BERNSTEIN LIEBHARD & LIFSHITZ, LLPsecurities.stanford.edu/filings-documents/1010/DFC... · the borrower likely could not repay the loan. Delta Funding approved loans where the borrower's

BERNSTEIN LIEBHARD & LIFSHITZ, LLPStanley D. Bernstein (SB-1644)Sandy A. Liebhard (SL-0835)Jeffrey M. Haber (JH-1728)Abraham I. Katsman (AK-7306)10 East 40th Street, 22nd floorNew York, NY 10016(212) 779-1414

MILBERG, WEISS, BERSHAD, HYNES& LERACH, LLP

Steven G. Schulman (SS-2561)Samuel H. Rudman (SR-7957)Keith M. Fleischman (KF-0199)Cheryl L. Guibone (CG-8475)One Pennsylvania PlazaNew York, NY 10119-0165(212) 594-5300

Lead Counsel For Plaintiffsand the Class

UNITED STATES DISTRICT COURTEASTERN DISTRICT OF NEW YORK

MERIDIAN INVESTMENT CLUB,WILLIAM RAMIREZ, AND JONATHANLERNER,

))))

Plaintiffs,

vs.

))))

CV-99-7033 (DRH)

Consolidated Class ActionComplaint

DELTA FINANCIAL CORPORATION,et. al.

))

Defendants. ))

Jury Trial Demanded

Lead Plaintiffs, Meridian Investment Club, William Ramirez,

and Jonathan Lerner, individually and on behalf of all others

similarly situated, by and through their attorneys, allege the

following upon information and belief, except as to the

allegations pertaining to the named plaintiffs and their counsel,

-2-

which are alleged upon personal knowledge. Plaintiffs’

information and belief is based on, inter alia, the investigation

made by and through their attorneys, which included the review of

Securities and Exchange Commission (“SEC”) filings; publicly

available reports, press releases, and news articles; reports

issued by securities analysts and investor advisory services; and

court filings by the State of New York (namely, the New York

State Attorney General (“NYSAG”)) and the federal government

(namely, the Federal Trade Commission (“FTC”), the Department of

Justice (“DOJ”), and the Department of Housing and Urban

Development (“HUD”)). (Collectively, the complaints filed by the

respective state and federal agencies are referred to as the

“Government Complaints.”) Plaintiffs’ investigation also

included interviews with former employees of defendant Delta

Financial Corporation (“Delta Financial” or the “Company”), who

worked at the Company and/or its subsidiaries during the Class

Period (defined below), and who are knowledgeable about Delta

Financial’s business and operations, and/or the industry and

markets in which Delta Financial operates. Except as alleged

herein, the information relating to defendants’ misconduct is not

available to plaintiffs and the public and lie within the

possession and control of defendants or other Company insiders,

thus preventing plaintiffs from further detailing defendants’

wrongful conduct. Plaintiffs believe that substantial additional

Case 0:99-cv-07033-DRH Document 23-1 Filed 09/07/2000 Page 2 of 82

-3-

evidentiary support will exist for the allegations set forth

herein after a reasonable opportunity for discovery.

NATURE OF THE ACTION

1. This is a federal securities class action brought on

behalf of all persons other than defendants who purchased the

Company’s common stock from October 31, 1996 to August 19, 1999

(the “Class Period”), including all persons who purchased Delta

Financial’s common stock pursuant to, or traceable to, the

Company’s initial public offering (the “IPO”) on October 31,

1996, or thereafter in the open market.

2. Delta Financial was founded in 1982. The Company

describes itself as a “specialty consumer finance company that

has engaged in originating, acquiring and selling and servicing

home equity loans.”

3. During the Class Period, defendants issued a

registration statement and prospectus containing numerous

material misrepresentations in violation of Sections 11, 12(2),

and 15 of the Securities Act of 1933, as amended (the “Securities

Act”), and engaged in a scheme and course of conduct in violation

of, Sections 10(b) and 20(a) of the Securities Exchange Act of

1934, as amended (the “Exchange Act”), pursuant to which they

artificially inflated the price of Delta Financial stock through

a series of false and misleading statements and omissions

concerning the Company’s financial condition and results of


-4-

operations. In particular, defendants led the investing public

to believe that Delta Financial was in compliance with all

applicable state and federal laws and regulations, and had grown

through conservative practices that stressed strict adherence to

prudent underwriting and appraisal standards.

4. However, unbeknown to investors who purchased Delta

Financial’s common stock during the Class Period, Delta Financial

was engaged in illegal loan practices that exposed the Company to

civil lawsuits and regulatory action. Indeed, Delta Financial

has been accused of engaging in the following illegal acts or

practices, among others:

! predatory loan practices –targeting minority and elderlyborrowers for high interest loanswith the intention of foreclosingon the loans and selling theunderlying properties;

! improper standard mortgagedocuments that violate federal lawon their face because they containillegal pre-payment penalties andincreased rates of interest upondefault; and

! “flipping” – when borrowers areunable to make payments, theborrower is refinanced into anotherloan with additional excessivefees.

5. Although the Company operates in different states,

almost half of Delta Financial’s lending operations are

concentrated in New York State, particularly in Kings and Queens

Counties. In 1998, Delta Financial funded at least 8,561 loans,


-5-

4,170 of which were on homes located in New York State. Of those

New York State loans, 2,040 were written in Kings and Queens

Counties. According to the 1990 Census, the majority of residents

living in these counties are African American or Hispanic.

6. As a subprime lender, Delta Financial approves and

funds loans to borrowers who have flawed credit histories and/or

debt-to-income ratios that are higher than those deemed

acceptable in the “A” or “conforming” mortgage market.

7. Within the subprime market, Delta Financial further

specializes in refinancing rather than purchase-money loans. In

New York State and within Kings and Queens Counties, more than

75% of Delta Financial’s loans are refinancings. Many of Delta

Financial’s subprime refinancings are for homeowners who obtain

loans that are secured by their homes and are used to pay off

unsecured debts or to pay for home improvements.

8. The Company’s lending and refinancing operations are

conducted primarily through brokers, who are compensated in one

of three different ways, with all costs ultimately borne by the

borrower:

(a) through “up-front” charges, fees, or points, with

points being a percentage of the loan amount paid to

the broker (usually at loan closing from the proceeds

of the loan);

(b) through “back-end” fees (also called “yield spread

premiums”), whereby the borrower accepts an interest


-6-

rate that is higher than Delta Financial’s “par”

interest rate and Delta Financial makes a direct

payment to the broker for securing the higher-than-par

loan; and

(c) through “miscellaneous” fees, which are usually paid

out of loan proceeds.

According to the Government Complaints, during at least the 1996-

1998 period, almost all of Delta Financial’s borrowers in Kings

and Queens Counties incurred up-front fees, one-third incurred

both up-front and back-end fees, and one-tenth incurred all three

kinds of fees.

9. Delta Financial individually underwrote and funded each

loan, it approved each loan fee paid to a broker, and aided its

brokers in obtaining their unearned fees. With respect to a

substantial portion of the loans, Delta Financial was aware that

little or no services were being performed in exchange for the

broker charges. In fact, according to the Government Complaints,

Delta Financial helped its brokers obtain the unearned fees by

performing many of the services for the brokers.

10. Delta Financial’s brokers typically charged fees

ranging from one to ten percent (or more) of the total amount

borrowed. Delta Financial’s borrowers seldom had the cash to pay

all of the brokers' fees. Therefore, the borrowers' loan amounts

were increased to cover the high fees. The increased loan

proceeds provided Delta Financial with additional profit and a


-7-

mechanism through which to pay its brokers. In doing so, Delta

Financial directly or indirectly gave a portion of the loan

proceeds to its mortgage brokers for which no services, or only

nominal services, were rendered.

11. Delta Financial also frequently gave its brokers a

portion of the broker fees in the form of a yield spread premium

(discussed below), when no services, or only nominal services,

were actually performed. Such payments (i.e., kickbacks) often

were given in exchange for the referral of loan business.

12. According to the Government Complaints, the brokers

received their fees without regard to the borrower’s credit risk

or the risk of default on the loan.

13. According to several former employees, Delta Funding (a

wholly-owned subsidiary of Delta Financial) (“Delta Funding”)

often approved loans without regard to a borrower's ability to

repay when prudent underwriting criteria, such as debt-to-income

ratios, residual income, and repayment history, indicated that

the borrower likely could not repay the loan. Delta Funding

approved loans where the borrower's debt payments would consume

more than half of the borrower's total pre-tax income, and in

many instances would leave the borrower with less than adequate

income for living expenses. In many instances, Delta Funding

relied on unverified income of the borrower, with no reasonable

basis for believing that such income existed and would support

the loan. Delta Funding also approved mortgage loans that caused


-8-

the borrower's monthly debt payments to increase, despite Delta

Funding's knowledge of the borrower's past inability to meet the

lower prior monthly payments. In many cases, there was no change

in the borrower's circumstances or other evidence to suggest that

the borrower would be able to meet the newer and more onerous

requirements.

14. In June 1999, the NYSAG announced that it had reached

an agreement in principle with Delta Financial whereby the

Company had agreed to pay $6 million to settle a proposed lawsuit

alleging that the Company targeted low income minority borrowers

providing them with high-interest loans. Although that

settlement fell through (and was not resurrected until September

1999), the Company was able to reach an agreement the New York

State Department of Banking (“NYSBD”) regarding the former’s loan

practices. Both the NYSAG and the NYSBD charged Delta Financial

with violating the Fair Housing Act, the Equal Credit

Opportunities Act, the Real Estate Settlement Procedures Act

(“RESPA”), the Home Ownership and Equity Protection Act of 1994

(“HOEPA”), the Truth In Lending Act (“TILA”), and New York state

law. As a result of the settlement, the Company agreed to, among

other things:

implement agreed upon changes to its lendingpractices; provide reduced loan payments,aggregating $7.25 million to certain borrowersidentified by the government; and create a fund ofapproximately $4.75 million....


-9-

15. According to the Government Complaints, as well as

former Company employees, the Company’s business structure and

illegal loan practices were in existence at the time of the IPO

and were not disclosed to the investing public at any time during

the Class Period.

16. At the time of this filing, the price of Delta

Financial common stock has traded at $1 per share – a decline of

over $15 per share, or over 90%, from the IPO price of $16.50 per

share. During the Class Period, the Company’s stock traded as

high as $25.625 per share.

JURISDICTION AND VENUE

17. The claims asserted herein arise under and pursuant to

Sections 11, 12(2), and 15 of the Securities Act, 15 U.S.C. §§

77k, 77l, and 77o, and Sections 10(b) and 20(a) of the Exchange

Act, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated

by the SEC under Section 10(b) of the Exchange Act.

18. This Court has jurisdiction over this action pursuant

to Section 22 of the Securities Act, 15 U.S.C. § 77v, Section 27

of the Exchange Act, 15 U.S.C. § 78aa, and 28 U.S.C. §§ 1331 and

1337.

19. Venue is proper in this District pursuant to Section 22

of the Securities Act, Section 27 of the Exchange Act and 28

U.S.C. § 1391(b) and (c). The acts and conduct complained of

herein, including the preparation, issuance and dissemination of


-10-

materially false and misleading information to the investing

public, occurred in substantial part in this District.

Additionally, the Company maintains its chief executive offices

and principal place of business within this District.

20. In connection with the acts and conduct alleged in this

Complaint, defendants, directly or indirectly, used the means and

instrumentalities of interstate commerce, including the mails and

telephonic communications and the facilities of the New York

Stock Exchange (the “NYSE”), a national securities exchange.

PARTIES

21. Lead Plaintiffs, Meridian Investment Club, William

Ramirez, and Jonathan Lerner, purchased Delta Financial common

stock at artificially inflated prices during the Class Period,

as set forth in certifications previously filed with the Court in

connection with their motion for appointment as Lead Plaintiffs

(certifications incorporated by reference herein), and were

damaged thereby. The Court has designated these plaintiffs to

serve as Lead Plaintiffs pursuant to an order dated May 9, 2000.

22. Defendant Delta Financial is a Delaware corporation

with its principal executive offices located in Woodbury, New

York. The Company originates, acquires, sells and services non-

conforming home equity loans. On or about October 31, 1996, Delta

Financial sold to the investing public 4,000,000 shares of common

stock in the IPO.


