materially false and misleading at the time of their publication, or were recklessly disregarded as such for the reasons stated herein in paragraphs 75-76 and 89-90 supra.

The false and misleading statements issue by defendants continued to have the intended effect. As evidence of this, on July 6 and 9, 1998, based substantially upon defendants' representations regarding Conti's purported results and continuing growth prospects, Merrill Lynch issued two analyst reports on Conti in which it continued to encourage its customers to purchase Conti stock. In making its recommendations, the analyst relied significantly upon the Company's guidance that the charges taken would be a "one-time event" and that the Company was well positioned to continue to operate profitably. In this regard, the press release stated, in part, the following:

[July 6, 1998]

ContiFinancial Corporation Surprises the Market

After the market close on July 2nd, ContiFinancial announced that earnings for the first fiscal quarter ended Jun-30 would be substantially below analysts' estimates. Management attributed the disappointing results to adjustments to fair value on its excess spread receivables (IOs) from prior securitizations. The adjustment resulted from an increase in the CPR to 28%. from 27% covering the entire portfolio of serviced loans. The change is largely a result of high loan refinancing activity, driven by lower interest rates and (reportedly) improvement in the credit quality of CFN's borrowers that lead to the ability to refinance. CFN stock closed down by almost 25% today, as the disappointing news runs counter to CFN managements' previous assurances that prepayments were well within the cushion established routinely within the assumptions in the securitization process. For its part, management stated that the April and May prepayments had accelerated, requiring the adjustment that will reportedly be a one-time event. [Emphasis added.]

[July 9, 1998]

The CoritiFinancial Story: A Good One Based on Strong Management

ContiFinancial (CFN: Bal/BB+), a subsidiary of Continental Grain, has maintained its original ratings over this difficult period, which has been no small feat. CFN has a unique business strategy combining the benefits of wholesale and retail loan origination, as well as a demonstrated facility in providing value-added service in the packaging and sale of loans into securitizations. The latter skill has enabled CFN to engage in a series of "strategic alliances" with small originators of home equity loans, often accompanied by an equity stake for CFN, leading to an eventual purchase by CFN. In this way, ContiFinancial has shrewdly maintained loyalty from its partners, and transformed wholesale origination into more stable retail origination.

ContiFinancial there fore has been able to keep origination costs down by avoiding the high direct costs of a retail branch lending network, while forming alliances that allowed for wholesale production at attractive prices relative to the market. Strong customer service in the loan approval and securitization processes has helped attract customers and maximize profitability. Management also has been unusually articulate in explaining its strategies to the market, which have included a number of important diversification efforts.

Management attributed the disappointing results to adjustments to fair value on its excess spread receivables (IOs) from prior securitizations. The adjustment resulted from an increase in the CPR on the entire portfolio of serviced loans, to 28%, from 27%. The change is largely a result of high loan refinancing activity, driven by lower interest rates and (reportedly) improvement in the credit quality of CFNs borrowers, leading to the ability to refinance. CFN stock closed down by almost 25% on Jul 6(**th). the first day of trading after the announcement, as the market reacted negatively to the news that was counter to managements' previous assurances that prepayments were covered by the cushion established routinely within the assumptions in the securitization process. For its part, management stated that the April and May prepavments had accelerated, requiring the adjustment that will reportedly be a one-time event. At a meeting with analysts held on July 9(**th), management gave further details regarding the portfolio and prepayments.

Management's Case

* * * * *

Management believes that the action taken is adequate to cover the risk of lower interest rates, and expressed comfort with analysts' earnings estimates for the remainder of fiscal 1999. The higher prepayment curves now being used are more conservative than the estimates provided by two Wall Street firms, who reportedly expect that the more sensitive 196/1997 vintages will "bum out" this year - a process where prepayments decline after the borrowers likely to prepay have left the portfolio.

We believe that management has taken a conservative view of prepayment risk, and do not expect a similar surprise later on in 1998, although we see asset quality as a potential issue for the industry as a whole when the economy cools.

* * * * *

*** Notwithstanding The Charge, The Tone Of Conti's Conference Call Was Very Upbeat, With Management Expressing Confidence In The Company's Prospects And Consensus Go-Forward Estimates; We Regard The Recent Completion Of A One Million Share Repurchase Program As One More Vote Of Confidence On The Part Of Management

*** We Think The Company's Recent Move to Boost Its CPR Assumption To 28% Is prudent, If Not Conservative; Indeed, If Interest Rates Trend Higher Over The Next Seven Years, This Move May Turn Out To Have Been "Overkill"; It Is Still Far Too Early To Know One Way Or The Other.

*** At Current Prices, CFN Shares Appear Undervalued To Us;... In Our Opinion, Increased Confidence Should Result In A Higher Stock Price; We Reiterate Our Attractive Rating. [Emphasis added.]

Based on a review of the information provided in part by defendants and their analysis of the Company's reported record results and its stated growth prospects. Merrill Lynch estimated the following quarterly and year-end earnings per share:

Q1(Jun) Q2 (Sep) Q3 (Dec) Q04 (Mar) Year

1998A $0.59 $0.73 $0.74 $0.79 $2.86

1999E $0.13A $0.95 $1.06 $0.94 $3.08

2000E $0.99 $1.04 $1.08 $1.09 $4.20

As further evidence that the materially false and misleading statements issue by defendants had the intended effect, on July 7 and 8, 1998 based substantially upon defendants' representations regarding Conti's purported results and continuing growth prospects, Bear Steams issued two analyst reports on Conti which encouraged its customers to purchase Conti stock. In making its recommendations, the analysts relied in part, on the following:

[July 7, 1998]

*** Our Perception Is That Conti Does Not Have A Recurring Prepayment "Problem", But Rather That Conti's Management Is Trying To Stay Out In Front Of All Balance Sheet Issues, Preferring To Be Quick To Act Rather Than A Laggard

*** We Look Forward To Conti's Conference Call This Morning And To Its Investor/Analyst Presentation In New York City This Thursday, At Which Time We Anticipate That Conti Will Make Its Case For Its Brand Of Conservatism (Erring On The Side Of Caution)

*** If We Are Right In Our Perception Ttaat The (Relativeiy Modest) Writedown Is A Proactive Conservative Move, As Opposed To An In-Denial Reaction To A Bigger Problem, Then We Believe That The Market Has Overreacted, And That This Is A Buying Opportunity.

