united states district court in re homebanc...

Case 1:08-cv-01461-TCB Document 102 Filed 08/05/2009 of 99

UNITED STATES DISTRICT COURTNORTHERN DISTRICT OF GEORGIA

ATLANTA DIVISION

) Civil Action No.)

IN RE HOMEBANC CORPORATION ) 1:08-CV-1461-TCBSECURITIES LITIGATION )

)) CONSOLIDATED AMENDED) CLASS ACTION COMPLAINT) FOR VIOLATIONS OF THE) FEDERAL SECURITIES LAWS


CONSOLIDATED AMENDED COMPLAINT

Lead Plaintiff, William Kornfeld, Jr., on behalf of himself and all other

persons similarly situated, by and through his undersigned counsel, alleges the

following:

I. NATURE OF THE ACTION

1. This is a case about an allegedly conservative mortgage lender

(“Homebanc,” or the “Company”) that, without disclosure to its own investors,

dramatically loosened loan underwriting standards and focused on what could be

sold to the secondary market. In doing so, the Company knowingly utilized a

grossly inadequate loss reserve model to bolster profits, focused on loan quantity

without regard to quality, locked in loans at a loss that had to be disposed of as

“scratch and dent” loans, and failed to disclose that: its business was in dire

condition; the Company was facing an imminent liquidity crisis; and the Company

was suffering from default rates that were “completely out of control.” As a result,

the Company was able to increase its reported total revenues by nearly 138% from

2001 to 2006, but the end result was total failure, leaving HomeBanc in shambles

after the stock was decimated after the revelation of the fraud, which culminated in

the Company’s filing for bankruptcy on August 9, 2007.

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2. This action is brought on behalf of a class of purchasers of

HomeBanc’s common and Series A preferred stock purchased from September 26,

2005 through August 3, 2007, inclusive (the “Class Period”), and seeks to hold

HomeBanc’s officers accountable for the fact that they violated the federal

securities laws by issuing materially false and misleading statements and

omissions, ultimately causing HomeBanc’s shareholders millions of dollars in

losses when the truth was finally revealed.

II. JURISDICTION AND VENUE

3. This action arises under Sections 10(b) and 20(a) of the Securities

Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§ 78j(b) and 78t(a), and

the rules and regulations promulgated thereunder by the Securities and Exchange

Commission (“SEC”), including Rule 10b-5, 17 C.F.R. § 240.10b-5.

4. This Court has jurisdiction over the subject matter of this action under

Section 27 of the Exchange Act, 15 U.S.C. § 78aa, and 28 U.S.C. § 1331.

5. Venue is proper in this District pursuant to Section 27 of the

Exchange Act and 28 U.S.C. § 1391(c). Many of the acts and transactions that

give rise to the violations of law alleged herein, including the dissemination to the

public of materially untrue and misleading press releases and filings with the SEC,

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occurred in this District. During the Class Period, HomeBanc maintained its

headquarters in this District.

III. PARTIES

A. Lead Plaintiff

6. Lead Plaintiff, William Kornfeld, Jr., as set forth in his certification

submitted with his lead plaintiff motion and incorporated herein by reference,

purchased the publicly traded securities of HomeBanc at artificially inflated prices

during the Class Period and was damaged when the stock price fell dramatically

after the true facts were revealed.

B. Defendants

7. Defendant Patrick S. Flood (“Flood”) served as the Chief Executive

Officer and Chairman of the Board at all relevant times until his resignation from

the Company on January 12, 2007.

8. Defendant Kevin D. Race (“Race”) served as the Company’s Chief

Executive Officer following the resignation of Defendant Flood, and as President,

Chief Operating Officer and Chief Financial Officer at all relevant times, and

served as a director of the Company at all relevant times. Defendant Race joined

the Company in April 2002 as the President and Chief Operating Officer.

Defendant Race also served on the Investment and Risk Management Committee.

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C. Relevant Non-Party

9. At all relevant times, non-party HomeBanc was a Delaware

corporation, operating as a real estate investment trust (known as a “REIT”), in the

business of investing in and originating residential mortgage loans. The Company

was originally founded in 1929, and was reorganized and formed into a new public

corporation in March 2004 to become the parent holding company of HBMC, a

residential mortgage lender that originated loans through a retail network of stores

and strategic marketing alliances (“SMAs”), and held a leveraged portfolio of

mortgage loans. HomeBanc elected to be treated as a REIT under the Internal

Revenue Code of 1986, as amended, for the tax year ended December 31, 2004.

