the rosen law firm, p.a. - stanford...

Case3:09-cv-04208-JSW Document172 Filed01/07/11 Pagel of 26

Laurence M. Rosen (SBN # 219683)1 THE ROSEN LAW FIRM, P.A.2 333 South Grand Avenue, 25 th Floor

Los Angeles, CA 900713 Telephone: (213) 785-2610

Facsimile: (213) 226-46844 Email: lrosen(drosenlegal.com

5and

6Phillip Kim, Esq. (pro hac vice)

7 THE ROSEN LAW FIRM, P.A.8 275 Madison Avenue, 34th Floor

New York, New York 101169 Telephone: (212) 686-1060

Facsimile: (212) 202-382710 Email: pkin(it;rosenleoal.com

11Lead Counsel for Plaintiffs and the Class

12 UNITED STATES DISTRICT COURTNORTHERN DISTRICT OF CALIFORNIA

13 SAN FRANCISCO DIVISION

14 ) Case No. CV-09-4208-JSW15 KYUNG CHO; REX DECHAKUL; AND CV-09-4429-JSW

DAVID HWANG, INDIVIDUALLY AND ) CV-09-4449-JSW)16 ON BEHALF OF ALL OTHERS ) CV-09-4505-JSW

SIMILARLY SITUATED, ) CV-09-4513-JSW17 )Plaintiffs, ) PLAINTIFFS' MEMORANDUM OF18 ) POINTS AND AUTHORITIES IN

vs. ) OPPOSITION TO DEFENDANT CRAIG19 ) ON'S MOTION TO DISMISS THE

) CONSOLIDATED AMENDED20 UCBH HOLDINGS, INC.; THOMAS S. WU; ) COMPLAINT

EBRAHIM SHABUDIN; CRAIG ON )21

) CLASS ACTION DENNIS WU; ROBERT NAGEL; JOHN M.22 KERR; DANIEL M. GAUTSCH; DOUGLAS ))

MITCHELL; BURTON D. THOMPSON; ) Date: February 18, 201123 JOHN CINDEREY; JOSEPH J. JOU; PIN PIN) Time: 9:00 a.m.

CHAU; LI-LIN KO; JAMES KWOK; ) Courtroom: 11, 19th Floor24 QINGYUAN WAN; GODWIN WONG; ) Judge: Hon. Jeffrey S. White

25 DAVID NG; DANIEL P. RILEY; and ))RICHARD LI-CHUNG WANG )26 )Defendants.

27

280

PLS. MEMORANDUM OF P&As IN OPP. TO DEFENDANT CRAIG ON'S MOTION TO DISMISS Case No.CV 09-04208-JSW

Case3:09-cv-04208-JSW Document172 Filed01/07/11 Page2 of 26

1 TABLE OF CONTENTS

2 Page

3 ISSUES TO BE DECIDED iv

4 SUMMARY OF THE ARGUMENT

5 I. STATEMENT OF FACTS 1

6 II. THE CAC SUFFICIENTLY PLEADS FALSITY 1

7 ALL and Provision in 4Q2007 and FY2007 1

8 Internal Controls 4

9 On 's Oral Statement 9

III. THE CAC SUFFICIENTLY PLEADS SCIENTER 10

11 IV. THE CAC SUFFICIENTLY PLEADS CONTROL PERSON

12 LIABILITY 14

13 V. CONCLUSION 14

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TABLES OF AUTHORITIES

2 Cases Page(s)

3 Adams v. Kinder-Morgan, Inc.,

4 340 F.3d 1083 (10 th Cir. 2003) 14

5 Atlas v. Accredited Home Lenders Holding Co.,

6 2008 WL 80949 (S.D. Cal. Jan. 4, 2008) 4

7 Belmont Holdings Corp. v. Sun Trust Banks, Inc.,

8 2010 WL 3545389 (N.D. Ga. Sept. 10, 2010) 3, 4, 5

9 Fait v. Regions Fin. Corp.,

10 712 F. Supp. 2d 117 (S.D.N.Y. 2010) 3,5

ii Howard v. Everex Sys., Inc.,

12 228 F.3d 1057 (9th Cir. 2000) 13

13 In re CIT Group, Inc. Sec. Litig.,

14 349 F. Supp. 2d 685, 690 (S.D.N.Y. 2004) 3

15 In re Countrywide Financial Corp. Den y. Litig.,

16 554 F.Supp.2d 1044 (C.D. Cal. 2008) 10,11

17 In re Countrywide Fin. Corp. Sec. Litig.,

18 588 F.Supp.2d 1132 (C.D. Cal. 2008) 10,14

19 In re Refco, Inc. Sec. Litig.,

20 503 F.Supp.2d 611 (S.D.N.Y. 2007) 13

21 In re Thornburg Mortg. Inc. Sec. Litig.,

22 695 F. Supp.2d 1165 (D.N.M. 2010) 14

23 Miss. Pub. Emps. Retirement Sys. v. Boston Scientific Corp.,

24 523 F.3d 75 (1st Cir.2008) 11

25 Patel v. Parnes,

26 253 F.R.D. 531 (C.D. Cal. 2008) 13

27

28

PLS. MEMORANDUM OF P&As IN OPP TO DEFENDANT CRAIG ON'S MOTION TO DISMISS Case NoCV 09-04208-JSW


1 TABLES OF AUTHORITIES(Continued)

2Cases Page(s)

3Shields v. Citytrust Bancorp., Inc.,

425 F.3d 1124 (2d Cir.1994) 14

5Tellabs v. Makor Issues & Rights, Ltd.,

6551 U.S. 308 (2007) 11

7Von Saher v. Norton Simon Museum of Art at Pasadena,

8592 F.3d 954 (9th Cir. 2010) 13

9Warsaw v. Xoma,

1074 F.3d 955 (9th Cir. 1996) 6

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Case3:09-cv-04208-JSW Document172 Filed01 /07/11 Page5 of 26

1 ISSUES TO BE DECIDED

2 1. Does the CAC adequately allege that Defendant Craig On made false or

3 misleading statements?

4 2. Does the CAC adequately allege facts, that individually or holistically, create a

5 strong inference that Defendant Craig On acted with scienter, i.e. acted knowingly or with

6 deliberate recklessness?

