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1 WILLIAM F. SALLE (#124498)-) LAW OFFICES OF WILLIAM F. SALLE
425 E. Colorado St., Suite 7553 Glendale, CA 912054 Telephone: (818) 543-1900
V„
5 Facsimile: (818) 543-1550 • _Email: wfslawgyahoo.com
6 ,,
Attorneys for Plaintiff Susan D'Errico _ -
UNITED STATES DISTRICT COURTCENTRAL DISTRICT OF CALIFORNIA
9
10
LS — MI1/-1 R-1()SUSAN D'ERRICO. Individually and NO.
H On Behalf of All Others SimilarlySituated,
12CLASS ACTION COMPLAINT
13 Plaintiff. FOR BREACH OF FIDUCIARY
14 DUTY AND VIOLATIONS OFvs. FEDERAL SECURITIES LAWS
15
16 LOUIS J. RAMPINO,
11-7 17 Defendant. JURY TRIAL DEMANDED
(. IS
23i3SUMMARY OF ACTION
71 1. This is a securities fraud class action on behalf of all persons
22 who purchased or othenvise acquired the common stock of Fremont General
Corporation ("Fremont General" or the "Company") between April 28, 2005 and
15 February 27, 2007 (the "Class Period") for breach of fiduciary dq3DEtaoiving!
of the Securities Exchange Act of 1934 ("1934 Act"). 2 2 2001 I
27
28 BY • j
CLASS ACTION COMPLAINT
Page I (
0PdCT,\,',AL
2. Durin g the Class Period defendant issued statements
concernin g Fremont General's business, operations and prospects which3
4 defendant knew or recklessly disre garded were materially false and misleadin g . As
5 a result of defendant's' failure to disclose the Company's improper business6
practices, Fremont General stock traded at artificially inflated prices during the
8 Class Period.
93. On February 27, 2007, investors were shocked when Fremont
10
General issued a press release disclosin g that the Company would postpone filing11
12 its Form 10-K annual report for 2006 with the SEC, and that the Company
13"intends to file a Form 12b-25 with the Securities and Exchange Commission
14
1 5 explainin g the reasons therefor." As a result of this news, the next day shares of
16 the Company's stock declined $2.84 per share, or 24 percent, to close on February17
28, 2007, at $8.81 per share, on unusually heavy tradin g volume.18
19 4. On March 2, 2007, the Company filed a Form 12b-25 with the
SEC informing investors that the Company was unable to timely file its Form 10-21
K and — even more disturbing — that the Company intended to exit its subprime
23 residential real estate lending business.
5. The true facts, which were known by the defendant but7,5
16 concealed from the investing public durin g. the Class Period, were that Fremont
27 General and its wholly owned bankin g subsidiary Fremont Investment 8.: Loan
CLASS ACTION COMPLAINTPage 2
1 (FIL) were, among other thin gs, en g a gin g in the followin g improper business
practices:
4 Operating with mana gement whose policies and practices aredetrimental to FIL;
5
6 Operating FIL without effective risk management policies andprocedures in place in relation to FIL's primary line of businessof brokered subprime mortgage lending;
9
-
Operating FIL without effective risk management policies andprocedures in place in relation to FIL's other primary line of
10 business of commercial real estate construction lending:
11- Operating with inadequate underv,Titin g criteria and excessive
risk in relation to the kind and quality of assets held by FIL;
13- Operating with a lar ge volume of poor quality loans:
14
15 Engaging in unsatisfactory lendin g practices;
16
-
Operating without an adequate strate gic plan in relation to the
17 volatility of FIL's business lines and the kind and quality ofassets held by FIL;
18
19 Operating with inadequate capital in relation to the kind andquality of assets held by FIL;
20
Operating in such a manner as to produce low andunsustainable earnings;
- Operating with inadequate provisions for liquidity in relation to
24 the volatility of FIL's business lines and the kind and quality ofassets held by FIL:
")5
26 Marketing and extending adjustable-rate mortgage ("ARM")
CLASS ACTION COMPLAINT
28 Pa2e 3
products to subprime borrowers in an unsafe and unsoundmanner that greatly increases the risk that borrowers willdefault on the loans or otherwise cause losses to FIL,
4 Making mortga ge loans without adequately considering the
5borrower's ability to repay the mort ga ge accordin g to its terms;and
6
7Operating inconsistently with the FDIC's Interagency Advisoryon Mortgage
9JURISDICTION AND VENUE
10 6. Jurisdiction is conferred by §27 of the 1934 Act. The claims
11asserted herein arise under §§10(b) and 20(a) of the 1934 Act and SEC Rule 10b-
13 7. (a) Venue is proper in this District pursuant to §27 of the 1934
14 Act. Many of the acts and transactions giving rise to the violations of law
15
16 complained of herein, includin g the preparation and dissemination to the investing
17 public of false and misleadin g information, occurred in this District.
18 (b) Fremont General's principal executive offices are situated in this19
Judicial District at 2425 Olympic Boulevard, Santa Monica, California 90404.
PARTIES
8. Plaintiff Susan D'Errico purchased Fremont General common
24 stock as described in the attached certification and was damaged thereby.
9. Defendant, Louis J. Rampino (hereinafter "Rampino" or
?6
77 CLASS ACTION COMPLAINT
28 Page 4
I "Defendant"), was, from May 2004 until May 2007 and at all times relevant
hereto, the Company's President and Chief Executive Officer. During the Class3
4 Period, Rampino was responsible for the false and misleading financial statements
5 issued to the public.6
10. Defendant Rampino, because of his positions with the7
S Company, possessed the power and authority to control the contents of Fremont
9General's quarterly reports, press releases and presentations to securities analysts,
10money and portfolio managers and institutional investors, i.e.. the market. He was
11
12 provided with copies of the Company's reports and press releases alleged herein to
13be misleading prior to or shortly after their issuance and had the ability and
14
15 opportunity to prevent their issuance or cause them to be corrected. Because of his
16 positions with the Company, and his access to material non-public information17
available to him but not to the public. Defendant knew that the adverse facts18
19 specified herein had not been disclosed to and were being concealed from the
public and that the positive representations being made were then materially false
and misleading. Defendant Rampino is liable for the false statements pleaded
23 herein.
24
Is
CLASS ACTION COMPLAINT
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•
FRAUDULENT SCHEME AND COURSE OF BUSINESS
11. Defendant is liable for: (i) makin g, false statements: or (ii)3
4 failing to disclose adverse facts lolown to him about Fremont General.
5 Defendant's fraudulent scheme and course of business that operated as a fraud or6
deceit on purchasers of Fremont General common stock was a success, as it: (i)7
8 deceived the investing public re garding Fremont General's business, operations
9and prospects: (ii) artificially inflated the price of Fremont General common stock:
I()and (iii) caused plaintiff and other members of the Class to purchase Fremont11
12 General common stock at inflated prices.
13CLASS ACTION ALLEGATIONS
14
15 12. Plaintiff brin gs this action as a class action pursuant to Rule 23
16 of the Federal Rules of Civil Procedure on behalf of all persons who purchased or17
otherwise acquired Fremont General common stock during the Class Period (the18
19 "Class"). Excluded from the Class is Defendant.
13. The members of the Class are so numerous that joinder of all?1
members is impracticable. The disposition of their claims in a class action will
23 provide substantial benefits to the parties and the Court.
2414. There is a well-defined community of interest in the questions
m of law and fact involved in this case. Questions of law and fact common to the
CLASS ACTION COMPLAINT
28 Page 6
•
1 members of the Class which predominate over questions which may affect
individual Class members include:3
4 (a) whether the 1934 Act was violated by Defendant;
5 (b) whether Defendant omitted and/or misrepresented material6
facts;
(c) whether Defendant's statements omitted material facts
9necessary to make the statements made, in light of the
10
11circumstances under which they were made, not misleading:
12 (d) whether Defendant knew or deliberately disregarded that his
13statements were false and misleading;
14
15 (e) whether the price of Fremont General's common stock was
16 artificially inflated; and17
(f) the extent of damage sustained by Class members and theIS
19 appropriate measure of damages.
15. Plaintiff's claims are typical of those of the Class because-)1
,y) plaintiff and the Class sustained damages from Defendant's wrongful conduct.
16. Plaintiff will adequately protect the interests of the Class and
74has retained counsel who are experienced in class action securities litigation.
