1 consolidated amended complaint for violation of the federal securities laws 06/22/2006

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

x

In re DORAL FINANCIAL CORP. SECURITIES LITIGATION This document Relates To:

ALL ACTIONS.

: : : : : : : : : : : x

Master Docket No. 1:05-md-01706-RO (Civil Action No. 1:05-cv-04014-RO)

ELECTRONICALLY FILED

CLASS ACTION

CONSOLIDATED AMENDED COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS DEMAND FOR JURY TRIAL

TABLE OF CONTENTS

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I. NATURE OF THE ACTION ..............................................................................................1

II. JURISDICTION AND VENUE ..........................................................................................9

III. PARTIES .............................................................................................................................9

IV. CLASS ACTION ALLEGATIONS ..................................................................................13

V. SUBSTANTIVE ALLEGATIONS ...................................................................................14

A. The Company and Its Business..............................................................................14

B. Doral “Sells” Its Pool of Mortgage Loans and Books a Gain on the “Sale” of the Loans Generating Hundreds of Millions of Dollars of Phantom Income....................................................................................................................15

1. Doral Falsely Represents that It Sold Its Mortgage Loans ........................15

2. Doral Artificially Inflates the Value of Its IO Strips by Manipulating Key Accounting Assumptions and Third Party Valuations ..................................................................................................19

C. The Restatement.....................................................................................................24

VI. MATERIALLY FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD ......................................................................................26

A. Fiscal Year 2000 ....................................................................................................26

B. Fiscal Year 2001 ....................................................................................................36

C. Fiscal Year 2002 ....................................................................................................48

D. Fiscal Year 2003 ....................................................................................................60

E. Fiscal Year 2004 ....................................................................................................72

VII. ADDITIONAL SCIENTER ALLEGATIONS................................................................101

VIII. DORAL’S FINANCIAL REPORTING DURING THE CLASS PERIOD WAS MATERIALLY FALSE AND MISLEADING AND VIOLATED GAAP....................106

A. Doral’s Admission that Its Financial Misstatements During the Class Period Were Material...........................................................................................110

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B. Doral’s Violations of GAAP................................................................................111

1. Misstated Mortgage Loan Transfers ........................................................112

2. Misstated IO Strip Valuations..................................................................114

3. Misstated Derivative Instruments ............................................................116

4. Misstated Investments..............................................................................116

5. Misstated Servicing Assets ......................................................................116

6. Other Financial Misstatements ................................................................118

7. Doral’s False and Misleading Reporting and Certifications of Disclosure and Internal Controls .............................................................120

IX. PWC’S PARTICIPATION IN THE FRAUD .................................................................126

A. PwC’s Materially False and Misleading Statements During the Class Period ...................................................................................................................127

B. PwC Knew or Recklessly Disregarded that Doral’s Class Period Financial Statements Were Materially Misstated ................................................................132

C. PwC Knew or Recklessly Disregarded that Its “Audit” Report on Doral’s 2004 System of Internal Control over Financial Reporting Was Materially Misstated ..............................................................................................................134

D. PwC Knew or Recklessly Disregarded that Its “Audit” of Doral’s Class Period Financial Statements Were Not Conducted in Accordance with GAAS...................................................................................................................145

E. PwC’s Additional Scienter Allegations ...............................................................152

X. LOSS CAUSATION/ECONOMIC LOSS ......................................................................155

XI. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE ...................................................................................................159

XII. NO SAFE HARBOR .......................................................................................................160

COUNT I .........................................................................................................................161

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For Violation of §10(b) of the Exchange Act and Rule 10b-5 Against All Defendants.....................................................................................161

COUNT II ........................................................................................................................162

For Violation of §20(a) of the 1934 Act Against All Defendants........................................................................................162

XIII. PRAYER FOR RELIEF ..................................................................................................162

XIV. JURY DEMAND.............................................................................................................162

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Lead Plaintiff West Virginia Investment Management Board (“Lead Plaintiff”) and Plaintiffs

Angel A. Burckhart and Administracion De Compensaciones Por Accidentes De Automoviles

(collectively with the Lead Plaintiff referred to herein as “Plaintiffs”) assert the following

allegations, except as to allegations specifically pertaining to Plaintiffs and Plaintiffs’ counsel, based

upon the investigation undertaken by Plaintiffs’ counsel, which included analysis of publicly

available news articles and reports, public filings, securities analysts’ reports and advisories about

Doral Financial Corporation (“Doral” or the “Company”), press releases and other public statements

issued by the Company, interviews with former employees of the Company and media reports about

the Company. Plaintiffs believe that substantial additional evidentiary support will exist for the

allegations set forth herein after a reasonable opportunity for discovery.

I. NATURE OF THE ACTION

1. This is a federal securities class action brought on behalf of purchasers of Doral

securities between March 15, 2000, to October 25, 2005, inclusive (the “Class Period”), seeking to

pursue remedies under the Securities Exchange Act of 1934 (the “Exchange Act”).

2. Defendant Doral is a diversified financial services company engaged in mortgage

banking, commercial banking, institutional broker-dealer activities and insurance agency activities.

The Company’s financial activities are principally conducted in Puerto Rico and the New York City

Metropolitan area.

3. This case concerns a massive accounting fraud perpetrated by Doral and the other

Defendants.1 As detailed herein, during the Class Period, Doral issued materially false and

misleading financial statements that violated the federal securities laws and Generally Accepted

1 The term “Defendants” does not refer to defendant PWC, unless otherwise indicated.

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Accounting Principles (“GAAP”) in order to overstate the Company’s pre-tax income by more than

$920.8 million and understate its debt by more than $3,3 billion. During the Class Period, Doral

purportedly sold more than $4 billion of fixed rate non-conforming mortgages to First BanCorp and

others. In connection with the “sales,” Doral retained a portion of the interest to be paid on the

mortgages – known as an interest-only strip (“IO Strips”) – and booked a gain on the sale of the

mortgages. Doral then valued its growing pool of IO Strips utilizing certain assumptions that it

represented were “sound” and based on an “independent” analysis. As a result of these purported

“sales,” during the Class Period, Doral’s reported income grew considerably and its pool of IO Strips

rose as well. Contrary to Defendants’ representations, however, Doral did not truly “sell” the

mortgages but instead was simply borrowing money which was collateralized by the mortgages.

Indeed, through side deals and oral agreements, Doral provided the “purchaser” with full recourse

rights that were far beyond the scope of the limited recourse rights provided for in the written

contracts between the parties, thereby rendering the transactions as loans. Furthermore, the

assumptions utilized by Doral to value its IO Strips were not “sound” or “independent” but rather

were manufactured by Defendants to conceal losses in the Company’s portfolio of IO Strips.

4. Doral has now admitted that its reported financial results for the past five years were

materially false and misleading when issued and has restated its financial statements for the five year

period ended December 31, 2004 (the “Restatement”). Furthermore, as detailed herein, Doral has

conducted a so-called independent investigation, which was performed by the Company’s outside

counsel, Latham & Watkins, LLP (the “Independent Investigation”), into its accounting issues. The

Independent Investigation’s publicly reported findings state that Doral’s senior management,

including Defendants S. Levis, M. Levis, Melendez and D. Levis, Sr. (as defined below) “took

inappropriate actions that resulted in transactions or accounts not being properly recorded in the

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Company’s financial statements for the years ended December 31, 2004, 2003 and 2002 and for each

of the quarters of 2004 and 2003.” In addition, the Independent Investigation found, among other

things that:

• Defendants D. Levis and Melendez participated in a scheme that succeeded in concealing IO Strip losses of $400 million to $600 million by manipulating key valuation factors used to determine such losses;

• Defendants S. Levis and Melendez were informed of material errors in IO impairment valuations prepared for the fourth quarter 2004 prior to the publication of Doral’s financial results for that period, but took no action to investigate or correct the errors;

• Defendants M. Levis and D. Levis provided false information concerning Doral’s mortgage loans and sales to certain third-parties who used the information to prepare “ independent” IO valuations” that formed a basis for Doral’s published financial statements;

• Defendants M. Levis and D. Levis entered into oral agreements with respect to certain mortgage loan sales that provided for recourse beyond that established in the associated written sales contracts resulting in Doral’s reversal of more than $595 million in previously reported “gain on sale income” and the failure to report more than $3.3 billion in additional recourse liabilities and debt as of December 31, 2004; and

• Defendant M. Levis entered into side letters guaranteeing the yield on certain assets “sales” resulting in the further material misstatement of Doral’s earnings and equity.

5. Defendants’ fraudulent scheme started to come to light in January 2005. On January

18, 2005, Doral reported its financial results for the fourth quarter of 2004. Among other things, the

Company noted that it had taken an “impairment charge” of $97.5 million related to the valuation of

its IO Strips and that these losses had, in effect, been offset with a “windfall” tax benefit. Given

these circumstances, analysts started to raise questions about the timing of the charges and the value

of the Company’s IO Strips. On the next trading day, January 19, 2005, the price of Doral common

stock declined 11% to close at $42.02 per share (split adjusted) on volume of 9.5 million shares and

continued to decline over the next four trading sessions closing at $38.96 per share (split adjusted)

on January 25, 2005. In an analyst report issued at that time, analyst Jim Shanahan at Wachovia

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Capital Markets, LLC (“Wachovia”), noted that the market continues to be concerned about an

“impairment of IO securities, a full week after the Company reported Q4 results.”

6. Then, on March 15, 2005, the market’s concerns about the quality of Doral’s reported

earnings were confirmed when Doral filed its Form 10-K for the year ended December 31, 2004,

with the Securities and Exchange Commission (“SEC”). The Form 10-K purported to disclose the

assumptions used by Defendants to value Doral’s IO Strips during the fourth quarter of 2004. The

market immediately perceived a “disconnect” between the assumptions used by Defendants in

comparison to then existing market conditions. For example, that same day, Wachovia analyst J.

Shanahan, issued a report noting the “overly aggressive [IO valuation] assumptions” used by Doral

and downgrading Wachovia’s investment rating for Doral common stock to “Under-perform” and

lowering earnings estimates for 2005.

7. On March 16, 2005, in response to the disclosures in the Form 10-K, the price of

Doral common stock lost 20% of its value, closing at a split-adjusted price of $29.32 per share on

trading volume of 7.5 million shares. The stock continued to fall, declining to a split-adjusted price

of $20.62 per share on March 18, 2005 in extremely heavy volume of more than ten times the daily

average.

8. Defendants attempted to stem the decline in the price of Doral common stock. On

March 17, 2005, Defendants held a conference call with analysts and investors to discuss the issues

raised concerning the valuation of Doral’s IO Strips, among other issues. During that call,

Defendant M. Levis falsely represented that the Company’s IO Strip valuation assumptions were

“sound” and based on the performance characteristics of the underlying loan portfolios. Similarly,

on March 18, 2005, Doral issued a press release entitled “Doral Financial Corporation Addresses

Unusual Market Activity.” The press release stated in pertinent part as follows:

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Mr. Salomon Levis, Chairman of the Board and Chief Executive Officer of Doral Financial Corporation, a diversified financial services company, announced today that the Company knows of no relevant events or material information causing the unusual activity in the Company’s common stock on the New York Exchange other than the recent downgrade of its common stock by certain analysts. Sandard [sic] & Poor’s had also changed the Company’s credit outlook to negative from stable when it reaffirmed the Company’s investment grade credit rating.

The Chairman noted that the Company held an investor call yesterday during which management reiterated that the fundamentals of the Company such as loan originations and fee income remained strong and that the Company was anticipating record mortgage production, record commercial loans and record insurance fee income for the first quarter of 2005. He encouraged investors that had not participated in the call to hear the recorded version.

9. Despite Defendants’ efforts to conceal the full scope of their fraud, the market was

starting to appreciate the magnitude of Doral’s accounting machinations. On April 14, 2006, Merrill

Lynch & Co. analyst Kenneth Bruce downgraded Doral common stock to “Sell” from “Neutral” and

noted that if Doral were to value its IO securities more conservatively, it might write down its

portfolio by as much as $600 million, or $4 per share. The report also noted “the potential for an

accounting restatement, further [IO] impairment and the corresponding impact that either would

have on the company’s earnings model.” In response to this report, on April 14-15, the price of

Doral common stock continued to decline closing at a split-adjusted share price of $16.28.

10. On April 19, 2005, Doral issued a press release announcing that it would “correct” the

valuation methodology used to calculate the value of its IO Strips and that the Company’s estimate

was that this would result in a decrease in fair value of between $400 million to $600 million. The

Company also reported that its published financial statements for the past years “should no longer be

relied upon” and it would be restating its financial statements for the periods from January 1, 2000

through December 31, 2004.

11. That same day, the SEC informed Doral that it was initiating an inquiry into Doral’s

accounting and disclosure practices concerning its restatement announcement. The SEC

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investigation became a “formal” investigation in October 2005 and, as of this filing, the SEC

continues to actively investigated Doral.

12. Over the next several days, the price of Doral common stock declined to a split-

adjusted trading price below $15.00 per share, closing at $14.94 per share on or about April 25,

2005.

13. Following the announcement of the restatement, Doral’s management initiated an

internal review of the Company’s books, records and accounting practices, under the oversight of the

Audit Committee and with the assistance of outside consultants. According to Doral’s public filings,

this internal review “extended beyond issues surrounding the valuation of Doral Financial’s portfolio

of floating rate IOs.”

14. During this time, in addition to Doral’s internal review, the Independent Investigation

by Doral’s outside counsel was initiated and the accounting firm of Ernst & Young LLP was

engaged to assist with the investigation. On or about August 17, 2005, Doral’s Board of Directors

met to review the results of the Independent Investigation “to-date,” and immediately thereafter

asked for the resignations of defendants S. Levis, M. Levis, D. Levis, and Meléndez. When

Meléndez refused to tender his resignation, he was terminated from his position at Doral.

15. On August 24, 2005, the U.S. Attorney’s Office for the Southern District of New

York served Doral with a grand jury subpoena seeking the production of certain documents relating

to issues arising from the restatement, including corporate, auditing and accounting records, as well

as financial statements, prepared during the period January 1, 2000, to the date of the subpoena.

According to the Doral’s recent public filings, the Company has produced some documents and

information in response to the subpoena.

16. On the last day of the Class Period, October 25, 2005, Doral issued a press release

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announcing that the scope of the restatement had been expanded to include “some or all” of the

hundreds, if not thousands, of mortgage loan sale transactions the Company treated as “sales” in its

previously issued financial statements. The press release stated in pertinent part:

[Doral] reported today that it no longer expects to file by November 10, its amended annual report on Form 10-K for the year ended December 31, 2004. The delay is principally attributable to new information regarding the Company’s mortgage loan sales to local financial institutions. Latham & Watkins LLP, outside counsel to the independent directors and the Audit Committee of the Board of Directors, is investigating this information, and the Company is assessing what effect, if any, this information may have on the Company’s financial statements. This information may impact the accounting treatment of some or all of these transactions as “sales” under Statement of Financial Accounting Standards (SFAS) 140. In the event that the Company determines that a transaction does not qualify as a “sale” for accounting purposes, the Company would record the transaction as a loan payable secured by mortgage loans and reverse the gain previously recognized with respect to such transaction.

* * *

In addition, the Company reported that the U.S. Securities and Exchange Commission (the “SEC”) has issued a formal order of investigation in connection with the previously announced informal inquiry into the Company’s restatement of its consolidated financial statements. Opening a formal investigation enables the SEC to issue subpoenas for witnesses and documents, including third parties outside the Company. As part of the formal investigation, the Company has received a subpoena from the SEC seeking the production of documents principally regarding the restatement and related financial reporting matters and the terms of certain transactions with local financial institutions. The subpoena is similar to informal SEC document requests previously received by the Company, to which it has been responding. The Company is continuing to cooperate with the SEC in connection with this investigation.

17. On this news, the price of Doral common stock tumbled an additional 24% per share

to close at $8.65 per share, a decline of $2.85 from the split adjusted closing price of October 24,

2005. As of the date of this filing the Company’s common shares continue to trade in the range of

$6.00-$7.00 per share (split adjusted).

18. The following chart graphically depicts Defendants’ fraudulent scheme, key events

during the Class Period and the devastating impact of the fraud on Plaintiffs and the Class:

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II. JURISDICTION AND VENUE

19. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the

Exchange Act [15 U.S.C. §§78j(b) and 78t(a)] and Rule 10b-5 promulgated thereunder [17 C.F.R.

§240.10b-5].

20. This Court has jurisdiction of this action pursuant to Section 27 of the Exchange Act

[15 U.S.C. §78aa] and 28 U.S.C. §§1331 and 1337 and 28 U.S.C. §§1331 and 1337.

21. Venue is properly laid in this District pursuant to Section 27 of the Exchange Act and

28 U.S.C. §1391(b) and (c). The acts and conduct complained of herein occurred in substantial part

in this District.

22. 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.

III. PARTIES

23. Lead Plaintiff West Virginia Investment Management Board purchased Doral

publicly traded securities as set forth in its certification which was previously filed in this litigation

and is incorporated herein by reference, and has suffered damages.

24. Plaintiffs Angel A. Burckhart and Administracion De Compensaciones Por

Accidentes De Automoviles purchased Doral publicly traded securities as set forth in their respective

certifications which were previously filed in this litigation and are incorporated herein by reference,

and have suffered damages.

25. Defendant Doral is a diversified financial services company engaged in mortgage

banking, commercial banking, institutional broker-dealer activities and insurance agency activities.

The Company is a bank holding company.

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26. Defendant Salomon Levis (“S. Levis”) is the former Chairman, Chief Executive

Officer and director of Doral. In August 2005, S. Levis resigned his positions with the Company at

the request of Doral’s Board of Directors following findings that he directly participated in

fraudulent and “inappropriate actions that resulted in transactions or accounts not being properly

recorded in the Company’s financial statements . . .”

27. Defendant David Levis, Sr. (“D. Levis, Sr.”) is a former Chairman, Chief Executive

Officer and director of Doral. During the Class Period, D. Levis, Sr. served as a “director emeritus”

of Doral. In August 2005, D. Levis, Sr. resigned his position with the Company at the request of

Doral’s board of directors following findings that he directly participated in fraudulent and

“inappropriate actions that resulted in transactions or accounts not being properly recorded in the

Company’s financial statements . . .” According to Plaintiffs’ confidential sources D. Levis, Sr.

remained active in the day-to-day management of the Company, and acted as Doral’s de-facto chief

financial officer until he resigned at the request of Doral’s board in August 2005.

28. Defendant Zoila Levis (“Z. Levis”) was President, Chief Operating Officer and a

director of Doral. On January 31, 2006, Z. Levis “retired” from her operating positions at Doral but

remains a director of the Company.

29. Defendant David R. Levis (“D. Levis”) was President of HF Mortgage Bankers, a

division of Doral.

30. Defendant Ricardo Melendez (“Melendez”) was Executive Vice President and Chief

Financial Officer of Doral. In August 2005, Melendez was terminated for cause following findings

by Doral board of directors that Melendez directly participated in fraudulent and “inappropriate

actions that resulted in transactions or accounts not being properly recorded in the Company’s

financial statements . . .”

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31. Defendant Richard F. Bonini (“Bonini”) is the Secretary of the Board of Directors

and served as Chief Financial Officer of the Company from 1996 to December 2003.

32. Defendant Edgar M. Cullman, Jr. (“Cullman”) is a director of Doral and served on the

Company’s audit committee (“Audit Committee”) since 2001. As a member of the Audit

Committee, Cullman assisted the Board of Directors in its oversight of Doral Financial’s financial

reporting process. In connection with his role as an Audit Committee member, Cullman represented

that he considered and discussed the audited financial statements with management and an

independent accounting firm. Cullman and the Company’s outside auditors also discussed the

matters required to be discussed by auditing standards in effect at all relevant times.

33. Defendant Mario Levis (“M. Levis”) was Senior Executive Vice President and

Treasurer of Doral. In August 2005, M. Levis resigned his positions with the Company at the

request of Doral’s following findings that he directly participated in fraudulent and “inappropriate

actions that resulted in transactions or accounts not being properly recorded in the Company’s

financial statements . . .”

34. Defendant Efraim Kier (“Kier”) was, at all relevant times, a director of Doral and a

member of the Company’s Audit Committee. As a member of the Audit Committee, Kier assisted

the Board of Directors in its oversight of Doral Financial’s financial reporting process. In

connection with his role as an Audit Committee member, Kier represented that he considered and

discussed the audited financial statements with management and an independent accounting firm.

Kier and the Company’s outside auditors also discussed the matters required to be discussed by

auditing standards in effect at all relevant times.

35. Defendant Harold D. Vicente (“Vicente”) was appointed to the Company’s Board of

Directors on February 4, 2000 and was also a member Doral’s Audit Committee since 2001. As a

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member of the Audit Committee, Vicente assisted the Board of Directors in its oversight of Doral

Financial’s financial reporting process. In connection with his role as an Audit Committee member,

Vicente represented that he considered and discussed the audited financial statements with

management and an independent accounting firm. Vicente and the Company’s outside auditors also

discussed the matters required to be discussed by auditing standards in effect at all relevant times.

36. Defendant A. Brean Murray (“Murray”) was a director of Doral from 1994 through

2002 and was a member of the Company’s Audit Committee for the year 2000. As a member of the

Audit Committee, Murray assisted the Board of Directors in its oversight of Doral Financial’s

financial reporting process. In connection with his role as an Audit Committee member, Murray

represented that he considered and discussed the audited financial statements with management and

an independent accounting firm. Murray and the Company’s outside auditors also discussed the

matters required to be discussed by auditing standards in effect at all relevant times.

37. Defendant John B. Hughes (“Hughes”) was appointed to the Company’s Board of

Directors on December 2, 2002 and was a member of the Company’s Audit Committee since 2002.

As a member of the Audit Committee, Hughes assisted the Board of Directors in its oversight of

Doral Financial’s financial reporting process. In connection with his role as an Audit Committee

member, Hughes represented that he considered and discussed the audited financial statements with

management and an independent accounting firm. Hughes and the Company’s outside auditors also

discussed the matters required to be discussed by auditing standards in effect at all relevant times.

38. Defendant Peter A. Hoffman (“Hoffman”) was a member of Doral’s Audit

Committee in 2004. As a member of the Audit Committee, Hughes assisted the Board of Directors

in its oversight of Doral Financial’s financial reporting process. In connection with his role as an

Audit Committee member, Hughes represented that he considered and discussed the audited

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financial statements with management and an independent accounting firm. Hughes and the

Company’s outside auditors also discussed the matters required to be discussed by auditing standards

in effect at all relevant times.

39. Defendant PriceWaterhouseCoopers (“PwC”) is an international accounting and

consulting firm. PwC was engaged by Doral to provide “independent” auditing, accounting and

management consulting services, tax services, examination and review of filings with the SEC,

audits and/or reviews of financial statements which were included in Doral’s SEC filings, including

audited and unaudited information, and annual reports. As a result of the myriad of services it

rendered to Doral, PwC personnel were present at Doral corporate offices and operations

continuously during 2000-2005 and had continual access to and knowledge of Doral’s private and

confidential corporate information and business information. PwC received millions of dollars in

audit and consulting fees during the Class Period. PwC’s participation in the materially false and

misleading statements and omissions alleged herein is described in detail in ¶¶236-292 below.

IV. CLASS ACTION ALLEGATIONS

40. Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal Rules

of Civil Procedure on behalf of all persons who purchased Doral publicly traded securities during the

Class Period (the “Class”). Excluded from the Class are Defendants.

41. The members of the Class are so numerous that joinder of all members is

impracticable. The disposition of their claims in a class action will provide substantial benefits to

the parties and the Court. As of March 9, 2005, Doral had more than 107 million shares of common

stock outstanding, owned by hundreds if not thousands of persons.

42. There is a well-defined community of interest in the questions of law and fact

involved in this case. Questions of law and fact common to the members of the Class which

predominate over questions which may affect individual Class members include:

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(a) Whether Defendants’ statements were materially false and misleading when

issued and/or omitted material facts necessary to make the statements made, in light of the

circumstances under which they were made, not misleading;

(b) Whether Defendants knew or deliberately disregarded that their statements

were materially false and misleading;

(c) Whether the prices of Doral publicly traded securities were artificially

inflated; and

(d) The extent of damage sustained by Class members and the appropriate

measure of damages.

43. Plaintiffs’ claims are typical of those of the Class because Plaintiffs and the Class

sustained damages from Defendants’ wrongful conduct.

44. Plaintiffs will adequately protect the interests of the Class and has retained counsel

who are experienced in class action securities litigation. Plaintiffs have no interests which conflict

with those of the Class.

45. A class action is superior to other available methods for the fair and efficient

adjudication of this controversy.

V. SUBSTANTIVE ALLEGATIONS

A. The Company and Its Business

46. Defendant Doral was incorporated in Puerto Rico in 1972 and went public in 1988.

The Company manages its operations through four business segments: mortgage banking,

banking/thrift operations, institutional securities operations and insurance agency activities.

47. Doral describes itself as the largest residential mortgage company in Puerto Rico.

Historically, the Company’s mortgage banking segment has been its core business segment and has

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generated a majority of the Company’s reported net earnings – 85% in 2000, 67% in 2001, 56% in

2002 and 59% in 2003/4.

48. Doral’s mortgage banking segment is primarily engaged in the origination and

servicing of mortgage loans to residential borrowers in Puerto Rico. By the mid-1990’s, the

Company was originating billions of dollars of mortgage loans through its operating divisions and

subsidiaries.

B. Doral “Sells” Its Pool of Mortgage Loans and Books a Gain on the “Sale” of the Loans Generating Hundreds of Millions of Dollars of Phantom Income

49. Defendants engaged in a fraudulent scheme to overstate the assets and income of

Doral by falsely characterizing the sale of mortgages from Doral to other financial institutions and

then improperly accounting for those transactions on Doral’s financial statements. In particular,

Doral falsely represented that it “sold” more than $4 billion of mortgages to First BanCorp and other

financial institutions. In connection with the “sale” of the mortgages, Doral retained a portion of the

interest to be paid on the mortgages – the IO Strip – and also retained the servicing rights for the

mortgages. Doral booked a gain on the sale of the mortgages and valued its IO Strips and servicing

rights.

50. As a result of Defendants’ fraudulent activity, Doral reported increasing assets and

income during the Class Period. As detailed below, the Company’s seemingly positive financial

performance was the result of accounting manipulations and not based on the true nature and

substance of the “sales” transactions.

1. Doral Falsely Represents that It Sold Its Mortgage Loans

51. Doral supposedly “sold” the vast majority of its non-conforming mortgage loans to

First BanCorp. According to Doral, most of its non-conforming loans were designated as such

because of relaxed requirements for income verification or credit history (i.e., “no-documentation”

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loans). The average non-conforming loan originated by Doral was reported to be $90,000, rendering

the loans equivalent in characteristics to sub-prime loans.

52. Doral modeled the structure of its non-conforming loan “sales” on that of common

mortgage pass-through transactions with the following important exception: the Company retained a

portion of the interest payments for itself. In this regard, Doral sold pools of low balance no-

documentation fixed interest rate loans to First BanCorp and others but agreed to “retain” the right to

receive the fixed rate of interest on the mortgage loan and to pay to the buyer of the loans, a floating

interest rate indexed (eg. “3-month LIBOR”). Doral’s retention of the right to receive the net cash

flows (or net spread) was based on the monthly fixed interest payments received from the mortgage

pool less the LIBOR interest payments remitted to the buyer. This created a financial asset known as

an “interest only strip” or “IO Strip.”

53. On the date of the mortgage “sale,” Doral purportedly determined the value of the IO

Strip which it recorded on the Company’s balance sheet as an asset. Under applicable accounting

principles, Doral then reported the offset to the IO Strip asset as “gain-on-sale income” through its

income statement. Thus, on the “sale” of the mortgages, Doral reported a gain in income and an

increase in assets. Doral also retained the right to service the pools of mortgage loans it sold.

Defendants’ accounting for these retained “mortgage servicing rights” or “MSRs” virtually mirrored

the accounting applied to Doral’s IO assets.

54. The vast majority of Doral’s “gain on sale income” was derived from the sale of

relatively high-risk “non-conforming” mortgage loans to First BanCorp and others at margins seven

to eight times greater than margins realized from the sale of conforming loans. Market analysts

estimated that 70% of Doral’s reported gain-on-sale revenues of $390.1 million in 2003 were from

“sales” of non-conforming loans, increasing to 85% of $598.8 million in 2004. The Charts below

- 17 -

illustrates the growth in Doral’s non-conforming mortgage loan production and related sales

activities:

Doral Financial Corp. Non-conforming Mortgage Production Volume 1999 - 2004

$818

$1,409$1,594

$1,461

$2,341

$2,849

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

1999 2000 2001 2002 2003 2004

Year

$ M

illio

ns

Doral Financial Corp. Reported Loan Production and Sales

2000 - 2004

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

$9.0

$ B

illio

ns$0.0

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

$700.0

$ M

illio

ns

Loan Production $3.2 $4.2 $5.2 $6.5 $7.8

Loan Sales $2.4 $2.2 $4.0 $5.0 $6.8

Gain on Loan Sales $134.3 $187.2 $220.6 $390.1 $598.8

31-Dec-00 31-Dec-01 31-Dec-02 31-Dec-03 31-Dec-04

55. The chart below sets forth Doral’s reported gain on sale income in its various

components:

31-Dec-00 31-Dec-

01 31-Dec-02 31-Dec-

03 31-Dec-04

$0.0

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

Year

Doral Financial Corp. Components of Reported Gain on Sale Income

2000 - 2004

Fees/Other $17.3 $7.5 ($17.4) $61.8 $22.6

MSR $44.3 $38.2 $40.1 $47.0 $66.9

IO $72.7 $141.5 $197.9 $281.3 $509.3


- 18 -

56. During the Class Period, Defendants publicly represented in numerous press releases,

conference calls and SEC filings, that Doral’s sales of mortgage loans were made with only limited

recourse provisions and that these transactions qualified for treatment as “sales” under applicable

GAAP and SEC reporting requirements. In truth and in fact, as Doral has now admitted, the “sales”

were made with full recourse and, as detailed herein, did not qualify as “sales” and should not have

been accounted for as sales. According to the Independent Investigation, during the Class Period,

defendants M. Levis and D. Levis, and other senior executives of Doral, improperly negotiated “non-

conforming” mortgage loan sales to First BanCorp and others by means of “oral agreements [and]

understandings . . . providing recourse beyond the limited recourse” documented in Doral’s business

records.

57. As detailed in the Restatement, Doral’s improper gain on sale accounting artificially

inflated its reported income during the Class Period by $595.5 million and understated its debt by

$3.3 billion as of December 31, 2004.

58. Doral’s Audit Committee also identified a number of questionable transactions,

including transactions that occurred in 2000, 2001 and the fourth quarter of 2004, involving

generally contemporaneous purchases and sales of mortgage loans from and to Puerto Rico financial

institutions where the amounts purchased and sold, and other terms of the transactions were similar.

No contemporaneous documentation to substantiate the business purpose for these transactions could

be found. According to Doral’s SEC filings, the Audit Committee concluded that: “For some

periods, the gains on sale previously recorded in connection with such transactions had a material

impact on the Company’s consolidated financial statements.” In all likelihood the transactions

were triggered by the need to have Doral meet or exceed analysts’ earning expectations and further

inflate the price of Doral’s securities.

- 19 -

2. Doral Artificially Inflates the Value of Its IO Strips by Manipulating Key Accounting Assumptions and Third Party Valuations

59. Defendants further inflated Doral’s pre-tax earnings from 2000 to 2005 by more than

$306.2 million with falsified “mark-to-market” valuations on certain of Doral’s financial assets,

including Doral’s IO Strips and MSRs.

60. IO Strips are assets that the Company “created” in the course of mortgage loan sales.

Under a typical scenario, Doral purportedly sold mortgage loans while retaining the right to the

difference between the actual interest earned on the underlying loans and the interest it was obligated

to pay to the purchaser of the loan. The Company improperly estimated the value of an IO Strip on

the sale date and recorded this amount as an asset on Doral’s balance sheet. For purposes of the sale,

the value of the IO Strip was applied to reduce the book value of the loans transferred, thus ensuring

that Doral would record a “gain on mortgage loan sales” even if the sales proceeds were less than the

face value of the loans on the date of sale. For example, a sale of loans for proceeds of $90 with a

face value of $100 and “retained IOs” valued at $20 would generate a gain of $10 ($90 less

$80($100-$20)). Doral applied identical accounting treatment to the estimated values of MSRs

retained by Doral when the underlying loan was sold, thus further inflating the “gain on sale”

reported for the transaction.