-11-

23. The individuals named as defendants herein (the

“Individual Defendants”) served, at all times material to the

claims set forth herein, as senior executive officers and/or

directors of Delta Financial in the following positions:

a. Sidney A. Miller (“S. Miller”) -- Chairman of the

Board of Directors of Delta Financial;

b. Hugh I. Miller (“H. Miller”) -- Chief Executive

Officer, President, and Director of Delta Financial;

c. Richard Blass (“Blass”) -– Senior Vice President

and Director of Delta Financial; and

d. Irwin Fein -- Chief Financial Officer, Treasurer,

and Secretary of Delta Financial.

24. Each of the Individual Defendants named herein signed,

personally or by attorney-in-fact, the Company’s Registration

Statement.

25. Collectively, the Individual Defendants and Delta

Financial are referred to as the “Delta Financial Defendants.”

26. Delta Financial the Individual Defendants, as officers

and/or directors of the Company had a duty, because of the

positions they held, to disseminate complete, accurate, and

truthful information regarding Delta Financial’s business and

operations. Delta Financial and the Individual Defendants had a

duty to correct promptly any public statements issued by Delta

Financial that had become false and misleading.


-12-

27. The Individual Defendants participated in the drafting,

preparation, and/or approval of the various public reports and

other communications complained of herein. As to the Exchange

Act claims, the Individual Defendants were aware of or recklessly

disregarded the misstatements contained therein and omissions

therefrom, and were aware of their materially false and

misleading nature. Because of their Board membership and/or

executive and managerial positions with Delta Financial, each of

the Individual Defendants had access to the adverse, non-public

information about Delta Financial’s business practices, financial

condition, and results of operations as particularized herein. As

set forth below, as to the Exchange Act claims, the Individual

Defendants knew or recklessly disregarded that these adverse

facts rendered the positive representations made about Delta

Financial’s lending practices, financial condition, and results

of operations, issued or adopted by the Company, materially false

and misleading.

28. Defendants Natwest Securities Limited, Prudential

Securities Incorporated and U.S. Bancorp Piper Jaffray Inc.

(collectively, the “Underwriter Defendants”), participated in the

violations alleged herein through their involvement in the IPO.

29. The Underwriter Defendants were at all times entities

engaged in the business of investment banking, underwriting and

selling securities to the investing public. The Underwriter

Defendants were the underwriters of the IPO, pursuant to which


-13-

they received substantial fees. Prior to the IPO, the

Underwriter Defendants were required to and did conduct an

investigation into the business, operations, prospects, financial

condition and accounting and management control systems of Delta

Financial, known as a “due diligence investigation.” In the

course of such investigation, the Underwriter Defendants would

have obtained knowledge of the facts alleged herein if they had

acted with reasonable care.

PLAINTIFFS’ CLASS ACTION ALLEGATIONS

30. Plaintiffs bring this action as a class action pursuant

to Federal Rules of Civil Procedure 23(a) and 23(b)(3) on behalf

of themselves and all persons other than defendants who purchased

Delta Financial common stock from October 31, 1996 to August 19,

1999, including all persons who purchased the common stock of

Delta Financial pursuant to, or traceable to, the IPO on October

31, 1996, or thereafter in the open market. Excluded from the

Class are Delta Financial, its subsidiaries and affiliates; the

Underwriter Defendants, their subsidiaries and affiliates; the

Individual Defendants; members of the immediate family of each of

the Individual Defendants; any person, firm, trust, corporation,

officer, director or other individual or entity in which any

defendant has a controlling interest or which is related to or

affiliated with any of the defendants, and the legal


-14-

representatives, agents, affiliates, heirs, successors-in-

interest or assigns of any such excluded party.

31. The members of the Class are so numerous that joinder

of all members is impracticable. Delta Financial sold 4,000,000

shares of common stock to members of the investing public in the

IPO. On March 27, 2000, the Company had 15,883,749 shares issued

and outstanding, of which 3.7 million were held by members of the

investing public. The Company’s shares were actively traded on

the NYSE. The precise number of class members is unknown to

plaintiffs at this time but is believed to be in the hundreds, if

not thousands. In addition, the names and addresses of the class

members can be ascertained from the books and records of Delta

Financial or its transfer agent.

32. Plaintiffs will fairly and adequately represent and

protect the interests of the members of the Class. Plaintiffs

do not have any interests adverse or antagonistic to, or in

conflict with, the Class. Plaintiffs have retained competent

counsel experienced in class action litigation under the federal

securities laws to further ensure such protection and intend to

prosecute this action vigorously.

33. Plaintiffs’ claims are typical of the claims of the

other members of the Class because plaintiffs’ and all the Class

members’ damages arise from and were caused by the same false and

misleading representations and omissions made by, or chargeable

to, defendants.


-15-

34. A class action is superior to other available methods

for the fair and efficient adjudication of this controversy. As

the damages suffered by individual Class members may be

relatively small, the expense and burden of individual litigation

make it virtually impossible for Class members to seek redress

for the wrongful conduct alleged herein. Plaintiffs know of no

difficulty that will be encountered in the management of this

litigation which would preclude its maintenance as a class

action.

35. Common questions of law and fact exist as to all

members of the Class and predominate over any questions affecting

solely individual members of the Class. Among the questions of

law and fact common to the Class include whether:

a. the federal securities laws were violated by

defendants’ acts as alleged herein;

b. the Prospectus and Registration Statement (defined

below) issued by defendants to the investing public in connection

with the IPO omitted and/or misrepresented material facts about

Delta Financial and its business practices;

c. as to plaintiffs’ Exchange Act claims, the Delta

Financial Defendants acted with knowledge of, or with reckless

disregard for, the truth in misrepresenting and/or omitting

material facts;


-16-

d. during the Class Period, the market price of Delta

Financial common stock was inflated artificially as a result of

defendants’ wrongful conduct; and

e. members of the Class sustained damages, and if so,

what is the appropriate measure of damages.

NO STATUTORY SAFE HARBOR

36. The statutory safe harbor provided for forward-looking

statements under certain circumstances does not apply to any of

the false statements pleaded in this complaint. The statements

alleged to be false and misleading all relate to then-existing

facts and conditions. In addition, none of the statements

pleaded herein were identified as “forward-looking statements”

when made. Nor did meaningful cautionary statements identifying

important factors that could cause actual results to differ

materially from those in the statements accompany those

statements. To the extent that the statutory safe harbor does

apply to any statements pleaded herein deemed to be forward-

looking, defendants are liable for those false forward-looking

statement because at the time each of those statements were made

the speaker actually knew the forward-looking statement was false

and/or the statement was authorized and/or approved by an

executive officer of the Company, who actually knew that those

statements were false when made.


-17-

DELTA FINANCIAL’S UNDISCLOSED BUSINESS PRACTICES

A. The Sale of Fraudulent, Discriminatory,Illegal, And High-cost Mortgages

37. The geographic markets in which the Company does

business share several attributes: (1) neighborhoods with

significant numbers of homeowners who have substantial equity in

their homes; (2) homeowners who have limited monthly income; and

(3) neighborhoods in which the vast majority of residents are

minorities. Homeowners located in these areas often are unable

to obtain loans through traditional lending institutions. Seizing

on this happenstance, Delta Financial charged these borrowers

higher rates of interest than were available on conventional

loans underwritten by traditional lending institutions.

Moreover, Delta Financial and its cadre of licensed brokers

loaded these loan transactions with illegal and excessive fees

and terms, including super-inflated interest rates, so onerous

and disadvantageous that many borrowers would have been better

off with no loan at all.

38. According to the Company’s public filings, the

Government Complaints, as well as former employees, Delta

Financial’s loan process occurred as follows: (1) mortgage

brokers solicited loan applications from unsophisticated, often

minority, homeowners (a practice known as “reverse redlining”);

(2) Delta Financial approved such applications without regard to

the homeowner’s ability to repay the loan; (3) the mortgage loan


-18-

closed through the use of high-pressure sales tactics and

excessive and illegal fees were added to the transaction; and

(4) when the homeowner could not meet the new, often higher,

monthly payments required under the loan, Delta Financial

foreclosed on the property.

1. The Initial Loan Solicitation: Reverse Redlining

39. Delta Financial originated its loans through licensed

mortgage brokers, who the Company actively solicited; the Company

did not simply wait for random mortgage brokers to present

qualified prospective borrowers. As reported in the Company’s

1997 annual report on Form 10-K (the “1997 10-K”), after

carefully reviewing a mortgage broker’s business to ensure that

the broker met Delta Financial’s needs and criteria, Delta

Financial “typically initiates contact with a broker” through its

business development department. Delta Financial representatives

“have contacts with brokers . . . [who] originate nonconforming

mortgage loans within their geographic territory.” The Delta

Financial representatives “frequently visit[] the broker . . . ,

communicating [Delta Financial’s] underwriting guidelines . . .”

40. As a result of the close coordination between Delta

Financial and its mortgage brokers (e.g., during the first

quarter of 1999, one broker, All State Consultants, Inc. (“All

State”), solicited almost 600 loans, of which all but two were

referred to Delta Financial), the overall composition and type of


-19-

loan applications that Delta Financial ultimately received was

within Delta Financial’s control.

41. Delta Financial’s broker network solicited homeowners

to take out high-cost mortgage loans, for which the homeowner

used his/her already-owned home as collateral for a onetime loan;

while continuing to occupy the dwelling, the homeowner repays the

debt over time in multiple installments (almost always more than

four installments) pursuant to a written agreement. During the

repayment period, Delta Financial typically retained a security

interest in the homeowner’s principal dwelling.

42. The brokers who referred mortgage loan applicants to

Delta Financial solicited potential homeowners through a variety

of techniques. Some brokers employed telemarketing firms to call

thousands of phone numbers in targeted zip codes, promising the

homeowner lower monthly payments and suggesting that the

homeowner use a home equity loan to pay off existing credit card

debt. According to the NYSAG, one such phone solicitation script

read in part as follows:

We SPECIALIZE in helping homeowners like yourselfsave $300 to $400 or more each month on yourcredit cards, your mortgage or even byconsolidating all your debt into one, low monthlypayment. We can even show you how to possiblyreduce your income taxes.

WITH THAT IN MIND MAY I ASK:

Do you have an interest in saving $300 to $400 amonth?


-20-

SUBLIMINAL REBUTTALS:

* Do you use credit cards? Do you knowyour balance?

* Are you happy with your monthly payment?

* Have you ever considered consolidatingall your debt into one lower monthlypayment?

* Are you happy with your current mortgagepayment?

43. At no time during the solicitation was the targeted

homeowner informed that the high-cost mortgage loan being offered

could result in higher monthly payments. According to the NYSAG

and a former Company manager, the targeted homeowner was also not

informed that fees for such a high-cost mortgage loan could be up

to ten percent or more of the total proceeds. The former manager

also said that the Company routinely lied about prepayment

penalties, where customers were told that if they came back and

refinanced with Delta Financial, the prepayment penalty would be

waived, when, in fact, the penalty never was waived. Finally,

targeted homeowners were not told that by paying off credit card

debts with a “home equity loan,” they were substituting unsecured

debt (for which their home is not immediately at risk) for

secured debt (for which default could result in foreclosure

and/or eviction).

44. According to a former regional manager employed at the

Company before the IPO and sometime thereafter, Delta Financial,


-21-

through its brokers and its retail subsidiary Fidelity Mortgage,

Inc., targeted low-income people who could not afford the loans:

“John Grippa, Fidelity’s President, used to say, ‘we sell cash to

people who can’t afford it.’” Indeed, Delta Financial put an

emphasis on this practice, without regard to the likelihood of

default, in order to acquire properties through foreclosures.

Although, Delta Financial publicly claimed that it was in

business to help people get cash, in reality, Delta Financial

made loans to people who could not possibly repay them. For

example, although potential borrowers would tell loan officers

that they were earning $1,000 per month, Delta Financial would

issue loans that called for an $800 per month payment. According

to a former regional manager, this enabled Delta Financial to

repossess and auction off properties and securitize those loans.

45. Solicited individuals often possessed little formal

education or financial experience. In some areas in which Delta

Financial did substantial business, forty percent or more of the

residents did not have high school diplomas. One former loan

officer stated, “if you went back, you would probably see,

company-wide, that older black people were charged more.” He

attributed that practice to the fact that such borrowers were,

“uneducated and they don’t really know what’s going on and they

trust whoever the individual is that they’re working with.”

