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UNITED STATES DISTRICT COURTFOR THE SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION (DAYTON)
DAVID SLONE, et al., and
CARPENTER’S PENSION TRUST FORSOUTHERN CALIFORNIA,
CITY OF STERLING HEIGHTS GENERALRETIREMENT SYSTEM,
CITY OF ST. CLAIR SHORES POLICE ANDFIRE RETIREMENT SYSTEM,
CITY OF WESTLAND POLICE AND FIRERETIREMENT SYSTEM, AND
CITY OF STERLING HEIGHTS POLICE ANDFIRE RETIREMENT SYSTEM,
Plaintiffs,
vs.
FIFTH THIRD BANCORP, GEORGE A.SCHAEFER JR., NEAL E. ARNOLD, DAVID J.DEBRUNNER, and
DELOITTE & TOUCHE LLP
Defendants.
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Case No. 1:03cv211
JUDGE THOMAS M. ROSE
JURY TRIAL DEMANDED
CONSOLIDATED AMENDED CLASS ACTION COMPLAINT
Plaintiffs on behalf of themselves and on behalf of all other persons similarly situated
alleges the following, upon personal knowledge as to themselves and their own acts, and upon
information and belief as to all other matters, based upon, inter alia, the investigation conducted
by and through their attorneys, which investigation included a review of press releases and other
public statements made by defendant Fifth Third Bancorp (“Fifth Third” or the “Company”) and
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its officers and agents; filings by Fifth Third with the United States Securities and Exchange
Commission (“SEC”); reports by securities analysts about Fifth Third; publicly available articles
and information about Fifth Third and its management in the financial and general press and on
the internet; extensive review and analysis of Fifth Third’s public financial statements in
consultations with forensic accountants; interviews of former Fifth Third employees with
knowledge of the Company’s activities during the Class Period (as defined below). Plaintiffs
believe that additional facts and evidence available only from internal Fifth Third documents and
the testimony of Fifth Third officers, employees, and agents will further support the claims
alleged herein.
NATURE OF THE ACTION
1. This is a federal class action on behalf of purchasers of the securities of Fifth
Third between September 21, 2001 to January 31, 2003, inclusive (the “Class Period”) who were
damaged thereby (the “Class”), seeking to pursue remedies under the Securities Exchange Act of
1934 (the “Exchange Act”).
JURISDICTION AND VENUE
2. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of
the Exchange Act, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by
the Securities and Exchange Commission (“SEC”), 17 C.F.R. § 240.10b-5.
3. This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. §§ 1331 and 1337 and Section 27 of the Exchange Act, 15 U.S.C. § 78aa.
4. In connection with the acts alleged in this complaint, defendants named herein,
directly or indirectly, used the means and instrumentalities of interstate commerce, including, but
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not limited to, the mails, interstate telephone communications, and the facilities of the national
securities exchanges.
5. Venue is proper in this District pursuant to Section 27 of the Exchange Act, and
28 U.S.C. § 1391(b). Many of the acts charged herein, including the preparation and
dissemination of materially false and misleading information, occurred in substantial part in this
District.
PARTIES
6. Lead Plaintiff Carpenter’s Pension Trust for Southern California, and each of the
other named-plaintiffs, David Slone, City of Sterling Heights General Retirement System, City
of St. Clair Shores Police and Fire Retirement System, City of Westland Police and Fire
Retirement System, and City of Sterling Heights Police and Fire Retirement System (collectively
“Plaintiffs”), certifications attached hereto and attached to the original plaintiff filings with the
Court, purchased the common stock of Fifth Third at artificially inflated prices during the Class
Period as set forth in the certification previously filed with the Court, and each has been
damaged thereby.
7. Defendant Fifth Third is a corporation organized under the laws of Ohio, and
maintains its principal executive offices at 38 Fountain Square Plaza Cincinnati, Ohio 45263.
8. Defendant Deloitte & Touche LLP (“Deloitte”) during the Class Period, was the
outside auditor and accountant for Fifth Third. Deloitte has 670 offices in approximately 140
countries, including an office located at 250 East Fifth Street, Cincinnati, OH 45202, which is
the office that performed Fifth Third’s audits. Deloitte audited Fifth Third’s financial statements
for the fiscal year ended December 31, 2001
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9. Defendant George A. Schaefer, Jr. (“Schaefer”) was Fifth Third’s Chief
Executive Officer and President throughout the Class period.
10. Defendant Neal E. Arnold (“Arnold”) was Fifth Third’s Chief Financial Officer
and Executive Vice President throughout the Class Period.
11. Defendant David J. DeBrunner (“DeBrunner”) was Fifth Third’s Controller
throughout the Class Period.
12. Defendants Schaefer, Arnold and DeBrunner are referred to collectively herein as
the “Individual Defendants.” Fifth Third and the Individual Defendants are referred to
collectively herein as the “Fifth Third Defendants.” The Fifth Third Defendants and Deloitte are
collectively referred to herein as “Defendants.”
13. During the Class Period, each of the Individual Defendants, as senior executive
officers and directors of Fifth Third, was privy to confidential and proprietary information
concerning Fifth Third, its operations, finances, financial condition, present and future business
prospects. The Individual Defendants also had access to material adverse non-public
information concerning Fifth Third, as discussed in detail below. Because of their positions with
Fifth Third, the Individual Defendants had access to non-public information about its business,
finances, products, markets and present and future business prospects via access to internal
corporate documents, periodic reports, and emails, as well as conversations and connections with
other corporate officers and employees, attendance at management and Board of Directors
meetings and committees thereof, and via reports and other information provided to them in
connection therewith. Because of their possession of or access to such information, the
Individual Defendants knew or recklessly disregarded the fact that adverse facts specified herein
had not been disclosed to, and were being concealed from, the investing public.
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14. Each of the Defendants is liable as a direct participant in, and a co-conspirator
with respect to the wrongs complained of herein. In addition, the Individual Defendants, by
reason of their status as senior executive officers and directors were each a “controlling person”
within the meaning of Section 20 of the Exchange Act, and had the power and influence to cause
the Company to engage in the unlawful conduct complained of herein. Because of their position
of control, the Individual Defendants were able to and did, directly or indirectly, control the
conduct of Fifth Third’s business.
15. The Individual Defendants, because of their positions with the Company,
controlled and/or possessed the authority to control the contents of Fifth Third’s public reports,
press releases, and presentations to securities analysts and through the analysts, to the investing
public. The Individual Defendants were provided with copies of the Company’s reports and
press releases alleged herein to be misleading, prior to or shortly after their issuance, and had the
ability and opportunity to prevent their issuance or cause them to be corrected. Thus, the
Individual Defendants had the opportunity to commit the fraudulent acts alleged herein.
PLAINTIFFS’ CLASS ACTION ALLEGATIONS
16. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased the
securities of Fifth Third between September 21, 2001 to January 31, 2003, inclusive and who
were damaged thereby. Excluded from the Class are Defendants, Fifth Third’s predecessors,
successors, parents, and subsidiaries, the officers and directors of Fifth Third, the partners of
Deloitte, and members of each of their immediate families and their legal representatives, heirs,
or assigns and any entity in which any Defendant has have or had a controlling interest during
the Class Period.
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17. The members of the Class are so numerous that joinder of all members is
impracticable. There were 577.7 million shares of Fifth Third common stock outstanding as of
October 31, 2002, which were actively traded on the National Association of Securities Dealers
Automated Quotation System stock exchange (the “NASDAQ”). While the exact number of
Class members is unknown to Plaintiffs at this time and can only be ascertained through
appropriate discovery, Plaintiffs believe that there are thousands of members in the proposed
Class. Record owners and other members of the Class may be identified from records
maintained by Fifth Third or its transfer agent and may be notified of the pendency of this action
by mail, using the form of notice similar to that customarily used in securities class actions.
18. Plaintiffs’ claims are typical of the claims of the members of the Class as all
members of the Class are similarly affected by Defendants’ wrongful conduct in violation of
federal law that is complained of herein.
19. Plaintiffs will fairly and adequately protect the interests of the members of the
Class and has retained counsel competent and experienced in class and securities litigation.
20. Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
(a) whether the federal securities laws were violated by Defendants’ acts as
alleged herein;
(b) whether statements made by Defendants to the investing public during the
Class Period misrepresented material facts about the business, operations, assets, and financial
condition of Fifth Third; and
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(c) to what extent the members of the Class have sustained damages, caused
by Defendants’ violations of the federal securities laws, and the proper measure of damages.
21. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as
the damages suffered by individual Class members may be relatively small, the expense and
burden of individual litigation make it impossible for members of the Class to individually
redress the wrongs done to them. There will be no difficulty in the management of this action as
a class action.
SUBSTANTIVE ALLEGATIONS
Background Facts
22. Fifth Third is a financial and bank holding company engaged primarily in
commercial, retail and trust banking, electronic payment processing services and investment
advisory services. Fifth Third’s banks and other service centers are concentrated in the Midwest.
23. The Company has grown its business aggressively through dozens of acquisitions
over the years. The Company has actively promoted itself to the investing public as an effective
and efficient integrator of such acquisitions, which successfully uses and depends on acquisitions
to consistently expand its operations, revenues and earnings.
24. On April 2, 2001, the Company acquired Old Kent Financial Corp. (“Old Kent”)
in a stock-for-stock transaction valued at $5.5 billion. This acquisition was by far the
Company’s largest, doubling its assets and greatly expanding its operations geographically.
Integrating Old Kent’s operations with Fifth Third’s, however, turned into a Herculean
undertaking, requiring a massive integration of, among other things, 300 full-service banking
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centers and 1.2 million accounts, which Fifth Third was unprepared, and for which Fifth Third
lacked the experience or managerial competence to accomplish successfully.
25. Despite its positive disclosure to the market at the success of the Old Kent
acquisition, in a cost-cutting attempt aimed at making the merger appear profitable so as to
maintain the Company’s reputation as an effective and efficient integrator of such acquisitions,
Fifth Third recklessly fired essential personnel despite the fact that the Company had failed the
perform an adequate due diligence on Old Kent necessary to gage the strain the acquisition
would have on the Company’s already inadequate or non-existent internal financial controls.
Thus, the Company lacked the internal controls, experience and personnel necessary to
successfully integrate Old Kent.
26. Nevertheless, during the Class Period, Fifth Third issued press releases and filed
financial reports with the SEC, which represented that the Company had successfully and
seamlessly integrated Old Kent into its operations, and was already experiencing meaningful
growth from the acquisition. These statements were materially false and misleading because,
inter alia, they failed to disclose that the Old Kent merger strained the Company’s infrastructure
to its breaking point, exposed and exacerbated widespread and material deficiencies in Fifth
Third’s internal controls and other business-critical systems, that the attempted integration had a
material and negative impact on Fifth Third’s ability to operate, including monitor its pre-
existing core businesses, or to manage its securities brokerage operations. Rather than disclose
these material adverse facts to the public, and thereby permit the investing public to evaluate
Fifth Third’s success at its integration efforts, and properly value the Company and its current
and future financial prospects, and risks associated with Fifth Third’s operations, Defendants
continued to falsely tout the Company’s effective and successful integration of its acquisitions.
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Since the Company’s prior growth and success had been tied directly to its acquisition and
integration of other companies, Defendants could not admit to their failures in integrating Old
Kent. However, by virtue of concealing the difficulties encountered in integrating Old Kent into
Fifth Third, and the lack of adequate financial controls at Fifth Third necessary to properly
manage the company and account for Fifth Third’s assets and liabilities, Defendants artificially
inflated the Company’s publicly traded stock.
27. Moreover, as Fifth Third used the Company’s publicly traded stock as currency
for new acquisitions, it was imperative that the Defendants keep the price of Fifth Third stock at
high levels in order to avoid facing the inability to engage in further acquisitions which would
put a halt to the Company’s growth. However, by the time of the Old Kent acquisition, the
Company had outgrown its infrastructure and internal financial and operating controls.
Defendants concealed this fact from investors, falsely presenting its business as stronger than
ever, and promising continued growth along with investment-safety. Instead, the breakdown of
financial controls were producing false, misleading, and unreliable financial statements during
the Class Period. Indeed, Fifth Third’s lack of meaningful and adequate financial controls made
reliance on its financial statements impossible, a risk that was not disclosed to the investing
public.
28. Symptomatic of the breakdown of Fifth Third’s financial controls and
unreliability of its financial reports, on September 10, 2002, the Company announced that it
would be taking a $54 million after-tax ($81.8 million pre-tax) charge for impaired funds.
Essentially, the Company admitted it had lost, literally, $81,800,000.00 million in a botched
accounting reconciliation. The disclosure, contained in a Form 8-K filed with the SEC, primarily
discussed, in very optimistic terms, the Company’s upcoming third quarter earnings release. In
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talks with securities analysts, the Company further downplayed the incident as a one-time,
immaterial, event. In its public statements concerning the missing $81.8 million, Defendants
made not mention of the Company’s inadequate internal controls, nor alerted the market to the
risks inherent in the Company’s pervasive inadequate or non-existent financial controls, or the
risks to Fifth Third resulting from this lack of internal controls, including the risks of regulatory
intervention.
29. Then, on November 14, 2002, the Company revealed that the $81.8 million write-
off had triggered investigations by federal banking regulators and the SEC. Specifically, the
regulators were investigating whether the Company’s rapid growth had outpaced its internal
controls and processes. In reaction to this disclosure, the price of Fifth Third common stock
dropped, falling from a November 14, 2002 close of $62.53 to close at $57.42 the next day, a
one-day decline of 8.1%, on extremely heavy trading volume.
30. In a Form 8-K filed on December 10, 2002, the Company represented that while it
was still cooperating with the regulatory investigations, its own investigation had found that its
internal controls were adequate, and that there would be no additional negative financial impact
from the $81 million incident. Following these representations, news articles reported that
regulators disputed the Company’s claims that all was well at Fifth Third, and reiterated that the
regulatory investigations were ongoing and could still result in formal actions or, at the very
least, would require that Fifth Third implement massive internal control processes and
infrastructure changes.
31. Again contrary to the Fifth Third Defendant’s rosy gloss only a month before, on
January 31, 2003, the last day of the Class Period, the Company reported in a Form 8-K that
banking regulators would likely take formal action against the Company. Without providing
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details, the Company stated that it would likely be ordered to improve its internal controls by,
among other things, adding personnel and processes and submitting certain of its processes to
third-party review. On February 3, 2003, the first trading day following the announcement, the
price of Fifth Third common stock closed at $52.21 per share, a further decline of 15% from the
closing price on November 14, 2002 close of $62.53, the day that Fifth Third first revealed that it
was being investigated by state and federal banking regulators and the SEC.
32. On March 26, 2003, Fifth Third entered into an agreement with the Federal
Reserve Bank of Cleveland and the Ohio Division of Financial Institutions (the “Written
Agreement”) which was attached to the Company’s Form 10-K for the period ending December
31, 2002, whereby Fifth Third was required to dramatically reconstruct its entire system of
internal controls, the material deficiencies in which Fifth Third admitted by the Written
Agreement.
33. Moreover, a “written agreement” is the most severe action taken by bank
regulators short of issuing a “cease and desist order.” Specifically, as discussed by UBS
Warburg in a research report dated November 15, 2002:
“[b]ank regulators can issue four types of actions. Typically, the duration of thoseactions is proportionate to their severity. An overview of the four follows:
(1) Supervisory Letters – are generally the least serious and usually addressdeficiencies in a specific business area. They do not have to be disclosed publiclyand can be quickly lifted upon satisfactory compliance. Fifth Third’smanagement expects that the supervisory letters disclosed in today’s filings willbe resolved during the current quarter;
(2) Memorandum of Understanding (MOU) — also know as “informalagreement”, MOUs, like supervisory letter, are not required to be disclosed.MOUs tend to require changed in business practices (often focused on internalcontrols) . . . ;
(3) Written Agreements (WA) — are publicly disclosed by regulators. Theseactions usually address activities that are firm wide in scope rather than issue that
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are fairly narrowly-defined or business-line specific. Was usually requireperiodic updates and substantial action on the part of the company, and theyusually mandate prior approval from regulators before changes to the business(i.e. management changes, acquisitions, dividend increases) are made . . . ;
(4) Cease and Desist Order (C&D) — serve to immediately cause cessation ofbusiness activity, either in a specific activity, business line or for the company inits entirety. C&Ds are publicly disclosed.”
34. Thus, unbeknownst to the investing public, Fifth Third’s lack of adequate internal
controls had spiraled so out-of-control that the Company was one step away from bank
regulators taking the draconian action of requiring it to cease “business activity, either in a
specific activity, business line or for the company in its entirety.” Nevertheless, at no time prior
to public disclosures of the Written Agreement were investors informed of the depth or severity
of Fifth Third’s lack of internal financial controls or the risk to investors flowing from those
absent controls.
35. Defendants engaged in the wrongs alleged herein in order to use its stock as
currency for acquisitions to grow the Company. In turn, management bonus compensation was
tied directly to pre-set growth targets. Thus, the need to keep the price of Fifth Third at high
levels to finance the cost of acquisitions to produce necessary growth rates to trigger substantial
bonus compensation to the Fifth Third management, in particular the Individual Defendants who
received the highest levels of such bonus compensation, directly induced and caused the
Individual Defendants to conceal the wide-spread collapse of internal controls throughout Fifth
Third. Disclosure of the regulatory investigation and likely action brought such growth
opportunity to a halt. Specifically, as announced by the Company on July 24, 2002, Fifth Third
had agreed to acquire Franklin Financial Corporation, which operated a Nashville, Tennessee-
based bank, in a stock exchange valued at $240 million. That acquisition was halted by the
regulatory investigation which placed a moratorium on further acquisitions throughout 2003.
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36. Further, as a result of the regulatory investigation, forbidding Fifth Third to
proceed with any further acquisitions, Firth Third’s prior strategy of growth-through-acquisition,
which the Fifth Third Defendants repeatedly emphasized as the key to the Company’s success in
public statements before and during the Class Period. Thus, as a result of Fifth Third’s lack of
adequate internal financial controls, its core growth strategy, was in serious jeopardy and was, in
fact, halted for a substantial period of time until the Company entirely revamped its internal
financial control system. However, at no time before or during the Class Period disclosed the
Company’s lack of meaningful internal controls or the risk to Fifth Third’s survival, its future
growth, or reported financial condition resulting from its lack of internal financial controls until
forced to do so by the Written Agreement.
Evidence of Inadequate Internal Controls
37. The Bank suffered from a chronic, systematic, and internally obvious breakdown
of its internal accounting controls throughout the Class Period, which rendered Fifth Third’s
financial reporting inaccurate, unreliable, and subject to manipulation resulting in materially
false and misleading financial statements. Contrary to Generally Accepted Accounting
Principles (“GAAP”) and SEC requirements, Defendants either failed to implement and maintain
an adequate internal accounting control system, or knowingly and/or recklessly tolerated the
failure to use existing internal accounting controls in a manner that would ensure compliance
with GAAP.
38. At the same time the Company was touting its growth-by-acquisition strategy, in
particular the Company’s “seamless” acquisition of Old Kent, and attributing its success to its
“decentralized” management system, it was aware that its internal controls - - which were
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inadequate prior to the Old Kent acquisition - - had been so strained by that acquisition that they
had reached the point where the Company was unable to keep track of its finances.
