1 Presented by Lori G. Feldman, Esq. Milberg Weiss LLP Liability Exposure in the Primary Market: Plaintiff’s Perspective on Class Actions Against Public Companies

2 Common Types of Subprime-Related Class Action Litigation Against Public Companies  Securities Fraud  ERISA  Shareholder Derivative

3 Subprime-Related Securities Fraud Class Actions

4 Elements of Securities Fraud Claim under Section 10(b) of the Securities Exchange Act of 1934:  A false statement or omission  Made in connection with the purchase or sale of a security  That is material  That is made with scienter  That is justifiably relied upon by the plaintiff (“transactional causation”)  That is the proximate cause of the plaintiff’s damages (“loss causation”)  Damages Subprime-Related Securities Fraud Actions (cont.)

5 Heightened Pleading Requirements: Private Securities Litigation Reform Act of 1995  With respect to misstatements/omissions, a complaint must “specify”: ▫the reason(s) why the statement/omission is misleading ▫if an allegation is made on information and belief, the complaint must state with particularity all facts on which that belief is formed  With respect to scienter, a complaint must: ▫with respect to each act or omission ▫state with particularity ▫facts giving rise to a strong inference ▫that the defendant acted with scienter Subprime-Related Securities Fraud Actions (cont.)

6 In Re: Beazer Homes USA, Inc. Sec. Litig. Master File No. 1:07-cv-725-CC (N.D. Ga. filed May 18, 2007).  Defendant homebuilder, Beazer Homes USA, and its mortgage origination subsidiary, Beazer Mortgage Corporation, allegedly targeted low-income first-time buyers by inducing them to enter into subprime mortgages for which they were not qualified  Beazer and its mortgage origination business were allegedly able to fund loans for less qualified home loan applicants by, among other tactics, falsifying loan applications to meet underwriting guidelines and providing applicants’ down payment funds  Beazer has allegedly failed to comply with federal rules in arranging government-insured loans for buyers in its subdivisions Subprime-Related Securities Fraud Actions (cont.)

7 In Re: Beazer Homes USA, Inc. Sec. Litig. Master File No. 1:07-cv-725-CC (N.D. Ga. filed May 18, 2007).  Specifically, Beazer is alleged to have: a)Undermined Federal Housing administration rules (“FHA”) that require borrowers to make a 3% down payment by donating monies to nonprofit organizations that would then assist buyers with down payments (Beazer would then incorporate the cost of the donated down payment into the home price and inflate the appraised value to meet underwriting guidelines) b)Served as builder, seller, and mortgage broker for two-thirds of its buyers in one of its subdivisions, which enabled Beazer to control the financing process, arrange loans larger than some buyers could afford, and thereby include the cost of financial incentives in the price of the homes c)Instructed buyers to omit, misstate, and/or falsify information on home loan applications and Beazer altered home loan applications themselves in order to qualify buyers for home loans Subprime-Related Securities Fraud Actions (cont.)

8 In Re: Beazer Homes USA, Inc. Sec. Litig. Master File No. 1:07-cv-725-CC (N.D. Ga. filed May 18, 2007).  Defendants (Beazer and individual defendants, including Beazer’s CEO, CFO, Chief Accounting Officer, and General Counsel), allegedly issued materially false and misleading statements regarding Beazer’s growth, business, prospects and then-current financial condition and engaged in improper and illegal mortgage lending activities in order to misleadingly enhance the Company’s business  Beazer’s illegal lending activities enabled the company to sell more properties and earn more in mortgage origination fees than it would have been able to absent the fraud  Beazer’s lending practices and lack of internal controls led to large amounts of defaults, foreclosures and other problems which materially impacted Beazer’s business  These practices have resulted in investigations by the FBI, DOJ, SEC, IRS and HUD Subprime-Related Securities Fraud Actions (cont.)

9 In Re: Beazer Homes USA, Inc. Sec. Litig. Master File No. 1:07-cv-725-CC (N.D. Ga. filed May 18, 2007).  Beazer’s common stock traded at artificially inflated prices as a result of Defendants’ false statements and/or omissions. Class consists of public investors of Beazer stock during class period  The price of Beazer common stock plummeted by approximately 60% from its class period high after important revelations became public  True facts concealed from public investors included: a) Beazer’s lack of adequate internal controls over its construction and lending practices; b) Beazer’s growth was based in large part on its improper and allegedly illegal lending practices to low-income buyers; c) many of Beazer’s buyers would not be able to make their mortgage payments, leading to lower sales for Beazer and higher than average foreclosure rates on Beazer sold properties; and d) given the uncertainty and volatility in the housing development, construction and mortgage financing market, Beazer’s statements and projections were, at minimum, severely reckless Subprime-Related Securities Fraud Actions (cont.)

10 In Re: Beazer Homes USA, Inc. Sec. Litig. Master File No. 1:07-cv-725-CC (N.D. Ga. filed May 18, 2007).  The Aftermath: ▫Resignations of top Beazer executives, including certain of the individual defendants ▫One defendant terminated for cause due to violation of Beazer’s ethics policies stemming from attempts to destroy documents in violation of the company’s document destruction policy ▫Entry of Stipulation and Order Regarding Preservation of Documents ▫Beazer announces that it will be restating its financial statements for fiscal years 2004 through 2006 and the interim periods of fiscal 2006 and fiscal 2007 as part of Beazer’s “independent internal investigation” into its mortgage origination business and certain accounting and financial reporting matters ▫Restated financials still pending Subprime-Related Securities Fraud Actions (cont.)