/5
26 Plaintiff has no interests which conflict with those of the Class.
CLASS ACTION COMPLAINTPage 7
1 17. A class action is superior to other available methods for the fair
and efficient adjudication of this controversy.3
4 SUBSTANTIVE ALLEGATIONS
5 18. Fremont General Corporation is the holdin g company for6
Fremont Investment & Loan, which en gages in commercial and residential real7
estate lending business in the United States. It ori ginates non-prime or sub-prime
9residential real estate loans through independent brokers on a wholesale basis.
10which are primarily sold to third-party investors, and commercial real estate loans,11
12 includin g, bridge, construction and permanent loans on a nationwide basis.
13.Defendant's False and Misleading Statements During the Class Period
14
15 21. On April 28, 2005, Fremont General issued a press release
16 announcin g the Company's financial results for first quarter 2005. The press17
18 release, in relevant part, stated:
19 Fremont General Reports a 9% Increase in Quarterly Net Income
20SANTA MONICA, Calif., April 28 TRNewswire-FirstCall/ -
21 Fremont General Corporation (NYSE: FMT) (the "Company"), anationwide residential and commercial real estate lender doingbusiness primarily through its wholly- owned industrial banksubsidiary, Fremont Investment & Loan, reported today its results for
24 the first quarter of 2005. Net income for the first quarter of 2005 was$90,102,000, which represents an increase of 9%, as compared to netincome of 882,663,000 for the first quarter of 2004. Diluted net
/6 income
CLASS ACTION COMPLAINT
28 Pane 8
per share was $1.22 for the first quarter of 2005, up 9% as comparedto S1.12 per share for the first quarter of 2004.
3 Residential Real Estate Lending,4
5Residential real estate loan originations totaled $7.76 billion during
the first quarter of 2005, up from $5.09 billion during the first quarter
6 of 2004. ...
7 * * *
8 As a result of this volume, loans held for sale increased to $6.09
9billion at March 31, 2005, up from S3.75 billion at March 31, 2004. ...
10 * * *
11 thThe net gain on the sale of residential real estate loans during e firstquarter of 2005 totaled $108.4 million (or 1.55%) on whole loan sales
12 and securitizations of $7.06 billion, as compared to a gain of $122.2
13 million (or 2.62%) on whole loan sales and securitizations of $4.63billion during the first quarter of 2004. The gross premiums realized
14 on whole loan sales and securitizations during the first quarter of
15 2005 were lower than in the first quarter of 2004 as a result of lowerinterest rate margins reflecting price competition in the non-prime
16 mortgage origination market.17
Commercial Real Estate Lending18
19 Commercial real estate loans held for investment, before theallowance for loan losses, totaled approximately $3.81 billion atMarch 31, 2005, as compared to $3.90 billion at March 31, 2004.
7 1 New loan commitments entered into increased to S1.08 billion duringthe first quarter of 2005, up from S804.7 million durin g the fourthquarter of 2004 and $396.9 million in the first quarter of 2004. ...
* * *
Non-accrual commercial real estate loans and REO totaled $96.2million (comprised of 14 loans and 6 REO properties andrepresenting 2.51% of total
-)7 CLASS ACTION COMPLAINT
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•
1 portfolio and RE0 ,) at March 31. 2005, down from $103.7 million(comprised of 15 loans and 11 REO properties and representing2.61% of total portfolio and REO) as of March 31, 2004. Net loancharge-offs for the commercial real estate portfolio decreased during
4 the first quarter of 2005 to S621.000 from S9.1 million durin g the first
5quarter of 2004. The annualized net char ge-off ratio for the quarterending March 31, 2005 for the commercial real estate loan portfolio
6 was 0.07%, as compared with a ratio of 0.91% for the quarter endedMarch 31, 2004.
7
Other Highlights
9* Net interest income increased to $118.8 million for the first
10 quarter of 2005, as compared to $117.6 million for the first quarter of
11 2004. Net interest income, as a percentage of net interest-earningassets at the financial services operations level, while still at strong.
12 levels, decreased from 5.30% in the first quarter of 2004 to 4.89%
13 for the first quarter of 2005. This decrease is primarily a resultof lower interest rate mar gins as fundin g costs increased faster than
14 the yields on the loans outstandin g durin g the first quarter of 2005.15
* As a result of the decreased level of net charge-offs durin g the
16 first quarter of 2005, the Company realized a decrease in its
17 provision for loan losses expense to S1.04 million as compared to$16.4 million for the first quarter of 2004. As of March 31, 2005,
IS the allowance for loan losses totaled S171.9 million, or 4.50% of the
19 total commercial real estate loans held for investment.
70* Fremont Investment & Loan, as of March 31, 2005, had $10.8
7 1 billion in assets and $7.8 billion in FDIC-insured deposits, with atotal Risk-Based Capital ratio of 18.03%.
23 * The residential real estate loan servicing platform was servicingapproximately $18.8 billion in loans outstanding as of March 31,2005. This amount was comprised of the Company's securitizedloans, loans held for sale and interim servicing for loans sold to thirdparties.
27 CLASS ACTION COMPLAINT
28 Pane 10
* Stockholders' equity per share was S14.13 at March 31, 2005.
22. On May 10, 2005 Fremont General filed its quarterly report for the3
4 period ended March 31. 2005 with the SEC on Form 10-Q, which was si g:ned by
5 Defendant Rampino and reaffirmed the Company's previously announced6
financial results. Pursuant to Section 302 of the Sarbanes-Oxley Act of 20027
S ("Sarbanes-Oxley"), the Form 10-Q included a certification si gned by Rampino
9stating that the Form 10-Q did not include any material misrepresentations.
10
1123. On July 28, 2005. Fremont General issued a press release
12 announcing the Company's financial results for second quarter 2005. The press
13release, in relevant part, stated:
14
15 Fremont General Reports Diluted Net Income per Share of S1.21 For
16the Second Quarter of 2005
17 SANTA MONICA, Calif.. July 28 /PRNewswire-FirstCalli --Fremont General Corporation (the "Company") (NYSE: FMT), a
18 nationwide residential and commercial real estate lender doing19 business primarily throu gh its wholly- owned industrial bank
subsidiary, Fremont Investment & Loan, reported today its results for')()
the second quarter of 2005. Net income for the second quarter of7 1 2005 was $90,770,000, which represents a decrease of 4.8%, as
compared to net income of $95,378,000 for the second quarter of2004. Diluted net income per share was $1.21 for the second quarterof 2005, down 7% as compared to $1.30 per share for the secondquarter of 2004.
Net income for the first six months of 2005 was $180,872,000, anincrease of 1.6% as compared to S178,041,000 for the first six months
-)7 CLASS ACTION COMPLAINT
28 Paee I I
of 2004. Diluted net income per share was $2.43 for the first sixmonths of 2005, as compared to the same $2.43 per share for the firstsix months of 2004.
3
4 Residential Real Estate Lending
5 Residential real estate loan ori ginations totaled $9.24 billion during
6 the second quarter of 2005, up from S5.89 billion during the secondquarter of 2004. ...
7
8 * * *
9As a result of this volume, loans held for sale increased to $5.49billion at June 30, 2005, up from $4.43 billion at June 30, 2004. ...
10* * *
11The net gain on the sale of residential real estate loans during the
second quarter of 2005 totaled $92.0 million (or 0.93%) on whole
13 loan sales and securitizations of $9.76 billion, as compared to a gainof $127.1 million (or 2.46%) on whole loan sales and securitizations
14 of $5.18 billion during the second quarter of 2004. The gross
15 premiums realized on whole loan sales and securitizations durin g thesecond quarter of 2005 were lower than in the second quarter of 2004
16 primarily as a result of lower interest rate mar gins reflectin g increased
17 price competition in the non-prime mortgage origination market.
18 Commercial Real Estate Lending19
Commercial real estate loans held for investment, before the?c,1allowance for loan losses, totaled $3.73 billion at June 30, 2005, as
21 compared to $3.84 billion at June 30, 2004. New loan commitmentsentered into increased to $1.16 billion durin g the second quarter of2005, up from $1.06 billion during the first quarter of 2005 and
23 $644.8 million in the second quarter of 2004. The increase in loan
24 commitments has not resulted in a corresponding increase in theCompany's loans outstanding due to a hi gher level of loan portfolio
"Yj run-off and lower avera ge fundin g.s on new loan commitments
26 entered into. ...