39. A former financial officer of one of Fifth Third Banks wholly owned subsidiaries
stated in an interview stated that the $81.8 million write-off was the result of Fifth Third’s lack
of internal controls. Specifically, he understood that the write-off had “to do with the
securitization and funds that came in, and posted for securitization — the funds came in and
posted to a receivable account, and it was cleared against a payable account, so it was sitting out
there in tow separate accounts — the two should have washed and offset each other. And they
became a stale item, and they ended up clearing other items against it, because they thought it
was an outage or something.”
40. Moreover, this former financial officer attributed the error to the fact that
“internal controls weren’t in place, that reconciliations weren’t done properly so that the stale
dated item could sit out there for so long before they discovered it . . . there’s some gross
negligence there, that internal controls weren’t in place, that reconciliations weren’t done
properly — and stale dated items weren’t followed up on.”
41. This former subsidiary financial officer reported that the failure in the Company’s
reconciliation process was, in part, the result of the Company understaffing in this area.
Specifically, when asked about internal controls, he remarked that “there were problems with
Fifth Third’s reconciliation process and that it would be problems in this area which would cause
this kind of error to occur.”
42. Additionally, the same former Fifth Third subsidiary financial officer also
explained that the error was “directly related to the Old Kent acquisition” in that the Company’s
“philosophy is to run a very lean shop and that’s what they’re known for in the industry. Having
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a very low efficiency ratio which is deemed to be very good, but in this case I think it was
obviously too low and they took on an Old Kent acquisition that was much larger than any
acquisition they had done before, and things got out of control - - and the reconciliation process
fell behind and they had a number of problems trying to slow that acquisition that led to these
problems that didn’t get discovered a year or whatever that time frame was.” This former
subsidiary financial officer explained the further that the Company “had collapsed the charters of
the affiliates and pulled out all the accounting functions into the parent holding company and at
the same time, then through the acquisition with Old Kent and they were trying to do too much at
once at the parent holding company and that’s where the problems were created.”
43. Moreover, he reported that the Company tried to do too many things with too few
people. He agreed that Fifth Third got rid of too many people who knew the Old Kent system,
and of arrogance the Company felt they would be able to handle it. He reported further that
“they were very used to running a very lean shop and the acquisition they did in the past, they
were able to swallow those . . . with that recipe. [But] Old Kent was so large, and had problems
that they had not discovered during due diligence . . .and when they took it on, it was more than
they could swallow.”
44. With respect to the Company’s failed due diligence in connection with the Old
Kent acquisition, the former subsidiary financial officer explained further that many of the
problems with Old Kent were not discovered in due diligence, in part, because the individual in
charge of due diligence had a heart attack during the due diligence process and was subsequently
unable to work for an extended period of time during the evaluation of Old Kent. The absence of
the person in charge of the due diligence was known to the Individual Defendants. Nevertheless,
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the Company proceeded with the acquisition, notwithstanding the lack of a full and adequate
understanding of Old Kent’s operations and finances.
45. Additionally, the former subsidiary financial officer explained that he had a dotted
line reporting relationship with defendant Arnold. Further, an additional source of problems for
Fifth Third was the fact that defendant Arnold was being “prepped to take over for [defendant]
Schaefer when he retires, and one thing that he did not have in his history is running a line
business, and so they put him in charge of Fifth Third Investment advisors — which is kind of a
trust of brokerage piece of the business, and he did not give up his CFO title — [defendant]
Arnold [was] not paying enough attention because he was spending all his time with the Fifth
Third Advisors. All these things together, rolled up for a disaster.”
46. A former Fifth Third Regional Manager who was with the Company from late
2001 until the spring 2003, and who called the Company’s branch processes “very loose,”
reported that he had identified deficiencies in the Company’s internal controls during this
Regional Manager’s tenure with the Company, and had brought these deficiencies to the
attention of Fifth Third management. Specifically, this Regional Manager reported that the
Company suffered from significant delays of 3-6 months in identifying and writing off bad
checks deposited at Fifth Third both with respect to business and personal accounts.
47. Additionally, this Regional Manager also reported problems with the Company’s
general ledger accounts, including the fact that the there were no internal controls to assure that
fee waivers were properly screened. Specifically, this Regional Manager attributed these
problems to the fact that Fifth Third’s teller system was “off-line”, which meant that paperwork
produced by the branch for teller transactions had to go to proof department and the end of the
day and proof operators would then encode them, after which the results would be put into the
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systems. A problem arose because there was “very little control over GL account tickets,” which
are used, for example, to credit a customer’s account for a fee waiver. He reported further that
“if anyone in the branch completed one of these tickets they could slip it into the work bag and
there was really no control to determine if anyone with the proper authority had approved the fee
waiver.”
48. A former Fifth Third Operations Manager who was with Fifth Third until the fall
of 2002, and who was formerly with Old Kent reported significant problems with Fifth Third’s
internal controls. Indeed, when asked to comment on Fifth Third’s internal controls, the former
Fifth Third Operations Manager said “You know you made me laugh when you said those two
words — internal controls — you made me laugh.” Specifically, this Operations Manager
reported that there were no internal controls to assure that the Company’s proof work was
properly processed. For example she reported that “when we processed proof work in different
sites, at one point, my site was given a bunch of branches to process . . . however there were no
real controls as far as the couriers that set up receiving the work, releasing the work from the
branches, in other words, this work could have gotten lost or some if it misplaced , and there
really would have been no way to backtrack it. They would have known something, but there
was such a lack of control over what was being processed — and this was even before our
consolidation and our systems merged — so were running two different item processing
systems.”
49. The Operations Manager also reported problems with the Company’s ledger
reporting systems, which typically ran several days behind the normal schedule. Moreover, these
problems were allowed to continue notwithstanding knowledge by management of these
inadequacies in accounting and reconciliation.
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50. As result of the Company’s widespread and material internal controls
inadequacies, the Operations Manager above also reported that the Company lost of tens of
millions of dollars related to the acquisition of Old Kent. Specifically, based on a discussion
with the Company’s Senior Vice President of Real Estate, Mason Coleman, the Operations
Manager learned that a failed database conversion resulted in tens of millions of dollars falling
out of balance, and that the Company was unable to locate the money in question. These facts
were not timely nor adequately disclosed by the defendants during the Class Period.
51. Moreover, when asked to comment on how smoothly the banks merged, the
former Operations Manager reported that there were a lot of employees who were severanced
during this time and it seemed like the bank was trying to slice everything. She explained that
she worked through another merge when Old Kent purchased American National Bank. Further,
she reported that “neither of them went smooth — neither of them went smooth . . . but the
original bank I worked for knew what they were doing. Old Kent did not know what they were
doing . . . from what I know and what I do, being in banking for a quarter of a century, Fifth
Third did not know what they were doing. Some of their practices, to me, were sleazy and
unreasonable . . . but Fifth Third’s consolidation — many of the procedures that they had in
place and the things they did to streamline — me being in operations for 25 year made absolutely
no sense, as far as good customer service.
52. The former Operations Manager also reported that integration problems in
merging Old Kent stemmed, in part, from the Company’s attempts to “slice” and severance so
many employees as to create understaffing problems.
53. A former Fifth Third employee - - who has been in the business for over 25 years,
working and running back office, middle and front office operations, (who requested that the
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Court protect his anonymity for fear of retribution) reported substantial problems, including the
Company’s lack of management controls, the failures in connection with integration of its
businesses, and inadequate internal controls. In general, this former employee reported that the
Company failed to address known existing financial control and operational problems until
forced to by governmental bank and securities regulatory entities. Far from reporting only on
general inadequate internal controls, however, this brokerage area employee pointed to written
material and periodic reports that underscored Fifth Third’s grossly inadequate internal controls,
Defendants’ knowledge of those inadequate internal controls, and Defendants concealment
thereof.
54. Indeed, when first asked about the Company’s internal controls at Fifth Third, this
former employee immediately commented that “They couldn’t balance their annuity transactions
— they were cash and carry. They couldn’t account for the differences between assets and
liabilities within their back office. There’s a whole bunch of stuff they can’t do.” The former
employee also described how Fifth Third’s lack of internal control procedures impacted on its
ability to introduce new financial products and programs. In connection with a CMA product,
Fifth Third offered “five free trades, not realizing that they didn’t have the ability to account
properly for the five free trades, thus actually screwing up to such a great degree that in some
cases they over credited monies into the customer accounts fro trades, whether it be a sale or a
buy. They screwed up the customers’ accounts to such an extent that they had to hush it up so
that the customers wouldn’t get pissed off and leave.”
55. This former Fifth Third employee reported that the Company’s controls were so
deficient that monthly customer statements had to be checked manually. This former employee
also learned of problems with the Company’s Form 1099 reporting, including basis issues in
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connection with 1099-B reporting. Indeed, this former employee stated that the Internal Audit
department was so ineffective in the implementation, execution, and improvement of requisite
internal controls, that this employee stated that the Company effectively had “no accounting
controls.” Moreover, to the extent that Deloitte identified any accounting control deficiencies
and errors, this former employee observed that attempts were made to simply minimize the
reported effect of these errors. Additionally, this former employee advised that Fifth Third was
incapable of producing a simple customer statement.
56. According to this former employee, in July 2003, regulators provided Fifth Third
with a nonpublic report, with a mandated September 2003 cutoff date, for First Third to institute
all requisite internal control changes. Additionally, the regulators “demanded” that five
department heads were to be phased out by September 2003. On information in belief, among
those required to be removed from their incumbent position was James J. Hudephol, who had
been the Company’s Manager of Information Technology, but who was moved to a temporary
project until the Company could find another, non-prohibited, position for him. Such sweeping
termination and demotion of such high-level personnel speaks volumes as to the collapse of
internal and management control by Fifth Third.
57. This former employee also reported that Fifth Third Securities, a subsidiary of
Fifth Third that resulted from one of the Company’s acquisitions, was so poorly managed,
ineffectually controlled, and unsuccessfully integrated that its customers’ securities trading
volume plummeted from approximately 38,000 trades per week at the time of the acquisitions to
2,900 trades per week, representing the millions of dollars in lost commission revenues annually.
Most egregiously, Fifth Third overstated its assets by approximately $100 million in connection
with the balance sheet consolidation of Fifth Third and Old Kent. Old Kent held mortgaged
21
backed securities as asset with a value of approximately $100 million. Fifth Third, according to
the brokerage area employee, split-off the mortgage component, and included them as assets on
their balance sheet (similar to FNMA), but also maintained the “securities” portion on the
balance sheet as assets held in the form of securities. In effect, Fifth Third double counted their
value, thus inflating the Company’s assets by $100 million. Defendants have not properly or
adequately disclosed this “double-booking” of assets, or the steps the Company took to rectify a
$100 million overstatement of assets.
58. This former employee also identified improprieties related to the Company’s
handling of annuities sold through the acquired Old Kent subsidiary. For instance, this
brokerage area employee reported that suggestions for improvements in the Company’s internal
controls governing annuities were ignored despite the fact that the Company was finding
reconciliation errors of thirty-two to fifty thousand dollars per week over a five year period.
59. This former employee described an email dated January 10, 2003 regarding
RAFT, which was a procedure Fifth Third had established to review the accuracy of certain Fifth
Third accounts. The email stated that “[t]he bank people are saying that they do not have the
ability to distinguish accounts, account numbers and even affiliate codes. . . I cannot believe that
this place is SO poorly run that the owners of an application have no control over their own
data. Moreover, if I didn’t know better I would say they are aggressively avoiding the issue. .
.We really need the Bank to do better than this. I do not have the ability or capacity to cope
with this kind of potential mendacity.”
60. This former employee also stated that Fifth Third or one of its divisions
simultaneously reported a 4% business profit and a 20% business loss.
22
61. Moreover, this former employee stated that the bank executives knew about the
internal control problems. Specifically, he cited an example where defendant Schaefer detected
daily errors in his personal cash management account and had to call the Chief Financial Officer
to get the account updated and corrected. Further, when asked if Fifth Third was completely
truthful in their statements about the extent of internal control problems, the former brokerage
area employee responded “I would say not.”
62. Indeed, after reviewing a Fifth Third press release, which disclosed that the
Company “had discovered we had recorded erroneous dates on some investments leading to
wrong values on securities backed by other assets,” this former employee reported that “It wasn’t
mortgages — it was mortgaged backed securities . . . and when they mean the other assets they
mean it was money associate . . . it could have been P& I, which is principal and interest paid
against mortgage backed securities or mortgages. They found additional monies, I think the
gross money was a hundred million . . . 81 to 100 million dollars . . . they didn’t know what to do
with it.” Moreover, when asked when the Company found this, he commented that “Well, I
think it was a combination of Ohio Company and Old Kent — I think they knew about it for a
while. They also had some other problems with other monies . . [because] they couldn’t unravel
those mistakes because they didn’t have the people in place who understood the business well
enough to unravel those mistakes.”
63. After reviewing the Written Agreement, dated March 26, 2003, by and among
Fifth Third Bancorp, Fifth Third Bank, Federal Reserve Bank of Cleveland, and the State of
Ohio Department of Commerce, Division of Financial Institutions, this former employee was
able to clearly recall numerous examples of the internal control deficiencies identified by the
non-public regulatory report. Indeed, the former employee reported that these control measures
23
identified in the report were not merely designed to improve the Company’s overall controls, but,
in most instances, were responses to specific, long standing known or commercially obvious
problems at Fifth Third, where controls were entirely lacking. Moreover, this former employee
previously had the opportunity to review the more complete regulatory report, sent to the
Company and not generally publicly available, which preceded the Written Agreement, and this
former employee confirmed that the original report identified numerous and long standing
internal controls deficiencies at Fifth Third that closely paralleled the specific internal control
changes mandated by the Written Agreement, but described the deficiencies in far harsher terms.
Additionally, this former employee witnessed many of these internal control deficiencies first
hand, or discussed them with other Company employees while at the Company in late 2002 and
2003, and confirmed that the Company was fully aware of these problems during the Class
Period due at least in part to attempts that had been made by this former employee and others in
this former employee’s presence to suggest methods to improve the deteriorating conditions.
These pleas for improvements to many of the specific deficiencies identified more specifically
below were rejected , and Fifth Third’s management was, in most cases, unwilling to make the
managerial, personnel or financial commitment necessary to improve the Company’s internal
controls.
64. Specifically, this former employee reported that the Management Review
improvements to the Company’s internal controls, identified at pages 2-3 of the Written
Agreement, were necessary, amongst other reasons, because the Company had numerous
members of management who were not only unqualified for their positions, but due to long
standing friendships with others members of Fifth Third senior management, had been allowed
24
to remain at the Company despite not possessing the required professional licenses or expertise
for their respective positions.
65. With respect to Risk Management improvements identified at pages 3-4 of the
Written Agreement, this former employee reported that the Company had not begun to address
the protection of information required by the Patriot Act until September of 2003. Moreover,
this former employee reported that there were not policies and/or procedures in place with
respect to the kinds of risk management protocol identified in subsection (d) of Risk
Management as required by the Written Agreement.
66. With respect to the improvements identified by the Accounting, Financial, and
Internal Controls section of the Written Agreement, this former employee stated that there was
“no such thing” as “retention and availability of work papers and other records of reconciliations
for internal and external audit review and regulatory review,” particularly in the brokerage side
of the Company. Further, this former employee reported that the Company had “no hard or soft
documentation of crisis management There were no auditing procedural controls in place, which
allowed for multiple points of failure.” Moreover, these problems were Company-wide as a
product of the Company’s arrogance that they could get away without paying attention to
reconciliations.
67. With respect to the improvement to the Company’s Internal Audit Function,
identified at pages 5-6 of the Written Agreement, this former employee stated that the Company
had not been willing to expend the resources necessary to maintain an internal audit function
prior to the Written Agreement. Therefore, for example, the products that the Company was
installing in the Information Technologies (“IT”) department were “woefully inadequate” for
serving their intended control function.
25
68. As to the Strategic Plan and Budget section of the Written Agreement, at page 7,
this former employee stated that the Company did not adequately fund all areas of its operations.
For example, because the Company would try take broker profits from any brokerage accounts
of over $500,000 in order to redistribute these profits to struggling Fifth Third departments,
members of the brokerage department either lost incentive to fully develop their client base, or
would have to shift client assets around in order to avoid the Company taking broker profits to
fund other levels of operations. Additionally, the Company’s resistance to adequately fund
certain departments, including IT, made it impossible for the Company to adequately improve its
internal controls prior to the Written Agreement despite employee pressure to remedy the
inadequate controls. Indeed, many of the employees who complained to management about the
Company’s inadequate internal controls were simply terminated.
69. With respect to the improvements identified for Information Technology, at pages
7-8 of the Written Agreement, this former employee stated that the Company did not have
adequate measures in place to protect nonpublic customer information. In fact, this former
employee identified weaknesses in the IT control measures as an additional example where the
Company was unwilling to expend the necessary resources to correct known problems prior to
the Written Agreement.
70. A former Fifth Third Chief Information Officer (“CIO”) confirmed many of the
facts identified by the former brokerage area employee above, and further undermines the
veracity of Fifth Third Defendants’ representations concerning Fifth Third’s success as an
integrator of acquired businesses. As to the acquisition of the Ohio Company on June 1998,
which resulted in Fifth Third’s securities subsidiary, the CIO reported that related data
26
processing conversions were “pretty much a disaster and huge losses were incurred in that
process.”
71. Indeed, this information regarding Old Kent is consistent with reports from the
former employee above that the Fifth Third due diligence on Old Kent had not been sufficiently
performed.
72. According to the former CIO, broader problems were soon identified as a result of
management and cultural differences between Fifth Third’s banking and securities divisions. For
example, problems were evident in the treasury department concerning the conversion of bank
software from a manual to an automated system. Specifically, the former CIO “found money” in
the process of the conversion amounting to approximately $80 million ($54 million net of tax).
Moreover, the money was then “spent” before the source was determined, or the accounting for
it was properly investigated for accuracy.
73. The CIO further stated that in 1998 federal regulators concluded that the Ohio
Company did not have adequate controls as a bank. According to the former CIO the primary
problem was that there were no controls on investment which Fifth Third was integrating. This
was particularly egregious because the Ohio Company was a full service broker-dealer and a
market maker along with maintaining active Municipal Bond, Syndicate, and Corporate Bond
trading departments. In connection with these businesses, it is illegal to oversubscribe issues or
to go short or negative on securities inventories. Therefore, internal system controls are required
to prevent such occurrences.
74. The former CIO also reported that Fifth Third’ accounting was improper for new
municipal bond issues. Particularly, Fifth Third’s accounting was improper regarding the
following issues: (i) setting up an account for each bond series; (ii) charge related expenses to the
27
account (legal, syndicate fees); (iii) purchase of bonds from the issuer; (iv) sale of bonds to the
public; and (v) reporting of the purchase and sales transactions to the Municipal Securities
Rulemaking Board. Further, Fifth Third did not have an adequate mechanism in place to track
whether bond accounts were in balance because the Company’s reporting system did not account
for any “Street” trades, i.e., where a customer deal was split with a third party, such as Merrill
Lynch, Fifth Third would only track the accounting for the customer portion of the deal and not
that portion related to the third party. Thus, Fifth Third was unable to determine if bond
accounts were in balance of if they were profitable. According to the former CIO, the municipal
bond accounting issues occurred from 1998 through at least 2002.
75. Moreover, according to this former CIO, the internal audit department was
ineffective and failed to deal with this issue. CIO’s warnings to management, including the head
of compliance, which went unheeded.