7 3. Does the CAC adequately allege control person liability against Defendant Craig

8 On?

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10

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12

13

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15

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17

18

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24

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28iv



1

2 SUMMARY OF THE ARGUMENT

3 The CAC alleges that as CFO and EVP of UCBH, Craig On presided over the finance

4 department's concealment of the rapid deterioration of the value of UCBH's loan portfolio. On

5 signed false SOX certifications, made false representations to investors in a conference call, and

6 provided UCBH's auditors with materially understated figures for UCBH's allowance for loan

7 losses ("ALL") and provision for loan losses ("Provision"). UCBH's auditors later determined

8 that "UCB senior executives" deliberately concealed serious financial reporting issues. As a

9 result, UCBH demoted On from CFO to Deputy CFO.

10 On would have this Court hold that he was unaware that UCBH falsified its financial

11 reporting. The CAC, however, demonstrates that "it would be difficult to conclude that [On] at

12 the top level... of [UCBH] did not know what was going on." In re Countrywide Financial

13 Corp. Sec. Litig., 588 F. Supp. 2d 1132, 1194 (C.D. Cal. 2008). Moreover, On must have known

14 his statements were false because after the FDIC stated that UCBH's ALL at year-end 2007 as

15 reported in its 2007 10K were understated by $35 million, UCBH repeated the same false figure

16 and the corresponding false Provision for FY2007 in its 2008 10K. UCBH also filed Call

17 Reports for FY 2007, 1Q2009 and 2Q2009 that materially contradicted the statements in the

18 2007 10K and 4/23/09, 8/6/09, and 9/9/09 press releases ("PRs") about the ALL and Provision

19 for 4Q2007, FY2007, 1Q2009 and 2Q2009, even filing one Call Report on the same day as the

20 PR it contradicted.

21 On's plea of ignorance is also belied by the many statements he made regarding his

22 vigilance regarding problem loans and loan losses as CFO: that he reviewed "every single loan'

23 every week; that he spent twenty-one years auditing banks for Deloitte & Touche; that he

24 prepared UCBH's financial statements; and that he participated in conference calls touting

25 UCBH's "conservative" methods. All the while he was telling investors that he was on top o

26 loan losses and ensuring their accurate financial reporting, he was misstating ALL in materia

27 amounts. On's motion should be denied in its entirety.

28



1 I. STATEMENT OF FACTS

2 Plaintiffs incorporate by reference, the statement of facts in the Shabudin Opp. Craig 0

3 ("On") was UCBH's EVP and CFO from October 2008 through the end of the Class Period.

4 From May 2008 through October 2008, On was Deputy CFO. From June 2005 to March 2008,

5 On was SVP and Corporate Controller. 1f33. On was deeply involved in UCBH's audit an'

6 financial controls functions.

7 On falsely signed the SOX certifications for the 10Qs for 2Q08 and 3Q08 and the 2008

8 10K. fi77, 86, 94. On spoke falsely during a conference call on 10/24/08 about the conservative

9 and timely method that UCBH uses to determine its Provision and ALL, and provided

10 materially understated figure for the ALL as of 9/30/08.1j82.

11 According to the Material Loss Review ("MLR"), UCBH's internal investigation foun•

12 that certain UCBH senior executives engaged in intentional misconduct that concealed UCBH's

13 fraud from the bank regulators and the general public. 1f83. "As a result, UCB's CEO and Chic

14 Operating Officer resigned, while others were terminated. The report also containe•

15 recommendations, which were adopted by UCBH's Board. For example, UCBH's Board an'

16 management agreed to provide bank employees with additional job training, and to reprimand,

17 reassign and in some instances, terminate or demote certain UCB employees." 1f83 (emphasis

18 added). As a result of On's misconduct, UCBH demoted On from CFO to Deputy CFO. Ex. R to

19 T. Wu MTD (9/8/09 PR) at 2.

20 II. THE CAC SUFFICIENTLY PLEADS FALSITY

21 In what follows, Plaintiffs address the falsity of UCBH's statements about its ALL an'

22 Provision for 4Q2007 and FY2007 and about its internal controls during the Class Period.

23 Plaintiffs incorporate by reference herein the portion of the T. Wu Opp. that addresses the same.

24 On, like the Directors, does not dispute, and is thus precluded from disputing on this motion, the

25 falsity of UCBH's statements of its ALL and Provision made in its 2008 10K about FY2008 an'

26 4Q08, and in PRs on 4/23/09, 8/6/09, and 9/9/09 about 1Q09 and 2Q09.

27 ALL and Provision in 402007 and FY2007

281



1 It is undisputed that the CAC asserts that the ALL and Provision for 4Q2007 and FY200

2 reported in the Company's 1/24/08 PR are false and misleading. 1f59. The CAC demonstrates the

3 falsity of the PR by citing the 2007 10K, and providing the corrected line items that were

4 misstated in the PR. The 1/24/08 PR understated the Provision for the year and quarter ende•

5 December 31, 2007 by 42% and 72%, respectively. 1f62. UCBH's then-CFO, Downing,

6 acknowledged the false statements. 1f63.1

7 The CAC also alleges that the Provision of $20.2 million for FY2007 reported in the

8 2007 10K is materially false because the Provision reported in the Call Report for the same

9 period was $22.2 million. 1f66. On argues in a footnote (On MTD at 11:20-27) that the Provisio

10 for FY2007 reported in the 2007 10K is not false because, as he claims, the Provision in the Cal

11 Report--unlike in the 2007 10K--does not incorporate any changes to the allowance for unfunde•

12 commitments during 2007. On claims that the Provision in the 2007 10K incorporates the change

13 in the allowance for unfunded commitments, which decreased by approximately $2 million fro

14 the beginning of FY2007 ($6.8 million) to the end of FY2007 ($4.9 million), thus rendering the

15 $20.2 million Provision reported in the 2007 10K consistent with the $22.2 million Provisio

16 reported in the Call Report for the same period.

