EPSTEIN
page 2 / 689 . OCR, unverified
b.
Bear Steams' Valuation Models Were Misleading
c.
The Importance of Value at Risk Models
d.
Bear Steams' Value at Risk Models Were Misleading
2.
Bear Stearns' Impoverished Risk Management Program
F.
Bear Steams Hides its Mounting Exposure to Loss
1.
Early Wamings
2.
Bear Steams' Deception Begins
G.
The Implosion of the Hedge Funds
H.
Repercussions of the Hedge Funds' Implosion
I.
Bear Stearns' Catastrophic Collapse
J.
Post Class Period Events
K.
Defendants' Fraudulent Statements Adversely Impacted Current and
Former Company Employees
I.
The RSU Plan
2.
The CAP Plan
3.
Defendants' Fraud Harmed Holders of RSU and CAP Plan Units
L.
The SEC Comment Letters
M.
Bear Stearns' Practices Violated Accounting Standards
I.
GAAP Overview
2.
Fraud Risk Factors Present at Bear Steams
a.
Fraud Risk Factors Applicable to Depository and
Lending Institutions
b.
Risk Factors Applicable to Brokers and Dealers in
Securities
3.
Audit Risk Alerts
4.
Bear Stearns Falsely Represented that its Internal Controls Over
Financial Reporting Were Effective
ii
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a.
Risk Management
b.
Pricing Models and VaR Systems
5.
GAAP Violations Relating to the Company's Financial Statements
a.
Bear Stearns Misstated Its Exposure to Loss from the
b.
Failed Hedge Funds
Bear Stearns' Financial Statements Misrepresented its
c.
Exposure to Decline in the Value of RIs
GAAP Violations Related to Failure to Appropriately
d.
Determine the Fair Value of Financial Instruments
Bear Stearns Failed to Provide Adequate Disclosure
e.
About Risk and Uncertainties
Bear Stearns Failed to Provide Reliable Disclosures to
104
Investors in Accordance with SEC Regulations
106
N.
Bear Stearns' Practices Violated Banking Regulations
107
I.
Overview of Capital Requirements
107
2.
Bear Stearns Failed to Take Timely and Adequate Capital Charges
109
3.
Inflation of Capital By Using Incorrect Marks
110
V.
4.
Misrepresentations to Regulators Relating to VaR
DEFENDANTS' SCIENTER
112
A.
James E. Cayne
112
B.
Alan D. Schwartz
115
C.
Samuel L. Molinaro. Jr.
116
D.
Warren J. Spector
120
E.
Alan C. Greenberg
121
F.
Michael J. Alix
123
G.
Jeffrey M. Farber
124
H.
Corporate Scienter
125
iii
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VI.
ADDITIONAL ALLEGATIONS SUPPORTING THE OFFICER
DEFENDANTS' SCIENTER
126
A.
General Allegations of Scienter
126
B.
Abnormal Profit Taking
129
VII.
DELOITTE'S DEFICIENT AUDITS OF BEAR STEARNS'
FINANCIAL STATEMENTS
133
A.
Overview of Allegations Against Deloitte
133
B.
Deloitte's Certifications
134
C.
Overview of GAAS
135
D.
GAAS Required Deloitte to Consider Risk Factors as Part of Audit
Planning
136
1.
Fraud Risk Alerts Relevant to Deloitte's Audit of Bear Stearns
136
2.
Audit Risk Alerts Relevant to Deloitte's Audit of Bear Stearns
137
3.
Deloitte's Experience Auditing the Hedge Funds
138
E.
Red Flags Recklessly or Deliberately Disregarded by Deloitte
139
I.
Bear Stearns' Misleading Fair Value Measurements
139
2.
Bear Stearns' Failures to Disclose Risks Inherent In Its Financial
Statements
142
3.
Bear Stearns' Misleading Accounting Treatment of the Hedge
Fund Bailout
143
4.
Bear Stearns' Failure to Disclose Critical Information Relating to
the Company's Valuation of Its Financial Instruments
144
5.
Bear Stearns' Inadequate Internal Controls
146
6.
Bear Stearns' Deficient Internal Audit Function
152
VIII. DEFENDANTS' MATERIALLY FALSE AND MISLEADING
STATEMENTS
154
A.
Statements Relating to Fiscal Year 2006 and Fourth Quarter 2006
154
I.
December 14, 2006 Press Release
154
iv
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a.
December 14. 2006 Press Release Statements
Regarding the Company's Fourth Quarter 2006
Results
b.
Press Release Regarding Fiscal 2006 Results
155
156
2.
Fourth Quarter 2006 Earnings Conference Call
156
3.
Form 10-K for Fiscal Year 2006
158
a.
The Company's Financial Results and Assets
159
b.
The Company's Risk Management Practices
159
c.
The Company's Exposure to Market Risk
d.
The Company's Compliance With Banking
162
Regulations
162
e.
The Company's Internal Controls
163
f.
Deloitte's Certification
164
B.
Statements Relating to Fiscal Year 2007 Results
164
I.
First Quarter 2007 Results
164
a.
First Quarter 2007 Press Release
164
b.
First Quarter 2007 Conference Call
166
c.
First Quarter 2007 Form I0-Q
168
2.
Second Quarter 2007 Results
172
a.
Second Quarter 2007 Press Release
172
b.
Second Quarter 2007 Conference Call
173
c.
June 22. 2007 Press Release
174
d.
Second Quarter 2007 Form 10-Q
175
3.
August 3. 2007 Press Release and Conference Call
180
4.
Third Quarter 2007 Results
182
a.
Third Quarter 2007 Press Release