46. Whenever a broker succeeded in persuading a homeowner

to take out a high-cost mortgage loan, the broker was paid a fee


-22-

by the borrower. This fee was a percentage of the total loan

amount. The brokers’ and Delta Financial’s collective fees were

often excessive, consuming as much as 10% of the total loan, and

routinely paid out of the loan proceeds. These fees were not

disclosed to the borrower until the day of the closing. The 1997

10-K states that Delta Financial sells high-cost mortgage loans

only through brokers or correspondents. Consequently, borrowers

had no choice but to pay the brokers’ fees as the price of doing

business with Delta Financial. Indeed, documents obtained by the

NYSAG showed that the borrowers had to sign loan papers at the

closing with Delta Financial expressly stating that the broker’s

fee was a cost of the loan. In the extremely rare case where a

borrower avoided using a broker -- usually where the borrower was

refinancing with Delta Financial -- Delta Financial charged its

own version of a broker’s fee known as an “origination fee,” thus

vitiating, at least part of, any savings to the borrower.

2. The Approval Process: Approval Of High Cost Loansfor Homeowners Who Had No Ability to Repay

47. Once a homeowner indicated an initial willingness to

enter into a home equity loan, the broker completed and sent a

mortgage loan application to Delta Financial for the latter’s

review. The loans were approved and made directly by Delta

Financial.

48. Delta Financial approved mortgage loan applications

without regard to the borrower’s ability to repay the debt, even


-23-

when reasonable underwriting practice indicated that the

prospective borrower could not repay the loan.

49. One indicator of a borrower’s ability to repay is

debt-to-income ratio: the percentage expression of the proportion

of a borrower’s total monthly income that is committed to service

the debt. Delta Financial approved loans where the borrower’s

debt payments consumed more than half of the borrower’s total

pre-tax income. (When calculated using after-tax dollars, the

debt-to-income ratio will be much higher and more representative

of the loan’s impact on the borrower’s finances.) Contrary to

Delta Financial’s practice of approving loans with debt-to-income

ratios of 50% or greater, HUD’s Home Mortgage Agency, which

insures mortgage loans in low-income neighborhoods, will not

insure any loan in which a borrower’s total monthly debt payments

consumes more than 41% of the borrower’s total monthly pre-tax

income. According to the NYSAG, Delta Financial, however,

routinely approved loans far in excess of this percentage, even

in cases where a borrower’s residual income was as little as a

few hundred dollars a month.

50. High debt-to-income ratios have a far greater negative

impact on low-income borrowers than they do on higher income

borrowers. For many low-income borrowers, high-cost mortgage

loans left them with inadequate “residual” income after payment

of their Delta Financial debt, thus plunging them into poverty,

and increasing their chances of default. For example, for a low-


-24-

income borrower who only earned $1,500 per month and supported a

family of four, a debt-to-income ratio of 50% would leave the

family with minimal residual monthly income of only $750 before

taxes.

51. Delta Financial often unreasonably overstated the

borrower’s available income to make the loan. For example, in

assessing the borrower’s income, Delta Financial relied on

nonexistent income streams, including rent from rental units that

had not yet been created. Delta Financial also included alleged

income streams without independently verifying the existence of

such income. According to a regional manager, the Company

approved loans where borrowers simply could write their salaries

on a piece of paper, and the Company would accept the figure as

true without further verification.

52. A former loan officer described Delta Financial’s

practices regarding false verification of mortgage (“VOM”) or

verification of employment: “These guys would just falsify this

information (employment) and send it up.” He also stated that

Delta Financial “trained everybody to take the people for

everything they had.” Such practices resulted in artificially

low debt-to-income ratios, which concealed the true residual cash

available to the borrower and his or her family to support

themselves.

53. Delta Financial’s Underwriting Guidelines (the

“Guidelines”), cited by the NYSAG, facilitated the practice of


-25-

overstating a potential borrower’s monthly income by permitting

underwriters to ignore the borrower’s objective ability to repay

the loan. For example, the Guidelines permit a borrower to

qualify for a high-cost mortgage loan merely by signing an

unverified “Ability to Pay Affidavit,” “which is essentially a

signed affirmation in the borrower’s own handwriting [sic] that

they [sic] have the ability to repay the loan and the source of

income that will allow them to do so.”

54. In cases involving a self-employed borrower, the

Guidelines allow for a “no-income-check” loan. To qualify under

Delta Financial’s Guidelines, “the borrower need only prove they

are actively self-employed and demonstrate ‘some’ income flow.”

If a “borrower is unable to provide tax returns as proof of

self-employment,” then a d/b/a certificate together with copies

of invoices for business supplies are the only proof of income

that Delta Financial required to complete the mortgage loan.

55. A former Company loan officer stated that when a

borrower’s employment was not easily verifiable, the loan

originator would often provide to the underwriter his own cell

phone number, and pretend to be the borrower’s employer for

verification purposes in the event the underwriter would call.

56. Delta Financial even approved mortgage loans that would

cause the borrower’s monthly debt payments to increase, despite

Delta Financial’s knowledge of a borrower’s past inability to

meet lower monthly payments. In those instances, there was often


-26-

no change in the borrower’s circumstances or other evidence to

suggest that the borrower would be able to meet the newer and

more onerous requirements.

57. Frequently, Delta Financial protected against serious

financial harm caused by borrower defaults by selling mortgages

worth less than 75% of the value of the home. In some instances,

the mortgages were worth less than half the value of the home.

As a result, in the event of a default, the home’s resale value

was worth considerably more than the defaulted mortgage. This

protection, combined with the overall profitability of its

high-volume, high-interest loans, allowed Delta Financial’s

overall profits to remain high even when homeowners defaulted.

3. Closing The Loan: Using High-PressureSales Tactics To Close Loans ContainingExcessive And Illegal Fees

58. After Delta Financial approved a loan application, the

transaction was completed or “closed.” Often Delta Financial

employed high-pressure sales tactics to force the borrower to

complete the loan. The borrower, frequently a person with little

formal education or financial experience, was confronted with

stacks of papers he had never seen before and directed to sign

without reading them because of shortness of time. Often,

borrowers were told that they did not have to read the documents

at the closing because they would receive copies to take home

with them and could read them after the closing.


-27-

59. At any given closing, Delta Financial charged the

borrower a variety of “points” and “fees” totaling as much as 10%

of the entire mortgage loan. These excessive, and at times

illegal, fees severely decreased the total amount of capital

available to the borrower after closing.

60. A former national manager stated that Company employees

were taught to generate as much income as possible. Loan

officers would tell clients whatever they had to in order to get

the deal done, even if it meant lying. He stated that the loan

officer would prepare a good faith estimate with the borrower and

have it signed without inserting all the fees until the closing.

This kept the borrower from knowing the size of the broker’s fee.

It was also typical to tell the borrower he qualified for a 10%

loan and then change it to 10½% at the last second. According to

this former loan officer, these practices were widespread

throughout the Company based on various conversations he had with

numerous loan officers.

61. As part of the overall transaction, brokers received a

fee from the borrower and also, in some cases, from Delta

Financial itself. Delta Financial paid these brokers “premium”

payments, or “yield spread premiums,” if the brokers agreed to

inflate their customers’ interest rates -- even in cases where

the broker already had collected a fee from the borrower.

According to the NYSAG, Delta Financial routinely paid yield


-28-

spread premiums to brokers such as PGM Enterprise Inc. (“PGM”),

All State, and Richmint Funding Ltd.(“Richmint”).

62. Yield spread premiums invited brokers to price-gouge.

The process worked as follows: Delta Financial published a sheet

of “par” rates, which represented the interest rates at which

Delta Financial would grant a mortgage to borrowers within

different categories. Thus, for a borrower who met the criteria

for a particular category, Delta Financial would provide a

mortgage loan at a certain, pre-determined, “par” interest rate.

Whenever a broker presented a mortgage loan application to Delta

Financial in which the borrower had been induced to pay an

interest rate that was higher than “par” -- i.e., an interest

rate higher than what Delta Financial would actually demand from

such a borrower -- Delta Financial paid a yield spread premium to

the broker.

63. A former loan officer stated that on every loan, the

loan officers were instructed by managers to add points on the

back end of the loan, which should have been divulged as yield

spread, but which they called broker’s compensation. In this

regard, loan officers were told “we want four points on the front

and four points on the back and we don’t want to see you doing

any loans without that.” Thus, the borrower would be led to

believe that he could get a better interest rate by paying more

points up front - but then would not be given the preferential

rate.


-29-

64. Another former manager confirmed that the Company

taught its employees to milk each loan as much as possible. He

cited the example of a customer with perfect credit who qualified

for a conforming loan. Loan officers were taught to take such

people and put them into higher rate loans, and sell it to them

as though they were B or C grade borrowers, even though they

qualified as an A grade borrower. In other words, Delta

Financial would not allow its employees to offer loans at a

relatively low interest rate, such as 8%, even if the borrower

qualified. To justify the higher rate, the loan officer, for

example, would tell the borrower that his debt ratio didn’t work

when in fact it did, and tell the borrower that he would have to

take a different, more costly route.

65. At Delta Financial’s retail subsidiary, for example,

borrowers who qualified for more competitive loans with other

lenders at a conforming rate were sent to Delta Financial only.

Thus, customers would come in and ask if they were getting the

best possible rate, and were assured that they were, even though

they were only getting the best rate that Delta Financial had,

not the best rate of the competition, which could have made the

loan at 3% or 4% less.

66. While the yield spread premium is in the first instance

paid by Delta Financial rather than the borrower, the borrower

ultimately paid the financial cost of this premium through higher

interest rates. Moreover, the payment of the yield spread


-30-

premium did not routinely reduce the other costs to the borrower,

such as the broker’s now duplicative, borrower-financed brokerage

fee paid out of the proceeds at the closing. Indeed, even when

Delta Financial paid a yield spread premium, the broker

typically collected a brokerage fee from the borrower comparable

to the fees collected when no such premium was paid.

67. The result of Delta Financial’s paying a yield spread

premium was that the total fees collected by the broker could

equal 10% of the total loan amount. Such fees are unreasonable

especially where the broker had not performed any services to

justify charging such an excessive fee.

68. Beyond the illegal and excessive fees, Delta Financial

also included in its mortgage agreements severely onerous, and

sometimes blatantly illegal, terms. For example, Delta Financial

often included a provision in its mortgage loan agreements

requiring the borrower to pay a higher rate of interest --

frequently up to 24% -- in the event of default.

69. Similarly, Delta Financial often charged a prepayment

penalty of 5% if the borrower repaid the loan within a year of

closing. Therefore, if a given borrower obtained a $100,000

mortgage and soon thereafter was able to pay off that mortgage by

taking out a cheaper, more equitable mortgage loan with another

lender, the borrower was forced to pay a $5,000 penalty in order

to escape from the onerous terms of the Delta Financial loan. In

cases where Delta Financial offered to re-finance one of its own


-31-

loans within the first year, Delta Financial would collect the 5%

penalty for “flipping” the loan, thus providing revenue to Delta

Financial but increasing the borrower’s debt without providing

any consideration in return.

4. Default And Foreclosure: Unable To Meet The CostlyPayments Of Their Delta Financial Loans, HomeownersDefault Leaving Their Homes At Risk of Foreclosure

70. Because their loans were secured by the value of their

home, borrowers who could not meet their monthly obligations to

Delta Financial faced foreclosure and loss of their homes.

71. At some of the foreclosure sales that followed default,

Delta Financial sometimes purchased the property that

collateralized the mortgage loan when its analysis of the home’s

underlying value revealed that the Company could do so

profitably. Even when a party other than Delta Financial

purchased the home at a foreclosure sale, the Company’s interest

was usually oversecured; by Delta Financial’s policy of typically

granting loans for less than 75% of the value of the home, Delta

Financial could minimize its losses -- or even profit -- from

defaulted loans. In 1997, although Delta Financial foreclosed

upon $85 million on loans, the Company’s total losses on these

loans were less than $5 million. By contrast, Delta Financial’s

revenues during that same year exceeded $133 million.


-32-

SUBSTANTIVE ALLEGATIONS

I. The Registration Statement And ProspectusIssued In Connection With The IPOWas Materially False and Misleading

72. On or about October 25, 1996, Delta Financial filed

with the SEC a final Form S-1 Registration Statement (the

“Registration Statement”) for the IPO.

73. On October 31, 1996, the prospectus that forms part of

the Registration Statement (the “Prospectus”) became effective

and Delta Financial sold, through the Underwriter Defendants,

among others, the common shares being offered to the public at

$16.50 per share. The stock closed up $4.875 per share at

$21.375 per share on its first day of trading.

74. In the IPO, Delta Financial sold 4 million shares of

common stock; 600,000 shares were purchased from the Company by

the Underwriter Defendants upon the exercise of an over-allotment

option. The gross proceeds of the IPO, including the exercise of

the over-allotment, were approximately $75.9 million.

