UNITED STATES DISTRICT COURTWESTERN DISTRICT OF NORTH CAROLINA

CHARLOTTE DIVISION3 :99CV237-MC K

IN RE: THE FIRST UNION CORP. )SECURITIES LITIGATION )

Clerk, U. S. Dist. CourtW. Dist of N. C.

THIRD CONSOLIDATED AND AMENDED CLASS ACTION COMPLAINT

TABLE OF CONTENTS

Page

NATURE OF THE CASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

JURISDICTION AND VENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

PARTICIPATION OF INDIVIDUAL DEFENDANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

CONFIDENTIAL SOURCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0

SUBSTANTIVE ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3

A. DEFENDANTS RECKLESSLY IGNORED THEFRAUDULENT PRACTICES AT THE MONEY STORE . . . . . . . . . . . . . . . . . 1 3

1 . Defendants Performed Virtually No Due Diligence . . . . . . . . . . . . . . . . . 1 3

B. THE "BARCELONA WEEKEND": FIRST UNIONEXECUTIVES DISCUSS THE MONEY STORE' STRUE FINANCIAL CONDITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6

C . A 1998 INTERNAL AUDIT AT THE MONEYSTORE REVEALS ENORMOUS ERROR RATE SIN THE MONEY STORE'S LOAN PORTFOLIO . . . . . . . . . . . . . . . . . . . . . . 1 8

1 . The Results of The Money Store Audit Are Given to First Union . . . . . . 192 . The Money Store's Fraudulent Practices are Detaile d

In Written Reports Provided to First Union . . . . . . . . . . . . . . . . . . . . . . . 20

D . First Union Is Directly Confronted With The Money Store's Fraud . . . . . . . . . . . 22

1 . Concerned Money Store Employees Confron tFirst Union Senior Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

2. Defendants Take No Action to Remedy the Fraudulent Practices . . . . . . . 2 3

E. The Impact of the Money Store's Fraud on First Union . . . . . . . . . . . . . . . . . . . . . 3 0

1 . The Magnitude of The Money Store's Problems . . . . . . . . . . . . . . . . . . . . 3 0

i

2 . The August 1998 KPMG Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 13 . The Elimination of Gain-On-Sale Accounting . . . . . . . . . . . . . . . . . . . . . 334. Defendants Receive Documents Describin g

Massive Losses at The Money Store . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345 . A Written Manual Prepared by First Unio n

Details The Money Store's Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366 . First Union Continues to Ignore Serious

And Illegal Practices at The Money Store . . . . . . . . . . . . . . . . . . . . . . . . . 37

F. THE NEED FOR OCC COMPLIANCE FURTHER FLAGGEDTHE MONEY STORE'S PROBLEMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

1 . The Conditional Approval Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422. OCC Inspectors Arrive at The Money Stor e

for an In -Depth Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443. The Project Book - - Written Evidence of Defendants ' Fraud . . . . . . . . . . 454. Defendants ' Fraud Violated GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

DEFENDANTS' FALSE AND MISLEADING STATEMENT SAND RELEVANT EVENTS DURING THE CLASS PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . 5 1

Defendants Announce the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1

Defendants' Statements In The March 4, 199 8Press Release Were False and Misleading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3

Defendants Close The Acquisition Of The Money Store . . . . . . . . . . . . . . . . . . . . . . . . . 5 5

First Union's False And Misleading Form I0-QFor The Quarter Ending June 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Defendants' Statements in the Third Quarter of 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Defendants Issue False Statements at Year End 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Defendants' Year-End 1998 Statements Were Materiall y

False and Misleading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Defendants ' Fraud Continues During Fiscal Year 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Defendants Failed to Disclose The Magnitude of TheProblems at The Money Store in The First Quarter of Fiscal 1999 . . . . . . . . . . . . . . . . . . 70

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DEFENDANTS CONTINUE TO ISSUE INFLATE DFINANCIAL REPORTS AFTER THE CLASS PERIOD . . . . . . . . . . . . . . . . . . . . . . . . 7 1

Defendants ' Statements After The Class Perio dContinued to Mislead Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

Defendants ' False Statements During Fiscal Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 77

THE FULL TRUTH ABOUT THE MONEY STORE IS REVEALED . . . . . . . . . . . . . . . . . . . 80

ADDITIONAL SCIENTER ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1

A. First Union Uses Inflated Stock as Currency . . . . . . . . . . . . . . . . . . . . 1 . . . . . 8 1

B . Defendants and Other Insiders Sell Millions atArtificially Inflated Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

C. Defendants' Actual Knowledge of The Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

NO SAFE HARBOR . . . . . . . . 8 8

RELIANCE ALLEGATION SFRAUD-ON-THE-MARKET DOCTRINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

INDIVIDUAL DEFENDANTS ' DUTY TOREPORT TRENDS , DEMANDS OR UNCERTAINTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

CLASS ACTION ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1

FIRST CLAIM FOR RELIEF FOR VIOLATION O FSECTION 10(b) OF THE EXCHANGE ACT AND SEC RULE I Ob-5 . . . . . . . . . . . . . . . . . . 93

SECOND CLAIM FOR RELIEF FOR VIOLATIO NOF SECTION 20(a) OF THE EXCHANGE ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

JURY TRIAL DEMANDED . . . . . . . . . . . . . . . . . . . . . _ . . . . . 96

III

Lead Plaintiffs ("Plaintiffs"), by and through their attorneys, allege the followin g

based upon the investigation of their attorneys, which included: (a) review and analysis of publi c

filings made by First Union Corporation ("First Union" or the "Company"), with the Securitie s

and Exchange Commission (the "SEC") ; (b) interviews with confidential witnesses who are

former employees of First Union and The Money Store Inc. ("The Money Store" or "Mone y

Store") ; (c) review and analysis of securities analysts' reports concerning First Union; (d) review

and analysis of First Union Press Releases and reports and articles about First Union and/or th e

individual defendants in the financial and general press ; (e) review and analysis of other publicl y

available information about First Union ; (f) review and analysis of First Union financial

statements and reports ; and (g) consultation with certified public accountants . Plaintiffs believe

that further substantial evidentiary support for the allegations will be uncovered after a

reasonable opportunity for discovery . Plaintiffs further believe that there are many additional

detailed facts supporting the allegations contained herein which are known only to defendants or

are within defendants' exclusive possession and control .

The Court dismissed certain claims in Plaintiffs' Second Consolidated and Amended

Complaint (the "Second Amended Complaint") . See Order, dated September 16, 2002, grantingin part defendants' motion to dismiss the Second Amended Complaint on procedural grounds

(the "Order") . The Order did not dismiss claims "relating to" misstatements alleged inParagraphs 101, 122, 133, 134, 137, 138 (in part), 141 and 143-147 of the Second Amended

Complaint . Order at 11-12 . Plaintiffs attach hereto Exhibit A, which alleges the originalParagraphs 101-204 of the Second Amended Complaint . Exhibit A is made part of this ThirdAmended Complaint for the purpose of preserving the record for any potential appeal of theOrder and Plaintiffs' ability and rights to make such an appeal after final judgment . See In reTrimble Navigation Securities Litigation, 1997 U .S. Dist . LEXIS 21138, at * 10-* 12 (N .D. Cal .

Dec . 10, 1997) (denying defendants' motion to strike allegations included in third amendedcomplaint that had been dismissed with prejudice from a second amended complaint, to preserveplaintiffs' appellate rights under Ninth Circuit law). Incorporating Exhibit A into this ThirdAmended Complaint, as in In re Trimble Navig. Sec . Litig., is warranted given that Plaintiffshave found no Fourth Circuit decision holding appellate rights are waived, as in the Ninth

NATURE OF THE CASE

1 . This is a class action on behalf of purchasers of the common stock of Firs t

Union, a nationwide banking and financial services provider, between March 4, 1998 and Ma y

24, 1999, inclusive (the "Class Period") . Plaintiffs' claims arise under Sections 10(b) and 20(a)

of the Securities Exchange Act of 1934 (the "Exchange Act") and SEC Rule I Ob-5 .

2. During the Class Period, defendants made a series of materially false

statements regarding the Company's $2 .1 billion acquisition of The Money Store Inc ., a New

Jersey-based sub-prime mortgage lender. The deal was touted as being "immediately" accretive

to earnings, and a conduit to an entire new customer base, borrowers with "B" credit who could

not qualify for traditional loans through First Union . In connection with the acquisition,

defendants recorded an astonishing $1 .9 billion of goodwill- - or over 90% of the purchase price

of The Money Store .

3 . The deal was crucial for First Union . In a decade of unprecedented bank

consolidation involving regular "mega-mergers" between multi-billion dollar financial

institutions, First Union was a company in the midst of an acquisition spree . In November 1997,

First Union formally announced plans to acquire Philadelphia-based CoreStates Financial Bank

in a deal valued at $19 .8 billion . The deal was scheduled to be consummated by April 30, 1998 .

The combination of the two organizations would create the biggest financial institution on the

East Coast, with assets of approximately $206 billion .

4 . The CoreStates acquisition, however, was not yielding the benefit s

promised to investors, due to a variety of problems integrating the operations of the two banks .

As defendant Crutchfield admitted in a May 26, 1999 Wall Street Journal article, First Unio n

Circuit, or not waived, by the failure to reallege claims dismissed with prejudice in a subsequentamendment . Consistent with In re Trimble Navig. Sec. Litig., except for purposes of asubsequent appeal of the Order, Plaintiffs' operative pleading consists only of the allegations andclaims set forth in the body of this Third Amended Complaint .

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was "crumbling under its own weight ." According to an August 16, 1999, article in The Morning

Call, First Union lost 400,000, or 20%, of CoreStates' 2 million customers due to service-related

issues resulting from the merger, Similarly, the costs resulting from these integration and

conversion problems were having a material adverse effect on the Company's profitability. As a

result, First Union looked to The Money Store as a quick fix to provide the immediate earnings

boost the Company needed to avoid reporting massive losses to investors . Indeed, defendants

were in such haste to announce the acquisition, that they rushed through a minimal off-site due

diligence, and, either intentionally or with extreme recklessness, ignored warnings to the First

Union due diligence team about The Money Store's improper practices, and the massive losses in

The Money Store's mortgage portfolio .

First Union began, almost immediately after its acquisition of The Mone y

Store, to suffer from The Money Store's dismal financial condition. As a former Money Store

Head of Delinquency described The Money Store operations, "the Wizard of Oz couldn't have

done anything to fix that company ." For years, The Money Store had regularly engaged in

fraudulent practices . These practices included: deliberately understating delinquency rates ;

failing to properly account for uncollectible receivables (including unpaid loans from long-

deceased customers) ; improper revenue recognition through double-counting customer payments ;

improperly "curing" or bringing up-to-date late accounts ; and granting loans to unqualified

customers to increase quarter-end revenues through what employees referred to as the "[expletive

deleted] it, fund it" policy.

6 . Defendants knew or recklessly disregarded The Money Store's fraudulen t

practices, but took no action to remedy or disclose the problems . As described below,

Defendants received written reports from senior Money Store employees detailing the fraudulent

practices - - and the impact on The Money Store's and First Union's bottom line . Defendants also

met face-to-face with former Money Store executives who spelled out the proliferation of losse s

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and the enormous error rates in The Money Store loan portfolio . Not one, but three separate

audits at The Money Store that defendants ordered or were well aware of, confirmed The Money

Store's accounting fraud and other improper procedures . Finally, the Office of the Comptroller of

the Currency ("OCC") descended on The Money Store in October 1998, and documented major

discrepancies its practices in a written report presented to defendants . (The OCC, along with the

Federal Reserve, regulates FDIC-insured banks .) Defendants, aware of the impending OCC

inspection for months, prepared an OCC "Project Book" detailing The Money Store's problems

that had to be remedied before the OCC audit . Indeed, a former Money Store executive openly

discussed the fact that she would lie to the OCC to "make them go away . "

7. Despite being directly confronted with The Money Store's fraud ,

defendants remained silent about The Money Store's true financial condition until January 1999,

when they gave the first hint of problems with the acquisition . In January, defendants disclosed

that a write-down was required - - a write-down that, in fact, was wholly inadequate to reflect the

true magnitude of The Money Store's losses . In response, the market price of First Union stock

plummeted over 9%. Moreover, this incomplete and partial disclosure was not even a voluntary

act, but was mandated by the OCC after its October 1998 audit .

The true magnitude of The Money Store debacle was stunning . During the

Class Period, The Money Store's reported goodwill was materially overstated by approximately

$2 billion. Goodwill, an intangible asset, must under generally accepted accounting principles

("GAAP"), be written off over the period it is estimated the asset will benefit the Company, but

not more than forty years . Even though The Money Store's loan portfolio was riddled with errors

and delinquencies that diminished its future cash flows and rendered the goodwill worthless,

defendants did not write-down goodwill when they learned the truth about The Money Store's

finances and operations. As a result, First Union carried overstated goodwill and artificially

inflated income on its financial statements during the Class Period . On June 26, 2000, the full

truth about The Money Store was revealed when First Union wrote off the entire $2 billion

acquisition price of The Money Store . The Money Store debacle contributed to restructuring

4

.

and other charges of $4.9 billion against First Union's earnings in 2000 - one of the largest

charges against earnings in the history of corporate America.

9. As a result of defendants' fraud, First Union investors by the end of the

Class Period saw the value of their holdings plummet by approximately 30% from a Class Perio d

high of over $65 per share on January 8, 1999. On July 30, 1999, First Union announced that

defendant Georgius, the principal architect of the CoreStates/Future Bank initiative had resigned

to "pursue other interests ." A few days later, William Templeton, President of The Money Store,

resigned "without comment ." When the full truth was revealed on June 26, 2000, the stock price

fell even further - resulting in a total loss of over 41 % from the Class Period high .

10. First Union insiders, including defendants Atwood, Crutchfield, an d

Georgius did not share the investing public's losses, as they sold over $ 10 million of First Unio n

stock at artificially inflated prices during the Class Period . And despite the fact that First Unio n

had to take billions in write-offs from its disastrous acquisitions of The Money Store an d

CoreStates Financial , defendant Crutchfield still received salary and bonuses of over $23 million

in 1998-1999 .

11 . The following chart illustrates the impact of defendants' fraud on the pric e

of First Union common stock :

MtiF.f 1 ~, d' ~z; 11 IdE I. l', 4R (:']' ._I L~GI_' Ilrvt. t.~fA', 't 1=v] FI;Fi l.!AP-d J!_(MF A. .2iiOp

Glass Period beg,,zs• Defen4ants close Defendants Georgius Defendants assure THE ENTIRE

thedeal sells over $B mul lion Cass Penodgnds- investorsof the ACQUISITION IS

Defendants announce of First union stock Money Store 's WRITTEN OFF$Z I billion Money Money Store sound underwnUU gStore deal . after employees confront practicesignoring warnings First union man-during due diligence agement with the

fraud

JURISDICTION AND VENU E

12. The claims herein arise under 15 U .S.C . § 78aa and 28 U .S .C . § 1331 .

Plaintiffs' claims arise under 15 U.S.C. §§ 78(j)(b) and 78(t)(a) of the Securities and Exchang e

Act of 1934 ( the "Exchange Act") and Rule lOb-5 promulgated thereunder (17 C.F .R . § 240 .1Ob-

5) .

13 . This Court has subject matter jurisdiction of this action pursuant to 1 5

U .S .C. § 78u .

14. Venue is proper in this District pursuant to Section 27 of the Exchange Act

and 28 U .S.C. § 1391(b). Many violations of law complained of herein occurred in subst antial

part in this district, including the preparation and dissemination of materially false an d

misleading statements and the omission of material information complained of herein .

6

15 . In connection with the conduct complained of herein, defendants, directl y

or indirectly, used the means and instrumentalities of interstate commerce, including the mail s

and interstate telephone communications, and the facilities of a national securities exchange .

PARTIES

16. Lead Plaintiffs James R. Allen, Vincent Russo, Forest E .R. Gordon, an d

the Hotel Trades Council and Hotel Association of New York City, Inc . Pension Fund purchased

shares of First Union common stock during the Class Period at market prices artificially inflate d

by defendants' fraud and were damaged thereby .

17. Defendant First Union Corporation maintains its principal place of

business at One First Union Center, Charlotte, North Carolina, with about 2,400 locations in 1 2

states and Washington D .C . In addition to retail banking, the Company provides investmen t

products, advice, corporate finance, home equity lending (through its Money Store unit), and

insurance products (with Hartford Financial) .

18. Defendant Edward E . Crutchfield ("Crutchfield") was at all times re levant

hereto the Chairman and Chief Executive Officer of First Union, and issued several of the fals e

and misleading statements at issue, and signed several of the Company's SEC filings .

19 . Defendant John R . Georgius ("Georgius") was at all times relevant heret o

the President of First Union . Georgius issued several of the false and misleading statements at

issue, and signed many of the Company's SEC filings . In addition, Georgius was a "hands-on "

manager who headed the integration process, was well aware of the importance to First Union' s

stock price of the acquisitions being perceived by the market as successfully integrated .

Georgius, aware of the major logistic and financial obstacles the Company was encountering in

the integration process and the effect of those problems on First Union's bottom line, sold ove r

$8,000,000 worth of his First Union stock holdings before the investing public learned the trut h

about the Company's declining profitability and drove down the market price of its stock .

20. Defendant James H . Hatch ("Hatch") was at all times relevant hereto th e

Senior Vice-President and Corporate Controller of First Union and signed each and every SEC

filing cited herein . Hatch, as the Company's controller, also had first hand inside knowledge o f

its financial results, statements and accounting practices, and the Company's reports and

evaluations about the progress and costs associated with its acquisition and integration activities .

21 . Defendant Robert Atwood ("Atwood") was the Chief Financial Officer

and Executive Vice President of First Union from 1991 until November 13, 2000 . As detailed

below , Atwood had first-hand knowledge of The Money Store's fraudulent practices through hi s

participating in the "Barcelona Weekend" through reviewing written reports detailing The Mone y

Store's problems, and through meetings .

22. Defendant James Maynor ("Maynor") was the Chief Executive Officer an d

President of First Union Mortgage Corporation from 1994-1999, and became head of Mone y

Store's lending unit, succeeding William S . Templeton in 1999 . In August 1999, Maynor was

appointed the Chief Executive Office of The Money Store . As detailed below, Maynor receive d

first-hand knowledge of The Money Store's fraud, and failed to take any action in response .

23 . Defendants Crutchfield, Georgius, Hatch, Maynor, and Atwood ar e

collectively referred to herein as the Individual Defendants .

PARTICIPATION OF INDIVIDUAL DEFENDANTS

24 . The Individual Defendan ts part icipated in the drafting and preparation o f

the various public filings and other communications complained of herein and were aware of th e

misstatements contained therein and omissions therefrom, and were aware of their materially

misleading nature . Because of their Board membership and/or executive and managerial

positions with First Union, the Individual Defendants had access to the adverse non-publi c

information about First Union's business prospects and financial condition . The Individual

Defendants, by reason of their stock ownership, management positions, and/or membership o n

First Union's Board of Directors, were controlling persons of First Union and had the power an d

influence, and exercised it, to cause First Union to engage in the illegal practices complained o f

herein .

25. It is appropriate to treat the Individual Defendants as a group for pleadin g

purposes and to presume that the materially false and misleading information conveyed in the

Company's public filings, Press Releases and other publications as alleged herein are th e

collective actions of the narrowly defined group of defendants identified above. Each of the

above officers of First Union, by virtue of his high-level position with the Company, directl y

participated in the management of the Company, was directly involved in the day-to-day

operations of the Company at the highest level and was privy to confidential proprietary

information concerning the Company and its business , operations and business prospects as

alleged herein. The Individual Defendants were involved or participated in the drafting ,

producing, reviewing and/or disseminating the false and misleading statements alleged herein .

