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Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008
UNITED STATES DISTRICT COURTFOR THE SOUTHERN DISTRICT OF FLORIDA
FORT PIERCE DIVISION
IN RE OPTEUM, INC. SECURITIESLITIGATION
Page 1 of 107
CIVIL ACTION NO. 07-14278-CIV-GRAHAM
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINTFOR VIOLATIONS OFFEDERAL SECURITIES LAWSJURY TRIAL DEMANDED
INTRODUCTION
1. Lead Plaintiff, the Kornfeld Group (comprised of William F. Kornfeld, Jr., John
A. Bums, and David Cottun), and additional plaintiff James Winn, bring this federal securities
law class action pursuant to Rules 23(a) and (b)(3) of the Federal Rules of Civil Procedure, on
behalf of two Classes.
2. The "Securities Act Class consists of all those who purchased the securities of
Opteum, Inc. ("Opteum or "Company ) in connection with, or traceable to, the Company's
September 17, 2004 Initial Public Offering ("IPO ) and/or the December 16, 2004 Secondary
Offering ("SPO ) (collectively, "Offerings ), seeking to pursue remedies under the Securities
Act of 1933 ("Securities Act ). The "Securities Act Class Period is September 17, 2004,
through and including July 24, 2005.
3. The "Exchange Act Class consists of all persons who purchased Opteum shares
in the open market between September 29, 2005 and August 10, 2007, inclusive ("Exchange Act
Class Period ), seeking to pursue remedies under the Securities Exchange Act of 1934
("Exchange Act ).
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JURISDICTION AND VENUE
4. The Securities Act claims asserted herein arise under Sections 11, 12(a)(2), and
15 of the Securities Act [15 U.S.C. §§ 77k and 77o] and rules promulgated thereunder by the
Securities and Exchange Commission ("SEC ).
5. The Exchange Act 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 lOb-5
promulgated thereunder by the SEC [17 C.F.R. § 240.1Ob-5].
6. This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. §§ 1331 and 1337 , and Section 22 of the Securities Act [15 U.S.C. § 77v] or Section 27
of the Exchange Act [15 U.S.C. § 78aa].
7. Defendants named herein have sufficient minimum contacts with this District,
state, or the United States so as to render the exercise ofjurisdiction permissible under traditional
notions of fair play and substantial justice.
8. Venue is proper in this District pursuant to 28 U.S.C. §§ 1391(b) and (c), and
Section 22 of the Securities Act [ 15 U.S.C. § 77v] or Section 27 of the Exchange Act [ 15 U.S.C.
§ 78aa]. Opteum maintains its principal place of business in this District and many of the acts
and practices complained of herein occurred in substantial part in this District.
9. In connection with the acts alleged in this complaint, Defendants, directly or
indirectly, used the means and instrumentalities of interstate commerce, including, but not
limited to, the mails, interstate telephone communications, and the facilities of the national
securities markets.
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PARTIES
10. Securities Act Class representatives, Lead Plaintiff William Kornfeld
("Kornfeld ) and additional plaintiff James Winn ("Winn ) (collectively, the "Securities Act
Plaintiffs ), purchased Opteum's common stock pursuant and/or traceable to the Registration
Statement and Prospectus issued with the IPO and/or SPO, which contained misrepresentations
and/or omissions of material fact, and were damaged thereby. The certification for Kornfeld was
submitted with the Kornfeld Group's motion for appointment as lead plaintiff and is incorporated
herein by reference. The certification of Winn is attached hereto as Exhibit A.
11. Exchange Act Class representatives are the members of the Kornfeld Lead
Plaintiff Group -- Kornfeld, John Bums, and David Cottun - who purchased the common stock
of Opteum at artificially inflated prices during the Exchange Act Class Period, and have been
damaged thereby (collectively, "Exchange Act Plaintiffs ). Certifications for each member of
Lead Plaintiff are attached to the Kornfeld Group's motion for appointment as lead plaintiff and
incorporated herein by reference.
Corporate Defendant
12. Defendant OPTEUM INC. is a Maryland corporation with its principal place of
business located at 3305 Flamingo Drive, Vero Beach, Florida 32963. The Company was
formed when Bimini Mortgage Management, Inc. ("Bimini ) acquired Opteum Financial
Services , LLC ("OFS ) on November 3, 2005 . The newly-merged entity subsequently changed
its name to Opteum, Inc. on February 10, 2006. In the IPO and SPO Registration Statement and
Prospectus , as well as in SEC filings issued during the Exchange Act Class Period, the Company
(then known as Bimini) described itself as "self-managed and self-advised . The Company
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operated as a real estate investment trust ("REIT )1 and invested primarily in residential
mortgage related securities ("MBS ) issued by the Federal National Mortgage Association
("Fannie Mae ), the Federal Home Loan Mortgage Corporation ("Freddie Mac ), and the
Government National Mortgage Association ("Ginnie Mae ). During both the Securities Act
Class Period and the Exchange Act Class Period, the Company presented itself as a mortgage
portfolio manager that sought to be different from other mortgage portfolio managers through the
Company's risk management approach. During the Exchange Act Class Period, the Company
touted that the post-merger entity represented part of a stronger diversified model whose parts
complemented each other and would position the Company for substantial growth.
Individual Defendants
13. Defendant ROBERT E. CAULEY ("Cauley ) is, and during both the Securities
Act Class Period and Exchange Act Class Period (collectively, "Class Periods ) was, Vice-
Chairman of the Board of Directors, Senior Executive Vice President, Chief Financial Officer,
and Chief Investment Officer of the Company. Defendant Cauley founded the Company and,
following the acquisition of OFS, served as Senior Executive Vice President and Co-Head of
OFS Capital Markets. Defendant Cauley signed and certified the Company's SEC filings,
including but not limited to Opteum's 2005 and 2006 Forms 10-K, Forms 10-Q for interim
periods, as well as the Registration Statement and Prospectus filed in connection with the IPO
and SPO. Following the acquisition of OFS, Defendant Cauley obtained a 45% salary increase
(2006 vs. 2005), and he also received bonuses of $450,000 and $400,000, in 2005 and 2006, and
stock awards of 672,000 shares and 1.06 million shares , respectively.
1 Opteum qualifies as a REIT for federal income tax purposes and is generally exempt from federal corporateincome taxes if it distributes at least 90% of its taxable income to stockholders. The Company is self-managed andself-advised, and elected to be taxed as a REIT commencing with taxable year ended December 31, 2003.
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14. Defendant PETER R. NORDEN ("Norden) was, during the Exchange Act
Class Period, a member of the Board of Directors and Senior Executive Vice President of the
Company. Defendant Norden was also President and CEO of OFS since 1999 and, following the
acquisition of OFS by the Company, served as Co-Head of Capital Markets . In conjunction with
the sale of the Retail Mortgage Origination Business on July 2, 2007, Defendant Norden resigned
his positions with the Company effective June 29, 2007. During the Class Periods, Defendant
Norden signed Opteum's SEC filings, including but not limited to its 2005 and 2006 Form 10-K.
Following the acquisition of OFS, Defendant Norden obtained a massive 500% + salary increase
($ 118,000 in 2005 vs. $750,000 in 2006) and bonuses of $750,000 in 2006.
15. Defendant JEFFREY J. ZIMMER ("Zimmer ) is, and during the Class Periods
was, Chairman of the Board of Directors and Chief Executive Officer of the Company.
Defendant Zimmer signed and certified the Company's SEC filings, including but not limited to
Opteum's 2005 and 2006 Forms 10-K, its Forms 10-Q for interim periods, as well as the
Registration Statement and Prospectus filed in connection with the IPO and SPO. Following the
acquisition of OFS, Defendant Zimmer also obtained a 25% salary increase (2006 vs. 2005), and
bonuses of $685,000 and $500,000, in 2005 and 2006, respectively, as well as stock awards of 1
million and 1.6 million shares, respectively.
16. Defendant KEVIN L. BESPOLKA ("Bespolka ) was, during the Class Periods,
a member of the Board of Directors of the Company as well as a member of the Audit,
Governance, and Compensation Committee(s) of the Board. Defendant Bespolka signed the
Company's SEC filings, including but not limited to Opteum's 2005 and 2006 Forms 10-K, as
well as the Registration Statement and Prospectus filed in connection with the IPO and SPO.
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17. Defendant MAUREEN A. HENDRICKS ("Hendricks ) was, during the Class
Periods, a member of the Board of Directors of the Company as well as a member of the Audit
and Compensation Committee(s) of the Board. Defendant Hendricks signed the Company's
SEC filings, including but not limited to Opteum's 2005 and 2006 Forms 10-K, as well as the
Registration Statement and Prospectus filed in connection with the IPO and SPO. Defendant
Hendricks resigned from the Company on June 12, 2007.
18. Defendant W. CHRISTOPHER MORTENSON ("Mortenson ) was, during the
Class Periods, a member of the Board of Directors of the Company . Defendant Mortenson
signed the Company's SEC filings, including but not limited to Opteum's 2005 and 2006 Forms
10-K, as well as the Registration Statement and Prospectus filed in connection with the IPO and
SPO.
19. Defendant BUFORD H. ORTALE ("Ortale ) was, during the Class Periods, a
member of the Board of Directors of the Company as well as a member of the Audit and
Governance Committee(s) of the Board. Defendant Ortale signed the Company's SEC filings,
including but not limited to Opteum's 2005 and 2006 Forms 10-K, as well as the Registration
Statement and Prospectus filed in connection with the IPO and SPO.
20. The individuals identified as Defendants in this section are referred to collectively
herein as the "Individual Defendants. In its Form 10-K for 2005, the Company identified
Individual Defendants Bespolka, Hendricks, Mortenson, and Ortale as "independent directors
and, as such, they each received Company stock as part of their compensation.
IPO Underwriter Defendants
21. In connection with the IPO and SPO, Defendant FLAGSTONE SECURITIES,
LLC ("Flagstone ) and Defendant BB&T CAPITAL MARKETS ("BB&T Capital ) acted as
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"Lead Underwriters organizing the distribution of at least 10.35 million shares of Company
stock to investors and initiating the first public market for Company shares. As the Company
reported in the Form 10-K/A filed on October 13, 2006, Flagstone received an additional
$4,747,517 from the proceeds of the Offerings that closed in January and February 2004.
Flagstone was the lead underwriter for Opteum's Class A Common Stock initial public offering
and pursuant to the terms of the offering, received fees of $5,836,250 in connection with the sale
of Class A Common Stock in the initial public offering, including shares issued in the exercise of
the Underwriters' over allotment option. Flagstone was also the lead underwriter for Opteum's
additional Class A Common Stock public offering and pursuant to the terms of the offering,
received fees of $4,278,000 in connection with the sale of Class A Common Stock in the SPO,
including shares issued in the exercise of the Underwriters' over allotment option.
22. In connection with the IPO and SPO, the Underwriter Defendants distributed
those shares, not including the exercise of over-subscription options, as follows:
IPO Underwriters # Shares
Flagstone Securities , LLC 3,590,000BB&T Capital Markets, A division of Scott & 1 ,000,000Stringfellow, Inc.FIG Partners , LLC 210,000Capital West Securities , Inc. 200,000
Total 5,000,000[* Oversubscription Option of 750,000 shares ]
Secondary Offering Underwriters # Shares
Flagstone Securities , LLC 2,888,000BB&T Capital Markets, A division of Scott & 722,000Stringfellow, Inc.FIG Partners , LLC 200,000Capital West Securities , Inc. 190,000
[* Oversubscription Option of 600,000 shares ]Total 4,000,000
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23. In connection with the IPO and SPO, the Underwriter Defendants were paid over
$10.114 million in fees, paid indirectly by purchasers of the Company's shares. The Underwriter
Defendants were paid as much as $1.015 per share in connection with the sale of these common
shares, including shares sold pursuant to the exercise of the Underwriters' over-subscription
option, as follows:
IPO UNDERWRITING FEES
Per shareTotal
SECONDARY OFFERING UNDERWRITING FEES
Per shareTotal
No FullExercise Exercise
$ 1.0150$ 1.0150$ 5,075,000 $ 5,836,250
No FullExercise Exercise
$ 0.93 $ 0.93$ 3,720,000 $ 4,278,000
GROSS FEES PAID ALL UNDERWRITERS = $ 10,114 ,250.00
24. Shareholders thus paid over $10.114 million in combined fees - the substantial
majority of which was paid to Underwriter Defendants - to compensate the Underwriters for
conducting purported significant due diligence investigations into the Company in connection
with each of the Offerings. The Underwriter Defendants' due diligence investigation was a
critical component of the IPO and SPO, and it was supposed to provide investors with important
safeguards and protections.
25. The due diligence investigations that were required by the Underwriter
Defendants included a detailed investigation into the Company, its operations, risk-management
controls and procedures, and other assumptions that extended well beyond a mere casual review
of the Company and its operational and financial controls . The failure of the Underwriter
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Defendants to conduct an adequate due diligence investigation prior to each of the Offerings was
a substantial contributing factor leading to the harm complained of herein.
COUNT I
By the Securities Act Plaintiffs on Behalf of Themselves and the Securities Act ClassAgainst the Company For Violation of Section 11 of the Securities Act
26. Securities Act Plaintiffs Kornfeld and Winn repeat and reallege each and every
allegation as if fully set forth herein only to the extent , however, that such allegations do not
allege fraud, scienter, or the intent of the Defendants to defraud the Securities Act Plaintiffs or
members of the Securities Act Class. This Count is predicated upon the Issuer's strict liability
for making materially untrue and/or misleading statements and omissions in the Registration
Statement and Prospectus . This Count is asserted by the Securities Act Plaintiffs by, and on
behalf of, persons who acquired shares of the Company's common stock pursuant or traceable to
the false Registration Statement and Prospectus issued in connection with the IPO and SPO.
27. The Company is the issuer of the stock issued via each materially untrue and
misleading Registration Statement and Prospectus. As such, Opteum is strictly liable for each
materially untrue and misleading statement contained therein.
28. Defendant issued and disseminated, caused to be issued and disseminated, and
participated in the issuance and dissemination of, material misstatements to the investing public
which were contained in the Registration Statements and Prospectuses, which misrepresented or
failed to disclose, among other things, the facts set forth. By reason of the conduct herein
alleged, Defendant violated Section 11 of the Securities Act.
29. This action is brought within one year after discovery of the untrue statements and
omissions which should have been made through the exercise of reasonable diligence, and within
three years of the effective date of the IPO and SPO of the Company' s common stock.
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30. By virtue of the foregoing, Securities Act Plaintiffs and the other members of the
Securities Act Class are entitled to damages under Section 11 as measured by the provisions of
Section 11(e), from the Defendant.
COUNT II
By the Securities Act Plaintiffs on Behalf of Themselves and the Securities Act ClassAgainst Underwriter Defendants For Violation of Section 11 of the Securities Act
31. Securities Act Plaintiffs Kornfeld and Winn repeat and reallege each and every
allegation as if fully set forth herein only to the extent , however, that such allegations do not
allege fraud, scienter, or the intent of Defendants to defraud the Securities Act Plaintiffs or
members of the Securities Act Class. This Count is predicated upon the Underwriter
Defendants' liability for making materially untrue and/or misleading statements and omissions in
the Registration Statement and Prospectus. This Count is asserted by the Securities Act
Plaintiffs by, and on behalf of persons who acquired shares of the Company's common stock
pursuant to or traceable to the Registration Statement and Prospectus issued in connection with
the IPO and SPO.
32. Underwriter Defendants owed to the holders of the stock obtained through the
Registration Statements or Prospectuses the duty to make a reasonable and diligent investigation
of the statements contained in the Registration Statements or Prospectuses at the time they
became effective to ensure that such statements were true and correct and that there were no
omissions of material facts required to be stated in order to make the statements contained
therein not misleading . As such, Underwriter Defendants are liable to Securities Act Plaintiffs
and the Securities Act Class.
33. None of the Underwriter Defendants made a reasonable investigation or possessed
reasonable grounds for the belief that the statements contained in the Registration Statements or
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Prospectuses were true or that there were no omissions of material facts necessary to make the
statements made therein not misleading.
34. Underwriter Defendants issued and disseminated, caused to be issued and
disseminated, and participated in the issuance and dissemination of, material misstatements to
the investing public which were contained in the Registration Statements and Prospectuses,
which misrepresented or failed to disclose, among other things, the facts set forth. By reason of
the conduct herein alleged, each Underwriter Defendant violated Section 11 of the Securities
Act.
35. As a direct and proximate result of Underwriter Defendants' acts and omissions in
violation of the Securities Act, the market price of Opteum's common stock sold in the IPO and
SPO was artificially inflated, and the Securities Act Plaintiffs and the Securities Act Class
suffered substantial damage in connection with their ownership of Opteum's common stock
purchased in the IPO and/or SPO and pursuant to the Registration Statements or Prospectuses.
36. At the times they obtained their shares of Opteum, Securities Act Plaintiffs and
members of the Securities Act Class did so without knowledge of the facts concerning the
misstatements or omissions alleged herein.
37. This action is brought within one year after discovery of the untrue statements and
omissions which should have been made through the exercise of reasonable diligence, and within
three years of the effective date of the IPO and SPO of the Company' s common stock.
38. By virtue of the foregoing, Securities Act Plaintiffs and the other members of the
Securities Act Class are entitled to damages under Section 11 as measured by the provisions of
Section 11(e), from each of the Underwriter Defendants and each of them, jointly and severally.
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COUNT III
By the Securities Act Plaintiffs on Behalf of Themselves and the Securities Act ClassAgainst Individual Defendants Zimmer, Cauley, Bespolka, Hendricks, Mortenson, and
Ortale For Violation of Section 11 of the Securities Act
39. Securities Act Plaintiffs Kornfeld and Winn repeat and reallege each and every
allegation as if fully set forth herein only to the extent , however, that such allegations do not
allege fraud, scienter, or the intent of the Defendants to defraud the Securities Act plaintiffs or
members of the Securities Act Class. This Count is predicated upon the Individual Defendants'
liability for making materially untrue and/or misleading statements and omissions in the
Registration Statement and Prospectus . This Count is asserted by the Securities Act Plaintiffs
by, and on behalf of persons, who acquired shares of the Company's common stock pursuant to
or traceable to the false Registration Statement and Prospectus issued in connection with the IPO
and SPO.
40. Individual Defendants as signatories of the Registration Statement or Prospectus,
as directors and/or officers of Opteum and controlling persons of the issuer, owed to the holders
of the stock obtained through the Registration Statements or Prospectuses the duty to make a
reasonable and diligent investigation of the statements contained in the Registration Statements
or Prospectuses at the time they became effective to ensure that such statements were true and
correct, and that there were no omissions of material facts required to be stated in order to make
the statements contained therein not misleading. As such, the Individual Defendants are liable to
Securities Act Plaintiffs and the Securities Act Class.
41. None of the Individual Defendants made a reasonable investigation or possessed
reasonable grounds for the belief that the statements contained in the Registration Statements or
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Prospectuses were true or that there were no omissions of material facts necessary to make the
statements made therein not misleading.
42. Individual Defendants issued and disseminated, caused to be issued and
disseminated, and participated in the issuance and dissemination of, material misstatements to
the investing public which were contained in the Registration Statements and Prospectuses,
which misrepresented or failed to disclose, among other things, the facts set forth. By reason of
the conduct herein alleged, each Individual Defendant violated and/or controlled a person who
violated Section 11 of the Securities Act.
43. As a direct and proximate result of the Individual Defendants' acts and omissions
in violation of the Securities Act, the market price of Opteum's common stock sold in the IPO
and SPO was inflated, and the Securities Act Plaintiffs and the Securities Act Class suffered
substantial damage in connection with their ownership of Opteum's common stock purchased in
the IPO and/or SPO and pursuant to the Registration Statements or Prospectuses.
44. At the times they obtained their shares of Opteum, Securities Act Plaintiffs and
members of the Securities Act Class did so without knowledge of the facts concerning the
misstatements or omissions alleged herein.
45. This action is brought within one year after discovery of the untrue statements and
omissions which should have been made through the exercise of reasonable diligence, and within
three years of the effective date of the IPO and SPO of the Company' s common stock.
46. By virtue of the foregoing, Securities Act Plaintiffs and the other members of the
Securities Act Class are entitled to damages under Section 11 as measured by the provisions of
Section 11(e), from the Individual Defendants and each of them, jointly and severally.
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Background to the IPO
47. Bimini was formed in September 2003 with the purpose, as stated in the IPO
Prospectus, of investing primarily in residential mortgage-related securities issued by Fannie
Mae, Freddie Mac, and Ginnie Mae. Bimini earned returns on the "spread (or the difference)
between the yield on assets and costs, primarily the interest expense on borrowed funds.
According to the IPO Prospectus , Bimini's business plan was to expand revenue by "borrow[ing]
between eight and 12 times the amount of [] equity capital to attempt to enhance [] returns to
stockholders.
48. In December 2003, Bimini commenced operations and, following an initial
private placement of approximately 10 million shares of Class A Common Stock, Defendants
raised net proceeds (after commissions and expenses) of approximately $141.7 million. This
stock sale provided Bimini with the money to invest in, and to leverage, government backed
securities. In fact, Bimini's portfolio of mortgage-backed securities grew from a fair market
value of $225 million in Q4:03 to over $1.51 billion by Q1:04.