17 On's contention is contradicted by UCBH's own SEC filings, which show that an

18 increases or decreases in the allowance for unfunded commitments are included in the "non-

19 interest expense" line item in the income statement, and therefore are not incorporated in the

20 Provision. Indeed, UCBH's 2005 10K filed with the SEC on March 16, 2006 states: "[t]he

21 allowance [for unfunded commitments] is included in other liabilities on the Company's

22 consolidated balance sheet with any related increases or decreases in the allowance included i

23 the non interest expense in the Company's consolidated income statement." Pls. RJN, Ex.8 at 58-

24 59. Although UCBH omitted this material fact in the 2007 10K, it is clear from the 2007 10

25 that UCBH continued in its 2007 financial statements to account for changes to the allowance fo

26

27 1 The CAC alleges that corrections resulting from an "error" result from accounting errors that existed a

28 the time financial statements were prepared. See ”127-129.

2PLS. MEMORANDUM OF P&As IN OPP TO DEFENDANT CRAIG ON'S MOTION TO DISMISS Case NoCV 09-04208-JSW


1 unfunded commitments as non interest expense, and not in the Provision, because UCBH'S

2 presentation of its income statement compares the line items for FY2005 with those for FY2007-

3 -and the FY2005 line items in the 2007 10K match the line-items originally reported in the 2005

4 10K. Pls. RJN, Ex.8 (2005 10K) at 70; T. Wu RJN, Ex.0 (2007 10K) at 78-79. Obviously the

5 2007 10K's comparison of the FY2007 line items with those of FY2005 would be meaningless i

6 the Provision for FY2007 was calculated in an entirely different way than the Provision fo

7 FY2005. Thus, UCBH continued to include any increases or decreases in the allowance as no

8 interest expense in the income statement in 2007, and not in the Provision.2

9 The CAC alleges that the year-end 2007 Provision in the 2007 10K of $20.2 million was

10 false for another reason, too. 1f66. The CAC alleges that the February 2008 Examination states

11 that UCBH understated in the 2007 10K its ALL by $35 million as of 12/31/07, which means

12 UCBH's Provision for 2007 was actually $55.2 million. 1f67. UCBH never corrected the false

13 figures for ALL as of 12/31/07 and the Provision for 2007 that were stated in the 2007 10K. 1f66.

14 Instead it repeated them in the 2008 10K. Id.

15 On incorrectly suggests that to allege the falsity of UCBH's statements about ALL an'

16 the Provision in the 1/24/08 PR and the 2007 10K, the CAC must allege the subjective falsity o

17 those statements--that Defendants believed the statements were false. On relies on cases in whic

18 loan loss reserves were not later corrected by the subject companies themselves or by ba

19 regulators, but were first alleged to have been inadequate after too many loans defaulted. Se-

20 Fait v. Regions Fin. Corp., 712 F. Supp. 2d 117, 124-25, & n.55 (S.D.N.Y. 2010); In re CI

21 Group, Inc. Sec. Litig., 349 F. Supp. 2d 685, 690 (S.D.N.Y. 2004). On also inaptly relies o

22 Belmont Holdings Corp. v. Sun Trust Banks, Inc., in which SunTrust Bank raised its loan loss

23 reserves as of a future date in order to accommodate a larger portion of uncollectible loans, bu

24 did not retroactively correct its loan loss reserves as of a prior date. 2010 WL 3545389, *6 (N.D.

25

26 2 On does not dispute, and is thus precluded from disputing, that the two Call Reports for 1Q2009 an.

27 2Q2009 contradict and reveal the falsity of the statements in the 4/23/09 PR, 8/6/09 PR, and 9/9/09 P •about the ALL and Provision for the same quarters.

283


Case3:09-cv-04208-JSW Documentl 72 Filed01/07/11 Pagel 0 of 26

1 Ga. Sept. 10, 2010). Here, the 2007 10K corrected the 1/24/08 PR's statements on ALL as o

2 12/31/07 and Provision for 2007, the FDIC corrected the 2007 10K's statements on ALL as o

3 12/31/07, and a Call Report corrected the 2007 10K's Provision for 2007. 3 These statements

4 were thus false at the time they were made.4

5 According to the FDIC, the 2007 10K's statements about ALL and the Provision were

6 false when made. Even if the Court finds that to allege the falsity of the ALL and Provision i

7 the 2007 10K, Plaintiffs must allege that Defendants who made the statements believed the

8 were false when made, the Court should infer they knew of the falsity. Indeed, that UCB

9 repeated these false figures in the 2008 10K, which was filed indisputably after Defendants

10 received the FDIC's February 2008 Examination Report, indicates that Defendants had a patte

11 of knowingly issuing false statements about UCBH's ALL and Provision. That pattern o

12 Defendants is evidenced by the material contradictions found in the Call Reports for FY 2007,

13 1Q2009 and 2Q2009 of the statements in the 2007 10K and 4/23/09, 8/6/09, and 9/9/09 PRs

14 about the ALL and Provision for 4Q2007, FY2007, 1Q2009 and 2Q2009. Indeed, the Cal

15 Report filed on 8/6/09 showed that the PR issued the same day materially understated the AL

16 and Provision. That the Call Reports for the first two quarters revealed the falsity of the PRs fo

17 the same time period is discussed in T. Wu Opp., which is incorporated by reference herein. The

18 Directors admit that if UCBH disclosed information in the Call Reports that contradicted thei

19 PRs, it clearly shows deliberate concealment by Defendants. Directors MTD at 8:2-5.

20 Internal Controls

21 Findings reported in the MLR and the UCBH's internal investigation demonstrate the

22 falsity of UCBH's statements about its internal controls in filings with the SEC, including al

23 10Ks and 10Qs during the Class Period, related PRs, SOX certifications, and other statements.5

24

25 3 As discussed above, Defendants admitted statements in the 1/24/08 PR were false when issued.4 Atlas v. Accredited Home Lenders Holding Co., 2008 WL 80949, *10 (S.D. Cal. Jan. 4, 2008) (findint,

26 that understated loan loss reserves violated GAAP where auditor refused to approve financial statementand subsequent auditor required those reserves to be retroactively increased by over $30 million).