CLASS ACTION COMPLAINT
28 Pasze 12
* * *
Non-accrual commercial real estate loans and REO totaled S51.2million (comprised of 8 loans and 6 REO properties) at June 30,
3 2005, down from S86.7 million (comprised of 13 loans and 9 REO
4 properties) as of June 30. 2004. Net loan charge-offs for the
5commercial real estate portfolio increased during the second quarterof 2005 to $7.8 million from $4.9 million during the second quarter of
6 2004. Of the 87.8 million in net loan char ge-offs in the secondquarter of 2005, $6.2 million came from one loan. The annualized netcharge- off ratio for the quarter endin g June 30, 2005 for thecommercial real estate loan portfolio was 0.81%, as compared with a
9ratio of 0.50% for the quarter ended June 30, 2004. The annualizednet charge-off ratio for the six month period ending June 30, 2005
10 was 0.45%, a decrease as compared to 0.71% the first six months of
112004.
12 Other Highlights
13* Net interest income increased to S128.0 million for the second
14 quarter of 2005, as compared to $121.4 million for the second quarter
15 of 2004. Net interest income increased as a result of increasedaverage interest-earning assets; however, net interest income, as a
16 percentage of net interest-earnin g assets at the financial services
17 operations level, while still at strong levels, decreased to 4.63% forthe second quarter of 2005 from 5.17% for the second quarter of
18 2004. This decrease is primarily a result of lower interest rate
19 margins as fundin g costs increased faster than the yields on theloans outstanding during the second quarter of 2005.
21 * As a result of the decrease in the non-accrual loan balances inthe commercial real estate loan portfolio in the second quarter of2005, the Company realized a decrease in its provision for loanlosses, which resulted in a $4.22 million credit to income ascompared to a $146,000 expense for the second quarter of 2004. Asof June 30, 2005, the allowance for loan losses totaled S160.0 million,or 4.28% of the total commercial real estate loans held for investment.
26
-r7 CLASS ACTION COMPLAINT
Page 13
* Fremont Investment & Loan, as of June 30, 2005, had S10.8billion inassets and $8.3 billion in FDIC-insured deposits, with a totalRisk-Based Capital ratio of 19.62%.
3
4
* The residential real estate loan servicing platform was servicing.approximately 821.0 billion in loans outstanding as of June 30,
5 2005. This amount was comprised of the Company's securitized6 loans, loans held for sale and interim servicin g, for loans sold to third
parties.
* Stockholders' equity per share was S15.37 at June 30, 2005.
924. On Au gust 9, 2005 Fremont General filed its quarterly report
0for the period ended June 30, 2005 with the SEC on Form 10-Q, which was
12 signed by Defendant Rampino and reaffirmed the Company's previously
13announced financial results. Pursuant to Section 302 of Sarbanes-Oxley, the Form
14
15 10-Q included a certification signed by Rampino statin g that the Form 10-Q did
16 not include any material misrepresentations.17
25. On October 27, 2005, Fremont General issued a press releaseIS
19 announcing the Company's financial results for third quarter 2005. The press
release, in relevant part, stated:'71
Fremont General Reports Diluted Net Income Per Share of S1.23 forthe Third Quarter of 2005
SANTA MONICA, Calif., Oct. 27 TRNewswire-FirstCall/ —Fremont General Corporation (NYSE: FMT) (the "Company"), a
/5 nationwide residential and commercial real estate lender doing
26 business primarily through its wholly- owned industrial bank
?7
CLASS ACTION COMPLAINT
Pasze
1 subsidiary, Fremont Investment & Loan, reported today its results forthe third quarter of 2005. Net income for the third quarter of 2005was $92,565,000, which represents an increase of 8.7%, as compared3to net income of 585,120.000 for the third quarter of 2004. Diluted
4 net income per share was 51.23 for the third quarter of 2005. up 7%
as compared to $1.15 per share for the third quarter of 2004.5
6 Net income for the first nine months of 2005 was 5273,437,000, anincrease of 3.9% as compared to $263,161,000 for the first nine
7months of 2004. Diluted net income per share was $3.65 for the first
8 nine months of 2005, as compared to 53.58 per share for the first nine
9months of 2004.
10 Residential Real Estate Lending
11Residential real estate loan ori ginations totaled 59.61 billion during.
12 the third quarter of 2005, up from S9.24 billion and $5.88 billion
13 during the second quarter of 2005 and the third quarter of 2004.respectively. ...
14
* * *15
As a result of this volume, loans held for sale increased to 55.77
16 billion at September 30, 2005, up from $4.36 billion at September 30,
17 2004. ...
IS * * *
19 The net gain on the sale of residential real estate loans durin g thethird quarter of 2005 totaled 5116.0 million (or 1.26%) on whole loansales and securitizations of S9.27 billion, as compared to a gain of589.4 million (or 1.32%) on whole loan sales and securitizations of56.80 billion during the third quarter of 2004. The gross premiums1-)realized on whole loan sales and securitizations during the third
23 quarter of 2005 were lower than in the third quarter of 2004 primarilyas a result of lower interest rate margins.
25 Commercial Real Estate Lending
26
CLASS ACTION COMPLAINTPage 15
1 Commercial real estate loans held for investment, before theallowance for loan losses, totaled 54.11 billion at September 30,2005, as compared to 53.85 billion at September 30, 2004. New loan
3 commitments entered into increased to S1.56 billion durin g the third
4 quarter of 2005, up from 51.16 billion durin g the second quarter of2005 and $881.2 million in the third quarter of 2004. The third
5 quarter increase in loan commitments has resulted in an increase in
6 the Company's loans outstanding . ...
* * *
8 Non-accrual commercial real estate loans and REO totaled 546.6
9million (comprised of 6 loans and 7 REO properties) at September 30,2005, down from 591.6 million (comprised of 14 loans and 11 REO
10 properties) as of September 30, 2004. The Company incurred no net
11 loan char ge-offs during the third quarter of 2005 and realized $2.8million in recoveries of loan balances previously charged-off; this iscompared to $5.0 million in net loan char ge- offs durin g the third
13 quarter of 2004. The annualized net char ge-off ratio for the ninemonth period ending September 30, 2005 was 0.20%, a decrease as
14 compared to 0.65% the first nine months of 2004.
15Other Highlights
16
17 * Net interest income increased to $120.3 million for the thirdquarter of 2005, as compared to $113.5 million for the third quarter of
18 2004. Net interest income increased as a result of increased average
19 interest-earning assets; however, net interest income, as a percentageof net interest-earnin g assets at the financial services operations
70level, while still at strong levels, decreased to 4.56% for the thirdquarter of 2005 from 5.15% for the third quarter of 2004. Thisdecrease is primarily a result of lower interest rate margins as-)?funding costs have increased faster than loan yields.
?3
24 * As a result of the decrease in the non-accrual loan balances inthe commercial real estate loan portfolio in the third quarter of 2005,
?5 the Company realized a decrease in its provision for loan losses,
76 which resulted in a $4.07 million credit to income as compared to a
CLASS ACTION COMPLAINTPate 16
S10.31 million credit to income for the third quarter of 2004. As ofSeptember 30, 2005, the allowance for loan losses totaled Sl's8.7million, or 3.85% of the total commercial real estate loans held for
3 investment.4
5* Fremont Investment & Loan, as of September 30, 2005, had
S10.8 billion in assets. $8.4 billion in FDIC-insured deposits and 51.56 billion in stockholder's equity, with a total Risk-Based Capital ratio of
16.6%.
8 * The residential real estate loan servicing platform was servicing
9approximately S22.2 billion in loans outstanding as of
September 30, 2005. This amount was comprised of the Company's10 securitized loans, loans sold with servicin g retained, loans held for
11 sale and interim servicing for loans sold to third parties.
* Stockholders' equity totaled S1.3 billion, or $16.64 per share, at
13 September 30, 2005.
14 26. On November 9, 2005 Fremont General filed its quarterly
15
16 report for the period ended September 30, 2005 with the SEC on Form 10-Q,
17 which was signed by Defendant Rampino and reaffirmed the Company's
18 previously announced financial results. Pursuant to Section 302 of Sarbanes-19
Oxley, the Form 10-Q included a certification signed by Rampino stating that the
21 Form 10-0 did not include any material misrepresentations.
-r)27. On March 9, 2006, Fremont General issued a press release
14 announcing the Company's financial results for fourth quarter and full-year 2005.