75. The Prospectus highlighted the Company’s business

strategy as follows:

The Company’s business strategy is to increaseprofitably the volume of its loan originations andpurchases and the size of its servicing portfolioby (i) continuing to provide top quality serviceto its network of brokers and correspondents,(ii) maintaining its underwriting standards,(iii) penetrating further its established marketsand recently-entered markets and expanding intonew geographic markets, (iv) broadening itsproduct offerings, (v) continuing its investment


-33-

in origination and servicing systems and (vi)strengthening its loan production capabilitiesthrough acquisitions. [Emphasis added.]

76. The Prospectus also highlighted the reasons for the

Company’s recent growth as follows:

The Company has experienced significant growth inthe last few years, particularly since January 1,1995. Management believes that this growth isprimarily attributable to (i) the Company’sgeographic expansion of ... its operations, (ii)the Company’s further penetration into itsestablished markets, and (iii) the Company’sincreased access to additional funding sourcesthrough larger warehouse agreements which enabledthe Company to accumulate larger pools of loansfor sales for securitization. [Emphasis added.]

77. In a section of the Prospectus entitled “Regulation,”

defendants explained that the Company was subject to numerous

federal and state regulations, and represented that:

Delta Financial believes that it is in compliancein all material respects with applicable federaland state law regulations.

78. The Prospectus also included a section entitled “RISK

FACTORS,” which purportedly advised investors of the potential

risks inherent in the Company’s operations and business. For

example, the Prospectus represented that the Company’s business

is subject to:

extensive regulation, supervision and licensing byfederal, state and local government authoritiesand is subject to various laws and judicialadministrative decisions imposing requirements onpart or all of its operations. The Company’sconsumer lending activities are subject to theFederal Truth-in-Lending Act and Regulation Z....Failure to comply with these requirements can leadto loss of approved status, termination or


-34-

suspension of servicing contracts withoutcompensation to the servicer, demands forindemnifications or mortgage loan repurchases,certain rights of rescission for mortgage loans,class action lawsuits and administrativeenforcement actions. There can be no assurancethat the Company will maintain compliance withthese requirements in the future.

79. This statement was materially false and misleading

because at the time defendants were purportedly “warning”

investors that “there can be no assurance that the Company will

maintain compliance with these [regulatory] requirements in the

future,” the Company was, as set forth above, already engaged in

systematic illegal and questionable loan practices.

II. Post-IPO False and Misleading Statements And Omissions

80. Based upon statements made by the Delta Financial

Defendants in connection with the IPO, various analysts,

including those from several of the Underwriter Defendants,

helped support the Company’s stock by issuing highly favorable

investment reports:

a. On November 26, 1996, the Dow Jones News Service

reported that NatWest Securities Corp. analyst John A. Heffern

initiated coverage of Delta Financial with a “buy” rating. In

his research report, Heffern wrote that the Company was “well

positioned for strong growth and consistent results over the next

several years.” Heffern stated that Delta Financial’s planned

expansion beyond New York could deliver long-term growth of 20%


-35-

to 25%, and said Delta Financial had one of the industry’s best

records for managing credit quality.

b. On December 5, 1996, the Dow Jones News Service

reported that Piper Jaffray Inc. analyst Jeffrey Evanson

initiated coverage of Delta Financial with a “strong buy” rating

and set a 12-month price target of $28 on the Company’s stock.

c. On December 10, 1996, the Dow Jones News Service

reported that Lehman Brothers Inc. initiated coverage of Delta

Financial with a “strong buy” rating. In a research note, Lehman

said the firm had a share-price target in the low $30s for the

Company.

d. On April 18, 1997, the Dow Jones News Service

reported that Prudential Securities Inc. initiated coverage of

Delta Financial with a “buy” rating. Prudential said Delta

Financial stood to benefit from solid loan origination growth.

Prudential estimated Delta Financial would earn $1.90 per share

in 1997 and $2.40 per share in 1998. Prudential set a 12-month

share price target of $24 per share.

81. On February 10, 1997, Delta Financial completed its

acquisitions of Fidelity Mortgage, Inc., headquartered in

Cincinnati, Ohio, and Fidelity Mortgage (Florida), Inc.,

headquartered in West Palm Beach, Florida (collectively,

“Fidelity”). The acquisitions accomplished Delta Financial’s

purported goal of diversifying its origination network into the

retail home equity loan market. The Fidelity operations


-36-

consisted of five branches, three located in Ohio and one each in

Indiana and Florida.

82. On or about March 27, 1997, Delta Financial issued its

1996 Annual Report to shareholders. In the Letter to

Shareholders, signed by defendants S. Miller and H. Miller, the

Delta Financial Defendants stated:

COMMITMENT TO PRUDENT GROWTH

While growth remains imperative within ourorganization, management is committed to ensuringthat Delta’s growth stays within the capacity tomanage it effectively. Accordingly, Deltamaintains strict adherence to the time-testedoperating practices that have proven successful ina variety of economic conditions over fifteenyears. These practices include underwriting everyloan funded or purchased by Delta, internalappraisal reviews for each property beforeclosing, following distinct loan-to-value andlending guidelines and retaining servicing forvirtually all of the non-conforming loanspurchased or originated.

83. In the Overview section, the Delta Financial Defendants

stated:

As Delta pursues its expansions plans, it remainscommitted to the underwriting standards andoperating disciplines that have allowed it toexpand significantly over the past several years.[Emphasis added.]

* * *

Delta’s teams work closely with brokers andcorrespondents, in an informal partnership aimedat achieving their goals of increasing loanproduction. To become part of Delta’s network, abroker or correspondent must first complete aformal approval process which reviews theirlending operations, licensing, credit standing andfinancial standing. [Emphasis added.]


-37-

* * *

Delta’s long-term adherence to the underwritingguidelines it has refined over the past 15 yearsis a principal factor in the Company’ssuccess. . . Furthermore, underwriting, which iscentralized in the Woodbury, New York headquartersand in the Atlanta full-service office, isindependent of the business development andorigination departments, to ensure the integrityof underwriting decisions. [Emphasis added.]

84. On March 31, 1997, the Delta Financial Defendants

caused the Company to file with the SEC its annual report on Form

10-K for the year ended December 31, 1996 (the “1996 10-K”).

Defendants S. Miller, H. Miller, and Blass signed the 1996 10-K.

Among other things, the 1996 10-K made the following

representations concerning the various rules and regulations that

the Company is subject to, and the Company’s compliance with

those rules and regulations:

Delta's business is subject to extensiveregulation, supervision and licensing by federal,state and local governmental authorities and issubject to various laws and judicial andadministrative decisions imposing requirements andrestrictions on part or all of its operations.Delta's consumer lending activities are subject tothe Federal Truth-in-Lending Act and Regulation Z(including the Home Ownership and EquityProtection Act of 1994), the Equal CreditOpportunity Act of 1974, as amended (ECOA), theFair Credit Reporting Act of 1970, as amended, theReal Estate Settlement Procedures Act (RESPA), andRegulation X, the Home Mortgage Disclosure Act andthe Federal Debt Collection Practices Act, as wellas other federal and state statutes andregulations affecting Delta's activities. Delta isalso subject to the rules and regulations of, andexaminations by HUD and state regulatoryauthorities with respect to originating, pro-


-38-

cessing, underwriting and servicing loans. . . .Delta believes that it is in compliance in allmaterial respects with applicable federal andstate laws and regulations. [Emphasis added.]

85. On April 24, 1997, Delta Financial announced its

financial results for the first quarter ended March 31, 1997.

Net income for the first quarter of 1997 reportedly rose to $7

million, or $0.45 per share, compared to a reported net loss of

$0.2 million, or $0.01 per share, on a pro forma basis (adjusted

for full corporate taxation at a 43% rate and the common stock

issued in the Company’s November 1, 1996 initial public offering)

in the first quarter of 1996. Delta Financial reported first

quarter revenues of $27.3 million, compared to $5.3 million, in

the comparable period a year prior. Loan originations and

purchases purportedly increased 104% to $237 million in the first

quarter of 1997, compared to $116 million in the same period a

year prior.

86. Commenting on these results, defendant H. Miller

stated:

Our first quarter results demonstrate our ongoingsuccess in extending our geographic presence whilealso increasing our penetration of existing andmore recently entered markets. Importantly,continued low losses and delinquencies reflect ourfundamental commitment to prudent growth throughthe uniform application of time-testedunderwriting standards. Additionally, byretaining servicing or our loans, we are creatingan increasingly important revenue stream whichalso provides us advantages in monitoring andproactively managing the performance of our loans.These disciplines have served us well over the


-39-

past 15 years through a variety of interest rateand economic environments. [Emphasis added.]

87. On July 29, 1997, Delta Financial announced its results

for the six months ended June 30, 1997. Net income for the first

six months of 1997 reportedly increased 101% to $14.2 million, or

$0.92 per share, compared to net income of $7.1 million, or $0.56

per share, on a pro forma basis (adjusted for full corporate

taxation at a 43% rate and the common stock issued in Delta

Financial’s November 1996 initial public offering) in the first

half of 1996. Net income for the second quarter ended June 30,

1997 was reported to be $7.2 million, or $0.47 per share,

compared to net income, on a pro forma basis, of $7.3 million, or

$0.57 per share, in the second quarter of 1996. The Company

attributed the “slight decrease in second quarter earnings . . .

to timing differences in Delta’s securitization program.”

Revenues for the six months ended June 30, 1997 reportedly

increased 91% to $57.8 million, compared to $30.3 million in the

comparable period in 1996. Revenues for the second quarter of

1997 and 1996 reportedly were $30.5 million and $25.0 million,

respectively. Loan originations reportedly increased 107% to

$265.4 million in the second quarter of 1997, compared to $128.3

million in the second quarter of 1996. Loans in foreclosure and

real estate owned reportedly decreased to 4.7% of the loan

servicing portfolio at June 30, 1997, compared to 5.3% at June

30, 1996.


-40-

88. Commenting on the reported results, H. Miller stated:

Continued originations growth in our newermarkets, from a balanced distribution channel,have enabled the Company to recognize increasedprofit margins as Delta benefits from growingeconomies of scale. Importantly, these newermarkets also have more preferential regulatory andcompliance environments specifically as theyrelate to foreclosure turn-around times. We willcontinue to expand our penetration of these newermarkets while strictly adhering to our establishedunderwriting and appraisal review practices whichwe have refined over 15 years. [Emphasis added.]

89. Subsequent to the close of the second quarter, Delta

Financial completed a $150 million offering of 9+% Senior Notes

due 2004. Commenting on the offering, H. Miller stated “We are

pleased by the Company’s ability to efficiently access capital

through the debt markets . . . . Delta’s significant base of

experience, well defined operating practices and strong track

record were well received by investors, enabling our bonds to

receive one of the lowest rates of any comparable issue in our

sector.”

90. On October 28, 1997, Delta Financial announced its

financial record results for the third quarter and nine months

ended September 30, 1997. Net income for the three months ended

September 30, 1997 was reported to be $7.9 million, or $0.51 per

share, representing an increase of 39% from the $5.7 million, or

$0.45 per share on a pro forma basis (adjusted for full corporate

taxation at a 43% rate and the common stock issued in Delta’s

November 1996 initial public offering), for the third quarter of


-41-

1996. Net income for the nine months ended September 30, 1997 was

reported to be $22.1 million, or $1.44 per share, representing an

increase of 74% from pro forma net income of $12.7 million, or

$1.01 per share, for the comparable period in 1996. Revenues for

the three months ended September 30, 1997 reportedly increased

81% to $37.4 million, compared with revenues of $20.7 million for

the same period one year ago. Revenues for the nine months ended

September 30, 1997 reportedly increased 86% to $95.2 million,

compared with revenues of $51.0 million for the 1996 nine-month

period.

91. Commenting on the results, defendant H. Miller stated:

This was a very strong quarter for Delta from allaspects of the business. The record financialperformance reflects the continued strong growthin loan originations and in loan servicing . . . .Notably, we continue to maintain our strictunderwriting policies and procedures, as we havedone for the past fifteen years, with one of thelowest average loan-to-value portfolios of anylender originating a similar credit quality mix of‘A-’ through ‘D’ credit borrowers. [Emphasisadded.]

92. On February 18, 1998, Delta Financial announced its

financial results for the fourth quarter and year ended December

31, 1997. Net income for the three months ended December 31,

1997 was reported to be $8.3 million, or $0.54 per share, which

reportedly represented an increase of 31% from the $6.4 million.