61. Doral utilized the following key assumptions to calculate the value of its IO Strips

including: 1) the average life of the transaction calculated using the “prepayment speed”; 2) the net

spread received each year of that average life; and 3) the rate at which these cash flows are

discounted. Throughout the Class Period, Defendants repeatedly assured investors that the pricing

models used to value Doral’s IOs and MSRs were based on the credit and payment characteristics of

the loans sold and market interest rate assumptions.

- 20 -

62. In truth and in fact, however, Defendants improperly manipulated the assumptions

that were used by the Company and did not base them on any verifiable or objective data found in

the Company’s financial reporting systems. The Independent Investigation found that Defendants

substituted “management’s assumptions” for key elements of the pricing models used by Doral to

value these assets. In particular Doral has admitted that the process for determining the prepayment

speed and discount rate assumptions for its internal IO Strip valuation, which was principally

conducted by Defendant Melendez, Doral’s former chief financial officer and Defendant D. Levis,

Sr., Doral’s former director emeritus, was not conducted in a systematic manner and was not

adequately documented.

63. By deflating the prepayment speed of Doral’s mortgage pools, the average life of

Doral’s mortgage pool transactions were artificially extended thereby overstating expected cash

flows. Similarly, Defendants used lower-than-market discount rates to compute the present value of

these inflated cash flows further overstating the value of the IO Strips. For example, Doral’s 2004

Form 10-K filed in March 2005 represented that Doral’s mortgage pools had a prepayment speed of

7.20% for purposes of valuing the Company’s IO Strips at December 31, 2004. However, the

Company has now conceded that the appropriate prepayment speed for Doral’s IO Strips was

actually 17.04% based on the Company’s own internal reports and verifiable market sources. By

using a prepayment speed that was nearly 10% lower than what it actually was, Defendants extended

the term of its IO Strips by several years and grossly inflated the expected cash flows from those

transactions. Doral has also admitted that Defendants used artificially low discount rates at

December 31, 2004, a reported rate of 7.63% versus a market rate of 10.50%. The combined impact

of Defendants’ intentional manipulation of these key valuation elements overstated the Company’s

earnings and assets by hundreds of millions of dollars during the Class Period.

- 21 -

64. Furthermore, Defendants represented that Doral historically obtained market

verifiable IO valuations from third parties, compared them to the valuation produced by the

Company’s internal model, and recorded the value of its IO Strips in its consolidated financial

statements at the lowest of the three valuations. In each of Doral’s Forms 10-K for the years ended

December 31, 2000 through 2004, Defendants represented the following:

2000

The fair value of IOs is generally determined based on market prices for sales of similar assets. The Company classifies these IOs as securities held for trading. The IOs are realized over time through the receipt of the excess interest cash flows. The Company periodically evaluates the net realizable value of its IOs based on the present value of the estimated remaining future excess interest cash flows, using current prepayment speed assumptions determined from market sources for similar types of loans and the same discount rate used to calculate the original value of the interest only strip.

2001

To compute the value of the IOs, Doral Financial multiplies the interest spread it is entitled to retain on the loans sold by the principal balance of the mortgage pool being sold. The resulting product is then multiplied by a market factor which Doral Financial obtains from an unrelated financial institution that obtains the factor by reference to internal valuation models that incorporate assumptions regarding discount rates and mortgage prepayment rates.

2002

To determine the fair value of its IOs, Doral Financial obtains dealer quotes for comparable instruments and uses external and internal valuations based on discounted cash flow models that incorporate assumptions regarding discount rates and mortgage prepayment rates. Doral Financial generally uses the lowest valuation obtained from these methods.

2003

To determine the fair value of its IOs, Doral Financial, on a quarterly basis, obtains dealer quotes for comparable instruments and compares these quotes with external and internal valuations based on discounted cash flow models that incorporate assumptions regarding discount rates and mortgage prepayment rates. Doral Financial generally uses the lowest valuation obtained from these methods.

- 22 -

2004

To determine the fair value of its IO portfolio, Doral Financial engages in two external valuations with parties independent of the Company and of each other. One of them consists of dealer market quotes for similar instruments and the other one consists of a cash flow valuation model in which all economic and portfolio assumptions are determined by the preparer. In addition to these two independent valuations, the Company prepares an internal, static cash flow model that incorporates internally generated prepayment and discount rate assumptions and an expected retained interest rate spread based on 3-month LIBOR rates at the close of the reporting period. As of December 31, 2004, the 3-month LIBOR rate used in the internal valuation model was higher than those contracted with investors for payment prior to the next resetting dates. It is Doral Financial’s policy to record as the fair value of the IOs the lowest of the three valuation sources. [Emphasis added.]

65. Doral has now admitted that the foregoing statements were not true as the so-called

third-party “independent” valuations were manipulated by Defendants. In this regard, the Company

has reported that the process for obtaining the third-party IO Strip valuations was flawed; Doral’s

former treasurer, M. Levis, who was the principal point of contact with the institutions performing

the third-party valuations, and Doral’s former director emeritus, David Levis, Sr., provided

information orally about Doral’s IO Strips that was not verified by the Company’s financial

reporting process and may have improperly provided inaccurate information concerning the portfolio

to these institutions.

66. The third parties used by Doral to perform the “independent” valuations were Morgan

Stanley and Popular Securities, Inc. According to Confidential Informant 1 (“CI 1”), Doral engaged

Morgan Stanley and Popular Securities, Inc. to perform the valuations. CI 1 was employed as an

internal auditor at Doral from 2001 to 2005 and participated in numerous meetings and

conversations with the former head of Doral’s internal audit department, Oscar Aponte (“Aponte”)

and Doral’s current audit director Jorge Rodriguez (“Rodriguez”), who was an internal audit

manager during the Class Period, concerning the IO Strip valuations.

- 23 -

67. According to CI 1, Doral had no formal agreement with Morgan Stanley and there

was only one individual from Morgan Stanley who, as a favor to Defendants D. Levis, Sr., had

stamped the valuations with a Morgan Stanley authorization, although Morgan Stanley had not

authorized this individual to perform the valuations on behalf of Doral.

68. According to CI 1, Popular Securities and Morgan Stanley were simply “running the

same valuation model” as Doral for the IOs. Aponte told CI 1 that D. Levis Sr. was “managing the

outcome of the independent valuations,” by insisting that any such “independent” work utilize only

Doral’s valuation model and assumptions. According to CI 1, Morgan Stanley and Popular

Securities were regurgitating the valuations provided to them by Doral, as opposed to independently

valuing the IO Strips.

69. According to CI 1, based on discussions with Aponte concerning the Independent

Investigation, CI 1 learned that, in some cases, the Morgan Stanley and Popular Securities valuations

were less than Doral’s valuations, but Defendants simply removed some loans from the valuations,

which served to increase the value of the IO Strips. For example, CI 1 learned from Aponte that D.

Levis, Sr. and M. Levis pulled out various construction loan strips (strips with very short lives that

pulled the average yield period down) from the IO Strip valuation models in order to increase the

overall valuation of the portfolio. Once the IO Strip valuations were computed to the satisfaction of

D. Levis Sr. and M. Levis - Popular Securities and Morgan Stanley “put their stamp” on the

valuations.

70. According to CI 1, in 2004, when Doral began to write down of its IO Strips, Popular

Securities sent a letter to M. Levis sometime between February and April 2005 requesting that Doral

sign a statement explaining that Popular Securities did not independently value the IO Strips. CI 1

learned about this letter in conversations with both Aponte and Rodriguez.

- 24 -

71. Popular Securities, which is a subsidiary of Banco Popular, has recently publicly

admitted that it was engaged by Doral to provide valuations of Doral’s IO Strips and that, in

connection with its valuation work, it “utilized assumptions provided by Doral that may have not

been consistent with the actual terms of the IO portfolios.” On page 53 of Banco Popular’s Third

Quarter 2005 Form 10-Q, filed with the SEC on November 4, 2005, Banco Popular stated in

pertinent part as follows:

“[b]etween October 2002 and December 2004, Popular Securities, Inc., a wholly-owned subsidiary of the Corporation, provided quarterly estimates of the value of portfolios of IOs on behalf of Doral. In accordance with its understanding regarding the engagement, in providing those estimates of value, Popular Securities utilized assumptions provided by Doral that may not have been consistent with the actual terms of the IO portfolios.”

72. Finally, Doral has admitted that in the fourth quarter of 2004 it did not follow its

internal valuation processes. In particular, Defendant Melendez and D. Levis, Sr. used assumptions

that were below the thresholds set forth in the Company’s controls and procedures without first

seeking specific approval from the appropriate governing bodies within the Company. According to

the Independent Investigation, Defendants Melendez and D. Levis, Sr. became aware of but

improperly failed to correct errors in the data used to determine the prepayment speed assumptions

for the fourth quarter of 2004. As a result, the impairment charge to the value of the Company’s IO

Strips for 2004 included in the original filing of the Company’s annual report on Form 10-K for the

year ended December 31, 2004 was materially understated.

C. The Restatement

73. On February 27, 2006, Doral filed an amended 2004 Form 10-K revealing the full

extent of Defendants’ overstatement of the Company’s true financial condition through December

31, 2004 (the “Amended 2004 10-K”). The cumulative effect of the restatement on Doral’s net

earnings for years prior to 2000 through 2004 was a decrease to Doral’s net earnings of $694.4

- 25 -

million, which includes a cumulative decrease of $508.1 million for 2004, 2003 and 2002. The

cumulative effect of reversing gain on sale income due to re-characterizing $4 billion of previously

reported mortgage sales to local financial institutions as secured borrowings on Doral’s pre-tax

income through December 31, 2004 was a decrease of $595.5 million. The cumulative effect of

changes in the value of Doral’s IO Strips, as a result of corrections in the valuation methodology, the

underlying data and certain reclassification of retained assets on Doral’s pre-tax income through

December 31, 2004 was a decrease of $283.1 million. The cumulative effect of the impairment to

Doral’s mortgage servicing assets on Doral’s pre-tax income through December 31, 2004 was a

decrease of $23.1 million. In total, the cumulative effect of the adjustments necessary to restate

Doral’s previously reported pre-tax earnings in accordance with GAAP was $920.8 million.

74. The following table illustrates the magnitude of the restatement on Doral’s previously

reported net earnings:

Net Earnings Overtstatement by Year: Cumulative Restatement Adjustments:

Year $ Millions % Description: $ Millions

Pre-2000 $85.0 n/a Reversal of gain on sale income 595.5

2000 55.2 188% Write-off of IO securities 283.1

2001 46.1 47% Write-off of servicing assets 23.1

2002 54.1 32% Other accounting adjustments 18.1

2003 179.2 126% Total decrease to pre-tax earnings $920.8

2004 274.8 128% Less: related tax adjustments (226.4) Total $694.4 Cumulative decrease to net earnings $694.4

- 26 -

75. The charts below illustrate the magnitude of the Restatement on Doral’s reported loan

sales (note: Doral has not published restated loan sales figures for 2000 and 2001) and gain on sale

income.

20002001

20022003

2004

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$ Billions

Doral Financial Corp. Loan Sales Restatement

2000 - 2004

Restated Loan Sales $2.4 $2.2 $1.9 $2.3 $2.5

Reported Loan Sales $2.4 $2.2 $4.0 $5.0 $6.8


VI. MATERIALLY FALSE AND MISLEADING STATEMENTS ISSUED

DURING THE CLASS PERIOD

A. Fiscal Year 2000

76. On May 15, 2000, Doral filed its Form 10-Q for the first quarter, the period ended

March 31, 2000, with the SEC which was signed by Defendants S. Levis, Bonini, and Melendez

(“First Quarter 2000 10-Q”). The First Quarter 2000 10-Q reported the Company’s net income for

the quarter increased to $20.3 million and that its “net gains from mortgage loans sales” increased by

49% during the quarter to $24.1 million, including gains from the creation of IO Strips totaling $17.0

million. The First Quarter 2000 10-Q represented that the value of Doral’s IO Strips reflected the

credit and payment characteristics of the loans sold, stating in pertinent part as follows:

IOs are created on the sale of loans with servicing retained, by computing the present value of the excess of the weighted-average coupon on the loans sold over the sum of: (i) the pass-through interest paid to the investor and (ii) normal servicing fee, based on the servicing fee permitted by FNMA and FHLMC, and adjusting such amount for expected losses and prepayments. [Emphasis added.]

20002001

20022003

2004 Restated Gain on Loan Sales

Reported Gain on Loan Sales$0.0

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

$ Millions

Doral Financial Corp. Restated Gain on Sale Income 2000 - 2004

Restated Gain on Loan Sales$83.6 $94.7 $70.2 $73.0 $75.8 Reported Gain on Loan Sales$134.3 $187.2 $220.6 $390.1 $598.8


- 27 -

The First Quarter 2000 10-Q represented that Doral’s loans sold with full recourse totaled $603.0

million as of March 31, 2000, stating in pertinent part as follows:

Loans that do not qualify for the insurance or guarantee programs of FHA and VA, or the sale or exchange programs of FNMA or FHLMC (“non-conforming loans”), including loans secured by multi-family projects, are often sold to investors on a partial or full recourse basis or with put back options to the purchasers. In such cases, the Company retains part or all of the credit risk associated with such loan after sale. As of March 31, 2000, the maximum amount of loans that the Company would have been required to repurchase if all loans subject to recourse defaulted or if investors exercised their put back options was $603.0 million. [Emphasis added.]

The First Quarter 2000 10-Q reported that as of March 31, 2000, Doral’s total assets were

$4,791,466,000, total liabilities were $4,392,430,000 and that stockholders equity was $399,036,000.

The First Quarter 2000 10-Q also represented that the Company’s financial statements were prepared

in conformity with GAAP stating in pertinent part as follows:

The Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Company’s Annual Audited Financial Statements included in the Company’s Annual Report for the year ended December 31, 1999 . . . All adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of results for the interim periods have been reflected. [Emphasis added.]

77. On July 12, 2000, Doral issued a press release announcing its financial results for the

second quarter of 2000, the period ended June 30, 2000. For the quarter, the Company reported that

it earned approximately $20.6 million, or $0.46 per share, an increase in earnings of 19.1% over the

prior-year period. Defendant S. Levis commented on the announcement stating in pertinent part as

follows:

[t]hese excellent results for the second quarter and first half of the year 2000 highlight the strength of Doral Financial’s operations and earnings capabilities under diverse interest rate environments. . . We have achieved important milestones with $8.0 billion in loan servicing portfolio and surpassing the $13 billion mark of assets under management. We are bullish about the remaining six months of the year 2000 as well as for the future.

- 28 -

78. On August 14, 2000, Doral filed its Form 10-Q for the second quarter, the period

ended June 30, 2000, with the SEC, which was signed by Defendants S. Levis, Bonini, and

Melendez, and confirmed the Company’s previously released financial results (the “Second Quarter

2000 10-Q”). The Second Quarter 2000 10-Q reported that Doral’s “net gains from mortgage loan

sales” increased by 32% during the second quarter to $31.6 million, including gains from the

creation of IOs totaling $16.0 million. The Second Quarter 2000 10-Q further represented that the

value of Doral’s IOs reflected the credit and payment characteristics of the loans sold, stating in



The Second Quarter 2000 10-Q represented that Doral’s loans sold with full recourse totaled $621.5

million as of June 30, 2000, stating in pertinent part as follows:

Loans that do not qualify for the insurance or guarantee programs of FHA and VA, or the sale or exchange programs of FNMA or FHLMC (“non-conforming loans”), including loans secured by multi-family projects, are often sold to investors on a partial or full recourse basis to the purchasers. Generally, such loans have a low loan-to-value ratio. In such cases, Doral Financial retains part or all of the credit risk associated with such loan after sale. As of June 30, 2000, the maximum amount of loans that Doral Financial would have been required to repurchase if all loans subject to recourse defaulted or if investors exercised their put back options was $621.5 million. [Emphasis added.]

In addition, the Second Quarter 2000 10-Q reported that as of June 30, 2000, Doral’s total assets

were $5,389,727,000, total liabilities were $4,975,087,000 and that stockholders equity was

$414,640,000. The Second Quarter 2000 10-Q also represented that the Company’s financial

statements were prepared in conformity with GAAP:

The Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Company’s Annual Audited Financial Statements included in the Company’s Annual Report for the year ended

- 29 -

December 31, 1999 . . . All adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of results for the interim periods have been reflected. [Emphasis added.]

79. On August 31, 2000, Doral completed an underwritten public offering of 2 million

shares of the Company’s 8.35% Noncumulative Monthly Income Preferred Stock, Series B, at a

price per share of $25.00, generating $50 million in proceeds. The offering was made pursuant to a

Prospectus Supplement dated August 29, 2000, which is a part of the Company’s registration

statement on Form S-3, (the “Series B Registration Statement”) filed with the SEC on or about April

19, 1999 and signed by defendants S. Levis, Bonini, Melendenz, Z. Levis and Cullman.

80. The Series B Registration Statement incorporated by reference Doral’s Forms 10-K

for the years ended December 31, 1998 and 1999 and Forms 10-Q for the quarterly periods ended

March 31, 1999 and 2000, June 30, 1999 and 2000 and September 30, 1999 and presented financial

statements for Doral for 1995-1999 and for the first six months of 2000. For the first six months of

2000 the Series B Registration Statement reported Doral’s net income, total assets and short term

borrowings – loans payable as follows:

Time Period Net Income Total Assets Short Term Borrowings - Loans Payable

Through June 30, 2000 $40,875,000 $5,389,727,000 $483,603,000

The Series B Registration Statement represented that Doral’s financial statements complied with

GAAP:

Financial information for the six-month periods ended June 30, 2000 and 1999, is derived from unaudited financial statements, which, in the opinion of management, include all adjustments necessary for a fair presentation of the results for those periods. These adjustments consist only of normal recurring accruals. [Emphasis added.]

- 30 -

81. On October 11, 2000, Doral issued a press release announcing its financial results for

the third quarter of 2000, the period ending September 30, 2000. For the quarter, the Company

reported “record” net income for the quarter of $21 million, an increase in earnings of 21.4% over

the prior-year period. Defendant S. Levis commented on the announcement stating in pertinent part

as follows:

[t]hese excellent results for the third quarter and first nine months of the year 2000 is another demonstration of the strength of Doral Financial’s operations and earnings capabilities under diverse interest rate environments. The ongoing expansion of Doral Bank PR and Doral Bank NY, the increased share and leadership in mortgage banking as well as the just announced entry in the insurance business, makes us feel very excited about the future.

82. On November 14, 2000, Doral filed with the SEC its Form 10-Q for the third quarter

ended September 30, 2000, which was signed by Defendants S. Levis, Bonini, and Melendez, and

confirmed the previously announced financial results (the “Third Quarter 2000 10-Q”). The Third

Quarter 2000 10-Q reported that Doral’s “net gains from mortgage loan sales” increased by 91%

during the quarter to $40.3 million, including gains from the creation of IOs totaling $19.0 million.

The Third Quarter 2000 10-Q further represented that the value of Doral’s IOs reflected the credit

and payment characteristics of the loans sold, stating in pertinent part as follows:


The Third Quarter 2000 10-Q represented that Doral’s loans sold with full recourse totaled $640

million as of September 30, 2000, stating in pertinent part as follows:

Loans that do not qualify for the insurance or guarantee programs of FHA and VA, or the sale or exchange programs of FNMA or FHLMC (“non-conforming loans”), including loans secured by multi-family projects, are often sold to investors on a partial or full recourse basis. In such cases, Doral Financial retains part or all of the credit risk associated with such loan after sale. As of September 30, 2000, the maximum amount of loans that Doral Financial would have been required to

- 31 -

repurchase if all loans subject to recourse defaulted or if investors exercised their put back options was $640.0 million. [Emphasis added.]

In addition, the Third Quarter 2000 10-Q reported that as of September 30, 2000, Doral’s total assets


$471,520,000. The Third Quarter 2000 10-Q also represented that the Company’s financial

statements were prepared in conformity with GAAP stating in pertinent part as follows:

The Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Company’s Annual Audited Financial Statements included in the Company’s Annual Report for the year ended December 31, 1999, and should be read in conjunction with the Notes to the Consolidated Financial Statements appearing in that report. All adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of results for the interim periods have been reflected. [Emphasis added.]

83. On January 17, 2001, Doral issued a press release announcing its financial results for

the fourth quarter of 2002 and fiscal year ended on December 31, 2000. For the fourth quarter, the

Company reported net income was $27.7 million, an increase of 56.5% over the prior-year period.

For fiscal year 2002, Doral reported that it earned a “record” $84.7 million, compared to $67.9

million for the same period of 1999 and that net gains on mortgage loan sales and fees was $134.3

million, compared to $80.2 million for the corresponding period a year ago. Defendant S. Levis

commented on the announcement stating in pertinent part:

[t]he year 2000 was a historic year for Doral Financial. . . . we are optimistic that 2000 has laid the foundation for even greater achievements during 2001 and subsequent years. . . . the recent increase in the price of Doral Financial’s Common Stock was evidence that the equity markets have been recognizing these achievements.

84. On March 26, 2001, Doral filed its Form 10-K for year ended December 31, 2000

with the SEC which was signed by Defendants S. Levis, Bonini, Cullman, Z. Levis, Melendez, Kier,

Murray, and Vicente and confirmed Doral’s previously released financial results (the “2000 10-K”).

- 32 -

The 2000 10-K and reported that Doral had achieved the following financial “milestones,” among

other things, stating pertinent part:

− Doral Financial posted record net income of $84.7 million representing a 25% increase over the prior year.

− [Doral] continued [its] well-established pattern of superior performance with a return on average common equity of 23% and a return on average assets of 1.66%.

− Net gains on the sale of loans amounted to $134.3 million, an increase of 68%.

− Shareholders’ equity grew 31% from $385.0 million to $505.7 million following a $50 million preferred stock offering and record earnings for the year.

− Doral maintained the investment grade rating on our public debt.

The 2000 10-K contained a “letter” to shareholders from Defendant S. Levis which represented that

Doral’s “record” 2000 earnings were achieved despite rising interest rates which negatively

impacted “traditional mortgage banking companies,” stating in pertinent part:

Despite an overall increase in interest rates during the past year, which negatively affected other traditional mortgage banking companies in both earnings and loan production, Doral Financial was able to increase net income by 25% to post all-time record earnings of $84.7 million that were fueled by a 17% increase in total loan production. [Emphasis added]

The 2000 Form 10-K described Doral’s mortgage banking business and mortgage loan sales

operations representing that a majority of the Company’s loan sales were made with limited or

“partial” recourse. The 2000 Form 10-K stated in pertinent part as follows:

[D]uring 1999 and 2000 most non-conforming loans were sold on a partial rather than full recourse basis. As of December 31, 2000, Doral Financial was servicing mortgage loans with an aggregate principal amount of $1.5 billion on a full or partial recourse basis. As of December 31, 2000, 1999 and 1998, the Company’s maximum aggregate recourse obligation relating to its mortgage servicing portfolio was approximately $593.4 million, $608.9 million and $489.1 million, respectively.

- 33 -

85. The 2000 10-K described Doral’s “sales” of non-conforming loans and “gain on sale

accounting” which resulted in the creation of IOs and MSRs in connection with those sales, stating

in pertinent part:

Mortgage loans that do not conform to GNMA, FNMA or FHLMC requirements (non-conforming loans) are sold in bulk to financial institutions or other private investors, or are securitized into “private label” mortgage-backed securities through grantor trusts or REMICs that either are organized by the Company or third parties and sold through broker-dealers. Most bulk sales of non-conforming loans are made to local financial institutions. Doral Financial’s bulk sales generally operate very similar to securitization transactions because when the Company sells the loans it retains the servicing rights and agrees to pay the purchaser a specified pass-through rate for the entire pool being purchased. Any amounts received on the mortgages above the pass-through rate are retained by the Company. The present value of the future cash flow retained by the Company above standard servicing fees for FNMA or FHLMC are recognized on the Company’s Financial Statements as interest only strips (“IOs”) and recognized currently as income.

* * *

The fair value of IOs is generally determined based on market prices for sales of similar assets. The Company classifies these IOs as securities held for trading. The IOs are realized over time through the receipt of the excess interest cash flows. The Company periodically evaluates the net realizable value of its IOs based on the present value of the estimated remaining future excess interest cash flows, using current prepayment speed assumptions determined from market sources for similar types of loans and the same discount rate used to calculate the original value of the interest only strip.

* * *

[W]henever Doral Financial sells a mortgage loan, it allocates the cost of the loan between the loan and the related mortgage servicing right [or MSR] based on their relative fair values. The servicing asset represents the present value of the servicing fees, net of estimated servicing costs, expected to be received on the loan over the expected term of the loan. The fair value of the servicing asset is determined based on market transactions of similar assets. The value of the servicing asset is recognized at the time of the sale of the related loan as an adjustment to the resulting gain or loss on the sale of the loan and is recorded as a component of “Net Gain on Mortgage Loan Sales” on Doral Financial’s Consolidated Statements of Income. [Emphasis added.]

86. The 2000 10-K represented that the Company’s financial statements complied with

GAAP stating in pertinent part as follows:

- 34 -

The accompanying consolidated financial statements include the accounts of Doral Financial Corporation and its wholly owned subsidiaries. Accounting and reporting policies conform with generally accepted accounting principles. [Emphasis added.]

87. The statements referenced above in ¶¶76-78, 80-85 were each materially false and

misleading when issued because they omitted and misrepresented the following adverse facts which

were known to Defendants or recklessly disregarded by them:

(a) that Doral’s reported financial results were materially overstated and did not

represent the true financial performance of the Company. Doral has now admitted that for the fiscal

year ended December 31, 2000: its net earnings were actually $29,428,000 and not $84,656,000 as

previously reported, an overstatement of $55,228,000 or 188%; its “net gain on mortgage loan sales

and fees” was actually $75,759,000 and not $134,339,000 as previously reported, an overstatement

of $58,580,000 or 77%; its stockholders’ equity was actually $365,679,000, not $505,710,000 as

previously reported; its “loans payable” were actually $1,255,488,000, not $372,620,000 as

previously reported, an understatement of $882,868,000 or 237%; and its total assets were actually

$6,196,267,000 for the year ended December 31, 2000, and not $5,463,386,000 as previously

reported;

(b) that Doral had improperly accounted for the sale of mortgages to First

BanCorp and others as “sales,” rather than as loans from First BanCorp and others as Doral had

agreed through secret side agreements and oral understanding to provide full recourse on the

transactions beyond the limited recourse provisions in the written contracts. Doral has now admitted

that Defendants M. Levis and D. Levis entered into oral agreements with respect to certain mortgage

loan sales that provided for recourse beyond that established in the associated written sales contracts

resulting in Doral’s reversal of more than $595 million in previously reported “gain on sale income”

- 35 -

and the failure to report more than $3.3 billion in additional recourse liabilities and debt as of

December 31, 2004;

(c) that Doral was improperly valuing its IO Strips by utilizing subjective and

unverifiable assumptions, including falsified prepayment and interest rate assumptions . Doral has

now admitted that its internal valuations were manufactured and its process for obtaining market

valuations for its IO Strips was manipulated by its senior executives, as detailed herein. The

Independent Investigation found that Defendant M. Levis, Doral’s former treasurer, who was the

principal point of contact with the institutions providing independent market valuations, and

defendant D. Levis, Sr., Doral’s former director emeritus, provided information orally about Doral

IO Strips that was not verified by the Company’s financial reporting process and improperly

provided inaccurate information concerning the portfolio to Morgan Stanley and Popular Securities,

who were purportedly engaged to independently value the Company’s IO Strips;

(d) that during 2001 Doral did not purchase $1.3 billion of mortgage loans for the

purpose of “securitization and resale to institutional investors.” Doral has now admitted that during

2000 and 2001 approximately $646.8 million of such purchases were comprised “contemporaneous

purchases and sales” of mortgage loans for no apparent business purpose. Furthermore, Doral has

admitted that its gain on sale income was materially overstated during 2000 and 2001 by these

contemporaneous purchase and sale transactions;

(e) that Doral’s secured borrowings were understated by nearly $1.1 billion as of

December 31, 2001, and the amount of loans subject to full recourse was vastly understated;

(f) that purchasers of Doral’s IO Strips were not receiving “the pass-through rate

[. . . normally] retained by the Company.” Doral has now admitted that it was entering into side

agreements which guaranteed certain interest rate yields to purchasers Doral’s IO Strips. The failure

- 36 -

to record and/or report these “side agreements” had the effect of further manipulating falsely high

market valuations of the Company’s IO Strips;

(g) that Doral’s financial statements were not prepared in accordance with GAAP

as detailed further herein. Doral has now admitted that its Class Period financial statements violated

GAAP in numerous respects and has restated those financial statements to correct its improper

accounting;

(h) that Doral’s quarterly financial statements did not contain “all adjustments”

necessary for a “fair presentation” of the Company’s financial performance as the financial

statements violated GAAP in material respects as detailed herein;

(i) that Doral failed to disclose sufficient information regarding its business and

accounting practices to investors;

(j) that Doral did not have effective controls to detect that it financial statements

was not in conformity with GAAP; and

(k) based upon the foregoing, each of Defendants’ statements, opinions and

projections concerning Doral’s current and future operating results and financial condition were

materially false and misleading when made.

B. Fiscal Year 2001

88. On March 28, 2001, Doral issued a press release under the banner headline: “Doral

Financial Corporation Announces That It Expects First Quarter Earnings To Exceed Analysts’

Expectations.” The press release stated that “due to strong performance from all of its business

units,” it currently expects that its earnings for the first quarter ending March 31, 2001 will exceed

the previous year’s “record earnings” by approximately 26% and most recent security analysts’

estimates of Doral’s earnings for the first quarter of 2001 by approximately 10%.

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89. On March 30, 2001, Doral issued a press release announcing that it had completed the

sale of $100 million of 7.65% Senior Notes due March 26, 2016. Doral stated that the notes were

sold at a price of 97.83% of the principal amount, resulting in proceeds of $97.7 million. The 2016

Senior Notes were sold pursuant to a Registration Statement on Form S-3 filed with SEC on or about

December 29, 2000 and signed by Defendants S. Levis, Bonini, Melendez, Z. Levis, Cullman, Kier,

Murray, and Vicente, which included a prospectus dated March 27, 2001 (the “2016 Senior Notes

Registration Statement”). The 2016 Senior Notes Registration Statement incorporated by reference

the Form 10-K and presented Doral’s financial results for the years ended December 31, 1996

through 2000. The 2016 Senior Notes Registration Statement represented that Doral’s 2000 net

income was $84.7 million, that its total assets as of December 31, 2000, were $5.5 billion, with total

liabilities of $5.0 billion and stockholders’ equity of $505.7 million.

90. On April 11, 2001, Doral issued a press release announcing its financial results for the

first quarter of 2001, the period ending March 31, 2001. For the quarter the Company reported that

income was a “record” $28.1 million, or $0.60 per diluted share for the first quarter of 2001,

compared to $20.3 million for the same period the prior year. Defendant S. Levis commented on the

announcement stating in pertinent part as follows:

[i]t is a pleasure to report these excellent results which top our first quarter 2000 record performance and point to another extraordinary and banner year for Doral Financial. These very strong record earnings, which for the first time exceeded $25 million for any quarter, demonstrate the Company’s ability to operate with great success under diverse interest rate environments. The Company’s net interest income will be favorably impacted by renewing short term repurchase agreements and other borrowings at lower interest rates. Doral has also begun to enter into longer term repurchase agreements secured by its fixed rate tax exempt GNMA MBS portfolio and extending the maturity of other debt at very attractive rates allowing the Company to lock in a higher net interest income spread for years to come. Our business has never been this great. [Emphasis added.]