25 The press release, in relevant part, stated:
CLASS ACTION COMPLAINT28 Page 17
Fremont General Reports Diluted Net Income Per Share of S4.37 forFull-Year 2005 and $0.72 for the Fourth Quarter of 2005
3 SANTA MONICA, Calif., March 9 /PRNewswire-FirstCall/ —4 Fremont General Corporation (NYSE: FMT) (the "Company"), a
nationwide residential and commercial real estate lender doing5 business primarily throu gh its wholly-owned industrial bank. Fremont6 Investment & Loan, reported today its results for the fourth quarter of
2005 and the full-year 2005. Net income for the fourth quarter of2005 was $54,511,000, which represents a decrease of 39.8%, ascompared to net income of 890,595.000 for the fourth quarter of
92004. Diluted net income per share was S0.72 for the fourth quarterof 2005, down 41.0% as compared to 81.22 per share for the fourth
10 quarter of 2004. Net income for all of 2005 was S327,948,000, a
11decrease of 7.3% as compared to 8353.756,000 for all of 2004.Diluted net income per share was $4.37 for all of 2005, as comparedto 84.80 per share for all of 2004.
13The Company's Board of Directors declared a quarterly cash
14 dividend of 80.11 per share on its common stock, payable April 28,
15 2006 to stockholders of record on March 31, 2006. This declarationrepresents a 10% increase over the previous quarter's dividend and is
16 the 117th consecutive quarterly cash dividend to be paid by the17 Company.
18 Residential Real Estate Lending19
Residential real estate loan ori ginations totaled $9.63 billion duringthe fourth quarter of 2005. up from 87.04 billion during the fourth
21 quarter of 2004. ...* * *
The net gain on the sale of residential real estate loans durin g the23 fourth quarter of 2005 totaled $29.2 million (or 0.29%) on whole loan
24 sales and securitizations of 89.89 billion, as compared to a gain of$98.7 million (or 1.68%) on whole loan sales and securitizations of
75 85.90 billion during the fourth quarter of 2004. The gross premiumsrealized on whole loan sales and securitizations during the fourth
77 CLASS ACTION COMPLAINT
">8“ IPa.,e8
quarter of 2005 (1.23% before derivative gains) were lower than inthe fourth quarter of 2004 (3.06?c before derivative gains) primarilyas a result of rapidly increasing interest rates, combined with softer
3 secondary market conditions.4
5The Company securitized more of its loans during the fourth
quarter of 2005 as management viewed the secondary market
6 execution for whole loan sales to significantly understate the
7long-term value of the underlyin g, loans. The Company increased itssecuritization volume during the fourth quarter of 2005 to S3.23billion from $1.03 billion in the third quarter of 2005 and as
9compared to $790.2 million in the fourth quarter of 2004. As a resultof the increase in securitization volume during the fourth quarter of
10 2005, the Company's balance of residual interests increased to $170.7
11 million at December 31, 2005. The residual interest balance wassubsequently reduced durin g. January of 2006 as the Company
12 executed a net interest margin ("NIM") transaction of approximately
13 $89 million.
14 During the past several quarters, the Company continued to
15 increase its weighted-average-coupon ("WAC") on its loanoriginations. For the third quarter of 2005, the WAC on first
16 mortgages was 7.32%, durin g, the fourth quarter of 2005, the WAC
17 had increased to 7.84% and during the first two months of 2006, theWAC on first mortgages further increased to approximately 8.35%.
18 As a result of these rate increases and improved secondary market
19 conditions, the Company has observed an increase in whole loan saleprices. The Company has entered into approximately $2 billion in
70forward sale commitments for the second quarter of 2006 with
21 execution levels resulting in gross premiums in excess of 2%. TheCompany, however, expects that the gross premium realized on its7./whole loan sales and securitizations for the first quarter of 2006 willbe lower than what was realized during the fourth quarter of 2005.
").4Commercial Real Estate Lending.
/5
26 Commercial real estate loans held for investment, before the
'77 CLASS ACTION COMPLAINT
28 Page 19
allowance for loan losses, totaled a record level of $4.75 billion atDecember 31. 2005, as compared to S3.48 billion at December 31.2004. New loan commitments entered into increased to a record level
3 of 82.13 billion durin g the fourth quarter of 2005. up from 81.56
4 billion durin g the third quarter of 2005 and S713.3 million in thefourth quarter of 2004. The fourth quarter increase in loan
5 commitments has resulted in an increase in the Company's loans
6 outstanding. ...
* * *
Loan quality for the commercial real estate loan portfolio continued
9to be strong during the fourth quarter of 2005. Non-accrualcommercial real estate loans and REO totaled $59.5 million
10 (comprised of 5 loans and 7 REO properties) at December 31, 2005,down from S103.6 million (comprised of 13 loans and 8 REO11properties) as of December 31, 2004. The annualized net charge-offratio for all of 2005 was a favorable 0.27%, down from 0.59% for allof 2004.13
14 Other Highlights
15* Net interest income increased to $133.4 million for the fourth
16 quarter of 2005, as compared to 8116.3 million for the fourth quarter
17 of 2004. Net interest income increased as a result of increasedaverage interest-earnin g. assets.
18
19 * The Company's provision for loan losses was a $3.3 millionexpense in the fourth quarter of 2005 as compared to a $13.1 millioncredit to income for the fourth quarter of 2004. As of December 31,
21 2005, the allowance for loan losses totaled S156.8 million, or 3.29%of the total commercial real estate loans held for investment.
* Fremont Investment & Loan, as of December 31, 2005, had$11.3 billion in assets, $8.6 billion in FDIC-insured deposits and S1.6billion in stockholder's equity, with a total Risk-Based Capital ratio of15.5%.
26
CLASS ACTION COMPLAINT
?8 Pave 20
1 * The residential real estate loan servicing platform was servicingapproximately $22.3 billion in loans outstanding as of December =11,2005, up 49% from S15.0 billion at December 31, 2004. These
3 amounts are comprised of the Company's securitized loans, loanssold with servicing retained, loans held for sale and interim servicingfor loans sold to third parties.
5
6 * Fremont Investment & Loan was assigned residential sub-primeloan servicer ratings during the fourth quarter of 2005 by Standard S.:Poors Ratin g_ Services (Average - Positive Outlook) and Moody's
8 Investors Service (SQ3+). The ratin2s, according to the rating
9agencies, were based on the Company's highly experiencedmanagement team, above average collection abilities and above
10 average foreclosure and REO timeline management.
11* The Company's stockholders' equity totaled $1.36 billion, or
1 7 $17.51 per share, at December 31, 2005, up 34% from $1.01 billion,
13 or $13.12 per share. at December 31. 2004.
14 28. On March 16, 2006 Fremont General filed its annual report for
15the period ended June 30, 2005 with the SEC on Form 10-K. The Form 10-K was
16
17 signed by Defendant Rampino, among others, and reaffirmed the Company's
18 previously announced financial results. Pursuant to Section 302 of Sarbanes-19
Oxley, the Form 10-K included a certifications signed by Rampino stating that the
21 Form 10-K did not include any material misrepresentations.
-y)29. On May 9, 2006, Fremont General issued a press release
14 announcing the Company's financial results for first quarter 2006. The press
25 release, in relevant part, stated:
76
CLASS ACTION COMPLAINTPaue 21
1 Fremont General Reports Diluted Net Income Per Share of S0.42 forFirst Quarter 2006
3 SANTA MONICA, Calif., May 9 ,PRNewswire-FirstCalr --
4 Fremont General
5Corporation (NYSE: FMT)(the "Company"), a nationwide residentialand commercial real estate lender doin g business primarily through
6 its wholly- owned industrial bank, Fremont Investment & Loan,reported today its results for the first quarter of 2006. Net income forthe first quarter of 2006 was S31,687,000, which represents adecrease of 65%, as compared to net income of S90,102,000 for the
9first quarter of 2005. Diluted net income per share was $0.42 for thefirst quarter of 2006, as compared to S1.22 per share for the first
10 quarter of 2005.
11Residential Real Estate Lending_
13 Residential real estate loan ori ginations totaled $8.54 billion duringthe first quarter of 2006, up from $7.76 billion during the first quarter
14 of 2005. ...