[July 8, 1998]

*** As We Anticipated, ContiFinancial Explained On A Conference Call Yesterday That The Recently-Announced Increase In Prepayment Speed Assumptions Is A Proactive Move To Get Out In Front Of The Prepayment Issue, By Assuming That Interest Rates Will Remain As They Are Now, Or Modestly Lower, For The Next 7 Years (Approximately The Remaining Effective Lives Of Conti's Existing Securitization Pools).

*** Based On Bear Stearns' View Of Future Interest Rates, We Do Not Anticipate That Any Further Prepayment Assumption Adjustments Will Be Required (Indeed, If Rates Increase, The New Prepayment Assumptions Should Prove To Be Conservative); And We Believe That The Negative Gain-On-Sale Impact Of The New Prepayment Assumptions Will Be (At Least) Offset By A Positive Combination Of Declining Premiums Paid (As Retail Becomes More Prominent) And Increasing Origination Volumes (Above Our Prior Projections); Accordingly. We Are Making No Changes In Our Go-Forward EPS Estimates

*** If Prepayments Do Indeed Increase in Line With Conti's New Assumptions, Then The Company Estimates That Cash Flow Will Be Reduced By Only $45 Million Over The Remaining Lives Of All Of Its Existing Securitization Pools (Effectively, About 7 Years), With The Impact In The First Year Being Only $5 Million.

Management of ContiFinancial /p/ (CFN: Bal/BB+) held a conference call to explain the reasoning behind its actions of last week, which involved an adjustment to fair value on its excess spread receivables (IOs). Most importantly, management stated that the action should cover the near term unless the long bond rallies by an estimated lOObp or more. As such, the adjustment is being characterized as a one-time event, and management even alluded to the 1993 period, where prepays ramped up considerably for a 6-9 month period, only to drop down quickly thereafter. Management feels comfortable with analysts' earnings estimates for the remainder of fiscal 1999. [Emphasis added.]

Based on a review of the information provided in part by the Company, and its analysis of the Company's reported record results and its stated growth prospects, Bear Steams estimated the following quarterly and year-end earnings per share:

Q1(Jun) Q2 (Sep) Q3 (Dec) Q4 (Mar) Year

1998A $0.59 $0.73 $0.74 $0.79 $2.86

l999E $0.13 $0.95 $1.06 $0.94 $3.08

2000E $0.99 $1.04 $1.08 $1.09 $4.20

The statements made by, or caused to be made by the defendants and reproduced in paragraphs 108-109 were materially false and misleading when made, and were known by defendants at the time they were made to be materially false and misleading for the reasons stated in paragraphs 75-76 and 89-90 supra.

Credit Suisse First Boston ("CSFB") issued an analyst report on the Company which concluded that, based on the Company's statements. expertise and recent guidance, the problems encountered by the Company were probably limited to the quarter past. In that regard, the CSFB report contained, in part. the following:

[We] believe that CFN holds the BB rating and that the credit rating agencies downgrade it to solid BB. CFN has assured the markets that its 2Q99 results will be in-line with previous strong quarters and that its annual earnings estimates should be about $3.25/share versus original street consensus of S3.55/share. Continued strong originations ($2 billion this past quarter), and strong commercial mortgage results (about 20% of pre-tax earnings and heading toward 25%) would catapult results. [emphasis added]

As further evidence that defendants' materially false and misleading statements misled investors and disguised the Company's deteriorating financial condition, on July 13, 1998, Asset Sales Report published an article which reported. in part. the following:

On July 30, 1998, Conti announced results for the first quarter, the period ended June 30, 1998. According to the press release, published on Business Wire, as previously announced, net income for the quarter was a paltry $6.0 million with earnings per share of only $0.13 per share, compared with net income of $26.9 million or $0.59 per share in the same period during the prior year. The press release did nothing to warn investors of the impending disaster which defendants knew, or recklessly disregarded, lay immediately ahead for the Company.

On August 18, 1998, the Company issued a press release published on Business Wire in which it published the text of a prepared presentation made by defendant Moore at Conti's Annual Meeting of Shareholders, held that day in New York. This statement, like others made, was calculated by defendants to have a materially misleading effect on investors. In this regard, the text of the prepared presentation stated, in substantial part. the following:

This range of businesses and first class management teams give us the breadth to achieve the diversified business mix we outlined in our annual report. Therefore, we have decided that while there remain opportunities in other sectors of specialty finance, these businesses are the key to our future and we will focus on building them.

* * * * *

First, it is important to note that it is primarily a capital markets issue, one that has resulted from the financial turmoil which has flowed from foreign markets to our own within the past 90 days. On the origination side of our business, volume continues strong as both consumers and commercial property owners seek to improve their economic situations by utilizing ContiFinamial to refinance their debt. Further, even though capital market costs have spiked sharply since August, over the past 30 days we have been able to reprice our loan originations to approximately match our increased financing costs. Importantly, particularly in the home equity sector, we have demonstrated pricing power, increasing the yield on our originations relative to treasuries. While these efforts will not be evident this quarter due to the market's sudden shift, we expect this pricing to have a favorable impact beginning in our third quarter. The commercial mortgage sector, with its longer durations and longer lead time to securitization, is more vulnerable to rapidly deteriorating capital markets. However, beginning in August, we have been able to reprice commercial mortgage products such that, absent a further deterioration in capital markets, we believe we should be able to return to a more traditional level of profitability for these products by our fiscal fourth quarter.

 

* * * * *

... In the middle of the financial fire storm, we have demonstrated an ability to raise the capital we need to manage our businesses, and the market discipline and ability to re price our products to meet the new capital markets reality. Your management's view is that we must assume that today's environment will continue throughout at least this fiscal year and perhaps well beyond. Every business we are in must demonstrate an ability to continue to operate profitably and access capital competitively.