76. The former CIO also confirmed that the Executive Vice President of Information
Systems, James J. Hudephol, was required to step down from that position at the Company.
77. The former CIO also provided details as to inappropriate practices related to the
Company’s mutual fund’s policies. Specifically, Old Kent brokers were instructed to sell only
Old Kent mutual funds to customers. New customers who refused to purchase Old Kent funds
were referred to the home office which then sent the “noncompliant” customer account up so that
the associated broker would never receive compensation for the account. These actions violated
NASD regulations and, according to the CIO, were perpetrated up to the time of the Old Kent
conversion.
78. The former CIO also reported that top Fifth Third executives were aware of the
Company’s reporting problems since these issues were addressed at weekly meetings for two and
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a half year following the conversion. The reports were generated from the end of 1998 to the
middle or third quarter of 2001.
79. Also, with respect to the errors with respect to the annuities business from 1998
2002, as identified above the former employee in the brokerage area, the former CIO reported
that the annuity accounting was maintained on a separate system from the Fiserv system and that
Fifth Third was never able to reconcile these accounts.
80. Further, the Written Agreement entered into on March 26, 2003, with the Federal
Reserve Bank of Cleveland and the Ohio Division of Financial Institutions evidenced Fifth
Third’s lack of meaningful internal controls - - and support the witness interviews described
above - - by requiring the Company to address, among other things, the following core
accounting policy and procedure and risk management deficiencies:
(a) “[Lack of] oversight of risk management processes by the boards ofdirectors, including but not limited to, timely response to identifieddeficiencies and risks;”
(b) “[Failure to implement] policies and procedures to establish controls,define responsibilities, and set risk tolerance levels for the consolidatedorganization;”
(c) “[Failure to implement] policies and procedures to identify and assess allrisks associated with new operations, products, and financial activities andto ensure the internal controls to manage those risks are in place;”
(d) “[Lack of] management information systems and reporting procedures toensure the accuracy of data provided to management and the board ofdirectors, including but not limited to, the performance of independentvalidations of market risk models;”
(e) “[Lack of] internal controls for the consolidated organizations that aredesigned to effectively manage risks;”
(f) “[Lack of] [s]tandardized processes to perform accurate and timelyaccount reconciliations, consistent with generally accepted accountingprinciples (“GAAP”), including use of standard reconciliation formats andprocedures;”
29
(g) “[Lack of] timely and independent review and approval ofreconciliations;”
(h) “[Lack of] appropriate segregation of duties with respect to thepreparation, review and approval of account reconciliations;”
(i) “[Failure to take] appropriate action with respect to identified aged items,including but not limited to, timely and appropriate charge-offs and timelyand accurate reports to management;”
(j) “[Failure to retain] and availability of work papers and other records ofreconciliations for internal and external audit review and regulatoryreview;” and
(k) “[Lack of] training of all personnel engaged in the account reconciliationfunction to ensure that they have sufficient skills and knowledge toperform accurate reconciliations consistent with GAAP.”
81. Further, Fifth Third violated Section 13(b)(2)(A) of the Exchange Act by failing
to maintain accurate records concerning its mortgage-backed and asset-backed securities,
earnings, and net income. Fifth Third’s inaccurate and false records were not isolated or unique
instances because they were improperly reported for multiple reporting periods, beginning at
least at the start of the Class Period. In fact, as described above, Fifth Third openly admitted its
serious problems associated with its internal accounting controls in its January 31, 2003 press
release.
82. According to SEC rules, to accomplish the objectives of accurately recording,
processing, summarizing and reporting financial data, a company must establish an internal
control structure. Section 13(b)(2) of the 1934 Exchange Act states, in pertinent part, that every
reporting company must:
(a) make and keep books, records and accounts which, in reasonable detail,accurately and fairly reflect the transactions and disposition of the assetsof the issuer; and
(b) devise and maintain a system of internal controls sufficient to providereasonable assurances that:
30
(i) transactions are executed in accordance with management’sgeneral or specific authorization; and
(ii) transactions are recorded as necessary (I) to permit preparation offinancial statements in conformity with generally acceptedaccounting principles . . . and (II) to maintain accountability forassets.
83. Notwithstanding, the systematic breakdown of internal and financial controls,
Fifth Third falsely represented in its Form 10-K for 2001 that it engaged in “constant focus on
process improvement and centralization of various internal functions such as data processing,
loan servicing and corporate overhead functions.”
84. Fifth Third thus violated Section 13(b)(2) of the 1934 Exchange Act and its own
disclosed policy by failing to establish an appropriate control environment resulting in significant
failures in the Company’s internal accounting controls and procedures. Fifth Third’s lack of
adequate internal accounting controls throughout the Class Period rendered the Company’s Class
Period financial reporting inaccurate, unreliable, and subject to manipulation resulting in the
issuance of materially false and misleading financial statements. Nonetheless, throughout the
Class Period, Fifth Third regularly issued quarterly and annual financial statements without ever
disclosing the existence of the significant and material deficiencies in its internal accounting
controls and falsely asserted that its financial statements complied with GAAP.
Further Regulatory Evidence of Internal Control Problems
85. The Company also knew that its internal controls were inadequate and would be
unable to weather the Old Kent merger based on regulatory investigations and action both prior
to and during the Class Period.
86. For example, the OCC commenced enforcement actions against Fifth Third Bank
personnel representatives as follows:
Name Bank/City City Action Type Date Doc #
31
Dana R.Williams-Brown
Fifth ThirdBank
Toledo, OH 1829 6/5/02
Darren A.Lossia
Fifth ThirdBank ofNorthwesternOhio
Cincinnati,OH
REM 12/14/01 2001-119
Fifth ThirdTrust Co.
Naples, FL BCMP 1/15/91 1010
RosalieUnderwood
Fifth ThirdBank ofNorthwesternOhio
Cincinnati,OH
1829 7/28/98
87. Similarly, Fifth Third Securities violated Section 15B(c )(1) of the Exchange Act
and MSRB Rule G-37 as follows: Between 1998 and 2000, officers of two affiliate banks of
Fifth Third Bank engaged in activities that constituted solicitation of municipal securities
business from issuers on behalf of Fifth Third Securities. These solicitation activities made the
officers “municipal finance professionals” under Municipal Securities Rulemaking Board
(“MSRB”) Rule G-37. Between 1997 and 2001, the two Fifth Third Bank executives directed
political action committee (PAC) contributions to candidates or incumbents for elective offices
responsible for, or having the authority to appoint persons who were responsible for, the hiring
of brokers, dealers, or municipal securities dealers for municipal securities business in the State
of Ohio. Under Rule G-37, these contributions triggered a two-year ban on municipal securities
business with the issuers, starting with the dates of the contributions.
88. Within two years of the above-mentioned political contributions, base on SEC
Release No. 46087 dated June 18, 2002, Fifth Third Securities participated in 24 municipal
securities transactions with the issuers noted above despite the two-year ban. In total, the 24
transactions represented sales to the public of approximately $2.3 billion from which Fifth Third
32
Securities earned approximately $1 million in underwriting fees. Fifth Third’s engagement in
municipal securities business with these issuers constituted a violation of Section 15B(c )(1) of
the Exchange Act and MSRB Rule G-37. As a result the SEC ordered that Fifth Third pay a civil
penalty of $1 million and retain an independent consultant to review and report on Fifth Third
Securities’ supervisory and compliance policies and procedures. The SEC also required Fifth
Third to implement the recommendations noted in the consultant’s report. The SEC did not
disclose the names of the two Fifth Third Executives.
89. In addition, based on the State of Maine Securities Division Consent Agreement
No. 01-077-CAG, Fifth Third Securities acted as a broker-dealer in Maine without being
licensed. As a result, Fifth Third violated Revised Maine Securities Act, Title 32 Maine Revised
Statutes Annotated Section 10101 and entered into a related consent agreement with the State of
Maine on or about March 29, 2001.
Materially False And Misleading Statements Made During The Class Period
90. The Class Period begins on September 24, 2001. On that day, Fifth Third issued a
press release headlined “Fifth Third Bank Completes Old Kent Conversion.” (Emphasis Added).
In the press release, defendant Schaefer represented that the merger was a “success,” resulting in
a 31% increase in checking balances, and that the Company would continue to grow despite the
economic downturn underway, stating as follows in pertinent part:
Fifth Third Bancorp President & CEO George A. Schaefer, Jr. states, “On behalfof our shareholders and Board of Directors, I am extremely proud of our FifthThird team members for engineering the largest integration in our history.
“When we announced this merger, we were mindful of the size and challenge. Todeclare ‘success,’ we knew this transition would have to be seamless to ourcustomers. We also understood that our affiliate banks in Ohio, Kentucky,Indiana and Florida would have to remain completely undistracted.
“Thanks to the diligence of our workforce, we converted 1.2 million accountsand 700,000 loans, embossed and issued over one million ATM cards. We mailed
33
over two million letters and thousands of videos to communicate with our newcustomers, and we teamed new employees with ‘veterans’ to focus oncross-selling and new sales opportunities in these new markets. As a result, weexperienced double digit growth in retail, business and processing customeraccounts while growing checking balances by 31%.”
Mr. Schaefer concludes, “Our employees are to be commended for their ability todeliver the sales and revenue our shareholders have come to expect. Their effortshave positioned the bank to continue to provide consistent growth regardless ofthe external environment.”
(Emphasis Added).
91. In addition, under the bolded heading “Wall Street feedback on Fifth Third’s
Integration Progress,” the press release included excerpts from analysts reports touting the
integration of Old Kent. These reports were consistent with, and conduits to the public for, the
Company’s own statements, highlighting Fifth Third’s alleged ability to quickly, seamlessly, and
successfully integrate and profit from acquisitions, an impression Fifth Third had fostered for
years. The following are quotes from certain of the analysts’ reports incorporated by the
Company into its September 24, 2001 press release:
Salomon Smith Barney analyst Keith Horowitz offers, “What we believe oftengets overlooked is that the Old Kent franchise is experiencing positive net newaccount growth versus the consensus expectation of 5-10% customer attritionwhen the deal was announced. Also, management noted that the introduction ofnew products and focused selling efforts have surpassed goals (which we shouldnote are not lay-ups). We believe this a reflection of management taking its timein its conversions and being willing to push out the timing for the realization ofthe cost savings in order to ensure a smooth integration.”
Lori Appelbaum of Goldman Sachs Global Equity Research states, “Depositgrowth has continued to accelerate across the franchise, with some of thestrongest trends experienced in the newly acquired Old Kent markets. Wereiterate our Market Outperformer rating as the company continues to generateabove-trend, double-digit revenue momentum in the midst of the integration ofOld Kent while also proactively managing its risk profile.”
Fifth Third Bank (Western Michigan), one of 16 affiliates of Fifth Third Bancorp,is led by President & CEO Kevin T. Kabat. [...]
34
Mr. Kabat offers, “Fifth Third has a long history of integration excellence.Together, we took a team approach to ensure a smooth transition for ourcustomers. And, with similar cultures, we were able to join forces quickly andconcentrate on our customers’ needs. As one of the strongest banks in the nation,Fifth Third gives us the capital strength to leverage for our customers in the formof competitive banking, investment and e-commerce products and services.”
(Emphasis Added).
92. Fifth Third thus convinced the market as to the success the Company was having
with the Old Kent acquisition. For example on September 27, 2001, just six days after the start
of the Class Period and just five months after the Old Kent acquisition, Raymond Jones Equity
Research reported that “Fifth Third is having remarkable success with its acquisition of Old Kent
in Michigan” and that the Company “had achieved this result because it aggressively attacked the
acquisition with a series of integration teams that concentrated on both making the transition of
systems smooth and reach out to Old Kent’s customer base.”
93. The statements referenced in ¶¶ 90-92, above, were each materially false and
misleading when made because they failed to disclose, and misrepresented the following
material adverse facts, among others:
(a) the Company’s blistering growth through acquisitions had over-taxed its
already inadequate internal controls and related infrastructure and safeguard processes;
(b) the integration of Old Kent was not a “success,” contrary to the
Company’s repeated assurances, because the acquisition exacerbated numerous internal control
deficiencies that negatively impacted the Company’s ability to monitor its accounts and fund
transfers and the integration was not going smoothly;”
(c) that the Company’s seemingly stellar growth had come at the cost of
increased risk to investors because the Company had further stressed its already inadequate
infrastructure and internal control processes and had only further weakened future safety;”
35
(d) the Company’s repeated assurances of “consistent, growth regardless of
the external environment . . .” and investment safety was materially false and misleading and
gave the market a false picture of the Company’s financial stability during a period in which the
capital markets were particularly concerned with, and especially sensitive to, quality of earnings
and investment safety, given the ongoing economic downturn and high-profile corporate
scandals which had negatively affected many other companies and the market in general;
(e) despite the fact that the Company “knew this transition would have to be
seamless to [its] customers” and was “mindful of the size and challenge of [the merger],” the
Company was aware that its already inadequate internal controls would make the integration far
from seamless;
(f) the Company’s inadequate due diligence had resulted in insufficient
staffing necessary to support appropriate internal controls; and
(g) despite Fifth Third’s continued efforts to portray itself as an efficient and
effective integrator of growth generating acquisitions, the Company had actually failed to retain
staffing sufficient to maintain adequate internal controls, which was only exacerbated both by the
increased demands of the Old Kent acquisition and the severancing of employees that the
Company had actually planned in order to cut costs and raise profitability.
94. On October 16, 2001, Fifth Third issued a press release announcing its results of
operations for the third fiscal quarter of 2001. Operating earnings for the quarter ($363.5 million)
were reportedly 17% higher than in the third quarter of 2000. Commenting on the results,
defendant Schaefer highlighted the Company’s ability to grow revenues and earnings in a
depressed economy and expressed great confidence in Fifth Third’s ability to continue to deliver
strong results, stating, in pertinent part, as follows:
36
“We have taken significant steps in recent periods to return our balance sheet toits traditional level of strength less than a year after announcing the acquisition ofOld Kent, beating our own expectations. The resulting financial flexibility, betterthan expected credit quality, strong revenue growth despite a more difficulteconomic environment and a culture of simply executing better on the basicsgives us a great deal of confidence in our ability to sustain quality growth acrossall of our business lines.”
“We believe that solid sales results in both new and existing markets, marketshare upside throughout our footprint, considerable expense flexibility, and thebest capitalized balance sheet in the industry position us well to provide theconsistent, quality growth our shareholders have come to expect. Overall, depositand service income growth trends continue to be as strong as at any time in ourhistory, and we intend to continue to focus on building and strengtheningrelationships to create a strong platform for future earnings opportunities.”
Further, in the press release, defendant Schaefer reiterated that Old Kent had been integrated
successfully, stating as follows regarding the matter:
“During the third quarter, we completed the last conversion of Old Kent FinancialCorporation, the largest and most successful in our history.[...] In recent months,our employees have converted over one million checking accounts and 700,000loans, issued over one million new ATM cards, and mailed three million welcomeletters and videos to our new customers. They are to be commended for theirefforts in carefully completing the conversion, while at the same time leading ournew affiliates to double-digit increases in retail and commercial checking depositsas well as payment processing accounts.”
Also, in the press release, the Company continued to misstate its successful integration of Old
Kent and omitted to disclose the true state of internal controls related to its purportedly “single
integrated completely scalable operating platform:
“As previously announced, Fifth Third successfully completed the remainingconversions of Old Kent’s operations in late September, including back-officefunctions in the Western Michigan affiliate. With the completion of theconversions, every Fifth Third Banking Center and all related customer support,financial reporting, and data processing systems operate on a single integrated,completely scalable operating platform.”
95. The statements referenced in ¶ 94, above, were each materially false and
misleading when made because they failed to disclose and misrepresented the following material
adverse facts, among others:
37
(a) the Company’s growth through acquisitions strategy had over-taxed its
already inadequate internal controls and related infrastructure and safeguard processes;
(b) the integration of Old Kent was not a success, contrary to the Company’s
repeated assurances, because the acquisition exacerbated numerous internal control deficiencies
that negatively impacted the Company’s ability to monitor its millions of accounts and fund
transfers and the Company’s “balance sheet” was not strong, but reflected significant control
weakness including the over-statements of assets resulting from consolidation with Old Kent;
(c) that the Company’s seemingly stellar growth had come at the cost of
increased risk to investors because the Company had further stressed its already inadequate
infrastructure and internal control processes and, therefore, defendant Schaeffer had no
reasonable basis in fact to represent that Fifth Third had “a culture of simply executing better on
the basics,” when, in fact, Fifth Third lacked the necessary “basic” financial controls required of
a comparable banking and securities operation;
(d) in fact, the Company’s “balance sheet” had only been manipulated to
appear returned to its “traditional level of strength” in order to convince the market that Fifth
Third was continuing its purported streak of seamless mergers when, in fact, the Company had
deferred significant expenses related to maintaining adequate internal controls, which also trigger
the Company’s failed reconciliations, triggering federal investigation and ultimate censure;
(e) the Company, in fact, had not managed to create a unified “data
processing system,” but instead was having trouble integrating its technology systems as
identified in the witness statements above and as confirmed by the Written Agreement discussed
herein;
38
(f) the Company’s repeated assurances of “financial flexibility better than
expected credit quality, strong revenue growth despite a more difficult economic environment
and a culture of simply executing better on the basics” along with investment safety was
materially false and misleading and gave false comfort to a market which was particularly
concerned with, and especially sensitive to, quality of earnings and investment safety, given the
ongoing economic downturn and high-profile corporate scandals which had negatively affected
many other companies and the market in general; and
(g) the Company’s assets, stockholders’ equity and earnings were overstated
because Defendants failed to timely write-down treasury related aged receivable and in-transit
reconciliation items as impaired, in contravention of GAAP.
96. On November 14, 2001, Fifth Third filed its financial report for the third quarter
of 2001 with the SEC on Form 10-Q, which was signed by defendant Arnold. In a section of the
10-Q titled “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” the Company reiterated the strong performance highlighted in the previously issued
press release. More specifically, the Company reported the following results:
The Registrant’s operating earnings were $363.5 million for the third quarter of2001 and $1 billion for the nine months of 2001, up 17.5 percent and 13.5percent, respectively, compared to $309.5 million and $888 million for the sameperiods last year. Operating earnings per diluted share were $.62 for the thirdquarter, up 14.8 percent over last year’s $.54, and $1.72 for the nine months of2001, up 11.0 percent from $1.55 for the same period last year.
97. The statements referenced in ¶ 96, above, were each materially false and
misleading when made because they failed to disclose that the Company’s financial reports were
unreliable as a result of the internal control deficiencies including those identified in ¶¶ 37-89
above. In particular, the Company’s assets, stockholders’ equity and earnings were overstated
39
because Defendants failed to timely write-down treasury related aged receivable and in-transit
reconciliation items as impaired, in contravention of GAAP.