27 5 On is wrong in claiming that allegations that UCBH made false statements on the quality of its internal

28 controls are merely derivative of their allegations regarding UCBH false statements pertaining to its ALL


Case3:09-cv-04208-JSW Documentl 72 Filed01/07/11 Pagel 1 of 26

1 The CAC alleges that UCBH made false statements that its internal controls were

2 adequate based on the findings of the MLR and the internal investigation. As to statements

3 issued in and concerning the periods from 2007 through October 2008, the CAC alleges a

4 plethora of objective facts demonstrating that the Company's claims regarding its internal

5 controls and monitoring thereof were false. 171; e.g., 171b, c (noting that beginning in 2007,

6 examination reports began to note more significant weaknesses in Board and management

7 oversight, bank failure caused by such weaknesses, and "management controls insufficient to

8 prevent inaccuracies and omissions and misrepresentation that affected key data"); 6 171c, d

9 (ineffective loan reviews and assessment of loan portfolio and risk management, March 2007

10 examination found, Board not aware of significant leverage strategy); 1f71f (2007-2009

11 examination found management turnover, inexperienced staff); 1f71j (February 2008,

12 examination directed inadequate monitoring of special mention loans loans with asset

13 weaknesses that demanded management's attention). Notably, the MLR found during this

14 period improper domination and control of the Company by Wu, who was "ultimately

15 responsible for (1) fostering a culture that led to the bank's approval of a large number of

16 exceptions to the bank's loan policy so UCB could make more loans, (2) fostering a combative

17 culture where management failed to downgrade non-performing loans in a timely manner, and

18 (3) overpaying to acquire financial institutions" CAC, EX.A (MLR) at 20; 171c. That UCBH

19 knowingly made false statements in its 1/24/08 PR and that UCBH understated its Provision in

20 its 2007 10K by $35 million, and repeated the same 2007 Provision in its 2008 10K reveals a

21 pattern of knowingly making false statements beginning on 1/24/08, which could not have

22 happened if adequate internal controls were in place. Reasonable minds could not disagree these

23 allegations demonstrate the falsity of the Company's statements about the adequacy of internal

24

25 and Provision. As set forth below, allegations that UCBH's statements on internal controls were falsehave numerous independent bases. The cases on which On frivolously relies are inapplicable because

26 there plaintiffs alleged that the subject companies must have had poor internal controls purely by dint othe alleged fact that the loan loss reserves were inadequate. See Fait, 712 F. Supp. 2d at 125; Belmon

27 Holdings, 2010 WL 3545389, at *7.

28 6 Such examination reports were reviewed by On, as the CFO. 71.


Case3:09-cv-04208-JSW Document172 Filed01/07/11 of 26

I controls and monitoring thereof See Warsaw v. Xoma, 74 F.3d 955, 959 (9th Cir. 1996)

2 ("[O]nly if 'reasonable minds' could disagree that the challenged statements were not

3 misleading should the district court dismiss under 12(b)(6).")

4 The FDIC examinations of UCBH, beginning with the February 2008 examination, states

5 that UCBH had internal control weaknesses. Those findings are not contradicted by the fact tha

6 the examinations before April 2009 yielded overall barely passing ratings of "2," meaninsj

7 "satisfactory."7 "Examiners contemplated a '3' ['troubled"' Management component rating, bu

8 after consultation with the SFRO, the FDIC provided a '2' rating because it was confident tha

9 UCB would remediate these issues and the bank's financial condition was satisfactory." CAC,

10 Ex.A at 19. The MLR stated that "Given UCB Board and management weaknesses reporte•

11 during 2007 through 2009, a lower Management component rating may have been justifies

12 earlier than April 2009..." Id. at 15. Moreover, UCBH was also subjected to another type o

13 review conducted by FDIC in the LIDI program. UCBH received a nepative outlook ratinl,

14 starting in the third quarter of 2008 and a "C" overall rating for each quarter of 2008. Id. at 26-

15 27, 30. 8 In fact, notwithstanding that UCBH received barely satisfactory and some negative

16 FDIC examination ratings through 2008, the MLR stated that KPMG believed that the

17 misconduct identified by UCBH's internal investigation began in October 2008. 1f83. Tha

18 Defendants hid the depth of their fraud from bank regulators during the initial part of the Class

19 Period cannot insulate them from liability under the federal securities laws.

20 As for UCBH's statements about the adequacy of its internal controls made during an'

21 after October 2008, through the end of the Class Period, in addition to the aforementione•

22 reasons, these were false and misleading because, according to the MLR, KPMG determined tha

23

24

25 In his motion, On attempts to mislead the Court in stating that UCBH received ratings of 1 ("stroll!,compliance") or 2 ("satisfactory") until 2009. UCBH received a rating of 1 only for one examination, an.

26 that examination was done well before the Class Period began, on 1/30/06. CAC, Ex.A at 16, 18. Duringthe Class Period, until the April 2009 targeted review, UCBH only received passing ratings of 2. Id. at 16.

27 The rating just below 2 is 3 ("troubled"). Id. at 18.

28The LIDI program provides a more forward-looking analysis. Id. at 27.



1 starting in at least October of 2008, "UCB senior executives" deliberately concealed serious

2 financial reporting issues. CAC, EX.A at 7; 1f83g.

3 The deliberate concealment included, among other things, (i) "modification of loan terms

4 to delay negative consequences ... of a weakened borrower" (i.e. "modifications were numerous

5 and included extending terms, lowering rates, and improperly using the interest reserve

6 account"), (ii) "intentional delays in recognizing risk rating downgrades or specific reserves'

7 (i.e. bank employees acted to delay the recognition of risk rating downgrade, or to minimize the

8 loan loss allowance or write-down of real-estate owned loans); (iii) numerous instances where

9 relevant information was intentionally withheld from KPMG, misrepresented to KPMG or both;

10 and (iv) inappropriate alteration of documents by bank employees in an effort to improve the

11 perception of credit quality, including the alteration that removed or ameliorated negative facts

12 that were material to the evaluation of credit, and backdating documents to make them appea

13 more reliable. ¶J 13, 17-19, 83f.

14 On argues that any statements about internal controls beginning with the 2008 10K were

15 not false because the 2008 10K acknowledged there was a single material deficiency in the

16 Company's internal control over financial reporting, concerning the Company's policies an'

17 procedures that "did not provide for timely evaluation of and revision to management's approac

18 for assessing credit risk inherent in the Company's loan portfolio to reflect changes in the

19 economic environment." 1f91. The 2008 10K admission of a single internal controls weakness

20 was false because there was more than one such weakness. Moreover, the 2008 10K's statemen

21 about the internal controls weakness was also false because the 2008 10K falsely stated that tha

22 weakness had already been remediated by the time the 2008 10K was filed on March 16, 2009.