HomeBanc, through its subsidiaries, engaged in the mortgage banking business

primarily in the southeastern United States. The Company has not been named as

a Defendant in this action because on August 9, 2007 it filed a voluntary petition

for Chapter 11 in the U.S. Bankruptcy Court for the District of Delaware.

IV. PLAINTIFF’S INVESTIGATION AND CONFIDENTIAL SOURCES

10. Plaintiff’s allegations are based upon the investigation of Lead

Counsel which included, among other things: (a) review and analysis of public

filings made by HomeBanc and other related parties and non-parties with the SEC;

(b) review and analysis of press releases and other publications disseminated by

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certain of the Defendants and other related non-parties; (c) review of news articles,

shareholder communications, and postings on HomeBanc’s website concerning the

Company’s public statements; and (d) review and analysis of other publicly

available information concerning HomeBanc, the Defendants, and related non-

parties. Plaintiff’s allegations are also based upon information provided by former

employees of HomeBanc with knowledge of the Company’s underwriting, lending

and accounting practices including, but not limited to, the following confidential

witnesses:

1) Confidential Witness 1 (“CW1”) is a Former HomeBancSenior Vice President of Product Development who worked atHomeBanc prior to and throughout the Class Period. CW1was responsible for developing new loan products anddeveloped both proprietary and mainstream products.

2) Confidential Witness 2 (“CW2”) is a Former HomeBancSenior Vice President/Portfolio Manager who worked atHomeBanc prior to and throughout the Class Period andbeyond. CW2’s responsibilities included managing theCompany interest rate risk of the balance sheet through theCompany warehouse debt facility, servicing rights, MortgageBacked Securities portfolio and valuation.

3) Confidential Witness 3 (“CW3”) is a Former HomeBancSenior Vice President/National Operations who worked atHomeBanc from prior to the Class Period through February2007. CW3 was in charge of the “operations piece” ofSpecialty Lending. As described by CW3, Specialty Lendingincluded Builder Services, Sub-Prime, Construction-to-Permanent and Joint Venture.

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4) Confidential Witness 4 (“CW4”) is HomeBanc’s FormerChief Credit Officer who worked at HomeBanc from prior tothe Class Period until summer of 2005. During CW4’s tenure,s/he reported directly to Defendant Kevin Race, among others.

5) Confidential Witness 5 (“CW5”) is a Former HomeBancProject Manager who worked at HomeBanc prior to andthroughout the Class Period.

6) Confidential Witness 6 (“CW6”) is a Former HomeBancSenior Accountant who worked at HomeBanc prior to andthroughout the Class Period.

7) Confidential Witness 7 (“CW7”) is a Former HomeBanc VicePresident/Director of Builder Services who worked atHomeBanc from prior to the Class Period through spring of2007.

8) Confidential Witness 8 (“CW8”) is a Former HomeBancDefault Specialist and Foreclosure Risk Analyst who workedat HomeBanc prior to and throughout the Class Period. CW8was a risk analyst on the foreclosure side of the business,whose group worked on loans HomeBanc serviced that wentinto delinquency.

9) Confidential Witness 9 (“CW9”) is a Former HomeBancSenior Vice President of Secondary Markets who worked atHomeBanc prior to and throughout the Class Period. CW9reported directly to defendant Kevin Race, among others.

10) Confidential Witness 10 (“CW10”) is a Former HomeBancFinance Investor Servicer who worked at HomeBanc prior toand throughout the Class Period.

11) Confidential Witness 11 (“CW11”) is a Former HomeBancVice President and Manager of Compliance Quality Controland Audit who worked at HomeBanc prior to andthroughout the Class Period.

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12) Confidential Witness 12 (“CW12”) is a Former HomeBancExecutive Vice President of Production Operations whoworked at HomeBanc prior to and throughout the ClassPeriod.

V. HOMEBANC’S BUSINESS AND OPERATIONS

11. As explained above, the Company was originally founded in 1929 and

restructured in 2004. HomeBanc was based in Atlanta, Georgia, and through its

subsidiaries engaged in the mortgage banking business primarily in the

southeastern United States. The Company primarily focused on originating prime

one-to-four family purchase money mortgage loans. HomeBanc offered various

fixed and adjustable rate residential mortgage loan products.