49. Prior to the IPO, the Federal Reserve increased interest rates a quarter of a point
on two different occasions, June 30, 2004 and August 11, 2004. These increases were especially
significant for Bimini because REITs are especially sensitive to movements in interest rates. As
one analyst stated after completing a study on the impact of interest rates on REITs:2
Let's focus on just the price component of REIT stocks. In the exhibit below, wecompare the same 10-year Treasury bond rates to a price-only index. In otherwords, we exclude dividends and isolate only on price changes to see what wouldhappen to $100 if it were invested in 1972. Although the overall correlation isweaker, there is a strong inverse pattern over the last 15 years in the periodshown above. In fact, from the 1989 point, the chart shows a virtual mirror-imagerelationship between the price component of the REIT index and the medium-
2 David Harper, The Impact of Interest Rates on Real Estate Investment Trusts , Investopedia, Nov. 3, 2004,available at www.investopedia.com/articles/04/110304.asp.
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term interest rate. For those considering a REIT investment as of late 2004, thiswould be a "red flag for two reasons. First, in the five years preceding 2004, theindex produced an annualized gain of 18.8%, including a steep annualized gainof 26% over the two preceding years. During that period, therefore, price gains(as a percentage) exceeded fundamental gains--as measured by earnings, cashflow, or funds from operations (FFO). While such gains could be replicatedgoing forward, it is unlikely...
The 15-year period examined above shows there is a strong inverse relationshipbetween REIT prices and interest rates . On average , it would be safe to assumethat interest rate increases are likely to be met by REIT price declines.
Therefore, Bimini would have lower net interest income due to the higher interest rates3 and
would not able to grow revenues and expand profitability according to its business plan. Based
on what was already happening with Bimini's interest income and interest expenses prior to the
IPO, as well as between the period of the IPO and the SPO, as explained in detail below, at the
time of the IPO, the Company' s risk management tools were not able to mitigate the effect of the
higher interest rates, rendering Defendants' statements in the IPO Prospectus and Registration
Statement, as well as in the SPO Prospectus and Registration Statement, materially untrue and
misleading.
50. The interest rate increases were very significant for Bimini because as interest
rates rose, interest expenses as a percentage of interest income would continue increasing, unless
Bimini was able to effectively manage its costs and expenses while at the same time managing
the enormous risk that grew as leverage was added. Because Bimini's portfolio consisted of a
significant portion of fixed-rate mortgage-backed securities, it was to be expected that if Bimini
could not put a proper business plan in place to counter the effect of the interest rates, Bimini
3 See James K. Glassman, REIT It and Weep? National Review Online, May 7, 2004, available athttp://www.nationalreview.com/nrof glassman/glassman200405070747.asp (stating that because REITs borrowmoney to buy property, as interest rates increase on the debt, profits will decrease.)
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would experience reduced net income throughout the periods of high interest rates. Bimini even
acknowledged this by stating in the IPO Prospectus that "A significant portion of our portfolio
consists of fixed-rate mortgage-backed securities , which may cause us to experience reduced net
income or a loss during periods of rising interest rates.
51. Between the time of Bimini's inception in September 24, 2003 through December
31, 2003, interest income was $71,480 and interest expense was $20,086 , making interest
expense 28% of interest income . Bimini, at that point , had $225,741,161 in mortgage-backed
securities at fair value. However, for the six months ended June 30, 2004, Bimini already
increased its investment in mortgage-backed securities to $1,508 ,421,270, at fair value, and as a
result, interest expense increased to 39% of interest income.4 Therefore, Defendants' business
plan, including their "Risk Management Approach, "Leverage Strategy, "Asset Acquisition
Strategy, and "Interest Rate Risk Management was not properly working and they would not
be able to grow revenue and expand profitability with the interest rate increases , making their
statements in the IPO Prospectus and Registration Statement, as well as the SPO Prospectus and
Registration Statement, regarding those strategies and their ability to overcome the effect of the
interest rates materially untrue and misleading.
Materially Untrue and Misleading Statements in theIPO Prospectus and Registration Statement
52. In the IPO Prospectus, filed with the SEC on September 17, 2004, Defendants
expressed to investors that Bimini would be able to grow revenues and expand profitability,
despite the increasing percentage of interest expenses compared to interest income, by
employing a variety of cost controls and procedures and an array of proprietary risk-management
tools . In addition to investing only in high-grade securities collateralized by government backed
4 Interest income was $18,153,131, while interest expense was $7,080,446.
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prime mortgages as a means of controlling risk of loss, Bimini purported to employ significant
self-management and analysis, and risk-management controls and procedures that allowed it to
allegedly control costs and expand profitability.
53. The IPO Prospectus described Bimini's purported "Risk Management Approach,
in part, as follows:
Risk Management Approach
... Finally, we seek to address interest rate risks by managing the interest rateindices and borrowing periods of our debt, as well as through hedging againstinterest rate changes.
We have implemented a risk-based capital methodology patterned on the generalprinciples underlying the proposed risk-based capital standards ... We expectour risk management program to reduce our need to use hedging techniques.
54. The statements regarding the "Risk Management Approach were materially
untrue and misleading because, at the time of the IPO, the Company was unable to grow
revenues and expand profitability through their "Risk Management Approach because interest
rates were already rising and because interest expenses were already growing as a percentage of
interest income . As reported in the IPO Prospectus , between the time of Bimini's inception in
September 24, 2003 through December 31, 2003, interest income was $71,480 , and interest
expense was 20,086, making interest expense 28% of interest income. Bimini, at that point, had
invested $225,741, 161 in mortgage -backed securities, at fair value. However, for the six months
ended June 30, 2004, Bimini increased its investment in mortgage-backed securities to
$ 1,508,421,270, at fair value, which increased the interest expense to 39% of interest income.
As a result, Defendants' "Risk Management Approach was not effective in controlling costs,
decreasing interest expenses, and/or expanding profitability, in light of the increasing interest
rates, making their statements about risk management materially untrue and misleading. As a
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result of the increasing rate of short-term interest rates, which Defendants failed to disclose, at
the time of the IPO, Bimini was not operating according to plan and that its "Risk Management
Approach was working, considering that the growth in Bimini's assets was not resulting in a
growth in earnings. Further, Defendants could achieve guidance sponsored and/or endorsed by
Defendants and provided to the media or to investors in interviews, one-on-one presentations,
and road-show demonstrations preceding the IPO, considering that interest rates continued to
increase and the "Risk Management Approach was not decreasing interest expenses, as a
percentage of interest income.
55. Bimini also purported to manage risk through its "Asset Acquisition Strategy, as
follows:
Asset Acquisition Strategy
We seek to differentiate our company from other mortgage portfolio managersthrough our approach to risk management. We invest in a limited universe ofmortgage related securities, primarily those issued by Fannie Mae, Freddie Macand Ginnie Mae. Payment ofprincipal and interest underlying securities issuedby Ginnie Mae is guaranteed by the U.S. Government. Fannie Mae and FreddieMac mortgage related securities are guaranteed as to payment of principal andinterest by the respective agency issuing the security ...
The primary assets in our current portfolio of mortgage related securities arefixed-rate mortgage-backed securities , floating rate collateralized mortgageobligations, adjustable-rate mortgage-backed securities, hybrid adjustable-ratemortgage-backed securities and balloon maturity mortgage-backed securities.The mortgage related securities we acquire are obligations issued by federalagencies or federally chartered entities, primarily Fannie Mae, Freddie Macand Ginnie Mae.
... By maintaining essentially all of our assets in government or government-sponsored or chartered enterprises and government or federal agencies, whichmay include an implied guarantee of the federal government as to payment ofprincipal and interest, we believe we can significantly reduce our exposure tolosses from credit risk . ..[Emphasis added.]
18
Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008 Page 19 of 107
56. The statements regarding the "Asset Acquisition Strategy were materially untrue
and misleading because, prior to the IPO, it was already the case that Defendants would not be
able to grow revenues or expand profitability through their "Asset Acquisition Strategy and that
Bimini's growth in assets was not resulting in a growth in revenues, as a result of Bimini's
failure to mitigate against the increasing interest rates. In addition, prior to the IPO, the
Company's strategy of investing in securities collateralized by government backed prime
mortgages as a way to control risk of loss was not working to decrease interest expense, as a
result of the increasing interest rates. Further, because Bimini's primary assets included fixed-
rate mortgage-backed securities, it was to be expected that if Bimini could not put a proper
business plan in place to counter the effect of the interest rates, Bimini would experience even
more reductions in net income throughout the periods of high interest rates, which were likely to
increase even more after the two increases in June 2004 and August 2004. Between the time of
Bimini's inception in September 24, 2003 through December 31, 2003, interest income was
$71,480 and interest expense was 20,086, making interest expense 28% of interest income.
Bimini, at that point , had $225,741,161 in mortgage-backed securities at fair value. However,
for the six months ended June 30, 2004, Bimini already had $1,508,421,270 in mortgage-backed
securities, at fair value, and interest expense increased to 39% of interest income. As a result of
the aforementioned adverse conditions, including the increasing rate of short-term interest rates,
Defendants' statements regarding their "Asset Acquisition Strategy, and its ability to control
costs and expand profitability were materially untrue and misleading. Bimini was not operating
according to its "Asset Acquisition Strategy, considering that the growth in Bimini's assets was
not resulting in a growth in earnings. Defendants further had no reasonable basis to claim that
the Company could achieve guidance sponsored and/or endorsed by Defendants and provided to
19
Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008 Page 20 of 107
the media or to investors in interviews, one-on-one presentations, and road-show demonstrations
preceding the IPO, especially as interest rates continued to increase.
57. Regarding Bimini's "Leverage Strategy, the IPO Prospectus, stated, in relevant
part, as follows:
Leverage Strategy
We seek to protect our capital base through the use of a risk-based capitalmethodology that is patterned on the general principles underlying theproposed risk-based capital standard for internationally active banks of theBasel Committee on Banking Supervision. We use our methodology to calculatean internally generated risk measure for each asset in our portfolio. This measureis then used to establish the amount of leverage we use . The goal of ourapproach is to ensure that our portfolio 's leverage ratio is appropriate for thelevel ofrisk inherent in theportfolio. [Emphasis added].
58. The statements regarding the "Leverage Strategy were materially untrue and
misleading because Defendants would not able to grow revenues or generate profits simply by
obtaining more leverage through their "Leverage Strategy, and growth in assets was not
resulting in a growth in profits. Between the time of Bimini's inception in September 24, 2003
through December 31, 2003, interest income was $71,480 and interest expense was 20,086,
making interest expense 28% of interest income . Bimini, at that point , had $225,741,161 in
mortgage-backed securities at fair value. However, for the period ended September 30, 2004,
Bimini's interest expense increased to 39% of interest income, while Bimini's investment in
mortgage-backed securities increased to $1,638,264,065. Therefore, Defendants' "Leverage
Strategy was not effective in controlling costs, expanding profitability, or countering the effect
of the interest rates , and their statements to that effect in the IPO Prospectus were materially
untrue and misleading. As a result of the aforementioned adverse conditions, including the
increasing rate of short-term interest rates, at the time of the IPO, Defendants lacked any
reasonable basis to claim that Bimini was operating according to its "Leverage Strategy because
20
Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008 Page 21 of 107
growth in Bimini's assets was not resulting in a growth in earnings . Moreover, Defendants
lacked any reasonable basis to claim that Bimini could achieve guidance sponsored and/or
endorsed by Defendants and provided to the media or to investors in interviews, one-on-one
presentations, and road-show demonstrations preceding the IPO, especially as interest rates
continued to increase.
59. Bimini also purported to use "Interest Rate Risk Management as a component of
its overall risk-management strategy for countering market risk, through various management
techniques including, in part, the following:
Interest Rate Risk Management
We believe the primary risk inherent in our investments is the effect ofmovements in interest rates. This arises because the changes in interest rates onour borrowings will not be perfectly coordinated with the effects of interest ratechanges on the income from, or value of, our investments. We therefore followan interest rate risk management program designed to offset the potentialadverse effects resulting from the rate adjustment limitations on our mortgagerelated securities. We seek to minimize differences between interest rate indicesand interest rate adjustment periods of our adjustable-rate mortgage-backedsecurities and related borrowings by matching the terms of assets and relatedliabilities both as to maturity and to the underlying interest rate index used tocalculate interest rate charges.
Our interest rate risk management program encompasses a number ofprocedures, including thefollowing:
• monitoring and adjusting, if necessary, the interest rate sensitivity ofour mortgage related securities compared with the interest rate sensitivities ofour borrowings.
• attempting to structure our repurchase agreements that fund ourpurchases of adjustable-rate mortgage-backed securities to have a range ofdifferent maturities and interest rate adjustment periods...
• actively managing, on an aggregate basis, the interest rate indices andinterest rate adjustment periods ofour mortgage related securities compared tothe interest rate indices and adjustment periods of our borrowings.....
21
Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008 Page 22 of 107
As a result, we expect to be able to adjust the average maturities and resetperiods of our borrowings on an ongoing basis by changing the mix ofmaturities and interest rate adjustment periods as borrowings mature or arerenewed Through the use of these procedures, we attempt to reduce the risk ofdifferences between interest rate adjustment periods of our adjustable-ratemortgage-backed securities and our related borrowings. [Emphasis added.]
60. The statements made regarding the "Interest Rate Risk Management were
materially untrue and misleading because, prior to the IPO, it was already the case that
Defendants would not be able to grow revenue and expand profitability through their "Interest
Rate Risk Management because REIT are expected to exhibit sensitivity to interest rate
changes. The ability to generate profits simply by raising more money and obtaining more
leverage was already in jeopardy.5 Further, because Bimini was primarily invested in fixed-rate
mortgage-backed securities, it would be especially sensitive to interest rate movements. As
reported in the IPO Prospectus, between the time of Bimini's inception in September 24, 2003
through December 31, 2003, interest income was $71,480 and interest expense was $20,086, thus
interest expense was 28% of interest income. Bimini, at that point , had $225,741,161 in
mortgage-backed securities at fair value. However, for the six months ended June 30, 2004,
Bimini had increased its investment to $1,508,421,270 in mortgage-backed securities , at fair
value, and interest expense increased to 39% of interest income, indicating the Company's
"Interest Rate Risk Management was not effective to mitigate the effects of the increasing
interest rates, making their statements to that effect materially untrue and misleading. As a
result of the aforementioned adverse conditions, Bimini was not operating according to its
"Interest Rate Risk Management plan and could mitigate against the effect of the increasing
5 "Even if the strength of the link between changes in interest rates and changes in REIT share pricesremains debatable, there is little doubt that , when interest rates rise, some other investments become relatively moreattractive , and those investors that have rotated into REITs for the yield may reallocate some of their REITinvestments into those other sectors . Steve Bergman , REITs & Rates, National Association of Real EstateInvestment Trusts , Sept./Oct. 2004 , available at http ://www.nareit.com/portfoliomag/04sepoct/feat2 . shtml.
22
Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008 Page 23 of 107
interest rates, considering that the growth in Bimini's assets was not resulting in a growth in
earnings, and interest expense continued to increase, as a percentage of interest income.
Defendants also lacked any reasonable basis to claim that they could achieve guidance sponsored
and/or endorsed by Defendants and provided to the media or to investors in interviews, one-on-
one presentations, and road-show demonstrations preceding the IPO, especially as interest rates
continued to increase.
61. Further supporting the fact that the Company needed to take steps to overcome
the impact of the increasing interest rates prior to the IPO, on July 25, 2005, Defendant Zimmer,
commenting on the Q2:05 results stated, in part , as follows:
...the second quarter was a period when very short-term rates went up, resultingin lower net interest income compared with the first quarter of 2005. TheCompany began over a year ago to take steps to mitigate the continuedimpact of further interest rate movements initiated by the Federal Reserve[which is prior to the IPO] by adding a greater proportion of adjustable-ratesecurities to the portfolio. But there is no assurance that net interest spreads willnot be compressed further. [Emphasis added.]
Further, on February 23, 2006, Defendant Zimmer, commenting on the Q4:05 and full year
results stated, in part, as follows:
The Opteum Board of Directors is pleased to be able to pay favorable dividends,but we are eagerly anticipating the time when the increases in short term fundingrates comes to a halt. The fourth quarter, as well as the entire year 2005, was aperiod when very short-term rates went up dramatically resulting in lower netinterest income as compared with the fourth quarter of 2004 and the year 2004.The Company, in its REIT operations, began over 19 months ago [which isprior to the IPOJ to take steps to mitigate the continued impact of furtherinterest rate movements initiated by the Federal Reserve by adding a greaterproportion of adjustable-rate securities to the Company's REIT portfolio.However, we still cannot give any assurances that net interest spreads will not becompressed further. [Emphasis added.]
Therefore, even prior to the IPO, steps were necessary to mitigate the effects of the increasing
interest rates because interest expense as a percentage of interest income was continuingly rising.
23
Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008 Page 24 of 107
Yet, even seeing that their plan was not effective to control costs and expand profitability,
Defendants made materially untrue and misleading statements in the IPO Registration and
Prospectus stating that they would be able to grow revenues and expand profitability by
following the plan that had previously proven not to work even though they lacked any
reasonable basis to make that claim, especially as interest rates continued to increase.
62. On June 14, 2004, Steve Sakwa, Merrill Lynch's senior REIT analyst, stated that
"while we are not in the business of forecasting interest rates, we believe that the general
direction is up over the next six to 12 months. Hence, we believe it is reasonable to assume the
sector [REIT] could experience [a further negative impact] if long-term interest rates move
higher during the second half of 2004.
63. The increases implemented by the Federal Reserve are summarized below:
eStated Feder al Fu nds Rate
4 5.
42 5.
a
2 5.
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24
Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008 Page 25 of 107
ChangeLevel
Date (Basis Points)(Percent)Increase Decrease
2006December 12 .. .. 5.25October 25 .. .. 5.25September 20 .. .. 5.25August 8 .. .. 5.25June 29 25 .. 5.25May 10 25 .. 5.00March 28 25 .. 4.75January 31 25 .. 4.50
2005December 13 25 ... 4.25November 1 25 ... 4.00September 20 25 ... 3.75August 9 25 ... 3.50June 30 25 ... 3.25May 3 25 ... 3.00March 22 25 ... 2.75February 2 25 ... 2.50
2004December 14 25 ... 2.25November 11 25 ... 2.00September 21 25 ... 1.75August 11 25 ... 1.50June 30 25 ... 1.25
64. The IPO occurred during Q3:04 when interest income was $11 million, while
interest expense was $4.3 million, with earnings of $0.51 per share (expenses were 39% of
income). By Q4: 04, interest expense had grown to over 53% of interest income, almost twice
the size compared to a year earlier . Thus, despite the fact that by Q4:04 Defendants had raised
over $80 million that they invested into almost $1.5 billion more of mortgage backed securities,
the growth in assets was not resulting in a growth in earnings. In fact, whereas Bimini had
earned $0.57 per share in Q2:04 (at a time Bimini had only $1.05 billion of mortgage backed
securities at fair value), by Q4:04 Bimini earned only $0 .44 per share on mortgage backed
securities fairly valued at $2.97 billion.
65. However, regardless of the apparent weakness in Bimini's plan and despite the
other adverse conditions that existed at that time which would prevent it from achieving the near-
25
Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008 Page 26 of 107
term guidance sponsored and endorsed by Defendants, in December 2004, Defendants proceeded
with an SPO and continued to state that Bimini would be able to grow revenues and expand
profitability, despite the ever increasing percentage of interest expenses relative to interest
income, by continuing to implement its various controls and risk-management procedures that
have proven not to be working, as made clear by the reported low earnings per share, and the
continuing increases in interest expense as a percentage of interest income. Thus, in addition to
purportedly investing only in high-grade securities collateralized by government-backed prime
mortgages as a means of controlling risk of loss, Bimini also continued to purport to employ
significant self-management and analysis tools that were supposed to allow Defendants and
Bimini to control costs and expand profitability.
Materially Untrue and Misleading Statementsin the SPO Prospectus and Registration Statement
66. On December 16, 2004, Bimini completed its SPO of 4 million shares of common
stock to investors in the open market at $15 . 50 per share . The SPO was a financial success for
Bimini as it managed to raise gross proceeds of over $66 million . In connection with the SPO,
Bimini filed a Registration Statement and Prospectus.
67. Bimini reported that it intended to use the proceeds from the SPO to invest in
residential mortgage-related securities similar to those already owned by Bimini, primarily those
issued by Fannie Mae, Freddie Mac and Ginnie Mae. Bimini also stated that "[u]ntil the funds
are needed for such purposes , the Company will invest the net proceeds in interest-bearing,
short-term investment grade securities or money market accounts consistent with maintenance of
its qualification as a REIT.
68. The SPO Registration Statement and Prospectus , filed with the SEC on or about
December 16, 2004, represented to investors that Bimini continued to maintain an adequate
26
Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008 Page 27 of 107
"Asset Acquisition Strategy, "Interest Rate Risk Management, and "Leverage Strategy that
continued to purport to allow Bimini to operate according to plan despite increasing interest
expenses. As evidence of this, the SPO Registration Statement and Prospectus contained
statements that were substantially similar to, or the same as, those statements contained in the
Bimini's IPO Prospectus and Registration Statement.
69. Regarding Bimini's "Asset Acquisition Strategy, the Prospectus, in relevant part,
stated:
Asset Acquisition StrategyWe seek to differentiate our company from other mortgage portfolio managersthrough our approach to risk management. We invest in a limited universe ofmortgage related securities, primarily those issued by Fannie Mae, Freddie Macand Ginnie Mae. Payment ofprincipal and interest underlying securities issuedby Ginnie Mae is guaranteed by the U.S. Government. Fannie Mae and FreddieMac mortgage related securities are guaranteed as to payment of principal andinterest by the respective agency issuing the security ...
The primary assets in our current portfolio of mortgage related securities arefixed-rate mortgage-backed securities , floating rate collateralized mortgageobligations, adjustable-rate mortgage-backed securities, hybrid adjustable-ratemortgage-backed securities and balloon maturity mortgage-backed securities.The mortgage related securities we acquire are obligations issued by federalagencies or federally chartered entities, primarily Fannie Mae, Freddie Macand Ginnie Mae.