15* * *
16 The loss on the sale of residential real estate loans durin g the first
17 quarter of 2006 totaled $15.2 million on whole loan sales of $7.26billion. This is compared to a gain of S108.4 million on whole loan
18 sales and securitizations of $7.06 billion durin g the first quarter of
19 2005. As previously indicated by the Company, the gross premiumsrealized on whole loan sales during the first quarter of 2006 werelower than in previous periods. The loans sold during the first quarterof 2006 were sold pursuant to forward loan sale commitments enteredinto during the fourth quarter of 2005, when secondary marketconditions were weak. In addition, pricing for second mort gages inthe secondary market has declined and the Company experienced aloss on the sale of these loans durin g the first quarter of 2006. TheCompany also recorded increased levels of provisions for loan
25 valuation and repurchase reserves, primarily as a result of increased
26 loan repurchase trends and lower pricing for second mortgages.
CLASS ACTION COMPLALNT
28 Page "r)
1 The Company has continued to increase itsweighted-avera ge-coupon ("WAC") on its loan originations. For thefirst quarter of 2006, the WAC on first mortgages was 8.35%, as
3 compared to a WAC of 7.84% durin g the fourth quarter of 2005. As
4 a result of these rate increases and improved secondary marketconditions for first mort gages. the Company has observed an increase
5- in whole loan sale prices for loans to be sold in the second quarter of
6 2006. The Company expects to sell over 89 billion in loans duringthe second quarter of 2006 with execution levels for its first
7mortgages resultin g in realized gross premiums in excess of 2%.
8 During April 2006, the Company ori ginated a total of 83.2 billion in
9residential real estate loans.
10 Commercial Real Estate Lending
11Commercial real estate loans held for investment, before the
17 allowance for loan losses, totaled a record level of $5.35 billion at
13 March 31, 2006, as compared to 83.81 billion at March 31, 2005.New loan commitments entered into increased to $1.09 billion during
14 the first quarter of 2006, as compared to 81.06 billion for the first
15 quarter of 2005. The increase in the Company's loans outstandingduring the first quarter of 2006 is a result of increased levels of loan
16 commitment origination in recent periods and a reduction in loan
17 paydowns.* * *
18 Loan quality for the commercial real estate loan portfolio continued
19 to be stron g during the first quarter of 2006. Non-accrual commercialreal estate loans and REO totaled 870.8 million (comprised of 5 loans
'70and 7 REO properties) at March 31, 2006, down from 896.2 million(comprised of 14 loans and 6 REO properties) as of March 31, 2005.The Company did not experience any commercial real estate loancharge-offs durin g the first quarter of 2006, nor did it restructure any
23 commercial real estate loans.
?.4Other Highlights
?5
26 * Net interest income increased to 8154.0 million for the first
CLASS ACTION COMPLAINT
28 Pa2e 23
quarter of 2006, as compared to S118.8 million for the first quarter of2005. Net interest income increased as a result of an increase in theaverage of commercial and residential real estate loans outstanding
3 and increased levels of retained residual interests in securitized loans.4
* The Company's provision for loan losses was a $3.9 million5 expense in the first quarter of 2006 as compared to a $1.0 million6 expense for the first quarter of 2005. As of March 31, 2006, the
allowance for loan losses totaled S160.8 million, or 3.0% of the totalcommercial real estate loans held for investment.
8
* Fremont Investment Loan, as of March 31, 2006, had 512.99
billion in assets, $9.3 billion in FDIC-insured deposits and 51.510 billion in stockholder's equity, with a total Risk-Based Capital ratio of
1114.1%.
* The residential real estate loan servicing platform was servicing
13 approximately $23.2 billion in loans outstanding as of March 31,2006, up 23% from $18.8 billion at March 31, 2005. Of the 523.2
14 billion at March 31, 2006, $8.6 billion was being serviced to maturity
15 in either the Company's securitizations or from whole loan sales withservicing retained; the remaining loans were either the Company's
16 loans held for sale or loans being interim serviced by the Company17 after being sold to third parties.
18* The Company's stockholders' equity totaled S1.38 billion, or
19 $17.69 per share, at March 31, 2006, up 25% from $1.10 billion, or$14.13 per share, at March 31, 2005.
30. On May 10, 2006 Fremont General filed its quarterly report for
the period ended March 31, 2006 with the SEC on Form 10-Q, which was signed
24 by Defendant Rampino and reaffirmed the Company's previously announced
25 financial results. Pursuant to Section 302 of Sarbanes-Oxley, the Form 10-Q
,6
,7
CLASS ACTION COMPLAINT
28 Paee 24
included a certification signed by Rampino statin g, that the Form 10-Q did not
include any material misrepresentations.3
4 31. On August 8, 2006. Fremont General issued a press release
5announcing the Company's financial results for second quarter 2006. The press
6
release, in relevant part, stated:7
8 Fremont General Reports Diluted Net Income Per Share of 50.68 for
9Second Quarter 2006 and Declares Common Stock Dividend
10 SANTA MONICA, Calif., Aug. 8 !PRNewswire-FirstCall/ --
11Fremont GeneralCorporation (NYSE: FNIT) (the "Company"), a nationwide residentialand commercial real estate lender doing business primarily through
13 its wholly- owned industrial bank, Fremont Investment & Loan,reported today its results for the second quarter of 2006. Net income
14 for the second quarter of 2006 was $51,924,000, which represents a
15 decrease of 43%, as compared to net income of $90,770,000 for thesecond quarter of 2005. Diluted net income per share was $0.68 for
16 the second quarter of 2006, as compared to S1.21 per share for the
17 second quarter of 2005.
18 Net income for the first six months of 2006 was $83,611,000 a
19 decrease of 54% as compared to $180,872,000 for the first six monthsof 2005. Diluted net income per share was S1.10 for the first six
90months of 2006, as compared to $2.43 per share for the first six
21 months of 2005. The decrease in net income for the second quarterand the first six months of 2006 was a result of a significant decreasein the net gain on whole loan sales and securitizations of theCompany's residential real estate loans, offset in part by an increase in
24 net interest income.
75 The Company's Board of Directors declared a quarterly cashdividend of $0.11 per share on its common stock, payable October 31,
CLASS ACTION COMPLAINT
28 Pace 25
1 2006 to stockholders of record as of September 29, 2006. Thisdeclaration represents the 119th consecutive quarterly cash dividendto be paid by the Company.
3
4 Residential Real Estate Lending
5 Residential real estate loan originations totaled $9.54 billion during
6 the second quarter of 2006, up from $9.24 billion during the second
7quarter of 2005. For the first six months of 2006, residential realestate loan originations totaled $18.1 billion, up from $17.0 billion
8 during_ the first six months of 2005. ...* * *
9The gain on the sale of residential real estate loans during the second
10 quarter of 2006 totaled $8.4 million on whole loan sales and
11securitizations ("loan sales") of S9.89 billion. This is compared to again of S92.0 million on loan sales of $9.76 billion during the second
12 quarter of 2005 and a loss of S15.2 million on loan sales of $7.26
13 billion during the first quarter of 2006.The gross premiums realizedon Tier I loan sales decreased during the second quarter of 2006 to
14 2.15%, as compared to the second quarter of 2005 level of 2.78%, but
15 was an increase over the first quarter of 2006 level of 1.21%.
16 The Company's level of „gain on loan sales during the second
17 quarter of 2006 was negatively impacted by higher expenseprovisions for loan valuation, loan repurchase and premium recapture
18 reserves. During the second quarter of 2006, these provisions totaled
19 $97.6 million, as compared to $25.1 million for the second quarter of2005 and $35.9 million for the first quarter of 2006. Losses on Tier IIloan sales increased to $26.9 million during the second quarter of
21 2006, up from $3.2 million in the second quarter of 2005 and $14.0million for the first quarter of 2006.
The Company recorded these increased provision levels primarily
24 as a result of increased loan repurchase and re-pricing trends from itsprevious whole loan sale transactions, as well as lower secondarymarket pricing for second mortgages. These increased loanrepurchase and re-pricing levels, which have been noted
'77 CLASS ACTION COMPLAINT
Page 26
industry-wide, are primarily due to increased levels of early paymentdelinquencies and a greater incidence of repurchase requests fromwhole loan purchasers. The Company's loan repurchases and
3 re-pricings increased to $238.4 million durin g the second quarter of
4 2006, up from $67.7 million and $107.7 million for the secondquarter of 2005 and the first quarter of 2006. respectively.