12. The Company also originated Fannie Mae/Freddie Mac mortgage

loans; U.S. Department of Housing and Urban Development and Veterans

Administration government-insured mortgage loans; and adjustable-rate mortgage

loans, which include construction-to-permanent and second-lien mortgage loans,

nonconforming loans, and subprime mortgage loans. In addition, HomeBanc sold

mortgage loans that it originated to unrelated third parties. The Company offered

its products through a retail network of stores and strategic marketing alliances

(SMAs).

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13. As of December 31, 2006, HomeBanc originated residential mortgage

loans through 21 store locations and 140 realtor store-in-store locations in the

states of Georgia, Florida, North Carolina, and South Carolina. The Company also

had 229 strategic marketing alliances, as of the above date. HomeBanc qualified

as a real estate investment trust (REIT) for federal income tax purposes.

14. REITs are publicly traded companies that typically make investments

in and/or manage real estate and pay rental income and profits to shareholders,

and/or (in the case of “Mortgage REITs”) invest in mortgage loans secured by real

estate. These secured mortgage loans are typically either originated or

underwritten by the REIT, or purchased by the REIT from a secondary market.

The funds invested by REITs typically come from equity capital invested by

shareholders or consist of debt borrowed from other lenders. As a REIT,

HomeBanc realized federal income tax benefits in that it was generally not taxed at

the corporate level for REIT taxable income that it distributed to its stockholders.

To qualify for treatment as a REIT, HomeBanc was, among other things, required

to distribute 90% of its REIT taxable income to investors.

15. The loans HomeBanc originated were funded with money the

Company borrowed through a variety of credit facilities, including warehouse lines

of credit and repurchase agreements – complex financing transactions whereby the

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Company sold loans that it agreed to later repurchase. HomeBanc’s facilities were

divided into three groups, which were termed warehouse facilities, master

repurchase agreements, and aggregation facilities. These credit facilities were

crucial to HomeBanc’s very existence. As CW12 explained, “once you are in

violation [the credit facilities] pull the plug.”

16. CW2, whose responsibilities included managing the warehouse debt

facilities, stated that HomeBanc’s Asset and Liability Committee (“ALCO”), of

which he was a member, also included, among others, Defendant Pat Flood,

Defendant Kevin Race, Executive Vice President Debra Watkins, Senior Vice

President Cameron Beane, CFO of the Company’s origination business Nicholas

Chater, and CW9.

17. According to HomeBanc’s 10-K filed on March 16, 2006, the “ALCO

oversees interest rate risk and prepayment risk associated with loans held for

investment, funding and liquidity risks, internal controls related to each of these

risks, and the development, communication and implementation of appropriate

policies and strategies for managing our assets and liabilities with the goal of

providing for consistency of earnings growth and adequate liquidity and capital,

communicating these policies and strategies to the appropriate personnel, and

monitoring compliance with these policies and strategies.”

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18. In addition, HomeBanc’s ALCO was “also responsible for oversight

of the risk management committee (“RMC”) and a credit committee (“CRC”),

each of which is comprised of senior officers, to evaluate, manage and monitor our

risks.” “The RMC oversees interest rate risk associated with the committed

pipeline and loans held for sale, competitive risks associated with products and

pricing, and the internal controls related to each of these risks,” and “[t]he credit

committee oversees the development of our credit risk management policies,

reserve requirements for loans that we hold for investment, the default risk on

loans that we hold for investment, counter-party risk, and the internal controls

related to each of these risks.”

19. The Company’s credit facilities were collateralized by the Company’s

own loans, and the quality of those loans was therefore critical to the maintenance

of the Company’s lines of credit. HomeBanc also used repurchase agreements to

finance investment securities. These repurchase agreements were collateralized by

the Mortgage Backed Securities that they are used to finance, and the terms of the

arrangements generally allowed HomeBanc to borrow up to a maximum of 95% of

the market value of the securities. As of September 30, 2006, the outstanding

balance on these facilities amounted to $1.5 billion.