... By maintaining essentially all of our assets in government or government-sponsored or chartered enterprises and government or federal agencies, whichmay include an implied guarantee of the federal government as to payment ofprincipal and interest, we believe we can significantly reduce our exposure tolosses from credit risk . ..[Emphasis added.]
70. The statements regarding the "Asset Acquisition Strategy were materially untrue
and misleading because, prior to the SPO, as a result of Bimini's failure to mitigate against the
increasing interest rates , the Company would not able to grow revenues or expand profitability
through their "Asset Acquisition Strategy and Bimini's growth in assets was not resulting in a
27
Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008 Page 28 of 107
growth in revenues . The Company 's strategy of investing in securities collateralized by
government backed prime mortgages as a way to control risk of loss was not working to decrease
interest expense, as a result of the increasing interest rates. Further, because Bimini's primary
assets included fixed-rate mortgage-backed securities, it was to be expected that if Bimini could
not put a proper business plan in place to counter the effect of the interest rates, Bimini would
experience even more reductions in net income throughout the periods of high interest rates,
which were likely to increase even more after the five recent increases in June 2004, August
2004, September 2004, November 2004, and December 2004. Between the time of Bimini's
inception in September 24, 2003 through December 31, 2003, interest income was $71,480 and
interest expense was 20,086, making interest expense 28% of interest income. Bimini, at that
point, had $225,741,161 in mortgage-backed securities at fair value. However, for the period
ended September 30, 2004, Bimini's interest expense increased to 39% of interest income, with
$1,638,264,065 invested in mortgage-backed securities.
71. As a result of the aforementioned adverse conditions, including the increasing rate
of short-term interest rates, Defendants' statements regarding their "Asset Acquisition Strategy,
and its ability to control costs and expand profitability were materially untrue and misleading.
Defendants lacked any reasonable basis to claim that Bimini was operating according to its
"Asset Acquisition Strategy, considering that the growth in the Bimini's assets was not resulting
in a growth in earnings . Defendants further had no reasonable basis to claim that the Company
could achieve guidance sponsored and/or endorsed by Defendants and provided to the media or
to investors in interviews, one-on-one presentations, and road-show demonstrations preceding
the SPO, especially as interest rates continued to increase.
28
Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008 Page 29 of 107
72. Regarding Bimini's "Leverage Strategy, the SPO Prospectus, stated, in relevant
part, as follows:
Leverage Strategy
We seek to protect our capital base through the use of a risk-based capitalmethodology that is patterned on the general principles underlying theproposed risk-based capital standard for internationally active banks of theBasel Committee on Banking Supervision. We use our methodology to calculatean internally generated risk measure for each asset in our portfolio. This measureis then used to establish the amount of leverage we use. The goal of ourapproach is to ensure that our portfolio 's leverage ratio is appropriate for thelevel ofrisk inherent in theportfolio. [Emphasis added].
73. The statements regarding the "Leverage Strategy, which were identical to the
statements in the IPO Prospectus were materially untrue and misleading because Defendants
would not able to grow revenues or generate profits simply by obtaining more leverage through
their "Leverage Strategy, and growth in assets was not resulting in a growth in profits. Between
the time of Bimini's inception in September 24, 2003 through December 31, 2003 , interest
income was $71,480 and interest expense was 20,086, making interest expense 28% of interest
income . Bimini, at that point , had $225,741,161 in mortgage-backed securities at fair value.
However, for the period ended September 30, 2004, Bimini's interest expense increased to 39%
of interest income , while Bimini's investment in mortgage-backed securities increased to
$1,638,264,065. Therefore, the Company's "Leverage Strategy was not effective in controlling
costs , expanding profitability, or countering the effect of the interest rates , and their statements to
that effect in the SPO Prospectus were materially untrue and misleading. As a result of the
aforementioned adverse conditions, including the increasing rate of short-term interest rates, at
the time of the SPO, Defendants lacked any reasonable basis to claim that Bimini was operating
according to its "Leverage Strategy because growth in Bimini's assets was not resulting in a
growth in earnings. Moreover, Defendants lacked any reasonable basis to claim that Bimini
29
Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008 Page 30 of 107
could achieve guidance sponsored and/or endorsed by Defendants and provided to the media or
to investors in interviews, one-on-one presentations, and road-show demonstrations preceding
the SPO, especially as interest rates continued to increase.
74. With regard to Bimini's strategies for countering market risk, the Prospectus, in
relevant part, stated:
Interest Rate Risk Management
We believe the primary risk inherent in our investments is the effect ofmovements in interest rates. This arises because the changes in interest rates onour borrowings will not be perfectly coordinated with the effects of interest ratechanges on the income from, or value of, our investments. We therefore followan interest rate risk management program designed to offset the potentialadverse effects resulting from the rate adjustment limitations on our mortgagerelated securities. We seek to minimize differences between interest rate indicesand interest rate adjustment periods of our adjustable-rate mortgage-backedsecurities and related borrowings by matching the terms of assets and relatedliabilities both as to maturity and to the underlying interest rate index used tocalculate interest rate charges.
Our interest rate risk management program encompasses a number ofprocedures, including thefollowing:
• monitoring and adjusting, if necessary, the interest rate sensitivity ofour mortgage related securities compared with the interest rate sensitivities ofour borrowings.
• attempting to structure our repurchase agreements that fund ourpurchases of adjustable-rate mortgage-backed securities to have a range ofdifferent maturities and interest rate adjustment periods...
• actively managing, on an aggregate basis, the interest rate indices andinterest rate adjustment periods ofour mortgage related securities compared tothe interest rate indices and adjustment periods of our borrowings.....
As a result, we expect to be able to adjust the average maturities and resetperiods of our borrowings on an ongoing basis by changing the mix ofmaturities and interest rate adjustment periods as borrowings mature or arerenewed Through the use of these procedures, we attempt to reduce the risk ofdifferences between interest rate adjustment periods of our adjustable-ratemortgage-backed securities and our related borrowings. [Emphasis added.]
30
Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008 Page 31 of 107
75. The statements made regarding the "Interest Rate Risk Management were
materially untrue and misleading because, prior to the SPO, it was already the case that the
Company would not be able to grow revenue and expand profitability through their "Interest
Rate Risk Management because REITs are expected to exhibit sensitivity to interest rate
changes and their ability to generate profits simply by raising more money and obtaining more
leverage was already in jeopardy. Further, because Bimini was primarily invested in fixed-rate
mortgage-backed securities, it was especially sensitive to interest rate movements. Between the
time of Bimini's inception in September 24, 2003 through December 31, 2003, interest income
was $71,480 and interest expense was 20,086, making interest expense 28% of interest income.
Bimini, at that point , had $225,741,161 in mortgage-backed securities at fair value. However,
for the period ended September 30, 2004, Bimini's interest expense increased to 39% of interest
income, with an increase of its investment in mortgage-backed securities to $1,638,264,065,
which should have signaled to the Defendants that their "Interest Rate Risk Management was
not effective to mitigate the effects of the increasing interest rates , making their statements to
that effect false and misleading.
76. As a result of the aforementioned adverse conditions, Defendants lacked any
reasonable basis to claim that Bimini was operating according to its "Interest Rate Risk
Management plan and could mitigate against the effect of the increasing interest rates,
considering that the growth in Bimini's assets was not resulting in a growth in earnings, and
interest expense continued to increase, as a percentage of interest income. Defendants also
lacked any reasonable basis to claim that they could achieve guidance sponsored and/or endorsed
by Defendants and provided to the media or to investors in interviews, one-on-one presentations,
31
Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008 Page 32 of 107
and road-show demonstrations preceding the SPO, especially as interest rates continued to
increase.
77. In fact, prior to the SPO, it was already clear that Defendants needed to take steps
to overcome the impact of the increasing interest rates. On July 25, 2005, Defendant Zimmer,
commenting on the Q2:05 results stated, in part , as follows:
...the second quarter was a period when very short-term rates went up, resultingin lower net interest income compared with the first quarter of 2005. TheCompany began over a year ago to take steps to mitigate the continuedimpact of further interest rate movements initiated by the Federal Reserve[which is prior to the IPO and SPO] by adding a greater proportion of adjustable-rate securities to the portfolio. But there is no assurance that net interest spreadswill not be compressed further. [Emphasis added].
Further, on February 23, 2006, Defendant Zimmer, commenting on the Q4:05 and full year
results stated, in part, as follows:
The Opteum Board of Directors is pleased to be able to pay favorable dividends,but we are eagerly anticipating the time when the increases in short term fundingrates comes to a halt. The fourth quarter, as well as the entire year 2005, was aperiod when very short-term rates went up dramatically resulting in lower netinterest income as compared with the fourth quarter of 2004 and the year 2004.The Company, in its REIT operations, began over 19 months ago [which isprior to the IPO and SPOJ to take steps to mitigate the continued impact offurther interest rate movements initiated by the Federal Reserve by adding agreater proportion of adjustable-rate securities to the Company's REIT portfolio.However, we still cannot give any assurances that net interest spreads will not becompressed further. [Emphasis added.]
Therefore, even prior to the SPO, it was foreseeable that the Company would have to take steps
to mitigate the effects of the increasing interest rates because interest expense as a percentage of
interest income was continuingly rising. Yet, Defendants made materially untrue and misleading
statements in the SPO Registration and Prospectus stating that they would be able to grow
revenues and expand profitability by following the plan that had previously proven not to work
even though they lacked any reasonable basis to claim that Bimini would be able to achieve
32
Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008 Page 33 of 107
guidance sponsored and/or endorsed by Defendants and provided to the media or to investors in
interviews, one-on-one presentations, and road-show demonstrations preceding this SPO,
especially as interest rates continued to increase.
78. In addition to the foregoing, as interest rates continued to rise6 and Bimini
continued to invest in mortgage backed securities, following the SPO, Bimini's earning per share
declined and the interest expenses as a percentage of income continued to rise. As reported, in
Q1:05, Bimini acquired $3.3 billion of mortgage-backed securities. Interest income was $31.1
million and interest expense was $19.8 million for the first quarter of 2005. Earnings per share
were $0.52. For Q2:05, Bimini reported that it had acquired over $3.90 billion in mortgage-
backed securities reported at fair value, yet earnings per share had fallen all the way to $0.39 per
share, a decline of 25% sequentially. Further, interest income was $36.7 million and interest
expense was $26.5 million for the second quarter of 2005, making interest expenses 72% of
interest income.
September 30,2004
December 31,2004
March 31 ,2005
June 30,2005
September30,2005
December 31,
2005Interest income 11,017 20,463 31,070 36,749 43,574 49,248
Interest expense 4,253 10,824 19,842 26,453 33,509 43,854
Interest Expense as a% of Interest Income
39% 53 % 64% 72% 77% 89%
The Truth Is Revealed Re2ardin2 the IPO and SPO
79. The Securities Act Class Period ends on July 24, 2005. The following day, on
July 25, 2005, Bimini issued a press release reporting its Q2:05 results. The press release stated,
in part, as follows:
As of June 30, 2005, the Company held $3.9 billion of mortgage-backedsecurities at fair value. Interest income was $36.7 million and interest expense
6 Beginning in January 2005, the Federal Reserve's persistent rate increases led to a flattening yield curve asshort-term rates rose faster than long-term rates, and consequently led to an industry wide decline in spread income.
33
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was $26.5 million for the second quarter of 2005. As of June 30, 2005, theweighted average yield on assets was 3.81 % and the weighted average borrowingcost was 3.14%. The weighted average constant prepayment rate for the portfoliowas 28.4% for June 2005. The effective duration of the portfolio at the end of thesecond quarter was 0.57.
80. Commenting on the results , Defendant Zimmer, stated:
...However, the second quarter was a period when very short-term rates wentup, resulting in lower net interest income compared with the first quarter of 2005.The Company began over a year ago to take steps to mitigate the continuedimpact offurther interest rate movements initiated by the Federal Reserve byadding a greater proportion of adjustable-rate securities to the portfolio. Butthere is no assurance that net interest spreads will not be compressed further.[Emphasis added.]
81. Bimini's disclosure that interest expense was now 72% of interest income, on top
of Bimini's disclosure that its business plan from over a year ago has not actually worked to
mitigate the impact of interest rate increases and that Bimini was not making any assurances that
interest expenses would not further increase, caused Bimini's stock to drop from a close of
$14.15 per share on July 22, 2005 to a low of $12.26 per share on August 23, 2005.
82. Then on August 24, 2005 , Bimini issued another press release , in which
Defendant Zimmer, stated, in relevant part, as follows:
However, continued aggressive increases in the Federal Funds Target Rate willinevitably put pressure on earnings to the extent that our funding rates increasefaster than the income on our adjustable rate mortgage related assets. Inparticular, while yields on our adjustable rate assets will ultimately move inresponse to movements in short term rates, they will do so with a lag owing toreset frequencies that are often greater than monthly and owing to interim andlifetime securities maximum coupon reset rates that may preclude a security fromachieving its fully indexed rate.
83. On the news that the interest rates were still greatly affecting Bimini's earnings,
the stock continued to drop to a low of $12.30 on August 29, 2005.
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84. From July 25, 2005 (the time the Company reported results for Q2:05) through
the beginning of end of August 2005, shares of the Company declined precipitously, as indicated
by the chart below:
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85. The disclosures in the press releases made it clear that Bimini's risk management
approach was not adequately protecting investors against loss and Bimini was not operating
according to its own plan that it put in place prior to the IPO and the SPO, when it was already
the case that the business plan was not effective and would not be effective to mitigate the effect
of the interest rates on Bimini's revenues.
SECURITIES ACT CLAIMS:CLASS ACTION ALLEGATIONS
86. The Securities Act Plaintiffs bring this action as a class action pursuant to Federal
Rule of Civil Procedure 23(a) and (b)(3) on behalf of themselves and the Securities Act Class,
consisting of all those who purchased or otherwise acquired the common stock of Opteum in, in
connection with, or traceable to, the IPO and/or SPO, and who were damaged thereby. Excluded
from the Securities Act Class are Defendants, the officers and directors of the Company at all
relevant times, members of their immediate families and their legal representatives, heirs,
successors , or assigns and any entity in which Defendants have or had a controlling interest.
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87. The members of the Securities Act Class are so numerous that joinder of all
members is impracticable. Throughout the Class Period, Opteum common shares were actively
traded on the New York Stock Exchange ("NYSE ). As of December 18 , 2006, the Company
had over 24.513 million shares of common stock issued and outstanding. While the exact
number of Securities Act Class members is unknown to Securities Act Plaintiffs at this time and
can only be ascertained through appropriate discovery, Securities Act Plaintiffs believe that there
are hundreds or thousands of members in the proposed Class. Record owners and other members
of the Securities Act Class may be identified from records maintained by Opteum or its transfer
agent and may be notified of the pendency of this action by mail, using the form of notice similar
to that customarily used in securities class actions.
88. The Securities Act Plaintiffs' claims are typical of the claims of the members of
the Securities Act Class as all members of the Securities Act Class are similarly affected by
Defendants' violations of the Securities Act that is complained of herein.
89. The Securities Act Plaintiffs will fairly and adequately protect the interests of the
members of the Securities Act Class and have retained counsel competent and experienced in
class and securities litigation.
90. Common questions of law and fact exist as to all members of the Securities Act
Class and predominate over any questions solely affecting individual members of the Securities
Act Class. Among the questions of law and fact common to the Class are:
(a) whether the Securities Act of 1933 was violated by Defendants' acts as
alleged herein;
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(b) whether the Registration Statement and/or Prospectus issued in connection
with the IPO and/or SPO contained materially untrue and misleading statements and/or
omissions; and,
(c) to what extent the members of the Securities Act Class have sustained
damages and the proper measure of damages.
91. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as
the damages suffered by individual Securities Act Class members may be relatively small, the
expense and burden of individual litigation make it impossible for members of the Securities Act
Class to individually redress the wrongs done to them. There will be no difficulty in the
management of this action as a class action.
NO SAFE HARBOR FOR SECURITIES ACT CLAIMSFOR STATEMENTS ISSUED IN CONNECTION WITH THE OFFERINGS
92. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly materially untrue statements and omissions
pleaded in the Securities Act claims, including to statements made in connection with the initial
public offering. 15 U.S.C. § 77z-2(b)(2)(D). Moreover, any 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.
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COUNT IV
(Against the Company, Underwriter Defendants , and Individual DefendantsZimmer, Cauley, Bespolka, Hendricks, Mortenson, and Ortale)
For Violation of Section 12(a)(2) of the Securities Act
93. Securities Act Plaintiffs repeat and reallege each and every allegation contained
above as if fully set forth herein only to the extent, however, that such allegations do not allege
fraud, scienter or the intent of the Defendants to defraud Securities Act Plaintiffs or members of
the Securities Act Class. This Count is brought pursuant to Section 12(a)(2) of the Securities
Act. Defendants were sellers, offerors, and/or solicitors of purchasers of the shares offered
pursuant to the Opteum IPO and/or SPO Registration Statement and Prospectus.
94. The Registration Statements and Prospectuses contained untrue statements of
material facts, omitted to state other facts necessary to make the statements made not misleading,
and failed to disclose material facts. The Individual Defendants' actions of solicitation include
participating in the preparation of the materially untrue and misleading IPO and/or SPO
Registration Statements and Prospectuses.
95. Defendants owed to the purchasers of Opteum's common stock, including
Securities Act Plaintiffs and other members of the Securities Act Class, the duty to make a
reasonable and diligent investigation of the statements contained in the IPO and SPO materials,
including the Registration Statements and Prospectuses, to ensure that such statements were true
and that there were no omissions to state a material fact required to be stated in order to make the
statements contained therein not misleading.
96. Securities Act Plaintiffs and other members of the Securities Act Class purchased
or otherwise acquired Opteum's common stock pursuant to and/or traceable to the defective
Registration Statements or Prospectuses. Securities Act Plaintiffs did not know, or in the
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exercise of reasonable diligence could not have known, of the untruths and omissions contained
in the Registration Statements and Prospectuses.
97. Securities Act Plaintiffs, individually and representatively, hereby offer to tender
to Defendants that common stock which Securities Act Plaintiffs and other Securities Act Class
members continue to own, on behalf of all members of the Securities Act Class who continue to
own such common stock, in return for the consideration paid for that common stock together
with interest thereon. Securities Act Class members who have sold their Opteum common stock
are entitled to rescissory damages.
98. By reason of the conduct alleged herein, Defendants violated, and/or controlled a
person who violated Section 12(a)(2) of the Securities Act. Accordingly, Securities Act
Plaintiffs and members of the Securities Act Class who hold Opteum common stock purchased
in the IPO or SPO have the right to rescind and recover the consideration paid for their Opteum
common stock, and hereby elect to rescind and tender their Opteum common stock to the
defendants sued herein. Securities Act Plaintiffs and Securities Act Class members who have
sold their Opteum common stock are entitled to rescissory damages.
99. This action is brought within three years from the time that the common stock
upon which this Count is brought was sold to the public, and within one year from the time when
Securities Act Plaintiffs discovered or reasonably could have discovered the facts upon which
this Count is based.
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COUNT V
(Against the Individual Defendants Zimmer, Cauley, Bespolka,Hendricks, Mortenson, and Ortale)
For Violation of Section 15 of the Securities Act
100. Securities Act Plaintiffs repeat and reallege each and every allegation contained
above as if fully set forth herein only to the extent, however, that such allegations do not allege
fraud, scienter, or the intent of the Defendants to defraud Securities Act Plaintiffs or members of
the Securities Act Class.
101. Each of the Individual Defendants was a control person of the Company by virtue
of his/her position as a director and/or senior officer of the Company or as a result of their large
equity interest. The Individual Defendants each had a series of direct and/or indirect business
and/or personal relationships with other directors, officers, and/or major shareholders of the
Company.
102. Each of the Individual Defendants is liable for violating Section 15 of the
Securities Act based on their ability to control the Company, which violated Section 11 of the
Securities Act as alleged above. This ability stems from their management positions and/or
ability to control those persons in management positions, access to information regarding the
Company's operations and/or financial condition, ability to cause and direct the dissemination of
that information, and/or the ability to prevent the issuance of, correct, or cause to be corrected,
the misleading statements in the Registration Statement.
103. The Individual Defendants, by reason of their positions with the Company, were
controlling persons of the Company and are liable under Section 15 of the Securities Act.
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104. By virtue of the conduct alleged herein, Defendants are liable for the aforesaid
violations and are liable to Securities Act Plaintiffs and the Securities Act Class for damages
suffered.
OVERVIEW OF THE EXCHANGE ACT CLAIMS
Background to Bimini's Acquisition of OFS
105. Against a background of receding net interest margins and rate spreads, and a
declining stock price, on September 29, 2005, Bimini announced its intention to purchase OFS
after watching its stock decline to about $12.00 per share from a near-term high of almost $16.00
in early March 2005 , mere months after the 2004 Offerings. After a purported due diligence, on
November 3, 2005, Bimini acquired OFS which, upon the closing of the transaction, became a
wholly-owned taxable REIT subsidiary of Bimini.
106. Although due diligence was a critical component of the merger, and this was
supposed to provide investors with important safeguards and protections, Defendants completely
abandoned their duties in this regard. Defendants' purported significant pre-merger "due
diligence investigation into OFS and its lending and mortgage business and operations was, as
evident when the truth became known, a canard. One confidential witness ("CW ), CW2, who
worked as an assistant vice-president and operations manager in the California office throughout
the Class Period, confirmed that Bimini never performed due diligence in Opteum's California
office, which was responsible for at least 40% of the business . As CW2 recounts, "I thought it
was extremely odd considering how much business we did. Another confidential witness,
CW9, a loan officer with management responsibilities who worked closely with Alex Koutouzis,
one of Opteum's co-founders during the relevant time period, also confirmed that there was no
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due diligence done in Atlanta when Bimini bought Opteum in 2005 . CW9 further indicated, "I
don't think they were diligent about their due diligence, that's the truth.