5
6 Given these loan repurchase and re-pricing trends, with anobjective of reducing its early payment delinquencies, the Company
7made modifications in its loan ori gination parameters durin g the
8 second quarter of 2006, includin g eliminatin g or reducing certain
9higher loan-to-value products and lower FICO bands. The Companyexpects to see the impact of these changes durin g the fourth quarter of
10 2006 and the first quarter of 2007.
11The residential real estate loan servicin g platform was servicing
17 approximately $24.9 billion in loans outstanding as of June 30, 2006,
13 up 19% from $21.0 billion at June 30. 2005. Of the $24.9 billion atJune 30, 2006, $11.2 billion was bein g serviced to maturity in either
14 the Company's securitizations or from whole loan sales with servicing
15 retained, as compared to $4.9 billion at June 30, 2005; the remainingloans were either the Company's loans held for sale or loans being
16 interim serviced by the Company after being sold to third parties.17
Commercial Real Estate Lending18
19 Commercial real estate loans held for investment, before theallowance for loan losses, totaled a record level of $5.69 billion at
')0June 30, 2006, as compared to £3.73 billion at June 30, 2005. New
7 1 loan commitments entered into increased to $1.44 billion durin g thesecond quarter of 2006, as compared to $1.16 billion for the secondquarter of 2005. The increase in the Company's loans outstanding
23 during the second quarter of 2006 is a result of increased levels ofloan commitment ori gination in recent periods and a reduction in loan24paydowns.
* * *
76 Loan quality for the commercial real estate loan portfolio continued
-)7 CLASS ACTION COMPLAINT
Pa2e 27
1 to be strong during the second quarter of 2006. Non-accrualcommercial real estate loans and REO totaled 839.7 million(comprised of 4 loans and 1 REO property) at June 30, 2006. down
3 from $51.2 million (comprised of 8 loans and 6 REO properties) as of
4 June 30, 2005. The Company did not experience any commercial real
5estate loan charge-offs durin g, the second quarter of 2006, nor did itrestructure any commercial real estate loans. Delinquent loans 30
6 days past due increased to 1.04% of the outstanding portfolio at June30, 2006, up from 0.0% and 0.15% at June 30, 2005 and March 31,2006, respectively. The total amount of 30 day delinquencies at June
8 30, 2006 is related to one loan.Delinquent loans 60 days past due or
9greater decreased to 0.59% of the outstanding portfolio at June 30,2006, down from 0.72% and 0.69% at June 30, 2005 and March 31,
10 2006, respectively.
11The Company's provision for loan losses was an 811.7 million
expense in the second quarter of 2006 as compared to a 84.2 million
13credit to income for the second quarter of 2005. The provision levelis primarily derived from a higher level of commercial real estate
14 loans outstanding as of June 30, 2006 and the increase in 30 day
15 delinquencies. As of June 30, 2006, the allowance for loan lossestotaled 8172.7 million, or 3.03% of the total commercial real estate
16 loans held for investment, as compared to 8160.0 million, or 4.28%,
17 as of June 30, 2005.
18 Other Highlights19
* Net interest income increased to 8165.4 million for the second*)0
quarter of 2006, as compared to 8128.0 million for the second quarter
21 of 2005. Net interest income increased primarily as a result of anincrease in the average of commercial and residential real estateloans outstanding.
* Fremont Investment & Loan, as of June 30, 2006, had 812.6-)4billion in assets, 89.6 billion in FDIC-insured deposits and 81.6
25 billion in stockholder's equity, with a total Risk-Based Capital ratioof 13.9%.
CLASS ACTION COMPLAINTPa2e 2S
•
1 * The Company's stockholders' equity totaled S1.44 billion, or$18.45 per share, at June 30, 2006, up 20% from $1.20 billion, or$15.37 per share, at June 30, 2005.
3
4 32. On August 9, 2006 Fremont General filed its quarterly report
5 for the period ended June 30, 2006 with the SEC on Form 10-Q, which was signed6
by Defendant Rampino and reaffirmed the Company's previously announced
8 financial results. Pursuant to Section 302 of Sarbanes-Oxley, the Form 10-Q
9included a certification si gned by Rampino statin g that the Form 10-Q did not
10
include any material misrepresentations.11
33. On November 9, 2006, Fremont General issued a press release
13announcin g the Company's financial results for third quarter 2006. The press
14
15 release, in relevant part, stated:
16 Fremont General Reports Diluted Net Income Per Share of $0.39 for
17 Third Quarter 2006
18 SANTA MONICA, Calif., Nov. 9 i ."PRNewswire-FirstCallt -
19 Fremont GeneralCorporation (the "Company") (NYSE: FMT), a nationwide residentialand commercial real estate lender doin g business primarily throughits wholly- owned industrial bank, Fremont Investment & Loan,reported today its results for the third quarter of 2006. Net income forthe third quarter of 2006 was $29,525,000, which represents adecrease of 68%, as compared to net income of $92,565,000 for the
24 third quarter of 2005. Diluted net income per share was $0.39 for thethird quarter of 2006, as compared to $1.23 per share for the third
-)5 quarter of 2005.
27 CLASS ACTION COMPLAINT
28 Page 29
1 Net income for the first nine months of 2006 was $113,136.000 adecrease of 59% as compared to $273,437,000 for the first ninemonths of 2005. Diluted net income per share was $1.49 for the first
3 nine months of 2006, as compared to $3.65 per share for the first nine
4 months of 2005. The decrease in net income for the third quarter andthe first nine months of 2006 was primarily the result of a significant
5 decrease in the net gain on whole loan sales and securitizations of the6 Company's residential real estate loans, offset in part
by an increase in net interest income.7
8 Residential Real Estate Lending
9Residential real estate loan ori ginations totaled $7.8 billion during
10 the third quarter of 2006, down from S9.6 billion during the third
11quarter of 2005. For the first nine months of 2006, residential realestate loan originations totaled $25.8 billion, down sli ghtly from$26.6 billion during the first nine months of 2005. ...
13* * *
14 The following are the primary comparative aspects for the residential
15 real estate lending operations between the second and third quartersof 2006:
16
17 * Loan ori gination volume decreased from $9.54 billion in thesecond quarter to $7.76 billion in the third quarter - this decrease is
1S due in large part to the implementation in the second quarter of19 various loan underwritin g guideline adjustments desi gned to lower
early payment defaults, reduce the level of second mortgagesoriginated and to improve the overall credit performance of the loans.
21
) * The third quarter loss on the sale of residential real estate loans7-)totaled $9.6 million on whole loan sales and securitizations of $8.15billion. This is compared to a gain of $8.4 million on loan sales of
24 $9.89 billion during the second quarter of 2006.
25 * During the third quarter, as part of its loss on the sale of
26 residential real estate loans, the Company recognized a hed ging loss
CLASS ACTION COMPLAINT
28 Page 30
of S20.4 million as compared to a gain of S1.6 million durin g, thesecond quarter.
* The Company had lower expense provisions for loan valuation,
4 loan repurchase and premium recapture reserves during the third
5quarter.
During the third quarter, these provisions totaled S76.3 million,6 as compared to S124.5 million for the second quarter.
7* Loan repurchases and re-pricin gs increased to S345.7 million
8 during the third quarter, up from S238.4 million for the second
9quarter.
10 * The Company had a lower avera ge amount of loans held for saleoutstandin g durin g the quarter, which when combined with a slightly
11lower wei ghted-average interest rate on the loans during the thirdquarter, led to a decrease in net interest income on the loans during
13 the third quarter.
14 * During the third quarter, the gross premiums realized on Tier I
15 loan sales (both first and second mort gages) decreased to 1.82%, ascompared to the second quarter level of 2.15%. The third quarter
16 level was impacted by:17
-- A hi gher overall level of loan securitizations (includin g a18 stand-alone second mort gage only securitization), for which the19 Company books a lower gross premium, but for which it does not
have any loan repurchase requirements.20
21 -- The Company also entered into a whole loan sale for S1.06billion in which the Company received a lower level of grosspremium in return for the buyer assuming certain levels of first
1- payment defaults in the loan pool.
")4-- Tier I loan pricin g for the Company's whole loan sales of first
25 mortgages were in the 2.300/o to 2.40% range during the third
26 quarter.