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20. HomeBanc styled itself as a prime mortgage lender, creating the

impression that it made loans to the most credit-worthy borrowers who were

eligible for the lowest monthly rate, called the prime rate. Prime borrowers are

usually able to fully document such critical elements of their financial condition as

income, employment history and assets. Loans to prime borrowers are generally

“conforming” loans, meaning that they meet certain funding and credit guidelines

established by Fannie Mae and Freddie Mac, and do not exceed a dollar limit set

by the Office of Federal Housing Enterprise Oversight (“OFHEO”). 1 Being a

prime lender of conforming loans is thus an indicator both of the quality of the

Company’s loan and the existence of a ready secondary market for those loans.

21. HomeBanc claimed that it focused its “mortgage origination activities

primarily on prime one-to-four family residential purchase money mortgage loans

(those originated in connection with the purchase and sale of real property) rather

than mortgage refinancings.” HomeBanc also said that “While the definition of

‘prime’ loans varies from company to company, we consider ‘prime’ loans to be

loans that satisfy our prescribed investment criteria, namely loan product type,

credit scores and loan-to-value ratios.” HomeBanc assured investors that it “does

1 A loan to a “prime” borrower for an amount greater than the OFHEO limits is known as a“Jumbo” loan, and is not considered subprime.

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not participate to a significant degree” in sub-prime lending. See, e.g., HomeBanc

Nov. 14, 2005 10-Q.

22. On August 9, 2007, HomeBanc filed a voluntary petition for Chapter

11 in the U.S. Bankruptcy Court for the District of Delaware. On February 24,

2009, the Bankruptcy Court issued an Order converting HomeBanc’s Chapter 11

case into a liquidation under Chapter 7.

VI. DEFENDANTS KNEW AND/OR RECKLESSLY DISREGARDED THE TRUE ADVERSE CONCEALED FACTS

A. HOMEBANC VIOLATED UNDERWRITING STANDARDS

23. HomeBanc repeatedly stated throughout the Class Period to the

public and its investors that it “offer[ed] a wide variety of fixed- and adjustable

rate residential mortgage loan products to meet our different market and customer

needs,” and that it “originat[ed] FNMA/FHLMC mortgage loans, FHA/VA

government-insured mortgage loans, adjustable-rate mortgage loans, which

includes construction-to-permanent and second-lien mortgage loans (generally in

connection with first-lien mortgage loans), nonconforming loans and a limited

volume of sub-prime mortgage loans.”

24. However, contrary to HomeBanc’s public representations (detailed

below) that the Company had, “in each case,” “appl [ied] our loan underwriting

guidelines and practices and other quality control measures to seek better returns

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and consistency through our origination process,” HomeBanc instead issued loans

in direct violation of the Company’s underwriting guidelines throughout the Class

Period. Former HomeBanc employees described this situation as set forth below.

25. Reports from confidential witnesses confirm that Defendants knew

and/or recklessly disregarded that they were in violation of underwriting standards,

in part because the Company held frequent meetings focusing on which products

would sell, rather than their risk. CW1 was part of a Product Steering Committee

that met every Monday morning. Members of the Committee included CW2,

CW4, CW9, and Senior Vice President D.C. Aiken. CW4 would determine the

risk of a product, Aiken would provide input regarding whether the product could

be sold to borrowers, and CW9 provided input as to whether the product could be

sold to the secondary market. The meetings generally took place in a Company

conference room. CW 1 revealed that the Committee “didn’t do a lot of data

analysis; instead we to talked to investors in the secondary market to see what they

would buy.”

26. Defendants purposefully focused on quantity over quality and ignored

underwriting standards, while knowingly and/or with severe recklessness making

public statements to the contrary. CW1 explained that as originations began

slowing, there was “intent to generate a lot more volume. As a result, there was an

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intent to increase the proportion of Alt-A [alternative documentation] loans as part

of our portfolio.” The key for HomeBanc was to “expand our product profile

beyond that of other players in the Alt-A space.” In other words, “to determine

underwriting guidelines for the Alt-A products, we were taking a look at what

purchasers in the secondary market would acquire.” Because the Company based

its underwriting standards on what could be acquired in the secondary market, the

Company set guidelines based on the “overall pool of loans being at an acceptable

level.” “That allowed us to bring in a broader set of characteristics.”