23 1f91 ("[t]his material weakness resulted in a material misstatement of the Company's loan loss

24 allowance and provision for loan losses as of and for the year ended December 31, 2008 that has

25 been corrected prior to issuance of the Company's 2008 consolidated financial statements").

26 UCBH's statements that only a single material internal control deficiency existed, that it ha'

27 corrected the misstatement resulting from the deficiency, and that it had taken all necessary steps

287



1 to remediate control weaknesses and ensure adequate internal controls over financial reportinv

2 were materially false and misleading because of the following five reasons:

3 1. In the May 20, 2009 8-K, the Company admitted that its financial statements for fiscal

4 year ended December 31, 2008 could no longer be relied upon and had to be restated, and tha

5 the "restatement will result in material adjustments to the loan loss provision and relate'

6 allowance for loan losses" which were discovered during the Company's re-examination of its

7 internal controls. ¶93(a).

8 2. Starting from at least October 2008 through 2009 senior management and board members

9 of the Company were deliberately concealing the Company's deteriorating financial conditio

10 by, among other things, altering documents and lying to the Company's auditors to abate credi

11 rating downgrades and to minimize the Company's loan loss allowance, as set forth in lf 83

12 above. ¶93(b).

13 3. The Company had undisclosed management and control weaknesses from at least 200

14 through 2009 (fi 71, 83) which also caused the Company to issue misstatements and omissions

15 to investors during the Class Period. ¶93(c).

16 4. Contrary to the Company's representations of ongoing and "active" remediation efforts,

17 the MLR reported that officials from the FDIC San Francisco Regional Office, found that thei

18 efforts to rate the Bank's Capital, Asset Quality, Management, Earnings, Liquidity an'

19 Sensitivity to Market Risk ("CAMELS") in late 2008 and into 2009 was hindered by the

20 Company's deliberate misconduct, which included, (a) "presenting examiners with inaccurate

21 financial information on certain occasions regarding loans they reviewed" (b) not providinv

22 regulators a December 2008 IARD loan review report until three months after it was prepared,

23 which "would have shed light on UCB's declining loan performance"; and (c) not beinv

24 "forthright with examiners when questioned about loan loss provision expenses for the fourt

25 quarter of 2008." ¶93(d).

26

27

288



1 5. The MLR also noted that FDIC's April 2009 targeted review report identified "new loa

2 administration issues related to troubled debt restructuring and loss impairment analyses fo

3 problem loans that surfaced once asset quality deteriorated." ¶93(e).

4 6. After the 2008 10K was filed, UCBH released on 4/23/09 its earnings for 1Q2009, whic

5 UCBH admitted in its 5/20/2009 8K also contained false financial statements that could not be

6 relied on. 1f113. Furthermore, as discussed above and in Pls. T. Wu. Opp., UCBH filed Cal

7 Reports for the first two quarters of 2009 that revealed the materially false financial statements i

8 PRs for the corresponding quarters. If UCBH had successfully remediated its internal controls b

9 March 16, 2009, the date the 2008 10K was filed, then UCBH would not have continued to make

10 the same false statements about ALL and the Provision that it made in the 2008 10K and before.

11 Indeed, if internal controls were even the slightest bit effective, then there is no way that in one

12 day, August 6, 2009, UCBH would have issued a PR and Call Report on earnings for 2Q2009

13 that were materially inconsistent with one another.

14 On 's Oral Statement

15 On also made a false statement orally during the 10/24/08 earnings call, in which he

16 stated in pertinent part:

17We have been and continue to follow the accounting standards under FASB 114,

18 Raymond... to the extent that we get information that might indicate that we havespecific impaired loan, we will put those into the FAS 114 category which we do ye A

19 timely. That is a basic underpinning of our methodology... But our FAS 114, the tota

20loans that we had as of 9/30/08 was about $325.6 million. Total s secific valuatioallowances on these loans amounted to 27.1 million...

21 1f82. Here, On falsely reassured investors that UCBH's method for determining its Provision an'

22 ALL was conservative and timely, when in truth, it was done with intentional misconduct to

23 mask UCBH's deteriorating financial condition, and UCBH's financial statements were

24 completely unreliable because there were not adequate internal controls. Indeed the MLR state'

25 that KPMG determined that UCB's management had begun to conceal serious financial reportinl,

26 •issued around October 2008. CAC, EX.A at 44.

27

289



1 An additional reason that On's oral statement is false is that On understated the ALL as

2 of 9/30/08. Indeed, UCBH admitted that its 2008 10K figure for ALL had to be restated, an'

3 UCBH's 2007 10K figure for ALL was found by the FDIC to be understated.

4 III. THE CAC SUFFICIENTLY PLEADS SCIENTER

5 Plaintiffs incorporate by reference herein the portion of T. Wu Opp. that addresses the

6 standard for pleading scienter.

7 Under the core operations inference the Court should find that On, who was the Compan

8 CFO from October 2008 through the end of the Class Period, and prior to that the Deputy CFO,

9 knowingly made misstatements about ALL, the Provision, and internal controls pertaining to

10 monitoring the reporting of ALL and the Provision. ALL and the Provision are at the very hea

11 of UCBH's business and On had to have known that the challenged statements were false. In r-

12 Countrywide Financial Corp. Sec. Litig. explains why: "the alleged underwriting quality an'

13 credit risk management issues were so fundamental to Countrywide, and on such a broad scale,

14 should have been so apparent that 'it would be difficult to conclude that those Defendants at the

15 top levels of Countrywide management did not know what was going on.... The sciente

16 inference is of actual knowledge or intent, not deliberate recklessness. The plausible alternative

17 inference is willful ignorance." 588 F.Supp.2d 1132, 1194 (C.D. Cal. 2008) (quoting In r-

18 Countrywide Financial Corp. Den y. Litig., 554 F.Supp.2d 1044, 1066 (C.D. Cal. 2008)). I

19 Countrywide Sec. Litig., the fraud consisted of poor quality underwriting coupled wit

20 overstatement of the quality of the loans. Countrywide Sec. Litig. found that the core operations

21 inference applied not only to those familiar with operations, such as the COO, but that it applies

22 to those familiar with financials because they are interrelated. 588 F.Supp.2d 1132 at 1196

23 ("Defendants object that [the CFO's] job had nothing to do with loan underwriting. However,

24 strong inference of scienter is warranted ... as CFO, Sieracki was directly responsible fo

25 Countrywide's financials. Those financials ... depended on Countrywide's operations"). Thus,

26 the falsity of the statements about UCBH's financials, which were at the core of UCBH's

27 business, was known by the CFO.