 

I would like to finish this address with a brief quote from a letter I sent to each of our employees last week:

 

Let us turn now to the difficult financial environment in which we find ourselves today and which has brought our business strategy into question in the minds of some analysts and investors.

Your management team is a seasoned group of professionals who have experienced volatile and difficult markets in the past. We are fully committed to seizing the opportunities that will come our way in this market environment. Our success in doing so will be based on the dedication and commitment of each of our employees.

 

Fiscal 1999 may well be a defining year for the financial markets in which ContiFinancial competes. We fully expect to come through this year a stronger and better company with an enhanced market position. We look for your wholehearted support as we implement the strategies necessary to achieve this goal." [Emphasis added.]

 

The statements contained in the August 18, 1998, press release, reproduced herein in paragraph 114 above, were materially false and misleading, and were known by defendants to be materially false and misleading at the time of their publication, or were recklessly disregarded as such for the reasons stated herein in paragraphs 75-76 and 89-90 supra.

Between August 20, 1998, and September 17, 1998, the price of Conti common stock was cut in half. On August 20, 1998, the price of Conti common stock closed at $20.25 per share, and on September 17, 1998, the price of Conti common stock closed at $10.25.

On September 18, 1998, the Company sold $2.1 billion in securities, with the aid of Morgan Stanley, Dean Whitter & Co.. which acted as underwriter of the sale. Days later, the Company claimed that these loan sales were priced at spreads which took into account current and near-term market conditions.

On September 21, 1998, with Conti stock now trading in the low $9.00 range, Company spokesman. executive vice president and co-president of ContiFinancial Services Corp., Glenn Goldman. attempted to bolster the price of Conti's stock by representing that the Company was now operating in accord with its revised expectations. In this regard, Goldman gave an interview to the American Banker, which reported the following:

Goldman also attempted to directly address investors concerns over the current fluctuations in the interest rate, and other, markets, by stating. in part, the following:

The statements contained in the September21, 1998, press release, reproduced herein

in paragraph 118 above, were materially false and misleading, and were known by defendants to be materially false and misleading at the time of their publication, or were recklessly disregarded as such for the reasons stated herein in paragraphs 75-76 and 89-90 supra.

Defendants continued to materially misstate the Company's true financial condition by failing to disclose the full, materially adverse impact which loan prepayments were having, and would likely continue to have, on the Company's operations. net earnings and earnings per share. Between September 18, 1998, and October 5, 1998 the price of Conti common stock was again devalued by over 50% . On September 18, 1998, the price of Conti common stock traded to $10.38 per share, and on October 5, 1998, the price of Conti common stock closed at $5.00 per share.

By October 7, 1998, Conti stock traded below 3.00 per share, reaching an intra-day low of $2.94 per share. The next day, as reported by Bloomberg, Continental Grain stepped in to support Conti's failing common stock by promising to help the Company, financially if necessary, and to buy up to 2.5 million shares of Conti common stock in the open market. In response to this announcement, shares of Conti stock rose 64%, climbing $2.00 to close at $5.13, as 1.09 million shares traded, more than 6 times the three-month average trading volume. Bloomberg reported that Continental Grain, the second-largest U.S. grain exporter. which owned 77% of Conti prior to this announcement, could increase its position to 82% as a result of the intended stock purchases.

On November 16, 1998, the Company announced that it would record a pre-tax write

down of $129 million to its commercial real estate loan portfolio and other pre-tax charges of $36

million. The reported net loss of over $114 million for the second quarter of 1999, were equal to a

loss of approximately $2.48 per share, compared to $0.73 per share profit reported in the year-earlier

period and compared to analysts' expectations of $0.41 per share profit, according to First Call. Additionally, the press release stated that Conti experienced a significant loss after special charges for its second fiscal quarter of 1999, ended September 30, 1998, and that the Company also had begun implementing a series of initiatives to address the extremely difficult capital market conditions that have impacted its financial performance. The press release also stated, in part, the following:

As has been widely reported, in recent months the market for commercial real estate loans and securities has deteriorated sharply, remains volatile and was adversely affected by highly unusual macroeconomic conditions around the world. Although interest rates on U.S. Treasury securities moved significantly lower during the quarter, the interest rate spreads between such securities and other fixed income securities widened considerably. At ContiFinancial, these adverse developments resulted in special charges against earnings of$ 165.1 million, primarily to reflect the write down the value of commercial real estate loans and the write off of the Company's equity investment in and receivables from certain affiliates.

Strategic Overview

James E. Moore, President and Chief Executive Officer of ContiFinancial Corporation, said: "Clearly, the Company's financial performance in the second quarter was extremely disappointing. However, at a time when the collapse of liquidity in our industry caused a number of our competitors to file for bankruptcy protection, we are pleased that we have been able to come through this crisis and are confident about the future. Mr. Moore continued, "We maintained sufficient levels of liquidity during the second quarter and were able to fund our business activities, albeit at reduced levels, including the additional cash requirements in connection with margin calls on both secured financing and hedge positions. We have taken steps to reduce our financing needs and provide for continued access to liquidity in the future. This access will be aided by the financial support of our majority owner. Continental Grain Company which continues to have confidence in our business.

"In fact, despite the problems in the capital markets," Mr. Moore continued, consumer demand for the Company's products continues to be very strong. However, given the changes that have swept through our industry, we believe it is imperative to modify our business strategy. We are in the process of implementing a number of initiatives which will have a profound effect on our business model going forward. These measures have already reduced our business risk."

* * * * *

Taken together, we believe these actions will enhance our ability to tackle the challenges we are facing. At a time of great uncertainty and instability in our industry, we have reacted quickly and decisively and are clearly focused on executing our plans successfully," [defendant Moore] said. [Emphasis added.]