27. By way of example, CW 1 explained that if the pool guidelines

required a 680 FICO score, HomeBanc would originate Alt-A loans with a 670

FICO score and “expect that the overall pool will meet the 680 standard.” CW 1

revealed that underwriting based on the potential pool to be sold to the secondary

market could be problematic in the event the Company eventually either retained

individual loans on its own loan portfolio or the Company was required to

repurchase the loans.

28. CW2 corroborates HomeBanc’s underwriting violations, including

violations of its own standards and procedures, and Defendants’ knowledge of and

direct involvement with these issues. CW2 indicated that the Company began

“loosening underwriting standards in order to maintain production levels as early

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as late 2005.” CW2 also stated “Pat Flood was involved in the conversations with

senior production people” regarding the underwriting standards. “Pat would

definitely be involved in the approvals.” “Pat was a very sales oriented guy, and

he followed in great detail the underwriting standards and loan procedures.” CW2

also revealed that the actual reason HomeBanc began purchasing Mortgage Backed

Securities in 2005 was to make up for the slowing HomeBanc originations on the

Company balance sheet. “We had to buy on the market to make up for what we

were not originating,” CW2 said. And by early 2006, the secondary market for the

HomeBanc mortgages began to slow substantially.

29. These insider accounts stand in stark contrast to reports of

professional equity analysts who followed the Company during the Class Period,

which reports reflected the repeated assurances offered by management as to the

quality of HomeBanc’s loans. For example, in its reports on HomeBanc, A.G.

Edwards noted in June 2005 that the Company “relies on strict underwriting

standards that it has devised from analyzing proprietary historical performance

data on interest-only ARM loans that it has originated over the past eight years.”

(emphasis added). And again, in November 2005, A.G. Edwards, after spending

several days visiting with Defendants Flood, Race, and other senior management,

said: “WE WORRY VERY LITTLE ABOUT ASSET QUALITY at HomeBanc,

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as the company has maintained strict underwriting standards and a prime-quality

orientation in its portfolio.” “Because of its prime-quality focus and ROBUST

CREDIT QUALITY METRICS, we believe that the credit risk of HomeBanc’s

portfolio is very manageable.” “We think that HomeBanc is managing interest rate

and credit risks appropriately and that its management team is gaining

credibility.” (emphasis added).

B. HOMEBANC USED A GROSSLY INADEQUATE LOSSRESERVE MODEL

30. Despite reassurances to investors that HomeBanc was properly

maintaining “a reserve for losses,” “based on historical losses adjusted for current

trends and information,” the reserve model utilized was woefully inadequate.

CW4 was HomeBanc’s Chief Credit Officer from January 2002 until June 2005.

During his/her tenure, CW4 reported to Defendant Kevin Race, among others.

CW4 indicated that the ultimate responsibility for “taking the reserves” was the

responsibility of the Executive Committee, which consisted of Pat Flood, Kevin

Race, Debra Watkins and CFO of the origination business, Nicholas Chater. CW9,

the former HomeBanc Senior Vice President of Secondary Markets, and CW12,

the former HomeBanc Executive Vice President of Production Operations, also

confirmed that the people making decisions about reserves included Defendant

Race, Nicholas Chater, and Debra Watkins.

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31. CW4 was responsible for developing the Company’s loss reserve

model. CW4 recalled that, “at the time we were becoming a REIT,” (in 2004)

CW1 or Debra Watkins came to CW4 to ask CW4 to put together a loss reserve

model. CW4 was given just four days to put the model together. CW4 described

the model as nothing more than a “stop-gap” that was “not really strong enough to

get us past two or three quarters.” The model did not contain enough variables to

detect whether the loans were good or bad. CW4 explained that, based on his/her

experience, a good loss reserving model should contain approximately 30-40

market variables. The model CW4 created contained only three market variables.

32. Rather than use an independent third party or develop an appropriate

loss reserve model, Defendants knowingly and/or with severe recklessness touted

the Company’s loss reserves while employing this grossly inadequate temporary

loss reserve model for years. Approximately one year after CW4 left HomeBanc

employment, CW4 came across HomeBanc’s Vice President of Capital Markets,

Kortney Rollinger. Rollinger confirmed to CW4 that as of mid-2006, the

Company was still employing the loss reserve model developed by CW4. CW4

explained that in his/her experience “anybody would have found an internal

controls issue” with the Company employing CW4’s loss reserve model for more

than anything beyond one or two quarters, and “the people on the executive team,

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including Kevin [Race] knew better that he should use an independent third party

to set reserves.”