98. On January 15, 2002, Fifth Third issued a press release headlined Fifth Third
Bankcorp Reported 21 Percent In Fourth Quarter Net Income; in “2001 Marks 28th Consecutive
Year of Increased Earnings.” Defendant Schaefer touted the Company’s ability to deliver double
digit growth while “flawlessly” integrating Old Kent. In addition, Schaefer specifically assured
the market that the integration did not compromise the Company’s results or “balance sheet
quality,” stating as follows in pertinent part:
“I would like to thank all of our employees for their hard work in producinganother rewarding year for our shareholders. Their accomplishments have createdan even stronger growth company for the future without interrupting ourperformance track record,” stated George A. Schaefer, Jr., [...] “2001 was our28th year of uninterrupted earnings increases, including the last 23 at double-digitgrowth rates. Earnings this quarter continued to be driven by strong revenuegrowth, an improved net interest margin and controlled credit quality that remainsamong the best in the industry despite the challenges of an uncertain externalenvironment. The recognized financial strength of our balance sheet, theflexibility provided by $7.6 billion in equity capital, sales opportunities in bothour new and existing markets and a culture of simply executing better on thebasics serve to effectively position Fifth Third to continue to deliver consistentearnings growth.”
“In addition to delivering quality growth in our existing markets, our employeesteamed up to execute flawlessly on several acquisitions in 2001, most notably OldKent, the largest and most successful in our history. We are well on our way toachieving the financial objectives from these transactions and look forward totheir continued earnings opportunities. More importantly, the fourth quarter and2001 results prove that we are unwilling to compromise the financialperformance and balance sheet quality that our shareholders expect in order tocreate these opportunities.” [Emphasis added].
Finally, Schaefer represented that the Company can prosper during a bad economy, much more
effectively than its peers, assured investors that they can expect “consistent quality growth,” and
that their investment in Fifth Third was safer than ever, stating as follows in relevant part:
40
Schaefer continued, “The last several months have brought a number ofchallenges to some of our competitors and the financial services industry ingeneral. Hard work, a focused operating model and a conservative risk profile cannever entirely insulate even the best performing companies. The foundation of ourtrack record is not in operating with immunity from these challenges, but rather inmaintaining the flexibility to respond without sacrificing the earnings ourshareholders have come to expect. An investment in Fifth Third is defined byconsistent, quality growth without regard for difficult credit cycles, arecessionary economy or other external factors. It is with a great deal of pridethat we announce another year of record earnings and look forward to meeting theopportunities and challenges that 2002 will provide. We believe we made yourcompany even stronger in terms of future growth prospects and safety.”[Emphasis added].
99. The statements referenced in ¶ 98, above, were each materially false and
misleading when made because they failed to disclose and misrepresented that the Company’s
financial reports were unreliable as a result of the internal control deficiencies including those
identified in ¶¶ 37-89 above. Moreover, the Company’s balance sheets lacked true “strength”
and were not “best in the industry,” but overstated by approximately $100 million as a result of
the Company’s failed reconciliations. Thus, the Company’s assets, stockholders’ equity and
earnings were overstated because Defendants failed to timely write-down treasury related aged
receivable and in-transit reconciliation items as impaired, in contravention of GAAP.
100. On March 12, 2002, Fifth Third filed its 2001 Annual Report with the SEC on
Form 10-K, which incorporated by reference the Company’s 2001 Annual Report to
Shareholders, and was signed by defendants Schaefer and Arnold. In the Form 10-K, the
Company described its growth-by-acquisition strategy and its plans for future acquisitions, as
follows:
The Registrant has completed several mergers and acquisitions over the yearsinvolving financial institutions throughout Ohio, Indiana, Kentucky, Michigan,Illinois, and Florida. The Registrant is continually evaluating strategic acquisitionopportunities and frequently conducts due diligence activities in connection withpossible transactions.
41
In his letter to the shareholders, defendant Schaefer again touted the Company’s performance
and the allegedly successful integration of Old Kent, stating as follows in relevant part:
This year’s financial performance was marked by continued strong revenuegrowth, improved efficiency, stable credit quality despite the challenges of anuncertain environment and the successful integration of Old Kent.
[. . . ]
Continuing our growth momentum while simultaneously integrating Old Kentsmoothly and ahead of schedule was the decisive achievement of 2001. Ourability to pull off the largest merger in our history without disrupting ourongoing operations is a skill we’ve learned and then honed from the more than50 acquisitions we’ve made in the past 10 years.
[Emphasis added].
101. The successful integration of Old Kent was highlighted in another part of the
Annual Report, as follows:
Despite its size, we were able to integrate its entire operation in less than oneyear, on budget and two months ahead of schedule. In fact, success in the levels ofdeposit growth and balance sheet improvement has exceeded our initialprojections by nine months.
The one-time pre-tax merger cost to integrate Old Kent was $384 million. Thissum was expensed in 2001, and we expect to more than recoup these costs fromearnings generated by the former Old Kent.
102. Additionally, in the Form 10-K for 2001, the Bank falsely represented that it
engaged in “constant focus on process improvement and centralization of various internal
functions such as data processing, loan servicing and corporate overhead functions.”
103. The statements referenced in ¶¶ 100-102, above, were each materially false and
misleading when made because they failed to disclose and misrepresented the following material
adverse facts, among others:
(a) Defendant Schaefer’s statement that Fifth Third’s “ability to pull off the
. . . was materially false and misleading because (i) the merger was not the success described; (ii)
42
the merger had pushed Fifth Third’s previously inadequate internal controls to the breaking
point; (iii) the merger strapped Fifth Third’s inadequate personnel and did, indeed, disrupt other
Company functions; and (iv) it prior acquisition experience was insufficient to properly and
accurately combine Fifth Third and Old Kent;
(b) the Company’s financial reports were not audited in compliance with
GAAP, and, in fact, were unreliable due to the Company’s wide-spread lack of internal controls,
including those identified in ¶¶ 37-89 above; and
(c) despite the Company’s assurance of its constant focus and review of
internal controls measures, the Company’s internal controls were not only deficient for the
reasons identified in ¶¶ 37-89 above, but the Company failed to address widespread material
deficiencies during the Class Period despite the fact that the Company was on notice of these
inadequacies as a result of both internal complaints for at least the reasons identified in ¶¶ 46, 49,
53, 55, 58, 53, 67, and the recent history of regulatory censure related to the Company’s lack of
internal controls for at least the reasons identified in ¶¶ 85-89 above; and
(d) the Company’s assets, stockholders’ equity and earnings were overstated
because Defendants failed to timely write-down treasury related aged receivable and in-transit
reconciliation items as impaired, in contravention of GAAP.
104. In the 2001 Annual Report, attached as an exhibit to the form 10-K for 2001, Fifth
Third also represented that “We achieved record earnings for the 28th year in a row, despite a
weak economy, while we simultaneously integrated the largest and most successful acquisition
in our history. We have one of the strongest balance sheets in the industry, proven expense
discipline and considerable market share growth potential.”
43
105. The statements referenced in ¶ 104 above were each materially false and
misleading when made because they failed to disclose and misrepresented the following material
adverse facts, among others: (a) the Company’s financial reports were unreliable a result of its
internal controls deficiencies including those identified in ¶¶ 37-89 above; (b) Defendants had
caused the Company to violate GAAP by improperly failing to timely write-down treasury
related aged receivable and in-transit reconciliation items as impaired; (c) the integration of Old
Kent had not been successful for at least the reasons identified in ¶¶ 38-44, 50-52, 57-58 above;
(d) indeed the Old Kent acquisition had contributed to the Company failed reconciliation which
triggered the regulatory investigation into Fifth Third’s inadequate controls, as identified, inter
alia, in ¶¶ 42-43 above and, in addition having to enter the Written Agreement, the state and
federal regulators had determined, in fact, that Fifth Third’s internal control weaknesses were so
deficient as to prevent Fifth Third from entering into engaging in any additional acquisitions
until the investigation was fully resolved; (e) the Company’s balance sheet was, in fact, not
strong, but actually inaccurate as a result of the Company’s failure to timely write-down treasury
related aged receivable and in-transit reconciliation items as impaired; and (f) the Company’s
“expense discipline” was actually materially misrepresented as the Company’s practice of
deferring internal control costs and understaffing its internal control areas that was unsustainable,
and would ultimately weakens the Fifth Third’s share growth potential.
106. The 2001 Annual Report also represented that “We continued to grow throughout
2001 by adding to and expanding relationships with customer in our existing markets and by
taking advantage of our opportunities in new markets provided by four acquisitions. Our
employees are to be commended for their focus and dedication in carefully completing the
integration of these acquisitions while maintaining our performance track record. This year’s
44
financial performance was marked by continued strong revenue growth, improved efficiency,
stable credit quality despite the challenges of an uncertain environment and the successful
integration of Old Kent.”
107. The statements referenced in ¶ 106 above were each materially false and
misleading when made because they failed to disclose and misrepresented the following material
adverse facts, among others: (a) the integration of Old Kent had not been successful for at least
the reasons identified in ¶¶ 38-44, 50-52, 57-58 above; (b) the Old Kent acquisition had
contributed to the Company failed reconciliation which triggered the regulatory investigation
into Fifth Third’s inadequate controls, for at least the reasons identified in ¶¶ 42-43 above and, in
addition having to enter the Written Agreement, the state and federal regulators had determined,
in fact, that Fifth Third’s internal control weaknesses were so deficient as to prevent Fifth Third
from entering into engaging in any additional acquisitions until the investigation was fully
resolved, as identified in ¶¶ above; (c) the Company’s revenue growth was misleading because
Fifth Third could not continue its practice of deferring expenses necessary to maintain adequate
internal controls, for at least the reasons identified in ¶¶ 42-43, 52, 63 above, in the heavily
regulated banking industry; (d) there was no “improved efficiency,” but rather a disregard of
necessary financial and reporting controls needed to assure accurate timely and financial
reporting in favor of short-term and short-sighted savings of expense; (e) Fifth Third was
bleeding business in areas acquired by Fifth Third through the acquisitions including losses of
substantial business in its brokerage business; and (f) there was no “focus” in “carefully
completing the integration of these acquisitions,” but rather emphasizes on speed acquisitions.
45
108. The 2001 Annual Report also represented that “customers traditionally seek
strong institutions in a weak economy. No other bank in our markets has a better record for
strength or delivering financial solutions.”
109. The statements referenced in ¶ 108 above were each materially false and
misleading because Fifth Third’s appearance of strength was misleading because the Company
could not continue its practice of deferring expenses necessary to maintain adequate internal
controls, for at least the reasons identified in ¶¶ 41-43, 52, 63 above, in the heavily regulated
banking industry. Indeed, by its own admission, if customers and investors knew the full depth
and severity of Fifth Third’s lack of internal controls and the corresponding lack of reliability of
its reported financial information, Fifth Third would have lost business, adversely impacting its
revenues and earnings, and in turn, adversely impacting its stock price. Further, Defendants
themselves have explained one of their motives to conceal Fifth Third’s problems until
revelation of those deficiencies was forced by regulatory authorities — the fact that “customers
traditionally seek strong institutions,” not institutions without meaningful internal controls.
110. The 2001 Annual Report also represented that “the 2001 results prove that we are
unwilling to compromise the performance and balance sheet quality our shareholders have come
to expect.”
111. The statements referenced in ¶ 110 above were each materially false and
misleading when made because, as identified in ¶¶ 37-89 above, that Fifth Third pervasively
compromised the Company’s performance and balance sheet quality by failing to maintain
adequate internal controls, and by improperly failing to timely write-down treasury related aged
receivable and in-transit reconciliation items as impaired.
46
112. The 2001 Annual Report also represented that “we increased our transaction
deposits. When other banks were struggling with their acquisitions and posting huge losses, we
integrated ours smoothly and derived increased earnings from each in the first year we acquired
them. When many banks reported enormous write-offs during last year’s slumping economy, we
solidified our existing business relationships - - and forged new ones - - to maintain a high level
of service and record strong profits.”
113. The statements referenced in ¶ 112 above were each materially false and
misleading when made because they failed to disclose and misrepresented the following material
adverse facts, among others: (a) the Old Kent acquisition was not a success, for at least the
reasons identified in ¶¶ 38-44, 50-52, 57-58 above; and (b) the Old Kent integration, in fact, had
strained to the breaking point the Company’s internal controls, leading to the Company’s $81.8
charge for impaired funds due to a failed accounting reconciliation, thereby triggering the state
and federal investigation into the Company’s inadequate internal controls.
114. The 2001 Annual Report also represented that “[w]e have a disciplined
acquisition strategy focused on metropolitan markets and future growth potential - - carefully
evaluating every opportunity as owners.”
115. The statements referenced in ¶ 114 above were each materially false and
misleading when made because they failed to disclose and misrepresented that the Company had
actually failed to conduct the proper due diligence with respect to the Old Kent acquisition for at
least the reasons identified in ¶¶ 43-44, 70-71 above, thus refuting the statement that Fifth Third
had a “disciplined acquisition strategy,” and that it “carefully evaluat[ed] every opportunity.”
116. The 2001 Annual Report also represented that “[w]e focus on flawless execution”
and “[w]e’re frugal and know how to do more with less.”
47
117. The statements referenced in ¶ 116 above were each materially false and
misleading when made because they failed to disclose and misrepresented the following material
adverse facts, among others: (a) the Company’s execution was actually riddled with flaws,
including but not limited to an inadequate due diligence and reconciliation processes, for at least
the reasons identified in ¶¶ 40, 43-44, 58, 62, 72-73 above, a breakdown in the Company’s
ledger systems, for at least the reasons identified in ¶ 47 above, inadequate technology systems,
for at least the reasons identified in ¶¶ 67, 69 above; and (b) the Company was not doing more
with less, but was rather was recklessly deferring the expenses necessary to maintain adequate
internal controls in a heavily regulated industry.
118. The 2001 Annual Report also represented that “[d]espite its size, we were able to
integrate its entire operation in less than one year, on budget and two months ahead of schedule.
In fact, success in the level of deposit growth and balance sheet improvement has exceeded our
initial projections by nine months.”
119. The statements referenced in ¶ 118 above were each materially false and
misleading when made because they failed to disclose and misrepresented the following material
adverse facts, among others: (a) the Company’s financial reports were unreliable a result of its
internal controls deficiencies as identified in ¶¶ 37-89 above; (b) Defendants had caused the
Company to violate GAAP by improperly failing to timely write-down treasury related aged
receivable and in-transit reconciliation items as impaired; (c) the integration of Old Kent had not
been successful, and, therefore, Fifth Third had not “integrated its entire operation in less than
one year,” for at least the reason identified in ¶¶ 38-44, 50-52, 57, 58, 70, 71 above, problems
related to the lack of an adequate due diligence at the time of the acquisition and on-going lack
of adequate internal financial controls resulted in the overstatement of assets in connection with
48
Old Kent; (d) the Old Kent acquisition had contributed to the Company failed reconciliation
which trigger the regulatory investigation into Fifth Third’s inadequate controls, for at least the
reasons identified in ¶¶ 42-43 above and, in addition having to enter the Written Agreement, the
state and federal regulators had determined, in fact, that Fifth Third’s internal control weaknesses
were so deficient as to prevent Fifth Third from entering into engaging in any additional
acquisitions until the investigation was fully resolved; (e) the Company’s balance sheet was, in
fact, not strong, but actually inaccurate as a result of the Company’s failure to timely write-down
treasury related aged receivable and in-transit reconciliation items as impaired; and (f) the
Company’s “expense discipline” was actually materially misrepresented as the Company’s
practice of deferring internal control costs was unsustainable, and would ultimately weakens the
Fifth Third’s share growth potential.
120. The 2001 Annual Report also represented that “Fifth Third’s ability to operate
more efficiently than its peers is a product of the disciplined expense control that comes from a
culture of ownership, profit and loss accountability throughout the organization, and the
synergies across business lines provided from a single integrated computer platform.”
121. The statements referenced in ¶ 120 above were each materially false and
misleading when made because they failed to disclose and misrepresented the following material
adverse facts, among others: (a) the Company was not engaging in discipline expense control,
but had recklessly cut staff and control measures, for at least the reasons identified in ¶¶ 42, 43,
52, 63 above, necessary for accurate financial reporting in the heavily regulated banking
industry, risking the right to engage in acquisitions, which was one of, if not the most important
means for the Company’s continued growth; (b) for at least the reasons identified in ¶¶ 67, 69,
the Company had failed disastrously to integrate its computer platforms and had actually refused
49
to spend the resources necessary to improve its computer platform despite insistence from Fifth
Third employees as to the importance of doing so, for at least the reasons identified in ¶¶ 53, 67,
69 above; and (c) there was an utter lack of experience and qualified personnel to operate the
acquired brokerage business which refuted the statement concerning purported synergies from
Fifth Third’s acquisitions.
122. In the Notes to Consolidated Financial Statements for the Form 10-K for 2001,
Fifth Third represented that “[t]he preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the amounts reported the financial statements and
accompanying notes. Actual results could differ from those estimates.” These statements were
each materially false and misleading when made because they failed to disclose and
misrepresented that the Company had improperly failed to timely write-down treasury related
aged receivable and in-transit reconciliation items as impaired, and that due to the Company’s
overall lack of adequate financial controls, Fifth Third consolidated and segment financial
statements were inherently unreliable. Further, Defendants failed to disclose that “[a]ctual
results could differ from those estimates,” because the Company’s lack of internal financial
controls make accurate estimations of financial results impossible.
123. Also in the Company Form 10-K for the year 2001, Fifth Third reported that
“[t]he Bancorp’s proven expense discipline continues to drive its efficiency ratio to levels well
below its peer group and the banking industry through the consistent generation of revenue at a
rate faster than expenses. The Bancorp’s success in controlling operating expenses comes from
efficient staffing, a constant focus on process improvement and centralization of various internal
functions such as data processing, loan servicing and corporate overhead functions.”
50
124. The statements referenced in ¶¶ 122-123 above were materially false and
misleading because they led investors to believe that fifth Third was an efficient operation,
carefully controlled and monitored by management when, in fact, (a) “controlling operating
expense” did not come from “efficient staffing,” but from inadequate, understaffing at the cost of
prudent and adequate internal controls; and (b) there was no “focus on process improvement” or
“internal functions such as data processing,” as those areas lacked any meaningful internal
controls.
125. In a Proxy Statement dated March 19, 2002, the Company’s Audit Committee
reported that the “Committee also discussed with management, the internal auditors and the
independent auditors the quality and adequacy of Fifth Third’s internal controls and the internal
audit function’s organization, responsibilities, budget and staffing.”
126. The statements referenced in ¶¶ 125, above, were each materially false and
misleading when made because they failed to disclose and misrepresented the following material
adverse facts, among others:
(a) the Company’s financial reports were materially deficient as a result of its
lack of meaningful internal controls as identified in ¶¶ 37-89 above;
(b) despite the Company’s assurance of its constant focus and review of
internal controls measures, the Company’s internal controls were not only deficient as identified
in ¶¶ 37-89 above, but the Company failed to address widespread material deficiencies during
the Class Period despite the fact that the Company was on notice of these inadequacies as a result
of both internal complaints for at least the reasons identified in ¶¶ 46, 49, 53, 55, 63, 67, and the
recent history of regulatory censure of the Company’s internal controls for at least the reasons
identified in ¶¶ 85-89; and
51
(c) the Company’s assets, stockholders’ equity and earnings were overstated
because Defendants failed to timely write-down treasury related aged receivable and in-transit
reconciliation items as impaired, in contravention of GAAP.