The Individual Defendants were thus aware that these false and misleading statements were

9

being issued regarding the Company and approved or ratified these statements, in violation of th e

federal securities laws .

CONFIDENTIAL SOURCES

26. Plaintiffs, through counsel and counsel's agents, have spoken to numerous

confidential witnesses who have personal knowledge of the state of affairs at The Money Store ,

both prior to and following First Union's acquisition of The Money Store (the "Merger"), as wel l

as First Union's knowledge of these matters . These witnesses are identified herein by their

current or former position or title at The Money Store, First Union or other entities employed to

perform services by The Money Store or First Union during or immediately preceding the Class

Period . From the positions identified and/or from descriptions of particular witnesses' duties at

First Union or The Money Store, is evident that these individuals have reliable persona l

knowledge of facts alleged herein .

27. The following chart describes former employees of First Union who were

sources of relevant facts alleged herein, including a description sufficient to illustrate the scop e

of knowledge of each former employee :

TITLE SCOPE OF KNOWLEDGE

Manager - Mortgage Servicing Division (The For 18 months after the Merger, this ManagerMoney Store) . calculated the losses in the general loan

portfolio of The Money Store . He was alsoresponsible for examining and analyzinglosses (including loans that were securitizedor sold to third party investors) that weredelinquent. He prepared a written analysis i nreport and spreadsheet form showed whic hlosses which should have been recognized - areport that was distributed to senior FirstUnion and The Money Store officialsincluding Jack Pearce, Malcolm Murray anddefendants Crutchfield and Maynor. (~~61 ,62, 63, 64, 65, 66 )

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II TITLE III SCOPE of KNOWLEDGE I I

Risk Management Department Supervisoremployed at The Money Store from June1998 until October 1999 .

Aware of problems and blatantly fraudulentpractices at The Money Store . This formeremployee received a written manual fromFirst Union which detailed severe problemswith The Money Store prepared in an attemptto solve the problems prior to the OCC'sOctober , 1998 inspection date .(¶¶37, 67,68(a)-(f), 83, 85)

Senior Vice President for Home ImprovementServicing (The Money Store) from October1996 until January 1999 ,

Head of the New Ventures Group

Assistant Vice President -Marketing Division(The Money Store) .

Hired in 1996, and immediately recognizedserious problems involving missing operatingprocedures, understated losses and failure tofollow accounting principles which hebrought to the attention of seniormanagement including Robert Benson, JackHill, Jack Pearce and William Templeton .(¶¶29, 30, 36, 48, 49, 50(a), 50(f), 50(h),50(i), 50(j), 50(k), 69-71, 72-73, 82, 86)

This employee was part of the due diligenceteam at The Money Store until the Mergerclosed, and witnessed firsthand First Union'slack of an appropriate due diligence review ofThe Money Store's operations . (¶52)

This employee was aware of blatant problemsat The Money Store in March 1998-January1999, including serious problems on themortgage side . (¶54)

TITLE SCOPE OF KNOW. LEDGE

Head of Delinquency (The Money Store) . This witness knows of the circumstance sunder which First Union executives wer eadvised of The Money Store's problems, andFirst Union's due diligence, and confirmed th eevents surrounding the "Barcelona weekend "alleged below . This former employee als otold Jack Pearce about the problems at TheMoney Store, particularly those regarding thepooling and servicing agreements . Thiswitness was also a contact person betwee nThe Money Store and the OCC, andparticipated in meetings during which th eOCC criticized The Money Store' sprocedures. (1¶28, 35, 50(a), 50(d), 50(e), 75 ,81) .

Chief Financial Officer of the Mortgage Unit This witness has knowledge of First Union' s(The Money Store) until late 2000 . due diligence, the OCC examination of The

Money Store after the Merger, and the use o f"gain on sale" accounting to "manage" it snumbers . (~¶33, 60, 80)

Head of Marketing (Small Business Division This witness has knowledge of the- The Money Store) . unsuccessful steps taken by First Union t o

cure the severe problems at The Money Store ,and the failed integration effo rts . (¶53)

Senior Vice President/Consultant from July This witness has knowledge of The Mone y1997 to January 1999 . Store's : 1) problems in the servicin g

department ; 2) problems in the rat ecalculation for adjustable rate mortgages and3) computer system problems - as well a sFirst Union's knowledge of those problem s(¶¶38, 76(a)-(c)) .

President of Mortgage Quality Assurance This witness has knowledge of the conditio n("MQA") . External Auditor Retained by The of The Money Store's loan portfolio becaus eMoney Store . this auditor was retained by the Company to

conduct an audit of its loans in late 1997 andearly 1998. (111132, 39, 40, 41, 42, 43, 44 ,50(g), 84) .

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TITLE S. PE OF KNOWLEDGE

Head of Quality Control and Operational This witness has knowledge of The Mone yReview . Store's underwriting policies . (¶J45, 45(a)-(c) ,

46, 47) .

Head of Risk Management - First Union This witness has knowledge of First Union' svaluation of The Money Store's loan portfoli oprior to the acquisition . ' 137, 58, 59, 83, 8 4

Independent Auditor . This witness has knowledge of theinformation that was provided to First Unionduring the due diligence phase of the Merger,and worked on the internal "self-audit" i nAugust 1998 . (~J31, 55, 56 )

SUBSTANTIVE ALLEGATIONS

A. DEFENDANTS RECKLESSLY IGNORED THE FRAUDULENTPRACTICES AT THE MONEY STORE

1 . Defendants Performed Virtually No Due Diligenc e

28. It was well known within The Money Store that there were massiv e

accounting problems and fraudulent sales practices that were considered part of The Money

Store's corporate culture - - problems that First Union willfully ignored or tu rned a blind eye to

during the course of its pre-acquisition "due diligence" investigation of The Money Store .

According to the former Head of Delinquency at The Money Store, even though The Money

Store was a company in financial and operational disarray, First Union "wanted to do the deal

even before they got to the due diligence stage . "

29. A former Senior Vice President of The Money Store noted that Norwest ,

another potential bidder for The Money Store , recognized early on in its due diligence that ther e

were serious cash flow problems and discrepancies at The Money Store and that is why they di d

13

not submit a final bid . The former Senior Vice President revealed that The Money Store

employees wondered why anyone would buy The Money Store at all, let alone for $2 .2 billion .

30 . According to a former Money Store Senior Vice President in charge of

servicing in the home improvement division, Norwest analyzed the materials from its du e

diligence in their acquisition models, and could not reconcile The Money Store's poor cash flo w

with the low delinquency rates . Nor-west was concerned by the aging of accounts in delinquency,

flow reports, losses , lack of proper documentation and lost insurance policies in The Money

Store's portfolio . The former Money Store Senior Vice President spoke to members of th e

Norwest team after the First Union acquisition, and they told him they declined to bid because o f

the poor numbers reviewed in the diligence . According to the Senior Vice President : "The more

that they [Norwest] drilled, the more resistance they got . So they just finally walked away from i t

because they weren't getting the answers they needed . "

31 . Defendants deliberately or recklessly disregarded other red flags during

their inadequate and improper due diligence . According to an independent auditor who assiste d

in an audit of The Money Store's loan po rtfo lio in August, 1998, First Union ignored a multitude

of signals prior to the merger which pointed to potential problems with the acquisition, includin g

(i) the failure of Green Tree Financial, a company which securitized loans in the same manner a s

The Money Store (another mo rtgage lending company that announced dramatic losses i n

connection with sub-prime lending activities) ; (ii) the SEC's growing opposition to gain-on-sal e

accounting; and (iii) the lower interest rate environment which dramatically increased pre-

payments. According to the auditor, "there's a lot of things that indicated this type of lending wa s

very volatile, and based on the way the market was moving at that time, all indications were tha t

it was going to be even more volatile ."

14

32, Another glaring red flag which defendants recklessly disregarded wa s

described by the President of Mortgage Quality Assurance ("MQA"), a division of Mace-Trac e

Inc., a company hired by The Money Store in 1998 to perform an audit. On or about late January

and early February , 1998, the President of MQA told a member of the internal audit division at

First Union who was on the due diligence team that The Money Store had significant errors in it s

loan portfolio . The President of MQA said he could not hand over his audit report, but suggeste d

that First Union ask The Money Store for it, or conduct its own analysis . The President of MQA

also communicated the information to Jack Pearce, a former Senior Vice President at First Union

and The Money Store's former Chief Operating Officer, and others at First Union . The Presiden t

of MQA noted that : "I do know that people at First Union were aware that we were conductin g

this audit. . . .They should have been looking at our work before they bought it . "

33 . According to the former Chief Financial Officer of The Money Store's

mortgage unit, First Union completed their due diligence around the third week of January, 1998 ,

primarily off-site at the Fairmont Hotel in San Francisco . In early March, 1998, former Money

Store CEO, Marc Turtletaub, told First Union "if you want this thing , give me a bid now. "

Defendants recklessly rushed a pre-emptive bid . In their reckless haste to acquire The Mone y

Store, the defendants blinded themselves to critical information about The Money Store' s

fundamental business - facts widely known to Money Store insiders -- that gain- on-sal e

accounting would not be available going forward, which would severely impact The Mone y

Store's business, and that the secondary market for securitized loans was in imminent jeopardy .

34 . After the purchase of The Money Store on June 30, 1998, even defendants '

willful blindness was not enough to prevent First Union's employees and managers -- no w

including former Money Store employees and managers -- from having to acknowledge Th e

15

Money Store' s rampant improper practices and virtually non-existent accounting controls, which

ranged from knowingly accepting bad checks, to excessively "curing" loans, and relaxing credi t

policies at the end of fiscal quarters pursuant to a "[expletive deleted] it, fund it" policy to inflate

quarterly results, as detailed below. As a result of these fraudulent practices , First Union failed

to take charges to earnings necessary to properly account for The Money Store's actual losses an d

uncollectible receivables, ultimately resulting in the massive multi-billion dollar plus write-of f

announced on June 26, 2000 .

B. THE "BARCELONA WEEKEND" : FIRST UNION EXECUTIVESDISCUSS THE MONEY STORE'S TRUE FINANCIALCONDITIO N

35 . The weekend before The Money Store acquisition closed in June, 1998 ,

the entire deal almost collapsed when First Union management was confronted with seriou s

questions about problems with The Money Store's loan portfolio . According to a former Head

of Delinquency at The Money Store, during a weekend at the end of June, 1998, right before the

deal closed , First Union executives met to discuss the closing of The Money Store acquisition in

Barcelona, Spain. The meeting was attended by, among others, Bill MaKuch (head of Firs t

Union's Capital Markets Group), Defendant Maynor and Brian Simpson . According to The

Money Store's former employee, "There were issues that were brought up at the very last minute

that jeopardized the entire deal" . . . . ."somebody raised the issue and said, 'is this deal worth it?" '

36. A former Senior Vice President of servicing for the Home Improvement

Division of The Money Store reported that, at the last minute of the Barcelona meeting, First

Union finance executives , specifically defendant Atwood , and Peter Schild (head of Audit at

First Union) opposed completing the merger . But Defendant Maynor and Jack Pearce pushed the

deal through .

16

37, According to a former First Union Head of Risk Management, Bil l

MaKuch, the head of the mortgage analysis group in capital markets flew out to Sacrament o

immediately prior to the Barcelona weekend and his group did a "quick and dirty" analysis of th e

valuation of The Money Store's $13 billion securitized loan portfolio . MaKuch's group

calculated a value of The Money Store which was much lower than the price that had bee n

offered in March . The Money Store people (headed by Sumit Sen) came back with their own

number, which was far from First Union's . The First Union and The Money Store people wer e

up all night during that weekend before the close . According to the former Head of Risk

Management, "neither side had enough time to come up with a forecast that could be supported ;

it was a crap shoot day . "

38. According to a former (July 1997 to January 1999) Senior Vic e

President/consultant who coordinated the servicing process for all the business units of Th e

Money Store, and served as a compliance officer during the Barcelona weekend, Bill Makuch

calculated the losses in The Money Store portfolio and reported them to Crutchfield, Firs t

Union's CEO, and expressly advised Defendant Crutchfield not to close the deal . Defendant

Crutchfield insisted on closing the deal anyway .

17

C . A 1998 INTERNAL AUDIT AT THE MONEYSTORE REVEALS ENORMOUS ERROR RATESIN THE MONEY STORE'S LOAN PORTFOLI O

39 . After First Union closed on its acquisition of The Money Store on June 30 ,

1998, The Money Store's fraud and dismal financial condition was too obvious for even

defendants to continue to ignore . MQA was hired by The Money Store in early 1998 to conduct

an in-depth audit of The Money Store 's loans , including fixed rate and adjustable rate mortgage s

("ARMs"), MQA was hired to audit 43, 000 loans in an engagement that continued until about

June 1999 . According to the President of MQA, the audit exposed a "very high" error rate in

the level of what should have been paid by borrowers under these loans versus what was actuall y

paid . Thirty percent above the industry standard for ARMs and 10% above industry standard fo r

fixed rate mortgages . These errors included regular customer overcharges that should have bee n

refunded to customers . In one instance, MQA was scheduled to mail checks to The Money

Store customers as refunds, but "overnight" The Money Store decided to take control of th e

payout .

40. According to the President of MQA, The Money Store was not using the

correct index for the ARM's, and it failed to maintain a library of indices which detailed the

current mortgage rates . As a result, customers would pay more than the current adjustable rat e

for their mortgages and The Money Store would improperly recognize the revenue . Thi s

fraudulent practice was documented in a January 27, 1998 letter to Mary Jane Seebach, an

assistant corporate counsel at The Money Store . In the letter, the President of MQA notified The

Money Store that it should implement a codified index in order to insulate itself from "any lega l

challenge pertaining to an index selection ."

18

1 . The Results of The Money Store Audit Are Given to First Union

41 . The President of MQA met with The Money Store's Tu rtletaub and Firs t

Union's Pearce on October 27, 1998, and described the findings of his several-month audit t o

them. Turtletaub told the President of MQA to meet with Russell Pleasants, who was appointed

head of servicing for The Money Store on October 28, 1998 . The MQA President met with

Pleasants at a restaurant on a barge in Sacramento on October 28, 1998, and told him about th e

audit ' s findings, but nothing was done . The President of MQA told Pleasants and Jack Pearce of

the need to continue to audit the additional loans in The Money Store portfolio due to the severe

magnitude of errors uncovered . Only about 43,000 of the 350,000 loans had been audited, and

none of those audits involved loans originated after March 1996 . The President of MQA said that

only a large audit would insulate them from a class action lawsuit . Pearce refused to engage

MQA for further audit and said "we've gone through so many mergers, it'll all come out in th e

wash,"

42. In one audit of 9,205 loans, MQA's President told Ronald Williams, a Firs t

Union auditor who performed the analysis on the home improvement division around May 1999 ,

that in retail loans originated by The Money Store, MQA discovered a 56.86% error rate . I n

contrast, the national correspondent loans showed 16 .4% error rate, wholesale broker loan s

showed 8 .1 % error rate, and wholesale correspondent loans showed a 0 .7% error rate .

43 . The problems uncovered at The Money Store by the MQA audit were s o

severe, that, on May 26, 1999, the President of MQA audit sent a letter to David Crespi, (Crespi

was The Money Store auditor who reported to First Union 's former chief auditor, Peter Schild )

and Ronald Williams. The letter stated that 300,000 loans still had not been reviewed by MQA ,

and the letter "strongly recommended" auditing those loans since "a multiple array o f

19

discrepancies were discovered" in the audit to date of 43,000 loans . For example, in a sample

407 loans audited, 144 of them had errors of overcharging customers . The letter further stated :

[A]pproximately 17-20% of the loans have complex paymenthistories (excessive reversals and other anomalies) . . . . First Unionand The Money Store are fully aware of the issues discovered inthe audit projects and the necessity of immediate action.

44 . Despite the magnitude of the issues uncovered through the audit, First

Union took no action to audit the remaining loans . The President of MQA revealed that h e

repeatedly pressed First Union to take steps to remedy the level of reversals , overcharges and

other discrepancies, stating, "we were stressing again and again, 'We've got an acknowledge d

problem, we're solutions providers here, call us ,' First Union did not, and this was MQA's final

communication with First Union .

2 . The Money Store's Fraudulent Practices are DetailedIn Written Reports Provided to First Unio n

45 . A former Head of Quality Control and Operational Review, employed at

The Money Store until 2000 and who reported to The Money Store officers, Joseph Parisi an d

Peter Salamone (Senior Vice Presidents in process management), revealed that there wer e

significant quality issues in The Money Store loan portfolio . The Quality Control an d

Operational Review Group was charged with analyzing a statistical sample of loans to determine

whether the loans were underwritten properly (according to about 60 documented procedures )

and whether the loans were serviced properly . The former Quality Control Supervisor woul d

then provide monthly written reports which extrapolated his findings to the entire loan portfoli o

and break it up according to different divisions . According to this former employee, "there wer e

a lot of quality problems there . . . .they were very clearly spelled out [in the reports] ." These

written reports were provided to his immediate supervisors, and after the merger in June 1998 ,

20

the reports were provided to Mark Walter (First Union's former Head of Risk Management) and

then to Phillip Gerlach after Walter left First Union . In the course of his reviews, the former

Head of Quality Control and his team in the Quality Control department found a wide array o f

fraudulent practices which were regularly being conducted at The Money Store and wer e

described in the reports including the following :

a) Paying for loans using checks multiple times : The Money Store woul d

attempt to post a payment with a check that had already been processed . Sometimes the bank

markings would not record on the check, and they would attempt to re-use the check in order t o

keep the account current . "Sometimes it goes through, the bank doesn't put the numbering on it ,

and it came back through, it was able to go through again . They'd try it again," the former Head

of Quality Control said ,

b) Excessive "curing" of accounts : The Money Store violated its own internal

policies by exceeding the proper number of times they were allowed to bring an account up t o

date, or "cure" it . According to the policies established by The Money Store, "Curing" was only

allowed to occur once every 12 or 24 months for any given loan, but was often done at the end o f

each quarter, i .e ., every three months, to decrease the number of delinquent loans .

c) Lack of diligence and paperwork on the loans : The Money Store would fai l

to obtain documentation proving a customer 's income, and thereby throw off the debt ratios .

They would also fail to inquire about past credit history and value of the prope rty being used as

collateral . According to the former Head of Quality Control, "in effect, you're flying blind fo r

the most part when the information used to underwrite the loan is not adequate ." This improper

practice led loans to be classified as a higher level grade than they should have been .

21

46. After First Union' s acquisition of The Money Store, the former Head of

Quality Control continued to provide his repo rts on a monthly basis, and added senior Firs t

Union executives, including Jack Pearce, to the distribution list . He met with Pearce once o r

twice before the first OCC audit in October and gave him a historical batch of quality control

reports so that Pearce could get up to speed with respect to the ongoing problems at The Mone y

Store . According to the former Head of Quality Control there were a signi ficant number o f

loans which had problems -- up to 80% .

47 . According to the former Head of Quality Control, in the fall of 1998 ,

Pearce and others from First Union asked him to calculate the effect of the quality issues on the

bottom line, essentially to come up with an analysis of how many of the loans that were mad e

improperly were at risk for default (because they did not gather the proper information when

making the loan) and would not pay out . The range ofpotential losses were in the "millions of

dollars," but the review was never finished and no write-down for uncollectible loans was ever

taken as required by GAAP . The former Head of Quality Control said that Phil Gerlach, hi s

superior who replaced Mark Walter as head of risk management, called off the project, for n o

apparent reason .