91. On or about May 15, 2001, Doral filed its Form 10-Q for the first quarter of 2001, the

period ended March 31, 2001, with the SEC which was signed by Defendants S. Levis, Bonini, and

- 38 -

Melendez (the “First Quarter 2001 10-Q”). The First Quarter 2001 10-Q reported that Doral’s “net

gains from mortgage loan sales” increased by 90% during the quarter to $45.9 million, including

gains from the creation of IOs totaling $32.5 million. The First Quarter 2001 10-Q further

represented that the value of Doral’s IOs reflected the credit and payment characteristics of the loans

sold, stating in pertinent part as follows:

Doral Financial creates IOs as a result of the sale of loans in bulk or securitization transactions. IOs are created on the sale of loans with servicing retained, by computing the present value of the excess of the weighted-average coupon on the loans sold over the sum of: (i) the pass-through interest paid to the investor and (ii) normal servicing fee, based on the servicing fee permitted by FNMA and FHLMC, and adjusting such amount for expected losses and prepayments. [Emphasis added.]


million as of March 31, 2001, stating in pertinent part as follows:

Loans that do not qualify for the insurance or guarantee programs of FHA and VA, or the sale or exchange programs of FNMA or FHLMC (“non-conforming loans”), including loans secured by multi-family projects, are often sold to investors on a partial or full recourse basis. In such cases, Doral Financial retains part or all of the credit risk associated with such loan after sale. As of March 31, 2001, the maximum amount of loans that Doral Financial would have been required to repurchase if all loans subject to recourse defaulted or if investors exercised put back options was $640.5 million. [Emphasis added.]



The First Quarter 2001 10-Q also represented that the Company’s financial statements were prepared

in conformity with GAAP stating in pertinent part as follows:

The Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Company’s Annual Audited Financial Statements included in the Company’s Annual Report for the year ended December 31, 2000, and should be read in conjunction with the Notes to the Consolidated Financial Statements appearing in that report. All adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair statement of results of operations for the interim periods have been reflected. [Emphasis added.]

- 39 -


second quarter of 2001, the period ending June 30, 2001. For the quarter, the Company reported that


prior-year period, when the Company reported earnings of $20.6 million, or $0.46 per share.

Defendant S. Levis commented on the announcement stating in pertinent part as follows:

We are delighted to report these excellent results for the second quarter which exceeded our second quarter 2000 record results, which in turn were quite impressive.

Mr. Levis noted that the Company achieved important milestones during the second quarter of 2001 surpassing quarterly earnings of $30 million and quarterly mortgage production of $1 billion. Mr. Levis felt that these achievements demonstrated Doral Financial’s proven ability to operate with great success under diverse interest rate environments. Mr. Levis also noted that the Company is taking advantage of the drop in short-term interest rates and has been locking in the interest cost of its borrowings, which should positively affect net interest income in the future. He also added that the demand for new housing and mortgage credit in Puerto Rico, the Company’s principal market remains strong.

93. On or about August 1, 2001, Doral announced the sale of 5,060,000 common shares

at $32 each, generating proceeds of $161.9 million. The shares were sold pursuant to a registration

statement filed with the SEC on or about December 29, 2000, which included a prospectus effective

July 26, 2001 (the “August 2001 Registration Statement.) The August 2001 Registration Statement,

signed by Defendants S. Levis, Bonini, Melendez, Z. Levis, Cullman, Kier, Murray, and Vicente,

described Doral as “well-capitalized,” incorporated by reference all financial and operating data

announced or filed by Doral, including the Company’s audited consolidated financial statements, for

the five years ended December 30, 2000. The August 2001 Prospectus reported Doral’s net income,

total assets and short term borrowings – loans payable as follows:

- 40 -


Year ended December 31, 2000 $84,700,000 $5,463,000,000 $372,620,000

Quarter ended March 31, 2001 $33,995,000 $5,909,914,000 $304,229,000

94. On August 14, 2001, Doral filed its Form 10-Q for the second quarter of 2001, the

period ended June 30, 2001, with the SEC which was signed by Defendants S. Levis, Bonini, and

Melendez (the “Second Quarter 2001 10-Q”). The Second Quarter 2001 10-Q reported that Doral’s

“net gains from mortgage loan sales” increased by 44% during the quarter to $45.5 million,

including gains from the creation of IOs totaling $34.6 million. The Second Quarter 2001 10-Q

further represented that the value of Doral’s IOs reflected the credit and payment characteristics of

the loans sold, stating in pertinent part as follows:

Doral Financial creates IOs as a result of the sale of loans in bulk or securitization transactions. IOs are the estimated fair market value of cash flows Doral Financial expects to receive in the future on the economic interest it retains on loans sold or securitized. The value of IOs reflects the present value of the excess of the weighted-average coupon on the loans sold over the sum of: (i) the pass-through interest paid to the investor and (ii) normal servicing fee, based on the servicing fee permitted by FNMA and FHLMC, and adjusting such amount for expected losses and prepayments. [Emphasis added.]


million as of June 30, 2001, stating in pertinent part as follows:

Loans that do not qualify for the insurance or guarantee programs of FHA and VA, or the sale or exchange programs of FNMA or FHLMC (“non-conforming loans”), including loans secured by multi-family projects, are often sold to investors on a partial or full recourse basis. In such cases, Doral Financial retains part or all of the credit risk associated with such loan after sale. As of June 30, 2001, the maximum amount of loans that Doral Financial would have been required to repurchase if all loans subject to recourse defaulted or if investors exercised their put back options was $645.0 million. [Emphasis added.]

In addition, the Second Quarter 2001 10-Q reported that as of June 30, 2001, Doral’s total assets


- 41 -

$543,781,000. The Second Quarter 2001 10-Q also represented that the Company’s financial





reported that it earned approximately $36.8 million, or $0.74 per share, an increase in earnings of

75.2% over the prior-year period, when the Company reported earnings of $21 million, or $0.46 per

share. Defendant S. Levis commented on Doral’s financial results of third quarter of 2001, stating in


We are optimistic and excited about Doral Financial’s opportunities and prospects for the fourth quarter of 2001 and for the full year 2002. We look forward to continued strong performance from our traditional activities, as well as greater contributions from new activities such as sales of property insurance and other insurance products through Doral Insurance Agency. We are committed to further enhance shareholder value.

96. On or about November 14, 2001, Doral filed its Form 10-Q for the third quarter of

2001, the period ended September 30, 2001, with the SEC, which was signed by Defendants S.

Levis, Bonini, and Melendez (the “Third Quarter 2001 10-Q”). The Third Quarter 2001 10-Q

reported that Doral’s “net gains from mortgage loan sales” increased by 11% during the quarter 2001

to $44.8 million, including gains from the creation of IOs totaling $36.3 million. The Third Quarter

2001 10-Q further represented that the value of Doral’s IOs reflected the credit and payment

characteristics of the loans sold, stating in pertinent part as follows:

- 42 -

Doral Financial creates IOs as a result of the sale of loans in bulk or in securitization transactions. IOs are the estimated fair market value of the cash flows that Doral Financial expects to receive in the future on the economic interest it retains on loans sold or securitized. The value of IOs reflects the present value of the excess of the weighted-average coupon on the loans sold over the sum of: (i) the pass-through interest paid to the investor and (ii) normal servicing fee, based on the servicing fee permitted by FNMA and FHLMC, and adjusting such amount for expected losses and prepayments. [Emphasis added.]

The Third Quarter 2001 10-Q represented that Doral’s loans sold with full recourse totaled $655

million as of September 30, 2001, stating in pertinent part as follows:

Loans that do not qualify for the insurance or guarantee programs of FHA and VA, or the sale or exchange programs of FNMA or FHLMC (“non-conforming loans”), including loans secured by multi-family projects, are often sold to investors on a partial or full recourse basis. In such cases, Doral Financial retains part or all of the credit risk associated with such loan after sale. As of September 30, 2001, the maximum amount of loans that Doral Financial would have been required to repurchase if all loans subject to recourse defaulted or if investors exercised their put back options was $655.0 million. [Emphasis added.]





The Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Company’s Annual Audited Financial Statements included in the Company’s Annual Report for the year ended December 31, 2000, and should be read in conjunction with the Notes to the Consolidated Financial Statements appearing in that report. All adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation. [Emphasis added.]

97. On January 16, 2002, Doral issued a press release announcing its earnings for the for

the fourth quarter of 2001 and the fiscal year ended December 31, 2001. For the quarter, the

Company reported that net income was $42.5 million, an increase of 87% over the prior-year period

and that for fiscal 2001 consolidated earnings per diluted share before the cumulative gain-effect of a

change in accounting principle were $2.82 per share, compared to $1.85 per diluted share for the

- 43 -

same period of 2000, an increase of 52%. Doral also stated that “[f]or the fourth quarter of 2001,

Doral Financial’s . . . [n]et gain on mortgage loan sales and fees, the main component of noninterest

income, increased to $51.1 million for the fourth quarter of 2001 from $38.3 million for the

comparable 2000 period, an increase of 33%. For the year ended December 31, 2001, Doral

Financial’s . . . [n]et gain on mortgage loan sales and fees was $187.2 million for the year ended

December 31, 2001 compared to $134.3 million for the corresponding period of 2000, an increase of

39%.” Defendant S. Levis described the financial results as “outstanding.”

98. On or about March 22, 2002, Doral filed its Form 10-K for the year ended December

31, 2001, with the SEC which was signed by Defendants S. Levis, Bonini, Z. Levis, Melendez,

Cullman, Kier, Murray, and Vicente, among others (the “2001 10-K”).

99. The 2001 10-K described Doral’s mortgage banking business and mortgage loan sales

operations representing that a majority of the company’s loan sales were made with limited or

“partial” recourse. The 2001 10-K stated in pertinent part as follows:

Doral Financial purchases mortgage loans from other mortgage bankers in Puerto Rico consisting primarily of FHA loans and VA loans for securitization and resale to institutional investors in the form of GNMA securities. Doral Financial also purchases mortgage loans on a wholesale basis from U.S. financial institutions. For the years ended December 31, 2001 and 2000 total loan purchases amounted to approximately $1.3 billion and $1.1 billion, respectively.

* * *

Doral Financial generally sells non-conforming loans on a limited or full recourse basis. As of December 31, 2001, Doral Financial was servicing mortgage loans with an aggregate principal amount of $2.1 billion on a full or limited recourse basis. As of December 31, 2001, 2000 and 1999, Doral Financial’s maximum aggregate recourse obligation relating to its mortgage servicing portfolio was approximately $1.0 billion, $770.8 million and $608.9 million, respectively.



in pertinent part:

- 44 -

Mortgage loans that do not conform to GNMA, FNMA or FHLMC requirements (non-conforming loans) are sold in bulk to local financial institutions or to FNMA or FHLMC. Doral Financial’s bulk sales generally operate very similar to securitization transactions because when Doral Financial sells the loans it retains the servicing rights and agrees to pay the purchaser a specified pass-through rate for the entire pool being purchased. Any amounts received on the mortgages above the pass-through rate are retained by Doral Financial. The pass-through rate paid to the investors may be a fixed rate or a variable rate generally based on a spread over the three-month Libor rate. The present value of the future cash flow retained by Doral Financial above standard servicing fees for FNMA or FHLMC are recognized on Doral Financial’s financial statements as interest only strips (“IOs”). The fair values assigned to the IOs and the mortgage servicing rights reduce the carrying amount of the loan sold. The gain realized on the sale of the loan is determined by the difference of the sales price for the loan over the carrying amount.

* * *

IOs are created on the sale of mortgage loans with servicing retained and represent the estimated present value of the excess of the weighted-average coupon on the loans sold over the sum of: (i) the pass-through interest paid to the investor and (ii) a normal servicing fee, based on the servicing fee permitted by FNMA and FHLMC, after adjusting such amount for expected losses and prepayments. The pass-through interest payable to the investor may be a fixed rate or a floating rate generally based on a spread over the three-month LIBOR rate. The amount of the IOs is recognized as an adjustment to the carrying basis of the loans and is recorded at the time of sale of the related loans.

* * *

[W]henever Doral Financial sells a mortgage loan it allocates the cost of the loan between the loan and the related mortgage servicing right (the “servicing asset” or “mortgage servicing right”) based on their relative fair values. The servicing asset represents the present value of the servicing fees, net of estimated servicing costs, expected to be received on the loan over the expected term of the loan. Doral Financial determines the fair value of its servicing assets by reference to prices paid by third parties in market transactions for similar mortgage servicing rights.

101. The 2001 10-K represented that “net gains on mortgage loan sales” of $187.2 million

were accounted for using the “fair market value” of “retained” IOs and MSRs determined on the date

of the loan sale, stating in pertinent part as follows:

To compute the value of the IOs, Doral Financial multiplies the interest spread it is entitled to retain on the loans sold by the principal balance of the mortgage pool being sold. The resulting product is then multiplied by a market factor which Doral Financial obtains from an unrelated financial institution that obtains the factor by

- 45 -

reference to internal valuation models that incorporate assumptions regarding discount rates and mortgage prepayment rates.

* * *

Net gains on mortgage sales and fees increased by 39% during 2001 and by 68% from 1999 to 2000. The increases for 2001 and 2000 were related to recording of higher gains on such sales related primarily to the recognition of IOs retained in connection with mortgage loan sales.

* * *

Doral Financial recognized IOs of approximately $141.4 million for 2001, compared to $72.7 million and $46.1 million in 2000 and 1999, respectively. During 2001, Doral Financial was generally able to recognize higher values for its IOs because the prevailing interest pass-through rates paid to investors tended to decline more than the weighted average interest rates of the loans (generally non-conforming loans) sold, thereby increasing the interest rate spread payable to Doral Financial over the expected life of the IOs.

* * *

Amortization of IOs for each of the years ended December 31, 2001, 2000 and 1999, was approximately $31.9 million, $13.6 million and $6.9 million, respectively. The increase in the amortization for 2001 compared to 2000 and 1999 is due to the increase in the amount of IOs as well as increased amortization resulting from increased mortgage prepayment rates tied to decreases in interest rates. The carrying amount of the IOs is reflected in Doral Financial’s Consolidated Statements of Condition as a component of “Securities held for trading.” As of December 31, 2001, 2000 and 1999, the carrying amount of IOs and other residual interest retained in securitization transactions recorded on Doral Financial’s Consolidated Financial Statements was $236.5 million, $158.0 million and $106.4 million, respectively.

* * *

Sales of mortgage loans made during 2000 resulted in the recording of approximately $72.7 million of IOs, compared to $46.1 million and $30.0 million in 1999 and 1998, respectively. The unamortized balance of the IOs is reflected in Doral Financial’s Consolidated Statement of Condition as a component of “Securities held for trading.” As of December 31, 2000, 1999 and 1998, the unamortized balance of IOs was $137.7 million, $84.3 million and $42.2 million, respectively.

* * *

During the years ended December 31, 2001, 2000 and 1999, Doral Financial recognized servicing assets of $38.3 million, $36.5 million and $45.0 million, respectively, related to the recognition of mortgage servicing rights in connection with the sale of internally originated loans. Servicing assets purchased in bulk from

- 46 -

third parties are initially recorded on Doral Financial’s financial statement at the amount paid for such assets. The unamortized balance of the servicing asset is reflected on Doral Financial’s Consolidated Statements of Financial Condition. [Emphasis added.]

102. The 2001 10-K reported that as of December 31, 2001, Doral’s total assets were


The 2001 10-K also represented that the Company’s financial statements complied with GAAP

stating in pertinent part as follows:

The accompanying consolidated financial statements include the accounts of Doral Financial Corporation and its wholly owned subsidiaries. Accounting and reporting policies conform with generally accepted accounting principles.

103. The statements referenced above in ¶¶88-97, 99-102 were each materially false and

misleading when issued because they failed to disclose and misrepresented the following facts which

were known to Defendants or recklessly disregarded by them:



year ended December 31, 2001: its net earnings were $97,709,000, not $143,851,000 as previously

reported, an overstatement of $46,142,000 or 47%; its reported “net gain on mortgage loan sales and

fees” was $73,048,000, not $187,221,000 as previously reported, an overstatement of $114,173,000

or 156%; its “stockholders’ equity” was actually $577,675,000, not $762,120,000 as previously

reported; its “loans payable” was actually $1,224,787,000, not $161,101,000 as previously reported,

an understatement of $1,063,686,000 or 660%; and its total assets were actually $7,759,956,000, not

$6,694,283,000 as previously reported;




- 47 -






December 31, 2004;

















- 48 -











accounting;











C. Fiscal Year 2002

104. On or about April 10, 2002, Doral issued a press release announcing that it had

completed sale of $100 million of senior notes (the “2002 Senior Notes”). The Senior Notes were

- 49 -

sold pursuant to a registration statement on Form S-3 filed with the SEC on or about November 2,

2001 (the “2002 Senior Notes Registration Statement”), and signed by Defendants S. Levis, Bonini,

Melendez, Murray, Cullman, Kier, Z. Levis, and Vicente, which included a prospectus dated April 9,

2002. The 2002 Senior Notes Registration Statement incorporated by reference all financial and

operating data announced or filed by Doral, including the Company’s audited consolidated financial

statements, for the five years ended December 30, 2001. The 2002 Senior Notes Registration

Statement also incorporated Doral’s Quarterly Reports on Form 10-Q for the quarters ended March

31, 2001 and June 30, 2001 and reported Doral’s net income, total assets and short term borrowings -

loans payable as follows:





first quarter of 2002, the period ending March 31, 2002. For the quarter, the Company reported that




We are extremely pleased with the excellent performance experienced during the first quarter of 2002 which builds on the record performance for 2001. The first quarter results further strengthen our optimism regarding the Company’s opportunities for significant growth in earnings and shareholder value for the remainder of the year and beyond.

106. On May 14, 2002, Doral filed its Form 10-Q for the first quarter, ended March 31,

2002, with the SEC, which was signed by Defendants S. Levis, Bonini, and Melendez (the “First

Quarter 2002 10-Q”). The First Quarter 2002 10-Q reported that Doral’s “net gains from mortgage

- 50 -

loan sales” was $46.0 million for the quarter, compared to $45.9 million for the same period of 2001,

including gains from the creation of IOs totaling $38.5 million. The First Quarter 2002 10-Q further

represented that the value of Doral’s IOs reflected the credit and payment characteristics of the loans

sold, stating in pertinent part as follows:

Doral Financial creates interest only strips (“IOs”) in connection with the sale of loans in bulk or in securitization transactions. IOs are created on the sale of mortgage loans with servicing retained and represent the estimated present value of the cash flows that Doral Financial expects to receive in the future on the economic interest it retains on loans sold or securitized. The value of IOs reflects the present value of the excess of the weighted-average coupon on the loans sold over the sum of: (i) the pass-through interest paid to the investor and (ii) a servicing fee generally equal to 25 basis points, and adjusting such amount for expected losses and prepayments. [Emphasis added.]


billion as of March 31, 2002, stating in pertinent part as follows:

Loans that do not qualify for the insurance or guarantee programs of FHA and VA, or the sale or exchange programs of FNMA or FHLMC (“non-conforming loans”), including loans secured by multi-family projects, are often sold to investors on a partial or full recourse basis. In such cases, Doral Financial retains part or all of the credit risk associated with such loan after sale. As of March 31, 2002, the outstanding principal balance of loans sold subject to recourse, partial recourse or put-back arrangements was $2.2 billion. The maximum amount of loans that Doral Financial would have been required to repurchase if all loans subject to recourse defaulted or if investors exercised their put back options was $1.2 billion. [Emphasis added.]

In addition, the First Quarter 2002 10-Q reported that as of March 31, 2002, Doral’s total assets were


The 1Q02 10-Q also represented that the Company’s financial statements were prepared in

conformity with GAAP stating in pertinent part as follows:

The Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Company’s Annual Audited Financial Statements included in the Company’s Annual Report for the year ended December 31, 2001, and should be read in conjunction with the Notes to the Consolidated Financial Statements appearing in that report. All adjustments (consisting only of normal recurring accruals) which are, in the opinion of

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management, necessary for a fair presentation of results for the interim periods have been reflected. [Emphasis added.]

107. On May 31, 2002, Doral issued a press release announcing that it had closed the sale

of 3.6 million shares of its 7.25% Noncumulative Monthly Income Preferred Stock, Series C (the

“Series C Stock”). The Company stated that the net proceeds of the shares sold was approximately

$87 million. The Series C Stock was sold pursuant to a registration statement on Form S-3 filed

with the SEC on or about November 2, 2001 (the “2002 Series C Registration Statement”), and

signed by Defendants S. Levis, Bonini, Melendez, Murray, Cullman, Kier, Z. Levis, and Vicente,

which included a prospectus dated May 30, 2002 (the “Series C Prospectus”). The Series C

Registration Statement incorporated by reference all financial and operating data announced or filed

by Doral, including the Company’s audited consolidated financial statements, for the five years

ended December 30, 2001. The Series C Prospectus also incorporated Doral’s Quarterly Reports on

Form 10-Q for the quarters ended March 31, 2001 and June 30, 2001 and reported Doral’s net

income, total assets and short term borrowings – loans payable as follows:


Year ended Dec. 31, 2000 $84,700,000 $5,463,000,000 $372,620,000

Year ended Dec. 31, 2001 $143,900,000 $6,694,000,000 $161,101,000




it earned approximately $52 million, or $1.01 per share, an increase in earnings of 70% over the



- 52 -

We are extremely pleased with the excellent performance experienced during the second quarter of 2002 which builds on the record performance of 2001 and further strengthens our optimism with respect to the future. I am particularly proud of Doral’s excellent efficiency ratio. I would also like to emphasize that Doral’s strong balance sheet and the high quality of its assets, comprised mostly of Triple A rated investments and residential mortgage loans, have been key elements in Doral’s consistent performance during varying economic cycles. . . I am pleased to report that during this quarter, US Banker, the prestigious financial publication, in its May 2002 issue, designated Doral the best of the 100 largest US Banking Companies in performance ranking. This is a great honor for our customers, employees and shareholders. It is also a recognition of the Company’s success in meeting its goals of providing unrivaled financial services to the people in the communities we serve in an efficient and profitable manner.

109. On August 14, 2002 Doral filed its Form 10-Q for the second quarter ended June 30,

2002 with the SEC, which was signed by Defendants S. Levis, Bonini, and Melendez (the “Second

Quarter 2002 10-Q”). The Second Quarter 2002 10-Q reported that Doral’s “net gains from

mortgage loan sales” increased by 28% during the quarter to $58.2 million, including gains from the




IOs are created on the sale of mortgage loans with servicing retained and represent the estimated present value of the cash flows that Doral Financial expects to receive in the future on the economic interest it retains on loans sold or securitized. The value of IOs reflects the present value of the excess of the weighted-average coupon on the loans sold over the sum of: (i) the pass-through interest paid to the investor and (ii) a servicing fee generally equal to 25 basis points, after adjusting such amount for expected losses and prepayments. [Emphasis added.]


billion as of June 30, 2002, stating in pertinent part as follows:

Loans that do not qualify for the insurance or guarantee programs of FHA and VA, or the sale or exchange programs of FNMA or FHLMC (“non-conforming loans”), including loans secured by multi-family projects, are often sold to investors on a partial or full recourse basis. In such cases, Doral Financial retains part or all of the credit risk associated with such loan after sale. As of June 30, 2002, the outstanding principal balance of loans sold subject to full recourse, partial recourse or put-back arrangements was $2.2 billion. The maximum amount of loans that Doral

- 53 -

Financial would have been required to repurchase if all loans subject to recourse defaulted or if investors exercised their put back options was $1.3 billion. [Emphasis added.]

The Second Quarter 2002 10-Q reported that as of June 30, 2002, Doral’s total assets were


The Second Quarter 2002 10-Q also represented that the Company’s financial statements were

prepared in conformity with GAAP stating in pertinent part as follows:





58.4% over the prior-year period, when the Company reported earnings of $36.8 million, or $0.49

per share. Defendant S. Levis commented on the announcement stating in pertinent part as follows:

It is a pleasure to report this excellent performance for the third quarter and nine months ended September 30, 2002. The Company once again surpassed historical records in mortgage loan production, mortgage servicing portfolio, earnings, capital and in several key financial ratios.

111. On or about November 13, 2002, Doral filed its Form 10-Q for the third quarter ended

September 30, 2002 with the SEC, which was signed by Defendants S. Levis, Bonini, and Melendez

(the “Third Quarter 2002 10-Q”). The Third Quarter 2002 10-Q reported that Doral’s “net gains

from mortgage loan sales” increased by 18% during the quarter to $53.0 million, including gains

from the creation of IOs totaling $48.8 million. The Third Quarter 2002 10-Q further represented

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that the value of Doral’s IOs reflected the credit and payment characteristics of the loans sold, stating

in pertinent part as follows:

IOs are created on the sale of mortgage loans with servicing retained and represent the estimated present value of the cash flows that Doral Financial expects to receive in the future on the economic interest it retains on loans sold or securitized. The value of IOs reflects the present value of the excess of the weighted-average coupon on the loans sold over the sum of: (i) the pass-through interest paid to the investor and (ii) a servicing fee generally equal to 25 basis points, after adjusting such amount for expected losses and prepayments. [Emphasis added.]

The Third Quarter 2002 10-Q represented that Doral’s loans sold with full recourse totaled $2.2

billion as of September 30, 2002, stating in pertinent part as follows:

Loans that do not qualify for the insurance or guarantee programs of FHA and VA, or the sale or exchange programs of FNMA or FHLMC (“non-conforming loans”), including loans secured by multi-family projects, are often sold to investors on a partial or full recourse basis. In such cases, Doral Financial retains part or all of the credit risk associated with such loan after sale. As of September 30, 2002, the outstanding principal balance of loans sold subject to full recourse or partial recourse was $2.2 billion. The maximum amount of loans that Doral Financial would have been required to repurchase if all loans subject to recourse defaulted was $1.4 billion. [Emphasis added.]






112. On January 15, 2003 Doral issued a press release announcing its financial results for


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Company reported that its net income was $64.2 million, an increase of 51.1% over the prior-year

period and for fiscal year 2002 earned a “record” $221.0 million, compared to income of $137.9

million (before the cumulative gain-effect of a change in accounting principle) for the same period a

year ago, an increase of 60%.” Doral also stated that “[f]or the fourth quarter of 2002 . . . [n]et gain

on mortgage loan sales and fees, the main component of non-interest income, was $63.3 million for

the fourth quarter of 2002 as compared to $51.1 million for the 2001 period” and “[n]et gain on

mortgage loan sales and fees was $220.6 million for the year ended December 31, 2002 an increase

of $33.4 million from $187.2 million for the corresponding period a year ago. Defendant S. Levis

commented on the announcement stating in pertinent part as follows:

We are truly proud that the record earnings attained during the quarter ended December 31, 2002 represents the 20th consecutive quarter (five years) that the Company achieves record earnings. Our excellent capital and cash positions gives [sic] us the opportunity to deploy them in the Company’s growth plan including investment in higher yielding AAA rated assets, expansion of existing business segments both in Puerto Rico and New York and possible strategic acquisitions of other secured lenders. Due to these excellent results, we were able to increase the dividend rate of the common stock twice during 2002 . . . .

It is gratifying that the Company’s efforts to further improve operations and thereby enhance shareholders [sic] value has been appreciated by the market place as reflected in the Company’s stock price. For the one year period ended December 31, 2002, Doral Financial’s common stock price increased by 37% compared to a decrease of 3.88% for the S&P 500 Banks Index, and has gone up approximately 238% in the last five years compared to a reduction of 6.22% in such S&P index. Also in the past 10 years, Doral Financial’s stock price has increased by approximately 1,460% while the S&P 500 Banks Index increased by 172.77%.

113. On or about March 26, 2003, Doral filed its Form 10-K for the fiscal year ended

December 31, 2002, with the SEC, which was signed by Defendants S. Levis, Bonini, Cullman, Z.

Levis, Melendez, Kier, Murray, Hughes, and Vincente, among others (the “2002 10-K”). The 2002

10-K described Doral’s mortgage banking business and mortgage loan sales operations representing

that a majority of the company’s loan sales were made with limited or “partial” recourse:

- 56 -

Doral Financial generally sells non-conforming loans on a limited or full recourse basis. As of December 31, 2002 and 2001, Doral Financial was servicing mortgage loans with an aggregate principal amount of $2.2 billion and $2.1 billion, respectively, on a full or limited recourse basis. As of December 31, 2002 and 2001, Doral Financial’s maximum aggregate recourse obligation relating to its mortgage servicing portfolio was approximately $1.5 billion and $1.0 billion, respectively.



in pertinent part:

Mortgage loans that do not conform to GNMA, FNMA or FHLMC requirements (non-conforming loans) are sold in bulk to local financial institutions or to FNMA or FHLMC in negotiated transactions. Doral Financial’s bulk sales generally operate very similar to securitization transactions because when Doral Financial sells a pool of loans to an investor it retains the servicing rights and agrees to pay the purchaser a specified pass-through rate for the entire pool being purchased. Any amounts received on the mortgages above the pass-through rate are retained by Doral Financial. The pass-through rate paid to the investors may be a fixed rate or a variable rate generally based on a spread over the three-month Libor. The present value of the future cash flow retained by Doral Financial above standard servicing fees for FNMA or FHLMC are recognized on Doral Financial’s financial statements as interest only strips (“IOs”). The fair values assigned to the IOs and the mortgage servicing rights reduce the carrying amount of the loan sold. The gain realized on the sale of the loan is determined by the difference of the sales price for the loan over the carrying amount.

* * *

Doral Financial’s sale and securitization activities generally result in the recording of two types of retained interest: MSRs and IOs. MSRs represent the estimated present value of the normal servicing fees (net of related servicing costs) expected to be received on the loan over the expected term of the loan. IOs represent the estimated present value of the excess of weighted-average coupon of the loans underlying the mortgage pool sold over the sum of (1) the rate required to be paid to investors and (2) a normal servicing fee after adjusting such amount for expected losses and prepayments. The contractual rate payable to investors may be either a fixed or floating rate. In the case of non-conforming loan pools, it is generally a floating rate based on a spread over the 90-day London Interbank Offered Rate (“LIBOR”). MSRs are classified as servicing assets and IOs are classified as trading securities on Doral Financial’s Consolidated Statements of Financial Condition.

- 57 -



of the loan sale,1 stating in pertinent part as follows:

Net gains from mortgage loan sales and fees increased by 18% during 2002 and by 39% from 2000 to 2001. The increases for 2002 and 2001 were mainly the result of a greater volume of loan securitizations and sales and the ability of Doral Financial to obtain higher profitability through higher loan fees and the creation of IOs in connection with bulk sales of mortgage loans to institutional investors.

* * *

Loan sales were $4.0 billion for 2002, compared to $2.2 billion for 2001 and $2.4 billion for 2000. Doral Financial recognized IOs as part of its sales activities of $197.9 million for 2002, compared to $141.4 million for 2001 and $72.7 million for 2000. During 2002, Doral Financial also recorded $40.1 million in connection with the recognition of MSRs as part of its loan sale and securitization activities, compared to $38.2 million for 2001 and $41.7 million for 2000. Loan origination fees were $64.2 million for 2002 compared to $64.9 million for 2001 and $51.4 million for 2000.

* * *

To determine the fair value of its IOs, Doral Financial obtains dealer quotes for comparable instruments and uses external and internal valuations based on discounted cash flow models that incorporate assumptions regarding discount rates and mortgage prepayment rates. Doral Financial generally uses the lowest valuation obtained from these methods. While Doral Financial has consistently sold some IOs in private sales, currently there is no liquid market for the purchase and sale of IOs. Doral Financial recognized IOs with recorded fair values of $197.9 million, $141.4 million and $72.7 million for the years ended December 31, 2002, 2001 and 2000, respectively. As of December 31, 2002, 2001 and 2000, the carrying value of IOs reflected in the Consolidated Financial Statements was $359.2 million, $236.5 million and $158.0 million, respectively.

* * *

During 2002, total amortization of servicing assets, including unscheduled amortization and impairment, amounted to $40.6 million versus $29.7 million for 2001 and $14.3 million for 2000. As noted earlier, Doral Financial’s servicing assets are also evaluated for impairment. [Emphasis added.]


$8,421,689,000, total liabilities were $7,376,718,000 and that stockholders equity was

- 58 -

$1,044,971,000. The 2002 10-K also represented that the Company’s financial statements complied

with GAAP stating in pertinent part:

The accompanying consolidated financial statements include the accounts of Doral Financial Corporation and its wholly owned subsidiaries. Accounting and reporting policies conform with generally accepted accounting principles.