127. On April 16, 2002, Fifth Third issued a press release announcing its results for the
first quarter of 2002. Reported operating earnings of $389.9 million were 27% higher than in the
first quarter of 2001. In the press release, defendant Schaefer touted the Company’s “track
record as a high-quality growth company” and praised the Company’s flexibility and financial
strength, as follows:
“We are pleased to start the year with such strong results,” states George A.Schaefer, Jr., President and CEO. “With a diversified business mix and thefinancial flexibility afforded by the recognized strength of our balance sheet, FifthThird delivered another solid quarter highlighted by continued strong revenuegrowth across all of our businesses, an improved net interest margin andcontrolled credit quality. Across our footprint, Banking Center and Commercialsales teams continue to attract outstanding numbers of new customers, our servicebusinesses are producing solid, sustainable growth and revenues as a wholecontinue to advance at a consistent pace.”
“Our success this quarter certainly reinforces our optimism about the remainder of2002. Although we are mindful of the challenges that an uncertain externalenvironment can bring, we have considerable momentum to sustain qualityearnings growth. With the flexibility provided by $7.8 billion in equity capital,extremely positive sales trends in our largest markets and market share upsidethroughout our footprint, we believe that we have built a solid foundation tosustain our track record as a high-quality growth company.”
128. The statements referenced in ¶¶ 127, above, were materially false and misleading
when made because they failed to disclose that the Company’s financial reports were unreliable
as a result of its lack of meaningful internal controls identified in ¶¶ 37-89 above, and that
instead of “a solid foundation,” the Company’s operations and financial reporting were built on a
lack of proper, prudent, or adequate internal controls or implementations of such controls.
52
129. On July 16, 2002, Fifth Third issued a press release reporting its results for the
second quarter of 2002. The Company’s operating earnings ($404 million) were 19% higher than
the second quarter of 2001. As he had done throughout the Class Period, defendant Schaefer
continued to represent to investors that the Company offers a combination of industry leading
growth, “safety,” and the financial flexibility to prosper in poor economic times, stating as
follows in relevant part:
“We are extremely pleased to deliver solid financial results during a difficultperiod,” stated George A. Schaefer, Jr., President and CEO. “Earnings this quarterwere highlighted by outstanding revenue and core deposit growth, a stable netinterest margin, better than expected loan growth, and improving credit qualitythat remains among the best in the industry.
[. . .]
“We are also proud to receive several accolades this quarter. Most notably,Moody’s Investors Service further upgraded the Bancorp’s senior debt ratings toAa2 on the strength of our low-risk balance sheet, solid liquidity profile andstrong capital position. This rating is equaled or surpassed by only three otherU.S. bank holding companies. We appreciate Moody’s affirmation of our abilityto deliver industry-leading growth and financial performance without sacrificingsafety. Fifth Third has always believed that one of the keys to consistent growthin all economic cycles is a strong, flexible balance sheet.”
130. The statements referenced in ¶ 129, above, were materially false and misleading
when made because they failed to disclose that the Company’s financial reports were deficient as
a result of the lack of meaningful internal controls identified in ¶¶ 37-89 above.
131. On September 10, 2002, Fifth Third filed a Form 8-K with the SEC revealing,
among other things, that the Company will take a $54 million after-tax charge for “treasury
related aged receivable and in-transit reconciliation items” which have become “impaired.” In
relevant part the press release stated as follows:
During the third quarter, Fifth Third has concluded that certain predominatelytreasury related aged receivable and in-transit reconciliation items are impaired.As of the date of this filing, Fifth Third expects to realize an after-tax expense ofapproximately $54 million related to the establishment of an impairment reserve
53
for these items. Fifth Third is devoting significant effort and resources in thecontinuation of this review, including third party expertise, and will adjust theimpairment reserve in the future if recoverability exists.
This statement appeared at the end of the Form 8-K, which primarily discussed the Company’s
stellar results for the third quarter of 2002. In reaction to this announcement, the price of Fifth
Third’s common stock dropped, from $67.14 on September 10 to $65.69 on September 11 and
$61.39 per share on September 12.
132. Following this announcement, securities analysts, after discussions with Fifth
Third management, issued, as conduits for the Company’s management, reports purporting to
clarify the Company’s vague statement about the matter, and reassuring the market that this was
only an isolated aberrant problem. The following are representative statements from several
analysts on the matter:
(i) Merrill Lynch Capital Markets, September 10, 2002:
Fifth Third’s recently-released 8K surprised the market with the announcement ofa one-time after-tax asset impairment charge of $54mm to be taken in 3Q, relatedto an Old Kent systems glitch for the reconciliation of in-transit securities. Mgmtis conservatively setting up an impairment reserve as it will take rime to finalizethe ultimate impairment cost. We think that this systems glitch is a one-off eventand that the $54mm is likely the maximum potential cost; we believe at leastpart of the reserve could be reversed in future periods. [Emphasis added]
(ii) Salomon Smith Barney, September 10, 2002:
At the bottom of the 8-K, Fifth Third disclosed that it expects to realize a $54million after tax charge ($0.09 per share) related to the establishment of animpairment reserve related to a receivable in its securities portfolio (i.e. anaccounts receivable was sitting on its books, but it seems to be related to anaccounting mistake and thus does not seem to be collectible.
How this likely happened in the first place? At this point, the company is not100% positive on how the receivable originally established, and continues to haveaccountants researching this issue. Our best guess is that the origin of this item is
54
likely related to the conversion of Old Kent’s securities portfolio onto FifthThird’s accounting system or a prior period mortgage securitization. At thispoint, this does not appear to be related to any type of fraud.
(iii) Morgan Stanley, September 11, 2002:
Fifth Third released their quarterly 8-K yesterday. The filing underscored severalpositive fundamental trends at the bank and reaffirmed the company’s 2002guidance. There was one exception to the usual good news; FITB stated that itwill create a $54 million after-tax reserve in 3Q02. The reserve is being set upagainst a discrepancy the bank found between the company’s general accountingledger and its government bond portfolio during a software system upgrade twoand a half weeks ago. While the discrepancy is disappointing, this one-timeoccurrence does not change our view on the quality of the bank and does not, inour opinion, put its multiple at risk. [Emphasis added].
133. The announcement regarding the charge was soon overshadowed by the
Company’s October 15, 2002, press release, announcing third quarter 2002 results. Operating
earnings reportedly rose 15% over the third quarter of 2001. Defendant Schaefer represented that
in addition to meeting or beating expectations, the Company had invested heavily in improving
its infrastructure and that the Company was well positioned in that regard for future growth,
stating as follows in pertinent part:
“We are pleased to announce solid financial results,” stated George A. Schaefer,Jr., President and CEO. “Earnings this quarter were driven by our success inexpanding Retail and Commercial customer relationships, quality loan growth,and continued strength in all of our business lines. We have taken significant stepsin recent periods to reinforce and maintain the recognized strength of our balancesheet while at the same time making the necessary investments in people,technology and facilities to ensure the future growth of the franchise. Morespecifically, we are devoting significant resources in the expansion andimprovement of our sales force, Retail Banking platform and back-officesystems in order to drive and support future earnings growth. We believe thatwe have an extremely solid foundation to sustain revenue growth and increasemarket share in all of our markets.” [Emphasis added].
134. On November 14, 2002, Fifth Third disclosed in its Form 10-Q for the third
quarter of 2002 that regulatory agencies were investigating the Company’s financial controls in
the wake of Fifth Third’s announcement regarding the $54 million charge. Specifically, the
55
Federal Reserve Bank of Cleveland and the Ohio Department of Commerce, Division of
Financial Institutions requested information about the Company’s internal controls and
procedures. In addition, according to the Form 10-Q, the SEC had begun an informal
investigation focused on the adequacy of the Company’s financial controls. The regulators
imposed a moratorium on any additional acquisitions by the Company pending resolution of
their investigation, including the Company’s acquisition of Franklin Financial, announced on
July 24, 2004. In relevant part the Company stated as follows:
In a Report on Form 8-K dated September 10, 2002, the Registrant reported that ithad concluded that certain predominantly treasury-related aged receivable andin-transit reconciliation items were impaired. The Registrant also reported that itwas devoting significant effort and resources to a review of the impairment.
On November 7, 2002, the Registrant received a supervisory letter from theFederal Reserve Bank of Cleveland and the Ohio Department of Commerce,Division of Financial Institutions relating to matters including procedures foraccess to the general ledger and other books and records; segregation of dutiesamong functional areas; procedures for reconciling transactions; the engagementof third party consultants; and efforts to complete the impairment review referredto above. In addition, the supervisory letter imposes a moratorium on futureacquisitions, including Franklin Financial Corporation, until the supervisory letterhas been withdrawn by both the Federal Reserve Bank of Cleveland and the OhioDepartment of Commerce, Division of Financial Institutions. The Registrant isperiodically subjected to regulatory oversight and examinations and hashistorically and will continue to comply with any findings and recommendationsresulting from these reviews.
On November 12, 2002, the Registrant was informed by a letter from theSecurities and Exchange Commission that the Commission was conducting aninformal investigation regarding the after-tax charge of $54 million reported inthe Registrant’s Form 8-K dated September 10, 2002 and the existence or effectsof weaknesses in financial controls in the Registrant’s Treasury and/or Trustoperations. The Registrant intends to fully comply and assist the Commission inthis review.
135. In reaction to this announcement, the price of Fifth Third common stock dropped,
falling from a November 14, 2002 close of $62.53 to close at $57.42 the next day, a one-day
decline of 8.1%, on extremely heavy trading volume. The full truth — that Fifth Third lacked
56
adequate internal controls, and its systems have been overwhelmed by the Company’s Old Kent
and other acquisitions and in its efforts to cut costs and maximize reported earnings — however
was still hidden from the investing public. Indeed, as discussed below, the Company forcefully
downplayed the seriousness of the regulatory investigations regarding these matters.
136. On December 10, 2002, Fifth Third filed a Form 8-K with the SEC discussing the
ongoing regulatory investigations of the Company’s internal controls. In the filing, the Company
represented that while it was cooperating fully with the Ohio Federal Reserve and the SEC, it has
conducted its own investigation and concluded that its internal controls are adequate and that the
charge was an isolated event which would not result in additional “financial exposures”, stating
as follows in relevant part:
Based on the reviews completed to date by Fifth Third and independent thirdparty experts, management has concluded that there is no significant or furtherfinancial exposure in excess of the amount charged-off in the third quarter andprior period financial statements are unaffected by these treasury reconcilingitems.
Fifth Third also has conducted a thorough internal review of internal controls andall internal account reconciliation activity in the treasury and other areas of itsoperation. The purpose of the review was to determine if there were anyadditional financial exposures in excess of the amount charged-off in the thirdquarter or improvements in internal controls in treasury or other operational areasthat could have limited the third quarter charge. Fifth Third has implementedcertain additional processes and controls as a result of this review, remainsconfident in the adequacy of its internal controls and based on the reviewscompleted to date has determined that there are no additional material financialexposures. [Emphasis added].
137. The Company’s assurances were well received by securities analysts and the
investing public - - leading both to erroneous conclusions about Fifth Third’s true internal
operating and financial condition. On December 11, 2002, an article in the Cincinnati Post
quoted Fred Cummings, of Gradison McDonald Investments as stating that: “The review reveals
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there are no widespread internal control problems at Fifth Third, said [Cummings]. “This is a
major step in helping Fifth Third put this situation behind it,” he added.
138. The statements referenced in ¶¶ 131-137 above, were each materially false and
misleading for the reasons stated in ¶¶ 37-89 above and, in addition, for the following reasons:
(a) the Company knew that the missing $81 million was symptomatic of
serious infrastructure deficiencies facing the Company as a result of its rapid growth and was
not, as it had led investors to believe, a one-time immaterial event;
(b) the Company’s December 10, 2002 representation that it “remains
confident in the adequacy of its internal controls” even as state and federal banking regulators
and the SEC were still conducting an investigation into the matter was lacking in any reasonable
basis when made and because its internal controls were not, in fact, adequate; and
(c) the representation that there were “no additional material financial
exposures” was false in light of the pending regulatory reviews which, as would later be
revealed, would lead to regulatory actions, or a settlement, requiring the addition of expensive
measures and processes to address the Company’s internal control problems, which would erode
profits and could negatively impact the Company’s growth.
The Truth About Fifth Third’s Lack of Internal Controls Begins to Emerge
139. On December 17, 2002, The American Banker published an article reporting that
federal regulators stated the Company would have to spend considerable amounts to upgrade its
internal controls and that the investigations were very serious. In that regard, the article reported
as follows:
But a senior federal regulator was clearly irked by the second 8K filing, sayingFifth Third is not out of the woods and will need to sink considerable resourcesinto beefing up internal controls and risk management systems. Noting that thebank supervisors have plenty of other matters to keep them busy these days, this
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regulator said Fifth Third’s problems must be serious to justify the ongoinginvestigations.
140. On January 31, 2003, Fifth Third issued a press release announcing that it expects
regulators to soon take formal action against the Company. The news release was issued, at least
in part, in response to regulators’ disagreement with Company’s December 10, 2002 filing of the
Form 8-K, discussed above, which stated that the Company had concluded that its infrastructure
and processes were adequate. In relevant part, the Company stated in the January 31 press
release that it expects to enter into a formal agreement with banking regulators delineating how
the Company will improve its internal controls. The Company stated as follows in this regard:
Referring to statements made at the recent Salomon Smith Barney conference byFifth Third Bancorp President & CEO George A. Schaefer, Jr., recent articles inthe press have reported on Fifth Third Bancorp’s outlook regarding currentregulatory matters. In order to avoid confusion that may be associated with thosereports Fifth Third believes it is important to issue a clarifying statementregarding the matter.
As noted in Fifth Third’s press release reporting fourth quarter earnings issued onJanuary 15, 2003, Fifth Third continues to cooperate with the regulatory agencies,including the Federal Reserve Bank of Cleveland and the State of Ohio, Divisionof Financial Institutions, in their ongoing examination of the Company. Aspreviously stated, based on preliminary discussions with the regulators, FifthThird believes some form of regulatory action will be taken, but it is unable topredict what that action may be. Based on these preliminary discussions with theFederal Reserve and the State of Ohio, Fifth Third believes that the resultingagreement with the supervisory agencies will be formal and containcommitments to third-party reviews of certain functions as previously discussed.[Emphasis added].
Fifth Third does, however, remain optimistic that the steps taken in conjunctionwith the ongoing examination will make the organization stronger through thedevelopment of new and expanded risk management, audit and infrastructureprocesses. The full discussion and text of Fifth Third’s presentation can beaccessed through Fifth Third’s website at www.53.com.
Although short on details, this release is a tacit admission that the Company’s internal controls
were lacking, requiring “new and expanded risk management, audit and infrastructure
processes.” On February 3, 2003, the first trading day following the announcement, the price of
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Fifth Third common stock closed at $52.21 per share, a decline of 15% from the closing price on
November 14, 2002 close of $62.53, the day that Fifth Third first revealed that it was being
investigated by state and federal banking regulators and the SEC.
141. On December 11, 2002, Friedman Billings Ramsey Financial Services reported
that: “Yesterday, Fifth Third issued its customary quarterly 8-K. The filing provides the first
detailed description of its 3Q02 impairment charge. The [c]ompany states that it has turned its
attention to recovery of the charges . . . Fifth Third attributed [that] impairment to the
misapplication of funds received from a securitization. As implied by the impairment, it sent
approximately $82 million to other parties outside its control. Its immediate task is to identify
and recover all mispayments.”
142. On December 16, 2002, Hoefer & Arnet reported: “Presumably, the [c]ompany
did not want to sully its image by revealing that its control systems had failed, in this instance, so
it released a terse statement and then argued that the problem would take some time to be fully
explained. It then added to the credibility problem by failing, in a presentation to analysts in
Boston, to reveal that it was about to be investigated for this problem by its regulators.
Consequently, stockholders lost money.”
143. On January 16, 2003, Lehman Brother reported: “In our 11/22 call note entitled
“Further Thoughts on the Regulatory Issues,” we intimated the worst is likely behind us. We no
longer believe that is definitely the case, and are now considering that its recent supervisory
letter could be increased to either a memorandum of understanding informal action or even a
written agreement (formal). In the event this happens, we believe, FITB’s moratorium on
acquisitions would be extended . . . we are reducing our price target $2 to $63, reflecting a lower
terminal value in our DCF model.”
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144. On January 16, 2003, Baird/ U.S. Equity Research reported: “The [c]ompany
indicated the regulatory review should be completed during the first quarter and some form of
regulatory action is likely; however, management is uncertain as to what the regulatory action
might be . . . Whatever the outcome, we continue to believe the regulatory review creates
distractions for senior management and, to some degree, delays the likelihood of Fifth Third
completing accretive acquisitions . . . We are reducing our earnings estimate for 2003 to $3.12
from $3.17 and introducing a 2004 estimate of $3.50. Also we are reducing our 12-month price
target to $69 from $71 . . . “
145. On March 11, 2003, Salomon Smith Barney reported: “[L]ast night, Fifth Third
filed an 8-K previewing its 1Q03 earnings results. Overall, we found the top line trends to be
very encouraging, but it appears that we underestimated the expense impact from the ongoing
third party review (i.e., hiring outside consultants to do a reconciliation of every general ledger
account) plus net charge-offs seem to be running slightly higher than expected. After updating
our earnings model, we are reducing are 2004 EPS by $0.04 and our 2005 EPS estimate by $0.05
per share.”
146. On or about March 27, 2003, Fifth Third announced that it had entered into the
Written Agreement with the Federal Reserve Bank of Cleveland and the Ohio Department of
Commerce which required the Company to strengthen its risk management processes and
internal controls. The Written Agreement called for specific actions to be taken by the Company
in order to improve the Company’s inadequacies with respect to its risk management, internal
controls, financial accounting, audit, and information technology functions, as well as its
management and corporate governance policies and procedures.
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147. With respect to the Company’s accounting, financial and internal controls, the
Written Agreement required the Company to submit written policies and procedures for
accounting for the consolidate organization to enhance the accounting and control environment.
148. With respect to the Company’s Management Review, the Written Agreement
required the Company to hire an independent management consultant to asses the structure,
functions, composition and performance of Fifth Third’s management and board of directors.
Moreover, within ten days of the Written Agreement, the Company was also required to submit
an engagement letter that specifically outlines the Company’s plans, including that the study be
completed within 90 days and to have a semi-annual review of the Company’s adherence to the
new policies and procedures.
149. With respect to the Company’s Risk Management, the Written Agreement
required the Company to submit a joint plan to regulators that is designed to strengthen risk
management processes for the consolidated organization.
150. With respect to the Company’s Financial Statements and Regulatory Reports, the
Written Agreement required the Company to reconcile general ledger accounts on a monthly
basis and have those reconciliations maintained for external and internal audit review.
151. With respect to the Company’s Internal Audit function, the Written Agreement
required that within 10 days, the Company engage an independent firm to conduct a review of
the enterprise wide internal audit function and to prepare a written report of its findings and to
recommend changes. Moreover, the Written Agreement required that the report be submitted to
regulators within 60 days of the engagement. Additionally, within 30 days of the report
issuance, the Written Agreement required the Company to submit a plan describing its strategy
to address any identified deficiencies. Within 45 days of the report, the Written Agreement
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required the Company to alter its 2003 audit plan to reflect any changes that the independent
review may have suggested.
152. With respect to the Company’s Strategic Plan and Budget, the Written Agreement
required the Company within 180 days to submit a written enterprise wide strategic plan and
budget concerning the Company’s proposed business activities for the next three years.
Specifically, the Written Agreement requires appropriate funding for infrastructure, development
of policies for new activities or expanded functions, and requests financial performance
objectives.