 

 

The statements contained in the November 16, 1998, press release, reproduced herein

in paragraph 123 above, were materially false and misleading, and were known by defendants to be materially false and misleading at the time of their publication, or were recklessly disregarded as such for the reasons stated herein in paragraphs 75-76 and 89-90 supra.

Despite the Company's second surprise announcement concerning prepayment adjustments, on November 18, 1998, Deutsche Bank issued an analyst report on Conti in which it stated that the Company still "remains one of the best run of the sub-prime lenders." Based substantially upon guidance supplied by the Company, the analysts stated that Conti's charge-off represented a "watershed event" for the Company, and that its stock at its current trading levels represented a unique buying opportunity. ln this regard. the analysts stated, in part. the following:

On February 16, 1999, the Company issued a press release published on Business Wire, in which it announced another in a string of quarterly losses. On this day, Conti announced a net loss of $58.8 million in the fiscal third quarter, the period ended December 31, 1998, including a $44.2 million pre-tax charge related to the writedown of certain investments, establishment of reserves on receivables related to certain affiliates and costs related to the reduction in the scope of certain activities; as well as a $24 million "ESR" fair value adjustment, compared to net income of $35.1 million reported in the third fiscal quarter of the prior year. The press release also contained, in part, the following:

[Defendant Moore] stated, "We are disappointed with our third fiscal quarter results, but are encouraged by the implementation of a number of cost-cutting measures resulting from restructuring in our businesses, as well as by improving whole loan sales opportunities and a reduction of spreads in the bond markets. We have implemented programs to reduce the premiums we pay for whole loans, signed a forward loan sale agreement for up to $7.2 billion over the next two years and reached an agreement with our bank lenders. We continue to be clearly focused on the execution of our revised business strategy, designed to deal with the changes we have experienced in our industry."

 

 

Since the second quarter of fiscal 1999. the Company has maintained sufficient levels of liquidity and was able to fund its business activities, albeit at a reduced level because of additional cash requirements in connection with margins on secured financing and margins on hedge positions. The Company has taken steps to reduce its financing needs and provide continued access to liquidity. Continental Grain Company, which owns approximately 78% of the Company's outstanding common stock, provides up to an aggregate of $85 million in monthly servicer advances to certain REMICs for which Conti Mortgage, a wholly-owned subsidiary, is the servicer. Continental Grain has agreed to make these advances, for a fee, through October 15, 1999. Although the advances are made to, and repaid by, the REMICs, and not by the Company or ContiMortgage, Continental Grain's advances improve the liquidity of the Company by relieving it of the significant portion of its obligation to make these advances itself. [Emphasis added.]

 

The statements contained in the February 16, 1999, press release, reproduced herein in paragraph 126 above, were materially false and misleading, and were known by defendants to be materially false and misleading at the time of their publication, or were recklessly disregarded as such for the reasons stated herein in paragraphs 75-76 and 89-90 supra.

With the Conti's stock price at between $6.00 and $6.50 per share, on May 19, 1999, the Company announced, that it had tentatively agreed to be acquired by Residential Funding Corp. of Bloomfield, Minn., the finance unit of General Motors Corp.. the worlds biggest auto maker. According to a Bloomberg report. the terms of the acquisition, valued at $336 million, were to be worked out over the next thirty days. Around this time rumors also circulated in the market that Conti could be purchased by Cleveland, Ohio-based, National City Corp.

On June 4, 1999, Conti issued a press release published on Business Wire in which it announced its largest quarterly loss to date: the pre-tax loss for the fourth fiscal quarter of 1999 would reach $247 million. Additionally, the press release stated, in part, the following:

In an effort to raise the funds necessary to continue operations on June 7, 1999, the Company announced that it would sell Triad Financial Corporation, its wholly-owned non-prime automobile finance subsidiary. According to a Company press release published on Business Wire, the sale of Triad would result in a gain to Conti and provide approximately $125 million of liquidity through sale proceeds, approximately $90 million of which would be used to pay down Conti's revolving credit and commercial paper facilities. The total sales price was not disclosed in the press release. The following day the L.A. Times reported the sale of Triad under a banner headline which read, "Sale of Triad Financial... Will Help Parent Firm Dig Out of Hole."

Adding injury upon injury, commercial mortgage-backed securities issuers, including J.P. Morgan, were now refusing to co-securitize commercial mortgages purchased from Conti with their own loans. According to the Institutional Investor, on June 14, 1999, "[i]ssuers are concerned that mingling Conti paper with their own loans could hurt the subordination levels of their own pools or tarnish their reputation, traders said." On June 28, 1999, JP Morgan announced that it would securitize approximately $220 million in loans purchased from Conti on a stand-alone basis, separate from its own conduit deal scheduled to come to market at about the same time that the Conti deal will be offered.

On July 12, 1999, the National Mortgage News published an article which reported that if ContiFinancial can not find a buyer by August 21, 1999, a consortium of banks and Wall Street firms that funded the firm's unsecured debt could face major losses. The Mortgage News further reported that at least one bond rating agency official stated that, "[i]f (Conti) can't make the payment the company will be in technical default on some $420 million in debt." According to the Mortgage News negotiations between the Company and Residential Funding were, at that time, continuing.

Immediately following the Company's announcement on July 15, 1999, Fitch IBCA again lowered its credit rating on Conti to "C" from "CCC+." The Fitch press release, published on Business Wire, explained that a long-term debt rating of "C" signals imminent default on the Company's long term obligations.

On July 19, 1999, the Asset Sales Report published an article which accused the Company of manufacturing the proposed merger with Residential as a ruse which allowed it to buy more time before the inevitable fate of the Company was realized. The Asset Sales Report contained, in substantial part, the following:

ContiFinancial looks to be at the end of an ever shortening rope as it announced last week that its proposed merger with GMAC's mortgage unit Residential Funding Corp. was canceled.

Market watchers had predicted the demise of the deal soon after ContiFinancial in May floated a press release announcing acquisition talks between both companies.

Analysts thought the timing was dubious, as the New York-based home equity issuer received a corporate downgrade from Moody's Investor Service and Standard & Poor's Rating Group the day after the statement was issued.