* * *

At December 31, 2002, the Company’s banking subsidiaries were both well capitalized. An institution’s capital category, as determined by applying the prompt corrective action provisions of law, may not constitute an accurate representation of the overall financial condition or prospects of the Company, Doral Bank PR or Doral Bank NY, and should be considered in conjunction with other available information regarding the institution’s financial condition and results of operations.

117. The statements referenced above in ¶¶104-116 were each false and misleading when

issued because they failed to disclose and misrepresented the following facts which were known to

Defendants or recklessly disregarded by them:



year ended December 31, 2002: its net earnings were actually $166,882,000, not $220,968,000 as

previously reported; its “net gain on mortgage loan sales and fees” was actually $70,188,000, not

$220,585,000 as previously reported, an overstatement of $150,397,000 or 214%; its “stockholders’

equity” was actually $804,379,000, not $1,044,971,000 as previously reported, its “loans payable”

was actually $1,477,743,000, not $211,002,000 as previously reported, an understatement of

$1,266,741,000 or 600%; and its total assets were actually $9,346,613,000 for the year ended

December 31, 2002, not $8,421,689,000 as previously reported;




- 59 -






December 31, 2004;

















- 60 -











accounting;










materially false and misleading when made..

D. Fiscal Year 2003



- 61 -

it earned approximately $70 million, or $0.90 per share, an increase in earnings of 50.5% over the



We are very pleased with the excellent results for the first quarter of 2003 and with the contribution made by each of Doral’s business segments in achieving these results. The Company once again surpassed historical records in mortgage loan production, mortgage servicing portfolio, deposits, assets, earnings, capital and in key financial ratios. . . despite the current economic environment, the Company’s solid performance and the continued strength of the Puerto Rico residential market leads us to remain optimistic about Doral’s prospects for the future.

119. On May 14, 2003, Doral filed its Form 10-Q for the first quarter ended March 31,

2003, with the SEC, which was signed by Defendants S. Levis, Bonini, and Melendez (the “First

Quarter 2003 10-Q”). The First Quarter 2003 10-Q reported that Doral’s “net gains from mortgage

loan sales” increased by 68% during the quarter to $77.3 million, including gains from the creation

of IOs totaling $51.9 million. The First Quarter 2003 10-Q further represented that the value of

Doral’s IOs reflected the credit and payment characteristics of the loans sold, stating in pertinent part

as follows:

Doral Financial’s sale and securitization activities generally result in the recording of two types of retained interest: mortgage-servicing rights (“MSRs”) and IOs. MSRs represent the estimated present value of the normal servicing fees (net of related servicing costs) expected to be received on the loan over the expected term of the loan. IOs represent the estimated present value of the excess of weighted-average coupon of the loans underlying the mortgage pool sold over the sum of (1) the rate required to be paid to investors and (2) a normal servicing fee after adjusting such amount for expected losses and prepayments. [Emphasis added.]



Loans that do not qualify for the insurance or guarantee programs of FHA and VA, or the sale or exchange programs of FNMA or FHLMC (“non-conforming loans”), including loans secured by multifamily projects, are often sold to investors on a partial or full recourse basis. In such cases, Doral Financial retains part or all of the credit risk associated with such loan after sale. Doral Financial’s contingent obligation with respect to such recourse provisions is not reflected on Doral

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Financial’s Consolidated Financial Statements, except for the reserve referred to below. As of March 31, 2003, the outstanding principal balance of loans sold subject to full recourse or partial recourse was $2.2 billion. As of such date the maximum principal amount of loans that Doral Financial would have been required to repurchase if all loans subject to recourse defaulted was $1.6 billion. [Emphasis added.]



$1,095,866,000. The First Quarter 2003 10-Q also represented that the Company’s financial


The Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Company’s Annual Audited Financial Statements included in the Company’s Annual Report for the year ended December 31, 2002, and should be read in conjunction with the Notes to the Consolidated Financial Statements appearing in that report. All adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair statement of results for the interim periods have been reflected. [Emphasis added.]



it earned approximately $75 million, or $0.96 per share, an increase in earnings of 44.2% over the

prior-year period, when the Company reported earnings of $52 million, or $0.67 per share.


We are extremely pleased with the excellent performance experienced during the second quarter of 2003, which represents the 22nd consecutive quarter that Doral has achieved record earnings. Each one of the Company’s business segments contributed to the record results. The Company once again surpassed historical records in loan production, new housing financing, mortgage servicing portfolio, deposits both in Puerto Rico and New York, earnings, capital and run-on in key financial ratios. . . Doral’s solid performance and the continued strength of the Puerto Rico residential and retail banking markets lead us to remain optimistic about the Company’s prospects for the future.

121. On or about August 13, 2003, Doral filed its Form 10-Q for the second quarter ended

June 30, 2003 with the SEC which was signed by Defendants S. Levis, Bonini and Melendez (the

- 63 -

“Second Quarter 2003 10-Q”). The Second Quarter 2003 10-Q reported that Doral’s “net gain from





Doral Financial’s sale and securitization activities generally result in the recording of two types of retained interest: mortgage-servicing rights (“MSRs”) and IOs. MSRs represent the estimated present value of the normal servicing fees (net of related servicing costs) expected to be received on the loan over the expected term of the loan. IOs represent the estimated present value of the excess of the weighted-average coupon of the loans underlying the mortgage pool sold over the sum of (1) the rate required to be paid to investors and (2) a normal servicing fee after adjusting such amount for expected losses and prepayments. [Emphasis added.]



[L]oans the ordinary course of business, loans that do not qualify for the insurance or guarantee programs of FHA and VA, or the sale or exchange programs of FNMA or FHLMC (“non-conforming loans”), including loans secured by multifamily projects, are often sold to investors on a partial or full recourse basis. In such cases, Doral Financial retains part or all of the credit risk associated with such loan after sale. Doral Financial’s contingent obligation with respect to such recourse provisions is not reflected on Doral Financial’s Consolidated Financial Statements. As of June 30, 2003, the outstanding principal balance of loans sold subject to full recourse or partial recourse was $2.2 billion. As of such date the maximum principal amount of loans that Doral Financial would have been required to repurchase if all loans subject to recourse defaulted was $1.6 billion. [Emphasis added.]



$1,150,109,000. The Second Quarter 2003 10-Q also represented that the Company’s financial


The Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Company’s Annual Audited Financial Statements included in the Company’s Annual Report for the year ended December 31, 2002, and should be read in conjunction with the Notes to the

- 64 -

Consolidated Financial Statements appearing in that report. All adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been reflected. [Emphasis added.]

122. On September 22, 2003, Doral issued a press release announcing its intention to offer

$300 million of its perpetual cumulative convertible preferred stock in a private offering and that it

planned to offer the initial purchasers of the preferred stock an option to purchase an additional $45

million of the preferred stock.

123. On September 23, 2003, Doral issued a press release entitled “Doral Financial

Announces Pricing of $300,000,000 of the Company’s 4.75% Perpetual Cumulative Convertible

Preferred Stock.”

124. On October 8, 2003, Doral issued a press release entitled “Doral Financial

Corporation Announces Sale of an Additional $45 Million of Its 4.75% Perpetual Cumulative

Convertible Preferred Stock Pursuant to Exercise of Option Granted to Initial Purchasers.”




40.1% over the prior-year period, when the Company reported earnings of $58.3 million, or $0.74

per share. Defendant S. Levis commented on the announcement stating in pertinent part as follows:

It is a pleasure to once again report Doral’s excellent performance for the third quarter and nine months ended September 30, 2003 which represents the 23rd consecutive quarter that Doral has achieved record earnings. The Company surpassed historical records in loan production, new housing financing, mortgage servicing portfolio, bank deposits both in Puerto Rico and New York, earnings, capital and in several key financial ratios.


September 30, 2003 with the SEC, which was signed by Defendants S. Levis, Bonini and Melendez

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(the “Third Quarter 2003 10-Q”). The Third Quarter 2003 10-Q reported that Doral’s “net gain from


creation of IOs totaling $75 million. The Third Quarter 2003 10-Q further represented that the value

of Doral’s IOs reflected the credit and payment characteristics of the loans sold, stating in pertinent

part as follows:

Doral Financial’s sale and securitization activities generally result in the recording of two types of retained interests: mortgage-servicing rights (“MSRs”) and IOs. MSRs represent the estimated present value of the normal servicing fees (net of related servicing costs) expected to be received on the loan over the expected term of the loan. IOs represent the estimated present value of the excess of the weighted-average coupon of the loans underlying the mortgage pool sold over the sum of (1) the rate required to be paid to investors and (2) a normal servicing fee after adjusting such amount for expected losses and prepayments. [Emphasis added.]



[L]oans that do not qualify for the insurance or guarantee programs of FHA and VA, or the sale or exchange programs of FNMA or FHLMC (“non-conforming loans”), including loans secured by multifamily projects, are often sold to investors on a partial or full recourse basis. In such cases, Doral Financial retains part or all of the credit risk associated with such loan after sale. Doral Financial’s contingent obligation with respect to such recourse provisions is not reflected on Doral Financial’s consolidated financial statements. As of September 30, 2003, the outstanding principal balance of loans sold subject to full recourse or partial recourse was $2.2 billion. As of such date the maximum principal amount of loans that Doral Financial would have been required to repurchase if all loans subject to recourse defaulted was $1.7 billion. [Emphasis added.]

The Third Quarter 2003 10-Q reported that as of September 30, 2003, Doral’s total assets were


$1,508,292,000. The Third Quarter 2003 10-Q also represented that the Company’s financial


The Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Company’s Annual Audited Financial Statements included in the Company’s Annual Report for the year ended December 31, 2002, and should be read in conjunction with the Notes to the

- 66 -

Consolidated Financial Statements appearing in that report. All adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been reflected. [Emphasis added.]

127. On January 14, 2004, Doral issued a press release announcing its financial results for


Company reported that its net income was $94.7 million, an increase of 47.5% over the prior-year

period and for fiscal year 2003, the Company earned a “record” $321.3 million, compared to $221.0

million for the same period a year ago, an increase of 45%. Defendant S. Levis commented on the

announcement stating in pertinent part as follows:

We remain optimistic that 2004 will be another strong year for the Company. Even with the anticipation of higher interest rates, we expect greater profitability in 2004. We are committed to working hard and deliver to shareholders enhanced value on a consistent basis. [Emphasis added.]

128. On February 3, 2004, Doral issued a press release announcing that its registration of

4.75% Perpetual Cumulative Convertible Preferred Stock (the “4.75% Stock”) was declared

effective by the SEC. The 4.75% Stock was sold pursuant to a registration statement on Form S-3

filed with the SEC on or about December 24, 2003 and signed by defendants S. Levis, Z. Levis,

Bonini, Cullman, Hughes, Kier, Vicente, and Melendez, which included a prospectus dated February

9, 2004 (the “4.75% Registration Statement”). The 4.75% Registration Statement incorporated by

reference the financial statements for Doral for the five years in the period ended December 31,

2002, and for the first three quarters of 2003, and reported Doral’s net income, total assets and short

term borrowings – loans payable as follows:

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Time Period Net Income Total Assets Short Term Borrowings – Loans Payable

Year ended Dec. 31, 2000 $84,700,000 $5,463,000,000 $372,620,000

Year ended Dec. 31, 2001 $143,900,000 $6,694,000,000 $161,101,000

Year ended Dec. 31, 2002 $221,000,000 $ 8,422,000,000

Quarter ended Sept. 30, 2003 $226,700,000 $10,764,000,000 $206,385,000

129. On March 11, 2004, Doral filed its Form 10-K for the fiscal year ended December 31,

2003 with the SEC which was signed by Defendants S. Levis, Bonini, Cullman, Z. Levis, Melendez,

Kier, Vicente, and Hughes (the “2003 10-K”). The 2003 10-K described Doral’s mortgage banking

business and mortgage loan sales operations representing that a majority of the company’s loan sales

were made with limited or “partial” recourse:

Doral Financial generally sells non-conforming loans on a limited or full recourse basis. As of December 31, 2003 and 2002, Doral Financial was servicing mortgage loans with an aggregate principal amount of $2.4 billion and $2.2 billion, respectively, on a full or limited recourse basis. As of December 31, 2003 and 2002, Doral Financial’s maximum aggregate recourse obligation relating to its mortgage servicing portfolio was approximately $1.9 billion and $1.5 billion, respectively.



in pertinent part:

Mortgage loans that do not conform to GNMA, FNMA or FHLMC requirements (non-conforming loans) are generally sold in bulk to local financial institutions or to FNMA or FHLMC in negotiated transactions. Doral Financial’s bulk sales generally operate very similar to securitization transactions because when Doral Financial sells a pool of loans to an investor it retains the servicing rights and agrees to pay the purchaser a specified pass-through rate for the entire pool being purchased. Any amounts received on the mortgages above the pass-through rate are retained by Doral Financial. The pass-through rate paid to the investors may be a fixed rate or more often a variable rate generally based on a spread over the three-month London Interbank Offered Rate (“Libor”). The present value of the future cash flow retained by Doral Financial above standard servicing fees for FNMA or FHLMC are recognized on Doral Financial’s financial statements as interest only strips (“IOs”).

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The fair values assigned to the IOs and the mortgage servicing rights reduce the carrying amount of the loan sold. The gain realized on the sale of the loan is determined by the difference of the sales price for the loan over the carrying amount.

* * *

Doral Financial’s sale and securitization activities generally result in the recording of two types of retained interest: MSRs and IOs. MSRs represent the estimated present value of the normal servicing fees (net of related servicing costs) expected to be received on the loan over the expected term of the loan. IOs represent the estimated present value of the excess of the weighted-average coupon of the loans underlying the mortgage loan pool sold over the sum of (1) the rate required to be paid to investors and (2) a normal servicing fee after adjusting such amount for expected losses and prepayments. The contractual rate payable to investors may be either a fixed or floating rate. In the case of non-conforming loan pools, it is generally a floating rate based on a spread over the 90-day London Interbank Offered Rate (“LIBOR”). MSRs are classified as servicing assets and IOs are classified as trading securities in Doral Financial’s Consolidated Statements of Financial Condition.




[N]et gains from mortgage loan sales and fees at both its mortgage banking and banking units continue to be its principal source of revenues. For the year ended December 31, 2003, Doral Financial’s net gain on mortgage loan sales and fees was $390.1 million compared to $220.6 million for 2002, an increase of approximately 77%. Net gain on mortgage loan sales and fees constituted approximately 45% of Doral Financial’s total revenues.

* * *

Loan sales and securitizations were $5.0 billion for 2003, compared to $4.0 billion for 2002 and $2.2 billion for 2001. Doral Financial retained IOs as part of its sales activities of $281.3 million for 2003, compared to $197.9 million for 2002 and $141.5 million for 2001. During 2003, Doral Financial also recorded $47.0 million in connection with the recognition of MSRs as part of its loan sale and securitization activities, compared to $40.1 million for 2002 and $38.2 million for 2001. Loan origination fees were $71.8 million for 2003 compared to $64.2 million for 2002 and $64.9 million for 2001.

* * *

To determine the fair value of its IOs, Doral Financial, on a quarterly basis, obtains dealer quotes for comparable instruments and compares these quotes with external

- 69 -

and internal valuations based on discounted cash flow models that incorporate assumptions regarding discount rates and mortgage prepayment rates. Doral Financial generally uses the lowest valuation obtained from these methods. While Doral Financial has sold some IOs in private sales, currently there is no liquid market for the purchase and sale of IOs. The market multiple used by Doral Financial to value IOs ranged from 4.75 to 5.50 during 2003, compared to a range of 4.25 to 5.50 during 2002. As of December 31, 2003, 2002 and 2001, the carrying value of IOs reflected in the Consolidated Financial Statements was $578.1 million, $359.2 million and $218.8 million, respectively. The initial recorded value of IOs is amortized over the expected life of the asset, and is recorded as a reduction of interest income. The amortization is based on the amount and timing of estimated future cash flows to be received with respect to IOs.

* * *

Doral Financial’s servicing assets are amortized in proportion to, and over the period of the estimated net servicing income. Amortization of servicing assets is recorded as a reduction of servicing income in Doral Financial’s Consolidated Statements of Income. Doral Financial monitors changes in interest rates and prepayment rates and adjusts the amount of amortization or records an impairment loss, charged to current period earnings, to reflect changes in prepayment rates. During 2003, total amortization of servicing assets, including unscheduled amortization and impairment, amounted to $50.4 million versus $40.6 million for 2002 and $29.7 million for 2001.



$1,592,440,000. The 2003 10-K also represented that the Company’s financial statements complied


The accompanying Consolidated Financial Statements include the accounts of Doral Financial Corporation and its wholly owned subsidiaries. The Company’s accounting and reporting policies conform with accounting principles generally accepted in the United States of America. All significant intercompany accounts and transactions have been eliminated in consolidation.

* * *

As of December 31, 2003, the most recent notification from the FDIC dated October 20, 2003, categorized Doral Bank - PR as well capitalized under the regulatory framework for prompt corrective action.-

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133. The statements referenced above in ¶¶118-132 were each false and misleading when

issued because they failed to disclose and misrepresented the following facts which were known to

Defendants or recklessly disregarded by them:





and fees” was actually $94,709,000, not $390,081,000 as previously reported, an overstatement of

$295,372,000 or 312%; its “stockholders’ equity” was actually $1,182,362,000, not $1,592,440 as

previously reported; its “loans payable” was actually $2,014,183,000, not $178,334,000 as

previously reported, an understatement of $1,835,849,000 or 1,029%; and its total assets were

actually $11,755,228,000, not $10,393,996,000 as previously reported;









December 31, 2004;



- 71 -
























- 72 -


accounting;











E. Fiscal Year 2004



for it earned approximately $103.6 million, or $0.86 per share, an increase in earnings of 48% over

the prior-year period, when the Company reported earnings of $70 million, or $0.60 per share.


We are very pleased with the excellent results for the first quarter of 2004, in which the Company surpassed $100 million of quarterly net income for the first time in its history. Each of Doral’s business segments contributed in achieving these results. The Company once again established historical records in mortgage loan production, mortgage servicing portfolio, secured commercial lending, assets, deposits, earnings, capital and in key financial ratios. The quarter ended on a high note with the Company achieving its highest monthly loan production volume in its history during the month of March. We are now anticipating that loan production for the remainder of 2004 should be stronger than the first quarter and project over $7.5 billion for the year, well in excess of the $6.5 billion record levels of 2003. This substantial increase contrasts with anticipated US production for 2004, which is expected to fall

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well below 2003 levels. . .[w]ith the combination of $1.7 billion in stockholders’ equity, a tier 1 capital ratio over 22%, liquid assets of $2.0 billion, and a most capable management team, Doral is well positioned for another strong year in 2004 and many years to come.

135. On or about May 7, 2004, Doral filed its Form 10-Q for the first quarter ended March

31, 2004 with the SEC, which was signed by Defendants S. Levis and Melendez (the “First Quarter

2004 10-Q”). The First Quarter 2004 10-Q reported that Doral’s “net gain from mortgage loan

sales” increased by 77% during the quarter to $136.9 million, including gains from the creation of

IOs totaling $113.6 million. The First Quarter 2004 10-Q further represented that the value of


as follows:

Doral Financial’s sale and securitization activities generally result in the recording of two types of retained interests: mortgage-servicing rights (“MSRs”) and IOs. MSRs represent the estimated present value of the normal servicing fees (net of related servicing costs) expected to be received on the loan over the expected term of the loan. IOs represent the estimated present value of the excess of the weighted-average coupon of the loans underlying the mortgage loan pool sold over the sum of (1) the rate required to be paid to investors and (2) a normal servicing fee after adjusting such amount for expected losses and prepayments. [Emphasis added.]



[L]oans that do not qualify for the insurance or guarantee programs of FHA and VA, or the sale or exchange programs of FNMA or FHLMC (“non-conforming loans”) are often sold to investors on a partial or full recourse basis pursuant to which Doral Financial retains part or all of the credit risk associated with such loan after sale. Recourse is generally limited to a period of time (generally 24 months) or a percentage up to a 15% of the principal amount of the loans sold. Doral Financial’s contingent obligation with respect to such recourse provisions is not reflected on Doral Financial’s consolidated financial statements. As of March 31, 2004, the outstanding principal balance of loans sold subject to full recourse or partial recourse was $2.5 billion. As of such date the maximum principal amount in loans that Doral Financial would have been required to repurchase if all loans subject to recourse defaulted was $2.0 billion. [Emphasis added.]

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$1,718,033,000. The First Quarter 2004 10-Q also represented that the Company’s financial


The Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Company’s Annual Audited Financial Statements included in the Company’s Annual Report for the year ended December 31, 2003, and should be read in conjunction with the Notes to the Consolidated Financial Statements appearing in that report. All adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been reflected. Certain amounts reflected in the Company’s Consolidated Financial Statements for the 2003 periods, have been reclassified to conform to the presentation of 2004. [Emphasis added.]

136. On June 2, 2004, Doral issued a press release announcing that it agreed to sell $115

million of its Floating Rate Senior Notes due December 7, 2005 (the “Floating Rates Senior Notes”).

The Floating Rates Senior Notes were sold pursuant to a registration statement on Form S-3 filed

with the SEC on or about June 2, 2004 and signed by Defendants S. Levis, Z. Levis, Bonini,

Cullman, Vicente, Kier, and Melendez, which included a prospectus dated June 4, 2004 (the

“Floating Rates Senior Notes Registration Statement”). The Floating Rates Senior Notes

Registration Statement registered an additional $18,500,000 aggregate principal amount of senior or

subordinated debt securities, which was originally registered under a senior indenture, and declared

effective by the SEC on or about November 13, 2001. The Floating Rates Senior Notes Registration

Statement incorporated by reference the financial statements for Doral for the five years in the period

ended December 31, 2003, and for the first quarter of 2004, and reported Doral’s net income, total

assets and short term borrowings - loans payable as follows:

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Year ended Dec. 31, 2000 $84,700,000 $5,463,000,000 $372,620,000

Year ended Dec. 31, 2001 $143,900,000 $6,694,000,000 $161,101,000

Year ended Dec. 31, 2002 $221,000,000 $8,422,000,000 $211,002,000

Year ended Dec. 31, 2003 $321,299,000 $10,393,996,000 $178,334,000


137. On June 10, 2004, Doral filed a Form S-3 with the SEC to register $1.2 billion in

Debt Securities, Preferred Stock (the “1.2B Debt Securities Registration Statement”), due July 20,

2007. The 1.2B Debt Securities Registration Statement was signed by defendants S. Levis, Z. Levis,

Bonini, Cullman, Huffman, Hughes, Kier, Vicente, and Melendez, and included a prospectus dated

June 22, 2004 (the “1.2B Debt Securities Registration Statement”). The $1.2B Debt Securities

Registration Statement incorporated by reference the financial statements for Doral for the five years

in the period ended December 31, 2003 and for the first quarter of 2004, and reported Doral’s net

income, total assets and short term borrowings - loans payable as follows:


Year ended Dec. 31, 2000 $84,700,000 $5,463,000,000 $372,620,000

Year ended Dec. 31, 2001 $143,900,000 $6,694,000,000 $161,101,000

Year ended Dec. 31, 2002 $221,000,000 $ 8,422,000,000 $211,002,000

Year ended Dec. 31, 2003 $321,299,000 $10,393,996,000 $178,334,000


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138. On June 29, 2004, Doral issued a press release entitled “Doral Financial Anticipates

Record Loan Production in 2004 Despite Expected Increase in Interest Rates.” The press release

stated in part:

Mr. Salomon Levis, Chairman of the Board and Chief Executive Officer of Doral Financial Corporation, stated that contrary to recent announcements by US-based mortgage lenders, he did not believe that the expected increase in interest rates would have an adverse impact on the Company’s operations. In fact, Mr. Levis stated that the anticipated increases in interest rates during 2004 represent an opportunity for Doral Financial to realize additional profits.

As previously announced on April 15, 2004, the Company is anticipating loan production of $7.5 billion for the year 2004, well in excess of the $6.5 billion record production of 2003. The Company has previously explained that refinancing loans in Puerto Rico are generally in smaller loan amounts and tend to be driven more by debt consolidation considerations rather than interest rate savings. Because interest on a mortgage loan is tax deductible by a borrower under Puerto Rico income tax law, when interest rates increase on other consumer products on which the interest is not tax deductible, the average homeowner is more inclined to refinance his/her mortgage loan as interest rates on mortgage loans are generally also lower. That is why even in a considerably higher mortgage rate environment, like the one that existed in 1999, Doral’s refinancings generally run at a high level, i.e. 60% of internal mortgage loan originations. Since 1998, the Company has attained record earnings in the last 25 consecutive quarters, under different interest rate scenarios.

* * *

Mr. Levis concluded by reiterating his optimism for the remainder of the year 2004 and the future.


second quarter of 2004, the period ending June 30, 2004. The Company reported that for the quarter


prior-year period, when the Company reported earnings of $75 million, or $0.64 per share.


We are delighted with the excellent record performance for the second quarter of 2004. Each of Doral’s business segments contributed in achieving these results. The Company is carefully monitoring its interest rate management program to protect our assets and liabilities against rising interest rates. Our interest rate management program has proven successful under different interest rate

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environments and has been instrumental in Doral achieving 26 consecutive quarters of record earnings.

140. On July 15, 2004, Doral issued a press release announcing that agreed to sell $350

million of its 1.2B Debt Securities. The $350 million of Doral’s 1.2B Debt Securities were sold

pursuant to the 1.2B Debt Securities Registration Statement (See ¶137), and included a prospectus

dated July 19, 2004.

141. On or about August 9, 2004, Doral filed its Form 10-Q for the second quarter ended

June 30, 2004 with the SEC, which was signed by Defendants S. Levis and Melendez (the “Second

Quarter 2004 10-Q”). The Second Quarter 2004 10-Q reported that Doral’s “net gain from mortgage

loan sales” increased by 33% during the quarter $130.6 million, including gains from the creation of

IOs totaling $111.2 million. The Second Quarter 2004 10-Q further represented that the value of


as follows:




[L]oans that do not qualify for the insurance or guarantee programs of FHA and VA, or the sale or exchange programs of FNMA or FHLMC (“non-conforming loans”) are often sold to investors on a partial or full recourse basis pursuant to which Doral Financial retains part or all of the credit risk associated with such loan after sale. Recourse is generally limited to a period of time (generally 24 months) or a percentage up to a 15% of the principal amount of the loans sold. Doral Financial’s contingent obligation with respect to such recourse provisions is not reflected on Doral Financial’s unaudited consolidated financial statements. As of June 30, 2004, the outstanding principal balance of loans sold subject to full recourse or partial

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recourse was $2.9 billion. As of such date the maximum principal amount in loans that Doral Financial would have been required to repurchase if all loans subject to recourse defaulted was $2.3 billion. [Emphasis added.]



$1,718,270,000. The Second Quarter 2004 10-Q also represented that the Company’s financial


The Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Company’s Annual Audited Financial Statements included in the Company’s Annual Report for the year ended December 31, 2003. Certain information and note disclosure normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from these statements pursuant to the rules and regulations of the Securities and Exchange Commission and, accordingly, these financial statements should be read in conjunction with the audited Consolidated Financial Statements of the Company for the year ended December 31, 2003, included in the Company’s Annual Report on Form 10-K. All adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been reflected. [Emphasis added.]

142. On August 27, 2004, Doral issued a press release announcing that it agreed to sell

$125 million of its 1.2B Debt Securities. The $125 million of Doral’s 1.2B Debt Securities were

sold pursuant to the 1.2B Debt Securities Registration Statement (See ¶137), and included a

prospectus dated August 31, 2004.

143. On September 16, 2004, Doral issued a press release announcing that it agreed to sell

$150 million of its 1.2B Debt Securities. The $150 million of Doral’s 1.2B Debt Securities were

sold pursuant to the 1.2B Debt Securities Registration Statement (See ¶137), and included a

prospectus dated September 17, 2004.



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reported that for the quarter it earned approximately $120.6 million, or $1.01 per share, an increase

in earnings of 47.6% over the prior-year period, when the Company reported earnings of $81.7

million, or $0.70 per share. Defendant S. Levis commented on the announcement stating in pertinent

part as follows:

We are pleased with the record performance for the third quarter of 2004. Each of Doral’s business segments contributed in achieving our 27th consecutive quarter of record earnings. Mr. Levis concluded by stating that the results for the first nine months of 2004 continued to fuel his optimism for the Company’s prospects.

145. On October 21, 2004, Doral issued a press release entitled “Doral Financial

Anticipates Record Loan Production in Fourth Quarter 2004.” The press release stated in part:

Mr. Salomon Levis, Chairman of the Board and Chief Executive Officer of Doral Financial Corporation stated that contrary to recent announcements by US-based mortgage lenders, the Company’s loan production for the third quarter of 2004, as reported on October 13, 2004, was a record $2.0 billion compared to $1.7 billion for the comparable 2003 period, an increase of 18%. Also, net income for the third quarter of 2004 amounted to a record of $120.6 million, compared to $81.7 million for the third quarter of 2003, an increase of 48%.

The Chairman noted that the existing demand for new housing in Puerto Rico continues strong and so does Doral’s share of this new housing market including the growing government-sponsored affordable housing loans, most of which enjoy tax exempt interest rates. As a result, the Company has a strong mortgage backlog and a substantial pipeline of future mortgage production.

* * *

Mr. Levis stated that based on existing trends, the Company expected a record level of loan production for the fourth quarter 2004. Mr. Levis concluded by reiterating his optimism for the Company’s prospects, as previously expressed.


September 30, 2004 with the SEC, which was signed by Defendants S. Levis and Melendez (the

“Third Quarter 2004 10-Q”). The Third Quarter 2004 10-Q reported that Doral’s “net gain from

mortgage loan sales” increased by 68% during the quarter to $165.5 million, including gains from

the creation of IOs totaling $142.8 million. The Third Quarter 2004 10-Q further represented that

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the value of Doral’s IOs reflected the credit and payment characteristics of the loans sold, stating in





[L]oans that do not qualify for the insurance or guarantee programs of FHA and VA, or the sale or exchange programs of FNMA or FHLMC (“non-conforming loans”) are often sold to investors on a partial or full recourse basis pursuant to which Doral Financial retains part or all of the credit risk associated with such loan after sale. Recourse is generally limited to a period of time (generally 24 months) or a percentage up to a 15% of the principal amount of the loans sold. As of September 30, 2004, the outstanding principal balance of loans sold subject to full recourse or partial recourse was $3.1 billion. As of such date, the maximum principal amount of loans that Doral Financial would have been required to repurchase if all loans subject to recourse defaulted was $2.5 billion. [Emphasis added.]

The Third Quarter 2004 10-Q reported that as of September 30, 2004, Doral’s total assets were


$1,855,667,000. The Third Quarter 2004 10-Q also represented that the Company’s financial



147. Beginning in January 2005, the details of Defendants’ fraud started to come to light.

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148. On January 18, 2005, Doral issued a press release announcing its earnings for the

fourth quarter of 2004 and the fiscal year ended December 31, 2004. For the quarter, the Company

reported that net income was $150.5 million, an increase in earnings of 58.9% over the prior-year

period and for fiscal year 2004 the Company reported “record” net income of $489.6 million. Doral

also stated that “[n]et gain on mortgage loan sales and fees, the main component of non-interest

income, was $165.8 million for the fourth quarter of 2004 compared to $116.1 million for the

corresponding 2003 period.” The Company attributed the gain “to increased volume of loan sales as

a result of record mortgage loan production. Demand for the Company’s mortgage loans has

increased to record levels.” The Company further noted that it was taking an impairment charge of

$97.5 million in connection with its IO Strips. Doral also reported that it was the beneficiary of a

windfall tax benefit that, in effect, offset the IO impairment losses reported during the fourth quarter.

The press release stated in pertinent part as follows:

On August 22, 2004, local legislation was enacted to provide a temporary reduction in the long-term capital gain tax rates. The law amends the Puerto Rico Internal Revenue Code of 1994 to reduce the long-term capital gain tax rates by fifty percent for transactions occurring from July 1, 2004 through June 30, 2005. During the fourth quarter ended December 31, 2004, the Company effected certain tax planning strategies to accelerate long-term capital gains that had been deferred for tax purposes and, as a consequence, the Company recorded an income tax benefit of $77.0 million. Excluding this benefit, the Company’s effective income tax rate for the fourth quarter ended December 31, 2004 was approximately 18%.

