First BanCorp operates as the holding company for First Bank Puerto Rico, which provides various financial services in Puerto Rico, the U.S. Virgin Islands, and British Virgin Islands.
Several purported shareholder class action lawsuits have been filed against First BanCorp and certain of its officers and directors with violations of the Securities Exchange Act of 1934 in the U.S. District Courts for the District of Puerto Rico and for the Southern District of New York.
The Complaint alleges that Defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Specifically, the Complaint alleges that Defendants' statements made during Class Period concerning First Bancorp's earnings and financial condition were materially false and misleading when made because Defendants failed to disclose that: (1) the Company's earnings quality had been significantly reduced by First Bancorp's use of overly aggressive accounting methodologies, specifically in its accounting classification of purchases of mortgage loans originated by other financial institutions; (2) the Company lacked adequate internal controls and was therefore unable to ascertain the true financial condition of First Bancorp; (3) the Company's financial statements were not prepared in accordance with generally accepted accounting principles; (4) the Company's false and misleading accounting treatment of certain mortgage loans purchased would ultimately expose First Bancorp to regulatory scrutiny; and (5) that, as a result of the aforementioned, First Bancorp's reported net income and assets were materially overstated during the Class Period.
The Complaint further alleges that on or around August 25, 2005, the Company announced that it was subject to an SEC informal inquiry related to mortgage loans purchased by First Bancorp. On September 30, 2005, the Company's Chief Executive Officer and Chief Financial Officer resigned from First Bancorp. On October 21, 2005, the Company announced that the SEC had issued a formal order of investigation into First Bancorp relating to, among other things, transactions in which the Company acquired substantial number of mortgage loans from other Puerto Rican financial institutions.
On December 13, 2005, the Court entered the Order consolidating the actions under 05-CV-9379 (Lead Case). On January 18, 2006, the Court entered the Memorandum Order appointing co-lead Plaintiffs and approving their respective Counsel as co-lead Counsel. On February 13, 2006, the Plaintiffs filed a Consolidated Amended Class Action Complaint.
On March 2, 2006, the Plaintiffs filed a Notice of Voluntary Dismissal. On March 6, 2006, the Court entered the Notice signed by Judge Jed S. Rakoff. According to the Notice, lead Plaintiffs filed motions to transfer the action to the District of Puerto Rico to pursue claims in the related consolidated action, In re First BanCorp Securities Litigation, 05-CV-02148, pending before the Honorable Juan M. Perez-Gimenez. The lead Plaintiffs voluntarily dismiss the consolidated action filed in the Southern District of New York without prejudice. The action was then pending in the District of Puerto Rico. On February 13, 2006, the Plaintiffs filed an Amended Class Action Complaint. The Defendants responded by filing various motions to dismiss the Amended Class Action Complaint, which were granted in part and denied in part in an Opinion and Order entered on November 6, 2006.
In a press release dated February 1, 2007, following the previously announced internal review by the Corporation's Audit Committee, the Company and certain of its officers and directors and former officers and directors were named as Defendants in separate class action lawsuits filed late in 2005. These securities class actions were later consolidated. First BanCorp has since been engaged in discussions with the lead Plaintiff for a possible settlement of the class action and has accrued $74.25 million in its consolidated financial statements for the year ended December 31, 2005 in connection with a potential settlement. There can be no assurance that the amount accrued will be sufficient and the Corporation cannot predict at this time the timing or final terms of any settlement. First BanCorp has also been engaged in discussions with the staff of the SEC regarding a possible resolution of its investigation relating to the matters that resulted in the Corporation's restatement of its financial statements, and has accrued $8.5 million in its consolidated financial statements for the year ended December 31, 2005 in connection with a potential settlement of the SEC Staff's investigation of the Corporation. Any settlement is subject to the approval of the SEC.
In a press release dated March 5, 2007, First BanCorp announced that it has reached an agreement in principle to settle all claims with the lead Plaintiffs in a shareholder class action originally filed in 2005. Under the terms of the settlement, which is subject to notice being provided to the class and final approval by the United States District Court for the District of Puerto Rico, First BanCorp will pay the Plaintiffs $74,250,000.
The parties entered into a Stipulation of Settlement on June 27, 2007. The Court granted preliminary approval of the Settlement on August 1. On November 28, the Court granted final approval of the Settlement, including an award of Attorneys’ Fees and Expenses, and entered Final Judgment.