153. With respect to the Company’s Information Technology, the Written Agreement
required the Company to submit a plan to assess enterprise wide information security risks
including physical and logical information security and an evaluation of electronic payment
platforms.
154. With respect to the Company’s Treasury and Trust Operations, the Written
Agreement required the Company within 90 days to complete its revision of the policies,
procedures and controls in the treasury operations area. Additionally, the Agreement required
the Company to engage an independent firm to conduct a review of treasury operations and
prepare a written report to strengthen the policies, procedures and controls of the area. The
Written Agreement requires that the independent review is to be completed within 60 days of the
engagement and within 30 days of the report being completed, the Company is required to
submit a plan to fully address the findings and recommendations. The Written Agreement also
required the Company to complete by June 30, 2003 a reconstruction of treasury transactions that
occurred between March 1, 2000 through September 30, 2002. Upon completion of these
measures, the Written Agreement required the Company to engage an independent firm to
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review the findings and submit a report within 30 days of the completion of the reconstruction.
Within 10 days of the review, the Written Agreement required the Company to book any
adjustments that are discovered. Finally, within 90 days of the Written Agreement, the Company
is required to submit acceptable written policies and procedures to strengthen management
oversight of trust operations policies and procedures.
155. With respect to the Company’s Compliance Committee, the Written Agreement
required that within 15 days the Company establish a joint board and management committee to
monitor compliance with the Agreement.
156. Despite the Company’s Class Period assurances in its 8-K dated December 10,
2002, and elsewhere, that it would focus efforts “on the recovery of the $81.8 million charge-off
through the review and reconciliation of the entries posted into the various treasury accounts
from March 30, 2000 to September 30, 2002,” to date, Fifth Third has announced no such
recovery.
157. Instead, Fifth Third’s regulatory situation had a lasting negative impact on the
Company, and its publicly traded securities. For example, on January 16, 2004, Raymond James
reported that “[w]e are reiterating our Underperform rating on the common stock of Fifth Third
Bancorp following the company’s fourth quarter 2003 earnings announcement. Earnings quality
in the quarter was weak, and despite some positive trends, we believe the operating environment
in 2004 will remain challenging. Based on the complexion of earnings in the period, we believe
Fifth Third’s earnings power is less than the reported result, and that achievement of our $3.40
earnings per share estimate in 2004 would require near-flawless execution.” Raymond James
reported further that “[d]etails are still sketchy regarding the [C]ompany’s status with the
regulators.” Additionally, Raymond Jones reported that “Fifth Third has long commanded a
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premium valuation due to its consistency, better-than-peer growth, solid balance sheet, and
excellent profitability. While these features are still intact to some degree, the absence of
mergers and a difficult operating environment are putting pressure on earnings growth. As a
result, we believe the [C]ompany’s premium to the group may narrow, leading to our
Underperform rating.”
BREAKDOWN OF INTERNAL CONTROLS
158. Although Fifth Third Defendants claimed throughout the Class Period that there
was no accounting irregularities at the Company and that the investigation was proving
successful, and notwithstanding Defendant Deloitte’s issuance of a “clean,” unqualified audit
certification with respect to Fifth Third’s 2001 full-year financial statements, in fact, however,
the Company was suffering from a chronic and systematic breakdown of its virtually non-
existent internal controls and procedures such that its internal financial reporting was inherently
corrupted, subject to manipulation, and unreliable, resulting in materially false and misleading
balance sheets and financial statements. As the Written Agreement demonstrates, and which is
by their entry into that Written Agreement concedes, Fifth Third lacked at least the following
adequate internal financial controls throughout the Class Period:
(a) “[Lack of] oversight of risk management processes by the boards ofdirectors, including but not limited to, timely response to identifieddeficiencies and risks;”
(b) “[Failure to implement] policies and procedures to establish controls,define responsibilities, and set risk tolerance levels for the consolidatedorganization;”
(c) “[Failure to implement] policies and procedures to identify and assess allrisks associated with new operations, products, and financial activities andto ensure the internal controls to manage those risks are in place;”
(d) “[Lack of] management information systems and reporting procedures toensure the accuracy of data provided to management and the board of
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directors, including but not limited to, the performance of independentvalidations of market risk models;”
(e) “[Lack of] internal controls for the consolidated organizations that aredesigned to effectively manage risks;”
(f) “[Lack of] [s]tandardized processes to perform accurate and timelyaccount reconciliations, consistent with generally accepted accountingprinciples (“GAAP”), including use of standard reconciliation formats andprocedures;”
(g) “[Lack of] timely and independent review and approval ofreconciliations;”
(h) “[Lack of] appropriate segregation of duties with respect to thepreparation, review and approval of account reconciliations;”
(i) “[Failure to take] appropriate action with respect to identified aged items,including but not limited to, timely and appropriate charge-offs and timelyand accurate reports to management;”
(j) “[Failure to retain] and availability of work papers and other records ofreconciliations for internal and external audit review and regulatoryreview;” and
(k) “[Lack of] training of all personnel engaged in the account reconciliationfunction to ensure that they have sufficient skills and knowledge toperform accurate reconciliations consistent with GAAP.”
None of these inadequate financial controls were disclosed to the investing public during the
Class Period. On the contrary, Defendants repeatedly represented the adequacy of Fifth Third’s
controls and its ability to manage its complex operations efficiently and profitably, control
expenses prudently, and to report its financial condition and results accurately.
159. Fifth Third’s lack of adequate internal controls increased the opportunity for Fifth
Third Defendants to commit the fraud alleged above, and rendered the Company’s Class Period
financial statement inherently unreliable and non-compliant with GAAP. Nonetheless,
throughout the Class Period, the Company consistently issued false materially false and
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misleading statements without ever disclosing the existence of the significant and material
deficiencies in its internal accounting controls.
160. Although these materially adverse factors, trends, and facts were apparent to
defendants, including defendant Deloitte, at all material times defendants failed to timely and
adequately disclose them during the Class Period. Instead, as detailed below, Deloitte continued
to knowingly or recklessly issue “clean” audit opinions on the Company’s fraudulent financial
statements through the relevant period, and the Fifth Third Defendants continued to portray the
Company in unqualified, positive terms, and any partial disclosures that they may have made of
certain of these problems were materially incomplete and calculated to deceive or mislead
investors as to the true nature and extent of the problems and internal control deficiencies facing
the Company.
Defendant Deloitte’s Participation In The Fraud And Its Scienter
161. The following allegations regarding Defendant Deloitte’s participation and
scienter in the fraud alleged herein are based on a recently concluded investigation by Plaintiffs,
and discoveries made in that investigation as recent as the last several weeks preceding the filing
of this Complaint.
162. Defendant Deloitte is a worldwide firm of certified public accountants, auditors,
and consultants. Deloitte’s website touts that its “international audit approach is applied
consistently around the world, while providing the flexibility to serve the unique circumstances
and complexities of our clients. Our audit approach focuses on understanding the clients’ global
business and control issues from the inside out. It combines a rigorous risk assessment,
diagnostic processes, audit testing procedures as well as a continuous assessment of our clients’
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service performance.” Through its Cincinnati, Ohio office, Deloitte served as auditor and
principal accounting firm for Fifth Third Bank since 1970 and Fifth Third Bancorp since 1975.
163. Deloitte was required to audit the Company’s financial statements in accordance
with Generally Accepted Auditing Standards (“GAAS”). GAAS, as approved and adopted by
the American Institute of Certified Public Accountants (“AICPA”)’ relate to the conduct of the
individual audit engagements. Statements on Auditing Standards (codified and referred to as
“AU § __”) are recognized by the AICPA as the interpretation of GAAS. Deloitte was required
to fairly and accurately report its audit results to Fifth Third, the board of directors, the audit
committee, and the members of the investing public, including Plaintiffs and other members of
the Class. With knowledge of Fifth Third’s true financial condition, or in reckless disregard
thereof, Deloitte certified the materially false and misleading financial statements of Fifth Third,
described below and provided unqualified independent auditors’ reports, which were included in
the SEC filings and publicly disseminated statements. Without these materially false and
misleading unqualified audit opinions, the fraud alleged above could not have been perpetrated.
164. Deloitte recklessly disregarded, or outright ignored, blatant evidence of the Fifth
Third’s extreme accounting irregularities, particularly the Company’s complete lack of
meaningful internal controls and utterly ineffective banking and compliance practices. In
ignoring this evidence, Deloitte violated GAAS and federal regulatory requirements and issued a
fraudulent audit report during the Class Period as discussed below.
165. In connection with the financial statement audits, Deloitte violated GAAS by
failing to “obtain an understanding of internal controls sufficient to plan the audit by performing
procedures to understand the design controls relevant to an audit of financial statements, and
whether they have been placed in operation.”
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166. In addition, Deloitte violated the requirements under section 112 of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) which states that an
examination be performed in accordance with the attestation standards established by the
AICPA, which involves, among other things, testing, and evaluating the design and operating
effectiveness of the internal control.
Deloitte Had Full and Complete Access to Fifth Third’s Information
167. Because of the pervasiveness of these problems and the utter lack of internal
controls evident at the Company, Deloitte knew of, or recklessly disregarded, the Company’s
improper financial reporting practices complained of herein, but, nevertheless, proceeded to issue
materially false and misleading unqualified audit opinions during the Class Period. These issues
were further evident to Deloitte personnel who, by virtue of Deloitte’s thirty-plus year
relationship with Fifth Third and the nature of the auditing services rendered to the Company,
were regularly present at Fifth Third, had access to Fifth Third’s confidential internal corporate,
financial, operating and business information and had intimate knowledge of Fifth Third’s
financial reporting practices.
Deloitte Was Not Independent
168. Deloitte failed to maintain an independent mental attitude in all matters relating to
the assignment. See AU § 220.01. During fiscal 2000 alone, the fees paid by Fifth Third to
Deloitte exceeded $1.4 million. Indeed, 61.3% of this amount was non-audit fees, including fees
for consulting and other services rendered to Fifth Third by Deloitte. During fiscal 2001,
Deloitte billed Fifth Third in excess of $3.4 million, of which approximately 64% was for,
among other things, due diligence services related to mergers and acquisitions and tax fees.
These fees were particularly important to Deloitte’s partners as their incomes were dependent on
69
the continued business from Fifth Third. Further, Deloitte’s involvement in the acquisition due
diligence process infringed upon its independence as the post-closing success of those
acquisitions reflected directly on Deloitte’s pre-acquisition due diligence efforts for Fifth Third.
These pressures directly led to a conflict of interest for the auditors on the Fifth Third
engagement, and were a significant factor that led to Deloitte abandoning its requisite
independence, objectivity, and integrity on the Fifth Third financial statement audits and
reviews.
Deloitte Failed to Render an Accurate Audit Report
169. Deloitte violated GAAS Standard of Reporting No. 1 that requires the audit report
to state whether the financial statements are presented in accordance with GAAP. AU § 508.04.
Deloitte’s opinion falsely represented that Fifth Third’s 2001 year-end financial statements were
presented in conformity with GAAP when they were not for the myriad reasons herein alleged.
170. The auditor’s report must express an opinion on the financial statements taken as
a whole and must contain a clear indication of the character of the auditor’s work. The auditor
can determine that he is able to express an unqualified opinion only if he has conducted his audit
in accordance with GAAS. AU § 508.07.
171. Deloitte did not render an accurate audit report and thus did not exercise due
professional care, because Fifth Third’s financial statements were not in conformity with GAAP,
and because Deloitte failed to perform sufficient procedures to audit Fifth Third’s financial
statements as of December 31, 2001, in accordance with GAAS.
172. Deloitte issued its audit opinion, dated January 15, 2002, on Fifth Third’s 2001
and 2000 financial statements. Deloitte’s opinion stated that such Fifth Third financial
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statements were presented in conformity with GAAP and that Deloitte’s audit was performed in
accordance with GAAS:
We have audited the consolidated balance sheets of Fifth Third Bancorp andsubsidiaries (“Bancorp”) as of December 31, 2001 and 2000, and the relatedconsolidated statements of income, changes in shareholders’ equity, and cashflows for each of the three years in the period ended December 31, 2001. Thesefinancial statements are the responsibility of the Bancorp’s management. Ourresponsibility is to express an opinion on the financial statements based on ouraudits. The consolidated financial statements give retroactive effect to the mergerof the Bancorp and Old Kent Financial Corporation (“Old Kent”), which has beenaccounted for as a pooling of interests as described in Note 20 to the consolidatedfinancial statements. We did not audit the balance sheet of Old Kent as ofDecember 31, 2000, or the related statements of income, changes in shareholders’equity, and cash flows of Old Kent for the years ended December 31, 2000 and1999, which statements reflect total assets of $23,842,289,000 as of December 31,2000, and total interest income and other income of $2,129,369,000 and$1,918,093,000 for the years ended December 31, 2000 and 1999, respectively.Those statements were audited by other auditors whose report has been furnishedto us, and our opinion, insofar as it relates to the amounts included for Old Kentfor 2000 and 1999, is based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits and the report of the other auditors provide a reasonable basis for ouropinion.
In our opinion, based on our audits and the report of the other auditors, theconsolidated financial statements referred to above present fairly, in all materialrespects, the financial position of Fifth Third Bancorp and subsidiaries atDecember 31, 2001 and 2000, and the results of their operations and their cashflows for each of the three years in the period ended December 31, 2001 inconformity with accounting principles generally accepted in the United States ofAmerica.
* * *
(Emphasis added).
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173. In issuing such audit opinions, Deloitte turned a blind eye to Fifth Third’s
complete lack of meaningful internal controls, lack of adequate personnel, lack of management
controls, and other substantial and material deficiencies described in the Agreement, and as
described above, and issued an unqualified audit opinion on January 15, 2002, in connection
with Fifth Third’s 2001 annual financial statements, even though Deloitte knew or recklessly
disregarded that: (a) the financial statements had not been prepared in conformity with GAAP in
numerous respects and did not present fairly, in all material respects, the financial position of
Fifth Third and its subsidiaries as of December 31, 2001 and the results of their operations and
cash flow for the year ended December 31, 2001; and (b) Deloitte had not audited Fifth Third’s
2001 financial statements in accordance with GAAS.
174. An audit conducted in accordance with GAAS requires that an auditor consider
the effectiveness of the audited company’s internal controls systems before issuing an audit
report on financial statements derived from such systems. As the Fifth Third Defendants have
now admitted the Company’s utter lack of internal controls and accounting systems, which
Deloitte intentionally or recklessly disregarded. In light of the Fifth Third Defendants’
admissions, it is inconceivable that Deloitte could have opined that the Company’s financial
statements were fairly stated when those statements were prepared by fundamentally flawed
accounting systems because lack of internal controls “could adversely affect the organization’s
ability to record, process, summarize, and report financial data consistent with the assertions of
management in the financial statements.” AU § 325.02. These serious flaws did not develop
overnight. Indeed, it is admitted that the internal control weaknesses were rampant and existed
prior to the statements alleged herein to be false and misleading. Moreover, these serious flaws
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resulted in a $54 million after-tax charge for “treasury related aged receivable and in-transit
reconciliation items” which have become “impaired.”
175. Even the most basic audit procedures are designed to detect such conduct and
occurrences, particularly when, as here, the fraud infected the Company’s core operations, and
resulted in materially false and misleading financial statements. For example, Deloitte
acquiesced to the Fifth Third Defendants’ failure to reconcile accounts accurately and on a
timely basis resulting in the $54 million charge.
Deloitte Failed to Obtain Sufficient Competent Evidential Matter
176. Auditors must also obtain sufficient competent evidence through inspection,
observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding
the financial statements under audit. AU § 326.01. The validity and sufficiency of required
evidence depends on the circumstances and the auditor’s judgment. AU §§ 326.19-.20. An
assessment of higher risk may cause the auditor to expand the extent of procedures applied or
modify the nature of procedures to obtain more persuasive evidence.
177. For example, during the Class Period, Deloitte knew or recklessly disregarded the
obvious, and pervasive “red flags”:
“(a) [Lack of] oversight of risk management processes by the boards ofdirectors, including but not limited to, timely response to identifieddeficiencies and risks;
“(b) [Failure to implement] policies and procedures to establish controls, defineresponsibilities, and set risk tolerance levels for the consolidatedorganization;
“(c) [Failure to implement] policies and procedures to identify and assess allrisks associated with new operations, products, and financial activities andto ensure the internal controls to manage those risks are in place;
“(d) [Lack of] management information systems and reporting procedures toensure the accuracy of data provided to management and the board of
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directors, including but not limited to, the performance of independentvalidations of market risk models;
“(e) [Lack of] internal controls for the consolidated organizations that aredesigned to effectively manage risks;
“(f) [Lack of] [s]tandardized processes to perform accurate and timely accountreconciliations, consistent with generally accepted accounting principles(“GAAP”), including use of standard reconciliation formats andprocedures;
“(g) [Lack of] timely and independent review and approval of reconciliations;
“(h) [Lack of] appropriate segregation of duties with respect to the preparation,review and approval of account reconciliations;
“(i) [Failure to take] appropriate action with respect to identified aged items,including but not limited to, timely and appropriate charge-offs and timelyand accurate reports to management;
“(j) [Failure to retain] and availability of work papers and other records ofreconciliations for internal and external audit review and regulatoryreview; and
“(k) [Lack of] training of all personnel engaged in the account reconciliationfunction to ensure that they have sufficient skills and knowledge toperform accurate reconciliations consistent with GAAP.”
178. Additionally, upon Fifth Third’s acquisition of Old Kent, Deloitte took over
auditing the former Old Kent’s books and records from Arthur Andersen. Arthur Andersen had
audited and advised multiple companies which have been the subject of SEC investigations,
private securities litigations, and/or restatements of previously filed financial statements. It has
had an infamous recent history of failed audits, conflicts of interest, and document destruction in
some of the most egregious cases of accounting fraud in history, including, but not limited to,
Baptist Foundation of Arizona, Colonial Realty Company, Enron, Lincoln Savings/ACC,
Sunbeam, and Waste Management, all of which subsequently led to its ultimate demise.
Consequently, Arthur Andersen’s audit of Old Kent’s previous financial statements was a “red
flag” to Deloitte requiring it to apply extra scrutiny to its audit of Old Kent’s books and records.
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179. The foregoing pattern of “red flags” should have caused Deloitte to re-evaluate its
risk assessments. GAAS requires that risk assessments, and accordingly, any reevaluations of
risk assessments, should be made with consideration of applicable risk factors. See AU §§
316.12, 316.14. The auditor’s response to a risk assessment should be “influenced by the nature
and significance of the risk factors identified as being present.” AU § 316.25. Accordingly, “the
presence of certain conditions may suggest to the auditor the possibility that fraud may exist.
For example, an important contract may be missing, a subsidiary ledger may not be satisfactorily
reconciled to its control account . . . .” AU § 316 (emphasis added).
180. Moreover, Deloitte failed to obtain sufficient competent evidential matter to
determine whether Fifth Third’s financial statements accurately recorded, in all material respects,
Fifth Third’s actual operating results, and the Old Kent acquisition. Deloitte relied on financial
information provided by Fifth Third, that it knew or recklessly disregard was flawed and
unreliable. For example, among other things, Deloitte failed to obtain, or demand that Fifth
Third produce, sufficient competent corroborating evidence of the need for, or adequacy of,
“account reconciliations, consistent with generally accepted accounting principles” that would
satisfy an auditor applying an appropriately professional degree of skepticism in any audit.