Net income for the year ended December 31, 1997 was reported to

be $30.4 million, or $1.98 per share, which represented an

increase of 59% from pro forma net income of $19.1 million, or


-42-

$1.46 per share, for the year ended December 31, 1996. Loan

originations for the fourth quarter of 1997 reportedly increased

63% to a record $396 million, compared to loan originations of

$244 million for the 1996 fourth quarter.

93. Commenting on the results, defendant H. Miller stated:

We were quite pleased that we were able to, onceagain, achieve record revenues and earnings andexceed Wall Street consensus earnings estimatesfor the quarter and full-year. Our results arethe product of our continued strong, but prudent,growth in originations and our firm commitment tocredit quality.” [Emphasis added.]

94. In discussing the Company’s completion of a $400

million securitization in the fourth quarter, H. Miller stated:

[W]e believe that the superior executions wereceive is the result of our long term trackrecord, the excellent credit quality of ourassets, which is a product of our stringentunderwriting and appraisal review, andmanagement’s conservatism in all areas of thebusiness. [Emphasis added.]

95. Commenting on the purported credit quality of the

Company’s loans, H. Miller stated:

We attribute our history of low loan losses to oursuperior underwriting and appraisal review, thehigh credit quality mix of our originations andthe many years of experience among ourunderwriting and collections personnel.

96. Finally, in summing up the year, H. Miller stated:

In 1997, we had a year in which we increasedoriginations by 90% while at the same timelowering delinquency and loss rates, and we met orexceeded consensus estimates every quarter. Welook forward to continuing to grow our business in1998, while remaining focused on credit quality,improving efficiency and thus lowering costs, and


-43-

ultimately continuing to build long termshareholder value. [Emphasis added.]

97. On or about March 10, 1998, the Delta Financial

Defendants issued their 1997 Annual Report to shareholders. In

the Letter to Shareholders, signed by S. Miller and H. Miller,

the Delta Financial Defendants stated:

We’ve been quite diligent in sticking to ourbusiness plan and maintaining our conservatism,and it is reflected in Delta’s 1997 performance.

* * *

We can’t stress enough the importance of creditquality in this business, which is a directcorrelation to underwriting and appraisal review.Year in and year out, we put a considerable amountof time and effort into refining our underwritingand appraisal review standards. Our 16 years ofoperating history through several economic,interest rate, credit and competitive cycles hasenabled us to develop one of, if not the mostthorough underwriting and appraisal reviewpractices in the industry. [Emphasis added.]

* * *

We will remain conservative in all areas of thebusiness, including originations and underwriting,as our conservatism has played a key role in ourstrong financial performance to date and continuesto give shareholders comfort in our long-termcommitment to the business. [Emphasis added.]

98. In the Corporate Overview section, the Delta Financial

Defendants stated:

Loan Originations. Delta’s primary businessstrategy is to grow originations, whilemaintaining its stringent underwriting standardsand, accordingly, the high quality of its loanportfolio.

* * *


-44-

For broker originations, Delta’s network ofbrokers refers loans to Delta and the loans areclosed and funded by Delta. Before funding, theloans must meet Delta’s strict underwriting andappraisal review guidelines.

* * *

Since the February 1997 acquisition of FidelityMortgage, Delta has experienced strong growth inretail originations without sacrificing creditquality. All loans originated through Fidelitymust meet the same stringent underwritingguidelines that the Company imposes on all of itsloan production.

* * *Underwriting and Appraisal Review. Much ofDelta’s success has been the result of its strictunderwriting and appraisal review standards thatthe Company has continually refined during its 16years of operation. [Emphasis added.]

* * *While focusing on growth, the Company will notsacrifice credit quality as Delta will remainsteadfast in adhering to its stringentunderwriting and appraisal review standards.Finally, management’s conservatism in all aspectsof the business will remain the essential elementbehind the Company’s continued profitability goingforward as it has in the past. [Emphasis added.]

99. On March 31, 1998, the Delta Financial Defendants

caused the Company to file with the SEC the 1997 10-K.

Defendants H. Miller, S. Miller and Blass signed the 1997 10-K.






-45-

Delta’s business is subject to extensiveregulation, supervision and licensing by federal,state and local governmental authorities and issubject to various laws and judicial andadministrative decisions imposing requirements andrestrictions on part or all of its operations.Delta's consumer lending activities are subject tothe Federal Truth-in-Lending Act and Regulation Z(including the Home Ownership and EquityProtection Act of 1994), the Equal CreditOpportunity Act of 1974, as amended (ECOA), theFair Credit Reporting Act of 1970, as amended, theReal Estate Settlement Procedures Act (RESPA), andRegulation X, the Home Mortgage Disclosure Act andthe Federal Debt Collection Practices Act, as wellas other federal and state statutes andregulations affecting Delta's activities. Delta isalso subject to the rules and regulations of, andexaminations by HUD and state regulatoryauthorities with respect to originating,processing, underwriting and servicing loans. . .Delta believes it is in compliance in all materialrespects with applicable federal and state lawsand regulations. [Emphasis added.]

100. On April 28, 1998, Delta Financial announced its

financial results for the first quarter ended March 31, 1998.

Earnings per share for the three months ended March 31, 1998 was

reported to be $0.54, representing a reported increase of 20%

from earnings per share of $0.45 for the three months ended March

31, 1997. Net income for the first quarter of 1998 reportedly

increased 18% to $8.3 million, compared with reported net income

of $7 million for the first quarter of 1997. Revenues for the

three months ended March 31, 1998 reportedly increased 51% to

$41.2 million, compared with revenues of $27.3 million for the

same period one year prior. Loan originations for the first

quarter of 1998 reportedly increased 63% to $387 million,


-46-

compared with $237 million originated for the first quarter of

1997.

101. Commenting on the results, H. Miller, stated:

We are pleased that we continue to achieve year-over-year growth in revenues and earnings. The20% increase in earnings per share we achieved isthe result of our continuous commitment to deliverloan originations growth, while adhering to ourstringent underwriting standards. [Emphasisadded.]

102. On May 5, 1998, Delta Financial, and MCAP Mortgage

Corporation, and MCAP Service Corporation announced a strategic

alliance to originate, underwrite and service non-conforming

mortgage loans in Canada. In the press release, the Company

stated that “all loans [would] be underwritten by Delta to meet

Delta’s strict underwriting guidelines. Once approved, the loans

[would] be funded by Delta and serviced by MCAP Service Corp.”

[Emphasis added.]

103. On July 22, 1998, the Company announced that it was

reporting a net loss of $4.9 million, or $0.32 per share, for the

quarter ended June 30, 1998, compared with reported net income of

$7.2 million, or $0.47 per share, for the quarter ended June 30,

1997. The Company reported net income of $3.3 million, or $0.22

per share, for the six months ended June 30, 1998, compared to

net income of $14.2 million, or $0.92 per share, for the six-

month period one year ago. Revenues for the three months ended

June 30, 1998 were reported to be $20.7 million, compared with

revenues of $30.5 million for the same period in 1997. For the


-47-

six months ended June 30, 1998, revenues were reported to be

$61.8 million, compared with reported revenues of $57.8 million

for the 1997 six-month period. The second quarter net loss was

attributed to “the direct result of fair value adjustments the

Company made to its residual (i.e., the interest-only and

residual certificates) and servicing assets by increasing the

prepayment assumptions it uses in valuing these assets.

104. Commenting on the results, which the Delta Financial

Defendants largely blamed on industry-wide problems, H. Miller

stated:

While we are disappointed with the earningsresults for the second quarter, stemming from thefair value adjustment to the residual andservicing assets, we believe it is just a short-term event. With the accounting conservatism thatwe built in this past quarter, we hope thatinvestors can now focus on the fundamentals of ourbusiness, which we believe are excellent. We arevery pleased with our history of low loan lossesthat we have achieved and we look forward to thefuture with anticipation. We have one of thelongest operating histories in the industry, whichwe believe is a significant competitive advantage,and we feel that we are one of the mostconservative lenders in this business.

105. On August 24, 1998, Barron’s reported that class-action

lawyers had filed cases against Delta Financial, challenging its

yield-spread premium practices described above. Barron’s also

reported that on file with the NYSBD, which oversees mortgage-

related consumer complaints, there were 26 complaints against

Delta Financial so far that year, 29 complaints against Delta


-48-

Financial in 1997, and a total of 38 in 1996. The complaints

concerned disputes about servicing and protests about collection

tactics and foreclosures.

106. Barron’s reported that although Delta Financial

declined to comment about the article, the Company provided a

written response to the list of questions Barron’s sent in

preparation for the article:

We caution you that from our cursory review ofyour questions, there appear to be both factualinaccuracies and erroneous conclusions. DeltaFinancial will hold Barron’s accountable formaintaining professional standards of journalisticintegrity.

107. Market reaction to the Barron’s article was neutral.

On August 24, 2998, the price of the Company’ stock closed

unchanged from the day before at $9.75 per share.

108. On October 21, 1998, the Company announced that it was

reporting net income of $3.1 million, or $0.20 per share (basic

and diluted), for the quarter ended September 30, 1998, compared

to net income of $7.9 million, or $0.51 per share (basic and

diluted), for the quarter ended September 30, 1997. Net income

for the nine months ended September 30, 1998 was reported to be

$6.5 million, or $0.42 per share (basic and diluted), compared to

reported net income of $22.1 million, or $1.44 per share (basic

and diluted), for the nine months ended September 30, 1997.

Revenues for the third quarter ended September 30, 1998 were

reported to be to $38.1 million, compared to $37.4 million for


-49-

the third quarter of 1997. Revenues for the nine month period

ended September 30, 1998 were reported to be $99.9 million,

compared with reported revenues of $95.2 million for the

comparable period one year ago. Loan production in the third

quarter of 1998 was reported to be $476 million. Broker

originations represented 49% of total production in the third

quarter of 1998, up 17% from the second quarter of 1998 and

retail originations represented 14% of total production in the

third quarter, up 28% from the second quarter.

109. Commenting on the results, H. Miller stated:

The third quarter was a challenging period forcompanies in our sector and, despite the turmoilin the capital markets, we maintained ourprofitability while sustaining adequate liquidity.. . . We believe that our efforts to conservecapital and to continually focus on credit qualityhave placed us in a strong competitive position.

With a seventeen year history in non-conforminglending through various economic cycles, an eightyear securitization history, low employeeturnover, an efficient cost structure andconservative lending practices, we will continueto distinguish ourselves in the home equityindustry. We have not sacrificed credit qualityfor the sake of originations and have not indulgedin borderline product types. We always maintaineda conservative and consistent product offering.[Emphasis added.]

110. On January 12, 1999, the Company announced that it

expected “to generate positive cash flow from its operations in

the fourth quarter of 1998, and bring itself among independent

home equity lenders that securitize nearly all their loan

originations.” In addition, the Company stated that it was


-50-

“comfortable” with analysts’ earnings estimates for the fourth

quarter.

111. Commenting on the expected results, H. Miller stated:

We are extremely pleased with the way we areemerging from the fixed-income market turmoil of1998. . . . Generating positive cash flow fromoperations in the fourth quarter has furtherdifferentiated Delta from other independent homeequity lenders and has put Delta in a strongercompetitive position. Our conservative approachto the subprime home equity lending business, oursolid reputation among asset-backed securitiesinvestors and our underlying strength, which comesfrom 17 years of experience lending throughseveral economic, interest rate and competitivecycles, have made this differentiation possible.

112. Delta stock, which had closed the day before this

announcement at $6.375 per share, jumped to $7.125 on these

comments.

113. On January 18, 1999, Abbey, Gardy & Squitieri, LLP

announced that it had filed a consumer class action lawsuit

against Delta Financial. According to the press release, the

complaint alleged that:

Delta Financial defendants target low-incomeminority and/or elderly homeowners, inducing them– through fraud, misrepresentation, and otherunconscionable and illegal conduct – to enter intomortgage loan transactions with the DeltaFinancial defendants. The Complaint alleges thatDelta Financial’s mortgage loan transactions a)provide little or no benefit to borrowers, b) skimoff the equity in borrowers’ homes, c) are paddedwith excessive illegal fees that are paid todefendants and third parties, d) are pricedillegally without regard to borrowers’ abilitiesto make monthly payments, and e) place all classmembers in jeopardy of losing their homes, whichare collateral for the mortgage loans.


-51-

114. On January 19, 1999, an article appeared in The New

York Times entitled “Borrowers Beware- A Special Report; Suit

Says Unscrupulous Lending Is Taking Homes From Poor.” The

article described allegations of improper loan practices that had

been made against Delta Financial in several pending lawsuits.