2810



1 On argues that he did not know that UCBH was falsifying the most crucial aspect of

2 bank's financials. In Countrywide Den y. Litig., where the fraud was rooted in operations tha

3 violated company policy, and where the company did not disclose the fraudulent practices in its

4 financial statements, the Court rejected the defense of all the directors that they were no

5 involved in day-to-day operations although the fraud there was rooted in the company's

6 operations. 554 F.Supp.2d at 1064-66. 9 Here, the fraud was rooted in false reporting of loa

7 losses in the financials, not in corrupt operations and who was the top officer charged wit

8 ensuring the accuracy of the financial reporting? Defendant On. He was at the epicenter of the

9 fraud and claims complete ignorance. On's requested inference rings hollow. Countrywide Deny.

10 Litig. explains why On had to have known about UCBH's false statements about UCBH's ALL,

11 Provision, and internal controls. 554 F.Supp.2d at 1065. The court explained:

12 the idea that a Company-wide culture that encouraged unchecked deviations from

13 underwriting standards in a way which would fatally affect the Company's continuedfinancial performance went unnoticed by a Board of Directors simply does not square

14 with the specific and comprehensive monitoring duties assigned to the members of the

15Board. The purpose of the Committee system is to monitor the operation, financialperformance, and risk position of the Company. See Miss. Pub. Emps. Retirement Sys. v.

16 Boston Scientific Corp., 523 F.3d 75, 90-91 (1st Cir.2008) ( "It is fair to infer theCompany has highly effective information systems ... Defendants are in a highly

17 regulated industry and the company, it can be inferred, constantly monitors reports ... and

18looks for prompt solutions to such problems.") (finding scienter under the Tellabsstandard).

19 Id.

20 The Court should infer On's scienter not only because of the core operations inference

21 but also because On must have actually known that the challenged statements UCBH made were

22 false for nine reasons: 1) On signed the false SOX certifications for the 10Qs for 2Q08 and 3Q08

23 and the 2008 10K, 777, 86, 94; 2) On reassured investors in the 10/24/08 conference call abou

24 UCBH's conservative method of evaluating its loans and financial reporting process, an'

25 materially understated the ALL for 9/30/08, indicating that On was familiar with such subjec

26

27 9 Countrywide Den y. Litig. found a strong of inference of scienter for every director, except for those who28 only served on the compensation committee. Id. at 1052, 1064-66.

11PLS. MEMORANDUM OF P&As IN OPP. TO DEFENDANT CRAIG ON'S MOTION TO DISMISS Case No.CV 09-04208-JSW


1 matter; 3) as CFO, On prepared the financial statements for SEC filings and UCBH PRs,

2 prepared the Call Reports and received and reviewed the FDIC's examination reports when the

3 were first issued; 1 ° 4) On personally reviewed "every single loan" every week, and would have

4 thus known that UCBH's reported ALL and Provision misrepresented the quality of UCBH's

5 loans, 1f143(c); 11 5) On had extensive experience in financial reporting by banks as before he

6 joined UCBH he spent twenty-one years auditing banks for Deloitte & Touche, T. Wu RJN,

7 Ex.0 (2007 10K) at 13; 6) UCBH reported that its internal investigation found that certai

8 officers who were found to have deliberately engaged in fraudulent conduct would be terminate'

9 or reassigned and that On would be demoted to Deputy CFO, 1f83; T. Wu RJN, Ex.R (9/8/09

10 PR) at 2; 7) UCBH repeated the false Provision and ALL for FY2007, as first misstated in the

11 2007 10K, in the 2008 10K, which was filed indisputably after On received the FDIC's Februa

12 2008 Examination Report, which stated that the ALL reported for FY2007 was understated b

13 $35 million; 8) the ALL and Provision in the 2007 10K contradicts the 1/24/08 PR, and UCBH's

14 CFO replacement for Dennis Wu, Downing, admitted that the 1/24/2008 PR containe•

15 statements that UCBH knew were false when made; and 9) the Call Reports for FY 2007,

16 1Q2009 and 2Q2009 materially contradicted the statements in the 2007 10K and 4/23/09, 8/6/09,

17 and 9/9/09 PRs about the ALL and Provision for 4Q2007, FY2007, 1Q2009 and 2Q2009.

18 Indeed, the Call Report filed on 8/6/09 showed that the PR issued the exact same date

19 understated the ALL and Provision materially. The Directors admit that if UCBH disclose'

20 information in the Call Reports that contradicted their PRs, it clearly shows deliberate

21

22 10 As Deputy CFO from May 2008 to October 2008, and as Corporate Controller before that, On prepare.and reviewed the same.

23 (T. Wu stated with respect to the Company's loan portfolios: "what we are doing, every week, actually24 we have senior management reviews including myself; my chief credit officer, my chief [Inaudible] AL

THE BUSINESS UNITS [Inaudible] get together every week for a couple of hours, we actually look a25 ALL LOANS [with emphasis], for construction, CRE and C&I, we review 100% of our portfolio i

terms of their delinquency trends, we look at the NPA trends, we look at the classification trends, we26 look at EVERY SINGLE LOAN [with emphasis] to what we need to do proactively to make sure that we

are on top of every single problem if there is something actually surface so that will continue to help us27 really manage through this cycle and we anticipate all these kind of efforts will help us to really have .28 good handle on any potential problems that may surface because of the current economy").



1 concealment by Defendants! Directors MTD at 8:2-5. Plaintiffs also incorporate by reference

2 herein arguments made in T. Wu Opp. and Directors Opp. as to why On knowingly made false

3 statements.