D. First Union Is Directly Confronted With The Money Store's Frau d

1 . Concerned Money Store Employees ConfrontFirst Union Senior Managemen t

48. The pervasive problems at The Money Store were no secret to First Union .

A former Money Store Senior Vice President who ran servicing in the Mortgage Department ,

(specifically the Home Improvement Division) recognized by early 1997 that there were serious

problems at The Money Store involving missing operating procedures , process flaws, an d

22

understated losses . According to this former employee, "even for a sub-prime lender, they

weren't following any consistent accounting principles . . . . We were pretty shocked at the fact and

brought it to the executives' attention, and were pretty much ignored . "

49 . In July 1998, the former Senior Vice President in charge of servicing in th e

Home Improvement Division met with Jack Pearce to detail the problems at The Money Store .

Although Pearce initially said he would have to reconcile the problems, First Union did nothing .

Around October, 1998, the former Senior Vice President discussed The Money Store's

fraudulent practices (as detailed below) in a general meeting with defendant Maynor, again

nothing was done . By November or December 1998, the former Senior Vice President sen t

documentation concerning the fraud and accounting problems (as detailed below) to Defendant

Atwood and to the head of Audit at First Union . According to the former Senior Vice President ,

the fraudulent practices which he brought Jack Pearce's and to management's attention, included :

(1) failure to recognize delinquent loans ; (2) intentional misclassification of poor credit loans ; (3 )

understating losses ; (4) mismanaged home improvement loans ; (5) knowing collection of bad

checks; (6) lying to investors in the secondary market ; (7) lying to rating agencies; (8)

skyrocketing expenses ; (9) HUD censure; and (10 ) non-reporting of customer insurance lapses ,

as detailed below . Instead of taking immediate corrective action, defendants decided to cover up

the fraud .

2 . Defendants Take No Action to Remedy the Fraudulent Practices

50. The business practices that were ongoing at The Money Store sp anned to

nearly every operational area, and resulted in a failure to properly account for uncollectible

receivables, as well as the improper recognition of revenue, and significant violations of GAAP,

as detailed below in . These practices included :

23

a) First Union Improperly Brought Delinquent Loans to Current Status :

According to a former Senior Vice President in charge of servicing for the Hom e

Improvement Division , The Money Store had monthly delinquency targets, and one of the "tools "

they used to help reach that goal was called a "curer policy ." This entailed "curing" the

delinquent loans by moving up the due date. For instance, if a loan was due on January 1 and i t

was five months delinquent, they would go into the computer and change or "re-age" it so that

the payment was due on May 1 . The policy was in fact widely used even on first payment

defaults and for customers who went bankrupt . According to a former Head of Delinquency at

The Money Store, even if a customer had declared bankruptcy, and made one payment under th e

60 month bankruptcy plan, The Money Store would classify that as a "current" loan. The former

Senior Vice President of the Home Improvement Division recognized the impropriety of thi s

practice, and put a stop to it in his division . As a result, delinquency rates rose dramatically .

When he was questioned about the rising delinquency by Bob Benson (The Money Store's Chie f

Credit Officer) and Jack Hill (The Money Store 's Senior VP in charge of servicing for home

equity), he told them he had ended this improper "curer" policy . They told him to reinstate i t

immediately . The former Senior Vice President said that in the Home Equity division, the pre-

Merger delinquency rate was stated as 6-7% . As early as January 1998, the former Senior Vice

President told the credit policy committee, including Bill Templeton (head of The Money Store' s

Credit Policy Committee), that The Money Store was carrying between $7 and 10 million on th e

home equity and home improvement portfolio that should be booked as a loss . Templeton told

him, "My God, I can't do that . We're a publicly traded company and if I did that, we'd have to d o

it in increments and all that ." At that meeting, the former Senior Vice President also told the

credit committee about his objections to the "curer policy" . "The former senior vice presiden t

24

said 'That's just not standard practice in the industry ."' He was told, "Well, that's just the way w e

do business ." As a result of his failed attempts to have management react to these fraudulen t

practices, the former Senior Vice President detailed the improper practices in a packet of

material, including the non-performing receivables, and handed them out at the meeting . Some

in attendance at the meeting avoided even opening the folders .

b) Lying to investors in the secondai:y market : According to the forme r

Senior Vice President of Servicing, when The Money Store "cured" a delinquent loan, often the

investor in the secondary market would suffer . Secondary market loans paid investors interest i n

two ways : either "actual" or "scheduled ." On an actual basis, the interest would only be paid to

the investor if the loan applicant actually made his payment to the servicer . On a scheduled

basis, the payment would be made by The Money Store regardless of whether they had collected

a receivable from the loan applicant . For actual loans that were "cured" to be non-delinquent, the

investor would not receive the payment, but not be told it was delinquent . Consequently, the y

would have to look at their yield tables on the investment to recognize that a supposedly non-

delinquent receivable had not paid out . In some cases, investors did notice and complained. The

Money Store had conference calls where they said they would address the delinquency issue by

adding more collection agents and install new collection software, but they never addressed th e

true problem : the "curer" policy .

c) Intentional misclassification of Poor credit loans : According to the former

Money Store Senior Vice President, Loan officers would routinely make loans to people who had

impaired D and E level credit, and then book it as B and C level credit loans . This severely

impaired the worth of their receivable portfolio . Fitch, a rating agency that regularly reviews

companies for their creditworthiness and issues corresponding credit ratings, discussed Th e

25

Money Store's loan portfolio with defendants but were not told by senior management that the

loans were actually much higher risk loans than they were reported to be . These credit ratings are

vital to corporations looking to issue bonds or to obtain credit for general corporate purposes .

d) End of Quarter Action: According to the former Head of Delinquency at The

Money Store, who was in charge of handling loans that were more than 90 days delinquent, at th e

end of a fiscal quarter , The Money Store would make loans with abandon, and would "buy, close ,

whatever, to get its volume . They bought loans sight unseen, they never got reps and warrants ,

they never checked on the collateral , nothing ." This policy was referred to internally, and by the

lead production executive at the end of the quarter as "[expletive deleted] it, fund it . "

e) Understating losses : The Money Store would regularly fail to remov e

mortgage loans from its books that were clearly never going to be paid . These were usually case s

where either a person had died, or gone bankrupt . Instead The Money Store would carry thes e

loans as valid and collectible receivables . According to the former Head of Delinquency, "i f

people hadn't paid in six months, or if they died or filed bankruptcy, obviously that should be a

loss. But The Money Store continued to carry assets like that on the books ." In fact, according

to a former Senior Vice President of servicing in the home improvement division, the total los s

due to these improper accounting methods at The Money Store immediately prior to th e

acquisition was about $100 million, with $25 million attributable to the home improvemen t

division alone. In November and December of 1998, Russell Pleasants distributed memos t o

senior The Money Store employees confirming this figure, which was calculated by First Unio n

financial analyst John Lucke . According to the former Senior Vice President, this loss shoul d

have been recognized by December 1998 .

26

f) Failure to properly account for uncollectible receivables : According to the

former Senior Vice President of servicing at The Money Store, people who take out loans fo r

home improvement do not have to pay loan payments if the home improvement job is no t

completed or if not done to their satisfaction. Often The Money Store would count these loans a s

receivables when in fact they knew they were never going to be paid . The former senior vic e

president stated : "they would go ahead and book the receivable because they had all this pressur e

on meeting their business volume goals , that they made so many loans during the month. And of

course the customer wouldn't pay." When such a loan was not paid on the first date ("referred to

internally as the first payment default"), The Money Store should have investigated to recogniz e

the reason was because the improvement was not completed correctly . Then it could have gone

after the contractor . Instead, The Money Store marked these first payment defaults as "pending "

but not delinquent in order to continue to carry the receivables. The former Senior Vice

President argued, 'Well, you need to let the investor know this,' and management, including Bo b

Benson said, 'No, we've been doing it this way for a long time . We're just going to continue

doing this ."' In an attempt to rectify this practice, the former Senior Vice President hired a

contractor, Joe Maezzi, to travel around the country to document the home improvements tha t

were claimed to be unfinished. When Benson learned what the former Vice President had done

this, he stopped the practice of confirming the stage of home improvements immediately .

g) Knowing collection of bad checks : Jack Hill, The Money Store Vice President

in charge of home equity servicing, instituted a policy in which The Money Store collectio n

agents had a $50 incentive for each delinquent account made current by a customer payment .

Consequently, when a customer said he had no cash, it was common practice for the agent to ask

the customer to write a check . Both the customer and the agent knew the check would bounce,

27

but by the time it did, it delayed the delinquency report on that loan until the next month, and th e

collection agent would receive $50 for the collected check . This practice was confirmed by the

President of MQA, who revealed that The Money Store po rtfolio had a large number of

"reversals": The Money Store employees would post a payment to a loan and then reverse tha t

because customers were asked to pay with bad checks . In a letter sent to David Crespi on May

25, 1999, the President of MQA identified the number of reversals as a staggering 17-20% of

loans audited,

h) Lying to rating agencies : The former Senior Vice President was allowed t o

accompany The Money Store executive, Michael Benoff to a presentation to Fitch, a ratin g

agency, on the express condition that the above noted issues that the former Senior Vic e

President raised would not be discussed . The former Senior Vice President refused to participat e

on the grounds that failing to reveal this information would be tantamount to lying .

i) Lam growth in expenses : Expenses at The Money Store grew by 20% pe r

year while the former Senior Vice President was employed. Instead of initiating cost-

containment policies, The Money Store hired more employees , so that on a per-account basis, the

expenses grew slower . "They were just out of control . . . .it was terrible . They were throwing

money at people when really they should have been stopping everything . . . . instead they thought

they were still a small finance company from New Jersey and continued to shoot from the hip . "

j) Censure by HUD : The Money Store had received a censure from HUD

concerning FHA Title I loans , around late 1996, early 1997 . They were threatened with losing

their license because of the poor servicing standards . HUD told them not to file loss claims o n

the loans, and the former Senior Vice President investigated and discovered that they had . As a

28

result, The Money Store had to reimburse HUD over $1 million for these loans . The former

Senior Vice President informed First Union about this immediately after the Merger.

k) Non-reporting of customer insurance lapses : When The Money Store was

notified that a customer hadn't paid his insurance on his home, it was supposed to follow up wit h

the customer to ask why insurance hadn't been paid and also contact the senior lien holder . "You

had to exercise due diligence and make sure the customer had insurance on his home . . . . The

Money Store would throw those [the notifications] away ." When the former Senior Vic e

President questioned this practice, . he was told: "well if we throw them away then we can say w e

were never really notified . And if there's a loss we can go back against our own errors an d

admissions [ insurance policy]." The former employee stated "it was things like that that were

downright frightening in the business world ." By mid-1997, the former Senior Vice President

informed senior management in the monthly credit policy meetings, including Bob Benson ,

(chief credit officer), and Jack Hill, (senior VP for home equity servicing) of the fraudulent

practices he uncovered . (The meetings included Bill Templeton, John Reeves and Joh n

Davidson as well .) The former Senior Vice President was told by senior management includin g

Templeton that that was "the way things have always been done" and not to change anything .

The former Senior Vice President was told to "work the accounts harder, and we'll take a look a t

them later ." These were accounts in which there hadn't been payments for 6 months or a year an d

by all banking criteria and GAAP should have recognized via a loss provision through a charg e

to earnings . The former Senior Vice President also notified Bill Templeton, head of the mortgag e

division, and Marc Turtletaub, CEO, about the problems . Again, nothing was done, but

Turtletaub finally decided to sell The Money Store as a result of its inability to legitimatel y

increase profitability .

29

E. The Impact of the Money Store's Fraud on First Unio n

1 . The Ma nitude of The Money Store' s Problems

51 . Immediately after the acquisition, defendants confirmed that The Money

Store was plagued with a variety of serious accounting and operational problems which woul d

result in huge financial losses and render the acquisition virtually worthless if revealed, the sam e

problems which existed prior to the acquisition, as detailed above .

52. According to the former Head of the New Ventures Group and part of Th e

Money Store due diligence team, First Union originally planned to allow The Money Store t o

operate independently . A former Head of Marketing in the small business division confirmed

that First Union admittedly knew "within weeks" that something was wrong with its

purchase. At first, First Union promised complete autonomy to The Money Store . Defendant

Maynor, the First Union executive who engineered the merger, made this personal pledge to Th e

Money Store employees from the stage of The Money Store auditorium . But only a month later ,

First Union sent in their own people to start changing the rules, "because it was a botche d

acquisition ." Defendant Maynor was later sent to Sacramento to "be put out to pasture" and wa s

soon after let go .

53 . According to former Head of Marketing at The Money Store' s small

business division, a telling sign that First Union knew there were problems was its tightening o f

the credit requirements for loan applicants only one month after the merger . The former Head o f

Marketing met with credit officers from First Union immediately after the merger and reported

that, "you could see them physically wince" when they learned of the lax standards and policie s

at The Money Store . First Union felt that unless the loans had better credit standards than the

30

"D" and "E" credit loans on The Money Store's books, they wouldn't be able to sell the pooled

loans in the secondary market .

54. According to a former Assistant Vice President in the marketing divisio n

of The Money Store, First Union "had to have realized they bought a lemon shortly after" the

purchase in March 1998 . This former employee said it was common knowledge among

employees of The Money Store that there were serious problems, especially on the mortgage

side . She said that in late summer and into the fall of 1998, there were high-level meetings

convened between First Union and The Money Store officials to discuss the true state of affairs

of The Money Store . There was "serious doubt" as to whether the mortgage division was going

to make the numbers . In fact, by November of 1998, the former Assistant Vice President stated

that the departments received their reduced budget numbers, and this indicated there would

likely be layoffs because of the drastic budget reduction . By January 1999, The Money Store

employees were aware of the figure the small business division had to come in at, and looking at

it, we were also aware that in order to get to that something drastic was going to have to be

done." The division had to trim "several millions of dollars" from the small business division's

budget .

2 . The August 1998 KPMG Audit

55 . After the acquisition, in August 1998, KPMG was engaged at the direction

of First Union executives, including Jack Pearce, to help the internal audit division complete a

"self-audit" to prepare for the OCC investigation . According to a former independent auditor,

First Union decided to conduct the self-audit because of the increase in loan pre-payments, which

caused First Union to decide to take a hard look at the entire portfolio . The audit confirmed the

multitude of problems with The Money Store's portfolio, including misreporting of the

delinquency rate : a rate of 4-5% was discovered to be closer to 7-10% .

31

56 . According to the auditor, "they [First Union] weren't reporting it [th e

delinquency rate] as bad as they should have been. . . .some of it was just not wanting to report true

delinquency numbers ." The true delinquency rate was, in significant part, concealed through Th e

Money Store's improper "curing" policies ; whereby instead of marking a customer in default, it

would create a new loan at a higher rate and thus bring the loan current . The auditor reported

that

"instead of letting some of these loans go into default, they werecuring them. So instead of being two months delinquent, theyreissued another loan, attached that interest on, made it a biggerloan essentially a refinancing to hide delinquencies. Then they hada loan that was current and for a higher dollar amount. "

57. Another fraudulent practice reported by KPMG involved accepting

unfunded checks for loan payments . The Money Store would allow a customer to pay on th e

25th of the month, for example, even if the check was not backed by funds until the next month ,

if at all. The Money Store accepted a "payment" of a check over the phone as enough to bring an

account up to current, even though the payment might not arrive until 10 days later or not arriv e

at all . This helped The Money Store with its month-end delinquency rates . After the self-audi t

revealed all these problems, the internal audit people started "pointing fingers" at KPMG for no t

discovering these fraudulent practices earlier .

58 . According to a former Head of Risk Assessment at First Union, the Risk

Assessment group discovered many of the problems described above by August 1998 . The

former Head of Risk Assessment spoke directly to servicing people and delinquency people a t

The Money Store and conducted analyses of The Money Store's loan portfolio . One of the firs t

things the Risk Assessment group looked at was the quality of the securitized assets, and they

developed a formal statistical base to forecast future cash flow . The Risk Assessment Group

32

looked at the quality of the correspondent loans, and recognized significant problems with tha t

portfolio . For instance, the group compared loans from early 1997 to mid-1997, and found the

performance of the later loans was worse . "It was pretty serious. It was not the type of

performance that would suggest that you could make money. " These findings were

communicated up the corporate line . First Union closed the correspondent business in the fall o f

1998 .

59. According to the former Head of Risk Assessment many of The Mone y

Store securitized loans were two years old or newer . Most of the assets were either mortgag e

loans or home improvement loans. "It was the home improvement side was the first area that

bubbled up as an issue" because those loans have shorter lives, and the performance problem s

will present themselves quicker .

3. The Elimination of Gain-On-Sale Accounti n

60. In addition, defendants quickly realized that the elimination of gain-on-

sale accounting would be devastating for The Money Store and would further decrease the worth

of the acquisition . According to the former Money Store CFO, using gain-on-sale accounting ,

The Money Store made $77 million in 1996 and $100 million in 1997 . The former Money Store

CFO stated : "On a cash flow, on a dollar invested, was it making as much as it could have? No.

But this was the game that everyone was playing . It was wedded to the fact that it was gain o n

sale accounting ." By 1998, The Money Store earnings were merged with First Union, but wer e

well below $77 million, even though they still used the gain on sale accounting method . First

Union waited until 1999 to switch away from gain on sale accounting, because that helped thei r

1998 numbers . According to this former CFO, "That was all part of the game being played back

there. Managing their numbers ."

33

4. Defendants Receive Documents DescribinMassive Losses at The Mongy Store

61 . According to a former manager in the mortgage servicing division of The

Money Store, who reported to John Boland and Russell Pleasants and was responsible fo r

calculating the losses at The Money Store for 18 months after the merger, there were significant

losses in the general loan portfolio of The Money Store. The former manager personall y

calculated the figure representing loans that were in "serious stages of delinquency" just for the

home improvement division in June and July 1998 and determined this number to be about $12 5

million - - a number which grew over time . Of this number, the former manager estimated a loss

should have been taken on 70-80% of the figure because that was the percentage of hom e

improvement loans that were uncollateralized. The loss represented delinquent loans which wer e

fully owned by The Money Store (now First Union) and securitized pooled loans which had bee n

sold to investors .

62. In November 1998, the former manager was promoted and then looked at

the potential losses across the entire The Money Store mortgage division portfolio . He said that

the number of loans in "serious stages of delinquency" for the entire Money Store portfolio of

roughly $10 billion was between $300 and $500 million . Of those loans, he estimated a los s

should have been recognized on 40-50% of that figure (representing the uncoilateralized loans) .

63 . This analysis was compiled in report and spreadsheet format, showing the

stratification of the portfolio : products, origination sources, channels and delinquency stages .

The $125 million loss in home improvement was clearly spelled out in those repo rts , which the

former mortgage servicing manager distributed to officials at The Money Store and First Union

by July 1998, as part of the pre -OCC self-audit conducted of The Money Store . Jack Pearce ,

34

Russell Pleasants, John Boland, and Bill Lowman (The Money Store official in charge of th e

home improvement division) received these reports by July 1998 . The former manager also me t

and spoke directly with Jack Pearce in the Sacramento offices of The Money Store about the

losses in July 1998.

64. Senior management at First Union received the numbers around the sam e

time Pearce did, in July 1998 . "Jack was there very early on, and the communication was to hi m

and to him upward." The former manager said the communication extended to Malcolm Murra y

(First Union Chief Credit Officer) and to defendants Crutchfiled (CEO) and Maynor . "1 can' t

think of anybody who wasn't aware of it . . . .They weren't happy . . . "

65. The information on losses was available to First Union during First

Union's due diligence prior to closing the acquisition , but the former manager did not know i f

they looked at the numbers closely enough, although "the information was always there . "

Executives at The Money Store also recognized the severity of the losses before the merger ,

because the reports the former manager produced for the due diligence sessions reflected th e

losses . Indeed, the former manager was asked specifically by Bob Benson to prepare numbers

reflecting the delinquency levels and outstanding volume of the home improvement loan

portfolio for the diligence .