107. In any event, after the merger transaction, on February 10, 2006, in an effort to
more fully leverage OFS's national brand identity, Bimini changed its name to Opteum Inc. and
the merged entity would undertake both mortgage-backed securities (Bimini's forte) and
origination and securitization . As noted by Defendant Zimmer in a conference call held with
analysts and investors on September 30, 2005:
When Bimini's RMBS investment business is combined with Opteum's mortgagebanking business, we expect that the negative effect of movements in short-termfunding rates will be diminished. The combined Company will have greaterflexibility to operate profitably by having a cash flow REIT subsidiary.
108. At the time the OFS transaction was announced, Defendant Zimmer stated in a
release issued on September 29, 2005 that the OFS acquisition represented "an excellent
opportunity for both companies. From our standpoint, we are diversifying our revenue stream
while remaining in our area of expertise - the residential mortgage market. At the same time,
we are establishing a broader base for future growth." This release continued, "We can
continue to grow as opportunities present themselves as part of this very well run publicly held
company and attract capital at more favorable rates . That in turn will create new jobs and
improved opportunities for our existing associates . [Emphasis added.]
109. While Defendants publicly stated that the combination of Bimini and OFS was
likely to produce synergies, new revenue streams , new jobs, and additional value for
shareholders, in fact OFS was a company with a radically different - and much higher risk -
business plan than Bimini . Unlike Bimini (that traditionally invested only in assets collateralized
by government-backed mortgages) OFS invested in non-guaranteed, high risk, subprime, no-
document, limited-document, and interest-only high loan-to-value ratio mortgages.
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110. OFS was an extremely aggressive subprime mortgage lender that had engaged in,
and was continuing to engage in, untested and very speculative loan originations, including
adjustable rate Interest Only ("IO ) loans to subprime borrowers. Thus, while loan products like
IO loans historically have been reserved for conforming borrowers with very good credit, it was
OFS that introduced IO loans to subprime borrowers.
111. So concentrated was OFS ' business in subprime and so-called "Alt-A loans,
however, that by year-end 2004, OFS was named as one of the top 15 Alternative-A lenders, and
one of the top 15 wholesale lenders, in the country. During 2004 alone, OFS increased loan
production by approximately 40%, despite a projected industry decline of just over 30%.
Significantly, while OFS described these Alternate-A loans as being made primarily to
borrowers with good credit and alternate documentation, in fact, the majority of these loans were
based solely on "stated income, the quality of which ultimately rested upon the veracity of the
borrower.
112. In a September 30, 2005 pre-merger conference call, Defendant Norden stated, in
part, the following:
Most of our product is Alt-A, what is considered Alt-A origination. And I wouldsay primarily our Alt-A originations represent 65%, 65, to 70% of our overallproduction. We also produce a fair amount of prime business as well, FannieMae, Freddie Mac type business, and we do a small amount, and it is really thesmallest piece of credit challenged individual It really is a very small number,and all of those loans that are produced I will tell you are also all servicingreleased right after we originate those loans . [Emphasis added.]
Defendants Norden, Zimmer, and Cauley confirmed that the FICO score for Alt-A loans was in
the 690s, and for prime loans between 710 and 720, with the average loan size between $215,000
to $220,000. Defendant Norden added, in response to a question by an analyst whether the
above product mix would change over the course of the merger business plan, "The anticipation
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is it will stay that way, yes. Our concentration is on the Alt-A and on the (inaudible) side for the
most part . What Defendants knew or severely recklessly disregarded was that the Company's
loans would comprise high-risk loans to those with exceptionally weak credit, income, or asset
characteristics, relying not on verifiable criteria for approving loans, but simply on what the loan
applicant represented, even if it was plainly untrue.
113. During the conference call, at least one analyst, Shelia Donahue from Marlin
Capital, was very critical of this change, and stated that, "I'm a portfolio manager who has held
your stock since your IPO. I see this as a great change in your business model.... and you
have credit exposure that you did not have before. Every time Ipick up a financial newspaper
I'm told about the risks ofjust this kind of mortgage banking, and its troubling. [Emphasis
added.] Despite Analyst Donahue's concerns, in order to allay concerns and further hype the
supposed soundness of the merger and the quality of loan products offered by the Company,
Defendants advised investors that the Company was well-situated to make these changes, that
controls and procedures were already in place, and that management already possessed the
requisite ability to effectuate this transition and manage the integration of OFS. Accordingly, in
response to analyst Donahue, and in other statements made during the merger conference call,
Defendants stated, among other things, the following:
• Prior to announcing the merger, Defendants had already "workeddiligently on a merger and business plan that reasonably provided forfuture growth opportunities and a stronger position than either companycould achieve individually.
• OFS exposure to securities rated below AAA was "very very small.
AAA indicates "[t]he highest grade assigned to a debt obligation by a rating agency. It indicates anunusually strong capacity to pay interest and repay principal. Available at http://financial-dictionary.thefreedictionary.com/aaa (last accessed Oct. 28, 2008).
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• Defendants had adopted very conservative assumptions to create aunified business plan for OFS and the Company - including assuming a5% reduction in 2005 - 2006 loan originations.
• Following the merger, OFS was poised for substantial growth, havingbeen constrained previously only because of its limited access to capital.[Emphasis added.]
Furthermore, Defendant Zimmer noted, "Bimini has also been purchasing pools and mortgages
directly from Opteum, formally called Homestar, for over a year now. We know and
understand the quality of the originations and the quality of the associates at Opteum.
[Emphasis added.]
Adverse True Facts Concealed by DefendantsDuring The Exchange Act Class Period
114. In spite of the foregoing and additional misrepresentations and omissions detailed
herein, Defendants knew or were severely reckless in disregarding that the acquisition of OFS
marked a significant departure from prior practices and the prior business model, a highly
material fact which Defendants failed to disclose. Ultra high-risk loans did not represent a
"small piece, but rather, as investors later learned, such loans represented a sizeable chunk of
the Company's business , as a result of the Company' s disclosure in May 2007 of a $78 million
net loss for the first quarter of 2007 and an even more massive net loss of $162.5 million for the
following quarter.
115. Once Bimini acquired OFS, Bimini opted to utilize OFS' business strategy to its
detriment and without full disclosure to shareholders. No longer were government-backed
mortgages the standard. Instead, so important were the high-risk loans to the newly-merged
Company's business model that granting "Alt-A took on greater importance , and this impelled
Defendants into, at a minimum, being severely reckless in disregarding that the toxic atmosphere
they created in pushing these loans negatively affected morale and loan approval criterion. So-
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called "Alt-A loans (including those that did not meet Alt-A standards but were falsely labeled
as "Alt-A by the Company) and subprime mortgages consistently comprised approximately
70% of all mortgages originated by the Company during the Class Period . As CW1, who
worked as the wholesale area sales manager of Opteum for southern Florida during the Exchange
Act Class Period, confirmed, Alt-A loans "were mostly stated income and given to individuals
with a "credit score of around 660, markedly lower than the 690 FICO score mentioned by
Defendants in the pre-merger conference call of September 30, 2005.
116. As a result of the Company' s new high-risk, concealed business model, the
majority of the Company's loans during the Class Period constituted "liar loans because of the
high incidence of overstated incomes listed on the loan applications supporting these loans.
These were, in effect, loans given to those with exceptionally weak credit, income, or asset
characteristics . Defendants were eager to sign any borrower, as confirmed by CW4, a retail loan
officer who worked for the Company during the Exchange Act Class Period. CW4 stated that it
was unusual for a loan to be turned down and if one underwriter said no, it was usually
possible to find another underwriter or the manager to say yes to the same loan. As further
confirmed by CW12, who worked as a senior sales manager for Opteum at relevant times during
Class Period, oversaw a group of approximately 20 loan originators, and reported directly to the
Company's senior management, the kinds of mortgages granted to Opteum's customers
during CW12' s tenure were "liar loans , or "stated or "stated income , stated assets.
117. CW11 worked as a senior underwriter in the Conduit Division of Opteum during
the Exchange Act Class Period. CW11 reviewed and approved mortgages that Opteum bought
from smaller mortgage firms. During CW1 l's tenure , if CW11 discovered that buyers lied about
their job titles, CW11 would deny the application. However, management consistently overrode
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the denials and instructed CWll to accept the loan anyway. CW11 described the loans as
`foreclosures looking for a place to happen . CW11 recounted one situation when Opteum
bought a $700,000 loan that was granted "literally [to] a maid and a cherry picker. CW11
reported to Quin An Pham ("Pham ), whose boss, Senior Vice-President Mary Glass told Pham
to `push all of the loans through .. . it did not matter how risky they were. Glass, who was
touted as part of senior management in SEC filings (including the Company's free writing
prospectus filed on January 26, 2007), reported to Defendant Norden.
118. Further demonstrating the Company's dangerously destructive attitude with
respect to high-risk loans, CW8, a loan officer who worked for Opteum at relevant times during
the Class Period, recalled one particular issue. It was increasingly prevalent at the Company,
particularly in the Northeast, to encourage and permit potential borrowers to misrepresent their
adjusted gross income . Just before leaving the Company in February 2007, CW8 learned that it
was common for loan applicants to misrepresent their adjusted gross incomes by having their
accountants prepare one tax return for the IRS and another for loan officers. The return to the
loan officers did not reflect the write-offs taken in the one sent to the IRS, and it thus showed
that the individual had a much higher income than that expressed in the IRS return (adjusted for
deductions and write-offs).
119. Despite the foregoing, Defendants knew, or were severely reckless in disregarding
that the Company would be taking on even more high-risk loans and steering away from a
purportedly conservative business model that Defendants represented. CW10, a capital markets
analyst who worked in Secondary Marketing throughout the Exchange Act Class Period said that
the most senior executives - from Bimini, Defendant Zimmer, and from Opteum, Defendant
Norden - were "close , old friends. CW10 stated that Norden knew "exactly what was going
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on at the time of the fall 2005 sale and thereafter . To support this statement, CW10 stated that
one of the best traders in Structured Finance at the Company, Adam Tessler, dated Defendant
Norden's daughter . According to CW10, Tessler and Defendant Norden were "very close and
Tessler discussed the business with Norden all of the time . Tessler told CW10 "all of the time
that Opteum was a high-risk operation and that he, Tessler, was "going to get the hell out of
there as soon as possible . Indeed, Tessler resigned in 2007.
120. The merger thus represented a high-risk gamble that Defendants took, all the
while luring investors into believing that the Company had a measured, controlled, and non-risky
business model but, in the process , deceiving them. The Company 's loan review standards were
so lax as to be virtually non-existent , and its so-called "Alt-A loans were actually subprime,
given to loan applicants with insufficient income and asset documentation, high debt-to-income
ratios, or a low credit history. Defendants knew or were severely reckless in disregarding that
the Company did not verify documentation to determine that their Alt-A borrowers did in fact
meet the standards for Alt-A loans. CW1 confirmed, for example, that Alt-A loans "were mostly
stated income and given to individuals with a "credit score of around 660, which directly
contravenes Defendants' own representations at the September 30, 2005 conference call that Alt-
A loans were meant for individuals with a 690 FICO score.
121. As another example, loans reviewed by CW10 for pooling were either originated
by Opteum or purchased by Opteum from smaller mortgage companies and then filtered through
Opteum's Conduit Department based in California. CW10 received "boxes , and boxes, and
boxes of loans from the Conduit Department, then reviewed and coded each loan so it could be
pooled accurately . During this manual process , CW10 saw "loan after loan that made no sense,
noting that these were "stated loans to people who "clearly could not afford them. CW10
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recalled that there were clearly "gardeners and low wage employees getting loans for hundreds
of thousands of dollars. The majority of loans CW10 reviewed for pooling during his entire time
at the Company fell into subprime or "stated" categories , such as NINA (no income, no Asset),
SISA (stated income , stated asset), and NIVA (no income, verified asset).
122. According to CW10, one of the reasons loan officers were approving "high risk
loans was because Defendant Zimmer made it "very clear that if people did not make their
numbers, they were out the door. Zimmer increased quotas and made it "very hard for these
guys to keep up. CW10 said that this environment encouraged loan officers to get what they
could so they could get their commissions . Without commissions, CW10 said that loan officers
made "basically no money, they needed those commissions. It was thus evident that
Defendants (including Defendant Zimmer) knew during the Exchange Class Period that they
fostered an environment in which loan officers pushed and approved high-risk "liar loans. At a
minimum, Defendants were severely reckless in disregarding that they created such an
environment. CW6, a manager in the loan processing department throughout the relevant time
period and who spent a significant amount of time closing loans for Opteum's loan officers
(those who were based in states where they did not have the proper licensing to close a loan
themselves) indicated that Opteum loan officers were concerned in 2006 about getting the loans
in the door so they could make their commissions before they were fired.
123. Defendants created a falsely positive portrayal of the merger in statements
throughout the Exchange Act Class Period, including that the merger led to a "successful
integration, a "broader base for future growth, and would "create new jobs. In truth,
however, the merger was an abject failure because it exposed the Company to massive risk and a
new, dangerously high-risk business plan that could not succeed as it was grounded almost
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entirely on the granting of liar loans. Defendants knew (or severely recklessly ignored) at the
time of the purported due diligence and after the merger what they were getting into. Defendants
Norden and Zimmer had a long friendship extending over 20 years, and Bimini had a prior
business relationship with OFS (in which the former bought MBS from the latter).
124. Furthermore, evidence of the already seething financial problems pervading the
Company at the time of the merger, according to CW6, occurred by December 2005. Employees
either did not get their promised holiday bonuses that year or the bonuses were quite small.
Further, all raises from that point on were frozen. Between January 2006 and November 2006,
Opteum's New Jersey offices were relocated three times to save money. Opteum started in a
large office space in Paramus, then moved to Maywood, New Jersey, and then the office was
moved back just a few months later to a "teeny tiny office with low rent in Paramus where, as
CW6 noted, "everyone was piled on top of each other.
125. CW10 also stated that after Bimini bought Opteum, i.e., as a result of the merger,
"things did seem to go downhill quickly. CW7, a mortgage banker who worked with the
Company during relevant times of the Exchange Act Class Period, said that Opteum began to
struggle financially soon after Bimini took over. Despite "grandiose promises of a cash
infusion at the time of the merger, Bimini never produced and CW7 was laid off in March 2006.
As recounted by CW7, the decline of Opteum happened "very, very quickly and CW7 was
stunned upon losing the job. CW7 opined that the Company faltered so soon after Bimini took
over because Bimini did not understand the mortgage business well enough to gauge the risks of
buying a mortgage company. As early as the first quarter of 2006 "there was a subtle slowdown
in applications. Thus, clearly, despite Defendants' representations related to the merger, in fact,
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they had not successfully integrated a company that was for all intents and purposes of an
entirely different corporate culture and business philosophy.
126. In addition to the above, during the Exchange Act Class Period, the Company
represented that Opteum's financial statements were prepared in conformity with GAAP, but the
Company used improper accounting practices in violation of GAAP and SEC reporting
requirements. This had the effect of falsely inflating reported net income, earnings per share,
and book value per share in the interim quarters and fiscal year during the Class Period.
127. Stated income loans lingered on the Company's books and thus had a material
effect on financials and results . CW10 created mortgage backed securities in loan pools that
were ultimately sold on the free market to commercial banks such as Lehman Brothers,
IndyMac , Washington Mutual ("WaMu ), and Wachovia . CW10 stated that the Company kept
"liar loans on its books for "servicing . Thus, to CW10 it was clear that Opteum was "taking
risks and the "disturbing business practices "increased when Bimini took over.
128. Opteum sold loans to banking institutions, but some were returned because the
loans sold were not what the Company represented. Once returned, the dubious loans remained
on Opteum's books, thereby increasing the Company's high-risk portfolio. CW6 noted, as early
as the second quarter of 2006, some of the loans generated by Opteum "were not what they
should have been. CW6 indicated that Opteum sold its loans to banks such as WaMu,
IndyMac, and Countrywide. After Bimini took over, CW6 said these banks were returning
Opteum's loans because they were not what the Company represented.
129. For example, CW6 recalled that in either the second or third quarter of 2006,
CW6 was contacted by WaMu about a loan Opteum had sold to WaMu. CW6 had closed this
loan; when CW6 originally reviewed the paperwork, the originating loan officer had declared in
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writing that the loan was for a residential property, specifically, a dual family home that would
be used by the customer. However, when WaMu investigated, it turned out that the property was
not for the customer's use, but it was an "investment property. WaMu returned the loan and it
sat on Opteum's books. CW6 confirmed that this was not an isolated incident. Increasingly
during 2006, Opteum's banking customers who bought the loans were returning them. CW6
estimated that by November 2006, about 10% of the loans that had been sold to banks such as
WaMu and Countrywide had been returned and were "just sitting on our books. Furthermore,
there were loans generated by Opteum that were never sold to other banks because they were
"shaky so they too simply sat on the books. Thus, with the accumulated amount of loans
remaining on the Company's books as a result of loans the Company voluntarily chose to keep
on the books plus the aggregate of loans returned by servicing banks and kept involuntarily on
the books, Defendants placed the Company's very existence in jeopardy.
130. Furthermore , the Company overstated deferred tax assets by ignoring
deteriorating trends in its mortgage origination and securitization business which reduced the
likelihood that it would have sufficient taxable income to utilize its deferred tax asset. In SEC
filings (see, e.g., Form 10-Qs filed during the Exchange Act Class Period), the Company stated,
"deferred tax assets will more likely than not be realized due to the reversal of the deferred tax
liabilities and expected future taxable income. Defendants should not have reflected a deferred
tax asset in Opteum's financial statements for Q4:06 because the Company had incurred losses in
each of the previous quarters that were neither an extraordinary item nor an aberration, but a
continuing condition which had no evidentiary support to base any profitability projection.
There was no positive evidence of sufficient quality and quantity to counteract the available
evidence that a valuation allowance was needed.
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131. The Company also failed to take timely loss provisions related to the OFS
mortgage origination and securitization business. So-called "Alt-A" and subprime mortgages
consistently comprised at least 70% of all mortgages originated by the Company during the
Class Period. Despite repeated representations in press releases that the OFS acquisition would
result in diversification and lowered risk, the mortgages originated were highly concentrated
geographically with approximately 50% of mortgages underwritten originating from California
during the Class Period. The Company violated GAAP by materially understating the likelihood
of loss inherent in its subprime and Alt-A mortgages despite abundant evidence from the
Company's operations that these investments were far riskier than the Company represented. An
increasing risk profile demonstrates that the Company 's loss provisions were far too low and
violated GAAP because risk was increasing across both of the Company's businesses: the
leveraged MBS investment business and the mortgage origination and securitization business.
Additionally, there is no evidence that these two businesses were uncorrelated or negatively
correlated, a condition in which the Company's risk would in fact have been diversified as the
Company had represented because losses in one business would have been offset by gains in the
other.
132. Moreover, the Company disregarded the increased risk in the leveraged mortgage
backed securities investment business and failed to record timely fair value adjustments to the
MBS portfolio, thus overstating assets , stockholders' equity, and earnings during the Exchange
Act Class Period. During the Exchange Act Class Period, the Company recorded material net
unrealized losses but Defendants stated that "[t]he decline in fair value MBS of investments is
not considered to be other than temporary. Accordingly, the write down to fair value is recorded
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in other comprehensive loss as an unrealized loss. See, e.g., Form 10-K filed March 10, 2006.
Not until Q4:06 did the Company record any impairment related to its MBS Portfolio.
133. Moreover, although the Company in its Form 10-K filing covering 2005 boasted
of effective internal controls , these and such similar statements regarding internal controls were
materially false and misleading when made because Opteum did not contain adequate systems of
internal operational or financial controls. CW3 worked for Opteum at all relevant times during
the Exchange Class Period, starting as a business analyst for the servicing group before being
promoted to asset operations manager. More importantly, CW3 confirmed that information
provided in "normal investor reports were more standardized and less detailed with regard to
the information provided. CW3 indicated that around October or November 2006, Opteum
started to change how it classified subprime mortgages. The result of this change would have
been that when an investor looked at a prospectus for a securitized pool of loans, the percentage
of subprime mortgages in the pool was much smaller than it would have previously been.
134. Defendants had concealed the above adverse facts until the truth became known
through a partial disclosure on May 10, 2007 and then a subsequent disclosure on August 10,
2007.
MATERIALLY FALSE & MISLEADING STATEMENTSDURING THE EXCHANGE ACT CLASS PERIOD
OFS and the Integration
135. On November 3, 2005, following the end of their "due diligence investigations,
Defendants announced that the Company had finalized the acquisition of OFS, which at the time,
had a purported book-value of at least $60 million . On that day, Defendants published a release
in which Defendant Zimmer, commenting on the closing of the merger transaction, stated, in
part, the following:
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We are very pleased to have completed this transaction in a timely manner.This merger benefits both companies . It allows Bimini to diversify its revenuestream while remaining in the Company' s area of expertise . For Opteum, themerger provides increased access to capital to fund expanded growthopportunities. Ultimately, we believe this merger will add long-term value forall of our shareholders. [Emphasis added.]
136. Following the purported successful completion of the acquisition, on February 6,
2006, Defendants published a release announcing the formal name change of the two merged
businesses (OFS and Bimini) to Opteum. At that time, Defendants stated that this change was
being made, in substantial part, to commemorate the "seamless integration of OFS.