Investment activities for the fourth quarter of 2004 resulted in a loss of $95.4 million, compared to a loss of $8.0 million for the fourth quarter of 2003. The loss on investment activities during the fourth quarter of 2004 was principally due to an impairment on the value of the Company’s interest-only strips (IOs) of $97.5 million as a result of increases in the 3-month London Interbank Offered Rate (“LIBOR”) which reduced the anticipated spread of the Company’s variable rate IOs. If contrary to what is generally expected, LIBOR decreases, a portion of the impairment charges on the value of the IOs could be recovered. The Company recorded impairment charges on the value of its IOs of $131.0 million for the year ended December 31, 2004, compared to a positive valuation adjustment of $7.3 million for the corresponding 2003 period. Investment activities resulted in a loss of $190.1 million for the year ended December 31, 2004, compared to a gain of $11.0 million for the respective 2003 period. The loss on investment activities experienced

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during 2004 also included derivatives undertaken for interest rate management purposes.

149. Analysts quickly questioned the valuation of Doral’s IO Strips and Defendants’

opportunistic implementation of “tax planning strategies” which offset the Company’s reported IO

valuation losses. For example:

(a) On January 19, 2005, Deutsche Bank Securities, Inc., analysts N. Abramavage

and P. Van Hook, issued a report noting:

Doral reported fourth quarter results with a headline upside to our number, however containing offsetting extraordinary items. After reviewing the company’s 4Q-04 press release, we remain confident that Doral will meet our 2005 estimate of $4.60. We are introducing a 2006 estimate of $5.30 and reiterating our Buy rating and $55 target price.

* * *

The fourth quarter included a $77 million one-time income tax benefit which was offset by a $80.0 million net impairment on the company’s IO Strips.

Under the heading “What we didn’t like: offsetting noise of 4Q” the report stated:

The fourth quarter included a $77 million one-time income tax benefit, the result of a temporary change to the Puerto Rican tax code. Last August, the Puerto Rican tax code was amended to reduce long-term capital gains rates by 50% during a one-year window starting July 1, 2004 and ending June 30, 2005. By accelerating long-term capital gains, the company was able to incur the $77 million benefit in the fourth quarter. This benefit was largely offset however, by a loss on investment activities of $97.5 million due to an impairment on the value of the company’s interest-only strips. The impairment resulted from an increase in LIBOR during the quarter and the company’s desire to prepare for future increases to the extent possible. On a net basis, we estimate the impairment at $80.0 million.

(b) On January 19, 2005, Hibernia Southcoast Capital, analyst J. Cunningham,

issued a report maintaining its “Hold” rating and share price target of $51, noting:

Doral Financial reported 4Q EPS of $1.22, ahead of our $1.05 estimate. However, earnings included a $77 million tax benefit relating to temporary changes in the taxes for long-term gains in Puerto Rico.

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Revenues were $148 million in the quarter, inclusive of a $95.4 million loss in investment activities. The loss was due primarily to a $131 million impairment of the IO Strips, which in turn stemmed from the increase in 3-month LIBOR.

At first glance, this makes us concerned that future IO impairments may be forthcoming with additional Fed rate hikes in 2005. [Emphasis added.]

In a second report issued later that same day, but following discussions with Doral’s “management,”

Hibernia issued a report upgrading Doral’s investment rating to “Buy” noting:

Although there was plenty of confusion about 4Q04, our conversation with management has alleviated our concerns about potential IO issues ahead. Management indicated that they have been very conservative in their rate assumptions surrounding the IO and that they are using a YE04 three-month LIBOR of greater than 4%. [Emphasis added.]

(c) Then on January 25, 2005, Wachovia Securities, analyst J. Shanahan, issued a

report noting that Doral’s fourth quarter impairment charges may represent a “catch-up” for

impairment that were not taken in prior quarters. The report stated in pertinent part as follows:

Through the first nine months of 2004, [Doral] had recorded approximately $33.5mm in IO impairment, while [3-month LIBOR] increased by approximately 85bps. In the fourth quarter, [3-month LIBOR] increased by another 55bps and [Doral] recorded the aforementioned $97.5mm impairment. We question management’s suggestion that the impairments were “conservative,” as there is no question that the short-term interest rates have moved against the Company. While a $97.5mm impairment seems large for a smaller increase in [3-month LIBOR] during Q4, we are inclined to believe that the impairment in Q4 was potentially a catch-up, for impairment not taken during prior quarters. [Emphasis added.]

150. On the next trading day, January 19, 2005, the price of Doral common stock declined

11% to close at $42.02 per share (split adjusted) on volume of 9.5 million shares and continued to

decline over the next four trading sessions closing at $38.96 per share (split adjusted) on January 25,

2005.

151. On March 15, 2005, Doral filed its Form 10-K for the fourth quarter and year ended

December 31, 2004 (the “2004 10-K”), which was signed by Defendants S. Levis, Bonini, Cullman,

Z. Levis, Melendez, Hoffman, Hughes, Kier, and Vicente. The 2004 10-K described Doral’s

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mortgage banking business and mortgage loan sales operations representing that a majority of the

company’s loan sales were made with limited or “partial” recourse stating in pertinent part as

follows:

Doral Financial purchases conforming mortgage loans on a wholesale basis from U.S. financial institutions without the related servicing rights which are generally securitized into FNMA or FHLMC securities and sold into the market. Doral Financial also purchases mortgage loans from other mortgage bankers in Puerto Rico consisting primarily of nonconforming mortgage loans and to a lesser extent FHA and VA loans for securitization into GNMA securities and resale to institutional investors. For the years ended December 31, 2004 and 2003 total loan purchases amounted to approximately $2.9 billion and $2.1 billion, respectively, of which $2.5 billion and $1.7 billion consisted of U.S. conforming loans.

* * *

Doral Financial generally sells non-conforming loans on a full or limited recourse basis. As of December 31, 2004 and 2003, Doral Financial was servicing mortgage loans with an aggregate principal amount of $3.9 billion and $2.4 billion, respectively, on a full or limited recourse basis. As of December 31, 2004 and 2003, Doral Financial’s maximum aggregate recourse obligation relating to its mortgage servicing portfolio was approximately $3.3 billion and $1.9 billion, respectively.



in pertinent part:

Mortgage loans that do not conform to GNMA, FNMA or FHLMC requirements (non-conforming loans) are generally sold in bulk to local financial institutions or to FNMA or FHLMC in negotiated transactions. Doral Financial’s bulk sales generally operate very similar to securitization transactions because when Doral Financial sells a pool of loans to an investor it retains the servicing rights and agrees to pay the purchaser a specified pass-through rate for the entire pool being purchased. Any amounts received on the mortgages above the pass-through rate are retained by Doral Financial. The pass-through rate paid to the investors may be a fixed rate or more often a variable rate generally based on a spread over the three-month London Interbank Offered Rate (“Libor”). The present value of the future cash flow retained by Doral Financial above standard servicing fees for FNMA or FHLMC are recognized on Doral Financial’s financial statements as interest-only strips (“IOs”). The fair values assigned to the IOs and the mortgage servicing rights reduce the carrying amount of the loan sold. The gain realized on the sale of the loan is determined by the difference of the sales price for the loan over the carrying amount.

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* * *

Doral Financial’s sale and securitization activities generally result in the recording of two types of retained interest: MSRs and IOs. MSRs represent the estimated present value of the normal servicing fees (net of related servicing costs) expected to be received on the loan over the expected term of the loan. IOs represent the estimated present value of the excess of the weighted-average fixed coupon of the loans underlying the mortgage loan pool sold over the sum of (1) the contractual interest rate required to be paid to investors and (2) a normal servicing fee after adjusting such amount for expected losses and prepayments. The contractual rate payable to investors may be either a fixed or floating rate. In the case of non-conforming loan pools, which constitute 94% of the IOs portfolio, it is generally a floating rate based on a spread over the 3-month LIBOR that resets quarterly. Generally, the loans sold are subject to interest rate caps set at or below the weighted-average coupon (less the servicing fee) on the pools of loans and to a lesser extent based on a spread above the initial contractual pass-through rate at the time of sale, which does not exceed the weighted-average coupon on the loans.




[N]et gains from mortgage loan sales and fees at both its mortgage banking and banking units continue to be its principal source of revenues. For the year ended December 31, 2004, Doral Financial’s net gain on mortgage loan sales and fees was $598.8 million compared to $390.1 million for 2003, an increase of approximately 54%. Mortgage loan sales and fees are impacted in large part by the level of mortgage loan originations, which in turn are directly influenced by demand for housing and the level of mortgage interest rates. The volume of loans originated and purchased by Doral Financial during 2004 and 2003 was approximately $7.8 billion and $6.5 billion, respectively.

* * *

Total loan sales and securitizations were $6.8 billion for 2004, compared to $5.0 billion for 2003 and $4.0 billion for 2002. Loan sales and securitizations that resulted in the recording of IOs amounted to $3.5 billion during 2004, compared to $2.0 billion for 2003 and $1.6 billion for 2002. Doral Financial retained IOs as part of its sales activities of $509.3 million for 2004, compared to $281.3 million for 2003 and $197.9 million for 2002. During 2004, Doral Financial also recorded $66.9 million in connection with the recognition of MSRs as part of its loan sale and securitization activities, compared to $47.0 million for 2003 and $40.1 million for 2002.

* * *

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To determine the fair value of its IO portfolio, Doral Financial engages in two external valuations with parties independent of the Company and of each other. One of them consists of dealer market quotes for similar instruments and the other one consists of a cash flow valuation model in which all economic and portfolio assumptions are determined by the preparer. In addition to these two independent valuations, the Company prepares an internal, static cash flow model that incorporates internally generated prepayment and discount rate assumptions and an expected retained interest rate spread based on 3-month LIBOR rates at the close of the reporting period. As of December 31, 2004, the 3-month LIBOR rate used in the internal valuation model was higher than those contracted with investors for payment prior to the next resetting dates. It is Doral Financial’s policy to record as the fair value of the IOs the lowest of the three valuation sources.

* * *

Doral Financial’s servicing assets are amortized in proportion to, and over the life of the underlying mortgage loans. Amortization of servicing assets is recorded as a reduction of servicing income in Doral Financial’s Consolidated Statements of Income. Doral Financial monitors changes in interest and prepayment rates and adjusts the amount of amortization or records an impairment loss that is charged to current period earnings, to reflect changes in prepayment rates. During 2004, total amortization of servicing assets, including impairment charges, amounted to $35.7 million versus $50.4 million for 2003 and $40.6 million for 2002. The decrease in amortization of servicing assets during 2004 was primarily due to an increase in future estimated net MSR cash flows due to actual and forecasted lower mortgage prepayments in 2004 when compared to 2003.



$1,972,769,000.

155. The 2004 10-K also represented that the Company’s financial statements complied


The accompanying Consolidated Financial Statements include the accounts of Doral Financial Corporation and its wholly owned subsidiaries. The Company’s accounting and reporting policies conform with accounting principles generally accepted in the United States of America. All significant intercompany accounts and transactions have been eliminated in consolidation.

156. In a Message from the Chairman, contained in Doral’s 2004 10-K, Chairman of the

Board Salomón Levis stated the following:

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We are proud to announce that after being profitable in each of our 32 years, capped by an outstanding 2004, we have produced record-setting numbers that once again placed us among the best performing companies – not just financial institutions – in the nation.

Some highlights:

- Record earnings of $489.6 million, up 52% from $321.3 million posted in 2003

- Record loan production of $7.8 billion, up 20% for the year

- Record consolidated bank assets of $11.7 billion and consolidated deposits of $3.6 billion at year end, up 63% and 23% for the year, respectively

- Record capital of $2.0 billion, up 24% for the year

- Record loan servicing portfolio of $14.3 billion, up 12% for the year

- Return on average common equity (ROE) of 38.54% for the year, and return on average assets (ROA) of 3.85%, exceeding last year’s record performance

- Record efficiency ratio of 23.1% for the year, one of the best among all banking or financial holding companies in the U.S.

- Increased dividend rate on our common stock which was increased twice during the year

- Record all time high for the price of Doral’s common stock, up 53% for the year and 3,754% for the last 10 years

157. The 2004 10-K also purported to disclose the assumptions used by Doral in valuing

its IO Strips. The 2004 10-K reported that Doral’s key “prepayment” rate had improved during the

fourth quarter to 7.2% from 10.50% during the previous quarter. The Company reported that the

discount rate had also improved to 7.63% from 8.25%. The report stated in pertinent part as follows:

The IO portfolio is related almost exclusively to non-conforming mortgage loans that generally have low balances, lower loan-to-value ratios, insignificant historical charge-offs and slower prepayment rates. The difference in prepayment speeds is primarily due to prepayment penalties associated exclusively to non-conforming loans. Other activities that help reduce prepayments include the adoption of special internal measures such as loan modifications that reduce borrowers’ monthly payments by extending the terms of the loans and granting second mortgages in lieu of refinancing cash-outs. The discount rate assumed in valuing the IOs reflects the expected yield on the IOs determined based on a relevant mortgage rate index plus a risk premium.

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158. The statements referenced above in ¶¶134-139, 141, 144-46, 148, 152-157 were each

false and misleading when issued because they failed to disclose and misrepresented the following

facts which were known to Defendants or recklessly disregarded by them:





and fees” was actually $83,585,000, not $598,762,000 as previously reported, an overstatement of

$515,177,000 or 616%; its “stockholders’ equity” was actually $1,284,617,000, not $1,972,769,000

as previously reported; its “loans payable” was actually $3,638,507,000, not $279,560,000 as

previously reported, an understatement of $3,358,947,000 or 1,202%; and its total assets were

actually $17,835,662,000 for the year ended December 31, 2004, not $15,102,401,000 as previously

reported;









December 31, 2004;

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accounting;











159. The market immediately perceived a “disconnect” between the assumptions used by

Defendants in the 2004 10-K when compared to then existing market conditions. On March 18,

2005, Wachovia analyst J. Shanahan, issued a report noting the “overly aggressive [IO valuation]

assumptions” used by Doral and downgrading Wachovia’s investment rating for Doral common

stock to “Under-perform” and lowering earnings estimates for 2005.

160. In response to the disclosures in the Form 10-K, on March 16, 2005, the price of

Doral common stock lost 20% of its value, closing at a split-adjusted price of $29.32 per share on

trading volume of 7.5 million shares and continued to fall declining to a split-adjusted price of

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$20.62 per share on March 18, 2005 in extremely heavy volume of more than ten times the daily

average.

161. Defendants attempted to stem the decline in the price of Doral common stock. On

March 17, 2005, Defendants held a conference call with analysts and investors to discuss the issues

raised concerning the valuation of Doral’s IO Strips, among other issues. During that call,

Defendant M. Levis falsely represented that the Company’s IO Strip valuation assumptions were

“sound” and based on the performance characteristics of the underlying loan portfolios. Also, during

the conference call Defendant S. Levis was specifically asked by an analyst about Doral sale of loans

and recourse provisions and he lied about the true nature of the Company’s loan “sales.” A

transcript of the call published by Fair Disclosure Wire (“FD”) recorded the following exchange:

OPERATOR: Your next question is from the line of Jordan Hymalach of Philadelphia Financial. Please go ahead.

JORDAN HYMALACH (ph), ANALYST, PHILADELPHIA FINANCIAL: Hi. I just have 2 quick questions. One, I understand that your loans are sold with full recourse, is that correct?

SALOMON LEVIS: No, as a matter of fact, today most our loans are sold with no resource at all. In some cases there’s recourse, but of a limited measure. [Emphasis added.]

162. On March 18, 2005, Doral issued a press release entitled “Doral Financial

Corporation Addresses Unusual Market Activity.” The press release stated in pertinent part as

follows:

Mr. Salomon Levis, Chairman of the Board and Chief Executive Officer of Doral Financial Corporation, a diversified financial services company, announced today that the Company knows of no relevant events or material information causing the unusual activity in the Company’s common stock on the New York Exchange other than the recent downgrade of its common stock by certain analysts. Sandard [sic] & Poor’s had also changed the Company’s credit outlook to negative from stable when it reaffirmed the Company’s investment grade credit rating.

The Chairman noted that the Company held an investor call yesterday during which management reiterated that the fundamentals of the Company such as loan

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originations and fee income remained strong and that the Company was anticipating record mortgage production, record commercial loans and record insurance fee income for the first quarter of 2005. He encouraged investors that had not participated in the call to hear the recorded version.

163. On March 23, 2005, Doral issued a press released entitled “Doral Financial

Corporation Announces the Company is Evaluating Alternatives with Respect to a Possible Sale of

Interest-Only Strips”, which stated that the Company “was evaluating various alternatives with

respect to a possible sale of a portion of its portfolio of interest-only strips.” The press release

further announced that Doral “was engaged in preliminary discussions with a major financial

institution regarding a possible sale of a portion of Doral Financial’s IOs.”

164. Despite Defendants’ efforts to conceal the full scope of their fraud, the market was

starting to appreciate the magnitude of Doral’s accounting machinations. On April 14, 2006, Merrill

Lynch & Co. analyst Kenneth Bruce downgraded Doral common stock to “Sell” from “Neutral” and

noted that if Doral were to value its IO securities more conservatively, it might write down its

portfolio by as much as $600 million, or $4 per share. The report also noted “the potential for an

accounting restatement, further [IO] impairment and the corresponding impact that either would

have on the company’s earnings model.” In response to this report, on April 14-15, 2005, the price

of Doral common stock continued to decline closing at a split-adjusted share price of $16.28.

165. On April 19, 2005, the Company issued a press release entitled “Doral Financial

Announces Restatement of Earnings Related to Floating Rate IO Valuation.” The press release

stated in part:

Mr. Salomon Levis, Chairman of the Board and Chief Executive Officer of Doral Financial Corporation, today announced that after consulting with various financial institutions and other firms with experience in valuation issues, the Company has determined that it is appropriate to correct the methodology used to calculate the fair value of its portfolio of floating rate interest only strips (“IOs”). The Company’s preliminary estimate is that this correction will result in a decrease in the fair value of its floating rate IOs of between $400 million to $600 million as of December 31, 2004. The required adjustment cannot be taken as a charge in current period

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earnings but instead will have to be reflected in those periods during which the origination of floating rate IOs had a material impact on the Company’s financial statements. The after-tax effect of the required adjustments as of December 31, 2004 is estimated to range between $290 million to $435 million. The Company has not yet determined how such net impact will be distributed among the affected periods. The required charge to income will be a non-cash item and will not reduce the amount of the Company’s cash and cash equivalents as of December 31, 2004.

Based on the above, the Company’s management concluded that the previously filed interim and audited financial statements for the periods from January 1, 2000 through December 31, 2004, could be materially affected and, therefore, should no longer be relied on and that the financial statements for some or all of the periods included therein should be restated . . . .

As part of its mortgage business, the Company generates fixed rate non-conforming mortgage loans, pools them and sells most of them on a floating rate basis. Upon sale, the Company capitalizes and records for accounting purposes a floating rate IO. This IO represents the excess spread between the fixed rate the Company receives on the underlying mortgage loans and the floating rate based on 90 day LIBOR it pays to investors. The Company recognizes gain on sale of mortgages as part of these transactions. In the case of the floating rate IOs, the recorded gain on sale represents the estimated present value of the excess interest spread, discounted over the expected life of the underlying mortgages, using the prepayment experience of the mortgage portfolio to calculate estimated life. The Company has historically used the contractual or actual 90-day LIBOR rate at the end of each reporting period to compute the value of its IOs and gain on sale. The use of actual 90-day LIBOR rates instead of the forward LIBOR curve to value its floating rate IOs can have either a positive or negative impact on valuation depending on the relationship of existing 90-day LIBOR rates to the forward LIBOR curve at the time of valuation.

* * *

As a result of the restatement process, the Company will delay the release of its earnings for the first quarter of 2005. The Company stated that its objective was to release its unaudited earnings as soon as practicable but could not assure investors at this time when it would be in a position to release the restated results for prior periods and the results for the first quarter of 2005. As part of the restatement process, the Company will also be reviewing all the assumptions and processes used to value its IOs and mortgage servicing rights and to calculate the gains on sale as well as management’s report on internal controls over financial reporting for 2004. The Company also stated that the outside directors had retained Latham & Watkins LLP as its independent counsel to review the facts and circumstances relating to the IO valuation issues identified by the Company.

166. On this news, Doral shares fell to below $16 per share.

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167. On April 20, 2005, Doral issued a press release announcing that the SEC had

commenced an investigation concerning Doral’s announcement of its restatement.

168. On May 26, 2005, Doral issued a press release entitled “Doral Financial Provides

Operational Data and Updates Restatement Process in Form 8-K Filing.” The release stated in part:

Doral Financial Corporation today announced that the Company has filed a Current Report on Form 8-K providing certain operational data for the first quarter of 2005 as well as providing an update on the restatement process and related matters. Copy of the Form 8-K can be obtained from the Securities and Exchange Commission’s website at www.sec.gov or from the Company’s website at www.doralfinancial.com.

The Company, a financial holding company, is the largest residential mortgage lender in Puerto Rico, and the parent company of Doral Bank, a Puerto Rico based commercial bank, Doral Securities, a Puerto Rico based investment banking and institutional brokerage firm, Doral Insurance Agency, Inc. and Doral Bank FSB, a federal savings bank based in New York City.

169. The Form 8-K stated in part:

As previously disclosed, we have identified items that require adjustments to our prior period financial statements. As part of the restatement process, we are also reviewing certain other matters that may require restatement, including the accounting for the deferral and recognition of mortgage origination fees and expenses and for lease payments. As the review process continues, new information may come to light. Accordingly, any matters that we identify at this stage, and any assessments of the nature, scope or amount of restatements, are necessarily preliminary and subject to change as our investigation and analysis progress.

* * *

We have two indentures governing our public debt securities that require that we file with the relevant trustee the reports we are required to file with the SEC. One indenture was executed on October 10, 1996 (the “1996 Indenture”) and other on May 14, 1999 (the “1999 Indenture” and together with the 1996 Indenture, the “Indentures”). Under the 1996 Indenture, we have one public debt issue, with a total outstanding principal amount of $75 million. Under the 1999 Indenture, we have four public debt issues with a total of $937.3 million outstanding as of April 30, 2005.

Since we did not file our quarterly reports for the first quarter of 2005 by May 25, 2005, we are currently in default with respect to our reporting obligations under the Indentures. Since a default under the Indentures has occurred, the trustee or the holders of at least 25% of the outstanding principal amount of the securities of any series may provide us with a notice of default with respect to one or more series. If

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we fail to cure the default within 60 days (90 days in the case of the 1999 Indenture) after receipt of that notice of default, then the trustee or such holders will have the right to accelerate the maturity of the relevant series of debt securities. This would trigger the cross-acceleration provisions under the other series issued under the Indentures and certain of our other debt arrangements. While we consider such an acceleration to be unlikely, if it were to occur, we may be unable to meet our payment obligations. In addition, we cannot assure you that under such circumstances we would be able to refinance our debt, whether through the capital markets or otherwise, on commercially reasonable terms, or at all.

170. Then, on May 27, 2005, the Company issued a press release entitled “Doral Financial

Provides Update Letter to Shareholders.” The release stated in part:

Doral Financial Corporation today announced that it has mailed a special letter to shareholders, providing certain operational data for the first quarter of 2005 and an update on its restatement process and related matters. The full text of the letter follows:

May 27, 2005

Dear Shareholder:

Over the past several weeks, we have received many inquiries from shareholders and investors regarding the status and timing of the restatement effort Doral Financial Corporation is undertaking. This is understandable given our announcement of a restatement and the loss of equity value in Doral shares. While we are working diligently through the restatement process, it is premature for us to report definitive information on the timing and conclusion of the process. We currently estimate that the change in our valuation model will result in a reduction in the recorded fair value of our floating rate interest only strips (IOs) of approximately $600 million. However, we have not yet completed the restatement analysis or computed how this amount will be distributed among the affected periods.

* * *

With the restatement process underway, Doral will not report financial results in accordance with the Corporation’s regular quarterly timeframe. We are able to present certain unaudited and preliminary operational data for the first quarter ended March 31, 2005 that shows that strong operating progress was being achieved during the quarter . . . .

* * *

As Doral has previously reported, we have identified certain items that will require adjustments to our prior period financial statements for some or all of the periods from January 1, 2000 to December 31, 2004. As part of the restatement process, we

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are also reviewing other areas of our accounting. Based on our progress evaluation to date, we can provide you with the following update:

-- We will calculate future cash flows from our portfolio of floating rate IOs with a valuation model that uses an implied interest rate based on the forward yield curve rather than using actual contractual or period-end LIBOR rates. We estimate that this change in valuation model will result in a reduction in their recorded fair value of approximately $600 million.

-- Working closely with our external advisors, First Manhattan Consulting Group, we have developed new procedures to improve our risk management systems and processes.

-- Our Audit Committee, comprised entirely of independent directors, has instructed Latham & Watkins LLP to conduct an independent examination into the circumstances leading to the restatements.

-- Yesterday, we filed a Current Report on Form 8-K with the Securities and Exchange Commission, providing an update on the restatement process and summarizing some of the consequences and potential risks to the Company from the restatement. We encourage you to read this report. A copy of the report can be obtained from the Securities and Exchange Commission’s website at www.sec.gov or from the Company’s website at www.dorafinancial.com.

171. On June 18, 2005, the Company issued a press release entitled “Doral Financial

Corporation Declares Quarterly Cash Dividend on Common Stock; Company Reports Certain

Second Quarter Operational Data.” The release stated in part:

Doral Financial Corporation (NYSE:DRL), a diversified financial services company, today announced that the Board of Directors declared a regular cash quarterly dividend of $0.18 per common share to be paid on September 9, 2005 to shareholders of record on August 25, 2005.

Doral stated that, while it is unable to provide at this juncture complete financial results for the reporting period due to the previously announced restatement process, it is providing certain unaudited and preliminary operational data for the second quarter ended June 30, 2005.

* * *

Doral wishes to caution readers that they should not draw any inference from the loan production data of Doral’s gain on sale of mortgage loans or earnings to be reported for the first and second quarters of 2005.

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* * *

Doral reported that it is working diligently to conclude its restatement process. In addition, the Company took the opportunity to confirm that to date it had not received a notice of default under either of its two public indentures and, accordingly, the 60 and 90-day respective grace periods for not filing its quarterly unaudited financial results for the first quarter had not yet begun to run.

172. On August 19, 2005, Doral issued a press release entitled “Doral Financial Board

Appoints Key Senior Management to Lead Conclusion of Financial Restatement Process;

Undertakes Process of Putting in Place New Senior Management Team to Move Company Forward”

in which the Company announced that Zoila Levis, Doral’s President, was appointed Vice Chairman

of the Board and that John A. Ward III, a non-executive chairman with the Company, would assume

the position of “Chief Executive Officer on Interim Basis.”

173. On September 22, 2005, the Company issued a press release entitled “Doral Financial

Provides Update on Timing of Restatement; Expects to File Restated Financial Statements by

November 10, 2005.” The release stated in part:

Doral Financial Corporation (NYSE: DRL) announced today that it expects to file its amended annual report on Form 10-K for the year ended December 31, 2004, including its restated financial statements, by November 10, 2005, and to file its quarterly reports on Form 10-Q for the first three quarters of 2005 as soon as practicable thereafter. Doral Financial believes that this schedule provides sufficient time for the Company to complete the restatement and for PricewaterhouseCoopers LLP to complete its audits for the periods involved.

Based on the results of its work to date, Doral Financial estimates that its consolidated stockholders’ equity at December 31, 2004, will be reduced, on a pre-tax basis, by approximately $615 million related to corrections to the valuation of its interest-only strips (“IOs”), which is in line with the Company’s previously disclosed estimates. Also, as previously disclosed, the restatement process included the review of other accounting matters. Doral now estimates that these other matters will result in additional reductions to its consolidated stockholders’ equity of approximately $70 million related to corrections to the valuation of its mortgage servicing assets and $35 million related to the correction of other accounting practices. The estimate for the adjustments related to the mortgage servicing assets is based on a market valuation of the Company’s servicing portfolio as of December 31, 2004. The estimate for the adjustments to IOs and mortgage servicing assets also reflect certain reclassifications between such asset categories. All the estimates included above are

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unaudited and have been calculated on a pre-tax basis because the Company is still calculating the required adjustments for tax accruals.

174. Then on October 25, 2005, the Company issued a press release entitled “Doral

Financial Updates Status of Restatement and SEC Investigation; Declares Dividend on Common

Stock.” The release stated in part:

Doral Financial Corporation (NYSE: DRL) reported today that it no longer expects to file by November 10, its amended annual report on Form 10-K for the year ended December 31, 2004. The delay is principally attributable to new information regarding the Company’s mortgage loan sales to local financial institutions. Latham & Watkins LLP, outside counsel to the independent directors and the Audit Committee of the Board of Directors, is investigating this information, and the Company is assessing what effect, if any, this information may have on the Company’s financial statements. This information may impact the accounting treatment of some or all of these transactions as “sales” under Statement of Financial Accounting Standards (SFAS) 140. In the event that the Company determines that a transaction does not qualify as a “sale” for accounting purposes, the Company would record the transaction as a loan payable secured by mortgage loans and reverse the gain previously recognized with respect to such transaction.

* * *

The Company continues to work diligently to complete the previously announced restatement, but cannot reasonably estimate at this time when the investigation and assessment of this new information will be concluded.

175. On February 27, 2006, Doral filed an amended Form 10-K for the fourth quarter and

fiscal year ended 2004 (the “10-KA”). In an explanatory note, the 10-KA stated in part:

As previously announced, on April 15, 2005, Doral Financial Corporation (“Doral Financial” or the “Company”) determined that its previously filed interim unaudited and annual audited financial statements for the periods from January 1, 2000 through December 31, 2004 should no longer be relied upon and that its financial statements for some or all of the periods included therein should be restated. The need for the restatement was announced after the Company concluded that it was necessary to correct the methodology used to determine the fair value of the Company’s portfolio of floating rate interest-only strips (“IOs”).

176. On March 17, 2006, Doral announced that it had entered into consent orders with the

Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and

the Commissioner of Financial Institutions of Puerto Rico. The orders require Doral and its banking

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subsidiary to conduct reviews of their mortgage portfolios, and to submit plans regarding the

maintenance of capital adequacy and liquidity. Under the terms of the consent order with the FDIC

and the Commissioner, Doral Bank PR may not pay a dividend or extend credit to, or enter into

certain asset purchase and sale transactions with Doral or its subsidiaries, without the prior consent

of the FDIC and the Commissioner. The consent order with the Federal Reserve contains similar

restrictions on Doral Financial from obtaining extensions of credit from, or entering into certain asset

purchase and sale transactions with, Doral Bank PR, without the prior approval of the Federal

Reserve. The consent order also restricts Doral Financial from paying dividends on its capital stock

without the prior written approval of the Federal Reserve.

177. As part of the Company’s restatement, Doral’s February 27, 2006 Form 10KA

outlined several categories of “Risks Relating to the Restatement Process,” including: (a) “Doral

Financial is subject to ongoing regulatory investigations by the SEC and the U.S. Attorney’s Office

for the Southern District of New York, which could require it to pay substantial fines or penalties”;

(b) “Significant legal proceedings could adversely affect Doral Financial’s results of operations”; (c)

“Doral Financial and its banking subsidiaries are subject to the supervision and regulation of various

banking regulators, and these regulators could take action against the Company or its banking

subsidiaries”; (d) “Downgrades in Doral Financial’s credit ratings will increase Doral Financial’s

borrowing costs and may lessen Doral Financial’s ability to compete in certain business”; (e) “Doral

Financial’s failure to comply with certain reporting covenants under its public debt indentures may

result in the acceleration of its public debt securities and other debt arrangements”; (f) “Management

has identified several material weaknesses in Doral Financial’s internal control over financial

reporting”; (g) “Doral Financial does not expect to be able to access the public capital markets until

all of its filings with the SEC are up to date, including any amendments to previously filed reports”;

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(h) “There is a lack of public disclosure concerning Doral Financial”; (i) “Doral Financial may fail to

attract and retain key employees and management personnel.”