66 . According to the former manager, instead of taking the required losses al l

as a one-time charge, First Union decided to "deal with the most severe " loans first, and then

spread the losses out over time .

35

5 . A Written Manual Prepared by First UnionDetails The Money Store's Frau d

67. According to a former First Union executive who was in charge of the ris k

management group at The Money Store post-merger from June 1998 until October 1999, Firs t

Union recognized " significant " problems with The Money Store "almost immediately " -- in the

first 90 days after the June 30, 1998, closing date . In fact, First Union even put together a

manual which outlined the problems and the strategy to alleviate the problems preparation for the

OCC's first examination in October 1998 .

68 . According to the former Head of Risk Management, the following issues

at The Money Store were identified within the first few months of the Merger's close by the Ris k

management group, and were included in the manual :

a) Reluctance to write down bad loans : The risk management group analyze d

The Money Store portfolio, and recognized that the value of the assets was overstated : there were

many loans on which The Money Store was "reluctant to initiate foreclosure . From the surface

you would think,'Gee, look at their low charge-offs, and look at their low liquidation levels,' bu t

in reality there was a substantial inventory of defaulted loans building up, where no liquidatio n

was taking place . "

b) Encouraging payments with bad checks : The collection people woul d

encourage customers to give over their checking account number, in a process called "spee d

pay," even though they knew there was no money to cover the payments (a situation called

"NSF" -- not-sufficient funds) . In this way, The Money Store delayed report ing a delinquency ,

and temporarily brought an account to "current ." "It was stuff like that, it was games . "

36

c) Poor " process " regarding the collection strategy : there was no standard as to

when a customer was contacted and how often, and The Money Store lacked "standardized

management reporting and feedback mechanisms . "

d) Poor underwriting standards : "The credit decision process wasn't reall y

centralized, and there was no centralized control over the integrity of the decisions bein g

made . . . .There were many ways to cut the system, so to speak . You approve one thing, but what i t

ended up funding was something different ." For instance, at the end of the month, The Money

Store loan officers would make loans to D and E level customers and categorize them as higher-

grade loans .

e) Poor appraisal process : The Money Store loan officers would make loans t o

customers without verifying the collateral offered or performing even cursory diligence on their

ability to pay. "There was really no validation process . If they said the house was worth

$200,000 and was in good condition, there was really no review process to validate that . "

f) Poor controls in the correspondent loan division : "They were buying loans

that were of very questionable quality, and there were periods of times when the due diligence on

the loans they were buying were limited . "

6 . First Union Continues to Ignore SeriousAnd Illegal Practices at The Money Store

69. After the Merger went through, The Money Store's former Senior Vic e

President of Servicing set out to inform the First Union executives that there were seriou s

problems with The Money Store . "We were listened to at first, and then totally tuned out, and I

37

supplied a lot of documentation : memos, emails, and they were just turned aside. It was

amazing . It was almost as if they had assimilated the embarrassment ove rn ight." In July 1998 ,

Jack Pearce , senior vice president at First Union (and later COO of The Money Store) , made his

first post-merger visit to Sacramento . The former Senior Vice President had a one-on-one

meeting with Pearce in which he detailed the problems at The Money Store . According to thi s

former employee :

"I laid it all out, how many months I'd been trying to get thisstraightened out . . . 'He said, 'Oh my God, we've got to start takingthese losses on these non-performing assets . Put together a planthat shows incremental charge offs projected over the year . . .' Andthen I submitted it to him but nothing ever happened on it . I thinkby then it would have embarrassed him too much to have to cometo the bar and say, 'We've got this problem we've overlooked .' . . . .They knew. They knew. I had packages ready because I knew Iwould have to defend myself from having to be a pariah to thecompany, "

70. According to the former The Money Store Senior Vice President, "The

one who understood it thoroughly was Jack Pearce . . . Jack Pearce was the one in my mind wh o

said, 'Oh yeah, thank you for bringing these problems to my attention.' And then was

embarrassed about them, and decided to hide them on behalf of First Union rather than deal wit h

them."

71 . The former Senior Vice President , after having his concerns fall on deaf

ears speaking to Pearce about the fraud, sought to alert other First Union executives about Th e

Money Store' s illegalities . Around October 1998, Defendant Maynor went to The Money Stor e

in Sacramento to meet with about 20 executives, including the heads of each division and sale s

managers. Each executive reported on his business to Defendant Maynor during those meetings.

The former Senior Vice President mentioned some of the servicing problems when he met with

38

Defendant Maynor, including the loss and delinquency issues detailed above . This was the

second time this former employee met with Defendant Maynor to discuss these issues . The first

conversation the Senior Vice President had with Defendant Maynor regarding the servicing

issues took place right after the acquisition in July, 1998 .

72 . After being again disregarded by Defendant Maynor at yet an other meetin g

at the end of 1998 (November or December), the former Senior Vice President emailed and sen t

documents to Defendant Atwood, First Union CFO, and to the head of audit at First Unio n

detailing the problems . He described his attempts to alert First Union as follows: "after the

acquisition went down, I said 'There are some very very severe inherent problems in The Mone y

Store that somebody ought to know about .' I never got much of an audience ." He also informed

the examiners from the 0CC about his attempts to fix the accounting issues at The Money Store ,

and furnished them with numerous documents . In response , the 0CC demanded that First Union

acknowledge the losses, and, as a result, in January, 1999, First Union was forced to recogniz e

some of the losses which should have been recognized much earlier .

73 . As a result of this employee's efforts to rectify the fraudulent practices at

The Money Store, in January 1999, he was effectively offered a demotion (from senior VP to

VP) . Other high level executives who tried to alert management at First Union and The Money

Store were told not to comment during diligence and were similarly treated . Indeed, two other

high-level employees who spoke out about these improper practices were shuffled to lesse r

positions after the merger .

74. According to the former Senior Vice President of Servicing, the employee s

who raised concerns were consistently ignored by The Money Store, and then after the

acquisition, by First Union . He stated, "They just wanted us gone because they knew that we ha d

39

a lot of knowledge about the company and its problems, and it could be a potential source o f

embarrassment . "

75 . The former Head of Delinquency said that after the merger , he had dinner

with Jack Pearce at the Monterey Bay Restaurant in California, July 1998 and told him about al l

the problems, including the problems regarding the pooling and servicing agreements . One

provision in the pooling or se rv icing standard agreements called for The Money Store to mak e

sure the senior lien owner was paid first if The Money Store was holding the junior lien on a

mortgage. According to the former Head of Delinquency, "they didn't even know who the senio r

liens were with in half the loans they made . So how could they ever keep them current? "

Second, the pooling and servicing agreements said the loans were insured, when none of th e

loans were, in fact, insured . When the former employee found that out, he sent out memos t o

Money Store executives, but nothing was done . When he told this to Pearce, Pearce started to

say, "those bastards" but then recovered . "It was obvious this was news to him ." But Pearce

never did anything to fix these problems. According to the former The Money Store executive ,

"the Wizard of Oz couldn't have done anything to fix that company [The Money Store] . And

they didn't do anything to fix the company . "

76. A former senior vice president/consultant who coordinated the servicin g

process for all the business units of The Money Store, and later served as a compliance officer ,

from July 1997 to January 1999, met with Jack Pearce and Jack Reeves in July 1998 to speak t o

them about three major issues at The Money Store: 1) problems in the servicing department, 2 )

problems in the rate calculation for the adjustable rate mortgages (ARM), and 3) potentia l

problems with a new computer system . Pearce was unreceptive to the warnings and avoide d

40

conversations with this former employee at future meetings . Below are the details relating to

these problems that were related to Pearce :

a) Failure to Accurately Report Delinquency Rates: One major problem in the

servicing department was that Jack Hill, head of servicing for the home equity division within th e

mortgage department, often refused to turn over delinquent loans to the Head of Delinquency,

even though it was the delinquency division's job to follow up on seriously delinquent loans .

Originally The Money Store executives, including Hill, agreed that loans 60-days overdue shoul d

go to the Head of Delinquency . The Delinquency Division had responsibility to foreclose

collateralized property for delinquent loans, and sell the property, known as REO -- real-estat e

owned. The Division also oversaw bankruptcy filings of borrowers an d renegotiated loans with

delinquent customers . The Division was formally called AIM : Asset Integrity Management, and

had 350 employees . Loans that Hill sent over to AIM had often not been serviced at all by th e

time they reached AIM. Procedures called for telephone calls to be made in certain intervals a s

the loan became more and more delinquent (for instance , a call on the 10th, 30th, 45th and 60th

day of delinquency) . However, AIM received loans that were 180 days overdue and on no call s

had been made to the delinquent customer . According to the former Senior Vic e

President/consultant, Hill didn't want to send loans to AIM because it would indicate how poo r

the servicing had been to that point . According to the former Senior Vice President/consultant ,

he mentioned that Hill did not turn over loans to the Head of Delinquency and AIM, in a

conference call in late 1997 or early 1998 with Bill Templeton, Hill, DiMercurio, and Bo b

Benson. Templeton said he would appoint Benson to take care of the problems . The problems

continued . When the former Senior Vice President/consultant raised the issue again, about a

41

month later with Templeton, he was told that The Money Store was for sale, and therefore th e

issue was moot .

b) Improper Customer Charges : According to the former Senior Vic e

President/consultant, The Money Store was not calculating the rate on the ARM's correctly,

leading to customers overpaying or underpaying . The Money Store was using incorrect indice s

and margins to calculate the rate for the ARM's . It also potentially exposed The Money Store t o

a lawsuit based on the incorrect calculation . The former Senior Vice President/consultant

brought in an employee from QMA audit in Colorado to fix the problem, but both The Mone y

Store officials (especially Jack Hill) and, after the merger, Pearce, did not follow the auditors '

recommendations .

c) Computer System Issues : The former Senior Vice President/consultant

warned Pearce that the computer system they were considering implementing, Alltel's CP I

product, did not meet The Money Store's needs and would prevent people from updating th e

system and posting payments . Pearce ignored his warnings creating great difficulty in postin g

payments to the system for The Money Store .

F. THE NEED FOR OCC COMPLIANCE FURTHER FLAGGEDTHE MONEY STORE'S PROBLEMS

1 . The Conditional Approval Order

77 . Pursuant to federal law, before filing for approval to acquire The Money

Store, First Union was required to, and did, file an application with the OCC seeking fina l

approval of the acquisition . The application detailed The Money Store's operational procedures ,

management structure , and internal controls . (12 C .F.R. § 5.34(B)) . Under Federal law, Firs t

42

Union was directly responsible for any violations occurring within The Money Store, once Th e

Money Store became a First Union operating subsidiary . See, 12 C.F.R. § 5 .34(e)(3) .

78 . On June 29, 1998, the OCC conditionally approved First Union' s

application for approval to acquire as operating subsidiaries The Money Store and its direct and

indirect subsidiaries . (See, Conditional Approval # 280, July 1998, Comptroller of th e

Currency.) The OCC approval was expressly conditioned upon First Union (referred to a s

"FUNB" in the OCC Order) filing regular quarterly reports on The Money Store' s loan policies

and standards, and a detailed plan for monitoring those standards . Specifically, the OCC Order

stated :

. . . [T]he OCC has considered that, in connection with this

proposal, FUNB has represented that it intends to establish uniformloan policies and standards for home equity loans - - includingpricing policies, writing criteria, and credit rating standards - - for

FUNB, TMSI, and all other entities in the organization offeringthese loans . Thus, whether an applicant will be offered credit, andthe price at which credit will be offered to the applicant, will not beaffected by whether the applicant approaches the organizationthrough TMSI, FUNB, or some other company. FUNB iscurrently developing these uniform standards and has representedthat it expects to begin implementing these standards uponconsummation of the TMS] acquisition. In approving thisapplication, the OCC has specifically relied upon FUNB'srepresentations with respect to uniform loan policies, proceduresand standards . Accordingly, it is a condition of this approval thatFUNB provide reports to the 0CC - - detailing its progress inimplementing this unformity - - at the end of each calendarquarter until the implementation process is complete anduniformity is achieved. As part of the first such report, FUNBshall submit a detailed plan, acceptable to the OCC, for internalmonitoring of the pricing and assignment of credit ratings for homeequity loans, with a particular focus on monitoring for differencesbetween entities and for compliance with the fair lending laws .

(See, Conditional Approval # 280, July 1998, Comptroller of the Currency, at pg. 8) (emphasi s

added) .

43

79 . As a result of the monitoring obligations imposed upon First Union by th e

OCC, defendants could not have been ignorant of The Money Store's true financial conditio n

absent an extremely reckless disregard for the truth .

80. According to The Money Store's former CFO of the mortgage unit ,

employed with the Company until late 2000, the "honeymoon" lasted about 6 months from th e

March purchase . In August 1998, the examiners from the OCC started to examine The Money

Store. Initially the OCC was supposed to bring in 13 examiners , but First Union convinced the m

to lower that to 3-4. The former CFO said the head of the team , Greg Nelson , made an initial

review of The Money Store and reported to First Union's Board of Directors around October

1998 . This was a very critical report on sub-prime lending and the risk it entailed for Firs t

Union . The OCC had previously given First Union high marks , but that appraisal was now in

jeopardy .

2. OCC Inspectors Arrive at The Money Storefor an In-Depth Examinatio n

81 . The former Head of Delinquency had "extensive meetings " with the OCC

following the Merger during the summer and fall of 1998 . He said that in October 1998, the

OCC wrote a "very critical " 5-page single-spaced report . The audit lasted about a month , most of

October, and the OCC had to call in extra examiners because of the level of problems with Th e

Money Store . The OCC report "got the attention" of Malcolm Murray, the former chief credi t

officer of First Union . Murray retired in August 2000, and "took some of the fall for the failur e

of The Money Store ." The report criticized The Money Store 's lack of credit standards and

insufficient levels of reserves for securitizations .

44

82. The former heads of Compliance at The Money Store, Dara Jwaideh and

her husband, Russell Pleasan ts , were in charge of concealing the problems prior to the OC C

examination . At a meeting with First Union's other compliance officers prior to the October

1998 examination , which discussed strategies to deal with the OCC, Jwaideh told the forme r

Senior Vice Presidents she planned to falsify data to pass OCC scrutiny . She expressed her

intention to falsify some of the data demonstrating that First Union was dealing with th e

problems so that the OCC would not dig too deeply in those areas . She said she would "fill in

the blanks so the OCC would go away. "

3 . The Project Book - - Written Evidence of Defendants' Fraud

83. According to First Union's former Head of Risk Management, soon afte r

the Merger, the First Union capital markets group (mortgage division), headed by Bill MaKuch ,

knew about serious problems in the value of the portfolio of residuals. "It really started to com e

to light through their efforts in terms of the magnitude of what was occurring here ." These

problems, along with many of the process and servicing problems, were communicated to higher-

ups at First Union, and a "project book" was put together to address the problems aroun d

September 1998. KPMG was also engaged to help First Union identify issues with The Mone y

Store to prepare for the OCC examination, and helped prepare the book. After the OCC report i n

October 1998, First Union created a new plan to address the OCC' s issues . This plan was

documented in a second large and widely-distributed "project book," which identified "all of th e

tasks and people accountable and expected completion dates of every issue identified by th e

OCC . Every week people had to supply status updates ." The effort to fix these problems was

headed by Dara Jwaideh .

45

84. According to the President of MQA, he shared information about hi s

company's audit of The Money Store with KPMG in a letter dated August 13, 1998 for use in the

Project Book. The Project Book had a listing of issues and operational deficiencies and a red ,

yellow or green light to signify how much progress had been made . According to MQA's

President, "there were a lot of red lights . "

85 . The former First Union Head of Risk Management said that Jack Pearce ,

known as the "Coach," was the first person from First Union to arrive at The Money Store, an d

was in Sacramento 2-3 days a week. At that time, Pearce reported directly to defendant Maynor .

The former Head of Risk Management said he spoke with Pearce and told him about the issue s

he found at The Money Store in January, but he was not the first to inform Pearce about these

issues . He said Pearce was an "optimistic" person, and when the former Head of Risk

Management and his boss, Debbie Craig, sat down with Pearce before the second 0CC exam i n

Fall of 1999, "there was a certain element of 'Don't tell me what I don't want to hear ."' The

former Head of Risk Management was specifically trying to tell Pearce about the problems with

the operation and origination of loans, including bad appraisals and accepting income levels a t

face value, with no verifications . According to this former Head of Risk Management, Davi d

Crespi, the auditor at The Money Store was also "vocal" about the problems at The Money Store ,

and felt vindicated by the 0CC repo rt . Crespi repo rted to the then chief auditor at First Union ,

Peter Schild .

86. According to a former The Money Store Senior Vice President o f

Servicing, The Money Store and First Union "self-audited" themselves before the OCC came in

October 1998 . They then created the Project Book to correct the problems they found . Because

of the magnitude of the problems uncovered, Dara Jwaideh intended to falsify some of the dat a

46

as to appear that First Union was dealing with the problems, in order to prevent the OCC fro m

looking too deeply in those areas . Jwaideh specifically told the former Senior Vice President tha t

she was going to "fill in the blanks " in the Project Book in order to make the OCC "go away . "

87. Despite the turmoil at The Money Store and the revelation of sever e

accounting and operational issues diminishing the value of The Money Store acquisition -

revealed by at least three separate audits - defendants failed to disclose these problems or t o

take necessary write-downs to goodwill, as detailed below :

4. Defendants ' Fraud Violated GAAP

88 . GAAP (FASB Statement No . 5) requires that : "An estimated loss from a

loss contingency . . . shall be accrued by a charge to income if ., information available prior to

issuance of the financial statements indicates that it is probable that an asset had been

impaired . . ." and "the amount of the loss can be reasonably estimated ." The applicability of thi s

general rule as it applies to the accounting for goodwill was reaffirmed with the issuance of

FASB Statement No . 121 . Moreover , GAAP (APB Opinion No . 17, paragraph 31) speci fically

requires (i) a periodic evaluation of the carrying value of goodwill, and (ii) a writedown i f

goodwill becomes impaired .

89. First Union's 1997 Form 10-K and the Company's 1998 Form 10-K each

acknowledged this GAAP by stating :

The Corporation's unamortized goodwill is periodically reviewedto ensure that there are no conditions which exist indicating thatthe recorded amount of goodwill is not recoverable from futureundiscounted cash flows. The review process includes anevaluation of the earnings history of each subsidiary, itscontribution to the Corporation, capital levels and other factors . Ifevents or changes in circumstances indicate further evaluation iswarranted, the undiscounted net cash flows of the operations towhich goodwill relates are estimated . If the estimated undiscounte d

47

net cash flows are less than the carrying amount of goodwill, a lossis recognized to reduce goodwill's carrying value to fair value, andwhen appropriate, the amortization period is also reduced .

90 . Similarly, First Union's 1999 Form 10-K acknowledged GAAP

requirements by stating :

The Corporation's unamortized goodwill andother intangibles areperiodically reviewed to ensure that there have been no events orcircumstances to indicate that the recorded amount is no trecoverable from projected undiscounted net operating cash flows .If the projected undiscounted net operating cash flows are less thanthe carrying amount, a loss is recognized to reduce the carryingamount to fair value, and when appropriate, the amortizationperiod is also reduced .

91 . The foregoing representations were materially false and misleadin g

because defendants knew that the nearly $2 billion was not recoverable from projected

undiscounted net operating cash flows of The Money Store and turned a blind eye to th e

Company's blatantly material overstatement of goodwill and knowingly failed to reduce th e

carrying value of the Company's goodwill via a charge to earnings .