137. The November and February statements were materially false and misleading
when made because the integration of Opteum was not proceeding according to plan.
Defendants overstated the speed at which the integration was occurring when, in fact, the
Company's previous risk management controls and procedures were totally incompatible with
OFS's business, OFS continued to lack adequate controls or had ignored its stated underwriting
criteria, and OFS had created loans that were designed to produce short-term results at the
expense of subjecting the Company to great risk.
138. In particular, the statement that the transaction was completed in a "timely
manner was materially misleading because Defendants failed to disclose the fact that virtually
no pre-acquisition due diligence had taken place , which, if fully and completely undertaken
would have meant a probing review of the merger transaction. As discussed in detail in ¶106,
CW2 confirmed that Bimini never performed due diligence in OFS's California office, which
was responsible for approximately 40% of the business . CW9 also confirmed that the Company
undertook no due diligence in the Atlanta, Georgia office. Even the most basic due diligence
would have uncovered that OFS was engaged in high-risk liar loans incompatible with Bimini's
business model.
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139. The merger would not "allow[] Bimini to diversify its revenue stream while
remaining in the Company's area of expertise because the acquisition of OFS meant the
Company would begin to concentrate on higher-risk "liar loans, moving away from MBS,
Bimini's "area of expertise.
140. On February 23, 2006, Defendants published a release announcing results for the
fourth quarter and full year 2005. Despite announcing negative financial results , including a loss
of approximately $2.7 million, the release quoted Defendant Zimmer, in part, as follows:
The Board is pleased with the speed at which the successful integration ofOFS is taking place and views the opportunity for diversified sources ofincome as a great benefit to all shareholders. During the fourth quarter of 2005OFS successfully issued its first securitization in REMIC form since beingacquired by Opteum Inc.... [Emphasis added.]
141. This statement was materially false and misleading for the reasons discussed
above (See, e.g., ¶1109-11, 114, 116, 119-20, 123-25), including that the merger was not
proceeding according to plan, but rather was a disaster from the start because the business plans
of the two companies were starkly different and OFS could not be properly integrated even at the
most basic levels because its highly risky "liar loans were dramatically at odds with the risk
management protocol of the Company. As CW6 further confirmed (see ¶122), management
pressure was placed on employees to meet quotas at any cost and loan officers were forced to
lower their standards to get loans in the door regardless of the ability of the borrower to repay.
142. Defendants were already aware that this merger would not be of "great benefit to
all shareholders. As early as December 2005, it was clear that there were severe financial
problems at the Company. See, e.g., ¶1124-25. In addition, OFS had undertaken high-risk "liar
loans. See ¶¶ 116-17. According to CW4, see ¶116, even if one underwriter found a loan too
risky, another underwriter or manager could be found to approve the same loan.
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143. Rather than disclose the truth that the merger had caused severe integration
problems, Defendants simply kept touting and hyping the success of the merger and in an
attempt to show that the Company was growing, Defendants devised programs and schemes to
bring in still more ultra-risky loans and hide the tension within the Company . For example,
CW7 explained that Opteum offered customers a $500 refund if they were not satisfied with their
mortgage service and also that Opteum developed loan/lender partnership programs with
building companies. One company called Venture Homes had a deal with Opteum to send their
customers to Opteum in turn for financial compensation.
144. Rather than reveal the true, impaired financial and operational condition of the
Company, Defendants continued to publicize Opteum's purported success with its "Affordable
Products lending business and, on March 28, 2006, Defendants published a release that stated,
in part, that "[t]he sharp upward trend in `affordability products' this season is clear. In
addition, the release continued, "[IO loans are] best suited for those who exhibit a proven track
record for managing their finances well and understand the product's pros and cons. Opteum
anticipates that 10-year IO products will continue to gain popularity, whereas demand for the
two to three year (or shorter) IO term will drop dramatically.
145. On May 8, 2006, Defendants published a release announcing results for the first
quarter of 2006, the period ended March 31, 2006. While the Opteum Board had previously
determined not to provide forward guidance, in part, as a show of Defendants' confidence in the
business and operations of the Company, Defendants did issue forward guidance for the second
quarter of 2006, in part, as follows:
Previously, the Board had determined not to provide earnings guidance for futureperiods unless the estimates by the equity analyst community were clearly out ofline with management estimates. As a result of this policy, the Board hasdetermined that the Company should indeed provide earnings guidance forthe REIT taxable income for the second quarter of 2006. The Company
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estimates that approximately $0.25 to $0.35 will be available to pay dividendsfrom second quarter taxable earnings from the REIT. This estimate does notincorporate any second quarter results from OFS. The Board has authorizedmanagement to update the public with this information if new data makes theestimates fall outside this range. [Emphasis added.]
146. Commenting on the results, Defendant Zimmer stated, in part, the following:
The Board is pleased with the speed at which the successful integration ofOFS is taking place and views the opportunity for diversified sources ofincome as a great benefit to all shareholders . Moreover, the Boardanticipates the hedging program for OMSRs and residuals to commenceduring the second quarter of 2006 so as to reduce the volatility of theearnings results at OFS. [Emphasis added.]
147. The optimistic statements touted in the Company's March and May 2006
statements were materially false and misleading because, as detailed above, ¶128, Opteum's
loans "were not what they should have been as early as Q2:06. Banks had returned Opteum's
loans because the Company misrepresented the terms and quality of the loans and failed to fully
verify information provided by borrowers. By November 2006, 10% of the Company' s loans
had been returned and were sitting on the Company's books; other loans were so "shaky they
could never be sold to banks.
148. After Bimini took over, CW6 said these banks were returning Opteum's loans
because they were not what the Company represented. For example, CW6 recalled that in either
the second or third quarter of 2006, CW6 was contacted by WaMu about a loan Opteum had sold
to it . CW6 had closed this loan; when CW6 originally reviewed the paperwork, the originating
loan officer had declared in writing that the loan was for a residential property, specifically, a
dual family home that would be used by the customer. However, when WaMu investigated, it
turned out that the property was not for the customer's use, but it was an "investment property.
CW6 noted that while some customers do lie to get a loan, had the proper paperwork been
demanded by this loan officer, this would not have happened. WaMu returned the loan and it sat on
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Opteum's books. CW6 confirmed that this was not an isolated incident. Increasingly during
2006, Opteum's banking customers who bought the loans were returning them. CW6 estimated
that by November 2006, about 10% of the loans that had been sold to banks such as WaMu and
Countrywide had been returned and were "just sitting on our books. Furthermore, there were
loans generated by Opteum that were never sold to other banks because they were "shaky so
they too simply sat on the books.
149. On August 8, 2006, Defendants published a release announcing results for the
second quarter of 2006, the period ended June 30, 2006. At that time, Opteum reported a Q2:06
net loss of $3.69 million - claiming the loss was "mainly a result of the change in value of
assets held by OFS, which flow through the consolidated statement of operations, some of
which have increased in value and some of which have decreased in value. [Emphasis added.]
150. Commenting on the results, Defendant Zimmer, Chairman, President and Chief
Executive Officer of the Company stated, in part, the following:
The Opteum Board of Directors is pleased to be able to pay favorable dividendsfor the second quarter of 2006, but we are eagerly anticipating the time when theincreases in short-term funding rates come to a halt. The Board was pleased to seeforward funding rates decline in the first month of the third quarter of 2006,which will lower borrowing costs for future transactions and increase book valuenow.
OFS residential originations this year through the second quarter of 2006 wereapproximately 10% less than in the first two quarters of 2005. Both the retail andthe wholesale origination units closed fewer loans than had been anticipated,although at the same time, applications continue to be substantially higher thanthose of the first two quarters of 2005 . The Board is pleased that OFS had July2006 loan closings of approximately $628.4 million, which exceeded theCompany's expectations.
Mr. Zimmer went on to say:
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The competition in mortgage originations continued throughout the secondquarter and now into the third quarter. But, in addition to the previouslyannounced reductions in duplicative or underperforming personnel at OFS,which will result in over $3.5 million in annualized savings, the reducedborrowing costs the Company announced in the second quarter have now allbeen implemented and should save OFS approximately $3.5 million per yearin the future. Finally, we believe that OFS financial results will benefit on anongoing basis from the capital markets expertise that the REIT managementteam is rigorously applying to the OFS securitization strategy. [Emphasisadded.]
151. In truth, the Company's personnel cuts would not result in savings, and were not
designed to benefit the Company, but were rather a necessary result of the Company's financial
instability and inability to pay employees. Instead, the OFS acquisition was totally unraveling
and yet Defendants continued to conceal the true fact that the integration of OFS and Bimini was
still unsuccessful.
152. On November 8, 2006, six months before the Company completely unraveled,
Defendants announced in a press release that the Company would be forced to delay the filing of
its 3Q:06 results and restate its financial results for the first and second quarters of 2006.
According to the release, this restatement was "due primarily to the application of an accounting
policy by the Company' s subsidiary , [OFS], that was not in accordance with [GAAP].
153. The November 8, 2006 release stated that "[t]he previous accounting policy
relates to the manner in which OFS accounts for changes in the fair value of interest rate lock
commitments ('IRLCs'). In accordance with financial accounting standards:
IRLCs are to be recorded . . . at fair value with changes in fair value to bereflected in the Company's current period results of operations. OFS' prioraccounting policy resulted in a misapplication of SFAS No. 133, therebygenerating non-cash , short-term timing differences that overstated earningsin the first quarter of 2006 and understated earnings in the second quarter of2006... [Emphasis added.]
154. As a result, the Company announced its "consolidated financial statements...
consolidated balance sheet, statement of operations, statement of stockholders' equity, statement
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of cash flows and the notes thereto, as of, and for the periods ended, March 31, 2006, and June
30, 2006, should no longer be relied upon.
155. The Company reported that it believed, once restated, its consolidated results of
operations before income taxes would be reduced by less than $1 million. The Company also
announced in that release that the proper application of SFAS No. 133 would not have changed
the amount of dividends declared by the Company, and that the Company's dividend policy
would remain unchanged.
156. The fact that Opteum shares did not materially decline at that time is evidence that
investors did not consider this purportedly minor (less than $1 million with no impact on paid
dividends) restatement to have a material adverse impact on the Company.
157. Still unknown to investors, however, Defendants knew and/or severely recklessly
disregarded that this restatement was evidence of the significant control deficiencies within the
Company . Opteum had failed to conduct adequate due diligence into OFS and the integration of
the Company was failing. The fact that high-risk liar loans could be made (and be touted as
secure Alt-A loans, no less) without any verification of borrower information and in complete
disregard of borrowers' ability to repay further evidences that no internal controls were present
whatsoever to prevent the issuance of overly risky loans.
158. On December 20, 2006, Defendants published the delayed Form 10-Q for Q3:06.
For the Q3:06 in particular, Opteum reported a loss of $6.3 million, down from net income of
$7.9 million in Q3:06. This release also announced a net loss of $15 . 6 million for the nine
months ending September 30, 2006 compared with an income of $27 million for the same period
of the prior year.
159. Commenting on the results, Defendant Zimmer stated, in part, the following:
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We continue to experience extremely challenging operating conditions as ourfunding costs have accelerated faster than the yields on our portfolio assets overthe last two years. Additionally , the aggregate demand for mortgage productsand services has declined significantly during the year, which has negativelyaffected results at our taxable REIT subsidiary, Opteum Financial Services(OFS). It has been five months since the Federal Reserve last implemented a ratehike. If this neutral policy continues or if the Federal Reserve relaxesmonetary policy, the results from operations at both the Opteum REIT andOFS will have the opportunity for improvement. In the meantime, we areaggressively pursuing various funding alternatives to lower our borrowing costs,increase our liquidity and better position us to effectively compete with largerfinancial institutions that have lower costs of capital. [Emphasis added.]
160. Instead of acknowledging the true undisclosed condition of the Company,
Opteum blamed federal rates and policies for its losses . Known to and/or severely recklessly
disregarded by Defendants, OFS would not experience an "opportunity for improvement
regardless of federal rates. Rather, OFS was stuck with risky loans that the Company had
previously failed to pawn off onto banks.
161. Despite falling from a previously profitable financial position to reporting a $6.3
million loss in Q3:06, the Company announced the following day, December 21, 2006, that a
division of Citibank, Citigroup Realty, had paid $4.1 million for a 7.5% non-voting interest in
Opteum. At that time, the Company also granted Citigroup the option, exercisable at any time
before December 21, 2007, to purchase an additional 7.49% non-voting limited liability
company membership interest in OFS for an additional $4.1195 million . Besides stating that this
deal would result in substantial cost savings at OFS as a result of amendments to its funding
facilities with Citigroup, the Company's release announcing this deal also quoted Defendants, in
part, as follows:
"We are thrilled that Citigroup Realty, a subsidiary of a world-class financialinstitution, has partnered with us to drive profitable growth at OFS, said JeffreyJ. Zimmer, Chairman, President and Chief Executive Officer of Opteum Inc."We continue to believe in the value of the OFS franchise and are excited byCitigroup Realty's strong vote of confidence."
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"At OFS, we have long considered Citigroup Realty a strategic business partnerand are eager to expand our relationship with them, added Peter R. Norden,Senior Executive Vice President of Opteum Inc. and President and ChiefExecutive Officer of OFS. "With lower funding costs and even greater accessto capital, we are well positioned to profitably increase our market share aswe leverage our multi-channel mortgage origination platform." [Emphasisadded.]
162. As known and/or severely recklessly regarded by Defendants, these statements
were materially false and/or misleading because Defendants did not "continue to believe in the
value of the OFS franchise but, in fact, Defendants knew that OFS was an albatross to the
Company. Not only did OFS represent a virtual money pit full of suspect loans, but Defendants
had to secure additional access to capital just to remain a going concern. The "drive [to]
profitable growth at OFS was thus merely sham rhetoric designed to give investors the
impression that all was fine at the Company. By the time of the above statement , however, the
Company had experienced, among other things , deep job cuts and an ever increasing flood of
highly-risky loans backed only by the "stated word of the applicant.
163. Further, Defendants were not "well positioned to profitably increase market share
because, in fact, the Company could not integrate OFS seamlessly, had no internal controls, and
issued ultra-risky loans (as high as the $700,000 range), among others , to a "maid and cherry
picker. The Company's lax standards meant that anyone -- indeed, everyone -- who walked
through Opteum's doors could obtain a loan with virtually no questions asked.
164. On January 9, 2007, Defendants announced the unscheduled departure of OFS
Co-Founder Defendant Levine from his position as Executive Vice President and COO of the
Company's wholly owned subsidiary (OFS), effective March 31, 2007. Calling Defendant
Levine's departure a "retirement, this purported retirement of a key figure (in fact, co-founder)
of OFS was strategically timed after the good news regarding Citigroup, but came before the
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announcement of poor results leading to the Company's demise. At this time, however, it was
still undisclosed to investors that OFS was too riddled with risky loans to be salvageable, and the
other co-founder of OFS would be forced to resign within the next six months.
165. On February 14, 2007, when the Company reported results for the fourth quarter
and year end December 31, 2006, losses from OFS continued to weigh down results. According
to this release, results for the quarter and year-end were impacted. The Company reported a
consolidated net loss of $33.9 million - including a $10 million loss "attributable to an other than
temporary impairment... of certain mortgage-backed security ('MBS') portfolio assets. The
Company estimated that its Q1:07 earnings would "include a loss of approximately $1.1 million
related to the sale of these MBS assets . Its year-end 2006 results included a net loss of nearly
$50 million, down from a net income of more than $24 million for 2005. The Company's Book
Value per Share was down to $7.85, compared with $8 .41 just three months earlier.
166. Despite its continuously deteriorating OFS business, the Company's February 14,
2007 release also stated that it expected the Company's sale to Citigroup would "lead to
approximately $5.5 million to $6 million in savings at OFS. Defendants also claimed that the
Company had created "significantly leaner operations at OFS by eliminating 272 positions.
167. Though the Company acknowledged that "[t]he expected recovery in the
Company's Book Value Per Share discussed above will not be fully realized if OFS' s results do
not improve, it claimed that "the OFS management team believes the combination of its new
funding terms, cost savings associated with its reduction in staff, and access to Citigroup
Realty's capital markets expertise will lead to breakeven or positive monthly results at OFS by
mid-2007.
168. Commenting on these results, Defendant Zimmer stated, in part, the following:
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There is nothing we dislike more than reporting negative operating results. TheCompany had one of the best records of earnings and dividends among ourNew York Stock Exchange-traded peer group during 2004 and 2005, but in2006 we underperformed much of the peer group , which was understandablyreflected in our stock price. Challenging business and operating conditions during2006 resulted in inferior financial performance in both of our business units.[Emphasis added].
169. Defendant Zimmer cited four primary reasons for the Company' s recent losses at
OFS: "[a]ctual margins associated with sales of mortgage loans at OFS during 2006 were less on
average during the year than had been anticipated due largely to stiff competition in the
marketplace for mortgage originations[,] "stiff competition for mortgage loans during a period
when the number of loans originated declined nationwide, high debt costs, certain operating
inefficiencies and a substantial increase during the fourth quarter in loan loss reserves due to
anticipated increases in early payment defaults on fourth quarter 2006 originations.
170. Defendant Zimmer attempted to stave off any reaction by investors to this
negative news , touting the Company's potential and "path to profitability :
Despite the Company's recent operating losses , however, we are optimistic aboutthe opportunities that lie ahead in 2007. Actions have been taken andadditional actions are being evaluated to create a path to profitability in thenear future .... The Board of Directors and our senior management teambelieve that the implementation of recent operating changes will lead topositive operating results during 2007. I look forward to making that promisea reality so all of our shareholders can realize a positive return on theirinvestment. [Emphasis added.]
171. Defendants' statements forecasting profitability during 2007 lacked any
reasonable basis given the true financial condition of the Company at that time . In truth.
Defendants knew that OFS was doomed to fail. It had engaged in unreasonably risky loans,
many of which it was unable to sell off to banks. Instead, Defendants would be forced to sell off
the riskier mortgage divisions of OFS and to take almost $9.0 million in asset write-downs and
another $50 million in negative value adjustments - almost all of which were related to OFS.
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172. Throughout the Exchange Act Class Period, Defendants continually made
attempts to defend the Company and inflate Opteum stock despite knowledge of undisclosed
materially adverse facts. In particular, on March 20, 2007 Defendants responded to a negative
analyst report, published by Friedman Billings Ramsey & Co., Inc. ("FBR ) the prior day, via a
press release.8
173. Among other topics , the Company' s release stated, in substantial part, the
following:
The Company has produced approximately $44 million of sub prime mortgages in2007 which represents approximately 4.8% of 2007 year to date loan productionof approximately $916 million. Forty-four percent of the $44 million(approximately $19 million) subprime mortgages were underwritten by a thirdparty buyer and sold directly to that buyer. The Company no longerunderwrites sub prime mortgages . The Company believes that it isadequately reserved for early payment defaults related to sub primemortgages as well as all other mortgages . [Emphasis added.]
174. In defending itself against the report's question as to whether Opteum was a going
concern, Opteum trumpeted its current financial position, noting that:
The Company continues to believe it has very adequate liquidity. The Companycurrently owns approximately $3 billion in agency mortgage related assets,the value of which has increased during 2007 as rates have declined. Theseagency assets are guaranteed by an agency of the United States Government.
175. As a result of the Company's public repudiation and rebuke of the FBR report, the
following day, March 21, 2007, the American Banker reported that FBR analyst Ross had issued
a "revised report after stating that FBR accepted the Company's assurances that it had adequate
liquidity and raised the near-term price target to $4.00 per share.
8 In the FBR research note, analyst Ross downgraded Opteum's stock to "Underperform, from "MarketPerform, and lowered the near-term price target by $8.50 to $1 - after speculating that Opteum might no longer beable to obtain covenant waivers on its warehouse lines, as it has done over the past four quarters - in a less tolerantmarket environment - and after speculating that it may face losses on originated loans, and that servicing rights weresubject to write-downs.
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176. Undisclosed to investors , however, Opteum would be forced to exit its wholesale,
conduit, and retail mortgage lending businesses within the next month and a half - bringing the
Company out of the mortgage origination business entirely.
177. Indeed, on April 20, 2007, Defendants announced that Opteum would exit the
money-losing wholesale mortgage loan origination business. At that time, Defendants published
a release that stated, that OFS would "exit its Conduit and Wholesale mortgage loan origination
businesses... due primarily to the deterioration in the secondary market for closed mortgage loans
and continuing weakness in consumer demand for mortgage products and services.
178. Commenting on the release, Defendant Zimmer stated, in part, the following:
Recently, some secondary market investors in closed mortgage loans havechanged their terms and have delayed settling whole loan trades involving certainAlt-A mortgage products. This has forced OFS to re-market loans in respectof which it believed it had already obtained purchasing commitments, andhas resulted in an estimated $22 million pre-tax loss associated withmortgage loans originated by OFS. This loss will be reflected in the Company'sfirst quarter results. Because we believe that the current adverse marketenvironment may continue in coming quarters , we intend to exit the Conduitand Wholesale mortgage origination businesses [.] [Emphasis added.]
179. The release further stated:
OFS continues to originate high-quality loans through its network of 230 retailloan professionals located in 24 offices throughout Georgia, Florida, Illinois,New Jersey and Massachusetts. Additionally, the Company's $2.9 billion REITportfolio today consists entirely of Ginnie Mae, Fannie Mae and Freddie Macagency securities. [Emphasis added.]
180. Less than a month later, on May 7, 2007, Defendants also revealed that Opteum
would sell its money-losing retail mortgage loan origination business for an estimated $5 million.