181. As one of the largest audit firms in the world, Deloitte was well aware of the
strategies, methods, and procedures required by GAAS to conduct a proper audit. Also, Deloitte
knew of the audit risks inherent at Fifth Third and the industry in which Fifth Third operated
because of the comprehensive services it provided to Fifth Third over the years and its
experience in the banking industry. Deloitte’s intentional failure to comply with GAAS and
Deloitte’s performance on the Fifth Third audit rose to the level of recklessness and/or knowing
fraud.
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182. Indeed, Deloitte touted its expertise in the Banking industry. For example,
according to the Bank Director Third Quarter 2002:
Deloitte & Touches solid reputation for customer satisfaction combines with arecent ramp-up of banking industry expertise.
Paul Wirth, managing partner of Deloitte & Touches national banking practice, isthe first to admit that his firm lost a bigger share of the banking market than itgained in the series of mergers that narrowed the Big Eight accounting firms tothe Big Four. However, over the last four years, the firm has hired 350professionals with significant banking industry experience.
Deloitte’s intentional failure to comply with GAAS and Deloitte’s performance on the Fifth
Third audit rose to the level of recklessness and/or knowing fraud.
Deloitte Failed to Exercise Due Professional Care
183. Auditors must exercise due professional care in performing the audit and
preparing the audit report. AU § 230.01. Due professional care concerns what the auditor does
and how well he does it. AU § 230.04.
184. Deloitte did not exercise due professional care because it failed to: obtain
sufficient competent evidential matter to support the assertions in the financial statements;
maintain an attitude of professional skepticism; and render an accurate audit report on behalf of
Fifth Third.
185. Deloitte violated GAAS Standard of Reporting No. 4 that requires that, when an
opinion on the financial statements as a whole cannot be expressed, the reasons therefore must be
stated. Deloitte should have stated that no opinion could be issued by it on Fifth Third’s 2001
financial statements or issued an adverse opinion stating that the 2001 financial statements were
not fairly presented.
186. Deloitte violated GAAS General Standard No.2 that requires that independence in
mental attitude is to be maintained by the auditor in all matters related to the assignment.
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187. Deloitte violated SAS No. 82 in that it failed to adequately consider the risk that
the audit financial statements of Fifth Third were free from material misstatement, whether
caused by errors or fraud. Deloitte knew or recklessly ignored numerous risks relevant to
financial reporting including events and circumstances that occurred or existed at Fifth Third
during the Class period, which adversely affected Fifth Third’s ability to initiate, record, process,
and report financial data consistent with the assertions of management in the financial
statements. These events or circumstances include, but are not limited to:
• Changes in operating environment. Changes in the regulatory or operatingenvironment can result in changes in competitive pressures and significantlydifferent risks.
• New or revamped information systems. Significant and rapid changes ininformation systems can change the risk relating to internal control.
• Rapid growth. Significant and rapid expansion of operations can strain controlsand increase the risk of a breakdown in controls.
• New technology. Incorporating new technologies into production processes orinformation systems may change the risk associates with internal control.
• New business models, products, or activities. Entering into business areas ortransactions with which an entity has little experience may introduce new risksassociated with internal control.
• Corporate restructurings. Restructurings may be accompanied by staff reductionsand changes in supervision and segregation of duties that may change the riskassociated with internal control.
• Expanded foreign operations. The expansion or acquisition of foreign operationscarries new and often unique risks that may affect internal control, for example,additional or changed risks from foreign currency transactions.
• New accounting pronouncements. Adoption of new accounting principles orchanging accounting principles may affect risks in preparing financial statements.
188. Deloitte violated GAAS and the standards set forth in SAS No. 1 and SAS No. 53
by, among other things, failing to adequately plan its audit and properly supervise the work of
assistants, and to establish and carry out procedures reasonably designed to search for and detect
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the existence of errors and irregularities that would have a material effect upon the financial
statements.
189. Deloitte violated GAAS Standard of Field Work No. #2, which requires the
auditor to make a proper study of existing internal controls, including accounting, financial and
managerial controls, to determine whether reliance thereon was justified, and if such controls are
not reliable, to expand the nature and scope of the auditing procedures to be applied. The
standard provides that a sufficient understanding of an entity’s internal control structure be
obtained to adequately plan the audit and to determine the nature, timing and extent of tests to be
performed. AU § 150.02. In all audits, the auditor should perform procedures to obtain a
sufficient understanding of three elements of an entity’s internal control structure: the control
environment, the accounting system, and control procedures. AU § 319.02.
190. As a result of its failure to accurately report on Fifth Third’s 2001 financial
statements, Deloitte utterly failed in its role as an auditor as defined by the SEC. SEC
Accounting Series Release No. 296, Relationships Between Registrants and Independent
Accountants, Securities Act Release No. 6341, Exchange Act Release No. 18044, states in part:
Moreover, the capital formation process depends in large part on the confidenceof investors in financial reporting. An investor’s willingness to commit hiscapital to an impersonal market is dependent on the availability of accurate,material and timely information regarding the corporations in which he hasinvested or proposes to invest. The quality of information disseminated in thesecurities markets and the continuing conviction of individual investors that suchinformation is reliable are thus key to the formation and effective allocation ofcapital. Accordingly, the audit function must be meaningfully performed and theaccountants’ independence not compromised. The auditor must be free to decidequestions against his client’s interests if his independent professional judgmentcompels that result.
191. Deloitte’s opinions, which represented that Fifth Third’s 2001 year end financial
statements were presented in conformity with GAAP, were materially false and misleading
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because Deloitte knew or was reckless in not knowing that Fifth Third’s 2001 year end financial
statements violated the principles of fair reporting and GAAP. In the course of rendering its
unqualified audit certification on Fifth Third’s 2001 year end financial statements, Deloitte knew
it was required to adhere to each of the herein described standards and principles of GAAS,
including the requirement that the financial statements comply in all material respects with
GAAP. Deloitte, in issuing its unqualified opinions, knew or recklessly disregarded that by
doing so it was engaging in gross departures from GAAS, thus making its opinions false, and
issued such certifications knowing or recklessly disregarding that GAAS had been violated.
192. Deloitte knew or recklessly disregarded facts that indicated that it should have: (a)
disclaimed or issued adverse opinions on Fifth Third’s 2001 year end financial statements; or (b)
withdrawn, corrected or modified its opinion for the years ended December 31, 2001 to
recognize Fifth Third’s improper accounting and financial reporting stated above.
Deloitte Has a History of Participating in Major Accounting Frauds
193. Deloitte’s egregious conduct surrounding the Fifth Third is hardly an isolated
incident. Deloitte is a repeat offender with a history of failed audits and conflicts of interest in
some of the most egregious cases of accounting fraud in history. Moreover, Deloitte’s conduct
in these cases often shares the same underlying themes as it conducts in connection with Fifth
Third. For example:
194. On March 14, 1994, Deloitte consented to a cease and desist order of the Office of
Thrift Supervision (“OTS”) and agreed to pay $312 million to the federal government to settle
claims based on alleged accounting and auditing failures at banks, and savings and loans
institutions it audited. The settlement resolved fifteen pending suits brought by the Resolution
Trust Corporation (“RTC”), three suits brought by the Federal Deposit Insurance Corporation
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(“FDIC”) and resolved all other potential RTC, FDIC, and OTS claims as well concerning failed
institutions.
195. The Joint press release issued by the RTC, FDIC and OTS on the same date
stated, in pertinent part:
The OTS cease and desist order mandates that Deloitte and Touche partners andmanagers have specified levels of training and experience for auditing insureddepository institutions, order them to comply with specific professional standardsand defines quality control functions to be performed by partners on each insureddepository institution audit.
196. The OTS noticed claimed that [Deloitte’s] personnel failed to apply generally
accepted accounting principles (GAAP) and generally accepted accounting standards (GAAS) in
the audits of certain thrift institutions, their holding companies, subsidiaries and affiliates.
Specifically, OTS charged [Deloitte] with failure to disclaim or qualify its opinions because of
its clients’:
• “Failure to mark trading accounts to market in accordance with GAAP in its audits. . .”
• “Failure to audit allowances for loan losses in accordance with GAAP and GAASin its audits . . .”
• “Failure to account for loans to facilitate the sale of real estate owned and forinsubstance foreclosures in accordance with GAAP in its audits . . .”
• “Failure to account for sale/leaseback transactions in accordance with GAAP in itsaudits . . .”
• In addition, OTS charged [Deloitte] with “failure to properly document workpapers.”
DEFENDANTS’ FINANCIAL STATEMENTS DURING THE CLASS PERIODWERE MATERIALLY FALSE AND MISLEADING AND VIOLATED GAAP
197. At all relevant times during the Class Period, Defendants represented that Fifth
Third’s financial statements when issued were prepared in conformity with GAAP, which are
recognized by the accounting profession and the SEC as the uniform rules, conventions and
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procedures necessary to define accepted accounting practice at a particular time. However, in
order to artificially inflate the price of Fifth Third’s stock, Defendants used improper accounting
practices in violation of GAAP and SEC reporting requirements to falsely inflate its assets,
stockholders’ equity and earnings during the Class Period.
198. Fifth Third’s materially false and misleading Financial Statements resulted from a
series of deliberate senior management decisions designed to conceal the truth regarding Fifth
Third’ actual operating results. Specifically, Defendants caused the Company to violate GAAP
by improperly failing to timely write-down treasury related aged receivable and in-transit
reconciliation items as impaired.
199. GAAP are those principles recognized by the accounting profession as the
conventions, rules, and procedures necessary to define accepted accounting practices at a
particular time. As set forth in Financial Accounting Standards Board (“FASB”) Statement of
Financial Accounting Concepts (“Concepts Statement”) No. 1 (November 1978), one of the
fundamental objectives of financial reporting is that it provide accurate and reliable information
concerning an entity’s financial performance during the period being presented. Concepts
Statement No. 1, paragraph 42, states:
Financial reporting should provide information about an enterprise’s financialperformance during a period. Investors and creditors often use information aboutthe past to help in assessing the prospects of an enterprise. Thus, althoughinvestment and credit decisions reflect investors’ and creditors’ expectationsabout future enterprise performance, those expectations are commonly based atleast partly on evaluations of past enterprise performance.
200. As set forth in SEC Rule 4-01(a) of SEC Regulation S-X, “[f]inancial statements
filed with the [SEC] which are not prepared in accordance with [GAAP] will be presumed to be
misleading or inaccurate.” 17 C.F.R. § 210.4-01(a)(1). Management is responsible for preparing
financial statements that conform with GAAP. As noted by the AICPA professional standards:
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financial statements are management’s responsibility . . . . [M]anagement isresponsible for adopting sound accounting policies and for establishing andmaintaining internal control that will, among other things, record, process,summarize, and report transactions (as well as events and conditions) consistentwith management’s assertions embodied in the financial statements. The entity’stransactions and the related assets, liabilities and equity are within the directknowledge and control of management . . . . Thus, the fair presentation offinancial statements in conformity with Generally Accepted AccountingPrinciples is an implicit and integral part of management’s responsibility.
201. Fifth Third’s reported financial results during the Class Period were materially
false and misleading because the Company failed to timely write-down treasury related aged
receivable and in-transit reconciliation items as impaired. Indeed, Defendants failed to
implement a consistent methodology for the determination of whether receivables were no longer
fully or partially collectible.
202. GAAP provides that an estimated loss from a loss contingency, such as the
collectibility of receivables, “shall be accrued by a charge to income” if: (i) information available
prior to issuance of the financial statements indicated that it is probable that an asset had been
impaired or a liability had been incurred at the date of the financial statements; and (ii) the
amount of the loss can be reasonably estimated. Statement of Financial Accounting Standard
(“SFAS”) No. 5, Accounting for Contingencies ¶ 8(March 1975). SFAS No. 5 also requires that
financial statements disclose contingencies when it is at least reasonably possible (e.g., a greater
than slight chance) that a loss may have been incurred. The disclosure shall indicate the nature
of the contingency and shall give an estimate of the possible loss, a range of loss or state that
such an estimate cannot be made.
203. The SEC considers the disclosure of loss contingencies to be so important to an
informed investment decision that it promulgated Regulation S-X, which provides that
disclosures in interim period financial statements may be abbreviated and need not duplicate the
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disclosure contained in the most recent audited financial statements, except that, “where material
contingencies exist, disclosure of such matters shall be provided even though a significant
change since year end may not have occurred.” 17 C.F.R. § 210.10-01.
204. In addition, Accounting Research Bulletin No. 43, Restatement and Revision of
Accounting Research Bulletins Chapter 3, Section 9 (June 1953) provides that the objective of
providing for reserves against receivables is to assure that, “[a]ccounts receivable net of
allowances for uncollectible accounts . . . are effectively stated as the amount of cash estimated
as realizable.”
205. By improperly accounting for Fifth Third’s treasury related aged receivable and
in-transit reconciliation items as impaired in its interim financial statements, the Fifth Third
Defendants violated GAAP, as indicated by APB No. 28:
The amounts of certain costs and expenses are frequently subjected to year-endadjustments even though they can be reasonably approximated at interim dates.To the extent possible such adjustments should be estimated and the estimatedcosts and expenses assigned to interim periods so that the interim periods bear areasonable portion of the anticipated annual amount.
APB No. 28, Interim Financial Reporting ¶ 17 (May 1973).
206. In addition, FASB Concepts Statement No. 5 (December 1984) states, “[a]n
expense or loss is recognized if it becomes evident that previously recognized future economic
benefits of an asset have been reduced or eliminated . . .”
DEFENDANTS’ ADDITIONAL GAAP VIOLATIONS
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207. As a result of the foregoing accounting improprieties, the Defendants caused Fifth
Third’s reported financial results to violate, among other things, the following provisions of
GAAP for which each Defendant is necessarily responsible:
(a) The principle that financial reporting should provide information that is
useful to present and potential investors in making rational investment decisions and that
information should be comprehensible to those who have a reasonable understanding of business
and economic activities (FASB Concepts Statement No. 1, ¶ 34);
(b) The principle of materiality, which provides that the omission or
misstatement of an item in a financial report is material if, in light of the surrounding
circumstances, the magnitude of the item is such that it is probable that the judgment of a
reasonable person relying upon the report would have been changed or influenced by the
inclusion or correction of the item (FASB Concepts Statement No. 2, ¶ 132 (May 1980));
(c) The principle that financial reporting should provide information about
how management of an enterprise has discharged its stewardship responsibility to owners
(stockholders) for the use of enterprise resources entrusted to it. To the extent that management
offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for
accountability to prospective investors and to the public in general. (FASB Concepts Statement
No. 1, ¶ 50);
(d) The principle that financial reporting should provide information about an
enterprise’s financial performance during a period. Investors and creditors often use information
about the past to help in assessing the prospects of an enterprise. Thus, although investment and
credit decisions reflect investors’ expectations about future enterprise performance, those
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expectations are commonly based at least partly on evaluations of past enterprise performance.
(FASB Concepts Statement No. 1, ¶ 42);
(e) The principle that financial reporting should be reliable in that it
represents what it purports to represent. The notion that information should be reliable as well as
relevant is central to accounting. (FASB Concepts Statement No. 2, ¶¶ 58-59);
(f) The principle of completeness, which means that nothing is left out of the
information that may be necessary to ensure that it validly represents underlying events and
conditions. (FASB Concepts Statement No. 2, ¶ 80); and
(g) The principle that conservatism be used as a prudent reaction to
uncertainty to try to ensure that uncertainties and risks inherent in business situations are
adequately considered. The best way to avoid injury to investors is to try to ensure that what is
reported represents what it purports to represent. (FASB Concepts Statement No. 2, ¶¶ 95, 97).
208. The foregoing violations of GAAP were material. Indeed, as the Company
eventually was forced to admit, these failures to properly apply GAAP resulted in the Company
announcing a pre-tax charge of $81 million in its financial statements. As set forth in the
Company’s 8-K dated September 10, 2002:
During the third quarter, Fifth Third has concluded that certain predominatelytreasury related aged receivable and in-transit reconciliation items are impaired.As of the date of this filing, Fifth Third expects to realize an after-tax expense ofapproximately $54 million related to the establishment of an impairment reservefor these items. Fifth Third is devoting significant effort and resources in thecontinuation of this review, including third party expertise, and will adjust theimpairment reserve in the future if recoverability exists.
ADDITIONAL SCIENTER ALLEGATIONS
209. As alleged herein, Defendants acted with scienter in that Defendants knew that
the public statements or documents issued or disseminated in the name of the Company were
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materially false and misleading; knew that such statements or documents would be issued or
disseminated to the investing public; and knowingly and substantially participated or acquiesced
in the issuance or dissemination of such statements or documents as primary violations of the
federal securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their
receipt of information reflecting the true facts regarding Fifth Third, their control over, and/or
receipt and/or modification of the Company’s allegedly materially misleading misstatements
and/or their associations with the Company which made them privy to confidential proprietary
information concerning Fifth Third, participated in the fraudulent scheme alleged herein.
210. In addition, Defendants engaged in the wrongs alleged herein in order for Fifth
Third to use its stock as currency for acquisitions, which was the key ingredient, by the Fifth
Third Defendants’ own admissions, to the Company’s growth. For example, as announced by
the Company on July 24, 2002, Fifth Third had agreed to acquire Franklin Financial Corporation,
which operates a Nashville, Tennessee-based bank, in a stock exchange valued at $240 million.
However, that transaction was halted due to the regulatory investigations. Thus, the Company’s
acquisition-based growth strategy was forestalled and jeopardized by the Company’s serious
infrastructure and internal control deficiencies, and the regulatory investigation.
211. Moreover, defendants Schaefer and Arnold were under substantial pressure to
improve performance each and every year. For example, Fifth Third’s Proxy dated February 8,
2002 disclosed that “[a]t the end of 2001, the Company's goal was to increase net operating
income and operating earnings per share by 13% over 2000.” Accordingly, the Bank
aggressively acquired other banks, focusing on earnings growth, while disregarding risk
management processes and internal accounting controls, as evidenced by the March 26, 2003
agreement with regulators. Moreover, although, multiple former employees stated that the Old
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Kent acquisition exacerbated Fifth Third’ already existing internal control problems, Old Kent
presented the potential of adding approximately 24 to 29 percentage points to Fifth Third’s net
income, as evidenced by the table below.
Net Income Availableto CommonShareholders 2000 1999($ in thousands)
Fifth Third$ 862,900
$ 668,200 Old Kent 24% 277,500 29% 278,400
Combined$ 1,140,400
$ 946,600
212. Specifically, Defendants Schaefer and Arnold made various public statements
regarding their own management abilities and the wisdom of their acquisitions, including Old
Kent and, thus, were pressured to live up to those statements. Moreover, Defendants Schaefer
and Arnold were motivated by the promise of substantial additional compensation to make sure
their predictions of profitable performance became a reality. In this regard, Fifth Third 2001
Proxy disclosed that the Bank established “a bonus pool which increased if incrementally higher
net operating income or operating earnings per share resulted in 2001 as compared to 2000. In
2001, the target bonus ranged from 10% to 65% of base salary. However, if the Company’s
goals are not met, individual bonuses are reduced proportionately, with no bonuses paid unless
earnings increase.” Defendant “Schaefer earned a bonus of $1,485,000, which represented 150%
of his base salary for fiscal year 2001 . . . .” In addition, in fiscal 2001, Defendant Arnold
received total compensation in excess of $580,000. The acquisitions by Fifth Third were the
primary engine for increased growth, and accordingly, increased revenues and earnings by Fifth
Third. As a result, the Individual Defendants had a direct pecuniary financial interest in
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concealing any difficulties or failures in connection with past acquisitions, and any break-down
of internal controls which would jeopardize or delay future acquisitions.