92. Defendants also knew or recklessly disregarded that the grossly overstate d

carrying value of the Company's goodwill existed from the inception of the Class Period and i t

resulted in material misstatements of the Company's financial position and results of operation i n

all financial statements which were disseminated to the investing public during the Class Period .

93 . As particularized below, defendants knew or recklessly disregarded that it s

intangibles were materially overstated and intentionally concealed this fact from the investin g

public throughout the Class Period .

94. Further, defendants knew or recklessly disregarded, facts which indicate d

that the annual and interim financial statements which were disseminated to the investing publi c

48

during the Class Period were materially false and misleading, in addition to the other fraudulen t

causes as alleged herein, because said financial statements reflected a grossly overstated carryin g

value for goodwill . Defendants also knew or recklessly disregarded that such grossly overstate d

carrying values for goodwill resulted in material misstatements of the Company' s consolidate d

financial position and results of operation .

95 . In contravention of GAAP and its own stated accounting policy, th e

Company (with the concurrence of defendants), failed to write down its goodwill throughout th e

Class Period .

96 . According to GAAP, intangible assets are probable future economic

benefits obtained or controlled by an entity as a result of a transaction or event (FASB Statement

of Concepts No . 6, paragraph 25) . An essential characteristic of an intangible asset is that "it

embodies a probable future benefit that involves a capacity . . . to contribute directly or indirectly

to future net cash inflows" (FASB Statement of Concepts No . 6, 26) . A material portion of the

Company's intangible assets , which were presented on the financial statements during the Class

Period, had no future economic benefit. These assets should have been substantially written

down at the very beginning of the Class Period. To the extent that the recognition of losse s

through such writedown's were deferred, the Company's consolidated financial statements were

materially misleading .

97. In its filings with the SEC, the Company was required to recognize and

report expenses in conformity with GAAP and to disclose in its financial statements the existenc e

of the material facts described herein and to appropriately disclose material informatio n

concerning (i) "known trends or any known demands, commitments, events or uncertainties tha t

will result in or that are reasonably likely to result in the registrant's liquidity increasing or

49

decreasing in any material way," and (ii) "known trends or uncertainties that the registrant

reasonably expects will have a material impact on net sales, revenues or income from continuin g

operations ." During the Class Period, the Company failed to make such disclosures . This non-

disclosure, coupled with the Company' s material misstatements and fraudulent

accounting, served to defraud investors during the Class Period .

98 . Accordingly, the financial statements which were disseminated to the

investing public during the Class Period were not prepared in conformity with GAAP because :

(a) The accounting principles selected and applied did not havegeneral acceptance .

(b) The accounting principles were not appropriate in thecircumstances .

(c) The financial statements , including the related notes , were notinformative of matters that affected their use , understanding, andinterpretation .

(d) The financial statements did not reflect the underlying events andtransactions in a manner that presented the financial position andthe results of operations within a r ange of acceptable limits thatwere reasonable and practicable to attain in financial statements .

99. Defendants knew or recklessly disregarded that the Company's financia l

statements were required to comply in all material respects with GAAP, and that said financial

statements did not comply with GAAP as required . In issuing or permitting issuance of th e

Company's fraudulent financial statements during the Class Period, defendants knew or

recklessly disregarded that members of the Class would be injured.

100. Defendants knew or recklessly disregarded the facts set forth herei n

concerning the Company's failure to appropriately :

a. Write off intangibles .

50

b . Write down investments in mortgage securities .

Write off uncollectible receivables .

d. Make disclosures which were necessary to prevent the financialstatements from being materially misleading .

101 . Defendants further knew or recklessly disregarded that said failure s

resulted in material misstatements of the Company' s financial position and results of operatio n

throughout the Class Period .

DEFENDANTS' FALSE AND MISLEADING STATEMENTSAND RELEVANT EVENTS DURING THE CLASS PERIOD

Defendants Announce the Ac uisition

102. On March 4, 1998, First Union announced in a Press Release that it signe d

a definitive merger agreement with The Money Store to create "the nation's number one coast-to-

coast provider of home equity loans." Under the terms of the agreement, First Union exchanged

First Union common stock for each share of The Money Store's common stock valued at $34 pe r

share . The total purchase price was $2 .1 billion, First Union stated in the announcement tha t

"the transaction is expected to be immediately accretive to First Union's earnings. "

103 . This statement was intended to, and did, induce the market into believin g

that First Union' s acquisition of The Money Store would have a positive business and financial

impact on First Union and enhance the Company's value ; and that First Union had a reasonabl e

basis to expect the acquisition of The Money Store to enhance the profitability and value of Firs t

Union's overall business and expand its ability to make money in the home equity loan market .

The following additional facts, including additional statements made by defendants and agents o f

First Union, confirm, evidence , amplify and clarify that defendants intended the statement s

alleged in paragraph 102, above, to induce the investing public to believe that First Union had a

51

reasonable, and sound, basis to expect The Money Store acquisition to increase the range of Firs t

Union's home equity loan business and enhance the profitability and value of First Union :

(a) Defendant Georgius further explained and amplified the message tha t

defendants intended to convey to public investors and the market in the Company's March 4 ,

1998 Press Release, by saying later in that same Press Release that :

"We are excited by the opportunity this partnership presents for usto fill an important gap in meeting the credit needs of a broaderrange of customers with expanded and very complementaryproducts . The combination with The Money Store fits perfectlywith our retail strategy of meeting the needs of all customers when,where and how they want . "

(b) The March 4, 1998 Press Release also further clarified the benefits of The

Money Store acquisition by emphasizing First Union's gains in its expansion of its home equit y

loan customer base, stating : "The Money Store expands First Union's ability to provide credit t o

homeowners who may not otherwise qualify for bank credit . "

(c) According to an article on March 5, 1998 in The Atlanta Journal and

Constitution, Jack Antonini ("Antonini"), head of the First Union Consumer Group, similarl y

amplified the representation that the acquisition would be accretive to earnings, saying that "the

advantages of the deal include the ability of each company to sell the other's products," and later

that same day telling The Orlando Sentinel that the merger would "Add up to 4 cents a share to

First Union earnings this year and up to 8 cents a share to the bottom line next year. "

(d) Days later, on March 9, 1998, in National Mortgage News, commenting

on the acquisition price of $34 per share Antonini stated : "We feel that the price is very

reasonable. It's a relatively low level ofmultiple times (Money Store's) '98 earnings.

Especially on an adjusted basis for the savings that we're going to be able to achieve and it' s

52

accretive to earnings immediately . " All of these statements by Antonini, a First Union agent ,

strongly confirm that the intent of the statements alleged in Paragraph 102, above, included

inducing the investing public to believe that First Union had done its homework and thus had a

good solid basis for believing The Money Store acquisition would increase its profitability an d

value .

(e) Similarly, in a March 11, 1998 article in The American Banker, Chris

Oddleifson, President of First Union Home Equity Bank stated :

"The Money Store is a fabulous company . They have been doing Band C underwriting for a lot longer than we have," said ChrisOddleifson, president of First Union Home Equity Bank. MoneyStore's 31 years of experience with subprime loans allow it to "godeeper into the risk bucket . We have a lot to learn from them" .

(f) The intended public effect of the statements alleged in Paragraph 102,

above, particularly the representation that The Money Store acquisition would expand the scop e

of First Union's home equity loan business by creating "the nation's number one" home equit y

loan provider, were further reinforced and amplified in similar statements made by First Union a s

the closing date for The Money Store acquisition neared . For example , in the Outlook section o f

First Union's 1998 First Quarter Form l 0-Q, filed on May 14, 1998, First Union stated :

We believe 1998 will be a very active year as we work to turn newmarkets and business strategies into strong revenue stories . As aresult of our investments for the future . . .The pending acquisition ofThe Money Store Inc ., a consumer finance company . . . will broadenour geographic reach and product capability .

Defendants' Statements In The March 4, 1998Press Release Were False and Misleadin g

104. Defendants' statements in ¶102, above, were materially false an d

misleading . Defendants' statements announcing that the acquisition would result in the creatio n

53

of the "number one coast -to-coast provider of home equity loans ," and was expected to be

"immediately accretive to First Union's earnings," failed to disclose material, adverse facts abou t

The Money Store acquisition that defendants knew or recklessly disregarded when the statement s

were made . In particular, by March 1998, the following events had already occurred :

(a) Defendants had conducted an extremely cursory due diligence duringwhich they deliberately ignored, or recklessly disregarded glaring warningsignals concerning The Money Store's operations . In fact, an auditorhired by The Money Store told a member of the First Union duediligence team in January or February 1998, about massive errorsaffecting the quality of The Money Store's loan portfolio . (132)

(b) Defendants' recklessness included ignoring critical key defects in TheMoney Store . For example, according to a former Head of QualityControl, The Money Store engaged in a myriad of illegal practices to maskits true financial condition - - problems that other potential acquirors ofThe Money Store such as Norwest Bank, quickly discerned causingNorwest to lose interest in acquiring The Money Store . These problemsincluded: (1) re-using checks ; (2) improperly "curing" accounts ; (3) failingto apply credit criteria or obtain documentation on loans ; (4) lying toinvestors in the secondary market ; (5) understating losses - - includingcontinuing to carry on the books loans where the customer was dead ; (6)failing to properly account for uncollectible receivables; (7) knowinglyaccepting and crediting bad checks ; and (8) arbitrarily overchargingcustomers and improperly recognizing revenue . (¶¶45(a)-(c)) .

(c) Defendants recklessly disregarded information which was made availableto the due diligence team in January 1998 . In particular, a written reportwhich included spreadsheets (prepared by a former manager in themortgage servicing division who personally prepared the calculations)detailed that there were significant losses in the general loan po rtfolio ofThe Money Store due to loans that were severely delinquent . (T61) .

105 . In addition, these statements were materially false and misleading because

of the following undisclosed adverse facts concerning The Money Store ' s underwriting

procedures which defendants knew or recklessly disregarded as of March 1998 :

(a) The Money Store regularly failed to obtain income verification, credithistories , and value verifications of property being used as collateral(¶J45(c)-(d)) .

54

(b) At the end of a fiscal quarter, The Money Store employees resorted to a[expletive deleted] it, fund it" policy where employees abandoning eventhe pretense of using minimal criteria to underwrite loans (1J34 )

(c) At the end of the month, The Money Store would make "D" and "E" levelloans to unqualified customers and report them as higher grade "B" or"C" loans . (T¶68(d)) .

106. The undisclosed facts about the actual financial condition of The Mone y

Store and the rampant improper business practices routinely engaged in in its lending operations ,

rendered defendants' positive statements in the March 4, 1998 Press Release about the benefit s

First Union reasonably expected to see from its Money Store acquisition materially false and

misleading when made . If investors had known the true facts that were known to, or recklessly

ignored by the defendants, the market price of First Union stock would have been materiall y

below what it was following the March 4, 1998 Press Release, and the further amplifications o f

the news in that Press Release that were made by First Union and its agents in the ensuing

months.

Defendants Close The Acquisition Of The Money Stor e

107. On June 30, 1998, First Union issued a Press Release announcing th e

closing of the acquisition of The Money Store . The Press Release again reiterated that "as

previously announced, the transaction is expected to be immediately accretive to First Union' s

earnings ." In connection with this acquisition, the Company recorded $1 .8 billion of goodwil l

and a second intangible asset related to The Money Store's origination network of $304 million .

Commenting on the completion of the acquisition, Head of First Union's Consumer Bankin g

Group, Jack Antonini stated :

"Through The Money Store, First Union will be able to meet thefinancial needs of a broader range of customers- like hard-workingfamilies who may have fallen behind in their credit payments

55

because of job loss, medical emergency or family crisis and arefacing high-interest, revolving credit debt . The Money Storeproducts and services will allow us to say yes to more customersmore often . "

108. At the time of the acquisition, First Union said it estimated that the periods

of future benefit related to goodwill and the origination network intangible were 25 years and 1 5

years, respectively . Based upon this original determination, regarding the expected useful life o f

these intangibles, at all relevant times, they were amortized over the 25 and 15 year time periods .

109. According to a July 1, 1998 article in The American Banker, defendan t

Hatch, commenting on First Union's $2 .1 billion purchase of The Money Store, further amplifie d

the false and misleading statements in the March 4, 1998 Press Release by stating that the

acquisition of The Money Store was going to be "more accretive than originally thought . "

110. As reported by The American Banker on July 16, 1998 defendant Atwoo d

further reinforced the misleading representations about the impact of The Money Stor e

acquisition that defendants had already disseminated to the market when he claimed : "We got a

good deal. This is actually worth a lot more to us than we paid for it " .

First Union ' s False And Misleading Form 10-QFor The Quarter Ending June 30, 199 8

111 . On August 14, 1998, the Company filed a quarterly report on Form 10- Q

for the quarter ending June 30, 1998 (the "1998 Second Quarter 10-Q"). The 1998 Second

Quarter 10-Q was signed by defendant Hatch, The Second Quarter 10-Q reported that operatin g

earnings in the first half of 1998 increased 19% to $1 .7 billion from $1 .4 billion in the first hal f

of 1997 . On a diluted per share basis, such earnings appeared to increase 20% to $1 .75 in the firs t

half of 1998 from $1 .46 in the first half of 1997 . Operating earnings were reported as "a record "

$883 million, or $0.92, in the second quarter of 1998, compared with $719 million, or $0 .74, in

56

the second quarter of 1997. After merger- related and restructuring charges in the first half o f

1997 of $37 million, earnings were $1 . 0 billion in the first half of 1998 compared with $1 . 4

billion in the first half of 1997 . On a diluted per share basis, such earnings were $1 .07 in the first

half of 1998 compared with $1 .42 in the first half of 1997 . The 1998 Second Quarter 10-Q

stated :

We are very pleased with our progress in integrating recentacquisitions and with the growth prospects stemming from thesetransactions. We believe 1998 will continue to be a very activeyear as we work to develop new markets and business strategiesinto revenue growth . In addition to revenue growth, we expect

further improvements in efficiency as we begin to benefit fromthe consolidation of our recent acquisitions ,

112 . The market reacted almost immediately to these false and misleading

positive statements about the Company's acquisitions . The price of First Union common stock ,

which was $52 .87 per share on August 14, 1998, increased over a dollar per share to $53 .93 on

August 18, 1998 after the Second Quarter 1 a-Q was disseminated to the marketplace .

113 . Defendants' statements in the 1998 Second Quarter 10-Q were materiall y

false and misleading when made, By June 30, 1998, defendants had direct knowledge of th e

fraudulent activities, enormous delinquency rates, and illegal accounting methods that were an

integral part of The Money Store corporate culture, which were continuing unabated , and which

rendered defendants' continued statements boasting to investors about First Union's "growth

prospects," "revenue growth," and "further improvements in efficiency" as a result of thei r

acquisitions of The Money Store and CoreStates materially false and misleading . In addition, as

a result of the problems that were evident to defendants, the $1 .8 billion in goodwill associated

with The Money Store acquisition First Union had on its public financial statements was non-

57

recoverable . Among the undisclosed facts known or recklessly disregarded by defendants whe n

the 1998 Second Quarter 10-Q was filed were the following :

(a) In one May 1999 audit of 9,205 loans, the President of MQA discovered a56 .86% error rate, vastly higher than industry norms ranging from 0 .7% to16 .4% (¶42) .

(b) Starting immediately after the acquisition, written reports were provided toMark Walter, Phillip Gerlach, and defendant Pearce detailing problemswith a statistical sample of loans at The Money Store (~44) . These reportsincluded significant shortfalls in The Money Store's underwriting andcollection procedures . ($$68(c)-(d)) .

(c) For the home improvement division alone during the months of June andJuly, there were approximately $125 million worth of loans in seriousstages of delinquency, of which 70-80% should have been taken as a lossbut were not. This analysis was compiled in report and spreadsheetform and was distributed to Jack Pearce, Russell Pleasants, John Bolandand Bill Lowman. A former manager also had a one-on-one meetingwith Pearce to discuss the proliferating losses, a communication whichwas extended to the highest ranks of management , including JimMaynor, Malcom Murray and defendant Crutchfield. (T~63, 64) .

(d) Immediately after acquiring The Money Store, First Union beganpreparing for an OCC examination, scheduled to take place in October1998 . To prepare for the examination, First Union's risk assessmentdepartment put together a written manual detailing The Money Store'sfraudulent activity, ranging from encouraging customers to pay with badchecks to granting loans at quarter-end to unqualified "D" and "E" levelcustomers to boost sales volumes . (¶¶67(d)) .

(e) Concerned Money Store employees also approached First Unionmanagement to directly confront First Union with The Money Store'sillegal practices . For example, in July 1998 a The Money Store SeniorVice President met with Jack Pearce to describe the problems and the poorquality of the company's loan portfolio - - to no avail . The former TheMoney Store executive told Pearce about, inter alia, The Money Store's :(1) "curing" customer accounts - - a practice he stopped and was told toimmediately reinstate by Bob Benson and Jack Hill ; (2) lying to investorswho purchased loans in the secondary market : (3) lying to credit ratingagencies about the creditworthiness of Money Store customers ; (4)engaging in the "[expletive deleted] it, fund it" policy at quarter-end ; (5)deliberately understating losses including loans from deceased customerswhich could not be paid ; and (6) knowingly collecting checks whic h

58

would not clear in order to manipulate delinquency rates . (1~54(a)-(k),76)) .

(f) A second Money Store executive had dinner with Pearce at the MontereyBay restaurant in July 1998 to discuss The Money Store's true financialcondition, as well as significant deficiencies with pooling and servicingagreements, the company's deliberate understating of delinquency rates,and improper customer over-charges . (175)

(g) The Money Store practices were also described in the "Project Book",which was prepared after Bill MaKuch found serious problems in thevalue of the portfolio of residuals at The Money Store. (¶83)

(h) Due to the magnitude of the problems at The Money Store, defendantswere forced to abandon their earlier plan of allowing The Money Store tooperate independently, and sent in First Union executives to take controlof The Money Store's operations . (152)

(i) In August 1998 KPMG was hired by First Union, at the direction o fJack Pearce, to prepare an audit prior to the OCC investigation . The auditconfirmed The Money Store's deliberate manipulation of delinquencie sas well as the improper curing policy . (¶T55-57)

(j) The Risk Assessment Group at First Union also performed an audit byAugust 1998, which revealed serious problems in the correspondentloan division .(¶58)

(k) During the Barcelona Weekend before the June closing of The MoneyStore acquisition, serious questions were raised regardingthe true value of The Money Store, and a group of dissenters - - led byDefendant Atwood - - actively opposed the acquisition and felt theMoney Store's loan portfolio was overvalued. (¶1135-38 )

(1) Bill MaKuch prepared an analysis of the value of The Money Store's$13 billion securitized loan portfolio for use at the Barcelona meeting .MaKuch's group calculated a value for The Money Store which was muchlower than the price offered by First Union - - a price so excessive that it"shocked" Money Store employees . (1137)

Defendants' Statements in the Third Ouarter of 199 8

114. Between the filing of the 1998 Second Quarter I O-Q on August 14, 1998 ,

and the defendants' issuance of a false and misleading Press Release on January 14, 1999 ,

59

announcing First Union's 1998 Fourth Quarter and year end financial results, defendants mad e

public statements in a Press Release and a Form 10-Q about First Union's financial results an d

business operations during the Third Quarter of 1998 . These statements were intended to, an d

did reinforce, confirm and amplify defendants' earlier statements that misleadingly represented

The Money Store acquisition as enhancing First Union's business and financial condition,

contrary to undisclosed adverse facts about The Money Store's operations and finances that

directly showed that the acquisition was, in fact, a grave threat to First Union 's financial and

business well-being . For example :

(a) On October 14, 1998, First Union issued a Press Release announcing

"record operating earn ings" for the third quarter ending September 30, 1998 . The Compan y

reported operating earnings of a "record" $1 .0 billion, an increase of 35% from $748 million in

the third quarter of 1997 . On a per share basis, operating earnings increased 31 % to $1 .02 in the

third quarter of 1998 from $0 .78 in the third quarter of 1997, representing a return on averag e

stockholders' equity of 23 .50 % and a return on average assets of 1 .75 %. In the first nine months

of 1998, operating earnings increased 25 % to $2 .7 billion compared with $2 .2 billion in the first

nine months of 1997 . On a per share basis , operating earnings in the first nine months of 199 8

increased 24 % to $2 .77 from $2 .24 in the first nine months of 1997, representing a return on

average stockholders ' equity of 22 .89 % and a return on average assets of 1 .64 % .