The article reported that a Federal District Court Judge had

criticized mortgages written by Delta Financial, stating in

pertinent part:

Last month, Chief Judge Charles P. Sifton of theFederal Court for the Eastern District of New Yorkstopped the foreclosure sales of homes of threepeople who defaulted on Delta Financial loans,because, he wrote, the “mortgages on their face”violated Federal law, and so the borrowers showeda good chance of winning their lawsuit. [Emphasisadded.]

115. Delta Financial’s stock, which had traded as high as

$8.625 per share the day before the article appeared, fell to $7

per share the day after the article, and continued to fall the

next day, January 21, 1999, to $6.125 per share.

116. In response, defendants sought to control any damage

that may have been caused by the article. Defendants succeded on

many fronts. For example, Prudential Securities raised its

rating, on January 28, 1999, to “accumulate” from “hold.”

117. On February 1, 1999, the Delta Financial Defendants

publicly denied the “legal allegations that the subprime lender

targets low-income and elderly homeowners to fraudulently induce

them to take mortgage loans.” A Company representative also


-52-

denied the allegation that Delta Financial “flips” its loans,

stating that Delta Financial loses “tens of thousands” of dollars

on each foreclosed loan. He also stated that “Delta [Financial]

intends to vigorously defend itself against the allegations

made.”

118. Also on February 1, 1999, Delta Financial issued a pre-

earnings report “to calm investor concerns about the home equity

lender’s situation.” In the report, Delta Financial announced

that it expected to generate positive cash flow from its

operations in the fourth quarter and was comfortable with

analysts’ earnings estimates. Going forward, the Company stated

that its strategy was to grow its mortgage broker origination

channel in every region of the country. In that regard, H. Miller

stated: “We are very focused on our mortgage broker channel and

we are very committed to the broker community.”

119. As later reported in Barron’s on February 8, 1999, a

Company spokesman said the action before Chief Judge Sifton, had

no merit: “The charges that have been made about Delta

[Financial]’s lending practices are not only false, they are

outrageous . . . . The charge that the company intentionally

makes bad loans is ludicrous, especially because it typically

loses tens of thousands of dollars on each foreclosed loan.”

Barron’s noted that the spokesman declined to comment on the

Company’s specific dealings with government authorities, but did

say that: “Delta [Financial] does have a clean regulatory record,


-53-

an admirable complaint record, and has experienced only a handful

of lawsuits after more than 50,000 loans that have been

originated with no lawsuits having ended in any finding of

wrongdoing.”

120. The Delta Financial Defendants succeeded in calming

investor concerns following the reassuring statements that were

made on February 1, and February 8, 1999. For example, on

February 2, 1999, the Company’s stock rose to $7 per share from

$6.50 per share on February 1, 1999. On February 9, 1999, the

Company’s stock increased to $6.625 per share from $6.50 per

share on February 8, 1999.

121. On February 16, 1999, the Company reported net income

of $4.9 million, or $0.32 per share (basic and diluted), for the

quarter ended December 31, 1998, compared to reported net income

of $8.3 million, or $0.54 per share (basic and diluted), for the

quarter ended December 31, 1997. Net income for the year ended

December 31, 1998 was reported to be $11.3 million, or $0.74 per

share (basic and diluted), compared to reported net income of

$30.4 million, or $1.98 per share (basic and diluted), for the

year ended December 31, 1997.

122. Commenting on the reported results, defendant H. Miller

stated:

Throughout our 17-year operating history, we havecontinued to differentiate ourselves byoutperforming in difficult operating environments.The recession of the early 1990's was one exampleand 1998 was another. Each time we have succeeded


-54-

in emerging as a stronger company with a greatermarket position. This is a credit to our long-term employee base, our strict underwriting, ourthorough quality control measures, our strongservicing capabilities and our general overallconservative approach to running the business.[Emphasis added.]

123. On or about March 16, 1999, Delta Financial issued its

1998 Annual Report to shareholders. In the Letter to

Shareholders signed by defendants S. Miller and H. Miller, the

Delta Financial Defendants discussed the Company’s purported

conservative business practices stating:

We remained focused on our strict underwriting andappraisal review practices . . . Because we havealways been very consistent and conservative inthe products and programs we offer to our brokers,correspondents and retail customers, we did notneed to make any drastic changes during thistumultuous time. . . We’ve always stayed with ourconservative business plan and product typesrather than competing just for the sake of growth.

124. In the Corporate Overview Section, the Delta Financial

Defendants stated:

Delta has serviced substantially all of its loanssince inception. Therefore, the Company hasextensive loan performance data that it analyzesregularly to see how loans perform under variouseconomic conditions. This data has enabled theCompany to develop one of the most stringentunderwriting and appraisal review practices in theindustry.

* * *

Loans referred by brokers are closed and funded inDelta’s name. Since its inception in 1982, Deltahas been working primarily through smallerbrokers, a niche where the Company has been quitesuccessful. The Company will continue to focus onthis channel of production throughout 1999 as it


-55-

remains a profitable source of mortgage loans anda niche where the Company has demonstrated astrong competitive advantage. Delta’s brokeroriginations represented 49% of total originationsfor 1998.

* * *

Underwriting and Appraisal Review. In 1998, whenmany companies needed to dramatically revise andtighten their underwriting guidelines, Delta wasable to stand firm. That’s because the Companyhas always maintained one of the most stringentand consistent underwriting and appraisal reviewpractices in the industry – in good times and inbad. . . Delta’s underwriting and appraisalreview process is unmatched in the home equitylending business. The Company underwrites everyloan by Delta-employed underwriters, who undergoan extensive combined classroom and on-the-jobtraining program before receiving authority tosign off on a loan. The Company does not usethird party or contract underwriters, nor does thecompany delegate underwriting authority to anyoutside source. [Emphasis added.]

125. On April 1, 1999, the Delta Financial Defendants caused

the Company to file with the SEC its annual report on Form 10-K

for the year ended December 31, 1998 (the “1998 10-K”).

Defendants H. Miller, S. Miller, and Blass signed the 1998 10-K.





Delta’s business is subject to extensiveregulation, supervision and licensing by federal,state and local governmental authorities and issubject to various laws and judicial andadministrative decisions imposing requirements andrestrictions on part or all of its operations.Delta's consumer lending activities are subject to


-56-

the Federal Truth-in-Lending Act and Regulation Z(including the Home Ownership and EquityProtection Act of 1994), the Equal CreditOpportunity Act of 1974, as amended (ECOA), theFair Credit Reporting Act of 1970, as amended, theReal Estate Settlement Procedures Act (RESPA), andRegulation X, the Home Mortgage Disclosure Act andthe Federal Debt Collection Practices Act, as wellas other federal and state statutes andregulations affecting Delta's activities. Delta isalso subject to the rules and regulations of, andexaminations by HUD and state regulatoryauthorities with respect to originating,processing, underwriting and servicing loans.. . . Delta believes it is in compliance in allmaterial respects with applicable federal andstate laws and regulations. [Emphasis added.]

126. On April 20, 1999, the Company announced its financial

results for the quarter ended March 31, 1999. For the first

quarter, the Company reported net income of $5.7 million, or

$0.37 per share (basic and diluted), compared to reported net

income of $8.3 million, or $0.54 per share (basic and diluted),

for the first quarter of 1998. The Company attributed the

decrease in quarter-over-quarter net income and earnings per

share to the change in 1998 to the prepayment assumptions it used

in valuing its residual (i.e., interest-only and residual

certificates) and servicing assets.

127. Commenting on the first quarter results, defendant H.

Miller stated:

We continue to differentiate ourselves in anindustry that experienced quite a bit of turmoilin 1998. While many companies in the industryhave been focusing on restructuring theirbusinesses to improve liquidity, our favorableliquidity position -- which is the result of aconservatively run business over the past 17 years


-57-

-- has allowed us to focus on our business andmaximize long-term shareholder value. We continueto remain a leader among independent home equitylending companies. This is demonstrated by ourcontinued profitability, our ability to maintainpositive cash flow, our ability to secureadditional credit facilities, and our ability tofocus on underwriting and servicing, which hasbeen a key to producing better-than-expecteddelinquencies and one of the lowest loan losses inthe business. [Emphasis added.]

* * *

Notwithstanding the seasonal factors, we areespecially proud to report continued improvementin asset quality. The strong credit quality weexhibited -- with the 60-plus days delinquencycategory rising only 10 basis points, foreclosuresremaining flat, and losses increasing only 2 basispoints and continuing to be among the lowest inthe industry -- demonstrates our strongunderwriting, appraisal review and servicingcapabilities, and our ability to remain focused inthese areas. We believe we have one of the mostthorough and conservative underwriting andappraisal review processes in this industry, alongwith a very experienced servicing staff and atechnologically advanced servicing platform.

128. On June 23, 1999, Delta Financial announced that it had

settled claims that were to be brought by the NYSAG concerning

more than 1,000 high-interest home loans to low-income minority

residents in Brooklyn and Queens. The NYSAG had alleged that the

Company made loans to people with “exorbitant” interest rates -

sometimes as high as 14% - and excessive fees of 10% of more,

leading some to lose their homes and others to pay more than 50%

of their monthly pre-tax income to cover the loans. Under the

proposed settlement, Delta Financial agreed to: pay $6 million to

victims of its loan practices; allow the appointment of a neutral


-58-

monitor for the next three years to review its loan files in

order to insure compliance with civil rights, banking and

consumer fraud laws and end the payment of yield spread premiums

in certain classes of loans.

129. Delta Financial also agreed to reform its underwriting

guidelines to ensure that borrowers are left with enough income to

live on, and ensure that borrowers who cannot afford large loans do

not take them; permit the neutral monitor, and ultimately the

court, to carefully scrutinize the most questionable transactions,

and impose judicial remedies when patterns of violations are

discovered.

130. Notwithstanding the terms of the proposed settlement, a

spokesman for the Company denied any wrongdoing: “We did not

violate any laws or federal regulations.” Based upon, inter alia,

that mitigating statement, the Company’s stock closed up on June

23, 1999, at $6.5625 per share from $6.1875 per share on the prior

day.

131. On August 19, 1999, the last day of the Class Period, the

New York Acting Superintendent of Banks announced that Delta

Funding had reached an agreement with the NYSBD to provide $12

million in consumer restitution for making unscrupulous loans to

elderly and minority New York City residents. The settlement

addressed alleged violations of New York State’s Fair Credit Law,

HOEPA, and RESPA. The NYSBD had charged that Delta Funding’s high

cost mortgage loans targeted minority areas in Brooklyn and Queens.


-59-

In addition, the NYSBD charged that Delta Funding violated HOEPA by

putting homeowners’ equity at risk.

132. As part of the settlement, Delta Financial agreed to

establish a fund to be used for payment reductions on high cost

loans to homeowners. The Company also agreed to establish a second

fund to promote better industry practices, such as counseling,

consumer education, and foreclosure prevention. The second fund

also provided additional reimbursements to borrowers. In addition,

as part of the settlement, Delta Funding committed to implement

agreed upon changes to its lending practices.

133. Although able to resolve the claims alleged by the NYSBD,

the Delta Financial Defendants could not finalize the agreement in

principle reached with the NYSAG in June 1999. Thus, on August 19,

1999, the NYSAG filed a complaint in this District, charging Delta

Financial, among others, with violating HOEPA, RESPA, TILA, and the

New York Human Rights Law. Among other forms of relief, the

Attorney General sought to place Delta Funding into receivership,

alleging that the Company was unlikely to obey court orders that it

alter its lending practices.

134. In response to these August 19, 1999 developments, Delta

Financial’s stock, which had been trading at $7.31 per share before

the agreement in-principle was reached, dropped to approximately

$5.38 per share, a decline of approximately 27%.

135. In addition to the affirmative positive statements made

during the Class Period, as well as misleading omissions, in every


-60-

Form 10-Q and Form 10-K filed – even those filed after the NYSAG

initiated its action – within the Class Period, Delta Financial

issued the same statement under the heading “Legal Proceedings”:

Because the nature of the Company’s businessinvolves the collection of numerous accounts, thevalidity of liens and compliance with various stateand federal lending laws, the Company is subject,in the normal course of business, to numerousclaims and legal proceedings, including severalclass action lawsuits set forth below.