Most companies are notified by the rating's agency the day before they receive a downgrade.

Sources speculated that ContiFinancial asked RFC to affirm the announcement regardless of the degree of seriousness the talks held. Conti officials would not return phone calls on the matter

The company's stock hovered just above $1 at press time [Emphasis added.]

On July 21, 1999, the final day of the Class Period, American Banker reported that, contrary to the Company's prior statements, ContiFinancial appears to be headed for bankruptcy. The financial condition of the Company had deteriorated, with such massive debt accumulated on the Company's balance sheet, that Conti could not even find a buyer at this point. According to Reilly Tiernev, a vice president and analyst at Fox-Pitt, Kelton who was quoted in the article, Conti is "worth more dead than alive... They have so much debt on their balance sheets that it's easier to let them go bankrupt and then buy their assets." [Emphasis added.] While Conti maintained that it was negotiating to extend its debt facilities, Mr. Tiemey was skeptical, stating, "I can't see why the banks would want to keep this going... I think banks are just going to want to get their money out of it." According to Mr. Tierne, Conti's assets were probably outweighed by its approximate $1.7 billion of debt. The American Banker report also contained, in part, the following:

Steve Nelson. a senior analyst at Moody's Investors Services, said Conti's story is a familiar one in financial services: A pack of upstart companies suddenly pops up to blaze a trail in an under served niche, then just as suddenly blows up and fizzles away.

"Conti grew rapidly through aggressive pricing and loan origination, and it has come back to haunt them today," Mr. Nelson said. "I think we are going to see larger, more diversified consumer finance companies like Associates (First Capital) and Household (International) stepping up." [Emphasis added.]

Mr. Nelson said that the larger competitors who also served the subprime market were able to maintain "more rational pricing and prudent underwriting standards" while the specialists went belly-up one by one.

[A]s one analyst put it, Conti's stock price -$1.25 a share on Tuesday - "indicates that most people think it is going under." [Emphasis added.]

 

On July 21, 1999, with Conti stock trading as low as $ 1.125 per share, defendant

Moore abandoned the Company by tendering his resignation. According to Bloomberg, the ravaged Company would now be headed by Alan Fishman, the head of the buyout company,. Columbia Financial Partners LP.

Thus, with analyst reports coming out that the Company was headed for bankruptcy, the investing public finally understood the full extent of the problems lacing Conti. It was now apparent that the statements disseminated by Conti that characterized the Company's losses and decreased profits as one-tim. events, see for example paragraph 105 supra, and later presented the Company as being "confident about the future", see paragraph 123 supra, were gross misrepresentations aimed at impeding the public's awareness of Conti's true financial condition.

Following the end of the Class Period, the losses continued to mount. According to Bloomberg, on August 18, 1999, the Company posted another astronomical quarterly loss of $237.7 million for the first fiscal quarter of 1999. This first quarter loss was equal to $5.12 per share, compared to a gain of $0.13 per share earned during the same period the prior year. According to Bloomberg. Conti also announced that it had fired 30% of its staff. or almost 1,000 employees. To ease the stress caused by this massive lay-off, the Company authorized bonuses in excess of $16 million to key employees.

In the first three quarters of 2000, the Company recorded losses or $686 million, bringing total losses, including losses of $426.3 for fiscal year 1999, to $1.1 billion, according to the last Form 10-Q filed by they Company, on February 14, 2000 for the third fiscal quarter ending December 31, 1999. In this 10-Q, the Company reported that, in the first three quarters of fiscal

year 2000, the Company had written down its interest-only and residual certificates by an additional

$357 million, bring total interest-only and residual certificate writeoffs, including 1999 writeoffs of

$329 million, to $686 million.

Defendants' fraudulent scheme violated GAAP by failing to use reasonable estimates to calculate gain-on-sale revenue in connection with the Company's securitization of its loan pools, by failing to make necessary adjustments to the carrying value of the Company's Interest-only and residual certificates once it became apparent that actual credit losses and prepayment experience were significantly greater than the assumptions the Company had used, and by manipulating its loan records to conceal loan payment delinquencies. Specifically, defendants knowingly or recklessly violated Financial Accounting Standards Board ("FASB") Nos. 5, 65, 125, FASB Concepts Statement No. 2. Emerging Issues Task Force ("EITF") Issue Nos. 88-11, and Accounting Principles Board ("APB") 20. By failing to comply with the relevant GAAP principles, the Company's financial statements did not adhere to or accomplish the objectives of financial reporting, in violation of FASB's Statement of Financial Accounting Concepts Nos. 1 and 2.

Pursuant to FASB No. 5, the Company was required to book a charge to income when it became aware that an asset might become impaired and the amount of the loss could be reasonably estimated. During the Class Period, defendants knew or recklessly disregarded that the credit losses and prepayment rates greatly exceeded the Company's assumed rates, thereby impairing the Company's Interest-only and residual certificates. However, in violation of FASB No. 5, defendants knowingly or recklessly failed to take the necessary corrective action until the end of the Class Period.

Pursuant to FASB Nos. 65, 125. APB 20 and EITF Nos. 84-21, 88-11, and with respect to reporting the gain-on-sale from the securitization of its loan pools. and the recognition of the Interest-only and residual certificates, the Company was required to use realistic loan loss, discount, and prepayment assumptions. In violation of these principles, defendants knowingly or recklessly failed to account for increases in the actual loan loss, discount, and prepayment amounts.

Pursuant to FASB No. 125, the Company was required to recognize as gain-on-sale from its securitizations the difference between the proceeds from the sale, net of related transaction costs, and the allocated carrying amount of the receivables sold. The allocated carrying amount is determined by allocating the original amount of the receivables between the portion sold and any retained interests, based on their relative fair values at the date of the sale. The Company disclosed in its 1998 Form 10-K that:

The ESR is recorded as a receivable at the time of securitization. It is subsequently realized over the life of the securitization as cash distributions are received from the trust. ESR, reported as "Interest-only and residual certificates" in the accompanying Consolidated Balance Sheets, is the present value of the Excess Spread that the Company expects to receive over the life of a securitization. taking into consideration estimated prepayment speeds and credit losses.