(b) On November 13, 1998, First Union filed its Form 10-Q for the thir d

quarter of 1998 ending September 30, 1998 . The Company reported :

With the June 30, 1998, $2 .2 billion purchase accountingacquisition of The Money Store, we recorded $1 .9 billion ofgoodwill and an intangible asset related to The Money Store'sorigination network of $304 million . This is based on The MoneyStore's closing equity of $489 million and preliminary fair value

60

adjustments, net of tax effects, related to certain interest-only andresidual certificates related to asset-backed securities issued by TheMoney Store of $237 million, long-term debt of $47 million,professional fees and other acquisition-related expenses of $23million, deferred taxes related to the origination network intangibleof $120 million and other miscellaneous adjustments amounting to$103 million . The estimated periods of future benefit related togoodwill and the network intangible is twenty-five years andfifteen years, respectively .

115. In fact, as defendants knew or blindly and recklessly disregarded ,

problems stemming from The Money Store acquisition continued to get worse (and the recorde d

goodwill was a chimera), as shown by the following facts and events that occurred in late 1998 :

(a) On October 27, 1998 the President of MQA met with Turtletaub andPearce and described the findings of MQA's audit, which revealedhuge levels of reversals, overcharges and enormous error rates .The President of MQA stressed that due to the severe magnitude oferrors, a further audit was needed . Pearce refused to continue the audit,stating "we've gone through so many mergers, it'll all come out in thewash . " (~41 )

(b) In October 1998, The Money Store's former Head of Quality Controlmet with Pearce and gave him a historical batch of quality controlreports in order for Pearce to prepare for the OCC investigation .The reports detailed problems such as attempting to post checks toaccounts repeatedly excessively curing accounts and failin gto obtain required documentation for loans . These problems oftenimpacted as much as 80 % of the loan portfolio .(¶J45(a)-(c), 46)

(c) The former Head of Quality Control was asked to calculate the effectof the "quality" issues on the bottom line , which he preliminarilydetermined to be "millions" before the project was abruptly terminatedby Phil Gerlach, Head of Risk Management. (T47)

(d) In October 1998, a former The Money Store Senior Vice President metwith Jim Maynor to discuss the company's fraudulent practices . AfterMaynor failed to take action, the former The Money Store executive sentemails and documents to defendant Atwood and the head of audit at FirstUnion in November and December 1998 . (149)

(e) In November 1998, a former The Money Store manager calculated thepotential losses across the entire Money Store loan portfolio an d

61

determined that the number of loans in serious stages of delinquency wasas much as $500 million, and that a loss should have been recognized on40-50% of that figure . (~62)

(f) In October 1998, the OCC performed an on-site audit of The Money Storewhich lasted nearly a month . The OCC prepared a very critical reportwhich criticized The Money Store's lack of credit standards andinsufficient levels of reserves for securitizations . (~'J9 )

(g) In order to prepare for the OCC examination, after an analysis by BillMaKuch found serious problems in the value of The Money Store'sresiduals, a "project book" was created in an attempt to deal with some o fthe issues, which included mostly "red lights" - - indicating no progresshad been made in solving the deficiencies . Because of the magnitude ofthe problems, Jwaideh, the former head of compliance, expressed herintention to falsify data to "make the 000 go away. "(¶83)

116 . Defendants, despite knowing or recklessly disregarding all of the abov e

facts, as well as the fact that the $1 .9 billion goodwill associated with The Money Stor e

acquisition was grossly inflated through a failure to recognize the material impairment resultin g

in a material overstatement of First Union 's public reported income , made no attempt to fulfil l

their reporting obligations and duties under their federal securities laws to disclose the problem s

arising from The Money Store acquisition . The investing public remained deceived about th e

true business and financial impact on First Union of The Money Store acquisition .

Defendants Issue False Statements at Year End 199 8

117. On January 14, 1999, defendants issued a Press Release announcing Firs t

Union fourth quarter earnings for the quarter ending December 31, 1998 and for fiscal year 1998 .

The Company reported earnings of $ 857 million , or $0 .87 per diluted shares, for three months

ending December 31, 1998 - - up from $576 million or $0 .60 a share in the previous year . The

Company reported a 34% increase in operating earn ings, to $993 million , or $1 a share . For fiscal

year 1998, First Union reported "record" operating earnings at $3 .7 billion in 1998, a 27 %

62

increase from $2.9 billion in 1997 . On a per share basis, operating earn ings increased 25 % to

$3 .77 in 1998 from $3 .01 in 1997, representing a return on average stockholders' equity o f

22 .81% and a return on average assets of 1 .66%. Commenting on the results, defendant

Crutchfield stated "our record 1998 performance clearly underscores our progress in building a

new kind of financial services company . "

118 . On January 26, 1999, defendants filed a report on Form 8-K with the SEC ,

disclosing that it would eliminate its use of gain-on-sale accounting (a method which allow s

lendors to record profits on loan securitization before the loans are actually sold) when i t

securitizes sub-prime loans . The Company announced that dropping the gain-on -sale metho d

would decrease 1999 earnings by $0 .8 to $0.12 per share. In response to the news, which onl y

partially revealed the depth of the severe problems and costs First Union had encountered, an d

was continuing to encounter in integrating its acquisitions , the stock dropped $4 .88 per share

from its price of $52 .19 prior to the Company's disclosure .

119. On the same day, defendants issued a Press Release that ampli fied and

clarified the information in the January 26, 1999 Form 8-K by explaining that the elimination o f

gain on sale treatment for securitization activities related to B and C home equity loans was don e

to "reduce potential earnings volatility going forward ." The Press Release added :

"This accounting change, uncertainty in the economy and ourcontinued investments in strategic initiatives led us to concludethat an operating earnings per share growth goal in the mid to highsingle digits in 1999 is appropriate at this time . Achieving thisgoal would result in an estimated return on equity of 22 percent . "

120. On February 12, 1999, the Company issued its Annual Report t o

Shareholders for the year ending December 31, 1998 . Commenting on The Money Stor e

acquisition, in the Letter to Shareholders, signed by defendant Cruthchfield, he stated :

63

"We dramatically expanded our nationwide origination networkand added increased geographical diversification through the June1998 acquisition of The Money Store . "

Defendant Crutchfield further emphasized the significance of TheMoney Store acquisition by stating : "The 1998 addition of TheMoney Store establishes our position as the nation's top homeequity lender and the nation's sixth largest student loan originator,and it allows us to help more customers realize their financialdreams . To ensure that all of our customers receive the highestlevels of service, First Union's fair lending programs andprocedures extend across all channels, including The MoneyStore . "

121 . On March 16, 1999, the Company filed its annual report on Form 10-K fo r

the year ending December 31, 1998 (the " 1998 10-K"), signed by defendants Crutchfield an d

Hatch. The 1998 10-K reported $3 .7 billion in operating earnings, a 27% increase from $2 . 9

billion in 1997 . On a per share bas is, operating earnings increased 25% to $3 .77 in 1998 from

$3 .01 in 1997 .

122. Commenting on The Money Store acquisition, the 1998 Form 10-K stated :

The 1998 addition of The Money Store establishes our position asthe nation 's top home equity lender and the nation's sixth largeststudent loan originator . . .

123 . In the Management's Analysis of Operations Sections, the 1998 Form 10-

K amplified what defendants represented were factors behind the earnings announcements an d

other financial results in the 1998 10-K . Among other things, the Management's Analysis o f

Operations Section stated :

Fee income from Capital Management and Capital Marketactivities amounted to almost one-half of fee income in 1998 .Sundry income was $2 .4 billion in 1998 and $1 .1 billion in 1997 .Securitization gains included in sundry income amounted to $529million in 1998 compared with $154 million in 1997 . The increasewas primarily attributable to the securitization of credit cards an d

64

mortgage-related products including sub-prime home equity loansfrom The Money Store .

124. Similarly, in the Management Analysis of Operations, in the Busines s

Segments, Consumer Bank Section, the 1998 Form 10-K stated :

The Consumer Bank generated $1 .2 billion in net income in 1998compared with $1 .0 billion in 1997 . The Money Store, recordproduction in residential first mortgage loans (includingrefinancings) and home equity loans contributed to the increase inConsumer Bank net income . Residential first mortgage productionvolume increased 102 % to $18 billion in 1998 . Home equityvolume, including The Money Store, increased 20 % to $17 billionfrom 1997 .

125 . On March 19, 1999, defendants issued another false and misleading Press

Release in the PR Newswire that "reaffirmed" First Union's earlier $4 .00 per share earning s

outlook for 1999, excluding merger-related and restructuring charges and non-recurring gains . It

also stated that pre-tax cost savings after restructuring were expected to be approximately $400

million for 1999 . Operating earnings were expected to be in the range of $ .99 to $1 .01 per share

in the first quarter, excluding merger-related and restructuring charges . Management stated that

earnings per share for subsequent quarters of the year were expected to be significantly stronge r

than in the first quarter .

Defendants' Year-End 1998 Statements Were Materially False and Misleading

126. Defendants' statements alleged above in j¶ 117, 118, 121, 122 and 125,

were materially false and misleading because of the adverse facts, alleged above, defendants

knew or recklessly disregarded about The Money Store acquisition by August 14, 1998 and

thereafter, and because each statement failed to disclose the additional following material ,

adverse facts about The Money Store :

65

(a) By November 1998, The Money Store departments had received newbudgets which were dramatically cut, and employees expressed seriousdoubt that the mortgage division would be able to "make its numbers ."(1154)

(b) Defendants continued to improperly fail to properly account for significantlosses from non-performing assets in the loan portfolio, in order to delaythe additional hit to earnings such a necessary charge would have resultedin. In July 1998, Pearce confirmed the need for the recognition of losses,telling a former Senior Vice President, "Oh My God, we've got to starttaking these losses on these non performing assets. Put together a planthat shows incremental charge offs projected over the year ." Although theplan was immediately prepared, the losses were not recognized . (169) .

(c) In January 1999, a former Senior Vice President at The Money Storeinformed examiners from the OCC about the accounting improprieties atthe company, and furnished the OCC with documentation evidencing thefraud . As a result, the OCC demanded that The Money Store recognizethe losses . As a result of alerting authorities to defendants' fraud, thisemployee was demoted . (¶¶72-73 )

(d) Although defendants were well aware of the enormous impairment to thevalue of The Money Store's loan portfolio goodwill and the operationalproblems resulting from defendants' fraudulent practices (ranging fromcarrying uncollectible loans such as those from deceased customers on thebooks to double counting payments), defendants failed to recognize lossesassociated with the loan portfolio or take a necessary write-down of themassive $1 .9 billion of goodwill recognized from the acquisition . As aresult, defendants fourth quarter net income was materially overstated .

(e) According to a former Senior Vice President of servicing in the homeimprovement division, the total loss due to the improper accountingmethods at The Money Store immediately prior to the acquisition wasabout $100 million, with $25 million attributable to the homeimprovement division alone . In November and December of 1998,Russell Pleasants distributed memos to senior Money Store employeesconfirming thisfigure, which was calculated by financial analyst JohnLucke. According to the former Senior Vice President, this loss shouldhave been recognized by December 1998. ¶50(e)

66

Defendants' Fraud Continues During Fiscal Year 199 9

127. On April 15, 1999 the Company issued a Press Release announcing 199 9

first quarter earnings for the quarter ending March 31, 1999 . The Company's diluted operating

earnings per share were $1 .00 in the first quarter of 1999, including a $0 .12 cent per share

after-tax gain on the sale of First Union's interest in Electronic Payment Systems . Excluding thi s

one-time gain, earnings per share amounted to $0 .88 . Operating earnings of $1 .00 per share

compare with operating earnings of $0.83 cents per share in the first quarter of 1998 . Operating

earnings exclude merger-related and restructuring charges . Operating earnings were $96 5

million in the first quarter of 1999 compared with $809 million in the first quarter of 1998 . After

merger-related and restructuring charges of $398 million pretax ($259 million after tax, or $0 .2 7

per share) in the first quarter of 1999, net income was $706 million, or $0 .73 per share. After

merger-related and restructuring charges of $29 million pretax ($19 million after tax, or $0 .02

per share), net income was $790 million, or $0 .81 per share, in the first quarter of 1998 .

Commenting on the results, defendant Crutchfield stated :

"We were pleased in the first quarter with the disciplined way ourcompany focused on reducing our cost structure . We are confidentthat revenue momentum will continue to be strong, led by ourgrowing Capital Markets and Capital Management businesses .Although we view 1999 as a challenging year, we continue toinvest in areas that promise higher revenue growth . "

128 . On May 5, 1999, the Company filed a quarterly report on Form 10-Q fo r

the first quarter ending March 31, 1999 (the "First Quarter 1999 10-Q") . This document, which

was signed by defendant Hatch repeated, the financial results which were set forth in the Apri l

15, 1999 Press Release .

67

129. On May 25, 1999, defendants shocked the market by announcing that the

Company would revise its 1999 earning outlook due to a "year of transition, consolidation an d

strategic focus ." Defendants disclosed that following "a strategic review and analysis," i t

expected earnings for 1999 to be in the range of $3 .3 billion to $3 .4 billion, or $3 .40 to $3 .50 per

share . The "new" forecast fell far short of defendants previous forecast of $4 .00 per share .

130. Defendants further announced that they expected earnings for the second

quarter of 1999 to fall in the range of $770 million to $800 million, or $0 .80 to $0.83 per share .

A consensus of analysts' earnings estimates, however, was $0 .97 per share for the second quarte r

of 1999 . The Company itself had stated , in its March 19, 1999 Press Release, that operating

earnings in the first quarter would be between $0 .99 to $1 .01 per share, and that earnings for th e

subsequent quarters would be substantially higher.

131 . Commenting on the devastating revision, defendant Crutchfield sought t o

explain the shortfall as follows :

"In 1999, the Company's fundamental operations are strong, asevidenced by an estimated 20 % return on shareholders equity .However, in 1999, we are faced with overcoming the impact ofsubstantial, 1998 unusual non-core earnings items, majoracquisition integration and acceleration of spending for major newstrategic initiatives as we deploy a new business model . "

132. The reaction of the market to the news was swift and severe . On the same

day, First Union stock tumbled 8 .6% or 4 13/16 to 45 1/8, on trading of 16,786,600 shares, mor e

than seven times the normal trading volume . The drop constituted First Union's biggest drop i n

eight years, and was well below the stock's 52-week high of $65 .93 per share . Had the truth

about The Money Store's fraudulent practices been properly revealed to investors , the stoc k

would have dropped even more dramatically .

68

133 . The same day, numerous analysts slashed First Union' s ratings and

earnings estimates, citing First Union's problems as "digesting a slew of acquisitions ." In

response to the May 25, 1999 profit warning, the New York Times reported on May 26, 1999 that

while First Union proudly promotes itself as "the mountain ," the "ground beneath that mountai n

is trembling" . Commenting on the May 25, 1999 Press Release, Thomas K . Brown, Money

Manager with Tiger Management, stated : "For years I complained about the prices [First Union]

paid for acquisitions, but I always said they ran a good bank, but now they're having serious

problems running the basic bank - the wheels are coming off the cart . . .this is a tale of ego run

amok . . . This company has squandered its credibility with Wall Street,, .you cannot escape the

conclusion that they have trouble doing budgets over there ." The article further reported

Defendant Georgius stating in an interview that First Union's board had supported every

acquisition and was "very confident that our business fundamentals are solid. "

134. On June 1, 1999, in another article commenting on the Company's May 25 ,

1999 profit warning, The Charlotte Observer reported: "Is management just so arrogant that i t

can do whatever it wants without regard for the shareholders?" said Ryan, Beck analyst ,

Lawrence Cohen, in response the Company 's second profit warning . "They did too much to o

fast. . . What it boils down to is that somebody didn't have accountability for the numbers . . . nothing

more, nothing less," said Tom McCandles of CIBC World Markets .

135 . The June 1, 1999 article in The Charlotte Observer further reported :

"The Money Store, while a relatively small deal, hascaused big headaches. The company used anaccounting treatment called "gain on sale" when itbundled loans for sale to investors as bonds. Ratherthan spread that income over several years, TheMoney Store booked it immediately . Accountantsview this as a red flag when they look at a compan y

69

because it can add volatility to earnings . First Uniondecided to change the method in January--- but at acost of $0 .08 to $0.12 per share in 1999 . "

The Money Store made First Union the largest U .S .home equity lender, and it may turn out to be a goodpurchase, said a person close to the bank who askednot to be identified . But it was complicated ; indeed,the bank hired outside advisors to help evaluate thepurchase and may have relied on them too much,the person said .

Defendants Failed to Disclose The Magnitude of TheProblems at The Money Store in The First Quarter of Fiscal 1999

136. Defendants ' statements in ¶¶ 127-131, above, detailing first quarter 1999

results were materially false and misleading , and failed to disclose the problems The Mone y

Store was then experiencing, as detailed above . Indeed, by May 1999, defendants knew the

Company was experiencing such dramatic losses, that there was no way First Union could earn

$4 .00 per share in 1999 - - a figure defendants falsely expressed comfort with in March 1999 .

137. By virtue of the May 25, 1999 Press Release, investors were alerted that

First Union, as a whole, would not produce the anticipated financial results . However, investors

were in no way told about the severity of the problems The Money Store was then facing .

Defendants also continued , in violation of GAAP , to record nearly $2 billion worth of goodwil l

on the Company's books, despite the fact that this asset was materially impaired due, at least i n

part, to the proliferating uncollectible accounts receivables and unrecognized losses on The

Money Store's books . As a result, defendants first quarter financial results were artificially

inflated .

70

138 . The statements alleged in IT 129-131, above, were also materially fals e

and misleading in that each statement failed to disclose the following facts :

(a) In an audit prepared by MQA in May 1999, a 56 .86% error rate wasdiscovered, for retail loans originated by The Money Store, an error ratewhich exceeded the nationwide industry norm by as much as 56 .16% (¶42 )

(b) MQA's President told Ronald Williams about the magnitude of errors, andwas so concerned about the quality of the loan portfolio that he sent aletter dated May 26, 1999, to both David Crespi and Ronald Williams .The letter stated that 300,000 loans still had not been reviewed by MQA,and the letter "strongly recommended" auditing those loans since "amultiple array of discrepancies were discovered" in the audit to date of43,000 loans . The letter revealed enormous errors in overchargingcustomers . For example, in a sample 407 loans audited, 144 of the mhad errors of overcharging customers . The letter further stated :

"[A]pproximately 17-20% of the loans havecomplex payment histories (excessive reversals andother anomalies) . . . . First Union and The MoneyStoreare fully aware of the issues discovered in the auditprojects and the necessity of immediate action ."(1J43 )

(c) Despite the magnitude of the issues uncovered through the audit, FirstUnion took no action to audit the remaining loans . The President ofMQA revealed that he repeatedly pressed First Union to take steps toremedy the level of reversals, overcharges and other discrepancies, stating,"we were stressing again and again, 'We've got an acknowledged problem,we're solutions providers here, call us ." First Union did not, and this wa sMQA's final communication with First Union .(¶44)

DEFENDANTS CONTINUE TO ISSUE INFLATEDFINANCIAL REPORTS AFTER THE CLASS PERIOD

139. On July 14, 1999, the Company issued a Press Release announcing secon d

quarter earnings for the quarter ending June 30, 1999 of $0.90 per share compared with operatin g

earnings of $0 .92 per share in the second quarter of 1998. Earn ings were $873 million in the

second quarter of 1999 compared with operating earnings of $883 million in the second quarte r

71

of 1998 . The second quarter of 1999 included no merger-related and restructuring charges .