C. HOMEBANC COULD NOT SUPPORT ITS LIQUIDITYREQUIREMENTS AND ITS EXPENSES WERE TOO HIGH

33. Despite HomeBanc’s repeated assurance to investors that it could

support its liquidity requirements, there were serious liquidity problems within the

Company that threatened its viability as a going concern. CW9 explained that “the

real problem with respect to liquidity was a lack of operating capital.” CW9

explained, “volume was dropping and they were losing a lot of loan officers at the

time.” “They had a platform that could handle $5 billion a month, but we only had

about $500 million incoming loans, so expenses were way out of hand.”

34. Defendants knowingly, or with severe recklessness, falsely touted the

Company’s financial condition and ability to meet its liquidity requirements when

they knew of the imminent liquidity crisis that faced the Company. As set forth by

CW3, a Former HomeBanc Senior Vice President/National Operations who

worked at HomeBanc from prior to the Class Period through February 2007, in

October of 2006 Defendant Flood announced layoffs at a senior level executive

meeting and further stated that “we needed to cut expenses.” CW3 also provided

that Defendant Flood held a weekly all-hands meeting call with senior level

executives at which the Company’s slowing business was discussed. In fact,

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according to CW9, a HomeBanc Senior Vice President of Secondary Markets from

September 1991 to August 2007, the Company’s liquidity problems were the direct

result of Defendant Flood’s failed SMA business model, which required the

Company to “chase the infrastructure with production.”

D. HOMEBANC WAS SELLING LOANS AT A LOSS ANDPLACING PROBLEMATIC “SCRATCH AND DENT”LOANS ON ITS BALANCE SHEET

35. Further illustrating HomeBanc’s desperate, but ultimately futile,

attempts to stay afloat, the Company began selling loans at a loss just to hold on to

sales staff while knowingly or with severe recklessness painting a false and

misleading positive picture for the investing public and the analysts regarding the

Company and its loan products, as discussed in the false and misleading statement

section below. CW7, the former HomeBanc Vice President/Director of Builder

Services from February 2002 to April 2007, confirmed that “loans were actually

being locked at a loss and that Patrick Flood let that continue because he didn't

want to lose top sales people who were closing loans.” In each case, HomeBanc

had to absorb the losses. CW7 said salespeople could lose significant amounts of

commissions if the loans were not made, which could be $1,000 to $10,000 per

loan. “There were many loans that we did from a credit/risk perspective. At the

end we would originate some loans and underwrite them as Fannie Mae or Freddie

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Mac loans, and end up having to sell them as ‘scratch and dent.’” CW7 indicated

that each loan that sold at a loss depleted revenue.

E. DEFENDANTS KNEW AND/OR WERE SEVERELYRECKLESS IN DISREGARDING THAT HOMEBANC HADMASSIVE AND SYSTEMIC PROBLEMS AT LEAST ASEARLY AS 2005

36. Despite HomeBanc’s rosy statements to the public and the investors

regarding the Company, its business plan, its loan products, its current financial

state (including its liquidity), its ability to compete, its compliance with its

underwriting standards and its high standard of ethics, its adequate controls and

reserve model, HomeBanc’s management knew the Company’s true adverse

conditions and massive and systemic problems as early as 2005 and was internally

sounding the alarm bells and trying to stave off disaster at that time. CW10, the

former HomeBanc Finance Investor Servicer, stated that at the end of 2005,

Defendant Patrick Flood personally told him and others that tough times were

coming. Then, at the January 2006 annual employee meeting, which lasted about

two or three hours and was held at the Civic Center in Atlanta, Flood told

employees again that times would be tough. CW 10 recalled Flood announcing that

Company contributions to 401(k) plans, which had been expected to be raised from

50% to 60%, were in fact being cut to 25%. Flood also said that if things

improved, the percentage would go back up, but it all hinged on how much

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progress the Company could make. All Company employees were required to be

present.