 

In violation of FASB No. 125. implemented in January 1997, the Company

knowingly or recklessly failed to accurately reflect the prepayment, and loan loss amount (default rate) in recognizing gain-on-sale of receivables and in calculating the fair value of its interest only securities.

Pursuant to FASB Concepts Statement No. 2, the Company was required to produce accounting information that was reasonably free of error and bias and a faithful representation; there must be agreement between the numbers and descriptions and the events that these numbers and description purport to represent. Defendants knowingly or recklessly violated FASB Concepts Statement No. 2 by the practices set forth in ¶63 herein and by using various deceptions. as set forth in ¶¶56-66 herein, to conceal the Company's loan delinquency rate.

The market for Conti's common stock was open, well-developed and efficient at all relevant times. As a result of these materially false and misleading statements and failures to disclose, Conti's common stock traded at artificially inflated prices during the Class Period. The artificial inflation continued until the time Conti admitted that it did not have the technology, resources or management experience that would enable it to detect changing market conditions in a timely manner which would provide the Company's purportedly skilled management with enough time to respond to such changes, in a manner which was not materially adverse to the Company, and this admission was communicated to, and/or digested by, the securities markets. Plaintiffs and other members of the Class purchased or otherwise acquired Conti common stock relying upon the integrity of the market price of Conti's common stock and market information relating to Conti, and have been damaged thereby.

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

(i) That throughout the Class Period, defendants materially overstated the Company's revenues, net income. earnings per share and asset value;

(ii) That the Company had a practice of (a) extending credit to borrowers who could not possibly meet the terms of their loans; (b) carrying loans on the Company's books as an asset even though it had no reason to believe the loans would be repaid; aria (c) placing an unrealistically high appraised value on the collaleral securing the loans.

(iii) That as a result of the Company's analysis of prepayment rates for its securitized loans, which according to Conti were reviewed consistently and on a real-time basis, defendants knew or recklessly disregarded the fact that by the beginning of the Class Period, prepayment rates were running well above the Company's assumptions, which required the Company to increase its reserves, and which would result in a material adverse effect on net income and earnings per share;

(iv) That while the Company reported that it assumed a 27% prepayment rate for its 1998 loan pools, which Conti described as "conservative," in fact, as defendants knew or recklessly disregarded. a 27% prepayment rate was neither reasonable in light of market conditions or conservative based on the industry's use of this term. In fact, as reported by the Company in its 1998 Form 10-K, traditional, conservative. prepayment assumptions are traditionally set a full percentage point above average prepayment speeds. As defendants were aware that prepayments had averaged 29.3% for 1997 and that prepayments were then accelerating at a rate in excess of 1997 levels, a conservative prepayment assumption. according to the Company's own definition, would have been at least 3O.3% at that time, if not higher;

information provided by this advanced system was either willfully ignored or recklessly disregarded by defendants;

(vi) That defendants' statements were materially false and misleading, and were known by defendants to be materially false and misleading at the time of their publication, since, as investors would ultimately learn, the Company had not properly reviewed changes in assumptions regarding expected future CPR or credit losses which were necessary, in order to adjust ESR to reflect its present fair value. In violation of the Statement of Financial Accounting Standards rules for gain-on-sale revenue recognition, the Company maintained its previous assumptions despite skyrocketing prepayments which were known to, or recklessly disregarded by, defendants.

At all relevant times, the material misrepresentations and omissions particularized herein directly or proximately caused or were a substantial contributing cause of the damages sustained by plaintiffs and other members of the Class. As described herein, during the Class Period, defendants made or caused to be made a series of materially false or misleading statements about Conti's business, prospects and operations. These material misstatements and omissions had the cause and effect of creating in the market an unrealistically positive assessment of Conti and its business, prospects and operations. thus causing the Company's common stock to be overvalued and artificially inflated at all relevant times. Defendants materially false and misleading statements during the Class Period resulted in plaintiffs and other members of the Class purchasing the Company's common stock at artificially inflated prices. thus causing the damages complained of herein.

As alleged herein, defendants acted with scienter in that defendants knew that the public documents and statements issued or disseminated in the name of the Company were materially false and misleading; knew that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of information reflecting the true facts regarding Conti, their control over, and/or receipt and/or modification of Conti's allegedly materially misleading misstatements and/or their associations with the Company which made them privy to confidential proprietary information concerning Conti, participated in the fraudulent scheme alleged herein.

The Defendants engaged in such a scheme to inflate the price of Conti's common stock in order to: (i) allow certain executive officers and directors, several of whom are named as defendants herein, to receive bonuses, pegged to reported net profit, in excess of $2 million; and (ii) to maintain the appearance of compliance with financial covenants under the Company's Senior Notes, revolving credit facility and commercial paper program.

Conti operated on a cash flow negative basis and was dependent on various financing sources for its continued operations. Defendants engaged in a fraudulent scheme to artificially inflate the reported net worth of the Company in order to achieve and maintain the materially false and misleading appearance that the Company was creditworthy, i.e., in compliance with financial covenants under the Company's Senior Notes, revolving credit facility and commercial paper program. The covenants included, among other things. leverage ratios, minimum net worth tests and interest coverage ratios. In addition, the Company would not have been able to issue the Senior Notes that it issued during the Class Period (see ¶86 supra) had the lenders been aware of the Company's misstatements regarding its net worth, leverage ratio and interest coverage ratio.

Additionally, to raise cash to fund the Company's operations, Conti sold its right to receive a portion of the excess interest spread in the form of IO Strips and NIMs. Had defendants revealed the true risk potential purchasers were assuming, Jackson National as well as other purchasers would not have acquired the Company's IO strips and NIMs and defendants would not have been able to make these sales and thereby raise the necessary cash required for them to operate the Company.