These charges in the second quarter of 1998 amounted to $634 million after-tax . Expenses

remained on target to limit full year 1999 expense growth to approximately 3% . In the secon d

quarter of 1999, compared with the second quarter 1998 , expense growth was only 1% adjuste d

for expenses related to the purchase accounting acquisition of The Money Store on June 30 1998 .

Commenting on the results, defendants Crutchfield stated: "Second quarter 1999 results were i n

line with our expectations . We continue to focus a great deal of energy on strategicall y

repositioning our company for the future . "

140. On August 13, 1999 the Company filed a quarterly report on Form 10- Q

for its second 1999 fiscal quarter ending June 3, 1999 (the "Second Quarter 1999 10-Q") . The

second quarter 1999 1 O-Q, signed by defendant Hatch repeated the financial results contained in

the July 14, 1999 Press Release . In the Consumer Section of the second qua rter 1999 10-Q

stated :

Consumer Products generated $523 million in net income in thefirst six months of 1999 compared with $516 million in the first sixmonths of 1998, and $270 million in the second quarter of 1999,down from $286 million in the second quarter of 1998 . Net incomewas positively affected by the contribution from The Money Storeand gains from loan sales and securitizations, principally in thefirst quarter of 1999, while it was negatively affected by a lowerlevel of deposits resulting from branch divestitures, primarily latein the third quarter of 1998 . Fee and other income was $1 .1 billionin the first six months of 1999 compared with $799 million in thefirst six months of 1998, with the increase primarily attributable togains from the securitization of credit card, Small Business

Administration (SBA) and student loans, and the sale of firstmortgages. Residential mortgage income declined compared withthe second quarter of 1998, largely reflecting a lower level ofmortgage securitizations and a significant decline in refinancingactivity .

Noninterest expense was $1 .8 billion in the first six months of1999 compared with $1 .5 billion in the first six months of 1998 ,

72

and $900 million in the second quarter of 1999 compared with$772 million in the second quarter of 1998, with the increaselargely related to the addition of The Money Store .

141 . On October 14, 1999, the Company issued a Press Release announcin g

third quarter 1999 earnings for the quarter ending September 30, 1999 . The Company reporte d

operating earnings of $0 .84 per share in the third quarter of 1999 compared with $1 .02 in the

third quarter of 1998 . Operating earnings were $802 million in the third quarter of 199 9

compared with $1 .0 billion in the third quarter of 1998 . In the first nine months of 1999 ,

operating earnings were $2.6 billion, or $2 .74 per share, compared with $2 .7 billion in the firs t

nine months of 1998, or $2 .77 per share .

142 . On November 15, 1999, the Company filed a quarterly report on Form 10-

Q for its third 1999 fiscal quarter ending September 30, 1999 (the "Third Quarter 1999 10-Q") .

The third quarter 1999 10-Q, signed by defendant Hatch repeated the fin ancial results containe d

in the October 14, 1999 Press Release .

143 . In the 1999 Third Quarter 10-Q section titled Asset Quality

Nonperforming Assets, the Company stated :

At September 30, 1999, nonperforming assets were $1 .0 billion, or0.77 % of net loans and foreclosed properties, compared with $844million, or 0 .62 %, at December 31, 1998, and $825 million, or 0 .61%, at September 30, 1998 . The increase in installment loannonperforming assets reflects our decision to hold The MoneyStore home equity loans on our balance sheet rather thansecuritize them.

144 . On January 14, 2000, the Company issued a Press Release announcing

financial results for fourth quarter and year-end 1999 . The Company reported 1999 operating

earnings of $3 .5 billion, or $3 .60 per share, including previously disclosed nonrecurring gains o f

$0.20 per share related to the sale of the Company's interest in Electronic Payment Services, Inc . ,

73

and the sale of factoring assets . Excluding these one- time gains, earn ings amounted to $3.3 billion,

or $3 .40 . Operating earnings of $3 .5 billion, or $3 .60, compare with operating earnings of $3 . 7

billion, or $3 .77, in 1998. Operating earnings exclude merger-related and restructuring charges o f

$263 million after-tax, or $0 .27 per share, in 1999 and $805 million after-tax, or $0 .82, in

1998. In the fourth quarter of 1999, operating earnings were $846 million, or $0.86 cents per

share, compared with $993 million, or $1 .00, in the fourth quarter of 1998 .

145 . Commenting on the financial results, defendant Cruthcfield stated :

1999 ended with strong fee and net interest income growth, coupledwith stable credit quality and net charge-offs of 0 .52 % of loans. Ourreturn on equity and net charge-off ratios rank among the best in theindustry . . . We are in the strongest position ever to deliver value forclients and customers . The strength of our transformational businessmodel is clear in the contribution to fee and other income from FirstUnion Securities and the strong sales performance in our GeneralBank .

146. On February 22, 2000 the Company issued its Annual Report to

Shareholders . In the Letter to Shareholders, touting the Company's progress towards enhancing th e

operations of The Money Store, defendant Crutchfield stated : "By year-end we also saw

improvements in The Money Store, where we have begun to centralize credit underwriting and

to apply First Union 's standardsfor credit quality and operational processes. "

Defendants ' Statements After The Class Period Continued to Mislead Investor s

147 . The statements alleged at 11139-146, above continued defendants '

deception during the Class Period as alleged in this Third Amended Complaint . The continuatio n

of the fraud after the end of the Class Period is further evidence of the defendants' knowledge o r

reckless disregard during the Class Period . Defendants' efforts to minimize and cover-up the

extent of the negative financial and business impact on First Union of The Money Store

74

acquisition, and continued failure to disclose the known adverse facts, is inconsistent wit h

defendants' fraudulent representations during the Class Period being the result of mistake ,

inattention, negligence, simple recklessness or poor business judgment . To cover up the extent o f

their earlier fraudulent statements, the defendants falsely led investors to believe that the Compan y

had improved the profitability of The Money Store by heightening loan standards and raising the

quality of The Money Store's loan po rtfolio, when this was not true .

148. Defendants' statements in the Annual Report to Shareholders, alleged i n

¶146, above, failed to disclose that, in fact, the credit underwriting systems at The Money Stor e

were nowhere near First Union's standards . As detailed below, defendants, well before February

2000, were aware of the following adverse information regarding The Money Store's credit

policies :

(a) According to a former First Union Head of Risk management, there was nocentralized control over the integrity of the decisions being made at TheMoney Store . At the end of the month, The Money Store loan officerspeople would make loans to D and E level customers and book them ashigher-grade loans . (¶50(c) )

(b) The Money Store's lack of underwriting criteria severely impaired the worthof their receivable portfolio . Nonetheless, defendants represented that theseloans were "B" or "C" loans, including representing the quality of the loansto rating agencies . (¶50(c) )

(c) This policy of making loans to virtually any customer regardless ofqualifications to art ificially boost quarter -end sales figures was referred tointernally as the "[expletive deleted] it, fund it " policy. (150(d) )

(d) The Money Store loan officers would make loans to people withoutverifying the collateral or doing even cursory diligence on their ability topay. "There was really no validation process. If they said the house wasworth $200,000 and was in good condition, there was really no reviewprocess to validate that ." (¶50(e))

(e) The failure to verify collateral contributed to the dramatic rise indelinquency rates, rates which were deliberately understated by th e

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company. A former manager personally calculated the figurerepresenting loans that were in "serious stages of delinquency" just forthe home improvement division in June and July 1998 and determinedthis number to be about $125 million - - a number which grew over time .Of this number, the former manager estimated a loss should have been takenon 70-80% of the figure because that was the percentage of homeimprovement loans which were uncollateralized. (11 61 )

(1) The number of loans in "serious stages of delinquency" for the entire TheMoney Store portfolio of roughly $10 billion was between $300 and 500million. Of those loans, a loss should have been recognized on 40-50% ofthat figure (representing the uncollateralized loans) (¶62 )

(g) The Money Store would regularly and purposefully fail to obtaindocumentation proving a customer's income, and thereby throw off the debtratios . They would also fail to inquire about past credit history and value ofthe property being used as collateral . According to the former Head ofQuality Control, "in effect, you're flying blind for the most part when theinformation used to underwrite the loan is not adequate ." (¶45(c))

(h) The Money Store's poor underwriting procedures were included in a five-page, single spaced report which mandated the company to 1) fix lowstandards of loan origination (improved record-keeping and higher standardsof credit needed for the customers) and 2) increase the reserve levels for thesecuritizations . (~8I ) .

149. The statement alleged in ¶146, above, was also materially false an d

misleading because at the time it was made, defendants knew, based upon facts accumulate d

during an "extensive review of The Money Store" which had commenced three months earlier, tha t

there had been no "improvement" in The Money Store ; that, on the contrary, there had been a

"continued deterioration in credit quality" and, as a result, The Money Store had sustained no les s

than $438 million in credit-related losses which had not been recognized in the Company' s

financial statements in violation of GAAP (FASB Statement No . 115 and FASB Statement No . 5) .

150. Defendants' statements alleged in ¶¶139-146, above, were materially fals e

and misleading for the reasons detailed above and because :

(a) In the fall of 1999, in preparation for a second OCC inspection , a former

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First Union head of Risk Management and his supervisor, Deborah Craig,met face to face with Pearce and told Pearce about the issues The MoneyStore was, and had been facing. The problems discussed at the fall 1999meeting included the operation and origination of loans, bad appraisals andaccepting income levels at word of mouth, with no verifications . Themeeting did not result in any curative action, "there was a certain element of"don't tell me what I don 't want to hear" on Pearce's part . (¶85)

(b) In 1999, the small business division also experienced dramatic losses . ByJanuary 1999, Money Store were aware of the figure the small businessdivision had to come in at, and looking at it, we were also aware that inorder to get to that something drastic was going to have to be done ." Thedivision had to trim "several millions of dollars" from the small businessdivision's budget . (154 )

Defendants' False Statements During Fiscal Year 2000

151 . On March 15, 2000 the Company filed its 1999 Form 10-K for the yea r

ended December 31, 1999 (the " 1999 10-K"), signed by defendants Crutchfield and Hatch . The

1999 10-K repeated the financial results contained in the Company's January 14, 2000 Pres s

Release . In the non-performing assets section of the 2000 First Quarter 10-Q, the Company stated :

The Money Store nonperforming assets were $138 million atDecember 31, 1999, an increase of $100 million from December 31,1998 . Over the same period, The Money Store loans increased by$1 .9 billion to $5 . 6 billion .

152. With regard to the $2 . 1 billion of intangibles which had been recorded in

connection with The Money Store acquisition, the 1999 Form 10-K stated :

The Corporation's unamortized goodwill and other intangibles areperiodically reviewed to ensure that there have been no events orcircumstances to indicate that the recorded amount is not recoverablefrom projected undiscounted net operating cash flows. If theprojected undiscounted net operating cash flows are less than thecarrying amount, a loss is recognized to reduce the carrying amountto fair value, and when appropriate, the amortization period is alsoreduced .

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153 . This statement, in the absence of a reduction of the amortization period o r

the recordation of a loss to reduce the carrying amount of this $2 . 1 billion, led the investment

community to falsely believe that there had been no impairment of these intangibles . In fact ,

unbeknownst to the investment Community, as of the March 15, 2000 date of this representation,

defendants had already concluded (as a result of an ongoing three month strategic review of the

operations and profitability of The Money Store ) that the projected undiscounted net operating cas h

flows of The Money Store division were materially less than the carrying amount of the intangibles

and that a loss of approximately $1 .8 billion was required to have been recognized . In violation o f

GAAP (APB Opinion No . 17 and FASB Statement No . 121) and the Company' s own state d

accounting policy, no such loss had been recognized in the Company's 1999 financial statements .

154. On April 13, 2000 the Company issued a Press Release announcing firs t

quarter financial results for the quarter ending March 31, 2000 . The Company reported first

quarter 2000 operating earnings of $838 million , or $0.85 per share . Operating earnings in the first

quarter last year were $965 million, or $1 .00, including a $0.12 per share after-tax gain on the sal e

of First Union's interest in Electronic Payment Systems . Excluding this one-time gain, earnings

per share amounted to$0 . 88 . Operating earn ings in last year's first quarter also exclude $25 9

million after-tax , or 27 cents per share , in merger-related and restructuring charges related to th e

CoreStates merger and to the restructuring plan announced in March 1999 . Commenting on the

financial results, defendant Thompson stated :

"The strength of our diversified business model was clear in therecord revenue generated by First Union Securities . . . We continue tobe among the industry's Internet leaders with 1 .6 million retail andwholesale customers."

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155 . On May 12, 2000, the Company filed a quarterly report on Form 10-Q for its

first quarter ending March 31, 200 (the "First Quarter 2000 10-Q") . The First Quarter 2000 10-Q ,

signed by defendant Hatch repeated the financial results contained in the April 13, 2000 Pres s

Release .

156 . In the Non-performing Assets section of the first quarter 2000 10-Q, th e

Company stated :

The increase in installment loan nonperforming assets reflects ourdecision to hold The Money Store subprime home equity loans in theloan portfolio rather than securitize and sell them . The Money Storenonperforming assets were $155 million at March 31, 2000,compared with $138 million at December 31, 1999 . We expect thistrend to continue in the near term, which will also affect future netcharge-offs. Over the same period, The Money Store loans increasedby $715 million to $6 .3 billion at March 31, 2000 .

157, The Fist Quarter 2000 Form 10-Q was materially false and misleading

because it failed to disclose that defendants had, for five moths, been conducting an "extensiv e

review of The Money Store" and determined that :

(a) There had been a "continued deterioration in credit quality" and, as a result,The Money Store had sustained no less than $438 million in credit-relatedlosses which had not, in contravention of GAAP, been recognized in theCompany's financial statements .

(b) Approximately $ 1 .8 billion of intangibles which the Company had presentedon its balance sheet as a valuable asset were worthless and were not writtenoff, in contravention of GAAP .

158. Instead of disclosing the truth which was known to defendants, and thu s

recognizing losses attributed to the impairment of intangibles and other assets as required pursuan t

to GAAP, defendants represented that : "We continually evaluate our business operations an d

organizational structures ."

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159. Management's representations, set forth in IT 151-157, above, and the failur e

to record a reduction of the amortization period or the loss to reduce the carrying amount of the

Company's intangible assets, continued to lead the investment community to falsely believe that

there had been no impairment of the Company's intangibles . Similarly, the absence of a recognition

of significant impairment losses on securities available for sale, led the investment community t o

believe that there were no losses .

160. On June 6, 2000, the Company failed to participate in a scheduled major

investor conference in New York and, as a result, the price of the Company's stock fell $2 .12, or

almost 6%. The reason for the Company' s absence , was explained in The Charlotte Observer, on

June 7, 2000 :

First Union Chief Executive Ken Thompson was to speak at SanfordC . Bernstein's three-day "Strategic Decisions Conference," an eventthat provides analysts and investors with information on majorpublic companies, but the bank canceled .

"It's never a good sign," said Ryan, Beck & Co . bank analyst LarryCohn of the cancellation . "Ordinarily you don't pull out, you sendsomebody else if it's a personal issue . If you pull out altogether, ittypically means that you don't want to respond to questions ." Cohnbelieves the cancellation is a precursor to news that First Union'ssecond-quarter earnings will be lower than expected, mainly becauseof a slowdown in the capital markets business on which First Unionand other banks have increasingly relied . First Union canceledbecause it's in the middle of a review of which of its businesses itplans to keep, so attending didn't make sense, the bank'sspokeswoman said .

THE FULL TRUTH ABOUT THE MONEY STORE IS REVEALED

161 . The defendants revealed the full magnitude of The Money Store's losse s

with the issuance of a First Union Press Release on June 26, 2000 announcing that the Compan y

would cease all home lending activities at The Money Store . The Company announced the

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implementation of a "strategic repositioning" to intensify the Company's focus on high-growt h

businesses and improve its risk profile as it exits non-core lines of business . The disposition o f

various businesses and assets was estimated to result in restructuring and other charges of

approximately $2 .$ billion after tax, net of an estimated $1 billion in after-tax gains from the sal e

of non-core businesses . The bulk of the charges related to the Company's decision to discontinue

home equity lending activities at The Money Store . The Company said it had determined that it s

long-term profitability outlook and risk profile were inconsistent with First Union's strategic plan .

The Company announced it would cease The Money Store home equity loan originations and

terminate all future home equity lending activities related to The Money Store other than loan

servicing and portfolio management . Commenting on the decision, Ken Thompson, First Union

president and Chief Executive Officer stated :

"Over the past six months, we have conducted an intensive strategicreview of our businesses . Together with the company's seniormanagement team and the Board of Directors, we evaluated each ofour business lines using strict financial and strategic criteria. FirstUnion will exit businesses that do not meet our performance criteriaand where we do not have the scale to compete effectively . Althoughtaking these actions with respect to The Money Store requires thatwe record substantial restructuring and other charges, we havedecided to take these actions now so that we can focus on our corebusinesses, reduce our risk and create more stable earnings . "

162. On the same day, an Associated Press news article quoted Ken Thompson ,

First Union's Chief Executive Officer, as stating : "I know you have been frustrated by the fact that

we have not provided any guidance . It's been frustrating to us as well . . .But we couldn't tell you part

of the story without telling you the entire story . "

ADDITIONAL SCIENTER ALLEGATION S

A. First Union Uses Inflated Stock as Currenc y

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163 . In addition to the allegations of actual knowledge and/or recklessnes s

appearing above, the Individual Defendants acted with scienter to artificially inflate the price o f

First Union common stock in order to : (i) allow insiders to sell shares of First Union common

stock at a substantial profit before the truth could be discovered ; and (ii) enhance the ability o f

First Union to fund acquisitions by granting the acquired company shares of First Union commo n

stock .

164 . Specifically, First Union 's inflated stock price enabled defendants to acquire

EVEREN Capital Corporation ("EVEREN"), a full service brokerage based in Chicago, Illinois, i n

an all-stock transaction valued at $1 .1 billion as announced May 5, 1999 .

B. Defendants and Other Insiders Sell Millions atArtificially Inflated Prices

165. During and immediately after the Class Period, defendant Georgius sol d

over 133,672 shares of First Union common stock at prices ranging from $58 .31 per share to

$61 .53 per share for proceeds totaling $8 ,673,743 .