11 Subprime-Related ERISA Class Actions

12  Individual account or defined contribution plans, typically 401(k) plans, offer investment in the plan sponsor’s common stock as either investment option or company contribution  Employer’s publicly-traded common stock invested in 401(k) assets Subprime-Related ERISA Actions (cont.) The Basics:

13  Company engages in serious mismanagement and improper business practices  Company’s stock declines in value  Fiduciaries of 401(k) plan are sued for imprudently investing plan assets in company’s equity  Plan fiduciaries knew or should have known that such investment was unduly risky and imprudent in light of problematic business practices Subprime-Related ERISA Actions (cont.) The Basics (cont.):

14  Class actions are brought on behalf of the 401(k) plan by individual plan participants  Claim brought pursuant to Sections 409 and 502(a)(2) of the Employment Retirement Income Retirement Security Act of 1974 (“ERISA”) to recover losses to the plan for which Defendants are personally liable  Other equitable relief is also sought from Defendants under Section 502(a)(3), including injunctive relief, constructive trust, restitution and other monetary relief Basics (cont.): Subprime-Related ERISA Actions (cont.)

15  ERISA Sections 409(a) and 502(a)(2) authorize participants to sue in representative capacity for losses suffered by plan participants as a result of breaches of fiduciary duty  Class action would be brought under Fed. R. Civ. P. 23 on behalf of all participants and beneficiaries of the plan, whose plan accounts were invested in company stock Subprime-Related ERISA Actions (cont.) Basics (cont.):

16  Claims arise from the failure of Defendants, fiduciaries of the 401(k) plan, to act solely in the interest of plan participants and beneficiaries, and to exercise the required skill, care, prudence, and diligence in administering the plan and plan assets during a particular period of time Subprime-Related ERISA Actions (cont.) Basics (cont.):

17 Examples of Fiduciary Duties Breached:  Duty of loyalty  Duty of prudence  Duty to inform  Duty to investigate and monitor investment alternatives  Duty to monitor appointed fiduciaries  Co-Fiduciary liability  Non-Fiduciary liability Subprime-Related ERISA Class Actions (Cont.)

18 In Re: Morgan Stanley ERISA Litig. Master File No. 07- Civ (S.D.N.Y filed 12/14/07)  Morgan Stanley common stock is one of the investment options in the company’s 401(k) plan  As of June 2007, in excess of $1.8 billion of Morgan Stanley’s 401(k) plan’s $3.3 billion or more in assets were invested in Morgan Stanley common stock  The action alleges that the fiduciaries of the 401(k) and ESOP plans breached their fiduciary duties to the plans and their participants under ERISA by selecting and maintaining company stock as an investment alternative for participant contributions and company matching contributions, when it was no longer a suitable or prudent investment option Subprime-Related ERISA Class Actions (cont.)

19  The basic prudence allegations arise from the fact that defendants knew, or should have known, that Morgan Stanley was engaging in risky and unsound business practices in connection with its investments in: - Collateralized Debt Obligations (“CDOs”) - Conduits - Structured Investment Vehicles (“SIVs”) In Re: Morgan Stanley ERISA Litig. Master File No. 07- Civ (S.D.N.Y filed 12/14/07) Subprime-Related ERISA Class Actions (cont.)

20  These investment practices rendered Morgan Stanley stock an imprudent, inappropriate and extraordinarily risky investment for the retirement savings of plan participants  Morgan Stanley plan participants saw their retirement savings accounts devastated Subprime-Related ERISA Class Actions (cont.) In Re: Morgan Stanley ERISA Litig. Master File No. 07- Civ (S.D.N.Y filed 12/14/07)

21 Subprime-Related Derivative Litigation

22 Prerequisites to Prosecution of Stockholder Derivative Actions: Subprime-Related Derivative Litigation (cont.)  Contemporaneous Ownership of Stock  Pre-Suit Demand on Directors  Adequacy of the Derivative Representative

23 Subprime-Related Derivative Litigation (cont.)  “That issue must turn solely on the following questions: (1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually).” Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004). When is an action “derivative”?

24 In Re: Countrywide Financial Corporation Shareholder Derivative Litig. Lead Case No. BC (Ca. Super. Ct. filed Oct. 1, 2007).  Plaintiff shareholders assert derivative claims for breaches of fiduciary duties against certain of the corporation's officers and directors, alleging mismanagement of the corporation.  Mismanagement included exposing the corporation to liability by encouraging improper business and lending practices, such as: - Pushing high-cost loans on borrowers - Issuing oversized loans to borrowers with low credit scores - Steering low-income borrowers away from inexpensive government-backed loans Subprime-Related Derivative Litigation (cont.)

25 In Re: Countrywide Financial Corporation Shareholder Derivative Litig. Lead Case No. BC (Ca. Super. Ct. filed Oct. 1, 2007).  During the period of misconduct, Defendants repeatedly reassured investors as to corporation’s financial strength, continued growth, and stability, even as the subprime market continued to raise concerns. When defendants finally disclosed the extent of corporation’s subprime losses, corporation’s stock price plummeted 32% and corporation announced that it was laying off one-fifth of its workforce Subprime-Related Derivative Litigation (cont.)

26  Case seeks to remedy Defendants’ violations of state law and their breaches of fiduciary duty, waste of corporate assets, unjust enrichment and violations of California Corporate Code  Case is also brought as a class action by shareholders of Countrywide on behalf of all shareholders of the company seeking injunctive relief against Countrywide’s Board of Directors for its formulation and approval of the proposed acquisition of Countrywide by affiliates of Bank of America Corporation on inadequate terms and through an inadequate process Subprime-Related Derivative Litigation (cont.) In Re: Countrywide Financial Corporation Shareholder Derivative Litig. Lead Case No. BC (Ca. Super. Ct. filed Oct. 1, 2007).

27 Presented by Lori G. Feldman, Esq. Milberg Weiss LLP Conclusion