213. At the same time, Defendants Schaefer and Arnold had the opportunity, not only
to control the accounting treatment accorded to Fifth Third's financial data, but to be aware of the
material internal control failures plaguing the Company. Indeed, Defendant Arnold was the
Chief Financial Officer with responsibility for preparing financial statements and SEC filings,
and for interacting with Defendant Schaefer and Fifth Third's various financial advisors
regarding the Company's performance and the effect of that performance on the value of the
company. Defendant Schaefer, in turn, was the President and Chief Executive Officer
throughout the critical time period and was charged with oversight of all financial filings.
Moreover, both Defendants Arnold and Schaefer acted as the Company's spokespersons on
financial matters, publicly claiming to have substantial first-hand knowledge of these matters.
For example, the Business Courier on December 7, 2001, quoted Defendant Arnold stating that
the “integ[ration] of Old Kent Financial Corp. ha[d] gone so smoothly that . . . that the company
[was] a year ahead of revenue targets set in late 2000.” Similarly, according to PR Newswire, on
October 16, 2001, Defendant Schafer stated that "[d]uring the third quarter, we completed the
last conversion of Old Kent Financial Corporation, the largest and most successful in our
history.”
UNDISCLOSED ADVERSE INFORMATION
214. The market for Fifth Third’s common stock was open, well-developed and
efficient at all relevant times. As a result of these materially false and misleading statements and
failures to disclose, Fifth Third common stock traded at artificially inflated prices during the
Class Period. The artificial inflation continued until January 31, 2003, when the Company
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revealed that state and federal banking regulators would take formal action against the Company
and Fifth Third tacitly admitted that its internal controls had been overwhelmed. Plaintiffs and
other members of the Class purchased or otherwise acquired Fifth Third’s common stock relying
upon the integrity of the market price of the Company’s common stock and market information
relating to Fifth Third, and have been damaged thereby.
215. During the Class Period, Defendants materially misled the investing public,
thereby inflating the price of Fifth Third common stock, by publicly issuing false and misleading
statements and omitting to disclose material facts necessary to make defendants’ statements, as
set forth herein not false and misleading. Said statements and omissions were materially false
and misleading in that they failed to disclose material adverse information and misrepresented
the truth about the Company, its business and operations, as detailed herein.
216. At all relevant times, the material misrepresentations and omissions particularized
in this Complaint directly or proximately caused or were a substantial contributing cause of the
damages sustained by plaintiff and other members of the Class. As described herein, during the
Class Period, Defendants made or caused to be made materially false or misleading statements,
or failed and omitted to disclose material information necessary to make the statements made not
false and misleading as detailed above. These material misstatements and omissions created in
the market an unrealistically positive assessment of Fifth Third and its prospects and operations,
thus causing the Company’s common stock to be overvalued and artificially inflated at all
relevant times. Defendants’ materially false and misleading statements during the Class Period
resulted in Plaintiffs and other members of the Class purchasing the Company’s common stock
at artificially inflated prices, thus leading to their losses when the illusion was revealed, and the
market was able to accurately value the Company.
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APPLICABILITY OF THE FRAUD-ON-THE-MARKET DOCTRINE
217. At all relevant times, the market for Fifth Third’s securities was an efficient
market for the following reasons, among others:
(a) Fifth Third’s stock met the requirements for listing, and was listed and
actively traded on the NASDAQ, a highly efficient and automated market;
(b) As a regulated issuer, Fifth Third filed periodic public reports with the
SEC and the NASDAQ;
(c) Fifth Third regularly communicated with public investors via established
market communication mechanisms, including through regular disseminations of press releases
on the national circuits of major newswire services and through other wide-ranging public
disclosures, such as communications with the financial press and other similar reporting services;
and
(d) Fifth Third was followed by several securities analysts employed by major
brokerage firms who wrote reports which were distributed to the sales force and certain
customers of their respective brokerage firms. Each of these reports was publicly available and
entered the public marketplace.
218. As a result of the foregoing, the market for Fifth Third’s securities promptly
digested current information regarding Fifth Third from all publicly available sources and
reflected such information in Fifth Third’s stock price. Under these circumstances, all purchasers
of Fifth Third’s securities during the Class Period were entitled to rely on the integrity of the
market for Fifth Third’s publicly traded securities and their purchase of Fifth Third’s securities at
artificially inflated prices entitles them to a presumption of reliance.
NO SAFE HARBOR
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219. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this complaint.
Many of the specific statements pleaded herein were not identified as “forward-looking
statements” when made. To the extent there were any forward-looking statements, there were no
meaningful cautionary statements identifying important factors that could cause actual results to
differ materially from those in the purportedly forward-looking statements. Alternatively, to the
extent that the statutory safe harbor does apply to any forward-looking statements pleaded
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 knew that the particular
forward-looking statement was false, and/or the forward-looking statement was authorized
and/or approved by an executive officer of Fifth Third who knew that those statements were
false when made.
FIRST CLAIM
Violation Of Section 10(B) OfThe Exchange Act And Rule 10b-5
Promulgated Thereunder Against All Defendants
220. Plaintiffs repeat and reallege each and every allegation contained above as if fully
set forth herein.
221. During the Class Period, Fifth Third, the Individual Defendants, and Deloitte, and
each of them, carried out a plan, scheme and course of conduct which was intended to and,
throughout the Class Period, did: (i) deceive the investing public, including plaintiff and other
Class members, as alleged herein; (ii) artificially inflate and maintain the market price of Fifth
Third’s securities; and (iii) cause plaintiff and other members of the Class to purchase Fifth
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Third’s securities at artificially inflated prices. In furtherance of this unlawful scheme, plan and
course of conduct, Defendants, and each of them, took the actions set forth herein.
222. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made
untrue statements of material fact and/or omitted to state material facts necessary to make the
statements not misleading; and (c) engaged in acts, practices, and a course of business which
operated as a fraud and deceit upon the purchasers of the Company’s securities in an effort to
maintain artificially high market prices for Fifth Third’s securities in violation of Section 10(b)
of the Exchange Act and Rule 10b-5. All Defendants are sued either as primary participants in
the wrongful and illegal conduct charged herein or as controlling persons as alleged below.
223. Defendants, individually and in concert, directly and indirectly, by the use, means
or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a
continuous course of conduct to conceal adverse material information about the business,
operations and future prospects of Fifth Third as specified herein.
224. These Defendants employed devices, schemes and artifices to defraud, while in
possession of material adverse non-public information and engaged in acts, practices, and a
course of conduct as alleged herein in an effort to assure investors of Fifth Third’s value and
performance and continued substantial growth, which included the making of, or the
participation in the making of, untrue statements of material facts and omitting to state material
facts necessary in order to make the statements made about Fifth Third and its business
operations and future prospects in the light of the circumstances under which they were made,
not misleading, as set forth more particularly herein, and engaged in transactions, practices and a
course of business which operated as a fraud and deceit upon the purchasers of Fifth Third’s
securities during the Class Period.
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225. The Individual Defendants’ primary liability, and controlling person liability,
arises from the following facts: (i) the Individual Defendants were high-level executives and/or
directors at the Company during the Class Period; (ii) the Individual Defendants were privy to
and participated in the creation, development and reporting of the Company’s internal budgets,
plans, projections and/or reports; and (iii) the Individual Defendants were aware of the
Company’s dissemination of information to the investing public which they knew or recklessly
disregarded was materially false and misleading.
226. The Defendants had actual knowledge of the misrepresentations and omissions of
material facts set forth herein, or acted with reckless disregard for the truth in that they failed to
ascertain and to disclose such facts, even though such facts were available to them. Such
defendants’ material misrepresentations and/or omissions were done knowingly or recklessly and
for the purpose and effect of concealing Fifth Third’s operating condition and future business
prospects from the investing public and supporting the artificially inflated price of its securities.
As demonstrated by defendants’ overstatements and misstatements of the Company’s business,
operations and earnings throughout the Class Period, Defendants, if they did not have actual
knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain
such knowledge by deliberately refraining from taking those steps necessary to discover whether
those statements were false or misleading.
227. As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market price of Fifth Third’s
securities was artificially inflated during the Class Period. In ignorance of the fact that market
prices of Fifth Third’s publicly-traded securities were artificially inflated, and relying directly or
indirectly on the false and misleading statements made by Defendants, or upon the integrity of
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the market in which the securities trade, and/or on the absence of material adverse information
that was known to or recklessly disregarded by Defendants but not disclosed in public statements
by defendants during the Class Period, Plaintiffs and the other members of the Class acquired
Fifth Third securities during the Class Period at artificially high prices and were damaged
thereby.
228. At the time of said misrepresentations and omissions, Plaintiffs and other
members of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiffs
and the other members of the Class and the marketplace known of the true financial condition
and business prospects of Fifth Third, which were not disclosed by Defendants, Plaintiffs and
other members of the Class would not have purchased or otherwise acquired their Fifth Third
securities, or, if they had acquired such securities during the Class Period, they would not have
done so at the artificially inflated prices which they paid.
229. By virtue of Defendants’ dissemination of false and misleading information, the
price of Fifth Third’s publicly traded securities were caused to be artificially inflated throughout
the Class Period.
230. By virtue of the foregoing, Defendants have violated Section 10(b) of the
Exchange Act, and Rule 10b-5 promulgated thereunder.
231. As a direct and proximate result of Defendants’ wrongful conduct, plaintiff and
the other members of the Class suffered damages in connection with their respective purchases
of the Company’s securities during the Class Period.
SECOND CLAIM
Violation Of Section 20(A) OfThe Exchange Act Against The Individual Defendants
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232. Plaintiffs repeat and reallege each and every allegation contained above as if fully
set forth herein.
233. Each of the Individual Defendants acted as a controlling person of Fifth Third
within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their
high-level positions, and their ownership and contractual rights, participation in and/or
awareness of the Company’s operations and/or intimate knowledge of the statements filed by the
Company with the SEC and disseminated to the investing public, the Individual Defendants had
the power to influence and control and did influence and control, directly or indirectly, the
decision-making of the Company, including the content and dissemination of the various
statements which Plaintiffs contends are false and misleading. The Individual Defendants were
provided with or had unlimited access to copies of the Company’s reports, press releases, public
filings and other statements alleged by Plaintiffs to be misleading prior to and/or shortly after
these statements were issued and had the ability to prevent the issuance of the statements or
cause the statements to be corrected.
234. In particular, the Individual Defendants had direct and supervisory involvement in
the day-to-day operations of the Company and, therefore, are presumed to have had the power to
control or influence the particular transactions giving rise to the securities violations as alleged
herein, and exercised the same.
235. As set forth above, Fifth Third and the Individual Defendants each violated
Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue
of their position as a controlling person, the Individual Defendants are liable pursuant to Section
20(a) of the Exchange Act.
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236. As a direct and proximate result of Fifth Third’s and the Individual Defendants’
wrongful conduct, the price of Fifth Third stock was artificially inflated throughout the Class
Period, and Plaintiffs and other members of the Class suffered damages in connection with their
purchases of the Company’s securities during the Class Period.
WHEREFORE, Plaintiffs pray for relief and judgment, as follows:
(a) Determining that this action is a proper class action, certifying Plaintiffs as
the class representatives under Rule 23 of the Federal Rules of Civil Procedure and Plaintiffs’
Lead Counsel as Class Counsel;
(b) Awarding compensatory damages in favor of Plaintiffs and the other Class
members against all defendants, jointly and severally, for all damages sustained as a result of
defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;
(c) Awarding Plaintiffs and the Class their reasonable costs and expenses
incurred in this action, including counsel fees, and expert fees; and
(d) Such other and further relief as the Court may deem just and proper.
Respectfully submitted,
s/Ann Lugbill Ann Lugbill, Esq. (0023632)2406 Auburn AvenueCincinnati, Ohio 45219(513) 784-1280513) [email protected]
Trial Attorney for Lead Counsel
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s/David A.P. Brower Steven G. Schulman, Esq.David A.P. Brower, Esq.Jeffrey T. Spinazzola, Esq.MILBERG WEISS BERSHAD & SCHULMAN, LLPOne Pennsylvania Plaza, 49th FloorNew York, New York 10119(212) [email protected]@milbergweiss.com
Lead Counsel
Robert O’ReillyGuri AdemiADEMI & O’REILLY, LLP3620 East Layton AvenueCudahy, WI 53110Telephone: (414) 671-1000
J. Allen CarneyCAULEY BOWMAN CARNEY & WILLIAMS, LLP11001 Executive Center DriveSuite 200Little Rock, AR 7211(501) 312-8500(888) 551-9944(501) 312-8505
Daniel M. ShanleyDECARLO, CONNOR & SELVO,A PROFESSIONAL CORPOATION533 South Fremont Avenue, 9th FloorLos Angeles, California 90071-1706(213) 488-4100
Nadeem FaruqiFARUQI & FARUQI, LLP320 East 39th StreetNew York, NY 10016(212) 983-9330
Attorneys for Plaintiffs
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JURY TRIAL DEMANDED
Plaintiffs hereby demand a trial by jury.
s/Ann Lugbill s/David A.P. Brower
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CERTIFICATE OF SERVICE
I hereby certify that on August 16, 2004, I filed the foregoing with the Clerk, using theCM/ECF system, which sends notices of the filing to those registered; that I have mailed by U.S.Postal Service on August 17, 2004, the documents to the following non CM/ECF participants,together with the Notice of Filing; and that I have e-mailed the documents to my co-counsel asfurther set forth below.
s/Ann Lugbill Ann Lugbill (0023632)2406 Auburn AvenueCincinnati, OH 45219Phone: (513) 784-1280; Fax: (513) [email protected]
CM/ECF Participants:
Counsel for Defendant Fifth Third Bancorp.:
Stanley M. Chesley, Esq.WAITE SCHNEIDER BAYLESS &CHESLEY1514 Fourth and Vine TowerOne West Fourth StreetCincinnati, OH 45202Telephone: (513) [email protected]
Patrick F. Fischer, Esq.Rachael A. Rowe, Esq.KEATING, MUETHING & KLEKAMP,PLL1400 Provident TowerOne East Fourth StreetCincinnati, OH 45202Telephone: (513) [email protected]@kmklaw.com;[email protected]
Glenn V. Whitaker, Esq.Victor A. Walton, Esq.Jeffrey A. Miller, Esq.VORYS SATER SEYMOUR & PEASE,LLPSuite 2100, Atrium Two221 East Fourth StreetCincinnati, OH 45201-0236Telephone: (513) [email protected];[email protected];[email protected] for Defendants Schaefer, Arnoldand DeBrunner
Phyllis E. Brown, Esq.LAW OFFICES OF PHYLLIS E.BROWN119 East Court Street, Suite 500Cincinnati, OH 45202Telephone: (513) [email protected] for Plaintiff Roseman
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Richard L. Norton, Esq.Steven M. Rothstein, Esq.KATZ GREENBERGER & NORTON,LLP105 East Fourth Street, 4th FloorCincinnati, OH 45202Telephone: (513) [email protected]@kgnlaw.comCounsel for Plaintiff Herr
Ernest A. Eynon, Esq.CUNNINGHAM, TALIAFERRO & EYNON,LLC312 Walnut Street, Suite 3250Cincinnati, OH 45202Telephone: (513) [email protected] for Plaintiff
Joseph M. Hegedus, Esq.Matthew B. Baker, Esq.CLIMACO, LEFKOWITZ,LEFKOWITZ,WILCOX & GAROFOLI CO., LPA175 South Third Street, Suite 820Columbus, OH 43215Telephone: (614) 461-6677Counsel for Plaintiff Ferrari
Brian A. Ewald, Esq.2406 Auburn AvenueCincinnati, OH 45219Telephone: (513) 421-5555Fax: (513) [email protected] for Plaintiff German
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U.S. Postal Service mail to the followingnon CM/ECF participants:
Sherrie R. Savett, Esq.Carole Broderick, Esq.Douglas M. Risen, Esq.BERGER & MONTAGUE, P.C.1622 Locust StreetPhiladelphia, PA 19013Telephone: (215) 875-3000Counsel for Plaintiff Roseman
Jules Brody, Esq.STULL, STULL & BRODY6 East 45th StreetNew York, NY [email protected] for Plaintiff Hyde
John R. Climaco, Esq.Christina M. Janice, Esq.CLIMACO, LEFKOWITZ, PECA,WILCOX & GAROFOLI CO., LPASuite 900, The Halle Building1228 Euclid AvenueCleveland, OH 44115Telephone: (216) 621-8484Counsel for Plaintiff Ferrari
Fred Taylor Isquith, Esq.Gustavo Bruckner, Esq.WOLF HALDENSTEIN ADLERFREEMAN & HERZ270 Madison AvenueNew York, NY 10016Counsel for Plaintiff German
Robert I. Harwood, Esq.Jeffrey M. Norton, Esq.WECHSLER HARWOOD, LLP488 Madison Avenue, 8th FloorNew York, NY 10022Telephone: (212) 935-7400Counsel for Plaintiff Herr
Charles J. Piven, Esq.LAW OFFICES OF CHARLES J. PIVEN401 East Pratt Street, Suite 2525Baltimore, MD 21202Telephone: (410) 332-0030Counsel for Plaintiffs Herr and German
Mel Lifshitz, Esq.Bernstein Liebhard & Lifshitz LLP10 East 40th StreetNew York, NY 10016Phone: 212-779-1414Fax: 212-779-0154Counsel for Plaintiff Hyde
Joseph H. Weiss, Esq.Mark D. Smilow, Esq.James E. Tullman, Esq.WEISS & YOURMAN551 Fifth AvenueNew York, NY 10176Counsel for Plaintiff Hyde
Marc A. Topaz, Esq.SCHIFFRIN & BARROWAY, LLPThree Bala Plaza East, Suite 400Bala Cynwyd, PA 19004Telephone: (610) 667-7706Counsel for Plaintiff Ferrari
Robert O'Reilly, Esq.Guri Ademi, Esq.ADEMI & O'REILLY, LLP3620 East Layton AvenueCudahy, Wisconsin 53110Telephone: (414) 671-1000Counsel for Plaintiff Slone
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E-mail to Co-Counsel:
David A. P. Brower, Esq.Steven G. Schulman , Esq.Jeffrey Spinazzola, [email protected]@milbergweiss.comMILBERG WEISS BERSHAD &SCHULMAN, LLPOne Pennsylvania Plaza - 49th FloorNew York, NY 10119Telephone: (212) 594-5300Fax: (212) 868-1229Lead Counsel
J. Allen Carney, Esq.CAULEY BOWMAN CARNEY &WILLIAMS, LLPP.O. Box 25438Little Rock, AR 72221-5438Telephone: (501) [email protected] for Plaintiff Slone
Martin D. Chitwood, Esq.Lauren S. Antonino, Esq.CHITWOOD & HARLEY2300 Promenade II1230 Peachtree Street, NEAtlanta, GA 30309Telephone: (404) [email protected] for Plaintiff Townsend
Nadeem Faruqi, Esq.FARUQI & FARUQI, LLP320 East 39th StreetNew York, NY 10016Telephone: (212) [email protected] for Plaintiff Slone