4 Incredibly, On alleges that he was misled, relying on other UCBH officers and employees

5 as allegedly claimed in the internal investigation, which states: "It [the Subcommittee's

6 investigation] also found instances where information was withheld from or misrepresented to

7 the bank's Finance Department." This defense fails for three reasons: 1) this is a self-servinv

8 statement made by Defendants in their own report meant to protect the Directors and certai

9 other officers, including On; 2) the internal investigation found that only some aspects of the

10 information that the misleading statements were based on were withheld from the Finance

11 department; 3) On was personally reviewing every single loan every week. He had all the

12 information needed to understand the UCB's true financial condition. The only plausible

13 inference is that On knowingly made false statements. If any members of the Finance

14 department were truly misled, then On misled them.

15 On had a strong motive to conceal UCBH's true financial condition in order to obtai

16 TARP funds required to maintain the Company's survival and to prevent a run on the bank. As

17 indicated by the MLR, serious intentional misconduct began in October 2008, when the

18 Company submitted its application to receive over $298.7 million in TARP Funds to stay afloa

19 and continue operations.12

20

21 12 Howard, 228 F.3d at 1064 (allegation that CEO and chairman of the board had motive to inflate sales to

22 raise financing for company is probative of scienter). On's stock position in UCBH does not negate .

23 strong inference of scienter. On's attempt to convince the Court by his submission of evidence, that he di.not sell stock before the fraud was disclosed is inadmissible. Von Saher v. Norton Simon Museum of Ar

24 at Pasadena, 592 F.3d 954, 960 (9th Cir. 2010) (holding that judicial notice may not be taken for the trutof the matter asserted); Patel v. Parnes, 253 F.R.D. 531, 545-46 (C.D. Cal. 2008) (holding that court ca

25 take judicial notice of fact that Form 4 was filed, but cannot take judicial notice that its contents areaccurate). Even if the Court finds that On purchased and then held on to stock before the fraud was

26 disclosed, On and others may have believed they would continue to conceal the fraud indefinitely. Indeed,they were able to conceal the fraud from investors until the bottom fell out in September 2009. See In re

27 Refco, Inc. Sec. Lztzg., 503 F.Supp.2d 611, 646-47 (S.D.N.Y. 2007) (rejecting argument that defendants'

28 stock purchases were inconsistent with fraud, because defendants might have believed that uncollectable



I IV. THE CAC SUFFICIENTLY PLEADS CONTROL PERSON LIABILITY

2 Plaintiffs incorporate by reference herein the portions of Thompson Opp. that discusses

3 the legal standard for pleading control person liability and why the CAC alleges UCBH

4 committed a primary violation. Plaintiffs incorporate by reference herein the portion of

5 Directors Opp. that addresses why they controlled UCBH.

6 Additional specific facts pleaded in the CAC that show On had control over UCBH are

7 that he was the CFO and wielded absolute top-level responsibility for preparing the fraudulent

8 financial statements, On regularly reviewed first-hand every single loan given by UCBH, On

9 signed the Sox certifications for the 2007 and 2008 10Ks, and On spoke on earnings conference

10 calls. Countrywide Sec. Litig., 588 F.Supp.2d 1132 at 1196. ("CFO... [us directly responsible

11 for... [the company's financials").

12 Notwithstanding that the CAC has alleged many facts that indicate On's actual control

13 of UCBH, it would have been sufficient to simply allege that ON was CFO in order to

14 adequately plead On's control. In re Thornburg Mortg. Inc. Sec. Litig., 695 F. Supp.2d 1165,

15 1218 (D.N.M. 2010), citing Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1109 (10 th Cir.

16 2003) ("Simmons was the Chief Financial Officer of TMI [a mortgage investment firm] during

17 the entire Class Period, and the Tenth Circuit has held that an allegation that a Defendant is in

18 such a position, without further detail, can support liability under Section 20(a)").

19 V. CONCLUSION

20 For the foregoing reasons On's motion should be denied. Should the court giant On's

21 motion, for the same reasons set forth in the Thompson Opp., leave to amend should be granted.

22

23 Dated: January 7, 2011 Respectfully submitted,

24 THE ROSEN LAW FIRM, P.A.

25 /s/ Laurence Rosen, Esq.

26

27 receivables could be hidden indefinitely). Regardless, motive is not an essential component of scienter.

28See Shields v. Citytrust Bancorp., Inc., 25 F.3d 1124, 1128 (2d Cir.1994).

14PLS. MEMORANDUM OF P&As IN OPP. TO DEFENDANT CRAIG ON'S MOTION TO DISMISS Case No.CV 09-04208-JSW


Laurence Rosen (SBN #219683)1 333 South Grand Avenue, 25 th Floor

2 Los Angeles, CA 90071Telephone: (213) 785-2610

3 Facsimile: (213) 226-4684Email: lrosen(cOosenlegal.com

4

5 and

6 Phillip Kim, Esq. (pro hac vice)THE ROSEN LAW FIRM, P.A.

7 275 Madison Avenue, 34th Floor

8 New York, New York 10116Telephone: (212) 686-1060

9 Facsimile: (212) 202-3827Email: pkinvidsosenicgal.com

10

11Lead Counsel for Plaintiffs and the Class

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1

2 CERTIFICATE OF SERVICE

3

4 I, Phillip Kim, pursuant to 28 U.S.C. §1746, hereby declare under penalty of perjury as

5 follows:

6 I am an attorney with the Rosen Law Firm, P.A. I am over the age of eighteen.

7 On January 7, 2011, I electronically filed the following PLAINTIFFS'

8 MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO

9 DEFENDANT CRAIG ON'S MOTION TO DISMISS THE CONSOLIDATED

10 AMENDED COMPLAINT with the Clerk of the Court using the CM/ECF system which sent

11 notification of such filing to counsel of record.