CLASS ACTION COMPLAINTPasx 31
As previously reported for the second quarter of 2006, theCompany made modifications to its business processes during thesecond quarter, includin g chan ges in its loan origination parameters,
3 with an objective of reducing its early payment defaults and overall
4 loan repurchase levels. The Company's actions included. but werenot limited to:
6 * Eliminating the ori gination of combined first and secondmortgage loans with FICO scores under 640 for stated-incomedocumentation loans and 600 for full documentation loans;
8
* Modifyin g its whole loan sale agreements to limit the9
notification period for repurchase requests and to extend the
10 qualifying first payment measurement period;
11* Increasing of loan servicin g customer contact rates with the
focus on minimizin g early payment defaults;
13* Enhancement of the appraisal review process and analysis
14 systems. In the third quarter of 2006, the Company began to see the
15 positive impact of these measures. The following are some of themetrics that were notable:
16
17 * A 33% decrease in the dollar volume of second mortgages to6.2% from 9.2% during the second quarter of 2006 -- the percentage
18 of second mortgages to first mort gages produced, in terms of units,
19 also decreased durin g the third quarter to 25.3% from 40.0% duringthe second quarter of 2006;
20
* A decrease in stated-income documentation loans to 38.3% as apercentage of loan production from 44.6% during the second,7)
quarter of 2006;
24 * An increase in the overall wei ghted-average FICO score to 627for first mort gages and 664 for second mortgages from 623 and 652during the second quarter of 2006.
,7 CLASS ACTION COMPLAINT
78 Page 32
1 The Company expects to begin to see the impact of these changeson the Company's provisioning levels during the first quarter of 2007.Early indications are that these changes in production are decreasing
3 the level of first payment defaults.4
The residential real estate loan servicing platform was servicingapproximately $24.3 billion in loans outstanding as of September 30,
6 2006, up 9% from S22.2 billion at September 30, 2005. Of the S24.3
7billion at September 30, 2006, $15.1 billion was being serviced tomaturity in either the Company's securitizations or from whole loansales with servicing retained, as compared to S6.1 billion at
9September 30, 2005; the remaining loans were either the Company'sloans held for sale or loans being interim serviced by the Company
10 after being sold to third parties.
11Commercial Real Estate Lending
13 Commercial real estate loans held for investment, before theallowance for loan losses, totaled of 56.14 billion at September 30,
14 2006, as compared to $4.11 billion at September 30, 2005. New loan
15 commitments entered into decreased to S1.38 billion during the thirdquarter of 2006, as compared to S1.56 billion for the third quarter of
16 2005. ...17
* * *18 Loan credit performance for the commercial real estate loan portfolio
19 continued to be strong during the third quarter of 2006. Non-accrualcommercial real estate loans and REO totaled $39.0 million
-)0(comprised of 3 loans and 2 REO properties) at September 30, 2006,
7 1 down from $46.6 million (comprised of 6 loans and 7 REOproperties) as of September 30, 2005. The Company recorded?-)$153,000 in commercial real estate loan net charge-offs durin g, thethird quarter of 2006, and did not restructure any commercial real
24 estate loans. Delinquent loans 60 days past due or greater were0.51% of the outstanding portfolio at September 30, 2006, ascompared to 0.59% and 0.39% at June 30, 2006 and September 30,
26 2005, respectively.
CLASS ACTION COMPLAINT
28 Paec
1 The Company's provision for loan losses was a S12.7 millionexpense in the third quarter of 2006 as compared to a 84.1 millioncredit to income for the third quarter of 2005. The provision level is
3 primarily derived from a hi gher level of commercial real estate loans
4 outstanding as of September 30, 2006. As of September 30, 2006. theallowance for loan losses totaled S185.2million, or 3.01% of the total
5 commercial real estate loans held for investment, as compared to
6 S158.7 million, or 3.85%, as of September 30, 2005.
7 The Company's commercial real estate loan operation has
8 maintained a strong level of credit quality while growing its loan
9portfolio. While the Company has seen a decline in the sales velocityof some of the condominium projects that it finances, no significant
10 changes to the pricin g of the related units has been observed. To the
11 extent that sales prices do soften, the Company's underwritin g_standards provide protection in that most loans have been
12 underwritten to an approximate level of 65% of the expected net retail
13 sales proceeds. These loans also are structured with variousbalancing guarantees that require cash infusions from the developer
14 of the project in the event they become necessary. Further reducing
15 the Company's credit exposure on these projects is that the Company'scondominium portfolio is geo graphically diversified and that a
16 substantial amount of the loans are covered by pre-sales that involve
17 significant (generally between 5% and 20%) non-refundable deposits.
18 Other Highlights19
* Net interest income increased to S148.8 million for the third70
quarter of 2006, as compared to $120.3 million for the third quarter
21 of 2005. Net interest income increased primarily as a result of anincrease in the avera ge of commercial and residential real estateloans outstanding.
-)3
74 * Fremont Investment & Loan, as of September 30, 2006, had$12.6 billion in assets, $9.6 billion in FDIC-insured deposits and
25
81.6 billion in stockholder's equity, with a total Risk-Based Capital
26 ratio of 13.93%.
T7
CLASS ACTION COMPLAINT
28 Pe 34
•
* The Company's stockholders' equity totaled S1.5 billion, or518.70 per share, at September 30, 2006, up 12% from S1.3 billion, orS16.64 per share, at September 30. 2005.
3
1 * Durin g_ the third quarter. the Company opened its new residential
5loan servicing center in Irving. Texas. This new center adds to theCompany's capacity as it continues to grow its loan servicing
6 portfolio.
34. On November 9, 2006 Fremont General filed its quarterly
report for the period ended September 30, 2006 with the SEC on Form 10-Q,9
10 which was signed by Defendant Rampino and reaffirmed the Company's
11previously announced financial results. Pursuant to Section 302 of Sarbanes-
12
13 Oxley, the Form 10-Q included a certification signed by Rampino stating that the
14 Form 10-Q did not include any material misrepresentations.15
Disclosures at the End of the Class Period16
17 35. On February 27, 2007, Fremont General issued a press release
18announcing a delay in the filing of the Company's 2006 Form 10-K with the SEC,
19
20 and that the Company "intends to file a Form 12b-25 with the Securities and
21 Exchange Commission explaining the reasons therefor." The press release further
-y)stated that following:
/3
FREMONT GENERAL CORPORATION TO POSTPONERELEASE OF RESULTS FOR 2006 AND DELAY FILING OF
25 FORM 10-K26
"17i
CLASS ACTION COMPLAINT
28 Pane 35
(SANTA MONICA, CALIFORNIA .) — February 27, 2007: FremontGeneral Corporation (the "Company"). a nationwide residential andcommercial real estate lender doing business primarily through its
3 wholly-owned industrial bank, Fremont Investment & Loan, today
4 announced that it will postpone the release of its fourth quarter and
5full-year 2006 results of operations, as well as the conference call todiscuss such results, each previously scheduled for February 28,
6 2007. The Company also announced that it will not file its AnnualReport on Form 10-K for the fiscal year ended December 31, 2006 byMarch 1, 2007 and that it intends to file a Form 12b-25 with theSecurities and Exchange Commission explainin g, the reasons therefor.
9 * * *
10
36. As a result of this news, the next day shares of Fremont
General stock declined $2.84 per share, or 24 percent, to close on February
1328, 2007, at $8.81 per share, on unusually heavy trading volume.
14
15 Post Class Period Disclosures
16 37. On March 2, 2007, the Company filed a Form 12b-2517
with the SEC informing investors that, among other things. the CompanyIS
19 was unable to timely file its Form 10-K and — even more disturbing — that
20the Company intended to exit its subprime residential real estate lending
business.