Thus, defendants need to raise the funds required in order to operate the Company provided a powerful motive for defendants to engage in their scheme to mislead the public and as a result create an artificial market price of the Company's 10 strips and NIMs.

Thus, defendants' need to raise the funds required in order to operate the Company provided a powerful motive for the defendants to engage in their scheme to inflate artificially the market price of the ContiMortgage Certificates.

Maintaining the appearance of compliance with the credit covenants was so important to the Company that, once the truth about its net worth was revealed in July 1999, its lenders threatened to call their notes. and the ability of the Company to operate as a going concern was called into question.

The Individual Defendants also profited from their materially false and misleading statements in that they received lucrative bonuses that were based upon their false statements regarding the Company's net profits. According to the Company's proxy statement, filed with the SEC on July 29, 1998 (the "Proxy"), Moore received bonuses of $2,000, 000 and $2,380,000 in 1997 and 1998 respectively, and Willett received a $300.000 bonus in 1998. The Proxy contained a statement from the Company's Compensation Committee, which relied upon defendants materially false and misleading statements regarding the Company's performance. The Committee noted:

(a) the Company's performance was excellent when compared to that of other comparative companies in terms of growth in, and relative size of, gross revenu2s, net pretax profits and net income, and in terms of absolute and relative rates of return; [. . . ]

Had Moore and Willett not misrepresented the truth about the Company's gross revenues, net pretax profit and net income, they would not have, collectively, received more than $2,000,000 in bonus compensation in 1998.

Defendants, by virtue of their receipt of information reflecting the true facts regarding the Company. their control over, and/or receipt of the Company's materially misleading statements and/or their association with Company personnel which gave them access to and made them privy to confidential information concerning Conti's business and financial condition, directly participated in the fraudulent scheme alleged herein.

The undisclosed problems alleged in this Complaint regarding Conti's business and financial condition were sustained, material and of a nature and magnitude that evidences that they were in existence during the Class Period and were there tbre known to, or within the purview of, all defendants at all relevant times. Among other things. the undisclosed problems would have been a matter of utmost concern for senior Conti management in connection with the ongoing status and performance of the Company, such that all defendants either knew of. or recklessly disregarded those problems.

Throughout the Class Period, defendants knew, or recklessly disregarded. that Conti's revenue, income and earnings per share were materially overstated and that critical assumptions used in calculating gain-on-sale revenue were unreasonable and contradicted by actual experience.

Because Conti was dependent upon securitization as its chief source of liquidity, it was in defendants' interest to delay disclosure of the need to materially increase loan loss reserves and alter prepayment and other assumptions. Such actions would have resulted in lowering the Company's investment ratings and reducing its ability to sell its collateralized loans in the open market, which would have had a direct, adverse, and material effect on earnings.

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

(a) Conti's stock met the requirements for listing, and was listed and actively traded on the NYSE a highly efficient and automated market;

(b) As a regulated issuer. Conti filed periodic public reports with the SEC and the

NYSE;

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

(d) Conti was followed by several 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. Each of these reports was publicly available and entered the public marketplace.

As a result of the foregoing the market for Conti's stock promptly digested current information regarding Conti from all publicly available sources and reflected such information in Conti's stock price. Under these circumstances, all purchasers of Conti's common stock during the Class Period suffered similar injury through their purchase of Conti's common stock at artificially inflated prices and a presumption of reliance applies.

Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all persons who purchased Conti common stock between January 29, 1998, and July 21, 1999, inclusive (the "Class Period") and who were damaged thereby. Excluded from the Class are defendants, the officers and directors of the Company at all relevant times, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest.

The members of the Class are so numerous that joinder of all members is impracticable. Throughout the Class Period, Conti common shares were actively traded on the NYSE. As of June 1, 1999 there were approximately 46.75 million shares of Conti common stock issued and outstanding. While the exact number of Class members is unknown to plaintiffs at this time and can only be ascertained through appropriate discovery, plaintiffs believe that there are hundreds or thousands of members in the proposed Class. Record owners and other members of the Class may be identified from records maintained by Conti or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions.

Plaintiffs' claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by defendants wrongful conduct in violation of federal law that is complained of herein.

Plaintiffs will fairly and adequately protect the interests of the members of the Class and has retained counsel competent and experienced in class and securities litigation.

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 as alleged herein:

(b) whether statements made by defendants to the investing public during the Class Period misrepresented material facts about the business, operations. financial statements of Conti; and

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

A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this action as a class action.

Plaintiffs repeat and reallege each and every allegation contained above as if fully set forth herein.

During the Class Period. Conti and the Individual Defendants, and each of them, carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing public, including plaintiffs and other Class members, as alleged herein; (ii) artificially inflate and maintain the market price of Conti's common stock; and (iii) cause plaintiffs and other members of the Class to purchase Conti's common stock at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set forth herein.

Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading: and (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of the Company's securities in an effort to maintain artificially high market prices for Conti's securities in violation of Section 10(b) of the Exchange Act and Rule 10b-5. All defendants are sued either as primary participants in the wrongful and illegal conduct charged herein or as controlling persons as alleged below.

In addition to the duties of full disclosure imposed on defendants as a result of their making of affirmative statements and reports or participation in the making of affirmative statements and reports to the investing public, defendants had a duty to promptly disseminate truthful information that would be material to investors in compliance with the integrated disclosure provisions of the SEC as embodied in SEC Regulation S-K (17 C.F.R. Sections 210.01 et seq.) and Regulation S-K (17 C.F.R. Sections 229.10 et seq.) and other SEC regulations, including accurate and truthful information with respect to the Company's operations. financial condition and earnings so that the market price of the Company's securities would be based on truthful, complete and accurate information.

Conti and the Individual Defendants. individually and in concert, directly and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the business, operations and future prospects of Conti as specified herein.

These defendants employed devices, schemes and artifices to defraud, while in possession of material adverse non-public information and engaged in acts, practices. and a course of conduct as alleged alleged herein in an effort to assure investors Conti's value and performance and continued substantial growth, which included the making of, or the participation in the making of, untrue statements of material facts and omitting to state material facts necessary in order to make the statements made about Conti and its business operations and future prospects in the light of the circumstances under which they were made not misleading. as set forth more particularly herein. and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon the purchasers of Conti's common stock during the Class Period.