At that time, Defendants published a release in which Defendant Zimmer commented, stating, in
part, the following:
Given the reduced demand for mortgage products and services and thedeterioration in the secondary market for closed mortgage loans, this transaction
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will enable us to refocus our energies on managing and growing our RMBSportfolio, while stemming OFS's losses associated with mortgage originations[.]Upon completion of this transaction and the wind down of OFS' s Conduitand Wholesale mortgage origination divisions , we will be out of the mortgageorigination business entirely. Certain costs associated with exiting themortgage origination business will be reflected in our first quarter andsecond quarter results[. ] [Emphasis added.]
181. These statements stood in stark contrast to the statements made when Citigroup
Realty announced that it had partnered with the Company - at which time Defendants stated that
its lowered cost of funding and greater access to capital rendered OFS "well positioned to
profitably increase its market share as it leveraged its multi-channel mortgage origination
platform . This sudden and extreme reversal in such a short period of time was also not
consistent with the moderate decline that had occurred in the secondary market for mortgage
loans at that time.
182. The two units shuttered - wholesale and conduit (whole loan) purchasing
operations - amounted to almost 70% of Opteum's 2006 production. In connection with this
exit, Defendants also announced that they would incur at least $4.53 million in exit and disposal
costs. These costs were in addition to the $22 million pretax quarterly loss related to Defendants
Alt-A loan "remarketing.
183. Nevertheless, these April and May announcements again allowed Defendants to
condition the market for Opteum's future success despite its obvious financial turmoil. Now that
it was becoming apparent to investors that Opteum engaged in high-risk liar loans , the Company
announced it was selling its higher-risk businesses while "continu[ing] to originate high-quality
loans, which would purportedly allow the Company to "stem[] OFS's losses associated with
mortgage originations. These statements, in addition to the influx of cash (and apparent
support) from Citigroup in December and the Company's positive statements in its defensive
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response to the FBR report in March, gave a false impression to the public that Opteum was on
stable ground.
184. Despite the downward momentum in Opteum's business, Defendants never
conceded the true condition of the Company and instead garnered significant bonuses and
millions of dollars in stock awards from the Company. The chart below evidences these bonuses
paid throughout the Exchange Act Class Period - much of which was based upon the merger
with OFS or contingent upon earnings and upon the successful integration of OFS, as follows:
Summary Compensation Table
Payouts
Annual Compensation Long-Term Compensation
Awards
Name and Position Year Salary Bonus
Jeffrey J. Zimmer, 2005 $ 400,000 $ 684,177President and Chief 2006 500,000 500,000Executive OfficerRobert E. Cauley, 2005 $ 267,500 $ 456,118Chief Financial 2006 400,000 400,000Officer, ChiefInvestment Officerand SecretaryPeter R. Norden, 2005 $ 118,791President and Chief 2006 750,000 $ 750,000(3)Executive Officer(OFS); SeniorExecutive VicePresident
SecuritiesUnderlying
Restricted / Options/ Payouts All OtherOther Stock Awards SARs LTIP Compensation
- $ 1,008,700(1) - - $ 22,204- 1,614,529 - - 196,119
- $ 672,464(2) - - $ 23,487- 1,067,423 - - 131,586
$ 11,72358,067
(1) This represents a grant of 110,000 shares with dividend equivalent rightsawarded in 2006 as 2005 compensation, none ofwhich vested in 2005.
(2) This represents a grant of 73,333 shares with dividend equivalent rightsawarded in 2006 as 2005 compensation, none ofwhich vested in 2005.
(3) Non-discretionary cash bonus.
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MATERIALLY FALSE AND MISLEADING STATEMENTS REGARDING GAAPCOMPLIANCE AND INTERNAL CONTROLS
185. The Company's Exchange Act Class Period filings made materially false and
misleading statements regarding the Company's risk management, internal controls, and
compliance with GAAP and SEC reporting rules.
186. On March 10, 2006, Defendants filed the Company's Form 10-K for 2005 (the
year-end report) signed by all Defendants and certified by Defendants Zimmer and Cauley. In
addition to making statements that were substantially similar to those discussed above
concerning Opteum's operations , the integration of OFS, and the effects thereof, the 2005 Form
10-K also stated that the Company had adopted GAAP accounting, as well as several significant
accounting policies.
187. The 2005 Form 10-K reiterated the Company's purported Investment Strategy,
Asset Acquisition Strategy, Leverage Strategy, and Risk Management Approach, which were
each supposed to insulate investors from massive, catastrophic losses and to moderate the risk
taken by Defendants. As evidence of this, the 2005 Form 10-K stated that "Opteum seeks to
differentiate itself from other mortgage portfolio managers through its approach to risk
management, and also stated, in part, the following:
It invests in a limited universe of mortgage related securities, primarily, but notlimited to, those issued by Fannie Mae, Freddie Mac and Ginnie Mae. Paymentof principal and interest underlying securities issued by Ginnie Mae is guaranteedby the U. S. Government. Fannie Mae and Freddie Mac mortgage relatedsecurities are guaranteed as to payment of principal and interest by therespective agency issuing the security . Opteum seeks to manage the risk ofprepayments of the underlying mortgages by creating a diversified portfolio witha variety of prepayment characteristics. Finally, Opteum seeks to address interestrate risks by managing the interest rate indices and borrowing periods of its debt,as well as through hedging against interest rate changes. [Emphasis added.]
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188. The statements "Opteum seeks to differentiate itself from other mortgage
portfolio managers through its approach to risk management and "invests in a limited universe
of mortgage related securities, primarily, but not limited to, those issued by Fannie Mae, Freddie
Mac and Ginnie Mae were materially false and misleading because the Company's previous
risk management controls and procedures were incompatible with OFS' business, OFS continued
to lack adequate controls and/or ignored its stated underwriting criteria, and OFS had created
loans that were designed to produce short-term results at the expense of subjecting Opteum to the
unreasonable risk of hundreds of millions of dollars in loss.
189. Defendants undertook very little to no pre-acquisition due diligence , which, if
fully and completely undertaken, would have meant a more probing review of interoperable
systems and controls. A fuller due diligence was even more important because of the highly-
different products and loans offered between the two merging entities.
190. In addition to the foregoing , during the Exchange Act Class Period, Defendants
had propped up the Company' s results by failing to properly value and monitor collateral and
under-reporting loan loss reserves , and failed to report other material information about the
Company. Moreover, Defendants' efforts to allocate more resources to adjustable rate
mortgages did little or nothing to offset the huge risk of loss to which OFS had subjected the
Company as a result of its knowing and/or severely reckless disregard of reasonable risk
management and hedging control strategies.
191. At all times during the Exchange Act Class Period, unbeknownst to investors,
Defendants had materially overstated the Company's Book Value and projected cash flow -
critical metrics used by investors to evaluate the financial health, stability and profitability of the
Company - by failing to properly account for the Company's results of operations and by
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artificially inflating the Company's financial results. By failing to adequately hedge the
Company's risk exposure, Defendants also materially understated operating costs and overstated
net interest income.
192. In the 2005 Form 10-K, the Company represented that its "financial statements
are prepared in accordance with [GAAP] and that "all of the decisions and assessments upon
which its financial statements are based were reasonable at the time made based upon
information available to it at that time.
193. The Company's 2005 Form 10-K also contained representations that attested to
the purported effectiveness and sufficiency of the Company's controls and procedures, including
that "Management assessed the effectiveness of the Company's internal control over
financial reporting... [and] believes that the Company maintained effective internal control
over financial reporting . The 10-K also contained certifications by Defendants Zimmer and
Cauley attesting to the purported accuracy and completeness of the Company' s financial and
operational reports, noting, among other certifications, that: "The information contained in the
Report fairly presents, in all material respects, the financial condition and results of
operations of the Company. [Emphasis added.]
194. These and substantially similar statements regarding internal controls and GAAP
compliance were also included in the Company's Form 10-Qs filed October 28, 2005; May 8,
2006; August 8, 2006; December 20, 2006; May 10, 2007; and Form 10-Ks filed March 10, 2006
and March 14, 2007.
195. These statements were materially false and misleading when made because
Opteum did not contain adequate systems of internal operational or financial controls, such that
Opteum's reported financial statements were true, accurate, or reliable. Moreover, OFS' then-
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recent introduction of IO subprime loans did not represent a unique business opportunity for the
Company, as Defendants represented, but rather an even higher-risk effort - motivated by
desperation - to create artificial demand for OFS products.
196. The statements regarding internal controls and GAAP compliance were also
materially false and misleading for reasons described by CW3, who worked for Opteum at all
relevant times during the Exchange Class Period. CW3 started as a business analyst for the
servicing group before being promoted to asset operations manager. CW3 worked with the
securitized pool of loans, which were all subprime and so-called "Alt-A loans. During CW3's
tenure at the Company, CW3 estimated that the securitized side of the business constituted
approximately $20 billion or more, while the non-securitized loans held "in-house had a balance
of approximately $5 billion. CW3's responsibilities included tracking information relative to
payout expenses from the trust that held the loans in the pool, delinquencies, and prepayment
penalties. These findings would be placed into internal reports distributed to higher-level
management (and CW3 confirmed that Bimini executives received these internal reports after the
merger). Reporting occurred once per month. CW3 stated that information provided in
"normal investor reports" were more standardized and less detailed with regard to the
information provided CW3 indicated that around October or November 2006, Opteum started
to change how it classified subprime mortgages. The result of this change would have been
that when an investor looked at a prospectus for a securitized pool ofloans, the percentage of
subprime mortgages in thepool was much smaller than it would havepreviously been.
197. It was also not true that the Company's financial statements and reports were
prepared in accordance with GAAP and SEC rules (as discussed in greater detail below). As
such, Defendants lacked any reasonable basis to claim that Opteum was operating according to
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plan, or that Opteum could achieve guidance sponsored and/or endorsed by Defendants -
including forecasting profits in 2007.
VIOLATIONS OF GAAP AND SEC RULES
198. During the Exchange Act Class Period, the Company represented that Opteum's
financial statements were prepared in conformity with GAAP, which are recognized by the
accounting profession and the SEC as the uniform rules, conventions, and procedures necessary
to define accepted accounting practice at a particular time. However, the Company used
improper accounting practices in violation of GAAP and SEC reporting requirements to falsely
inflate Opteum's reported net income, and earnings per share, and book value per share in the
interim quarters and fiscal year during the Exchange Act Class Period.
199. Opteum's materially false and misleading financial statements resulted from a
series of deliberate senior management decisions designed to conceal the truth regarding the
Company's actual operating results. Defendants caused the Company to violate GAAP and SEC
rules by, among other things:
• Overstating its deferred tax asset by ignoring the adverse and worseningconditions of its operations as evidenced by, among other things,recurring operating losses;
• Failing to take timely loss provisions related to the OFS mortgageorigination and securitization business; and,
• Disregarding the increased risk in the leveraged mortgage backedsecurities investment business and failing to record timely fair valueadjustments to the MBS portfolio.
200. As set forth in Financial Accounting Standards Board ("FASB ) Statement of
Financial Accounting Concepts ("Concepts Statement ) No. 1 (November 1978), one of the
fundamental objectives of financial reporting is that it provide accurate and reliable information
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concerning an entity's financial performance during the period being presented. Concepts
Statement No. 1, paragraph 42, states:
Financial reporting should provide information about an enterprise's financialperformance during a period. Investors and creditors often use information aboutthe past to help in assessing the prospects of an enterprise. Thus, althoughinvestment and credit decisions reflect investors' and creditors' expectationsabout future enterprise performance, those expectations are commonly based atleast partly on evaluations of past enterprise performance.
201. As set forth in SEC Rule 4-01(a) of SEC Regulation S-X, "[fJinancial statements
filed with the [SEC] which are not prepared in accordance with [GAAP] will be presumed to be
misleading or inaccurate . 17 C.F.R. § 210 .4-01(a)( 1). Management is responsible for preparing
financial statements that conform with GAAP. As noted by the AICPA professional standards:
financial statements are management's responsibility . . . . [M]anagement isresponsible for adopting sound accounting policies and for establishing andmaintaining internal control that will, among other things, record, process,summarize, and report transactions (as well as events and conditions) consistentwith management's assertions embodied in the financial statements. The entity'stransactions and the related assets, liabilities and equity are within the directknowledge and control of management . . . . Thus, the fair presentation offinancial statements in conformity with Generally Accepted AccountingPrinciples is an implicit and integral part of management's responsibility.
Defendants Overstated Opteum' s Deferred Tax Asset
202. The Company violated GAAP and SEC reporting requirements by overstating the
value of its deferred tax asset.9 This manipulation consisted of ignoring deteriorating trends in
its mortgage origination and securitization business which reduced the likelihood that it would
have sufficient taxable income to utilize its deferred tax asset, thereby necessitating a valuation
allowance against the deferred tax asset.
A "deferred tax asset is defined as the deferred tax consequences attributable to a deductible temporarydifference and carryforwards. Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes,App. E, ¶ 289 (1992). A "deductible temporary difference is defined as temporary differences that result indeductible amounts in future years when the related asset is recovered. Id. A "carryforward is defined asdeductions or credits that cannot be utilized on a tax return during a year that may be carried forward to reducetaxable income or taxes payable in a future year.
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203. SFAS No. 109 establishes the accounting standards for income taxes, including
the recognition and measurement of a deferred tax asset . After a deferred tax asset has been
recognized, it must be reduced by a valuation allowance if, based on the weight of available
evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all
of the deferred tax assets will not be realized. SFAS No. 109 ¶ 17. All available evidence, both
positive and negative, should be considered in determining whether, a valuation allowance is
needed, including historical information and currently available information about future years.
Id. 120.
204. When there is negative evidence of cumulative losses in recent years, concluding
that no valuation allowance is needed is difficult . Id. ¶ 23. Other examples of negative evidence
include, but are not limited to, a history of operating losses and the existence of unsettled
circumstances that, if unfavorably resolved, would adversely affect future operations and profit
levels in future years. Id.
205. In its 2005 Form 10-K filed with the SEC, Opteum purported to adhere to SFAS
No. 109 stating:
OFS is the Company's TRS [taxable REIT subsidiary], and its activities aresubject to corporate income taxes, and the applicable provisions of SFAS No.109, Accounting for Income Taxes. Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences between thefinancial statement carrying amounts of existing assets and liabilities and theirrespective tax base. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The effect ondeferred tax assets and liabilities of a change in tax rates is recognized in incomein the period that includes the enactment date.
206. Opteum violated GAAP and its own publicly-disclosed policies by deliberately or
at a minimum severely recklessly disregarding overwhelming negative evidence in eliminating a
valuation allowance and recording deferred tax assets during the Exchange Act Class Period.
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The Company repeatedly stated in its SEC filings, "Management believes that the deferred tax
assets will more likely than not be realized due to the reversal of the deferred tax liabilities and
expected future taxable income. Defendants should not have reflected a deferred tax asset in
Opteum's financial statements for Q4:06 because the Company had incurred losses in each of the
previous quarters that were neither an extraordinary item nor an aberration, but a continuing
condition and had no consistent credible evidence to support its profitability projections. Id. ¶
24. For these same reasons , the net deferred tax liability on Opteum's balance sheet for the
preceding three interim reports of 2006 should have been larger than reported to reflect the
valuation allowance which the Company should have taken against its gross deferred tax asset.
The effect of these violations of GAAP was to materially overstate the Company's book value
and to materially understate the severity of its net losses during the Exchange Act Class Period.
207. Moreover, no positive evidence of sufficient quality and quantity existed to
counteract the available evidence that a valuation allowance was needed. For example: (a)
Opteum had incurred pretax operating losses of $8 . 8 million in Q1:06, $12.2 million in Q2:06,
$9.3 million in Q3:06, and $44. 5 million in Q4:06; (b) Opteum's erratic and deteriorating net
interest margin of 0.10% in Q1:06 , 0.33% in Q2:06, 0.03% in Q3:06, and (0.18)% in Q4:06 was
not a basis to conclude that future profitability would be sufficient because of decreases in the
Company's cost of funds or increases in its gross interest income ; and, (c) Opteum faced
increasingly challenging prospects for its mortgage origination and securitization business as
increases in interest rates both increased its own cost of funds and decreased the likelihood of its
subprime and Alt-A mortgagors being able to pay their obligations.
208. Furthermore, the increases in the Company's deferred tax assets without proper
valuation allowances in accordance to GAAP allowed Opteum to reduce the severity of its net
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losses by recording increases in its deferred tax asset. Indeed, the Company wrongly cushioned
the quarterly pretax operating losses for 2006 by recording provisions for income tax benefit in
the amounts of $3.79 million, $8.54 million, $3.06 million, and $11.82 million. Thus the 2006
quarterly net losses-$5 million, $8.8 million, $15.6 million, and $33.9 million-appeared more
favorable because of the materially overstated deferred tax asset.
209. Defendants conceded the impropriety of not establishing an adequate valuation
allowance in the first quarter of 2007 when the Company reversed course and finally booked a
$37.38 million valuation allowance against its $60.8 million gross tax asset, but the Company
had already decided to divest itself of the OFS mortgage origination business. The tax asset
valuation allowance comprised almost 50% of the Company's first quarter net loss.
210. The chart below demonstrates the relationship between the Company's net
deferred tax asset and the sharply escalating NOL during the Class Period.
(in millions) Q4:05Gross Deferred Tax
Asset $3.90
Valuation Allowance -Gross Deferred Tax
Liability (22.26)Net Deferred Tax
Asset (18.36)
Net Operating Loss $(7.10)
Q1:06 Q2:06 Q3:06 Q4:06 Q1:07
$10.54 $19.62 $28.32 $39.82 $60.80
- - - - (37.38)
(26.78) (27.33) (32.65 ) (32.64) (27.71)
(16.24) (7.70) (4. 32) 7.18 (4.28)
$(24.30) $(24.30) $(68.40) $(88.00) $( 126.80)
Defendants Failed to Take Timely, Sufficient Loan Loss Provisions
211. The Opteum Defendants violated GAAP by improperly failing to take timely loan
loss provisions related to the Company' s mortgages held for sale . According to SFAS No. 65,
Accountingfor Certain Mortgage Banking Activities, paragraph 28, a company must distinguish
between a loan held for sale and a loan held for investment on its balance sheet . Paragraph 4 of
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the SFAS No.65 states that "Mortgage loans held for sale shall be reported at the lower of cost or
fair value, determined as of the balance sheet date. Paragraph 4 further states that "[t]he amount
by which cost exceeds fair value shall be accounted for as a valuation allowance. Changes in the
valuation allowances shall be included in the determination of net income of the period in which
the change occurs.
212. Consistent with GAAP, the Company disclosed in its year ended 2005 Form 10-K
that mortgages held for sale "are carried at the lower of cost or market as determined by
outstanding commitments from investors or current investor yield requirements calculated on the
aggregate loan basis. The Form 10-K also represented that "[a] valuation allowance is
maintained to adjust mortgage loans held for sale to the lower of cost or market.
213. SFAS No. 5, Accountingfor Contingencies , requires that an estimated loss from a
loss contingency "shall be accrued by a charge to income if: (a) information available prior to
issuance of the financial statements indicated that it is probable that an asset had been impaired
or a liability had been incurred at the date of the financial statements ; and (b) the amount of the
loss can be reasonably estimated . SFAS No.5 also requires that financial statements disclose
contingencies when it is at least reasonably possible (i.e., greater than a slight chance) that a loss
may have been incurred. The disclosure shall indicate the nature of the contingency and shall
give an estimate of the possible loss or a range of loss, or state that such an estimate cannot be
made. Furthermore , FASB Interpretation No. 14, Reasonable Estimation of the Amount of a
Loss, Paragraph 3 states that if the reasonable estimate of a particular loss contingency is a range,
an amount shall be accrued for the loss. When some amount within the range appears at the time
to be a better estimate than any other amount within the range, that amount shall be accrued.
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When no amount within the range is a better estimate than any other amount, however, the
minimum amount in the range shall be accrued.
214. The disclosure of loss contingencies is deemed to be so important to an informed
investment decision that the SEC promulgated Regulation S-X, which provides that, although
disclosures in interim period financial statements may be abbreviated and need not duplicate the
disclosure contained in the most recent audited financial statements, "where material
contingencies exist, disclosure of such matters shall be provided even though a significant
change since year end may not have occurred. 17 C.F .R. § 210.10-01.
215. Opteum ' s valuation allowance and loan loss provisions violated GAAP by
materially understating the likelihood of loss inherent in its subprime and Alt-A mortgages
despite abundant evidence from the Company 's operations that these investments were far riskier
than the Company represented. In fact, Defendants described these loans as made primarily to
borrowers with good credit and alternate documentation when, in truth, the majority of these
loans were based solely on "stated income with lax or non-existent documentation or
verification standards.
216. In the November 2005 press releases and Form 8-K filings pertaining to the OFS
acquisition, the Company provided no financial statements about the mortgage business which it
was acquiring, done ostensibly to diversify its revenue sources and reduce risk. The Company
provided two press releases in January 2006 which contained OFS' consolidated financial
statements for 2002 to 2004 as well as unaudited pro forma financial statements for the
combined entities for 2005. These statements reveal that OFS had loan loss provisions of $1.61
million in 2002, $3.87 million in 2003, $5.37 million in 2004, and pro forma $5.9 million for the
first nine months of 2005. These loss provisions are a fairly stable percentage of net revenue for
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the years 2002 to 2004 and first nine months of 2005: 6.1%, 6.2%, 5.5%, and 6.9%,
respectively.