23 38. The Form 12b-25 also disclosed that Fremont General
Corporation, Fremont Investment & Loan (FR) and Fremont General Credit7)5
26 Corporation would enter into a voluntary cease and desist order with the
-)7 CLASS ACTION COMPLAINT
28 Page 36
1 Federal Deposit Insurance Corporation (FDIC) related to allegations of
unsafe or unsound banking practices. The cease and desist order requires3
the Company to discontinue, among other things:
5
-
Operating with mana gement whose policies and practices are6 detrimental to FIL;
7 - Operating FIL without effective risk management policies and8 procedures in place in relation to FIL's primary line of business
9of brokered subprime mortgage lending;
10 Operating FIL without effective risk mana gement policies and
11 procedures in place in relation to FIL's other primary line ofbusiness of commercial real estate construction lending;
13 Operating with inadequate undenvriting criteria and excessiverisk in relation to the kind and quality of assets held by FIL;
14
15 Operating with a large volume of poor quality loans;
16
-
Engaging in unsatisfactory lendin g practices;
17- Operating without an adequate strate gic plan in relation to the
IS volatility of FIL's business lines and the kind and quality of19 assets held by FIL;
- Operating with inadequate capital in relation to the kind andquality of assets held by FIL;
- Operating in such a manner as to produce low andunsustainable earnings;
- Operating with inadequate provisions for liquidity in relation to25 the volatility of FIL's business lines and the kind and quality of
26 assets held by FIL;
/7 CLASS ACTION COMPLAINT
Page
Marketing and extending adjustable-rate mort ga ge ("ARM")products to subprime borrowers in an unsafe and unsoundmanner that greatly increases the risk that borrowers will
3 default on the loans or otherwise cause losses to FIL,
4- Making mort ga ge loans without adequately considerin g the
5 borrower's ability to repay the mort gage according to its terms;6 and
- Operatin g inconsistently with the FDIC's Intera gency Advisoryon Mortgage
9UNDISCLOSED ADVERSE FACTS
10
11 39. The market for Fremont General securities was open,
12 well-developed and efficient at all relevant times. As a result of
13Defendant's materially false and misleadin g statements and failures to
14
15 disclose, Fremont General securities traded at artificially inflated prices
16 during the Class Period. Plaintiff and other members of the Class purchased17
or otherwise acquired Fremont General securities relying upon the integrity18
19 of the market price of Fremont General securities and market information
20relating to Fremont General, and have been dama ged thereby.
21
40. During the Class Period, Defendant materially misled the
investing public, thereby inflatin g the price of Fremont General securities,
24by publicly issuing false and misleadin g statements and omittin g to disclose
15
26 material facts necessary to make Defendant's statements, as set forth herein,
27 CLASS ACTION COMPLAINT
28 Page 3S
not false and misleading. Said statements and omissions were materially
false and misleadin g in that they failed to disclose material adverse3
4 information and misrepresented the truth about the Company, its business
5and operations, as alleged herein.
6
41. At all relevant times, the material misrepresentations and7
omissions particularized in this Complaint directly or proximately caused or
9were a substantial contributin g cause of the dama ges sustained by plaintiff
10
11 and other members of the Class. As described herein, during the Class
12 Period, Defendant made or caused to be made a series of materially false or
13misleading statements about Fremont General's business, prospects and
14
15 financial performance. These material misstatements and omissions had the
16 cause and effect of creatin g in the market an unrealistically positive17
assessment of Fremont General and its business, operations, andis
19 performance, thus causin g- the Company's securities to be overvalued and
7)0artificially inflated at all relevant times. Defendant's materially false and
misleading statements durin g the Class Period resulted in plaintiff and other
members of the Class purchasin g the Company's securities at artificially
?-4inflated prices, thus causing the damages complained of herein.
26
1-7 CLASS ACTION COMPLAINT
2S Pac/e 39
Applicability Of Presumption Of Reliance:Fraud-On-The-Market Doctrine
3 42. At all relevant times, the market for Fremont General securities4
was an efficient market for the following reasons, among others:5
6 (a) Fremont General stock met the requirements for listin g, and
7was listed and actively traded on the NYSE, a highly efficient and
9automated market;
10 (b) As a re gulated issuer, Fremont General filed periodic
11public reports with the SEC and the NYSE:
11
13 (c) Fremont General re gularly communicated with public
14 investors via established market communication mechanisms, including
15
16through regular disseminations of press releases on the national circuits of
17 major newswire services and through other wide-ranging public disclosures,
18 such as communications with the financial press and other similar reporting19
services; and20
(d) Fremont General was followed by several securities
analysts employed by major brokerage firms who wrote reports which were
24 distributed to the sales force and certain customers of their respective
25 brokerage firms. Each of these reports was publicly available and entered
'6
-)7 CLASS ACTION COMPLAINT
Paee 40
the public marketplace.
43. As a result of the foregoin g, the market for Fremont General3
4 securities promptly digested current information concerning Fremont
5 General from all publicly available sources and reflected such information6
in Fremont General's stock price. Under these circumstances, all purchasers
8 of Fremont General securities during the Class Period suffered similar
9injury through their purchase of Fremont General securities at artificially
10
11 inflated prices and a presumption of reliance applies.
12 LOSS CAUSATION
1344. Defendant's wrongful conduct, as alleged herein, directly
14
15 and proximately caused the economic loss suffered by Plaintiff and the
16 Class.17
45. During the Class Period, Plaintiff and the Class18
19 purchased or otherwise acquired Fremont General securities at artificially
inflated prices and were damaged thereby. The price of Fremont General21
common stock declined when the misrepresentations made to the market,
and/or the information alleged herein to have been concealed from the
24market, and/or the effects thereof, were revealed, causin g investors' losses.
-)6
27 CLASS ACTION COMPLAINT
28 Pac-IC 41
COUNT I
Against Defendant Rampino for Breach of Fiduciary Duty
4 46. Plaintiff repeats and realle ges each and every allegation
5 contained above as if fully set forth herein.6
47. Defendant owed a fiduciary duty to the Class, as
purchasers and owners of Fremont General stock.
948. Defendant, by means of his makin g the foregoing false
10
11and misleadin g statements, breached his fiduciary duty to the Class.
17 COUNT II
13Against Defendant Rampino for Violations of §10(b) of the 1934 Act
14 and Rule 10b-5 Promulgated Thereunder
1549. Plaintiff repeats and realle ges each and every allegation
16
17 contained above as if fully set forth herein.
1850. During the Class Period, Defendant Rampino
19
20disseminated or approved the false statements specified above, which he
21 knew or deliberately disregarded were misleading in that they contained
misrepresentations and failed to disclose material facts necessary in order to-)3
24 make the statements made, in light of the circumstances under which they
were made, not misleading.76
CLASS ACTION COMPLAINT
28 Page 42
L Defendant violated §10(b) of the 1934 Act and Rule 10b-
5 in that he:
(a) employed devices, schemes and artifices to defraud;
5 (b) made untrue statements of material facts or omitted to6
state material facts necessary in order to make the
8 statements made, in light of the circumstances under
9which they were made, not misleading; or
10
1(c) enga ged in acts, practices and a course of business that
1
12 operated as a fraud or deceit upon plaintiff and others
13
similarly situated in connection with their purchases of14
15 Fremont General common stock during the Class Period.
16 52. Plaintiff and the Class have suffered damages in that, in17
reliance on the integrity of the market, they paid artificially inflated prices18
19 for Fremont General common stock. Plaintiff and the Class would not have
2(1purchased Fremont General common stock at the prices they paid, or at all,
if they had been aware that the market prices had been artificially and
falsely inflated by Defendant's misleadin g, statements.
75
26
1-7
CLASS ACTION COMPLAINT
28 Pane 43
COUNT II
Against Defendant Rampino for Violations of §20(a) of the 1934 Act3
4 53. Plaintiff repeats and realleaes each and every allegation
5 contained above as if fully set forth herein.6
54. Defendant Rampino acted as a controlling person of
8 Fremont General within the meanin g. of §20(a) of the 1934 Act. By reason
9of his positions with the Company, and his ownership of Fremont General
10
11 stock, Defendant had the power and authority to cause Fremont General to
engage in the wrongful conduct complained of herein. Fremont General
13controlled the Defendant and all of its employees. By reason of such
14
15 conduct, Defendant is liable pursuant to §20(a .) of the 1934 Act.
16 PRAYER FOR RELIEF17
WHEREFORE, plaintiff prays for judgment as follows:18
A. Declaring this action to be a proper class action pursuant19
to Fed. R. Civ. P. 23;10
B. Awarding plaintiff and the members of the Class-)1
12 damages, including interest;
C. Awarding plaintiffs reasonable costs and attorneys'
24 fees; and
25 D. Awarding such equitable/injunctive or other relief as the
26 Court may deem just and proper.
27 CLASS ACTION COMPLAINT
28 Pe 44
0
1 JURY DEMAND
Plaintiff hereby demands a trial by jury.3
Respectfully submitted,
5 I Dated: June 14, 2007 LAW OFFICP " 9..̀..2 • • . t • - LE
6By:
7 William F. Salle425 E. Colorado St., Suite 755
8 Glendale, CA 91205
9 Telephone: (818) 543-1900Facsimile: (818) 543-1550•
10 Email: wfslaw@yaboo.com
11 An'orneys for Plaintiff
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CLASS ACTION COMPLAINT