178. Doral’s February 17, 2006 10-KA listed numerous significant corporate events that

took place following its announcement of the restatement on April 19, 2005, including:

• The conclusion by Doral Financial’s management, under the oversight of the Audit Committee of the Board of Directors, of an internal review of the Company’s books, records and accounting practices;

• The conclusion of an independent investigation relating to the Company by Latham & Watkins LLP, outside counsel to the independent directors and the Audit Committee of the Board of Directors;

• The commencement of a formal investigation by the SEC into the matters surrounding the restatement, and the receipt of a Grand Jury document subpoena from the U.S. Attorney’s Office for the Southern District of New York;

• The initiation of numerous private lawsuits, including purported class action lawsuits alleging violations of federal securities laws and shareholders derivative actions alleging among other things breach of fiduciary duties owed to the Company;

• The delisting of the Company’s 7% Noncumulative Monthly Income Preferred Stock, Series A, 8.35% Noncumulative Monthly Income Preferred Stock, Series B and 7.25% Noncumulative Monthly Income Preferred Stock, Series C from The Nasdaq Stock Market because of Doral Financial’s failure to comply with the reporting requirements for continued listing set forth in Nasdaq Marketplace Rule 4310(c)(14);

• The successful completion of a consent solicitation pursuant to which bondholders under the Company’s senior indenture agreed to temporarily forbear their right to declare an event of default as a result of the Company’s failure to comply with its reporting obligations under the senior indenture and the redemption in whole of the Company’s $75 million 7.84% Senior Notes due October 10, 2006;

• The identification of various material weaknesses in the Company’s internal control over financial reporting;

• The downgrade of the Company’s credit ratings by S&P, Moody’s and Fitch; and

• The receipt of inquiries from federal banking regulators regarding the status and impact of the restatement and related safety and soundness concerns,

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including the receipt on February 9, 2006 of a notification from the Office or Thrift Supervision (the “OTS”), directing Doral Bank, FSB, Doral Financial’s New York-based savings bank that, until further notice, it could not to pay any dividend, extend credit to, or enter into asset purchases and sale transactions with, Doral Financial, without the prior written consent of the OTS.

179. On April 25, 2006, Doral issued a press release entitled “Doral Financial Corporation

Approves Cash Dividend on Four Series of Preferred Stock; Suspends Common Stock Dividend

Payments,” which stated in part that “the Board of Directors voted to suspend the dividend on the

Company’s common stock. The Board views this suspension as a prudent capital management

decision designed to preserve and strengthen the Company’s capital.”

180. On May 03, 2006, Doral filed its Form 10-Q for the first quarter of 2005 for the

period ended March 31, 2005. The Form 10-Q read in part:

On April 25, 2006, Doral Financial announced that, as a prudent capital management decision designed to preserve and strengthen the Company’s capital, the Board of Directors voted to suspend the quarterly dividend on the Company’s common stock.

VII. ADDITIONAL SCIENTER ALLEGATIONS

181. In addition to the above-described involvement, each Individual Defendant had

knowledge of Doral’s problems and was motivated to conceal such problems. Melendez, as CFO,

was responsible for financial reporting and communications with the market. Many of the internal

reports showing Doral’s forecasted and actual growth were prepared by the finance department

under Melendez’s direction. Defendant S. Levis, as CEO and Chairman, was responsible for the

financial results and press releases issued by the Company. These in turn were based, in part, on

information prepared by Z. Levis, D. Levis and Melendez. Each Individual Defendant sought to

demonstrate that he/she could lead the Company successfully and generate the growth expected by

the market.

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182. Also, as alleged herein, defendants acted with scienter in that defendants knew that

the public documents and statements issued or disseminated in the name of the Company were

materially false and misleading; knew that such statements or documents would be issued or

disseminated to the investing public; and knowingly and substantially participated or acquiesced in

the issuance or dissemination of such statements or documents as primary violations of the federal

securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of

information reflecting the true facts regarding Doral, their control over, and/or receipt and/or

modification of Doral allegedly materially misleading misstatements and/or their associations with

the Company which made them privy to confidential proprietary information concerning Doral,

participated in the fraudulent scheme alleged herein.

183. In addition, Defendants were motivated to engage in the fraudulent scheme in order

for company insiders, including the Individual Defendants, to sell hundreds of thousands of their

personally-held Doral securities and reap millions of dollars in proceeds, as follows:

Insider

Date of Sales

# of Shares Sold

Price ($)

Value of Sales ($)

Richard Bonini 5/3/2004 100,000 $32.550 $3,255,000 Edgar Cullman 3/13/2003 150,000 $21.120 $3,168,000 5/5/2004 70,000 $30.810 $2,156,700 5/5/2004 55,000 $32.810 $1,804,550Total Cullman 275,000 $7,129,250 Salomon Levis 12/19/2001 53,325 $13.850 $738,551 12/19/2001 49,500 $13.860 $686,070 12/19/2001 7,650 $13.870 $106,105 12/19/2001 3,825 $13.870 $53,053 12/19/2001 2,925 $13.850 $40,511 12/19/2001 225 $13.880 $3,123 12/20/2001 21,375 $13.830 $295,616 12/20/2001 1,125 $13.840 $15,570 12/26/2001 6,750 $13.820 $93,285

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Insider

Date of Sales

# of Shares Sold

Price ($)

Value of Sales ($)

12/26/2001 5,625 $13.840 $77,850 12/26/2001 3,375 $13.830 $46,676 12/26/2001 1,125 $13.840 $15,570 12/26/2001 1,125 $13.850 $15,581 12/27/2001 6,750 $13.970 $94,297 12/31/2001 6,750 $14.000 $94,500 12/31/2001 1,125 $13.940 $15,683 12/31/2001 1,125 $13.960 $15,705 12/31/2001 1,125 $13.990 $15,739 12/31/2001 225 $13.980 $3,146 1/22/2003 150,000 $19.300 $2,895,000 10/29/2003 26,550 $34.300 $910,665 10/29/2003 21,750 $34.160 $742,980 10/29/2003 11,550 $34.250 $395,587 10/29/2003 7,950 $34.110 $271,175 10/29/2003 7,950 $34.220 $272,049 10/29/2003 7,650 $34.320 $262,548 10/29/2003 6,150 $34.100 $209,715 10/29/2003 5,700 $34.200 $194,940 10/29/2003 4,650 $34.130 $158,705 10/29/2003 4,650 $34.230 $159,170 10/29/2003 4,200 $34.260 $143,892 10/29/2003 3,600 $34.200 $123,120 10/29/2003 3,300 $34.210 $112,893 10/29/2003 3,150 $34.310 $108,077 10/29/2003 2,850 $34.240 $97,584 10/29/2003 2,550 $34.180 $87,159 10/29/2003 2,400 $34.050 $81,720 10/29/2003 2,400 $34.190 $82,056 10/29/2003 2,100 $34.060 $71,526 10/29/2003 2,100 $34.100 $71,610 10/29/2003 1,950 $34.240 $66,768 10/29/2003 1,950 $34.300 $66,885 10/29/2003 1,650 $34.150 $56,348 10/29/2003 1,500 $34.160 $51,240 10/29/2003 1,350 $34.090 $46,022 10/29/2003 1,200 $34.140 $40,968 10/29/2003 1,050 $34.140 $35,847 10/29/2003 1,050 $34.170 $35,879 10/29/2003 900 $34.330 $30,897 10/29/2003 600 $34.120 $20,472 10/29/2003 600 $34.180 $20,508

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Insider

Date of Sales

# of Shares Sold

Price ($)

Value of Sales ($)

10/29/2003 600 $34.220 $20,532 10/29/2003 600 $34.320 $20,592 10/29/2003 450 $34.120 $15,354 10/29/2003 450 $34.340 $15,453 10/29/2003 150 $34.010 $5,102 10/29/2003 150 $34.020 $5,103 10/29/2003 150 $34.030 $5,105 10/29/2003 150 $34.060 $5,109 10/29/2003 150 $34.080 $5,112 10/29/2003 150 $34.080 $5,112Total S. Levis 475,050 $10,453,204 Ricardo Melendez 10/29/2004 10,000 $42.000 $420,000 11/1/2004 8,100 $42.000 $340,200 11/2/2004 1,900 $42.000 $79,800Total Melendez 20,000 $840,000 Total Insiders Total: 911,275 23,048,605

184. The size and timing of Defendants’ insider selling was highly unusual in nature. For

example, Bonini sold nearly 10% of his Doral shares in May 2004. Defendant Cullman sold 32.28%

of his Doral shares during the Class Period, all of which was sold between March 2003 and May

2004, as Doral was beginning to write-down its IO values. Defendant S. Levis sold nearly 50% of

his shares in Doral during the Class Period. Finally, Defendant Melendez sold 49.13% of his Doral

shares Class Period, all of which were sold just two months before the Company’s January 2005

release of its 4Q 2004 earnings which included IO impairment losses.

185. In addition, Defendants were motivated to engage in the fraudulent scheme in order to

register and sell Doral stock and bonds throughout the Class Period, generating proceeds in excess of

$1.5 billion, as follows:

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Offering Proceeds

8.35% Noncumulative Monthly Income Preferred Stock, Series B $42,129,750

7.65% Senior Notes Due 2016 $97,705,000

5,060,000 common shares (at $32 each) $161,900,000

7.00% Senior Notes Due 2012 7.10% Senior Notes Due 2017 7.15% Senior Notes Due 2022

$97,726,260.69

3.6 Million Shares - 7.25% Noncumulative Monthly Income Preferred Stock, Series C

$87,165,000

1.38 Million Shares - 4.75% Perpetual Cumulative Convertible Preferred Stock

$345,000,000

Floating Rate Senior Notes Due December 7, 2005 $114,885,000

Floating Rate Senior Notes Due July 20, 2007 $349,300,000



Total Proceeds: $1,570,937,060.69

186. Further indication of Defendant’s scienter is established by the timing of the

resignation of defendants S. Levis and M. Levis, D. Levis, Sr. and the termination of defendant

Melendez -- all on August 19, 2005, immediately following the board’s review of preliminary

findings of wrongdoing by these three defendants that surfaced following the Independent

Investigation

187. In addition, The employment agreements of S. Levis, M. Levis, and Melendez,

respectively, contain the following termination provision:

Section 6. Termination of Employment

(a) Your employment hereunder may be terminated for dishonesty, death, incapacity, or inability to perform the duties of your employment on a daily basis, resulting from physical or mental disability caused by illness, accident or otherwise

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or refusal to perform the duties and responsibilities of you employment hereunder, or breach of fidelity to DFC. [Emphasis added.]

188. The fact that Defendant Melendez was terminated by Doral, coupled with the fact that

he can only be terminated for one of the stated bases, demonstrates that Defendants were aware of

defendant Melendez’s wrongdoing to the Company and its shareholders as alleged herein.

189. The fact that Defendants S. Levis and M. Levis were asked to resign and later did

resign, also indicates that Defendants were aware of defendants S. Levis’ and M. Levis’ wrongdoing

to the Company and its shareholders and alleged herein.

VIII. DORAL’S FINANCIAL REPORTING DURING THE CLASS PERIOD WAS MATERIALLY FALSE AND MISLEADING AND VIOLATED GAAP

190. Throughout the Class Period, Defendants highlighted their personal business

achievements and the Company’s financial performance. For example, in his “Message From The

Chairman” included in Doral’s 2003 Annual Report to Shareholders, Defendant S. Levis stated in

pertinent part:

The year 2003 was another remarkable year for Doral Financial Corporation. The Company once again surpassed its prior records for growth, capitalization, profitability and assets. Consolidated assets at year-end reached $10.4 billion; capital exceeded $1.5 billion, and net income for the year was a record $321.3 million. Our consistently high level of performance is gaining widespread recognition in the U.S. mainstream financial community. In April, Forbes magazine welcomed Doral Financial to its list of Top 500 U.S. Companies. The following month, I was honored to be included among the Forbes “10 Best Performing Bosses” in the nation. Our accomplishments also earned Doral Financial the No. 10 spot on Investor’s Business Daily 100, which tracks the innovation and growth of America’s leading companies. In addition, we ranked second among the largest publicly traded bank holding companies on the American Banker list of Banking Companies by Return on Assets, based on the 2002 fourth-quarter results. We are delighted to receive such acknowledgments, and we are proud to share them with the growing Doral family. We are also confident that we will continue to deliver the outstanding financial results and customer service that has earned us the respect of our clients, investors, peers, and the financial community. [Emphasis added.]

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Defendant S. Levis then reassured the marketplace about the integrity of the Company’s

management and its financial reporting:

We are committed to a strict code of ethics, safeguarding the independence of the Board of Directors, Audit Committee and Internal Audit Department, and complying with all the rules and regulations established by the Securities and Exchange Commission and the New York Stock Exchange. Our financial statements are independently audited by PricewaterhouseCoopers LLP. [Emphasis added.]

191. Doral’s financial reporting, however, during the Class Period was the product of an

intentional and undisclosed scheme by the Company’s Senior Executives to substantially inflate the

Company financial performance. At all relevant times during the Class Period, Defendants falsely

represented that Doral’s financial results were prepared in accordance with U.S. GAAP.

192. On April 15, 2005, Doral admitted that its previously filed interim unaudited and

annual audited financial statements during the four year period beginning January 1, 2000 through

December 31, 2004, “should no longer be relied upon and that its financial statements for some or all

of the periods included therein should be restated.” At that time, Doral reported that the restatement

was to correct the methodology it used to account for its portfolio of floating rate interest-only strips.

193. Following the announcement, a number of additional events occurred, including:

• The Audit Committee of the Board of Directors directed that a comprehensive review of the Company’s books, records and accounting practices be undertaken;

• Such review included the independent investigation of Latham & Watkins LLP, outside counsel to the independent directors and the Audit Committee of the Board of Directors;

• The Company accepted the resignations of Salomón Levis, former Chief Executive Officer and director, Mario S. Levis, former Treasurer, and David Levis, former Director Emeritus;

• Zoila Levis, the sister of Salomón Levis, “retired” from her positions as Doral’s President and Chief Operating Officer;

• Ricardo Meléndez was “terminated” from his former position of Chief Financial Officer;

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• The SEC commenced a formal investigation into the Company’s financial reporting practices;

• Doral received a Grand Jury document subpoena from the U.S. Attorney’s Office for the Southern District of New York;

• Doral received inquiries from Federal banking regulators regarding the status and impact of its financial restatement and related safety and soundness concerns, including a notification from the Office of Thrift Supervision (the “OTS”), directing Doral Bank, FSB not to pay any dividend or extend credit to, or enter into asset purchase and sale transactions with, Doral Financial, without the prior written consent of the OTS;

• The Company announced that it expects that other banking regulators will assess the safety and soundness of Doral and/or certain of its subsidiaries and impose restrictions on their respective ability to pay dividends, extend credit or purchase assets;

• Doral acknowledged various material weaknesses in its disclosure controls and internal control over financial reporting; and

• Doral’s credit ratings were downgraded by Standard & Poor’s (“S&P”), Moody’s Investor Service (“Moody’s”) and Fitch Ratings, Ltd. (“Fitch”).

194. Indeed, the magnitude and duration of Doral’s improper accounting coupled with

the above Audit Committee actions; Senior Executive resignations, terminations and retirements;

U.S. Justice Department and SEC investigations; U.S. and other banking regulatory actions and

material disclosure and internal control deficiencies are not indicative of innocent record keeping

mistakes. Rather, these developments are associated with purposeful fraudulent financial reporting.

195. Then, in the fall of 2005 Doral announced that:

• [I]t is likely that there were oral agreements or understandings between the former Treasurer and the former Director Emeritus of the Company and FirstBank Puerto Rico, a wholly-owned banking subsidiary of First BanCorp (“FirstBank”), providing recourse beyond the limited recourse established in the written contracts. Based on an analysis of these findings and other evidence reviewed by the Company, the Company concluded that the mortgage loan sales to FirstBank did not qualify as sales under Statement of Financial Accounting Standard (“SFAS”) 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”), because these sales did not satisfy the “reasonable assurance” standard of SFAS 140 regarding the isolation of assets in bankruptcy. In addition, the

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former Treasurer entered into side letters guaranteeing the yield to the investor in connection with certain sales of IOs; and

• [T]he Audit Committee decided to reverse a number of transactions, including a transaction occurring during the fourth quarter of 2004, involving generally contemporaneous purchases and sales of mortgage loans from and to local financial institutions where the amounts purchased and sold, and other terms of the transactions, were similar. The decision followed a determination that there was insufficient contemporaneous documentation to substantiate the business purpose for these transactions in light of the timing and similarity of the purchase and sale amounts and other terms of the transactions. For some periods, the gains on sale previously recorded in connection with such transactions had a material impact on the Company’s consolidated financial statements.

196. These admissions portray a deliberate practice of conscious misconduct at the highest

levels of Doral’s management that was designed to materially inflate the Company’s operating

results and enterprise value during the Class Period. Indeed, the only reason why such simultaneous

purchases and sales were recorded and such “side agreements,” which were designed to

surreptitiously mask the true terms and conditions of transactions, were entered into was to achieve

an inflated, pre-determined financial result.

197. In February of 2006, Doral filed an amendment to the 2004 Form 10-K. Such filing

provides further evidence of the Doral defendants’ intention to defraud investors during the Class

Period:

[Latham & Watkins’ independent investigation determined that] “certain former members of Senior Management and the former Director Emeritus did not adequately fulfill their responsibilities and, in certain instances, took inappropriate actions that resulted in transactions or accounts not being properly recorded in the Company’s financial statements for the years ended December 31, 2004, 2003 and 2002 and for each of the quarters of 2004, 2003 and 2002.” [Emphasis added.]

198. The Amended 2004 10-K also disclosed the following conclusions of Latham &

Watkins’ investigation:

• The former Chief Financial Officer [Melendez] and the Former Director Emeritus [D. Levis, Sr.] became aware of “significant” accounting errors and failed to correct them;

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• The former Chief Financial Officer and the former Director Emeritus used assumptions in determining internal IO valuations that were below the thresholds set forth in the Company’s controls and procedures;

• Certain Executive Officers of the Company, including the former Chief Executive Officer [S. Levis] and the former Chief Financial Officer [Melendez], were informed that the methodology being used by the Company to internally value its floating rate IOs resulted in a valuation that was significantly higher than the valuation produced by third parties; and

• The process of determining internal IO valuations, which was principally conducted by the former Chief Financial Officer [Melendez] and the former Director Emeritus [D. Levis, Sr.], was not adequately documented, performed in a systematic manner or conducted in accordance with established Company policies, procedures and controls.

199. The above facts and admissions depict a pattern and practice of conscious misconduct

by Doral’s most senior executives during the Class Period. In fact, Defendants brazenly touted their

individual achievements and the Company’s financial performance while engaging in flagrant

misconduct that was designed to deliberately inflate the Company’s operating results and enterprise

value during the Class Period.

A. Doral’s Admission that Its Financial Misstatements During the Class Period Were Material

200. By virtually any measure, Doral’s financial reporting was materially misstated during

the Class Period. In fact, the number and magnitude of the financial metrics now restated by Doral

depict a Company that bears little resemblance to the one that Defendants represented to investors

during the Class Period.

201. The magnitude of Doral’s financial misstatements during the Class Period can be

summed up by comparing its originally reported and restated net income on a cumulative basis from

2000 to 2004. As it has now admitted, Doral’s cumulative net income during the five years ended

December 31, 2004, was overstated by more than 93%. On a disaggregated basis, Doral has

determined that the net income it reported to investors for the years ended December 31, 2000, 2001,

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2002, 2003 and 2004 was respectively overstated by approximately 188%, 47%, 32%, 126% and

128%.

202. Moreover, as noted in greater detail below, Doral has admitted that most of the

individual financial metrics it reported to investors during the Class Period were materially

misstated, including virtually every selected Income Statement line item it disclosed to investors

from 2000 to 2004. In fact, Doral has now admitted that its balance sheets; risk management and

regulatory capital measures; financial statement footnotes; and statements of comprehensive income,

cash flows and shareholders’ equity during the Class Period were each materially false and

misleading.

203. As noted in the SEC’s Staff Accounting Bulletin (“SAB”) No. 99:

. . . the staff believes that a registrant and the auditors of its financial statements should not assume that even small intentional misstatements in financial statements, for example those pursuant to actions to “manage” earnings, are immaterial. While the intent of management does not render a misstatement material, it may provide significant evidence of materiality. The evidence may be particularly compelling where management has intentionally misstated items in the financial statements to “manage” reported earnings. In that instance, it presumably has done so believing that the resulting amounts and trends would be significant to users of the registrant’s financial statements. The staff believes that investors generally would regard as significant a management practice to over- or under-state earnings up to an amount just short of a percentage threshold in order to “manage” earnings. Investors presumably also would regard as significant an accounting practice that, in essence, rendered all earnings figures subject to a management-directed margin of misstatement. [Footnotes deleted, emphasis added.]

B. Doral’s Violations of GAAP

204. In its amended December 31, 2004 Form 10-K, Doral summarized its accounting

misstatements into the six categories noted below.1 Doral has quantified the cumulative, pre-tax

misstatements through December 31, 2004, as follows:

• Misstated mortgage loan transfers $595.5 million

• Misstated IO valuations $283.1 million

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• Misstated derivative instruments and investments $24.4 million

• Misstated servicing assets $23.1 million

• Misstated allowance and provision for loan and lease losses ($7.2 million)

• Other misstatements $1.9 million

1. Misstated Mortgage Loan Transfers

205. When a transferor of financial assets retains an interest in or has continued

involvement with the assets it has transferred, questions arise about whether the transfer is to be

accounted for as a sale or as a secured borrowing. Accordingly, GAAP provides that several criteria

must be met to conclude that a sale has occurred and control over the asset sold has been surrendered

to the purchaser. When control has not been surrendered, the transfer is accounted for by both

parties as a secured borrowing.

206. FASB’s Statement of Financial Accounting Standards (“SFAS”) No. 140 is the

primary GAAP for transfers of financial assets. Pursuant to SFAS No. 140, a transfer of financial

assets (or a portion of a financial asset) should be accounted for as a sale only if, and to the extent

that, the transferor both: (1) surrenders control over those financial assets; and (2) receives cash or

other proceeds in exchange for the financial assets. If these conditions are met, SFAS No. 140

provides that the transfer is to be accounted for as a sale; if not, the transfer should be accounted for

as a secured borrowing.

207. The above provisions of SFAS No. 140 were not lost on Defendants because such

requirements have been the subject of much interest and attention by financing institutions prior to

and during the Class Period. In fact, in the 2000 10-K, signed by Defendants S. Levis, Z. Levis, and

Melendez, Doral represented the following:

In September 2000, the FASB issued SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Liabilities - A Replacement of SFAS No. 125.” The SFAS revises the standards for accounting for securitizations and other transfers

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of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS 125’s provisions without reconsideration. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This statement becomes effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001. This standard is also effective for recognition and reclassification of collateral and disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. [Emphasis added.]

208. Then, in the 2001 10-K, signed by Defendants S. Levis, Z. Levis, and Melendez,

Doral represented that:

SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” was issued in September 2000 and replaces SFAS No. 125 of the same title. This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral, and requires certain disclosures, but carries over most of SFAS No. 125’s provisions without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Doral Financial’s adoption of this statement did not materially affect its results of operations or financial condition for the year ended December 31, 2001. [Emphasis added.]

209. Now, Doral has admitted that transfers of mortgage loans to FirstBank since 2000 did

not qualify as sales under GAAP because evidence, including, among other things, “side

agreements” between its Executives and FirstBank designed to circumvent the provisions of SFAS

No. 140, indicates that Doral provided FirstBank recourse beyond what was established in the

written contracts between the parties. In addition, Doral has admitted that:

. . . the Company decided to reverse a number of mortgage loan sales involving the generally contemporaneous purchases and sales of mortgage loans from and to other local financial institutions where the amounts purchased and sold, and other terms of the transactions, were similar. These include transactions during the fourth quarter of 2004 covering the purchase and sale of approximately $200.1 million in mortgage loans with a local financial institution, as well as transactions covering the purchase and sale of approximately $646.8 million of mortgage loans during 2000 and 2001 with other local financial institutions. The Company’s Audit Committee determined that there was insufficient contemporaneous documentation to substantiate the business purpose for these transactions, in light of the timing and similarity of the purchase and sale amounts and other terms of the transactions.

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Accordingly, the Company reversed the gains previously recognized with respect to these sales and recorded the transactions as loans payable secured by mortgage loans. Also, the mortgage loans purchases that were previously reported as purchases of residential mortgage loans are now reflected as commercial loans secured by mortgages. [Emphasis added.]

210. As it has now admitted, Doral’s recognition of a gain on the above contemporaneous

transfers violated GAAP and artificially inflated its reported financial results.

2. Misstated IO Strip Valuations

211. Doral customarily sells or securitizes pools of residential mortgage loans that it

originates. As it noted in its Forms 10-K filed with the SEC during the Class Period:

As part of its mortgage sale activities, Doral Financial generally retains the right to service the mortgage loans sold [“MSR”]. Also in connection with the sale of non-conforming mortgage loan pools and, to a lesser extent, the sale of FNMA and FHLMC securities, Doral Financial retains the right to receive any interest payments on such loans above the contractual pass-through rate payable to the investor and also retains its compensation for servicing the loans or mortgage-backed securities. Doral Financial determines the gain on sale of a mortgage-backed security or loan pool by allocating the acquisition cost of the underlying mortgage loans between the mortgage-backed security or mortgage loan pool sold and its retained interests, based on their relative estimated fair values. The reported gain or loss is the difference between the cash proceeds from the sale of the security or mortgage pool and its allocated cost after allocating a portion of the cost to the retained interests.

Below is a hypothetical example of the operation of this accounting principle based on a sale of loans with a carrying amount of $24,000:

1. Allocation of carrying amount based on relative fair values:

Fair Value

Percentage of Total

Fair Value

Allocated Carrying Amount

Loans Sold $25,000 88.2% $21,168

MSRs 350 1.2% 288

IOs 3,000 10.6% 2,544

Total $28,350 100.0% $24,000

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2. Gain on sale calculation:

Net proceeds from sale of loans $ 25,000

Carrying amount of loans sold (21,168)

Gain on sale $ 3,832

=======

3. Doral Financial retains:

MSRs and IOs with carrying amounts of $288 and $2,544, respectively. Simultaneously, the allocated carrying amount of the IOs will be adjusted to its fair value of $3,000.

212. Doral has now admitted that it materially understated the value it ascribed to its IO

Strips during the Class Period. Indeed, Doral was motivated to overstate its IO strip valuations

because, in so doing, it artificially inflated the gains on loan sales that give rise to the IO Strips.

213. Doral has now “corrected” its IO strip valuation methodology by, among other things,

using “publicly available and independently verifiable” rather than “internally generated”

prepayment and discount rate assumptions.

214. By restating its previously issued financial statements, Doral has determined that the

improper valuation it ascribed its IO strip portfolio during the Class Period was not due to benign

mistakes in judgment inherent in estimating assets values. In fact, Doral has now admitted that

“there was improper conduct by certain former members of management and the former director

emeritus which contributed to an overstated valuation of the IOs.”

215. Such manipulation violated GAAP because, as Concepts Statement No. 2 provides,

accounting information is not useful if it is unreliable and reliable accounting information must be

verifiable and neutral. Similarly, Concepts Statement No. 1 states that the role of “financial

reporting requires it to provide evenhanded, neutral, or unbiased information.

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3. Misstated Derivative Instruments

216. During the Class Period, the Company used derivatives to manage its interest rate

risk. GAAP, in SFAS No. 133, provides that all derivative instruments be measured at their fair

values. Doral has now admitted that during 2000 it improperly failed to fair value certain of its

derivative instruments in accordance with GAAP.

217. In addition, Doral has now admitted that shortly after its erroneous interim and/or

annual 2000 financial results were made public to investors, it realized that such results included

accounting for derivatives instruments that violated SFAS No. 133. Rather than correcting such

improper financial reporting by retroactivity restating its erroneous 2000 interim and/or annual

financial statements in accordance with then existing GAAP, Defendants sought to whitewash the

Company’s improper 2000 accounting for derivative instruments by correcting the effects of such

error by adjusting its 2001 financial results, further evidencing the Defendants’ intent to deceive

investors.

4. Misstated Investments

218. Doral has also admitted that during the Class Period it improperly accounted for its

investment securities. For example, Doral violated GAAP’s provisions in SFAS Nos. 5 and 115 by

improperly establishing a reserve account against its securities trading portfolio. Additionally, Doral

has now admitted that it violated GAAP during the Class Period by improperly accounting for

market premiums and discounts associated with its U.S. Treasury portfolio and by improperly

valuing certain of its investment securities.

5. Misstated Servicing Assets

219. As noted above, Doral generally seeks to retain the right to service mortgages,

thereby entitling it to receive servicing fees, when it sells pools of mortgages to investors. GAAP, in

SFAS No. 140, provides that the value of the servicing rights should be quantified as the difference

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between the expected future revenues from servicing the mortgage and the fair value of

compensation related to providing the service.

220. Doral has now admitted that during the Class Period, it materially overstated the

value it ascribed its servicing rights, which, similar to its improper accounting for IO Strips, had the

effect of artificially inflating gains on loan sales. By restating its previously issued financial

statements to correct its improper accounting for servicing rights, the Company has determined that

the improper valuation it ascribed to such assets during the Class Period was not due to benign

mistakes in judgment inherent in estimating asset values.

221. Doral’s improper accounting for its servicing rights during the Class Period violated

GAAP because, among other things, Concepts Statement No. 2 provides that accounting information

is not useful if it is unreliable and reliable accounting information must be verifiable and neutral.

Similarly, Concepts Statement No. 1 states that the role of “financial reporting requires it to provide

evenhanded, neutral, or unbiased information.”

222. Moreover, since Doral improperly accounted for the value of its MSRs, it improperly

failed to take timely write-downs in the value of its MSRs whose value had become impaired during

the Class Period. In so doing, Doral violated SFAS No. 140’s MSR impairment criteria (¶62.) and it

publicly disclosed accounting policies as set forth in its audited Class Period financial statements:

The value of Doral Financial’s MSRs and IOs is very sensitive to interest rate changes. Once recorded, Doral Financial periodically evaluates its MSRs for impairment. Impairment is defined generally as a reduction in the current fair value below the carrying value. If the MSRs are impaired, the impairment is recognized in current period earnings. Prior to July 1, 2002, Doral Financial recorded impairment charges as a direct write-down of servicing assets. Effective July 1, 2002, Doral Financial records impairment of MSRs through a valuation allowance.

* * *

For impairment and valuation purposes, Doral Financial continues to monitor . . . changes in interest rates to determine whether the assumptions used to value its MSRs and IOs are still appropriate in light of market conditions. It also attempts to

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corroborate the values assigned to these assets through the use of internal valuation models that incorporate assumptions regarding the direction of interest rates and mortgage prepayment rates. The reasonableness of management’s assumptions is corroborated through valuations performed by independent third parties on a quarterly basis.

6. Other Financial Misstatements

223. In addition to the violations of GAAP noted above, Doral has now admitted that it

violated the following provisions of GAAP:

• Doral violated the provisions of SFAS No. 65 in accounting for mortgage loans reported at the lower-of-cost-or-market value;

• Doral violated the provisions of SFAS No. 140 in accounting for obligations of loans sold with recourse;

• Doral violated the provisions of SFAS No. 140 in accounting for certain defaulted loans;

• Doral violated the provisions of SFAS No. 91 in accounting for origination fees and costs;

• Doral violated the provisions of SFAS No. 13 in accounting for rent expense; and

• Doral identified other accounting policies and practices that violated GAAP.

224. Defendants had the responsibility to select GAAP that were appropriate to reflect

Doral’s business activities in accordance with Section 13 of the Exchange Act of 1934. In addition

to the admitted to accounting improprieties noted above, Doral presented its financial statements

during the Class Period in a manner which also violated at least the following provisions of GAAP:

(a) The concept that financial reporting should provide information that is useful

to present and potential investors and creditors and other users in making rational investment, credit

and similar decisions (Concepts Statement No. 1, 34);

(b) The concept that financial reporting should provide information about the

economic resources of an enterprise, the claims to those resources, and the effects of transactions,

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events and circumstances that change resources and claims to those resources (Concepts Statement

No. 1, 40);

(c) The concept that financial reporting should provide information about how

management of an enterprise has discharged its stewardship responsibility to owners (stockholders)

for the use of enterprise resources entrusted to it. To the extent that management offers securities of

the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to

prospective investors and to the public in general (Concepts Statement No. 1, 50);

(d) The concept that financial reporting should provide information about an

enterprise’s financial performance during a period. Investors and creditors often use information

about the past to help in assessing the prospects of an enterprise. Thus, although investment and

credit decisions reflect investors’ expectations about future enterprise performance, those

expectations are commonly based at least partly on evaluations of past enterprise performance

(Concepts Statement No. 1, 42);

(e) The concept of completeness, which means that nothing is left out of the

information that may be necessary to ensure that it validly represents underlying events and

conditions (Concepts Statement No. 2, 79); and

(f) The concept that conservatism be used as a prudent reaction to uncertainty to

try to ensure that uncertainties and risks inherent in business situations are adequately considered.