217. Opteum's 2005 Form 10-K, the first filing after the OFS acquisition in November
2005, did not disclose a loan loss provision, although subsequent filings revealed it to be
$424,236, a figure which, when annualized, is comparable to the belatedly disclosed pro forma
financial statements . The Q1:05 Form 10-Q provided no disclosure about a loan loss provision
and concealed the expense in a line item on the income statement labeled "Other administrative
expenses. Comparison with subsequent Form 10-Qs, however, reveals that the loan loss
provision for Q1:05 was in fact $ 1.34 million . Similarly , the loan loss provision for Q2:05,
although not disclosed in that quarter's Form 10-Q, was $1.49 million. The provision grew to
$3.18 million in Q3:06, $7.29 million in Q4:06, and $17.81 million in Q1:07 before the
Company divested itself of OFS.
218. The Company's increasing risk profile demonstrates that the Company's loss
provisions were far too low and violated SFAS No. 5 because risk was increasing across both of
the Company's businesses, the leveraged MBS investment business and the mortgage origination
and securitization business. Increased risk in the MBS investment business will be discussed
below in the section on fair value adjustment to unrealized losses . Increased risk in the latter
business pertains to the credit profile of the OFS mortgages, primarily subprime and Alt-A, as
well as inflated valuation of certain retained assets from its securitization activity. Furthermore,
there is no evidence that these two businesses were uncorrelated or negatively correlated, a
condition in which the Company's risk would in fact have been diversified as the Company had
represented because losses in one business would have been offset by gains in the other. On the
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contrary, both were highly correlated and thus the OFS acquisition was more likely to increase
risk rather than lower it.
219. The Company' s subprime mortgages and so called "Alt-A loans (characterized
by lax or non-existent documentation or verification standards) consistently comprised
approximately 70% of all mortgages originated by the Company during the Class Period.
Despite repeated representations in press releases that the OFS acquisition would result in
diversification and lowered risk, the mortgages originated were highly concentrated
geographically with approximately 50% of mortgages underwritten originating from California
during the Class Period. The Company's Form 10-K and Form 10-Q filings did not provide
detailed disclosures about the Company's underwriting process . A November 5, 2006
presentation to bond investors, filed as an exhibit to a Form 8-K report, however, did reveal a
high level of risk in this aspect of Opteum's operations . According to the bond investor
presentation, 45% of Opteum's mortgages had a loan to value ("LTV ) ratio of 80% or higher,
that is to say the borrowers had made less than a 20% down payment. The Company also
disclosed that it ignored all late payments for revolving lines of credit (e.g. credit cards) when
evaluating the creditworthiness of potential borrowers.
220. Thus the riskiness of the OFS business, mortgage origination and securitization,
increased during the Class Period, but the Company' s loan loss provisions did not reflect the
increase in risk. The $2.8 million loan loss valuation allowance for the first half of 2006 resulted
in an annualized loan loss provision of $5.67 million, not materially higher than the loan loss
provisions for 2004 and 2005 when interest rates were dramatically lower and the likelihood of
loss was much smaller . Even after Q3:06, the annualized loan loss for all of 2006 was only $8
million, and the Company subsequently booked a $7.3 million loan loss provision for Q4:06
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alone . By Q1:07, the loan loss provision was $17. 8 million, far in excess of the $13.3 million
provision for all of 2006 . Accordingly the Company violated GAAP, specifically SFAS No. 5,
by failing to accrue sufficient loan loss provisions , in a timely fashion, in response to the high
probability that it had incurred losses during the Exchange Act Class Period.
Inflated Value of Mortgage Servicing Rights
221. The Company violated GAAP in its treatment of certain portions of the
securitized mortgages which it retained on its own balance sheet. Opteum, as is typical, retained
an interest in the pool of mortgages which it had securitized. In addition, the Company
capitalized and placed on its balance sheet as an asset so-called Mortgage Servicing Rights
("MSRs ) in accordance with SFAS No. 156, Accounting for Servicing of Financial Assets.
According to the 2006 Form 10-K, the MSRs consisted of the right to collect loan payments,
respond to customer inquiries, supervising foreclosures, and other administrative tasks.
222. SFAS No. 156 permits entities to choose between the fair value or amortized cost
valuation of MSRs; Opteum elected the fair value method. This election allowed the Company
to write up its previously amortized MSR cost basis by $4.3 million. During 2006, the Company
increased its MSRs via new underwriting by $43 million and took a ($33.5 million) fair value
adjustment. However, Opteum based its MSR valuation on a specialist MSR broker named
Interactive Mortgage Advisors LLC which was in fact 50% owned by the Company's OFS
subsidiary. This substantial ownership interest constituted a tremendous conflict of interest and
precluded the MSR valuation from being a bona fide fair value price at which the MSRs could be
transferred in an arm's length transaction. The insufficiency of the MSR valuation adjustment
was confirmed in Q1:07 when the Company took an additional ($12.2 million) charge, 15.6% of
the quarter' s net loss, to lower its carrying value of the MSRs to fair value.
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Defendants ' Failure to Record TimelyFair Value Adiustments to Mort2a2e Backed Securities
223. The Company violated GAAP by failing to timely record fair value adjustments
related to its mortgage-backed securities, thus overstating Opteum's assets, stockholders' equity,
and earnings during the Exchange Act Class Period . GAAP, specifically Statement of Financial
Accounting Standards ("SFAS ) No. 115, Accounting for Certain Investments in Debt and
Equity Securities, requires that mortgage-backed securities be classified as either "held to
maturity, "available for sale, or "trading, and it applies different accounting principles and
reporting requirements to each classification. Specifically, such securities classified as "trading
must be marked to market each reporting period with the changes in market value reported in the
current period as income or loss, while "held to maturity securities are reported at historical
cost, and "available for sale securities are reported at market value but the changes in their fair
value are recorded as direct increases or decreases in stockholders' equity.
224. SFAS No. 115, specifies that "[i]f the decline in fair value is judged to be other
than temporary, the cost basis of the individual security shall be written down to fair value.. .and
the amount of the write down shall be included in earnings. This write down results in a new
cost basis for the security, which cannot be recovered if the fair value subsequently increases.
225. In its 2005 Form 10-K, Opteum purported to adhere to SFAS No. 115, stating:
In accordance with GAAP, Opteum classifies its investments in mortgage backedsecurities as either trading investments, available-for-sale investments or held-to-maturity investments . Management determines the appropriate classification ofthe securities at the time they are acquired and evaluates the appropriateness ofsuch classifications at each balance sheet date . Although Opteum intends to holdits mortgage -backed securities ("MBS ) until maturity , it may, from time to time,sell any of its mortgage-backed securities as part of the overall management ofthe business . Opteum currently classifies all of its securities as available -for-sale,and assets so classified are carried on the balance sheet at fair value, andunrealized gains or losses arising from changes in market values are reported asother comprehensive income or loss as a component of stockholders ' equity.
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Other than temporary impairment losses , if any, are reported in earnings.
226. Opteum, however, violated GAAP and its own publicly-disclosed policies by
deliberately, or at a minimum recklessly, ignoring overwhelming negative evidence in failing to
timely record fair value adjustments related to its mortgage-backed securities during the
Exchange Act Class Period.
227. During the Exchange Act Class Period, the Company recorded material net
unrealized losses , as reflected in the table below.
MortgageBacked Securities
Net Unrealized Losses
(in millions) Q4:05 Q1:06 Q2:06 Q3:06 Q4:06 Q1:07
$(76.49) $(88.31 ) $( 110.49 ) $(98.03 ) $(76.77) $(72.78)
228. Defendants , however, represented throughout the Exchange Act Class Period that
"[t]he decline in fair value MBS of investments is not considered to be other than temporary.
Accordingly, the write down to fair value is recorded in other comprehensive loss as an
unrealized loss. Indeed, not until Q4:06 did the Company record any impairment related to its
MBS Portfolio. In this regard, the Company stated in its 2006 Form 10-K the following,
"Opteum recorded a $10.0 million other-than-temporary loss during the year ended December
31, 2006 associated with certain MBS assets that were expected to be sold in the first quarter of
2007.
229. The Company further asserted that it considered the following factors, including:
the expected cash flow from the MBS investment; the general quality of the MBS owned; any
credit protection available; current market conditions; and the magnitude and duration of the
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historical decline in market prices as well as Opteum's ability and intention to hold the MBS
owned.
230. The Company released information about the composition of its MBS portfolio
every six weeks via press releases and Form 8-K filings which indicated the deteriorating
conditions adversely impacting the MBS fair value. These changes in Opteum's portfolio reveal
a pronounced increase in riskiness and likelihood of loss during the Exchange Act Class Period,
which further demonstrates the inadequacy of the Company's fair value adjustments. The
mortgages backing the agency debt in Opteum's portfolio consisted of Adjustable Rate
Mortgages ("ARMs, i.e., the coupon was to be reset within one year), Hybrid Adjustable Rate
Mortgages ("Hybrid ARMs, i.e., fixed initial rates which converted to adjustable rates after one
year), Balloon Maturity, and a variety of Fixed Rate mortgages and collateralized mortgage
obligations ("CMO )
231. Balloon Maturity instruments, where the bulk of the principal is to be repaid at
maturity, were risky but constituted only 1-2% of assets during the Exchange Act Class Period.
The greatest material risk for Opteum's portfolio was the ARMs, especially in the 2006 time
period when interest rates were rising steadily. The Federal Funds Rate, for example, was 4% on
November 1, 2005, literally days before the OFS acquisition, and then underwent five
consecutive 25 basis point increases to reach a peak of 5.25% by June 2006, a level at which it
remained for over a year.
232. The percentage of Opteum's portfolio invested in ARMs, however, increased
dramatically over the Class Period as the following table shows.
10/31/2005 1/18/2006 6/23/2006 9/14/2006 12/29/2006ARMs as percentofportfolio 55.77% 57.82% 68.10% 69.48% 74.98%
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233. The reset of the ARMs' coupon was indirectly correlated with the Fed Funds
increases, typically through LIBOR and other short term interest rates which moved in tandem
with Fed Funds. The weighted average coupon of Opteum's ARMs increased from 4.46% in
December 2005 to 5.12% in December 2006. The weighted average ARM interest rate cap was
approximately 10%, but between a quarter and a third of the ARMs had no periodic cap limiting
the potential yearly increase. These interest rate trends, in addition to their deleterious effect on
Opteum's cost of borrowing, also increased the risk of the ARMs re-setting to higher interest
rates which borrowers would be less likely to be able to repay.
234. The composition of Opteum's unrealized losses demonstrates that ARMs were a
risky portion of its MBS portfolio and that the Company was not aggressive enough in writing
down the impaired ARM assets. The following table shows the percentage of Opteum's
unrealized MBS loss consisting of ARMs which had been in a loss position for more than twelve
months.
Q4:05 Q1:06 Q2:06 Q3:06
11.69% 22.98% 30.51% 36.43%
235. Only in the subsequent period of Q4:06 did the Company recognize a $10 million
temporary impairment charge on its MBS portfolio. This is despite the fact that the percentage
of its unrealized losses consisting of ARMs, which had been in a loss position for over a year had
more than tripled from 11.69% to 36.43% in just nine months.
THE TRUE FINANCIAL AND OPERATIONAL CONDITIONOF OPTEUM IS BELATEDLY DISCLOSED
236. It was only days later, on May 10, 2007, that Defendants first shocked and
alarmed investors after they published a release that partially revealed that as a result of the
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complete failure of the OFS merger, the Company would be forced to take almost $9.0 million in
asset write-downs and another $50 million in negative value adjustments - almost all of which
were related to OFS, and that it would report a net loss of over $78.0 million for the first quarter
2007. At that time, Defendants published a release that stated, in part, the following:
Opteum Inc. Reports First Quarter 2007 Results;
76.5% of First Quarter Net Loss Attributable To:;
$37.4 Million Valuation Allowance on OFS's Deferred Tax Assets;
$12.2 Million Negative Fair Value Adjustment to OFS's MortgageServicing Rights;
$1.3 Million Negative Fair Value Adjustment to OFS's Residuals;
$8.8 Million in Asset Write Downs at OFS
Opteum Inc. (NYSE:OPX) [], a real estate investment trust [], today reported aconsolidated net loss of $78.1 million, or $(3.14) per Class A Common Share forthe three month period ended March 31, 2007, compared to a consolidated netloss of $8.0 million, or $(0.34) per Class A Common Share, for the prior yearperiod. The Company's first quarter results were significantly impacted byoperations at the Company's majority-owned subsidiary, Opteum FinancialServices, LLC ("OFS").
Nearly 50% of the Company's first quarter net loss, or $37.4 million, wasattributable to a valuation allowance on OFS's deferred tax assets. Nearly17.5% of the first quarter net loss was attributable to negative fair valueadjustments to OFS's mortgage servicing rights and retained interests insecuritizations. Slightly more than 10% of the first quarter net loss wasattributable to asset write downs at OFS due in part to the Company's decision toexit the mortgage origination business. [Emphasis added.]
237. The May 10, 2007 revelations caused shares of Opteum stock to fall precipitously.
As evidence of this, the following day, after publication of Defendants' release , shares of the
Company dropped by over 25% in a single trading day - falling to approximately $4.08 per share
from $5.49 per share the prior day, on volume of over 1.79 million shares traded - many times
the Company's daily average trading volume. However, the full truth regarding the full extent of
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the complete failure of the OFS acquisition - and the impact on the Company's bottom line
continued to be concealed.
238. Thereafter, on July 2, 2007 - as evidence of the total failure of the OFS
acquisition - Defendants announced that the Company had completed the sale of the money-
losing retail mortgage loan origination business. At that time, Defendants also revealed that in
exchange for substantially all of the assets related to OFS' retail mortgage loan origination
business , and certain other assets associated with OFS' corporate staff functions , the Company
received $1.5 million cash plus the assumption of approximately $4 million in lease obligations
and other liabilities related to the business . Investors also learned that, in conjunction with the
sale of this business, Defendant Norden resigned his position as Senior Executive Vice President,
effective June 29, 2007, and also resigned his position as President , Chief Executive Officer, and
Co-Head of Capital Markets of OFS. Investors saw this as a step in turning the Company
around, having decided to divest itself of OFS. mortgage business and two OFS co-founders.
239. On August 10, 2007, the full truth was finally revealed when investors learned for
the first time that results for Q2:07 would be even worse than previously stated - with a massive
net loss ofapproximately $162.5 million or over $6.50 per share, and with a write down in the
Company's book-value to approximately $1.17 per share at June 30, 2007, compared with the
$4.80 book-value reported on March 31, 2007. This massive charge also included a loss from
continuing operations of at least $82 million, and losses from discontinued operations, net of
tax, of $80.5 million . On this news, the value of Opteum's stock fell from a closing price of
$1.65 on August 9, 2007 to close at $1.05 per share the following day -- a loss of over one third
of the shares' value on unusually high trading volume.
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CAUSATION AND ECONOMIC LOSS
240. Between January 9, 2007 (when the Company announced the unscheduled
departure of OFS co-founder Defendant Levine) and August 10, 2007 (when the truth was finally
revealed), Opteum shares fell from $7.17 to $1.05 - a loss of over 85% of their value. During
this period, Defendants made multiple partial disclosures regarding the Company's need to delay
filings, its improper accounting and need to restate financials, rapidly plummeting financial
results, and Opteum's eventual need to drop the vast majority of OFS' business. Defendants
continually prevented the market from being impacted by these statements and continued to
conceal the true financial condition of the Company by tempering these disclosures with ongoing
false and misleading statements. Even in those partial disclosures, Defendants touted OFS'
potential and Citigroup' s interest in the Company and defended the Company's stability in the
face of the FBR report questioning whether Opteum was a going concern. On August 10, 2007,
the Company was finally forced to announce a net loss of $162. 5 million.
241. During the Exchange Act Class Period, as detailed herein, Defendants engaged in
a scheme to deceive the market, and a course of conduct that artificially inflated Opteum's stock
price and operated as a fraud or deceit on Exchange Act Class Period purchasers of Opteum's
stock by misrepresenting the Company's financial results and the purpose and effect of the
acquisition of OFS in early-November 2005. Over a period of approximately 23 months,
Defendants improperly published a series of materially false and misleading statements about
Opteum and inflated the Company's financial results by failing to take adequate reserves or
properly hedge or value assets and collateral.
242. Ultimately, however, when Defendants' prior misrepresentations and fraudulent
conduct came to be revealed and was apparent to investors - including the ruinous consequences
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of Defendants' total failure to integrate OFS into the Company - shares of Opteum declined
precipitously - evidence that the prior artificial inflation in the price of Opteum's shares was
eradicated. As a result of their purchases of Opteum stock during the Class Period, Exchange
Act Plaintiffs and other members of the Exchange Act Class suffered economic losses, i.e.,
damages under the federal securities laws.
243. By improperly characterizing the Company's financial results and misrepresent-
ing its prospects, Defendants presented a misleading image of Opteum's business and future
growth prospects . During the Exchange Act Class Period, Defendants repeatedly emphasized the
ability of the Company to integrate OFS and to monitor and control costs and expenses and
monitor collateral value and risk, and consistently reported expenses and expense ratios within
expectations and within the range for which the Company was adequately reserved. These
claims caused and maintained the artificial inflation in Opteum's stock price throughout the
Exchange Act Class Period and until the truth about the Company was ultimately revealed to
investors.
244. The decline in Opteum's stock price at the end of the Exchange Act Class Period
was a direct result of the nature and extent of Defendants' fraud being revealed to investors and
to the market. The timing and magnitude of Opteum's stock price decline negates any inference
that the losses suffered by Exchange Act Plaintiffs and the other members of the Exchange Act
Class were caused by changed market conditions, macroeconomic or industry factors, or even
Company-specific facts unrelated to Defendants' fraudulent conduct.
245. Defendants' false and materially misleading statements had the intended effect of
causing Opteum's shares to trade at artificially inflated levels throughout the Class Period -
reaching a Class Period high of over $10.00 per share in early 2006. However, as a direct result
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of investors learning the truth about the Company beginning on May 10, 2007, Opteum's stock
price collapsed, falling 25% in a single trading day to $4.08 per share from $5.49 per share the
prior day. On the news revealed on the last day of the Exchange Act Class Period, the value of
Opteum's stock fell from a closing price of $1.65 on August 9, 2007 to close at $1.05 per share
the following day -- a loss of over one third of the shares' value on unusually high trading
volume. This dramatic share price decline eradicated much of the artificial inflation from
Opteum's share price, causing real economic loss to investors who purchased this stock during
the Class Period.
246. The economic loss, i.e., damages, suffered by Exchange Act Plaintiffs and other
members of the Exchange Act Class, was a direct result of Defendants' fraudulent scheme to
artificially inflate the price of Opteum's stock and the subsequent significant decline in the value
of the Company' s shares when Defendants ' prior misstatements and other fraudulent conduct
was revealed.
APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD-ON-THE-MARKET DOCTRINE
247. At all relevant times, the market for Opteum's common stock was an efficient
market for the following reasons, among others:
(a) Opteum's stock met the requirements for listing, and was listed and
actively traded on the NYSE national market exchange, a highly efficient and automated market;
(b) As a regulated issuer, Opteum filed periodic public reports with the SEC
and the NYSE;
(c) Opteum 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
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disclosures, such as communications with the financial press and other similar reporting services;
and,
(d) Opteum was followed by several securities analysts employed by major
brokerage firm(s) who wrote reports which were distributed to the sales force and certain
customers of their respective brokerage firm(s). Each of these reports was publicly available and
entered the public marketplace.
248. As a result of the foregoing, the market for Opteum securities promptly digested
current information regarding Opteum from all publicly available sources and reflected such
information in Opteum stock price. Under these circumstances, all purchasers of Opteum
common stock during the Exchange Act Class Period suffered similar injury through their
purchase of Opteum common stock at artificially inflated prices and a presumption of reliance
applies.
COUNT VI
By the Exchange Act Plaintiffs Against All Defendants
For Violation Of Section 10(b) Of The Exchange ActAnd Rule 10b-5 Promulgated Thereunder
249. The Exchange Act Plaintiffs incorporate by reference each and every allegation
contained above as if set forth herein.
250. During the Exchange Act Class Period, Defendants carried out a plan, scheme,
and course of conduct which was intended to and, throughout the Exchange Act Class Period,
did: (a) deceive the investing public regarding Opteum's business, operations, management and
the intrinsic value of Opteum common stock; (b) enable Defendants to artificially inflate the
price of Opteum shares; (c) allow Defendants to raise as much as $8.2 million in cash through
the sale of equity to investment bank Citigroup Realty; (d) allow Defendants to obtain millions
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of dollars in salary increases, bonuses and stock awards that were tied to the acquisition and false
financial reporting by Defendants within the Exchange Act Class Period; and (e) cause the
Exchange Act Plaintiffs and other members of the Exchange Act Class to purchase Opteum
common stock at artificially inflated prices.
251. In furtherance of this unlawful scheme, plan and course of conduct, Defendants,
jointly and individually (and each of them) took the actions set forth herein.
252. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made
untrue statements of material fact and/or omitted to state material facts necessary to make the
statements not misleading; and, (c) engaged in acts, practices, and a course of business which
operated as a fraud and deceit upon the purchasers of the Company' s common stock in an effort
to maintain artificially high market prices for Opteum's common stock in violation of Section
10(b) of the Exchange Act and Rule 10b-5. All Defendants are sued either as primary
participants in the wrongful and illegal conduct charged herein or as controlling persons as
alleged below.
253. Defendants, individually and in concert, directly and indirectly, by the use, means,
or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a
continuous course of conduct to conceal adverse material information about the business,
operations, and future prospects of Opteum as specified herein.