136. Although discussing the various class actions pending

against the Company, the Delta Financial Defendants sought to

mitigate any adverse effect disclosure would have by claiming that

the claims were without merit and, in any event, were immaterial to

the Company’s operations:

While it is impossible to estimate with certaintythe ultimate legal and financial liability withrespect to such claims and actions, the Companybelieves that the aggregate amount of suchliabilities will not result in monetary damageswhich in the aggregate would have a materialadverse effect on the financial condition orresults of operations of the Company. [Emphasisadded.]

* * *

The Company believes that it has meritoriousdefenses and intends to defend each of theselawsuits . . .

III. Post Class Period Events

137. On September 20, 1999, Delta Financial announced that it

and the NYSAG had settled the lawsuit commenced by the NYSAG in

August 1999. Under the terms of the settlement, which was executed


-61-

September 17, 1999, the NYSAG agreed to join with the NYSBD in the

$12 million settlement announced on August 19, 1999 regarding

certain lending practices.

138. On March 30, 2000, the federal government announced that

Delta Funding had agreed to settle charges brought by the FTC, the

DOJ, and the Secretary of HUD for violations of fair lending laws

and consumer protection laws. The lawsuit, filed the same day

together with the proposed settlement, alleged that Delta Funding

violated consumer protection and fair lending laws by approving and

funding loans without regard to the borrower's ability to repay;

approving and funding home mortgage loans to African American

females with higher broker fees than similarly situated white

males; and paying kickbacks and unearned fees to brokers to induce

them to refer loan applicants to Delta Funding. Under the terms of

the proposed settlement, Delta Financial would be prohibited from

engaging in any lending practice that discriminates on the basis of

sex, race, or color in the pricing of mortgage loans as prohibited

by the FHA and ECOA or that violates RESPA or HOEPA. The agreement

with the federal government completed the Company’s global

settlement with the NYSBD and the NYSAG.

IV. Delta’s Securitization of Loans

139. As a fundamental part of its business and financing

strategy, Delta Financial (and its subsidiaries) sold the majority

of its loans through securitization and derived a substantial


-62-

portion of its income therefrom. In a securitization, the company

sells a pool of loans it has originated or purchased to a REMC

trust for a cash price. The trust, in turn, finances the pool of

loans it has acquired by issuing “pass-through certificates,” or

bonds, which represent undivided ownership interests in the trust.

The holders of the pass-through certificates are entitled to

receive monthly distributions of all principal received on the

underlying mortgages and a specified amount of interest, as

determined at the time of the trust offering.

140. When the company sells a pool of loans to the

securitization trust, it receives the following economic interests

in the trust:

a. the difference between the interest payments due on

the loans sold to the trust and the interest rate paid to the pass-

through certificate holders, less the company’s contractual

servicing fee and other costs and expenses of administering the

trust, represented by interest-only and residual certificates; and

b. the right to service the loans on behalf of the

trust and earn a contractual servicing fee, as well as other

ancillary servicing related fees directly from the borrowers on the

underlying loans.

141. Thus, it was in Delta Financial’s interest to raise the

volume of its loans as high as possible in order to maximize

revenues from its securitization. The Company sold or securitized

$630.4 million of loans in 1996; $1.24 billion of loans in 1997,


-63-

through four quarterly loan securitizations; $1.73 billion of loans

in 1998, through four securitizations; and $1.46 billion in 1999,

through three securitizations and a loan sale through a conduit

facility.

142. According to a former regional manager, the Company

understood that many loans would go into default. He stated that

it was important to Delta Financial to generate loan volume because

they securitized their loans and sold them off, and wanted other

banks to buy those loans. He added that Delta Financial knew that

these loan packages, peddled as investment vehicles, would have

high default rates because of artificial employment and income

records and appraisals.

COUNT I

(Against All Defendants For ViolationsOf Section 11 Of The Securities Act)

143. Plaintiffs repeat and reallege each and every allegation

contained above that relates to the IPO, the Registration

Statement, and the Prospectus, and specifically exclude those

allegations contained above that may sound in fraud or relate to

scienter.

144. This Count is brought pursuant to Section 11 of the

Securities Act, 15 U.S.C. § 77k, on behalf of the Class, against

all defendants.

145. The Registration Statement for the IPO was inaccurate and

misleading, contained untrue statements of material facts, omitted


-64-

other facts necessary to make the statements made not misleading,

and concealed and failed adequately to disclose material facts as

described above.

146. The statements referenced in paragraphs 75 through 78

above were materially false and misleading when issued as they

misrepresented and/or omitted the adverse facts (as detailed in

paragraphs 36-71, above) which then existed, the disclosure of

which was necessary to make the statements made not false and

misleading, including:

a. the Company was engaged in improper and questionable

loan practices that exposed Delta Financial to heightened risk that

it would be sued in class actions or the subject of governmental

regulatory action;

b. the brokers soliciting on Delta Financial’s behalf

systemically engaged in illegal and/or fraudulent practices,

including reverse redlining and utilizing excessive hidden broker’s

fees;

c. the Company did not maintain strict, conservative

underwriting standards, but approved loan applications without

regard to the borrower’s ability to repay, including loans where

debt payments consumed more than half of the borrower’s total pre-

tax income;

d. the Company routinely overstated the borrower’s

income by including non-existent and/or unverified income streams;


-65-

e. the Company’s loan officers impersonated the

borrower’s “employer”, inventing their own employment

“verifications”;

f. the Company’s loan officers deceived borrowers by

inducing them, at the closing, to sign complicated documents

containing previously undisclosed terms of fees, and/or by filling

in or changing terms after the documents had been signed;

g. the Company charged borrowers points and fees

totalling as much as 10% of the entire loan amount, in violation of

HOEPA and TILA;

h. the Company provided kickbacks (in the form of yield

spread premiums) to brokers who inflated the borrower’s interest

rate;

i. the Company included onerous and illegal terms in

its loans, such as charging interest rates as high as 24% in case

of default;

j. the Company charged prepayment penalties of 5%,

often collecting the fee itself when “flipping” the loan

(refinancing its own loan within one year);

k. the Company was already engaged in systemic illegal

and/or questionable loan practices, contrary to the Prospectus’

“Risk Factor” section disclaiming future compliance with regulatory

requirements;


-66-

l. the Company’s increased growth was due, in material

part, to the Company’s improper and questionable loan practices;

and

m. the Company was not in compliance with federal and

state regulations concerning its lending practices.

147. Delta Financial was required to disclose in the

Registration Statement and Prospectus the existence of known

trends, events or uncertainties that it reasonably expected would

have a material unfavorable impact on net revenues or income of

Delta Financial or that were reasonably likely to result in the

Company’s profitability decreasing in a material way. Delta

Financial, however, failed to disclose the following material

information, disclosure of which was required by law:

a. the Company was engaged in improper and questionable

loan practices, as described above, which exposed the Company to

heightened risk that it would be sued in class actions or the

subject of governmental regulatory action; and

b. the Company’s increased growth was due, in material

part, to its improper and questionable loan practices.

148. At the time plaintiffs and other members of the Class

purchased Delta Financial shares, they were without knowledge of

the facts concerning the wrongful conduct alleged herein and could

not have reasonably discovered those facts prior to January 19,

1999. Less than one year elapsed from the time that plaintiffs

discovered or reasonably could have discovered the facts upon which


-67-

this complaint is based to the time that the initial complaints

were filed. On October 29, 1999, the first of these putative class

actions, entitled Parnes v. Delta Financial Corporation, et al.,

No. 99-7033 (the “Parnes Class Action”), was filed, thereby tolling

the applicable statute of limitations. Less than three years

elapsed from the time that the securities upon which this Count is

brought were bona fide offered to the public to the time this

action was filed.

149. Delta Financial is the registrant for the IPO and filed

the Registration Statement as the issuer of Delta Financial shares

issued in the offering, as defined in Section 11(a)(5) of the

Securities Act. The defendants named herein were responsible for

the contents and dissemination of the Registration Statement and

the Prospectus and caused its filing with the SEC.

150. As issuer of the shares, Delta Financial is strictly

liable to plaintiffs and the Class for the misstatements and

omissions.

151. None of the defendants named herein made reasonable

investigation or possessed reasonable grounds for the belief that

the statements contained in the Registration Statement and the

Prospectus were true and without omissions of any material facts

and were not misleading.

152. The defendants named herein issued, caused to be issued

and participated in the issuance of materially false and misleading

written statements to the investing public which were contained in


-68-

the Registration Statement and Prospectus, which misrepresented or

failed to disclose, inter alia, the facts set forth above. By

reason of the conduct herein alleged, each defendant named herein

violated, and/or controlled a person who violated, Section 11 of

the Securities Act.

153. Plaintiffs acquired Delta Financial shares issued

pursuant to, or traceable to, and in reliance on, the Registration

Statement.

154. By reason of the foregoing, defendants have violated

Section 11 of the Securities Act and are liable to plaintiffs and

the members of the Class, each of whom has been damaged by reason

of such violations, in an amount to be determined at trial.

COUNT II

(Against All Defendants For ViolationsOf Section 12(2) Of The Securities Act)


contained above that relates to the IPO, the Registration

Statement, and the Prospectus, and specifically exclude those

allegations contained above that may sound in fraud or relate to

scienter.

156. This Count is brought pursuant to Section 12(2) of the

Securities Act, 15 U.S.C. § 77l, on behalf of the Class, against

all defendants.


-69-

157. The Company offered and issued the Prospectus as part of

the Registration Statement in connection with the IPO. As set

forth above, the Prospectus was inaccurate and misleading,

contained untrue statements of material facts, omitted other facts

necessary to make the statements made not misleading, and concealed

and failed adequately to disclose material facts as described

above. The offering materials included untrue statements of

material fact and omitted to state material facts necessary in

order to make the statements made, in light of the circumstances

under which they were made, not misleading, as set forth herein.

Defendants’ solicitation included participating in the preparation

of the false and misleading Registration Statement and Prospectus.

158. At the time plaintiffs and other members of the Class

purchased Delta Financial shares, they were without knowledge of





this complaint is based to the time that the initial complaints

were filed. On October 29, 1999, the first of these putative class

actions, entitled Parnes v. Delta Financial Corporation, et al.,

No. 99-7033 (the “Parnes Class Action”), was filed, thereby tolling

the applicable statute of limitations. Less than three years

elapsed from the time that the securities upon which this Count is


-70-

brought were bona fide offered to the public to the time this

action was filed.

159. By reason of the foregoing, defendants have violated

Section 12(2) of the Securities Act and are liable to plaintiffs

and the members of the Class, each of whom has been damaged by

reason of such violations, in an amount to be determined at trial.

160. Plaintiffs and the other Class members hereby tender

their Delta Financial common stock to the defendants and seek

recission of their purchases to the extent they continue to hold

such securities.

COUNT III

(Against the Individual Defendants ForViolations of Section 15 of the Securities Act)

161. Plaintiffs repeat and reallege only those allegations

contained above which relate to Delta Financial’s IPO, Registration

Statement, and Prospectus, and specifically exclude those

allegations above that may sound in fraud or relate to scienter.

162. This Count is brought pursuant to Section 15 of the

Securities Act, 15 U.S.C. § 77o, against the Individual Defendants.

163. Throughout the Class Period, each of the Individual

Defendants, by reason of his executive position or positions had

the power and authority to cause, and did exercise that power and

authority to cause, indirectly or directly, the Company or others

to engage in the wrongful conduct complained of herein. As a

result, at the time of the wrongs alleged herein, the Individual


-71-

Defendants were “controlling persons” within the meaning of Section

15 of the Securities Act.

164. Each of the Individual Defendants named herein issued,

caused to be issued, and participated in the issuance of the

materially false and misleading statements contained in, or the

material facts omitted from, the Registration Statement and signed

the same. Pursuant to Section 15(a) of the Securities Act, by

reason of the foregoing, each of the Individual Defendants is

liable to the same extent as is Delta Financial for the Company’s

aforesaid violations of Section 11 and 12(a)(2) of the Securities

Act. As a direct and proximate result of said defendants’ wrongful

conduct, plaintiffs and the other members of the Class have

suffered damages in connection with their acquisition of Delta

Financial common stock.

COUNT IV

(Against The Delta Financial DefendantsFor Violations of Section 10(b) of the Exchange Act

And Rule 10b-5 Promulgated Thereunder)


contained above.

166. Delta Financial and the Individual Defendants: (a) knew

or recklessly disregarded material, adverse, non-public information

about Delta Financial’s loan practices and then-existing business

conditions, which were not disclosed; and (b) participated in

drafting, reviewing and/or approving the misleading statements,


-72-

releases, reports and other public representations of and about

Delta Financial.