The best way to avoid injury to investors is to try to ensure that what is reported represents what it

purports to represent (Concepts Statement No. 2, 95, 97).

225. In failing to file financial statements with the SEC which conformed to the

requirements of GAAP, Doral disseminated financial statements that were presumptively misleading

and inaccurate. The Company’s Class Period Forms 10-K and 10-Q filed with the SEC were also

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materially false and misleading in that they failed to disclose known trends, demands, commitments,

events, and uncertainties that were reasonably likely to have a material adverse effect on the

Company’s liquidity, net sales, revenues and income from continuing operations, as required by Item

303 of Regulation S-K.

7. Doral’s False and Misleading Reporting and Certifications of Disclosure and Internal Controls

226. In 2002, Congress enacted the Sarbanes-Oxley Act (“SOX”), in part, to heighten the

responsibility of public company directors and senior managers towards the quality of financial

reporting and disclosures made by their companies. Section 404 of SOX2 directed SEC to adopt

rules requiring companies to disclose the conclusions of its principal executive and principal

financial officer on the effectiveness of the Company’s disclosure controls and procedures and

disclose a report by management on its internal control over its financial reporting.

227. Concerning these disclosure requirements, Doral’s Forms 10-K and/or Annual

Reports to Shareholders, which were signed by Defendants S. Levis, Z. Levis, Cullman, Melendez,

Bonini, Cullman, M. Levis, Kier, Vicente, Murray, Hughes and Hoffman, contained the following

representations:

2002

Within the 90-day period prior to the filing of this Annual Report on Form 10-K, an evaluation was carried out under the supervision and with the participation of Doral Financial’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes were made in our

2 Section 404 of SOX requires registered auditors of public companies to attest to management’s assessment of its company’s internal controls.

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internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. [Emphasis added.]

2003

Doral Financial’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of Doral Financial’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2003.

Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. [Emphasis added.]

* * *

At Doral, we have always believed in the importance of good corporate governance and adherence to the highest standards of ethical conduct as key to business success. We strive to maintain full compliance with the laws, rules and regulations that govern our diverse businesses and to uphold the highest standards of corporate governance. During 2002, we took many important steps to improve our corporate governance practices. Since good corporate governance is not a static process, during 2003 and into 2004 we continued to improve our practices by taking the following steps: 1) expensing stock option grants effective January 1, 2003; 2) adopting a set of corporate governance guidelines, setting forth Doral’s most important corporate governance principles; 3) updating our Audit Committee charter to, among other things, clarify that the Audit Committee is solely responsible for the appointment and termination of Doral’s independent auditors; 4) adopting a formal pre-approval policy in the Audit Committee for provision of audit and non-audit services by our independent auditors to ensure that these services do not impact their independence; 5) continuing to implement a 24-hour hotline through which employees can anonymously report possible legal or ethical violations; and 5) amending the Corporate Governance and Nominating Committee charter to provide that the committee will consider shareholder nominations submitted in accordance with Company bylaws.

Shareholders can review copies of our Corporate Governance Guidelines, Code of Business Conduct and Ethics as well as the charters of the Audit, Compensation and Corporate Governance and Nominating committees through our website at www.doralfinancial.com.

With respect to financial reporting, we are committed to reporting results accurately and transparently. Even before the recent corporate scandals and the Sarbanes-Oxley Act of 2002, we already had internal controls in place to promote accuracy in our financial reports. Due to recent events, we have further strengthened existing controls and procedures and implemented additional ones, such as the creation of the Financial Disclosure Committee, to assist senior

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management in ensuring accurate and transparent disclosure in our public filings. [Emphasis added.]

2004

Doral Financial’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Doral Financial’s management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of Doral Financial’s disclosure controls and procedures. As of December 31, 2004, based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective in ensuring material information required to be disclosed in this Annual Report on Form 10-K was recorded, processed, summarized, and reported on a timely basis.

In addition, during the quarter ended December 31, 2004, there were no changes in Doral Financial’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Doral Financial’s internal control over financial reporting.

Management’s responsibilities relating to establishing and maintaining effective disclosure controls and procedures include maintaining effective internal controls over financial reporting that are designed to produce reliable financial statements in accordance with accounting principles generally accepted in the United States. As disclosed in Management’s Report on Internal Control Over Financial Reporting on page 79 of the Annual Report, Management, including the Chief Executive Officer and the Chief Financial Officer, assessed Doral Financial’s system of internal control over financial reporting as of December 31, 2004, in relation to criteria for effective internal control over financial reporting as described in “Internal Control-Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, Management believes that, as of December 31, 2004, its internal control over financial reporting met those criteria and is effective.

On January 1, 2005, Doral Financial changed the core system of its mortgage servicing division. The system implementation required changes to Doral Financial’s internal controls. Management decided to replace the software in order to support Doral Financial’s strategic and operational goals and not as a response to any significant deficiency or material weakness identified by Doral Financial’s management or its independent registered public accounting firm. There have been no additional significant changes in Doral Financial’s internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2004.

* * *

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At Doral Financial we are committed to maintaining a comprehensive and effective corporate governance structure. We believe that good corporate governance and adherence to the highest standards of ethical conduct are key ingredients of our success.

During recent years, we have implemented a number of initiatives that have established an effective framework for corporate governance. Among these are the adoption of Corporate Governance Guidelines, a Code of Business Conduct and Ethics, and an Information Disclosure Policy in addition to the creation of a Financial Disclosure Committee. We have also adopted comprehensive written charters for each of our Board committees and have committed increased resources to our Internal Audit Department.

During 2004, management, the Board of Directors and the Audit Committee dedicated substantial efforts to review and test the effectiveness of our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. We are pleased to report that both management and our independent auditors concluded that there were no material weaknesses in our internal controls.

Doral Financial’s Board of Directors recognizes that corporate governance guidelines will continue to evolve over time. Accordingly, your Board will continue to reevaluate Doral Financial’s corporate governance structure and make changes as deemed appropriate in order to ensure that we always retain the trust and confidence, not only of our shareholders, but also of the marketplace as a whole.

You can review copies of our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Information Disclosure Policy as well as the charters of our Audit, Compensation, Corporate Governance, Nominating, and Risk Policy committees on our website at www.doralfinancial.com. [Emphasis added.]

228. Additionally, Defendants S. Levis and Melendez signed the following Management’s

Report on Internal Control over Financial Reporting which was included in Doral’s 2004

Form 10-K:

To Our Stockholders:

The Management of Doral Financial is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-5(f) and 15d-15(f) under the Securities Exchange Act of 1934, and for the assessment of the effectiveness of internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes controls over the preparation

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of financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA).

Doral Financial’s management, including its Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on our assessment under the framework in Internal Control - Integrated Framework, we have concluded that the Company maintained effective internal control over financial reporting as of December 31, 2004.

The independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, as stated in their report which appears on page 81 hereof. [Emphasis added.]

229. Doral has now admitted that the above representations about its internal controls and

disclosure controls, and the similar representations included in its interim filings made with the SEC

on Form 10-Q, were materially false and misleading when made. Concerning its internal controls

representations during the Class Period, Doral has now admitted:

The Company failed to have an effective control environment based on the criteria established in the COSO framework. The Company failed to appropriately design controls to prevent or detect instances of override or intervention by certain former

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members of senior management and the former director emeritus, and there were also inadequate mechanisms to identify and respond to such instances. This lack of effective controls allowed certain of these persons to take inappropriate actions that resulted in certain transactions not being properly reflected in the Company’s consolidated financial statements for the years ended December 31, 2004, 2003 and 2002 and for each of the quarters of 2004 and 2003. In addition, the Company failed to implement an adequate assignment of authority and responsibility among former members of senior management. In particular, a former director emeritus who was not a member of management was permitted to have substantial authority within the Company’s financial reporting process, and this authority was used in certain instances to override the Company’s internal control over financial reporting. Furthermore, the Company’s lines of communication among the Company’s operations, finance, accounting and internal audit staff and personnel were not effective in preventing or detecting instances of management override or intervention. These control deficiencies resulted in a “tone at the top” within the control environment that discouraged employees from reporting actual or perceived violations of policies and procedures to the Company’s governing bodies through appropriate channels. [Emphasis added.]

230. With respect to its disclosure controls representations during the Class Period, Doral

has now stated:

In connection with the original filing of its Annual Report on Form 10-K for the year ended December 31, 2004, Doral Financial’s former chief executive officer and former chief financial officer had concluded that the Company’s disclosure controls and procedures as of December 31, 2004 were effective. Following the original filing of Doral Financial’s Annual Report on Form 10-K for the year ended December 31, 2004, Doral Financial determined that its consolidated financial statements for the periods included therein should be restated and therefore should not be relied upon. In light of the restatement process, Doral Financial’s management, with the participation of its current Chief Executive Officer and current Chief Financial Officer, has reevaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2004.

Based on this reevaluation and following the identification of the “material weaknesses” in the Company’s internal control over financial reporting described below, the current Chief Executive Officer and the current Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2004 at the reasonable assurance level. [Emphasis added.]

231. In fact, Doral now restated the disclosure in the following footnotes to its audited

2004 year end financial statements:

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• Note 3 - Summary of Significant Accounting Policies; • Note 4 - Regulatory Requirements; • Note 6 - Securities Held for Trading; • Note 7 - Securities Available for Sale; • Note 8 - Securities Held to Maturity; • Note 9 - Investments in an Unrealized Loss Position; • Note 10 - Mortgage Loans Held for Sale; • Note 11 - Loans Receivable; • Note 12 - Allowance for Loan and Lease Losses; • Note 13 - Servicing Assets; • Note 14 - Sales and Securitizations of Mortgage Loans; • Note 15 - Premises and Equipment; • Note 16 - Sources of Borrowings; • Note 18 - Securities Sold Under Agreements to Repurchase; • Note 20 - Loans Payable; • Note 21 - Notes Payable; • Note 22 - Accrued Expenses and Other Liabilities; • Note 23 - Income Taxes; • Note 24 - Related Party Transactions; • Note 25 - Financial Instruments with Off-Balance Sheet Risk; • Note 26 - Commitments and Contingencies; • Note 27 - Retirement and Compensation Plans; • Note 28 - Capital Stock and Additional Paid-In Capital; • Note 30 - Supplemental Income Statement Information; • Note 31 - Earnings per Share; • Note 32 - Disclosures about Fair Value of Financial Instruments; • Note 33 - Risk Management Activities; • Note 34 - Segment Information; • Note 35 - Quarterly Results of Operations (Unaudited); • Note 36 - Doral Financial Corporation (Holding Company Only) Financial

Information; and • Note 37 - Subsequent Events.

232. Doral’s false and misleading representations about its disclosure and internal controls

during the Class Period, were then wrongfully certified by defendants S. Levis and Melendez and

included as part of Doral’s filings with the SEC as noted in ¶231 above.

IX. PWC’S PARTICIPATION IN THE FRAUD

233. Three of Puerto Rico’s largest financial institutions, Doral, First BanCorp, and R&G

Financial, are now each the subject of U.S. Federal investigations associated with the transactions

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that Doral has admitted it improperly accounted for during the Class Period. In addition, all three

financial institutions have agreed to oversight by U.S. regulators stemming from their improper

accounting for mortgage loans transactions occurring during the Class Period.

234. During the Class Period, Doral, First BanCorp and R&G Financial were each clients

of PwC’s San Juan office and each received unqualified audit opinions from PwC on financial

statements that Doral, First BanCorp and R&G Financial have now admitted were materially

misstated.

235. In fact, from 2000 through 2004, PwC’s San Juan office received fees for services it

rendered to Doral, First BanCorp and R&G Financial in excess of $12 million, contributing to its

motive to commit the fraud alleged herein. Moreover, the allegations herein demonstrate strong

circumstantial evidence of conscious misbehavior or recklessness by PwC’s San Juan office

personnel in the performance of its “audits” of Doral’s financial statements during the Class Period.

A. PwC’s Materially False and Misleading Statements During the Class Period

236. As detailed below, PwC knew or recklessly ignored that it falsely represented that

Doral’s annual financial statements for the years ended 2000 to 2004 were presented in conformity

with U.S. GAAP. In addition, PwC knew or recklessly ignored that it falsely represented that its

audits of such financial statements had been performed in accordance with Generally Accepted

Auditing Standards (“GAAS”) and the standards of the Public Company Accounting Oversight

Board (“PCAOB”).3

3 The PCAOB is a private-sector corporation created by SOX to oversee the auditors of public companies. Section 103 of SOX directs the PCAOB to establish auditing, quality control, ethics, and independence standards and rules to be used by registered public accounting firms in the preparation and issuance of audit reports.

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237. PwC issued the following materially false and misleading unqualified audit report,

dated February 16, 2001, on Doral’s financial statements for the year ended December 31, 2000:

In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows present fairly, in all material respects, the financial position of Doral Financial Corporation and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. [Emphasis added.]

238. PwC issued the following materially false and misleading unqualified audit report

dated, February 15, 2002, on Doral’s financial statements for the years ended December 31, 2001

and 2000:

In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows present fairly, in all respects, the financial position of Doral Financial Corporation and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management, our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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As discussed in Note 2 to the accompanying consolidated financial statements, in 2001 the Company adopted the Statement of Financial Accounting Standards No. 133, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” as amended, which effect was accounted for as a cumulative effect of a change in accounting principle. [Emphasis added.]


dated February 24, 2003, on Doral’s financial statements for the years ended December 31, 2002,

2001 and 2000:

In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows present fairly, in all material respects, the financial position of Doral Financial Corporation and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the accompanying consolidated financial statements, in 2001 the Company adopted the Statement of Financial Accounting Standards No. 133, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” as amended, which effect was accounted for as a cumulative effect of a change in accounting principle. [Emphasis added.]


dated February 24, 2004, on Doral’s financial statements for the years ended December 31, 2003,

2002, and 2001:

In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows present fairly, in all material respects, the financial position of Doral Financial Corporation and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows

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for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management, our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the accompanying consolidated financial statements, in 2001 the Company adopted the Statement of Financial Accounting Standards No. 133, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” as amended, which effect was accounted for as a cumulative effect of a change in accounting principle.


dated March 3, 2005, on Doral’s financial statements for the years ended December 31, 2004, 2003,

and 2002:

In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Doral Financial Corporation and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the accompanying consolidated financial statements, in the fourth quarter of 2004 the Company adopted the provisions of the Emerging Issues

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Task Force Issue 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share.” As a result, the calculation of diluted earnings per share for all periods presented has been retroactively adjusted to reflect the adoption of this accounting pronouncement. [Emphasis added.]

242. Additionally, PwC issued the following materially false and misleading report, dated

March 3, 2005, on Doral’s system of internal control over its financial reporting:

Also, in our opinion, management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management’s assessment and our audit of Doral Financial Corporation’s internal control over financial reporting also included controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii)

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provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. [Emphasis added.]

243. In addition, during the Class Period, Article 10 of Regulation S-X [17 C.F.R. 210.10

01(d)] required PwC to review, in accordance with professional standards, the 2000, 2001, 2002,

2003 and 2004 quarterly financial statements Doral filed with the SEC on Form 10-Q.

B. PwC Knew or Recklessly Disregarded that Doral’s Class Period Financial Statements Were Materially Misstated

244. The above-noted statements by PwC were materially false and misleading because, as

alleged in detail herein, Doral’s Class Period financial statements violated GAAP in numerous

respects, including:

• Doral’s accounting for loan transfers violated GAAP;

• Doral’s valuations of IOs violated GAAP;

• Doral’s accounting for derivative instruments violated GAAP;

• Doral established reserves against its trading securities in violation of GAAP;

• Doral’s accounting for its U.S. Treasury securities in violation of GAAP;

• Doral’s valuations of its investment securities violated GAAP;

• Doral failed to record MSR impairments in conformity with GAAP;

• Doral’s valuations of its MSRs violated GAAP;

• Doral’s accounting of loans at the lower-of-cost-or-market violated GAAP;

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• Doral’s accounting for defaulted loans violated GAAP;

• Doral’s accounting for loan origination costs violated GAAP;

• Doral’ accounting for rent expenses violated GAAP; and

• Doral committed other violations of GAAP.

245. The myriad of ways in which Doral’s financial statements violated GAAP coupled

with the duration of such violations and the magnitude of the financial metrics now restated by

Doral is indicative of PwC’s conscious misbehavior or recklessness associated with its “audits” of

such financial statements.

246. Indeed, the above noted violations of GAAP, which occurred over more than a five

year period, resulted in the cumulative misstatement of the following income statement metrics:

• Interest Income 18%

• Interest Expense 17%

• Net Interest Income 20%

• Provision for Loan and Lease Losses 17%

• Net Gain on Mortgage Loan Sales and Fees 285%

• Servicing Income 20%

• Commissions, Fees and Other Income 22%

• Non-Interest Income 200%

• Pre-Tax Income 137%

• Net Income 94%

247. In fact, Doral has now admitted that virtually every single audited income statement

line item during the five years ended December 31, 2004, was materially misstated.

248. Doral’s material financial misstatements during the Class Period did not end with its

completely distorted audited income statements. For example, the misstated line items in Doral’s

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audited balance sheets and statements of comprehensive income and cash flows from 2002 through

December 31, 2004 include:

At or for the year ended December 31, 2004 2003 2002

Securities Held for Trading 154% 91% 20%

Servicing Assets 65% 30% 65%

Total Assets 15% 12% 10%

Loans Payable 92% 91% 86%

Total Liabilities 21% 17% 14%

Total Stockholders’ Equity 54% 35% 30%

Comprehensive Income 146% 169% 33%

Operating Cash Flows N/A 39% 155%

Investing Cash Flows 52% 23% N/A

Financing Cash Flows 28% 25% 8%

249. As a result of Doral’s numerous violations of GAAP, its restated financial

statements for the years ended December 31, 2000, 2001, 2002, 2003 and 2004 bear little

resemblance to those “audited” by defendant PwC during the Class Period. Indeed, the myriad of

ways in which Doral’s financial statements violated GAAP, coupled with the duration of such

violations and the magnitude and number of the financial statement line items now restated by

Doral, evidences PwC’s conscious misbehavior or recklessness in the performance of its “audits” of

Doral’s financial statements. In fact, PwC’s audits were tantamount to no audits at all.

C. PwC Knew or Recklessly Disregarded that Its “Audit” Report on Doral’s 2004 System of Internal Control over Financial Reporting Was Materially Misstated

250. As noted above, defendant PwC’s “audit” report dated March 3, 2005, stated, among

other things, that “the Company maintained, in all material respects, effective internal control over

financial reporting as of December 31, 2004.”

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251. This conclusion was purportedly reached after PwC: (1) obtained an understanding of

Doral’s internal control over financial reporting; (2) evaluated management’s assessment of such

system of internal control; (3) tested and evaluated the design and operating effectiveness of the

internal control system; and (4) performed such other procedures as it deemed necessary.

252. Prior to issuing its report on Doral’s 2004 system of internal control, the PCAOB, in

its Auditing Standard (“AS”) No. 2, required that PwC obtain an in depth understanding of, and

conduct an extensive evaluation of management’s process for assessing the effectiveness of Doral’s

internal control over financial reporting.

253. In obtaining an understanding of Doral’s internal control over its financial reporting,

AS No. 2 required that PwC:

• Make inquiries of appropriate management, supervisory, and staff personnel;

• Inspect company documents;

• Observe the application of specific controls;

• Trace transactions through the information system relevant to financial reporting;

• Understand Doral’s control environment, which sets the tone of an organization and is the foundation of all other components of internal control including integrity, ethical values, and commitment to competence;

• Understand the risk of errors or fraud that could result in material financial statement misstatements by, among other things, identifying and analyzing significant estimates recorded in Doral’s financial statements;

• Understand the control activities that Doral’s management implemented to prevent or detect errors or fraud that could result in material misstatement in the accounts and disclosures and related assertions of the financial statements;

• Understand management’s information and communication systems and processes;

• Understand management’s monitoring of all controls, including control activities, which management identified and designed to prevent or detect material misstatement in the accounts and disclosures and related assertions of the financial statements;

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• Identify significant accounts and disclosures, both quantitatively and qualitatively; and

• Perform “walkthroughs” for each major class of transactions, in which the auditor traces a transaction from origination through the company’s information systems until it is reflected in the company’s financial reports.

254. After complying with the above-noted requirements, AS No. 2 required PwC to

thoroughly test and evaluate Doral’s systems design and operating effectiveness by:

• Identifying the company’s control objectives in each area;

• Identifying the controls that satisfy each objective;

• Determining whether properly operating controls can effectively prevent or detect errors of fraud that could result in material misstatements in the financial statements;

• Testing controls by inquiring of appropriate personnel, inspection of relevant documentation, observation of the company’s operations, and reperformance of the application of the control;

• Performing tests of controls over a period of time to determine whether, as of the date specified in management’s report, the controls necessary for achieving the objectives of the control criteria are operating effectively;

• Communicate all identified significant deficiencies and material weaknesses in controls to the audit committee in writing;

• Obtain sufficient evidence about whether the company’s internal control over financial reporting, including the controls for all internal control components, is operating effectively. In determining the extent of procedures to perform, the auditor should design the procedures to provide a high level of assurance that the control being tested is operating effectively. In making this determination, the auditor is required to: (1) subject manual controls to more extensive testing than automated controls; and (2) assess the complexity of the controls, the significance of the judgments that must be made in connection with their operation, and the level of competence of the person performing the controls that is necessary for the control to operate effectively. As the complexity and level of judgment increase or the level of competence of the person performing the control decreases, the extent of the auditor’s testing should increase; and

• Conduct the audit of internal control over financial reporting and the audit of the financial statements with professional skepticism.

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255. Now, after Ernst & Young LLP was retained by Latham & Watkins, LLP, to

investigate Doral’s financial reporting during the Class Period and Latham & Watkins, LLP has

issued its investigative findings, defendant PwC has admitted that its initial report on Doral’s 2004

system of internal control over its financial reporting and audited financial statements was materially

false and misleading:

Internal control over financial reporting

Also, we have audited management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting (restated) appearing under Item 9A, that the Company did not maintain effective internal control over financial reporting as of December 31, 2004 because (1) the Company did not maintain an effective control environment, including ineffective controls designed to prevent or detect instances where the recognition of gains on asset sales were not in accordance with GAAP and ineffective controls to detect or prevent the overvaluation of its IOs, (2) the Company did not maintain effective controls over the application of GAAP, (3) the Company did not maintain effective controls over the accounting for its MSRs and related amortization expense, (4) the Company did not maintain effective controls over the completeness and valuation of its portfolio of derivative financial instruments, (5) the Company did not maintain effective controls over the accounting for deferred loan origination fees and direct costs, (6) the Company did not maintain effective controls over the proper establishment or valuation of certain reserves and related income statement accounts based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company’s internal control over financial reporting is a process

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designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management’s assessment and our audit of Doral Financial Corporation’s internal control over financial reporting also included controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”). A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified, in its assessment, the following material weaknesses in the Company’s internal control over financial reporting as of December 31, 2004:

1. Control environment: The Company failed to have an effective control environment based on the criteria established in the COSO framework. The Company failed to appropriately design controls to prevent or detect instances of override or intervention by certain former members of senior management and a former director emeritus, and there were also inadequate mechanisms to identify and respond to such instances. This lack of effective controls allowed certain of these persons to take inappropriate actions that resulted in certain transactions not being properly reflected in the Company’s consolidated financial statements for the years ended December 31, 2004, 2003 and 2002 and for each of the quarters of 2004 and 2003. In addition, the Company failed to implement an adequate assignment of authority and responsibility among former members of senior management. In particular, a former director emeritus who was not a member of management was permitted to have substantial authority within the Company’s financial reporting process, and this authority was used in certain instances to override the Company’s internal control over financial reporting. Furthermore, the Company’s lines of communication among the Company’s operations, finance, accounting and

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internal audit staff and personnel were not effective in preventing or detecting instances of management override or intervention. These control deficiencies resulted in a “tone at the top” within the control environment that discouraged employees from reporting actual or perceived violations of policies and procedures to the Company’s governing bodies through appropriate channels.

This material weakness in the Company’s control environment permitted or contributed to the following additional material weaknesses:

Recognition of gains on asset sales not in accordance with GAAP. The Company did not have effective controls to detect that in certain instances its recognition of gains on asset sales was not in accordance with GAAP. In certain instances, information critical to an effective understanding of transactions and their related accounting implications was neither captured by the Company’s financial reporting process nor disclosed to the Company’s financial and accounting units, external or internal legal counsel, Board of Directors, regulators or independent registered public accountants. Specifically, the Company identified the following material weaknesses with respect to the recognition of gains on asset sales not in accordance with GAAP:

• The Company’s controls failed to detect, document and communicate certain oral arrangements entered into by the Company’s former treasurer and the former director emeritus with a local financial institution that likely constituted oral agreements with respect to certain mortgage loan sales. These oral arrangements provided for recourse beyond that established in the associated written mortgage loan sale contracts. The existence of these oral arrangements and their associated terms and conditions was neither captured by the Company’s financial reporting process nor communicated within the Company to permit the preparation of financial statements in accordance with GAAP. This failure resulted in the improper accounting for these transactions as sales and the associated improper recognition of gains on sales. Furthermore, the existence of these oral arrangements was not communicated to the Company’s Audit Committee, internal or external counsel or independent registered public accountants.

• The Company’s controls failed to adequately and contemporaneously document the business purpose for certain generally contemporaneous mortgage loan sales and purchases where the amount of the mortgage loans purchased and sold, and other terms of the transactions, were similar, including a transaction occurring during the fourth quarter of 2004. This failure resulted in the improper accounting for these transactions as sales and the associated improper recognition of gains on sales.

• The Company’s controls failed to document and communicate all relevant terms of certain sales of IOs. Specifically, the Company failed to detect, document and communicate certain side agreements entered into by the Company’s former treasurer guaranteeing a fixed yield to a purchaser of its floating rate IOs. This failure resulted in the improper accounting for these transactions as sales and the associated improper recognition of gains on sales. Furthermore, the existence of

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these side agreements was not communicated to the Company’s Audit Committee, internal or external counsel or independent registered public accountants.

Overvaluation of IOs. The Company did not have effective controls to detect that the valuation of its IOs was not in conformity with GAAP. Specifically, the Company identified the following material weaknesses related to the valuation of IOs:

• The Company’s controls failed to detect that information regarding the value of the Company’s IOs obtained as part of a review of the Company’s interest rate risk management practices by an external financial consultant was not properly considered in the preparation of the Company’s consolidated financial statements for the fiscal year ended December 31, 2004. In particular, certain executive officers of the Company, including the former chief executive officer and the former chief financial officer, had, as part of such interest rate risk review, been informed by such financial consultant that the market would value the IOs using implied forward LIBOR rates and that the spot methodology being used by the Company to internally value its IOs resulted in a valuation that was significantly higher than the valuation produced by the financial consultant, which incorporated implied forward LIBOR rates. This information was not appropriately communicated to the Audit Committee or its independent registered public accountants in connection with the preparation of the Company’s consolidated financial statements for the year ended December 31, 2004.

• The Company’s controls failed to prevent or detect the improper intervention or influence by the former director emeritus and the former chief financial officer in the determination of the assumptions used to calculate the impairment of the IOs reported in the Company’s consolidated financial statements for the year ended December 31, 2004. This failure resulted in a materially understated impairment amount for 2004.

• The Company’s controls failed to design effective controls to ensure that information provided to the parties providing the external valuations was accurate and complete. In particular, the Company’s controls failed to prevent the improper intervention of the former treasurer and the former director emeritus in communicating information to the parties providing the external valuations of the Company’s IOs that was not properly verified by the Company’s financial reporting process. This communication process was done orally. This process was not properly documented, and certain information provided to the parties providing the external valuations may have been inaccurate.

• The Company’s policies and procedures were not adequately designed or failed to operate properly to ensure that its internal valuation model reflected current market valuation practices. Among other things, the Company used simple prepayment assumptions and estimated future cash flows from its portfolio of floating rate IOs using existing LIBOR rates at the end of each reporting period instead of implied forward LIBOR rates. In addition, the Company’s policies and

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procedures were not properly designed to consistently ensure the preparation and retention of adequate documentation to support key judgments made in connection with the determination of the assumptions (prepayment speeds and discount rates) used in its internal valuation of the floating rate IOs. Furthermore, the external valuations used by the Company as indications of market value did not operate effectively to detect discrepancies between the Company’s internal valuation and market value.

This ineffective control environment contributed to the existence of the material weaknesses discussed below in numbered paragraphs 2 through 6. These material weaknesses resulted in the restatement of the Company’s consolidated financial statements for years ended December 31, 2004, 2003 and 2002 and for each of the quarters of 2004 and 2003. Additionally, these material weaknesses could result in misstatements of any of the Company’s financial statement accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

2. Resources, policies and procedures to ensure proper and consistent application of GAAP: The Company did not maintain effective controls over the application of GAAP. Specifically, the Company failed to successfully recruit and train a sufficient number of accounting and financial personnel with adequate knowledge, experience and training given the Company’s financial reporting, particularly as the volume and complexity of Doral Financial’s business increased over time. In addition, the Company failed to maintain or disseminate policies and procedures in certain areas, with a sufficient level of precision to allow existing personnel to adequately analyze transactions and determine the correct accounting under GAAP. These material weaknesses contributed to the existence of the material weaknesses discussed below in numbered paragraphs 3 through 6. These material weaknesses resulted in the restatement of the Company’s consolidated financial statements for the years ended December 31, 2004, 2003 and 2002 and for each of the quarters of 2004 and 2003. Additionally, these material weaknesses could result in misstatements of any of the Company’s financial statement accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, the Company’s management determined that these control deficiencies constitute material weaknesses.

3. Accounting for MSRs: The Company did not maintain effective controls over the accounting for its MSRs and related amortization expense. Specifically, Doral Financial did not maintain effective controls to ensure that appropriate adjustments were made to external valuations received with respect to the MSRs related to its conforming mortgage loans when determining the value of its non-conforming servicing portfolio. In addition, the Company did not maintain effective controls to ensure the proper allocation of its retained interests between IOs and MSRs. This control deficiency resulted in a restatement of the Company’s consolidated financial statements for the years ended December 31, 2004, 2003 and 2002 and for each of the quarters of 2004 and 2003. Additionally, this control

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deficiency could result in a misstatement in the MSRs and the related amortization expense accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, the Company’s management has determined that this control deficiency constitutes a material weakness.

4. Accounting for derivative financial instruments: The Company did not maintain effective controls over the completeness and valuation of its portfolio of derivative financial instruments. Specifically, effective controls were not designed and in place to account for or report commitments to purchase fixed rate loan pools as derivatives and record changes in their fair value in the correct accounting period. This control deficiency resulted in a restatement of the Company’s consolidated financial statements for the years ended December 31, 2004, 2003 and 2002 and for each of the quarters of 2004 and 2003. Additionally, this control deficiency could result in a misstatement in valuation of the Company’s derivative financial instruments and related accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, the Company’s management has determined that this control deficiency constitutes a material weakness.

5. Accounting for the deferral and recognition of loan origination fees and direct costs: The Company did not maintain effective controls over the accounting for deferred loan origination fees and direct costs. Specifically, the method used by Doral Financial to value loan origination fees and costs lacked a sufficient level of precision to reflect actual loan fees received and costs incurred on various loan types. In addition, the Company amortized its deferred loan fees and costs using a straight-line method of amortization rather than the effective-interest method, as required by GAAP. This control deficiency resulted in a restatement of the Company’s consolidated financial statements for the years ended December 31, 2004, 2003 and 2002 and for each of the quarters of 2004 and 2003. Additionally, this control deficiency could result in a misstatement in the deferred loan fees and costs and related amortization accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, the Company’s management has determined that this control deficiency constitutes a material weakness.