254. These Defendants employed devices, schemes, and artifices to defraud, while in
possession of material adverse non-public information and engaged in acts, practices, and a
course of conduct as alleged herein in an effort to assure investors of Opteum's value and
performance and continued substantial growth, which included the making of, or the
participation in the making of, untrue statements of material facts and omitting to state material
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facts necessary in order to make the statements made about Opteum and its business operations
and future prospects in the light of the circumstances under which they were made not
misleading, as set forth more particularly herein, and engaged in transactions, practices, and a
course of business which operated as a fraud and deceit upon the purchasers of Opteum common
stock during the Exchange Act Class Period.
255. Each of the Individual Defendants' primary liability , and controlling person
liability, arises from the following facts: (a) the Individual Defendants were high-level
executives and/or directors at the Company during the Exchange Act Class Period and members
of the Company' s management team or had control thereof; (b) each of these Defendants, by
virtue of his responsibilities and activities as a senior officer and/or director of the Company was
privy to and participated in the creation, development and reporting of the Company's internal
budgets, plans, projections and/or reports; (c) each of these Defendants enjoyed significant
personal contact and familiarity with the other Defendants and was advised of and had access to
other members of the Company' s management team, internal reports and other data and
information about the Company's finances, operations, and sales at all relevant times; and,
(d) each of these Defendants was aware of the Company' s dissemination of information to the
investing public which they knew or severely recklessly disregarded was materially false and
misleading.
256. The Defendants had actual knowledge of the misrepresentations and omissions of
material facts set forth herein, or acted with severe reckless disregard for the truth in that they
failed to ascertain and to disclose such facts. Such Defendants' material misrepresentations
and/or omissions were done knowingly or with severe recklessness for the purpose and effect of
concealing Opteum's operating condition and future business prospects from the investing public
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and supporting the artificially inflated price of its common stock. As demonstrated by
Defendants ' overstatements and misstatements of the Company' s business , operations, and
earnings throughout the Exchange Act Class Period, Defendants , if they did not have actual
knowledge of the misrepresentations and omissions alleged, were severely reckless in failing to
obtain such knowledge by severely recklessly refraining from taking those steps necessary to
discover whether those statements were false or misleading.
257. As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market price of Opteum common
stock was artificially inflated during the Exchange Act Class Period. In ignorance of the fact that
market prices of Opteum's publicly-traded common stock were artificially inflated, and relying
directly or indirectly on the false and misleading statements made by Defendants, or upon the
integrity of the market in which the securities trade, and/or on the absence of material adverse
information that was known to or severely recklessly disregarded by Defendants but not
disclosed in public statements by Defendants during the Exchange Act Class Period, Exchange
Act Plaintiffs and the other members of the Exchange Act Class acquired Opteum common stock
during the Exchange Act Class Period at artificially high prices and were damaged thereby.
258. At the time of said misrepresentations and omissions, Exchange Act Plaintiffs and
other members of the Exchange Act Class were ignorant of their falsity, and believed them to be
true. Had Exchange Act Plaintiffs and the other members of the Exchange Act Class and the
marketplace known the truth regarding the problems that Opteum was experiencing, which were
not disclosed by Defendants, Exchange Act Plaintiffs and other members of the Exchange Act
Class would not have purchased or otherwise acquired their Opteum common stock, or, if they
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had acquired such common stock during the Exchange Act Class Period, they would not have
done so at the artificially inflated prices which they paid.
259. By virtue of the foregoing, Defendants have violated Section 10(b) of the
Exchange Act, and Rule I Ob-5 promulgated thereunder.
260. As a direct and proximate result of Defendants' wrongful conduct, Exchange Act
Plaintiffs and the other members of the Exchange Act Class suffered damages in connection with
their respective purchases and sales of the Company's common stock during the Exchange Act
Class Period.
EXCHANGE ACT CLAIMS:CLASS ACTION ALLEGATIONS
261. Exchange Act Plaintiffs bring this action as a class action pursuant to Federal
Rule of Civil Procedure 23(a) and (b)(3) on behalf of an Exchange Act Class, consisting of all
those who purchased shares of the Company in the open market between November 3, 2005 and
August 10, 2007, inclusive, and who were damaged thereby. Excluded from the Exchange Act
Class are Defendants, the officers and directors of the Company at all relevant times , members of
their immediate families and their legal representatives, heirs, successors, or assigns and any
entity in which Defendants have or had a controlling interest.
262. The members of the Exchange Act Class are so numerous that joinder of all
members is impracticable. Throughout the Exchange Act Class Period, Opteum common shares
were actively traded on the NYSE. As of December 18 , 2006, the Company had over 24.513
million shares of common stock issued and outstanding. While the exact number of Exchange
Act Class members is unknown to Exchange Act Plaintiffs at this time and can only be
ascertained through appropriate discovery, Exchange Act Plaintiffs believe that there are
hundreds or thousands of members in the proposed Exchange Act Class. Record owners and
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other members of the Exchange Act Class may be identified from records maintained by Opteum
or its transfer agent and may be notified of the pendency of this action by mail, using the form of
notice similar to that customarily used in securities class actions.
263. Exchange Act Plaintiffs' claims are typical of the claims of the members of the
Exchange Act Class as all members of the Class are similarly affected by Defendants' wrongful
conduct in violation of federal law that is complained of herein.
264. Exchange Act Plaintiffs will fairly and adequately protect the interests of the
members of the Exchange Act Class and have retained counsel competent and experienced in
class and securities litigation.
265. Common questions of law and fact exist as to all members of the Exchange Act
Class and predominate over any questions solely affecting individual members of the Exchange
Act Class. Among the questions of law and fact common to the Exchange Act Class are:
(a) whether the federal securities laws were violated by Defendants' acts as
alleged herein;
(b) whether statements made by Defendants to the investing public during the
Class Period misrepresented or omitted to state material facts about the business, operations, and
management of Opteum;
(c) whether Defendants acted with scienter with regard to the materially false
and misleading statements or omissions;
(d) whether Defendants' materially false and misleading statements or
omissions caused the Exchange Act Plaintiffs' and Exchange Act Class members' losses; and,
(e) to what extent the members of the Exchange Act Class have sustained
damages and the proper measure of damages.
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266. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as
the damages suffered by individual Exchange Act Class members may be relatively small, the
expense and burden of individual litigation make it impossible for members of the Exchange Act
Class to individually redress the wrongs done to them. There will be no difficulty in the
management of this action as a class action.
NO SAFE HARBORFOR EXCHANGE ACT CLAIMS
267. 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 Opteum who knew that those statements were false
when made.
EXCHANGE ACT CLAIMS: BASIS OF ALLEGATIONS
268. The allegations of the Exchange Act claims are based upon the investigation of
Exchange Act Plaintiffs' counsel, which included a review of SEC filings by Opteum as well as
regulatory filings and reports, securities analysts' reports and advisories about the Company,
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press releases and other public statements issued by the Company, media reports about the
Company, internet searches, and interviews of former employees and other persons with
knowledge. Exchange Act Plaintiffs believe that substantial additional evidentiary support will
exist for the allegations set forth herein after a reasonable opportunity for discovery.
EXCHANGE ACT CLAIMS: ADDITIONAL SCIENTER ALLEGATIONS
269. As alleged herein, Defendants acted with scienter in that each Defendant 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 Opteum, their control
over and/or receipt and/or modification of Opteum's allegedly materially misleading
misstatements and/or their associations with the Company which made them privy to
confidential proprietary information concerning Opteum, participated in the fraudulent scheme
alleged herein.
270. According to a Form 424B3 filed with the SEC on December 16, 2005, the
various Board Committees are described as follows:
Audit Committee: The audit committee of our board of directors recommendsthe appointment of our independent auditors, reviews our internal accountingprocedures and financial statements and consults with and reviews the servicesprovided by our internal and independent auditors, including the results and scopeof their audit. The audit committee currently consists of Ms. Hendricks(Chairperson and Audit Committee Financial Expert), Mr. Bespolka,Mr. Mortenson and Mr. Ortale. We believe that a majority of the members of theaudit committee satisfy the audit committee membership independencerequirements of the SEC and the independence and other standards of the NewYork Stock Exchange.
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Compensation Committee : The compensation committee of our board ofdirectors reviews and recommends to the board the compensation and benefits ofall of our executive officers, administers our stock option plans and establishesand reviews general policies relating to compensation and benefits of ouremployees. he compensation committee currently consists of Mr. Bespolka(Chairperson), Ms. Hendricks and Mr. Mortenson.
Governance and Nominating Committee: The corporate governance andnominating committee of our board of directors identifies individuals qualified tobecome members of our board of directors, selects, or recommends that our boardof directors select, the director nominees for each annual meeting of ourstockholders and develops our corporate governance principles. The corporategovernance and nominating committee currently consists of Mr. Ortale(Chairperson) and Mr. Bespolka.
271. Defendants were motivated to materially misrepresent to the SEC and investors
the true financial condition of the Company because the scheme: (a) deceived the investing
public regarding Opteum's business, operations, management and the intrinsic value of Opteum
common stock; (b) enabled Defendants to artificially inflate the price of Opteum shares; (c)
allowed Defendants to raise as much as $8.2 million in cash through the sale of equity to
investment bank Citigroup Realty; (d) allowed Defendants to obtain millions of dollars in salary
increases, bonuses and stock awards that were tied to the acquisition and false financial reporting
by Defendants within the Exchange Act Class Period; and (e) caused Exchange Act Plaintiffs
and other members of the Exchange Act Class to purchase Opteum common stock at artificially
inflated prices.
272. In addition to the foregoing, because of the Underwriter Defendants' and
Individual Defendants' positions with the Company, they each had access to the adverse
undisclosed information about the Company's business , operations , products , operational trends,
financial statements, markets, and present and future business prospects via access to internal
corporate documents (including the Company's operating plans, budgets, and forecasts and
101
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reports of actual operations compared thereto), conversations and connections with other
corporate officers and employees, attendance at management and Board of Directors meetings
and committees thereof, and via reports and other information provided to them in connection
therewith.
273. In addition to the Underwriting Defendants, it is also appropriate to treat the
Individuals named as Defendants herein as a group for pleading purposes and to presume that the
false, misleading, and incomplete information conveyed in the Company's public filings, press
releases, and other publications as alleged herein are the collective actions of the narrowly
defined group of Defendants identified above. Each of the Individual Defendants, by virtue of
their high-level positions with the Company, directly participated in the management of the
Company, was directly involved in the day-to-day operations of the Company at the highest
levels, and was privy to confidential proprietary information concerning the Company and its
business, operations, products, growth, financial statements, and financial condition, as alleged
herein. Accordingly, the Individual Defendants were also involved in drafting, producing,
reviewing, and/or disseminating the false, misleading, and incomplete statements and
information alleged herein, and approved or ratified these statements, in violation of the federal
securities laws.
274. As officers and controlling persons of a publicly-held company whose common
stock was , and is, registered with the SEC pursuant to the Exchange Act, and was traded on the
NYSE, and governed by the provisions of the federal securities laws, the Individual Defendants
each had a duty to promptly disseminate accurate and truthful information with respect to the
Company's financial condition and performance, growth, operations, financial statements,
business, products, markets, management, earnings, and present and future business prospects,
102
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and to correct any previously-issued statements that had become materially misleading or untrue,
so that the market price of the Company's publicly-traded common stock would be based upon
truthful and accurate information. The Individual Defendants' misrepresentations and omissions
during the Exchange Act Class Period violated these specific requirements and obligations.
275. The Individual Defendants, because of their positions of control and authority as
officers and/or directors of the Company, were able to and did control the content of the various
SEC filings, press releases and other public statements pertaining to the Company during the
Exchange Act Class Period. Each Individual Defendant was provided with copies of the
documents alleged herein to be misleading prior to or shortly after their issuance and/or had the
ability and/or opportunity to prevent their issuance or cause them to be corrected. Accordingly,
each of the Individual Defendants is responsible for the accuracy of the public reports and
releases detailed herein and is therefore primarily liable for the representations contained therein.
COUNT VII
By the Exchange Act Plaintiffs Against Individual DefendantsZimmer, Norden, Cauley, Bespolka, Hendricks, Mortenson, and Ortale
For Violation Of Section 20(a) Of The Exchange Act
276. Exchange Act Plaintiffs repeat and reallege each and every allegation contained
above as if fully set forth herein.
277. The Individual Defendants acted as controlling persons of Opteum within the
meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level
positions, and their ownership and contractual rights, participation in and/or awareness of the
Company's operations and/or intimate knowledge of the false financial statements filed by the
Company with the SEC and disseminated to the investing public, the Individual Defendants had
the power to influence and control and did influence and control, directly or indirectly, the
103
Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008 Page 104 of 107
decision-making of the Company, including the content and dissemination of the various
statements which Exchange Act Plaintiffs contend are false and misleading. The Individual
Defendants were provided with or had unlimited access to copies of the Company's reports,
press releases, public filings, and other statements alleged by Exchange Act Plaintiffs to be
misleading prior to and/or shortly after these statements were issued and had the ability to
prevent the issuance of the statements or cause the statements to be corrected.
278. In particular, each of these Defendants had direct and supervisory involvement in
the day-to-day operations of the Company and, therefore, is presumed to have had the power to
control or influence the particular transactions giving rise to the securities violations as alleged
herein, and exercised the same.
279. As set forth above, Opteum and the Individual Defendants each violated Section
10(b) and Rule 1 Ob-5 by their acts and omissions as alleged in this Complaint. By virtue of their
positions as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of
the Exchange Act. As a direct and proximate result of Defendants' wrongful conduct, Exchange
Act Plaintiffs and other members of the Exchange Act Class suffered damages in connection
with their purchases of the Company's common stock during the Exchange Act Class Period.
REQUEST FOR RELIEF : APPLICABLE TO ALL CLAIMS
WHEREFORE, Plaintiffs prays for relief and judgment, as follows:
A. Determining that this action is a proper class action , and certifying
Securities Act Plaintiffs and Exchange Act Plaintiffs as class representatives of the Securities
Act Class and the Exchange Act Class, respectively , under Rule 23 of the Federal Rules of Civil
Procedure and Plaintiffs' counsel as Class Counsel;
104
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B. Awarding compensatory damages in favor of Plaintiffs and the other Class
members against all Defendants, jointly and severally, for all damages sustained as a result of
Defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;
C. Awarding Plaintiffs and the Classes their reasonable costs and expenses
incurred in this action, including counsel fees and expert fees;
D. Awarding extraordinary, equitable and/or injunctive relief as permitted by
law, equity, and the federal statutory provisions sued hereunder, pursuant to Rules 64 and 65 and
any appropriate state law remedies to assure that the Classes have an effective remedy; and,
E. Such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED: APPLICABLE TO ALL CLAIMS
Plaintiffs hereby demand a trial by jury.
Dated: October 29, 2008 /s/ Jos h E. White, III
Joseph E. White, IIISAXENA WHITE, PA2424 North Federal Highway, Suite 2150Boca Raton, Florida 33431Telephone: (561) 394-3399Facsimile: (561) 394-3382Additional Counselfor Plaintiffs and the Classes
Kim E. Miller (admitted pro hac vice)KAHN GAUTHIER SWICK, LLC
12 E 41st Street, 12th FloorNew York, NY 10017Telephone : (212) 696-3730
Lewis Kahn (admitted pro hac vice)KAHN GAUTHIER SWICK, LLC
650 Poydras Street - Suite 2150New Orleans , LA 70130Telephone : (504) 455-1400Facsimile : (504) 455-1498
105
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David A.P. BrowerBROWER PIVEN, A Professional Corp.
488 Madison Avenue, 8t' Floor
New York, New York 10022Telephone: (212) 501-9000Facsimile: (212) 501-0300
Lead Counselfor Plaintiffs and the Classes
106
Case 2:07-cv-14278-DLG Document 42 Entered on FLSD Docket 10/29/2008 Page 107 of 107
UNITED STATES DISTRICT COURTFOR THE SOUTHERN DISTRICT OF FLORIDA
FORT PIERCE DIVISION
IN RE OPTEUM, INC. SECURITIESLITIGATION
CIVIL ACTION NO. 07-14278-CIV-GRAHAM
Certificate of Service
I hereby certify that on October 29, 2008, I electronically filed the foregoing documentwith the Clerk of the Court using CM/ECF. I also certify that the foregoing document is beingserved this day on all counsel of record or pro se parties identified on the Court's Docket and theattached Service List in the manner specified, either via transmission of Notices of ElectronicFiling generated by CM/ECF or in some other authorized manner for those counsel or partieswho are not authorized to receive electronically Notices of Electronic Filing.
/s/ Josoh E. White, III
Electronic FilingMara Aronson GeronemusSonya Ann StrnadTracy Ann NicholsHOLLAND & KNIGHT701 Brickell Avenue , Suite 3000Miami , FL 33131305-374-8500
Richard James Mockler, IIIGREENBERG TRAURIG, PACourthouse Plaza625 East Twiggs Street, Suite 100Tampa, FL 33602813-318-5700
107
Case 2:07-cv-14278-DLG Document 42-2 Entered on FLSD Docket 10/29/2008 Page 1 of 3
Exhibit A
Case 2 : 07-cv-14278-DLG Document 42-2 Entered on FLSD Docket 10/29/2008 Pa e 2 of 3Case 2:07-cv--14278 DLG Document 21-2 Entered on FLSD Docket 11/19/2007 Page 1 ¶ of 26
- I.CATIQN-QF PROP 09-E^AD_ IA1NTIFF
)amen brd Judy,, Winn Certify that,,
7. 1 have rxvi vied uom 1 L and I € titbrize Saxeaa White P.A. to ,,act on my behal(• in tIns matter (n eppty1nq for LeadPlniniiff status or for p11rtj at, a Wanda 1}i slntirf, and for all Wier purposes in connecttm wild) this litigation.
1 t cli4 not aacgx,ire the security that 1s the s{1bject of this action et the dfrectk5tr of plaintiff's counsel or In order topartidpate in 1W9 private action or a)w other litigation tinder ire feder l secur3Lies Jawwrs,
3- I am vri;ling to serve as a Lead Plaintiff or cuss repr€ ntative, either individually or as part of a group, I onderstanidthat a Lead PlalntiFf is a representative party who acts on behalf of other dues members in directing the action, andwhose duties may tnctude providinq testimony at dtposition and trio(, if nectsnry,
9. 1 represent anti warrant that I am i3u1310rized to rzecuto this Certi(iceuon on behalf of the pi)rrhasars of the subjectos udties described herein (lnclodtig, as the rase may be, rr)ysei€, any ca^owners, any carporatJons or other enbt(es,and/or arty beneficial owners).
5, I will not accept any paymaants for serving as a representative party on behalf at the dass beyond the ptirchaser's proMw t^l share of any recovery, akcept such reasonable costs end expenses (includir O last copes) directly relating to thereprosent4t(an of the class as vderod or approved by the o .urt.
6. I understand that Phis is not a data iorrt, and that My ability to share in any recovery as a member or the class isuppffoctod by my decision to erne as ii representative par or Lead Plaintiff,
7, 1 have listed Wow all my tmc ctlons to the seeurjttes of BlmIn ( Capital Management The 9ht(^) durirtc fhr t~lass Fetk l ^sfnli^'^I
Type OSecurity (Cornrnon stock, pre€orre€! Sto ck,Coils Puts or I#orkcfs
Perchcaso/AcgeieIttottoe S o Cs(9 ©sltto
Quantity Trade [ 3trrdry
Prlc pertat jSecu
See 5c( etttrta
(' L sc eeeoioo yal Iramisacuons on separate sheet, 1€ necessary}
"these securi[ia Were acquired or held In (check all that apply):
.l General (non•retirenzent accnilnt) D I rgerje q^r(eitiur Jdistrlbutlon l (liftt IRA t1 t=rnptoyer-sponsored plan (405k, 40U, etc.)
During the three years prior to the date of this Ceruratian, I have not tau grit to serve and i have not served as arepresentative party for a class In an action filed tinder- the federal securities taws except as described below (ifamy)=
I declare under penalty of perjury, under the tmsvs of the United States that the Information entered is accurate,
Iniecuted this r_.j_-day of , {{ {^ r_ , 2007
James.V%inn 7/in,6 W r tt r ^^" "''^
Narne (print ) 5lgrratrrrc
)Ud4-^Mn Anway (Print) - ^t^r
Case 2:07-cv-14278-DLG Document 42-2 Entered on FLSD Docket 10/29/2008 Par 3 of 3Case 2:07-cv-14278-DLG Document 21-2 Entered on FLSD Docket 11/19/2007 Page I f 26
I ([ VM1 >- L3G37 3. 10.: r. J3' 3
k)I1 D^ ItAFn` Juraas ;uc3Judy Winn
11/5/04 1,000 15,9311/6104 11000 15,801/1/6104 1,000 Mao.ao
11111/04 1,000 15.0411/12/04 1,000 15.5511/16104 11000 16,2011/10104 1,000 15.9911/22/04 1,000 15.6011/24/04 2,000 16.5812/6/04 1,000 '15.66
1241 6104 200 14.0112129]04 200 161'73119_4105 100 15.215114/06 3,80 0 15.065f18/Q5 340 13.807112106 ion 14.107112/05 100 14.107127/05 100 13.67/28/O5 1,00(} 13,297129105 500 13,198/3/05 26D 12.90
8/18100 3013 12.471011410/14/06 lopo€3 0 10.1810/20105 200 6.0211005 200 9.x}22.12/au Soo 0,55
2.2.3105 60o 8,793/2/05 500 8.06
3110106 5,000 8,644/4106 1,200 8A3513/00 1,500 8.59
W3ioloe .1 MO 8.608/2$/w 4,O0o 8.15
Sales:
Date shar$s 1sh r,^
7/28105 1,000 14.0611015100 5,200 8,371018106 2,300 8.$810000 2,500 8.39