12 On the same date I also caused the document to be submitted to the Stanford Law

13 School Class Action Clearinghouse via email to [email protected] .

14 Executed on January 7, 2011.

15

16

17 /s/ Phillip Kim

18 Phillip Kim

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2816



MASTER SERVICE LIST

Laurence M. Rosen Phillip KimThe Rosen Law Firm, P.A. The Rosen Law Firm, P.A.333 South Grand Avenue 275 Madison Avenue, 34th Floor25th Floor New York, NY 10016Los Angeles, CA 90071 212-686-1060213-785-2610 212-202-3827 (fax)213-226-4684 (fax) [email protected]@rosenlegal.com

Lead Counsel for Lead Plaintiff Kyung Cho,Lead Counsel for Lead Plaintiff Kyung Cho, & Named Plaintiffs Rex Dechakul and David& Named Plaintiffs Rex Dechakul and HwangDavid HwangJames Antone Lassart Steven Mark BauerRopers Majeski Kohn & Bentley Timothy Paul Crudo201 Spear Street Matthew HeltonSuite 1000 Latham & WatkinsSan Francisco, CA 94105 505 Montgomery Street415-543-4800 19th Floor415-972-6301 (fax) San Francisco, CA [email protected] 415-391-0600

415-395-8095 (fax)[email protected]@[email protected]

Counsel for Defendant Ebrahim Shabudin Counsel for Defendant Thomas S. Wu

Jordan Eth Thomas Francis KoegelAnna Erickson White Crowell & Moring LLPCraig Martin 275 Battery Street, 23rd FloorMorrison & Foerster LLP San Francisco, CA 94111425 Market Street 415-986-2800San Francisco, CA 94105 415-986-2827 (fax)415-268-6000 [email protected] (fax)[email protected]@[email protected]

Counsel for Defendant Craig On, Denis Wu, Counsel for E. Lynn Schoemnann InterestedJoseph Jou, Pin Pin Chau, Li-Lin Ko, Party/ Bankruptcy Trustee for UCBHGodwin Wong, David Ng, Daniel P. Riely, Holdings, Inc.and Richard Li-Chung Wang

1


Daniel J. Bergeson William P. KeaneGrace Y. Park Anthony P. SchoenbergBergeson, LLP Nell K. Clement303 Almaden Boulevard, Suite 500 FareIla Braun + Martel LLPSan Jose, CA 95110-2712 235 Montgomery Street, 17th FloorTelephone: (408) 291-6200 San Francisco, CA 94104Facsimile: (408) 297-6000 Telephone: (415) [email protected] Facsimile: (415) [email protected] [email protected]

[email protected]@fbm.com

Counsel for defendants Daniel M. Gautsch, Counsel for defendant John M. KerrDouglas Mitchell, and Robert Nagel

Jeffrey L. BornsteinMikal J. CondonClaudia A. QuirozK&L Gates LLP4 Embarcadero Center, Suite 1200San Francisco, CA 94111Telephone: 415.882.8200Facsimile: 415.882.8220

Counsel for defendant Burton D. Thompson

Nicole Catherine Lavallee Ira Neil RichardsAnthony David Phillips Kenneth I. TrujilloJoseph J. Tabacco, Jr. Jennifer AgnewBerman Devalerio Trujillo Rodriguez & Richards LLCOne California Street 1717 Arch StreetSuite 900 Suite 3838San Francisco, CA 94111 Philadelphia, PA 19103415-433-3200 215-731-9004415-433-6382 (fax) 215-731-9044 (fax)[email protected] [email protected]@[email protected]

Counsel for Lead Plaintiff Movants City of Counsel for Lead Plaintiff Movants City ofPhiladelphia Board of Pensions and Philadelphia Board of Pensions and Retirement,Retirement, and Louisiana Municipal Police and Louisiana Municipal Police EmployeesEmployees Retirement System. Retirement System.

2


Lionel Z. Glancy Dustin Lamm SchubertMichael M. Goldberg Schubert Jonckheer Kolbe & Kralowec LLPGlancy Binkow & Goldberg LLP 3 Embarcadero Center1801 Avenue of the Stars, Suite 311 Suite 1650Los Angeles, CA 90067 San Francisco, CA 94111310/201-9150 415-788-4220(310) 201-9160 (fax) 415-788-0161 (fax)[email protected] [email protected]

Counsel for Lead Plaintiff Movant Mark Counsel for Lead Plaintiff Movant DeKalbCooper, Dominique Durbin, Huy Tran County Pension Fund

James M. Wilson Ramzi AbadouChitwood Harley Barnes LLP Erik David Peterson1230 Peachtree Street, NE Barroway Topaz Kessler Meltzer & Check, LLPPromenade II, Suite 2300 580 California StreetAtlanta, GA 30309 Suite 1750404-873-3900 San Francisco, CA 94104404-876-4476 (fax) [email protected] 415-400-3001 (fax)

[email protected]@btkmc.com

Counsel for Lead Plaintiff Movant DeKalb Counsel for Lead Plaintiff Movants SalvadorCounty Pension Fund Perez, and Chite Lai

Darren Jay Robbins Robert S. GreenBrian 0. O'Mara Green Welling, P.C.Shawn A. Williams 595 Market Street, Suite 2750Coughlin Stoia Geller Rudman & Robbins San Francisco, CA 94105LLP 415-477-6700655 West Broadway, Suite 1900 415-477-6710 (fax)San Diego, CA 92101 CAND.USCOURTS@CLAS SCOUNSEL. COM619/231-1058(619) 231-7423 (fax)e file [email protected]'[email protected]@csgr.com

Counsel for Lead Plaintiff Movant Pension Counsel for Lead Plaintiff Movants Lap YinTrust Fund For Operating Engineers, and Chan, and Wai Shan Chan and Plaintiffs DanielPlaintiff Waterford Township General Nygaard, Wendy Fong, and James ElamEmployees Retirement System

3


Ralph M. Stone Mark Cotton MolumphyAmanda C. Scuder Cotchett, Pitre & McCarthyShalov Stone Bonner & Rocco LLP 840 Malcolm Road485 Seventh Ave, Suite 1000 Suite 200New York, NY 10018 Burlingame, Ca 94010212-239-4340 (650)697-6000Email: [email protected] 650-697-0577 (fax)Email: [email protected] [email protected]

Counsel for Lead Plaintiff Movants Lap Yin Counsel for Lead Plaintiff Movant the YanChan, and Wai Shan Chan and Plaintiffs GroupDaniel Nygaard, Wendy Fong, and JamesElam

Jacqueline Scott CorleyAdrian James SawyerKerr & Wagstaffe LLP100 Spear Street18th FloorSan Francisco, CA 94105415-371-8500415-371-0500 (fax)[email protected]@kerrwagstaffe.com

Counsel for Lead Plaintiff Movant TheFirefighters' Pension System of the City ofKansas City, Missouri Trust

4

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