6. Reserve accounting: The Company did not maintain effective controls over the proper establishment or valuation of certain reserves and related income statement accounts. Specifically, the Company failed to maintain adequate documentation supporting the existence and valuation of reserves, including, but not limited to, the Company’s allowances for loan and lease losses, recourse obligations and Puerto Rico tax-exempt GNMA securities. This control deficiency resulted in a restatement of the Company’s consolidated financial statements for the years ended December 31, 2004, 2003 and 2002 and for each of the quarters of 2004 and 2003. Additionally, this control deficiency could result in a misstatement in the Company’s reserve and related income statement accounts that would result in a material misstatement to the annual or interim consolidated financial statements that

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would not be prevented or detected. Accordingly, the Company’s management has determined that this control deficiency constitutes a material weakness.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2004 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. Management and we previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2004. In connection with the restatement of the Company’s consolidated financial statements discussed in Note 1 to the consolidated financial statements, management has determined that the material weaknesses described above existed as of December 31, 2004. Accordingly, Management’s Report on Internal Control Over Financial Reporting has been restated and our present opinion on internal control over financial reporting, as presented herein, is different from that expressed in our previous report.

In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the COSO. Also, in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2004, by the COSO.

256. Defendant PwC knew or recklessly ignored that it violated the PCAOB’s AS No. 2

when it issued its report on Doral’s 2004 system of internal control over financial reporting. Indeed,

the myriad of internal control deficiencies now admitted to by Doral, evidences PwC’s conscious

misbehavior or recklessness in the performance of its “audit” and issuance of its report of Doral’s

2004 system of internal control over its financial reporting. In fact, PwC’s audit of Doral’s 2004

system of internal control over financial reporting was tantamount to no audit at all.

257. In fact, PCAOB’s AS No. 2 required defendant PwC to obtain an understanding of

the results of procedures performed by Doral’s Internal Audit Department by making inquiries of

Doral’s internal auditors and gaining an understanding of the results of procedures they performed.

Had PwC done so, it would have learned, if it did not already know, that Doral’s Internal Audit

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Department identified deficiencies in Doral’s system of internal control over financial reporting

during the Class Period.

258. For example, CI 1 stated that Doral’s Internal Audit Department’s audits of the

Company’s servicing assets and IOs dating back to 2002 or 2003 revealed findings of “inadequate

procedures and documentation” associated with their respective valuations and that these findings

were routinely reported to Doral’s audit committee. In fact, CI 1 stated that the Internal Audit

Department’s findings cited an absence of procedures and documentation to support a basis for

management’s assumptions and a record describing the IO valuation rationale.

259. In addition, CI 1 stated that during the Class Period, Doral’s Internal Audit

Department issued “less than satisfactory” findings associated with Doral’s accounting for its

mortgage loan “sales,” and these findings were also routinely reported to Doral’s audit

committee. In this regard, CI 1 stated that the Internal Audit Department found a lack of proper

procedures and documentation to support Doral’s accounting methodology on loan pools sold.

260. The above-noted deficiencies identified by the Internal Audit Department during the

Class Period are now the very same deficiencies identified by defendant PwC in its recently issued

report on Doral’s 2004 system of internal control over financial reporting.

261. In fact, during the Class Period, PwC turned a blind-eye toward such deficiencies,

which Doral has now concluded resulted in the restatement of its financial statements since at least

2002. For example, the former Doral internal auditor stated that he personally attended Audit

Committee meetings where representatives from defendant PwC were in attendance and the

reports of the Internal Audit Department were discussed.

262. In addition, while defendant PwC’s above-noted “audit” report now states that

“information critical to an effective understanding of [mortgage loan sales] transactions and their

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related accounting implications was neither captured by the Company’s financial reporting process

nor disclosed to the Company’s financial and accounting units, external or internal legal counsel,

Board of Directors, regulators or independent registered public accountants” the former Doral

internal auditor has informed Plaintiffs’ counsel that Doral’s institutional consumers submitted “a

bunch of side-letters” signed by defendant Mario Levis to the Company when Doral failed to pay

them loan interest in accordance with agreed upon terms.

263. Had PwC “audited” Doral’s system of internal control over its financial reporting in

accordance with the standards established by the PCAOB, it would have discovered, if it did not

already know, that the above-noted side-letters were in existence.

264. Moreover, PwC’s above-noted audit report now acknowledges that Doral’s system of

internal control over financial reporting was not adequately designed in numerous respects. In fact,

PwC was intimately aware of such deficiencies because Doral paid PwC approximately $166,000 for

services PwC rendered to Doral associated with its “financial information system design and

implementation” during the Class Period.

D. PwC Knew or Recklessly Disregarded that Its “Audit” of Doral’s Class Period Financial Statements Were Not Conducted in Accordance with GAAS

265. In certifying Doral’s financial statements, defendant PwC also falsely represented that

its audits were conducted in accordance with GAAS.4 In fact, PwC violated GAAS in numerous

respects during the course of its “audits” of Doral’s financial statements during the Class Period.

4 Doral is a financial holding company engaged in mortgage banking, banking, institutional securities operations and insurance agency activities through its wholly-owned subsidiaries Doral Mortgage Corporation, SANA Mortgage Corporation, Centro Hipotecario de Puerto Rico, Inc., Doral Bank, Doral Bank, FSB, Doral Insurance Agency, Inc., Doral Securities, Inc., Doral Money, Inc., Doral International, Inc. and Doral Properties, Inc. Doral also conducts mortgage banking activities through HF Mortgage Bankers, an operating division within the parent company.

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266. For example, GAAS, as set forth in AU §326, required PwC to:

• Obtain sufficient competent evidential matter through inspection, observation, inquiries and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit;

• Consider whether specific audit objectives have been achieved in evaluating evidential matter;

• Be thorough in the search for evidential matter and unbiased in its evaluation;

• Design audit procedures to obtain competent evidential matter; and

• Consider relevant evidential matter regardless of whether it appears to corroborate or to contradict the assertions in the client’s financial statements.

267. In violation of the above GAAS standard, and contrary to the representations in its

reports on Doral’s financial statements, PwC did not obtain sufficient competent evidential matter to

support Doral’s financial statement assertions during the Class Period. In fact, Doral has now

admitted that evidence associated with its various financial statement assertions during the Class

Period did not exist:

• Doral has now reversed contemporaneous mortgage loan sales and purchases during the Class Period because there was “insufficient” documentation to substantiate their business purpose;

• Doral “failed to maintain adequate documentation supporting the existence and valuation of reserves, including, but not limited to, the Company’s allowances for loan and lease losses, recourse obligations and Puerto Rico tax-exempt GNMA securities”;

• Doral failed to document relevant terms of IO sales during the Class Period; and

• Doral failed to retain adequate documentation to support key judgments made in connection with the determination of the assumptions (prepayment speeds and discount rates) used in its internal valuation of the floating rate IOs.

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268. Had PwC obtained sufficient competent evidential matter in the course of “auditing”

Doral’s financial statements during the Class Period, it would have learned, if it did not already

know, of Doral’s myriad, material violations of GAAP6 alleged herein.

269. PwC also violated auditing standard AU §342 in that it failed to perform the audit

procedures necessary to determine that Doral’s accounting estimates were reasonable during the

Class Period. AU §342 provides that in establishing the reasonableness of an accounting estimate,

the auditor normally concentrates on key factors and assumptions including the significance of the

accounting estimate and its susceptibility to misstatement and bias. In evaluating the reasonableness

of an accounting estimate, AU §342 provides auditors with the following guidance:

In many situations, the auditor assesses the reasonableness of an accounting estimate by performing procedures to test the process used by management to make the estimate. The following are procedures the auditor may consider performing when using this approach:

a. Identify whether there are controls over the preparation of accounting estimates and supporting data that may be useful in the evaluation;

b. Identify the sources of data and factors that management used in forming the assumptions, and consider whether such data and factors are relevant, reliable, and sufficient for the purpose based on information gathered in other audit tests;

c. Consider whether there are additional key factors or alternative assumptions about the factors;

6 GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practices at a particular time. Generally Accepted Auditing Standard (“GAAS”) §AU 411.02. Regulation S-X [17 C.F.S. §210.4-01(a)(1)] states that financial statements filed with the SEC that are not prepared in conformity with GAAP are presumed to be misleading and inaccurate. Regulation S-X also requires that interim financial statements filed with the SEC comply with GAAP. [17 C.F.R. 210.01-01.]

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d. Evaluate whether the assumptions are consistent with each other, the supporting data, relevant historical data, and industry data;

e. Analyze historical data used in developing the assumptions to assess whether the data is comparable and consistent with data of the period under audit, and consider whether such data is sufficiently reliable for the purpose;

f. Consider whether changes in the business or industry may cause other factors to become significant to the assumptions;

g. Review available documentation of the assumptions used in developing the accounting estimates and inquire about any other plans, goals, and objectives of the entity, as well as consider their relationship to the assumptions;

h. Consider using the work of a specialist regarding certain assumptions; and

i. Test the calculations used by management to translate the assumptions and key factors into the accounting estimate.

270. In addition, AU §342, requires that the auditor evaluate both subjective and objective

factors associated with accounting estimates with an attitude of professional skepticism.

271. Had it audited Doral’s significant accounting estimates in accordance with GAAS,

PwC would have learned, if it did not already know, that:

• Doral’s internal IO valuation model did not reflect current market valuation practices;

• Doral’s policies and procedures associated with key judgments made in connection with the determination of the assumptions used in its internal valuation of the floating rate IOs were not properly designed or documented; and

• Doral’s method to value loan origination fees and costs “lacked a sufficient level of precision.”

272. During the Class Period, PwC also violated auditing standard AU §431, which

provides that if management omits from the financial statements, including the accompanying notes,

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information that is required by GAAP, the auditor should express a qualified or an adverse opinion

and should provide the required undisclosed information in its audit report.

273. Doral has now admitted that the disclosure in its financial statement footnotes

violated GAAP during the Class Period. In fact, Doral has now restated the disclosure contained in

a majority of its financial statement footnotes, including:

• Note 3 — Summary of Significant Accounting Policies; • Note 4 — Regulatory Requirements; • Note 6 — Securities Held for Trading; • Note 7 — Securities Available for Sale; • Note 8 — Securities Held to Maturity; • Note 9 —Investments in an Unrealized Loss Position; • Note 10 —Mortgage Loans Held for Sale; • Note 11 —Loans Receivable; • Note 12 —Allowance for Loan and Lease Losses; • Note 13 — Servicing Assets; • Note 14 — Sales and Securitizations of Mortgage Loans; • Note 15 — Premises and Equipment; • Note 16 — Sources of Borrowings; • Note 18 — Securities Sold Under Agreements to Repurchase; • Note 20 — Loans Payable; • Note 21 — Notes Payable; • Note 22 — Accrued Expenses and Other Liabilities; • Note 23 — Income Taxes; • Note 24 — Related Party Transactions; • Note 25 — Financial Instruments with Off-Balance Sheet Risk; • Note 26 — Commitments and Contingencies; • Note 27 — Retirement and Compensation Plans; • Note 28 — Capital Stock and Additional Paid-In Capital; • Note 30 — Supplemental Income Statement Information; • Note 31 — Earnings per Share; • Note 32 — Disclosures about Fair Value of Financial Instruments; • Note 33 — Risk Management Activities; • Note 34 — Segment Information; • Note 36 — Doral Financial Corporation (Holding Company Only) Financial

Information; and • Note 37 — Subsequent Events.

274. In addition to the foregoing violations of GAAS, PwC violated at least the following

provisions of GAAS in “auditing” Doral’s financial statements during the Class Period:

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(a) General Standard No. 3 which requires that due professional care be exercised

by the auditor in the performance of the audit and the preparation of the audit report. Due

professional care also requires that the auditor maintain professional skepticism in the course of

auditing a client’s financial statements. PwC conducted its “audits” of Doral’s financial statements

with such lack of care that it permitted systemic internal control deficiencies to exist over a multi-

year period. Indeed, GAAS, in AU §322, required PwC to make appropriate inquires of Doral’s

Internal Audit personnel in the performance of its audits of Doral’s financial statements. Had PwC

done so, it would have learned of, if it did not already know, the systemic internal controls

deficiencies now admitted to by Doral.

(b) Standard of Field Work No. 2 which required PwC to make a proper study of

existing internal controls, including accounting, financial and managerial controls, to determine

whether reliance thereon was justified, and if such controls are not reliable, to expand the nature and

scope of the auditing procedures to be applied. The standard provides that a sufficient understanding

of an entity’s internal control structure be obtained to adequately plan the audit and to determine the

nature, timing and extent of tests to be performed.

(c) AU §316 which required PwC to plan and perform its audits in a manner

which reasonably assured that Doral’s Class Period financial statements were free from

misstatements caused by error or fraud. PwC’s failed to adequately plan and perform its audit

procedures in a manner reasonably designed to identify the numerous financial improprieties alleged

herein. Such failure permitted Doral to issue materially false and misleading financial statements

over a five year period. Moreover, Section 10A of the Securities Exchange Act required PwC to

“determine” whether, in the course of its audits, an illegal act occurred and to notify the SEC if it

became aware of information indicating that an illegal act occurred if Doral’s management or Board

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of Directors failed to take appropriate remedial action with respect to the illegal acts. PwC knew or

recklessly ignored that it violated Section 10A of the Securities Exchange Act in the performance of

its “audits” of Doral’s 2000, 2001, 2002, 2003 and 2004 year end financial statements.

(d) GAAS Standard of Reporting No. 1 which requires the audit report to state

whether the financial statements are presented in accordance with GAAP. PwC’s opinion falsely

represented that Doral’s 2000, 2001, 2002, 2003 and 2004 financial statements were presented in

conformity with GAAP when they were not for the myriad reasons herein alleged.

(e) GAAS Standard of Reporting No. 4 which requires that, when an opinion on

the financial statements as a whole cannot be expressed, the reasons therefore must be stated. PwC

was required to state that no opinion could be issued by it on Doral’s 2000, 2001, 2002, 2003 or

2004 financial statements or issue an adverse opinion stating that such financial statements were not

fairly presented in conformity with GAAS. PwC’s failure to make such a qualification, correction,

modification and/or withdrawal of its audit opinions was a violation of GAAS, including the fourth

standard of reporting. PwC also failed to require Doral to restate its Class Period financial

statements to correct the numerous violations of GAAP alleged herein.

(f) GAAS General Standard No. 2, which requires that independence in mental

attitude is to be maintained by the auditor in all matters related to the audit.

(g) GAAS General Standard No. 1, which requires that audits be performed by

persons having adequate technical training and proficiency.

(h) GAAS Standard of Field Work No. 1, which requires that the audit is to be

adequately planned and that assistants should be properly supervised.

(i) GAAS Standard of Reporting No. 2, which requires that the audit report

identify circumstances in which GAAP has not been consistently observed.

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275. In certifying Doral’s financial statements, defendant PwC falsely represented that it

conducted its audits of Doral’s financial statements in accordance with each of the above-noted

auditing standards.

E. PwC’s Additional Scienter Allegations

276. Defendant PwC has served Doral in various capacities for an extended number of

years. In connection with Doral’s operations, PwC had virtually limitless access to information

concerning the Company’s operations as PwC had been Doral’s auditor since 1977 and it provided

Doral with substantial non-audit services during the Class Period. As a result, PwC knew or

recklessly ignored the audit risks inherent at Doral.

277. As a result of the numerous services it rendered to Doral, PwC’s personnel were

regularly present at the Company’s offices and had continual access to, and knowledge of Doral’s

internal accounting records, its confidential financial and non-public, business documents and

employees.

278. Despite its intimate knowledge of Doral’s business and financial reporting practices

resulting from the nature of the auditing and other services rendered to Doral, PwC falsely

represented that the Company’s Class Period financial statements were prepared in conformity with

GAAP. In so doing, PwC knew of or recklessly ignored adverse facts concerning the myriad of

ways in which the Company’s financial statements violated GAAP during the Class Period.

279. Indeed, there can little dispute that the number and magnitude of the financial

statement line items restated by Doral bear little resemblance to those presented in the financial

statements certified by defendant PwC as being in conformity with GAAP during the Class Period.

280. Moreover, PwC’s San Juan office enjoyed a lucrative, long-standing business

relationship with Doral’s senior management for which it has received millions of dollars in fees for

auditing, consulting and tax services it rendered to Doral. In fact, for its fiscal years 2000 through

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2004, the fees paid by Doral to PwC exceeded $6,218,000. These fees were particularly important to

the partners in PwC’s San Juan office as their standing within the firm and their incomes were

dependent on the continued business from Doral. PwC participated in the wrongdoing alleged herein

in order to retain Doral as a client and to protect the fees it received from the Company.

281. In fact, not only did PwC participate in the wrongdoing alleged herein in order to

retain the Company as a client and to protect the fees it received from Doral, but it did so in order

to protect and retain the fees it received from R&G Financial and First BanCorp.

282. As it has now admitted, Doral’s improper financial reporting was, in large part,

associated with transactions it entered into with R&G Financial and First BanCorp during the

Class Period. In fact, not only did the San Juan office of PwC audit Doral’s financial statements,

but it also audited the financial statements of R&G Financial and First BanCorp during the Class

Period.

283. As a result, personnel from PwC’s San Juan’s office were regularly present at each of

Doral’s, First BanCorp’s and R&G Financial’s offices during the Class Period. Accordingly, PwC

had access to each of Doral’s, R&G Financial’s and First BanCorp’s internal accounting records, its

confidential financial and non-public, business documents and employees during the Class Period.

284. Now Doral has admitted that its massive financial restatement is largely the result

of a multitude of improper transactions with R&G Financial and First BanCorp over an extended

period of time. Given its intimate knowledge of Doral’s accounting and financial reporting practices

and those of R&G Financial and First BanCorp, PwC knew or recklessly disregarded adverse facts

indicating that such transactions, which are now the subject of Federal investigations, were highly

irregular.

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285. Doral, R&G Financial and First BanCorp have each admitted that their financial

statements since at least 2003 were materially false and misleading. Nonetheless, PwC’s San Juan

office issued unqualified audit opinions on each of Doral’s, R&G Financial’s and First BanCorp’s

2003 and 2004 financial statements and unqualified audit opinions on each of Doral’s, R&G

Financial’s and First BanCorp’s 2004 system of internal control over financial reporting.

286. In truth and in fact, the personnel at PwC’s San Juan office abandoned their role as

independent auditor and turned a blind eye to each of numerous violations of GAAP, GAAS and

PCAOB standards alleged herein and participated in the instant wrongdoing to retain Doral, R&G

Financial and First BanCorp as clients of PwC’s San Juan office thereby protecting the fees they

paid PwC, which totaled more $12 million from 2000 through 2004.

287. In so doing, PwC fraudulently issued unqualified audit opinions on Doral’s financial

statements for the years ended December 31, 2000, 2001, 2002, 2003 and 2004 and on Doral’s 2004

system on internal control over financial reporting.

288. As a worldwide firm of Certified Public Accountants, auditors and business

consultants, PwC was well aware of duties and obligations in serving as Doral’s “independent

auditor.” In fact, PwC’s website states:

The financial statement audit has never been more important. In today’s business environment there is more scrutiny and skepticism of a company’s financial statements than ever before. Investors have lost faith in corporate governance and reporting and they expect more: greater reliability, more oversight and clear evidence of internal controls. Corporate management, boards and audit committees, internal and external auditors, analysts and other investment professionals all have important roles to play in rebuilding investor trust by executing their respective responsibilities, keeping in mind both legal obligations and the heightened expectations of investors. Meeting investor expectations begins with the completeness and accuracy of information contained in a company’s financial statements.

* * *

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. . . PwC can provide high quality audit services. We can also address any specific regulatory reporting requirements such as those under Sarbanes-Oxley S404 for SEC registrants, including foreign private issuers.

PwC’s work takes into account all current and where appropriate, prospective auditing, accounting, and reporting regulations and guidance. Our audit clients include many of the world’s leading multinational corporations, as well as many small and medium-sized companies and a significant number of local authorities and other public sector bodies.

289. As a result of its absolute failure to properly report on Doral’s Class Period financial

statements and internal controls, PwC utterly failed in its role as an auditor as noted by the SEC:

[T]he capital formation process depends in large part on the confidence of investors in financial reporting. An investor’s willingness to commit his capital to an impersonal market is dependent on the availability of accurate, material and timely information regarding the corporations in which he has invested or proposes to invest. The quality of information disseminated in the securities markets and the continuing conviction of individual investors that such information is reliable are thus key to the formation and effective allocation of capital. Accordingly, the audit function must be meaningfully performed and the accountants’ independence not compromised.

Relationships Between Registrants and Independent Accountants, SEC Accounting Series Release

No. 2961, 1981 SEC LEXIS 858, at *8-*9 (Aug. 20, 1981).

X. LOSS CAUSATION/ECONOMIC LOSS

290. During the Class Period, as detailed herein, Defendants engaged in a scheme to

deceive the market and a course of conduct that artificially inflated the price of Doral securities and

operated as a fraud or deceit on Class Period purchasers of Doral securities by misrepresenting the

Company’s financial results. During the Class Period, Defendants improperly inflated Doral’s

reported financial results and made numerous other misrepresentations as detailed herein. When

Defendants’ prior misrepresentations and fraudulent conduct were disclosed and became apparent to

the market, the price of Doral securities fell precipitously as the prior artificial inflation came out of

the price of Doral securities. As a result of their purchases of Doral securities during the Class

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Period, Plaintiffs and other members of the Class suffered economic loss, i.e., damages, under the

federal securities laws.

291. By improperly reporting Doral’s financial results, Defendants presented a misleading

picture of Doral’s business and financial performance. During the Class Period, Defendants

repeatedly emphasized Doral’s “record earnings.” These claims of “record earnings” caused and

maintained the artificial inflation in the price of Doral securities throughout the Class Period and

until the truth was revealed to the market.

292. Defendants’ materially false and misleading statements had the intended effect and

caused Doral stock to trade at artificially inflated levels throughout the Class Period, reaching as

high as $47.22 per share on January 18, 2005, the day Doral reported a 59% increase in earnings for

the fourth quarter 2004, compared to the prior year.

293. On the next day, January 19, 2005, questions concerning the quality of Doral’s

reported earnings began to surface when analysts questioned the opportunistic timing of offsetting

“extraordinary items” that allowed Doral to report “record” 2004 earnings. The concerns centered

on the Doral’s IO valuation and whether impairment losses reported for the fourth quarter

represented a “catch-up” for impairment not taken during prior quarters.

294. Then, on March 15, 2005, the market’s concerns about the quality of Doral’s reported

earnings were confirmed when Doral filed the 2004 10-K. The 2004 10-K purported to disclose the

assumptions used by Defendants to value Doral’s IO Strips during the fourth quarter of 2004. The

market immediately perceived a “disconnect” between the assumptions used by Defendants when

compared to then existing market conditions. For example, that same day, Wachovia analyst J.

Shanahan, issued a report noting the “overly aggressive [IO valuation] assumptions” used by Doral

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and downgrading Wachovia’s investment rating for Doral common stock to “Under-perform” and

lowering earnings estimates for 2005.

295. On April 14, 2006, Merrill Lynch & Co. analyst Kenneth Bruce downgraded Doral

common stock to “Sell” from “Neutral” and noted that if Doral were to value its IO securities more

conservatively, it might write down its portfolio by as much as $600 million, or $4 per share. The

report also noted “the potential for an accounting restatement, further [IO] impairment and the

corresponding impact that either would have on the company’s earnings model.”

296. On April 19, 2005, Doral announced that it would need to restate its earnings for the

prior five-year period. Specifically, the Company disclosed that: (1) Doral’s financial reports from

January 1, 2000 through December 31, 2004 were erroneous and could no longer be relied upon; and

(2) Doral would adjust downward the fair value of its floating rate IO Strips by at least $400 million

to $600 million as of December 31, 2004.

297. On April 20, 2005, Defendants publicly disclosed that the SEC had launched an

informal investigation of Doral’s accounting practices.

298. On May 26, 2005, Doral announced it had filed a Form 8-K which disclosed that its

restatement for the IO Strips was at the high end of estimates, that other accounting issues could be

restated and that it was in default under certain of its Indentures.

299. On the last day of the Class Period, October 25, 2005, Doral issued a press release

announcing that the scope of the restatement had been expanded to include “some or all” of the

hundreds, if not thousands of mortgage loan sale transactions the Company had treated as “sales” in

its previously issued financial statements.

300. These public revelations indicated that there had been prior falsification of Doral’s

financial results and business prospects due to defendants’ accounting manipulations. As investors

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and the market became aware that Doral’s prior financial results and business prospects had been

falsified, the prior artificial inflation came out of the price of Doral securities, damaging investors.

301. As a direct result of news of Defendants’ manipulation of Doral’s reported earnings

and IO valuations entered the market on January 19, 2005, the price of Doral common stock declined

11% to close at $42.02 per share (split adjusted) on volume of 9.5 million shares and continued to

decline over the next four trading sessions closing at $38.96 per share (split adjusted) on January 25,

2005. On March 15, 2005, the further disclosure of irregularities with Doral’s IO valuation

assumptions caused Doral stock prices to plummet by 44%, on unusually high volume, falling from

$38.29 to $21.50 in a matter of days. On April 14-15, 2006, the price of Doral common stock

continued to decline closing at a split-adjusted share price of $16.28, following an April 14, 2005

downgrade of Doral’s common stock by Merrill Lynch & Co. analyst Kenneth Bruce, who cautioned

that Doral’s earnings model could be negatively impacted -- by as much as $4 per share -- should

Doral decide to value its OI securities more conservatively. After the Company’s further admissions

and public revelations concerning the need to restate its financial results on April 19, 2005, Doral’s

stock price fell to $16.15 per share. After the May 26, 2005 disclosures, Doral’s stock dropped to

below $11 per share before closing at $11.52 per share. After the October 25, 2005 disclosures

Doral common stock tumbled an additional 24% per share to close at $8.65 per share, a decline of

$2.85 from the split adjusted closing price of October, 24, 2005. Through the date of this filing the

Company’s common shares continue to trade in the range of $6.00-$7.00 per share (split adjusted).

These drops removed the inflation from Doral’s stock price, causing real economic loss to investors

who had purchased the stock during the Class Period. In sum, as the truth about defendants’ fraud

was revealed, the Company’s stock price plummeted, the artificial inflation came out of the stock

and Plaintiffs and other members of the Class were damaged, suffering economic losses of at least

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$38.57 per share. The prices of other Doral securities similarly suffered a decline in value as the

truth about Defendants’ fraudulent scheme was revealed to the market.

302. The decline in the price of Doral stock and other Doral securities, as detailed above,

was a direct result of the nature and extent of Defendants’ fraud being revealed to investors and the

market. The timing and magnitude of the decline in the price of Doral stock and other Doral

securities negates any inference that the loss suffered by Plaintiffs and other Class members was

caused by changed market conditions, macroeconomic or industry factors or Company-specific facts

unrelated to Defendants’ fraudulent conduct. During the same period in which Doral’s stock price

fell as much as 70% as a result of Defendants’ fraud being revealed, the Standard & Poor’s 500

securities index was flat. The economic loss, i.e., damages, suffered by Plaintiffs and other members

of the Class, was a direct result of Defendants’ fraudulent scheme to artificially inflate the price of

Doral securities and the subsequent significant decline in the value of Doral stock and other Doral

securities when Defendants’ prior misrepresentations and other fraudulent conduct was revealed.

XI. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE

303. At all relevant times, the market for Doral’s securities was an efficient market for the

following reasons, among others:

(a) Doral common stock met the requirements for listing, and was listed and

actively traded on the NYSE, a highly efficient and automated market;

(b) As a public company, Doral filed periodic public reports with the SEC;

(c) Doral regularly communicated with public investors via established market

communication mechanisms, including through regular disseminations of press releases on the

national circuits of major newswire services and through other wide-ranging public disclosures, such

as communications with the financial press and other similar reporting services; and

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(d) Doral was followed by several securities analysts employed by major

brokerage firms who wrote reports which were distributed to the sales force and certain customers of

their respective brokerage firms. Each of these reports was publicly available and entered the public

marketplace.

304. As a result of the foregoing, the market for Doral’s securities promptly digested

current information regarding Doral from all publicly available sources and reflected such

information in Doral’s stock price. Under these circumstances, all purchasers of Doral securities

during the Class Period suffered similar injury through their purchase of Doral securities at

artificially inflated prices and a presumption of reliance applies.

XII. NO SAFE HARBOR

305. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

Many of the specific statements pleaded herein were not identified as “forward-looking statements”

when made. To the extent there were any forward-looking statements, there were no meaningful

cautionary statements identifying important factors that could cause actual results to differ materially

from those in the purportedly forward-looking statements. Alternatively, to the extent that the

statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are

liable for those false forward-looking statements because at the time each of those forward-looking

statements was made, the particular speaker knew that the particular forward-looking statement was

false, and/or the forward-looking statement was authorized and/or approved by an executive officer

of Doral who knew that those statements were false when made.

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a. COUNT I

(1) For Violation of §10(b) of the Exchange Act and Rule 10b-5 Against All Defendants

306. Plaintiff incorporates ¶¶1-305 by reference.

307. During the Class Period, Defendants disseminated or approved the false statements

specified above, which they knew or deliberately disregarded were misleading in that they contained

misrepresentations and 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.

308. Defendants violated §10(b) of the 1934 Act and Rule 10b-5 in that they:

(a) Employed devices, schemes, and artifices to defraud;

(b) Made untrue statements of material facts or 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; or

(c) Engaged in acts, practices, and a course of business that operated as a fraud or

deceit upon plaintiff and others similarly situated in connection with their purchases of Doral

publicly traded securities during the Class Period.

309. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of

the market, they paid artificially inflated prices for Doral publicly traded securities. Plaintiff and the

Class would not have purchased Doral publicly traded securities at the prices they paid, or at all, if

they had been aware that the market prices had been artificially and falsely inflated by defendants’

misleading statements.

310. As a direct and proximate result of these Defendants’ wrongful conduct, plaintiff and

the other members of the Class suffered damages in connection with their purchases of Doral

publicly traded securities during the Class Period.

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COUNT II

For Violation of §20(a) of the 1934 Act Against All Defendants

311. Plaintiffs incorporate ¶¶1-310 by reference.

312. The Individual Defendants acted as controlling persons of Doral within the meaning

of §20(a) of the 1934 Act. By reason of their positions as officers and/or directors of Doral, and

their ownership of Doral stock, the Individual Defendants had the power and authority to cause

Doral to engage in the wrongful conduct complained of herein. Doral controlled each of the

Individual Defendants and all of its employees. By reason of such conduct, the Individual

Defendants and Doral are liable pursuant to §20(a) of the 1934 Act.

XIII. PRAYER FOR RELIEF

WHEREFORE, plaintiff prays for judgment as follows:

A. Declaring this action to be a proper class action pursuant to FRCP 23;

B. Awarding plaintiff and the members of the Class damages, including interest;

C. Awarding plaintiff reasonable costs, including attorneys’ fees; and

D. Awarding such equitable/injunctive or other relief as the Court may deem just and

proper.

XIV. JURY DEMAND

Plaintiff demands a trial by jury.

DATED: June 22, 2006 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP SAMUEL H. RUDMAN (SR-7957) ROBERT M. ROTHMAN (RR-6090) RUSSELL J. GUNYAN (RG-4724) MARK S. REICH (MR-4166)

RUSSELL J. GUNYAN

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58 South Service Road, Suite 200 Melville, NY 11747 Telephone: 631/367-7100 631/367-1173 (fax)

and

PATRICK J. COUGHLIN JONATHAN E. BEHAR MICHAEL F. GHOZLAND 9601 Wilshire Blvd, Suite 510 Los Angeles, CA 90210 Telephone: 310/859-3100 310/278-2148 (fax)

Attorneys for Lead Plaintiff

WHATLEY DRAKE, LLC JOE R. WHATLEY, JR. RICHARD ROUCO 2323 Second Avenue North Birmingham, AL 35203 Telephone: 205/328-9576 205/328-9669 (fax)

Additional Counsel I:\Doral Financial\Pleadings\Amended Complaint FINAL.doc

1 consolidated amended complaint for violation of the federal securities laws 06/22/2006

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