166. Georgius' stock sales were as follows : '

2 Trades are as reported in First Call's Insider Trading Report .

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DATE 1 ?SIR S l .PER Ste, > A10/21/98 5,000 58 .31 291,550

10/21/98 12,338 58 .44 721,032

10/21/98 2,662 58.44 155,56 7

10/21/98 9,572 58.75 562,355

10/21/98 5,500 58 .38 321,090

10/21/98 1,500 58 .69 88,03 5

10/21/98 5,000 58 .31 291,550

10/21/98 12,338 58 .44 721,032

10/21/98 9,572 58.75 562,355

10/21/98 5,500 58 .38 321,090

10/21/98 1,500 58 .69 88,03 5

11/30/98 59,690 61 .53 :3,672,72 5

12/1/98 3,500 60.25 210,875

4/21/99 9,840 54.88 540,01 9

6/20/99 2,523 44 .00 111,01 2

6/21/99 1,882 43 .81 15,42 1

TOTAL 123,672 8,673 .743

167. In addition to defendant Georgius' substantial sales of First Union stock ,

according to Insider Trader, defendant Crutchfield sold 26, 637 shares of his own First Unio n

stock in a "private sale" at prices ranging from $53 .19 per share to $54 .88 per share, between

March 8, 1999 and April 21, 1999, shortly before the Company's first disclosure of problems a t

The Money Store was revealed, for total proceeds of over $1 .46 million; and defendant Hatch sold

over 3,000 shares at prices ranging from $52 .31 to $62.88 per share, generating proceeds of nearl y

$389,000 between March 8, 1999 and June 20, 2000 . Crutchfield sold an additional $1,184,53 0

between June 20, 1999, and June 20, 2000 - - some of the sales occurring only six days befor e

defendants announced that the entire value of The Money Store would be written off .

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168 . In addition, executives privy to inside knowledge regarding The Mone y

Store's problems, members of the Audit and Credit/Market Risk Committee, who held at least six

meetings in 1998, sold thousands of shares at artificially inflated prices . These sales are

particularly significant given the responsibilities of these committees, and the inside knowledg e

attributed to these insiders . According to the Company's 1999 Proxy Statement , these committees

were described as follows :

a) The audit committee : The principal responsibilities of the Committee are toensure that the Board receives objective information regarding policies,procedures and activities with respect to auditing, accounting, internalaccounting controls, financial reporting, regulatory matters and such otheractivities as may be directed by the Board ;

b) The credit/market risk committee . The Credit/Market Risk Committeeheld six meetings in 1998 . The Committee is authorized, among otherthings, to review the deposit base, allowance for loan losses, and fundsmanagement, market risk and lending policies, and to monitor the liquidity,investment portfolio, trading activities, non-performing assets and ownedreal estate .

169 . The following table details the insider selling of these commi ttee members ,

including sales on June 20, 2000, six days before Defendants announced that the entire value of

The Money Store would be completely written off.

Filer's Name Date Transaction Description s ofshares

sFr koBare

$Value Holdings

Schild, Peter James 6120100 Disposition by Exercise of Options 312 29.13 9,107 24,30 9Murray, Malcolm Thomas 6120100 Disposition by Exercise of Options 795 29.13 23,158 81,22 1Murray, Malcolm Thomas 4/20/00 Disposition by Exercise of Options 1,505 33 .19 49,951 82,01 6Schild, Peter James 4/20/00 Disposition by Exercise of 0 tions 522 33 .19 17,325 24,82 1

Schild, Peter James 4/14/00 Disposition by Exercise of Options 705 32.94 23,223 24,62 1Murray, Malcolm Thomas 4/14/00 Disposition by Exercise of Options 1,816 32.94 59,819 82,01 6Goldberg, Arthur M . 4/6/00 Open Market Sale 5,200 32.94 199,212 101,16 2Goldberg, Arthur M . 4/6/00 Open Market Sale 7,000 38 .31 269,920 101,16 2Goldberg, Arthur M . 4/6/00 Open Market Sale 18,000 38.56 693,000 101,16 2

Goldberg, Arthur M . 4/6/00 Open Market Sale 19,800 38.50 759,924 101,16 2Goldberg, Arthur M . 3/29/00 O en Market Sale 25,000 36.25 906,250 301,162Reynolds, Randolph Nicklas 3/27/00 Open Market Purchase 150 36.36 5,457 2,85 0Goldberg, Arthur M . 3/20/00 Open Market Sale 5,000 34.84 174,200 301,16 2SchiId, Peter James 12/27/99 Disposed B Gift 350 0 - 21,598Murra , Malcolm Thomas 12/08/99 Disposed By Gift 1,850 0 - 71,83 7

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Adams, Austin Alfred 06/21/99 Disposition by Exercise of Options 829 43 .81 36,318 80,14 3Murray, Malcolm Thomas 06/21/99 Disposition b Exercise of Options 829 43 .81 36,318 73,68 7Adams, Austin Alfred 06/20/99 Disposition by Exercise of Options 1,054 44.00 46,376 80,14 3Schild, Peter James 06/20/99 Disposition by Exercise of Options 415 44.00 18,260 21,94 8Murray, Malcolm Thomas 06/20/99 Disposition by Exercise of O tions 1,054 44.00 46,376 73,68 7Adams, Austin Alfred 04/21/99 Dispo sitio nosition by Exercise of Options 1,046 54.88 57,404 82,028Schild, Peter James 04/21/99 Disposition by Exercise of O tions 325 54.88 17,838 22,36 3Murray, Malcolm Thomas 04/21/99 Disposition by Exercise of Options 928 54.88 50,929 75,57 0

TOTAL: s,s

C . Defendants' Actual Knowledge of The Fraud

170. In addition, defendants were directly confronted with The Money Store's fraud ,

through written reports, or face-to-face meetings . The following chart depicts some of these

events :

Mid 1997 Former Senior V ice President Former V .P. tells those Credit committeeof servicing for the home present at monthly credit tells former V .P. toimprovement division ("V .P.") meeting of prevalence of suggest a ne wBob Benson, Jack Hill, Bill accounts in which there "charge-off' policyTempleton John Reeves and had been no payments which he does .John Davidson at monthly for 6 months or a year, as The new charge offcredit meetings well as numerous policy which

improper practices properly accountsdetailed at 150(k) for uncollectible

loans is notimplemented .T50(k)

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F y "t

January 1998 Former V .P. gave a Non-performing Nonepresentation to The Money receivables (149(a)),Store Credit Committee, need to book $7-1 0including Bill Templeton million loss (¶49(a)) ,

poor credit quality o floans, knowin gcollection of bad loans,and practices detailed in¶50(a))¶

July 1998 Former Senior Vice President (1) problems in the Employee i s/Consultant Jack Reeves and servicing department; (2) shunned by Pearc eJack Pearce . problems in the rate at future meetings .

calculation for ARM Sand (3) MI Sproblems.(¶¶ 76(a)-(c) )

July 1998 Former V.P . and Jack Pearce, Former V .P. describes Jack Pearce statesin Sacramento (Money Store how he has been trying to "Oh My God, we'veheadquarters) sort out problems got to start taking

regarding non- losses on theseperforming assets non-performingdetailed in ¶63 for assets . Put togethermonths to no avail . a plan that show s

incremental charge-offs projected overthe year ." FormerV .P. complies, nocorrective actiontaken. ¶69

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~/ 4 r c L Res t $1 ~ .,

July 1998 Former Head of Delinquency "[expletive deleted] it , Pearce attempts tomeets with Jack Pearce for fund it" policy , and blame Money Storedinner at the Monterey Bay problems relating to executives ,Restaurant pooling and servicing referring to them as

agreements, which were "those bastards . "previously brought to No action taken.Money Store ¶75management ' s attention .(¶¶50(d), 72 )

September Project Book List of deficiencies with Due to magnitude1998 red, yellow or green of problems ,

coding . ¶84 Jwaideh plans t ofalsify results .1$82,83,86

October 1998 Former Head of Delinquency Problems detailed in OCC writes criticaland OCC examiners, headed ¶¶80 five page repo r tby Greg Nelson which is sent to

First Unionmanagement ,including forme rChief Credi tOfficer MalcolmMurray. ¶8 1

November 1998 Former VP and Jim Maynor . Magnitude of losses at NoneThe Money Store .

November 1998 Former V.P. sent "There are some very None .documentation to Atwood and very severe inherentFirst Union 's then head of problems in The Mone yaudit Store that somebody

ought to know about . "¶72

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November 1998 Former V .P . and OCC Former V.P. tells OCC OCC requires Firstexaminers about accounting Union to tak e

improprieties $72 write-offannounced i nJanuary, 1999Former V .P. isdemoted fromSenior VicePresident to VicePresident. ¶72

May 1999 President of MQA and Ronald President of MQA tells None .Williams, (a First Union Williams that there i sauditor) over a 56% error rate in

Money Store retail loans¶42

May 26, 1999 President of MQA letter to Letter describes massive Audit is ceased .David Crespi, (who reported overcharges and errors indirectly to First Union Head of loan portfolio andAudit Peter Schild) and recommends extendingRonald Williams audit . ¶43

Fall 1999 Meeting between former First Risk Management None .Union Head of Risk employees tell PearceManagement, Pearce, and about bad appraisals ,Deborah Craig improper documentation ,

and loan originatio nproblems 85

NO SAFE HARBOR

171 . The statutory safe harbor provided for forward looking statements under ce rtain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint .

The statements alleged to be false and misleading herein all relate to then-existing facts an d

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conditions . In addition, to the extent certain of the statements alleged to be false may b e

characterized as forward looking, they were not identified as "forward looking" when made, ther e

was no statement made with respect to any of those representations forming the basis of this

complaint that actual results "could differ materially from those projected," or there were no

meaningful cautionary statements identifying important factors that could cause actual results t o

differ materially from those in the purportedly forward-looking statements . Alternatively, to the

extent that the statutory safe harbor is intended to apply to any forward-looking statements ple d

herein, defendants are liable for those false forward-looking statements because at the time each of

those forward-looking statements was made, the particular speaker had actual knowledge that th e

particular forward-looking statement was materiaily false or misleading, and/or the forward-

looking statement was authorized and/or approved by an executive officer of First Union wh o

knew that those statements were false when made .

RELIANCE ALLEGATIONSFRAUD-ON-THE-MARKET DOCTRIN E

172. Plaintiffs will rely, in part, upon the presumption of reliance established by th e

fraud-on-the-market doctrine in that, among other things :

(a) First Union common stock met the requirements for listing, and was listed ,

on the New York Stock Exchange, a highly efficient market ;

(b) as a regulated issuer, the Company filed periodic public reports with th e

SEC ;

(c) the trading volume of the Company's stock was substantial, reflectin g

numerous trades each day ;

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(d) First Union was followed by securities analysts employed by several major

brokerage firms who wrote reports which were distributed to the sales force and certain customers

of such firms and which were available to various automated data retrieval services ;

(e) the misrepresentations and omissions alleged herein were material an d

would tend to induce a reasonable investor to misjudge the value of First Union common stock ;

and

(f) plaintiffs and the members of the Class purchased their common stoc k

during the Class Period without knowledge of the omitted or misrepresented facts .

173. Based upon the foregoing, plaintiffs and the other members of the Class are entitle d

to a presumption of reliance upon the integrity of the market for the purpose of class certification

as well as for ultimate proof of their claims on the merits . Plaintiffs will also rely, in part, upon th e

presumption of reliance established by material omissions and upon the actual reliance of the clas s

members .

INDIVIDUAL DEFENDANTS' DUTY TOREPORT TRENDS DEMANDS OR UNCERTAINTIES

174. Under the rules and regulations promulgated by the SEC under the Exchange Act ,

specifically Item 303 of Regulation S-K, the Individual Defendants also had a duty to report al l

trends, demands or uncertainties that were reasonably likely to impact First Union's :

(a) liquidity ;

(b) net sales , revenue and/or income; and/or

(c) previously reported financial information such that it would not b e

indicative of future operating results .

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175 . As set forth in detail above , the Individual Defendants ' representations during the

Class Period violated their duty to report all trends, demands or uncertainties reasonably likely to

impact upon First Union's net sales, revenue, income, and previously reported financia l

information such that it would not be indicative of future operating results .

CLASS ACTION ALLEGATION S

176. Plaintiffs bring this action as a class action , pursuant to Fed. R. Civ. P. 23(a) and

(b)(3), on behalf of a class consisting of all persons who purchased First Union common stoc k

between March 4, 1998 and June 26, 2000 inclusive, and who were damaged thereby (the

"Class") . Excluded from the Class are defendants , the officers and directors of First Union ,

members of the immediate families of such officers and directors and subsidiaries and affiliates o f

defendants and their officers and directors .

177. During the Class Period, there were over 967 .9 million shares of First Unio n

common stock outstanding held by thousands of shareholders . First Union common stock was

actively traded on the New York Stock Exchange under the symbol "FTU," an open and efficient

market, during the Class Period. Because persons who purchased First Union shares during the

Class Period number at least in the hundreds and are believed to be located throughout the country ,

joinder of all such class members is impracticable .

178. There are questions of law and fact common to all class members whic h

predominate over any questions affecting only individual class members, including :

(a) Whether the federal securities laws were violated by defendants ' acts as

alleged herein ;

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(b) Whether documents, releases and/or statements disseminated to th e

investing public and First Union shareholders during the Class Period omitted and/o r

misrepresented material facts about the business and financial condition of the Company;

(c) Whether defendants made materially misleading statements during the Clas s

Period about the business and financial condition of the Company ;

(d) Whether the defendants acted knowingly and/or recklessly in makin g

materially false statements and omitting material facts about the business and financial condition o f

the Company ;

(e) Whether the market price of the Company's common stock was artificiall y

inflated during the Class Period due to the non-disclosures and/or material misrepresentation s

complained of herein ; and

(f) Whether the members of the Class have suffered damages and, if so, what i s

the proper measure of damages .

179. Plaintiffs' claims are typical of all class members' claims . Plaintiffs have selected

counsel experienced in class and securities litigation and will fairly and adequately protect th e

interests of the Class . Plaintiffs have no interests antagonistic to those of the Class .

180. A class action is superior to other available methods for the fair and efficien t

adjudication of this controversy . Since the damages suffered by individual class members may be

relatively small, the expense and burden of individual litigation make it virtually impossible fo r

members of the Class individually to seek redress for the wrongful conduct alleged .

181 . Plaintiffs know of no difficulty which will be encountered in the management o f

this litigation which would preclude its maintenance as a class action .

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FIRST CLAIM FOR RELIEF FORVIOLATION OF SECTION 10(b) OF THEEXCHANGE ACT AND SEC RULE 101- 5

182 . Plaintiffs repeat and reallege each and every allegation contained in the paragraph s

above as if fully set forth herein .

183 . During the Class Period, the defendants engaged in a course of conduct, describe d

above, pursuant to which they knowingly or recklessly engaged in acts, transactions, practices, and

a course of business which operated as a fraud upon plaintiffs and the other members of the Class ;

made various untrue statements of material facts and omitted to state material facts necessary to

make statements made, in light of the circumstances under which they were made, not misleadin g

to plaintiffs and the other Class members ; and employed manipulative and deceptive devices and

contrivances in connection with the purchase of First Union common stock .

184 . The purpose and effect of the defendants' plan, scheme, conspiracy and course o f

conduct was to artificially inflate the price of First Union common stock and artificially to maintai n

the market price of the stock .

185 . The Individual Defendants, through their positions as officers and/or a director had

actual knowledge of the material omissions and/or the falsity of the statements set forth above, an d

intended to deceive plaintiffs and the other members of the Class or, in the alternative, acted with

reckless disregard for the truth when they failed or refused to ascertain and disclose in th e

aforementioned documents the true facts to plaintiffs and the other members of the Class .

186 . The defendants had actual knowledge of the material omissions and/or the falsity o f

the statements set forth above, and intended to deceive plaintiffs and the other members of the

Class or, in the alte rnative, acted with reckless disregard for the truth when they failed or refused to

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ascertain and disclose in the aforementioned documents the true facts to plaintiffs and the othe r

members of the Class .

187 . As a result of the foregoing, the market price of First Union stock was artificiall y

inflated during the Class Period . In ignorance of the materially false and misleading nature of th e

misrepresentations, described above, made by defendants and the deceptive and manipulativ e

devices and contrivances employed by the defendants, plaintiffs and the other members of th e

Class relied, to their detriment, on the integrity of the market price of the stock in purchasing First

Union stock . Had plaintiffs and the other members of the Class known of the material advers e

information not disclosed by the defendants, they would not have purchased First Union stock a t

the artificially inflated prices that they did .

188. Plaintiffs and the other members of the Class have suffered substantial damages as a

result of the wrongs alleged herein .

189. By reason of the foregoing, defendants have violated Section 10(b) of the Exchang e

Act and Rule i Ob-5 promulgated thereunder, in that they : (a) employed devices, schemes an d

artifices to defraud; (b) made untrue statements of material fact or omitted to state material fact s

necessary to make the statements made not misleading; and (c) engaged in acts, practices and a

course of business which operated as a fraud or deceit upon plaintiffs and the other members of the

Class in connection with their purchases of First Union stock during the Class Period .

SECOND CLAIM FOR RELIEF FOR VIOLATIONOF SECTION 20(a) OF THE EXCHANGE ACT

190. Plaintiffs repeat and reallege each and every allegation set forth in the paragraph s

above, as if set forth fully herein .

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191 . The Individual Defendants, by virtue of their offices, directorship, and specific act s

were, at the time of the wrongs alleged herein, controlling persons of First Union within the mean-

ing of Section 20(a) of the Exchange Act . The Individual Defendants had the power and influence

and exercised the same to cause First Union to engage in the illegal conduct and practices com-

plained of herein by causing the Company to disseminate to the public, or through analysts, the

materially false and misleading information referred to above .

192 . The Individual Defendants ' positions made them privy to, and provided them with ,

actual knowledge of the material facts concealed from plaintiffs and the Class by First Unio n

during the Class Period .

193. By reason of the conduct alleged in the First Claim for Relief, the Individua l

Defendants are liable for the aforesaid wrongful conduct and liable to the plaintiffs and the other

members of the Class for the substantial damages which they suffered in connection with their

purchases of First Union common stock during the Class Period .

WHEREFORE, plaintiffs on their own behalf, and on behalf of the other members of th e

Class, prays for judgment as follows :

A. Declaring this action to be a proper class action, and certifying the Lead

Plaintiffs as Class representatives ;

B . Declaring and determining that the defendants violated the federal securitie s

laws by reason of their conduct as alleged herein ;

C . Awarding money damages against the defendants, jointly and severally, i n

favor of the plaintiffs and the other members of the Class for all losses and injuries suffered as a

result of the acts and transactions complained of herein, together with prejudgment interest on al l

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of the aforesaid damages which the Court shall award from the date of said wrongs to the date o f

judgment herein at a rate the Court shall fix ;

D. Awarding plaintiffs their costs an d expenses incurred in this action ,

including reasonable attorneys', accountants' and experts' fees ; and

E. Awarding such other relief as may be just and proper .

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury pursuant to Rule 38(b) of the Federal Rules of Civi l

Procedure .

Dated: October 14, 2002 LESESNE & CONNETTE

By : KEdward G . Connette III f

1001 Elizabeth Avenue, Suite 1-DCharlotte, NC 28204-223 4Tel : (704) 372-5700Fax : (704)377-2008

BROWN & ASSOCIATESDonald Brown

7400 Carmel Executive Park, Suite 120Charlotte, NC 28226Tel : (704) 542-2525Fax : (704) 541-475 1

Co-Liaison Counse l

MILBERG WEISS BERSHADHYNES & LERACH LLPAbraham Rappapo rtMaya SaxenaTara Isaacson5355 Town Center Road , Suite 900Boca Raton, Florida 3348 6Tel : (561) 361-5000

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Fax: (561) 367-8400

SCHIFFRIN & BARROWAY, LLPAndrew L . BarrowayDavid KesslerMarc Willne rThree Bala Plaza EastSuite 400Bala Cynwyd, PA 19004Tel : (610) 667-7706Fax : (610) 667-7056

SCHOENGOLD & SPORN, P .C .Samuel P . SpornChristopher LomettiJay P . Saltzma nCannon's Walk, 19 Fulton StreetSuite 406New York, NY 10038Tel: (212) 964-0046Fax: (212) 267-813 7

Co-Lead Counsel

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