167. Delta Financial and the Individual Defendants, with

knowledge of, or reckless disregard for, the truth, disseminated or

approved numerous false statements issued from October 31, 1996

through August 18, 1999, which statements were of the same or

similar nature to those made in the Prospectus, among other false,

misleading and incomplete statements. These statements were

materially false and misleading in that Delta Financial and the

Individual Defendants failed to disclose, as specified above, that

the Company was engaged in systematic improper and questionable

loan practices and, accordingly, failed to disclose material facts

necessary in order to make the statements made, in light of the

circumstances under which they were made, not misleading.

168. In particular:

a. The statements in paragraphs 80 to 136 were

materially false and misleading because, defendants knew or

recklessly disregarded the following, as set forth in detail in

paragraphs 37 to 71:

1. In the course of offering and extending credit

to borrowers, the Delta Financial Defendants were violating HOEPA

by extending credit to a borrower based on the borrower's

collateral rather than considering the borrower's current and

expected income, current obligations, and employment status to

determine whether the borrower was able to make the scheduled


-73-

payments to repay the obligation, in violation of TILA and

Regulation Z. Indeed, the Delta Financial Defendants often

approved loans without regard to a borrower's ability to repay when

prudent underwriting criteria, such as debt-to-income ratios,

residual income, and repayment history indicated that the borrower

could not repay the loan. The Company approved loans where the

borrower's debt payments consumed more than half of the borrower’s

total pre-tax income, in many instances leaving the borrower with

less than adequate income for living expenses. Former Delta

Financial employees stated that the Company routinely relied on

unverified income information of the borrower with no reasonable

basis for believing that such income existed to support the loan.

For example, a former manager stated that upper management/regional

managers “told us to lie on job letters.” Delta Financial also

offered a low income type of loan called a limited income check

loan (“L.I.C. Loan”), referred to by Company insiders as a “liars

loan.” Because pay stubs were not required for this type of loan,

loan officers would generate bogus employment letters. The highest

percentage of defaulted loans occurred with respect to L.I.C.

loans. Moreover, the Company approved mortgage loans that caused

the borrower's monthly debt payments to increase, despite Delta

Financial’s knowledge of the borrower’s past inability to meet the

lower prior monthly payments. In many cases, there was no change in

the borrower’s circumstances or other evidence to suggest that the


-74-

borrower would be able to meet the newer and more onerous

requirements;



and Regulation Z by including a prohibited prepayment penalty

provision;



and Regulation Z by including a prohibited “increased interest rate

after default” provision;

4. The yield spread premium the Company paid to

its brokers constituted a kickback or thing of value for the

referral of settlement service business involving a federally

related mortgage loan in violation of RESPA;

5. The giving of a portion or percentage of a

settlement service charge involving a federally related mortgage

loan other than for services actually performed violated RESPA.

The Delta Financial Defendants knew that little or no services were

being performed in exchange for the broker charges because the

Company individually underwrote and funded each loan, and approved

each loan fee paid to a broker. Further, the Delta Financial

Defendants knew that the total of the broker compensation did not

bear a reasonable relation to the level of services that were

provided or performed. In fact, Delta Financial aided its brokers


-75-

in obtaining the unearned fees described herein by performing many

of the services for the brokers;


to borrowers, the Company’s brokers typically charged fees ranging

up to 10 percent or more of the total amount borrowed. However,

Delta Financial’s borrowers seldom had the cash on hand to pay all

of the brokers’ fees. Therefore, the borrower’s loan amount was

increased to cover the high fees. The increased loan proceeds

provided Delta Financial with additional profit and with a

mechanism through which to pay its brokers. A former loan officer

stated that the Delta Financial Defendants instructed brokers to

“add four points on the front, and four points on the back,” adding

“we don’t want to see you doing any loans without that.” In fact,

Delta Financial employed consultants to instruct brokers and

employees on these dishonest/illegal practices;


to borrowers, the Delta Financial Defendants wrongfully targeted

minorities having little income and education in violation of the

Fair Housing Act and the Equal Credit Opportunity Act. According

to a former loan officer, the Delta Financial Defendants employed

consultants to train brokers and employees to target vulnerable

clients, people who traditionally paid a lot for money or people

that had large debt. According to a former regional manager,

Fidelity President, John Grippa and Vice President, Ed Clark, were

responsible for the Company’s telemarketing efforts and target


-76-

determination. Grippa often received complaints from managers

concerning the low income/minority targeting, who argued that Delta

Financial was not conducting its business in a manner consistent

with the accepted practices of other lenders, and that such

practices would eventually put the Company out of business.

According to a former regional manager, similar complaints were

made by him and other managers directly to corporate management,

such as Stuart Atias (a vice-president at Delta Financial and one

of Delta’s most senior underwriters) and Daryl King, who was Delta

Financial’s management representative in Cincinnati. King was the

chief underwriter for all the loans that went through Fidelity to

Delta Financial. Another former manager stated that there was

pressure from the Company to take potential borrowers out of the

conforming market and pull them into higher rated (higher interest)

B and C loans;

8. The Delta Financial Defendants’ statements

concerning low loan defaults were knowingly or recklessly false and

misleading. According to a former regional manager, the Company

understood that many loans had and would go into default. He

stated that it was important to Delta Financial to generate loan

volume because they securitized their loans and sold them off, and

wanted other banks to buy those loans. He added that the Delta

Financial Defendants knew that these loan packages, being sold as

investment vehicles, would have default rates that would be high

because of the phony employment and income records and appraisals.


-77-

By selling these loans, the Company made it appear as if there was

little loss due to default in its loan portfolio; and

9. A former national manager stated that Delta

Financial’s management knew about these abuses. The regional

managers were in daily contact with the corporate office, wanting

to know about pipelines, generated fees, deals expected to close

and general updates. There was very clear and constant

communication between regional managers and Delta Financial,

keeping senior management apprised of production status which would

have to include the abuses described herein.

169. The statements in paragraphs 117 and 136 were knowingly

false and misleading. The Delta Financial Defendants knew that

both the NYSBD and the NYSAG each had initiated an investigation of

the Company’s lending practices in at least late January/early

February 1999. According to Barron’s (on February 8, 1999), the

NYSAG initiated an examination pursuant to federal and state law

regarding the Company’s compliance with the laws and regulations

identified above. The Delta Financial Defendants also knew, but

failed to disclose, that they had been trying to resolve the

various regulatory investigations without litigation.

170. The false and misleading nature of the

statements/omissions and the existence of the undisclosed business

practices outlined above, concerned the very core of Delta

Financial’s operations, and were known to the Delta Financial


-78-

Defendants at the time they were made, as confirmed by several

former Delta Financial employees.

171. At the time they purchased Delta Financial shares,

plaintiffs and other members of the Class were without knowledge of





this Complaint is based to the time that the original complaints

were filed. In addition, the Parnes Action referred to in Count I

tolled the applicable statute of limitations. Less than three

years elapsed from the time that the securities upon which this

Count is brought were bona fide offered to the public to the time

the Parnes class action was filed.

172. The Delta Financial Defendants violated Section 10(b) of

the Exchange Act and Rule 10b-5 promulgated thereunder in that

they: (a) employed devices, schemes and artifices to defraud; (b)

made untrue statements of material fact or omitted to state

material facts necessary in order to make statements made, in light

of the circumstances under which they were made, not misleading; or

(c) engaged in acts, practices and a course of business that

operated as a fraud or deceit upon the purchasers of Delta

Financial stock from October 31, 1996 through August 18, 1999.

173. Plaintiffs and the Class have suffered damage in that, in

reliance on the integrity of the market, they paid artificially


-79-

inflated prices for Delta Financial common stock. Plaintiffs and

the Class would not have purchased Delta Financial common stock at

the prices they paid, or at all, if they had been aware that the

market prices had been artificially and falsely inflated by the

Delta Financial Defendants’ false and misleading statements.

COUNT V

(Against The Individual Defendants ForViolations of Section 20(a) of the Exchange Act)


contained above.

175. This Count is brought pursuant to Section 20(a) of the

Exchange Act against the Individual Defendants.

176. Each of the Individual Defendants was a control person of

Delta Financial by virtue of his position as director and/or senior

officer of Delta Financial. Finally, the Individual Defendants

each had a series of direct and/or indirect business and/or

personal relationships with other directors and/or major

shareholders of Delta Financial.

177. Each of the Individual Defendants was a culpable

participant in the violations of Section 10(b) of the Exchange Act

alleged in Count IV above, based on his participation in the

fraudulent conduct alleged above. Each of the Individual

Defendants had the power to influence and control and did influence

and control, directly or indirectly, the decision-making of Delta


-80-

Financial, including the content and dissemination of the various

statements that plaintiffs contend are false and misleading.

178. By reason of the conduct alleged above, the Individual

Defendants are liable for the aforesaid wrongful conduct, and are

liable to plaintiffs and to the other members of the Class for the

substantial damages which they suffered in connection with their

purchase of the Company’s common stock during the Class Period

PRAYER FOR RELIEF

WHEREFORE, plaintiffs, on behalf of themselves and the Class,

pray for judgment as follows:

A. declaring this action to be a class action properly

maintained pursuant to Rule 23(a) and (b)(3) of the Federal Rules

of Civil Procedure and certifying plaintiffs as class

representatives;

B. awarding plaintiffs and other members of the Class

damages, together with interest thereon;

C. awarding plaintiffs and other members of the Class their

costs and expenses of this litigation, including reasonable

attorneys’ fees, accountants’ fees and experts’ fees and other

costs and disbursements; and

D. awarding plaintiffs and other members of the Class such

other and further relief as may be just and proper under the

circumstances.


-81-

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

Dated: August 23, 2000

Respectfully submitted,

BERNSTEIN LIEBHARD & LIFSHITZ, LLP

By:Stanley D. Bernstein (SB-1644)Sandy A. Liebhard (SL-0835)Jeffrey M. Haber (JH-1728)Abraham I. Katsman (AK-7306)

10 East 40th Street, 22nd floorNew York, NY 10016(212) 779-1414

MILBERG, WEISS, BERSHAD, HYNES& LERACH, LLP

By: ______________________________Steven G. Schulman (SS-2561)Samuel H. Rudman (SR-7957)Keith M. Fleischman (KF-0199)Cheryl L. Guibone (CG-8475)

One Pennsylvania PlazaNew York, NY 10119-0165(212) 594-5300

LEAD COUNSEL FOR PLAINTIFFSAND THE CLASS

STULL STULL & BRODYJules Brody (JB-9151)Aaron Brody (AB-5850)6 East 45th StreetNew York, New York 10017(212) 687-7230


-82-

WEISS & YOURMANJoseph H. Weiss (JW-4534)The French Building551 Fifth AvenueNew York, New York 10176(212) 682-3025

LOWEY DANNENBERG BEMPORAD& SELINGER, P.C.

Richard Bemporad (RB-8778)Jeanne D’Esposito (JD-5843)The Gateway, 11th FloorOne North Lexington AvenueWhite Plains, New York 10601(914) 997-0500

SHAPIRO HABER & URMY LLPThomas G. Shapiro (TS-0377)Theodore M. Hess-Mahon (TH-8499)75 State StreetBoston, Massachusetts 02180(617) 439-3939

ATTORNEYS FOR PLAINTIFFS

X:\web\local\apache\services\xfer\39B7C084-6A05-C370\Consolidated Complaint.wpd


X:\web\local\apache\services\xfer\39B7C45A-7056-B0D0\cert of service.wpd

CERTIFICATE OF SERVICE

I hereby certify that a true and correct copy of

plaintiff’s Consolidated Class Action Complaint was served on the

23rd day of August, 2000, by hand upon the following attorneys:

Melvin A. BrostermanSTROOCK & STROOCK

& LAVAN LLP180 Maiden LaneNew York, New York 10038Ph.: (212) 806-5400Fax: (212) 806-6006Attorneys for Defendants Delta

Financial Corporation andthe Individual Defendants

John F. CambriaSALANS HERTZFELD HELBRONN

& CHRISTY & VIENER620 Fifth AvenueNew York, NY 10020-2457Ph.: (212) 632-5500Fax: (212) 632-5555Attorneys for Defendant NatWest

Securities Limited, PrudentialSecurities Incorporated and U.S.Bancorp Piper Jaffray Inc.

Joan Devlin Farrell

Documents

BERNSTEIN LIEBHARD & LIFSHITZ, LLPsecurities.stanford.edu/filings-documents/1010/DFC... · the borrower likely could not repay the loan. Delta Funding approved loans where the borrower's