Each of the Individual Defendants' primary liability, and controlling person liability, arises from the following facts: (i) the Individual Defendants were high-level executives and/or directors at the Company during the Class Period and members of the Company's management team or had control thereof (ii) each of these defendants, by virtue of his or her responsibilities and activities as a senior officer and/or director of the Company was privy to and participated in the creation, development and reporting of the Company's internal budgets, plans, projections and/or reports; (iii) each of these defendants enjoyed significant personal contact and familiarity with the other defendants and was advised of and had access to other members of the Company's management team. internal reports and other data and information about the Company's finances, operations, and sales at all relevant times; and (iv) each of these defendants was aware of the Company's dissemination of information to the investing public which they knew or recklessly disregarded was materially false and misleading.

The defendants had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Such defendants' material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and effect of concealing Conti's operating condition and future business prospects from the investing public and supporting the artificially inflated price of its securities. As demonstrated by defendants' overstatements and misstatements of the Company's business, operations and earnings throughout the Class Period, defendants, if they did not have actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps necessary to discover whether those statements were false or misleading.

As a result of the dissemination of the materially false and misleading information and failure to disclose material facts, as set forth above, the market price of Conti's common stock was artificially inflated during the Class Period. In ignorance of the fact that market prices of Conti's publicly-traded securities were artificially inflated, and relying directly or indirectly on the false and misleading statements made by defendants, or upon the integrity of the market in which the securities trade, and/or on the absence of material adverse information that was known to or recklessly disregarded by defendants but not disclosed in public statements by defendants during the Class Period, plaintiffs and the other members of the Class acquired Conti common stock during the Class Period at artificially high prices and were damaged thereby.

At the time of said misrepresentations and omissions, plaintiffs and other members of the Class were ignorant of their falsity, and believed them to be true. Had plaintiffs and the other members of the Class and the marketplace known of the true financial condition and business prospects of Conti, which were not disclosed by defendants, plaintiffs and other members of the Class would not have purchased or otherwise acquired their Conti common stock, or, if they had acquired such common stock during the Class Period, they would not have done so at the artificially inflated prices which they paid.

By virtue of the foregoing, defendants have violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder.

As direct and proximate result of defendants' wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their respective purchases and sales of the Company's common stock during the Class Period.

Plaintiffs repeat and reallege each and every allegation contained above as if fully set forth herein.

This Count is brought by plaintiffs against the Individual Defendants and Continental Grain in their capacities as controlling persons of Conti which, but for the imposition of bankruptcy protections. would be primarily liable.

By reason of their control over the operations of Conti each of the defendants is a "controlling person" within the meaning of Section 20(a) of the Exchange Act and had the power and influence (which was exercised) to cause Conti (or its agents, employees or representatives) to engage in the unlawful conduct complained of herein, and could have prevented such violations from taking place but failed to do so.

The Individual Defendants and Continental Grain by virtue of their high-level positions, and their ownership and contractual rights. participation in and/or awareness of the Company's operations and/or intimate knowledge of the Company's financial condition and the adverse effects rising prepayments were having, and would continue to have, at all times during the Class Period, the Individual Defendants and Continental Grain had the power to influence and control and did influence and control, directly or indirectly, the decision-making of the Company, including the content and dissemination of the various statements which plaintiffs contend are false and misleading. Defendants were provided with or had unlimited access to copies of the Company's reports, press releases, public filings and other statements alleged by plaintiffs to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected.

In particular, the Individual Defendants had direct and supervisory involvement in the day-to-day operations of the Company and. therefore, is presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as alleged herein, and exercised the same.

By reason of the defendants each being a "controlling person," as that term is defined in Section 20(a) of the Exchange Act. of Conti which would have been primarily liable to plaintiffs and the Class, but for the imposition of bankruptcy protections. pursuant to the claims arising under Section 10(b) of the Exchange Act alleged above, the defendants are secondarily liable for such securities law violations pursuant to Section 20(a) of the Exchange Act.

As a direct and proximate result of defendants' wrongful conduct, plaintiffs and other members of the Class suffered damages in connection with their purchases of the Company's common stock during the Class Period.

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

(a) Determining that this action is a proper class action, designating plaintiffs as Lead Plaintiffs and certifying plaintiffs as a class representative under Rule 23 of the Federal Rules of Civil Procedure and plaintiffs' counsel as Lead Counsel;

(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 defendants' 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) Such other and further relief as the Court may deem just and proper.

Plaintiffs hereby demand a trial by jury.

DATED: New York, New York

December 18, 2000

By:______________________

One Pennsylvania Plaza

New York, New York 10119

(212) 594-5300

By:_______________________

Marvin L. Frank (MF-1436)

275 Madison Avenue

New York, New York 10016

(212) 682-1818

By:_______________________

Stanley Bernstein (SB-1644)

Timothy J. MacFall (TM-8639)

10 East 40th Street, 22nd Floor

New York, New York 10016

(212) 779-1414

Aaron Lee Brody

6 East 45th Street

New York, New York 10017

(212) 687-7230

Sharie T. Rowley

270 Madison Avenue

New York, New York 10025

(212) 545-4600

1622 Locust Street

Philadelphia, PA 19103

(215) 875-3000

Harold B. Obstfeld

260 Madison Avenue

New York. New York 10016

(212) 696-1212

I hereby certify that on December 18, 2000, I caused a true and correct copy of Consolidated Amended Class Action Complaint to be served by hand on the following counsel for defendants:

Richard W. Reinthaler

Dewey Ballantine LLP

1301 Avenue of the Americas

New York. New York 10019-6092

Richard A. Rosen

Paul, Weiss, Rifkin. Wharton, & Garrison

1285 Avenue of the Americas

New York. New York 10019-6094

_______________________

Joshua H. Vinik