37. CW8 was a risk analyst on the foreclosure side of the business.

His/her group worked on loans which HomeBanc serviced that went into

delinquency. CW8 stated that his/her group started getting busy in October 2005

with more loans becoming delinquent. However, s/he said that in most cases, the

Company was able to work out a plan with the borrower so that the loan didn't go

into foreclosure. In 2006, things got worse and HomeBanc was “open to short

sales.” CW8 said that by the end of 2006 and the beginning of 2007 defaults were

“completely out of control.” CW8 stated that monthly reports showing these

delinquencies and foreclosures of loans were sent to CW8’s boss, Marilynn

Eberhardt, and that these monthly reports were also turned over to the financial

team and that Nicholas Chater and Kevin Race were on the distribution list. CW8

stated that it was easy to see the trend and it was bad.

38. CW11, the former HomeBanc Vice President and Manager of

Compliance Quality Control and Audit, said that “once Florida went down and

HomeBanc started losing salespeople, that was the end.” “Flood had expected

loyalty from the sales force.” CW 11 said that sales people started leaving around

August 2006. S/he said that Countrywide, Wells Fargo, and other major players

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were offering signing bonuses to the sales people which could amount to as much

as $200,000 guaranteed per year. When salespeople saw that HomeBanc's loan

officers pipeline was drying up, it was a no brainer to leave, CW11 said. CW11

confirmed that Flood was fully aware of every salesperson who left and that Flood

took it very personally. He saw the departures as disloyalty to him, and fully

understood the negative impact these departures were having on the Company.

39. CW3, the former HomeBanc Senior Vice President/National

Operations, said that HomeBanc had its “first ever” layoffs in October 2006. CW3

recalled participating in an executive level meeting in October 2006, in which “Pat

Flood and the executive team updated us on the market and told us we needed to

cut expenses.” The meeting took place in the Company training facility, located on

the second floor of the Company headquarters at 2002 Summit Boulevard. All

Senior Vice President level employees and above were asked to attend. During the

meeting, the executive management team informed the participants of the layoffs

and explained that “business in Florida was off about 40%” by October 2006.

40. CW3 also indicated that Flood held a monthly “all-hands” meeting

call with senior level executives at 8:00 a.m. on the second or third Tuesday of

each month. During the call, the participants discussed “market conditions and the

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conditions at HomeBanc.” During these calls prior to the end of 2006, CW3

recalled discussions that HomeBanc business had slowed significantly.

41. CW5, the former HomeBanc Project Manager, revealed that each year

of his/her employment with the Company, HomeBanc held an all-hands employee

meeting in January. Employees from around the country were invited to the

meeting and were permitted to bring their spouses. The meeting was also a

marketing event, as HomeBanc invited major joint-marketing sponsors. In 2004

and 2005 the Company annual employee meeting was held in the Georgia World

Congress Center. In 2006, the meeting was held in the Atlanta Civic Center.

However, despite having these meetings every January for at least ten years, the

Company cancelled the annual employee meeting to be held in January 2007

without explanation.

42. CW6, the Former HomeBanc Senior Accountant, confirmed that

around March or April of 2007, HomeBanc started getting rid of its mortgage

securities. CW6 said that s/he found it odd and asked management the reason for

the selling of the securities. Tom Adams and Don Ramon told CW6 that the

reason for the selling of mortgages was that HomeBanc wasn't making any money

on these mortgages because they were not very secure. CW6 said that these

securities were sold to Fannie Mae and Bear Stearns. CW6 went on to say that

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s/he had seen the internal books for HomeBanc and that s/he and other people in

finance could see that starting in January 2007 HomeBanc was not making any

money.

43. In addition to the meetings, reports, and information provided above,

CW3 also revealed that HomeBanc top executives had access to Pipeline Reports

and Funding Reports that showed that the Company’s business was slowing

drastically prior to the end of 2006. These reports showed on a year-to-date and

month-to-date basis how many loans were in the pipeline and how many loans had

been funded. CW3 revealed that the Company’s operations system was called

FiTech and that HomeBanc also had internal program designed to produce reports.

CW3 further explained that the executives had access to “Executive Summaries”

for the Pipeline and Funding Reports. The Executive Summaries provided

information on a daily, weekly, monthly and quarterly basis.

44. As set forth in detail above, Defendants acted with scienter by virtue

of their awareness that the public documents and statements made in the name of

the Company were materially false and misleading and that such statements or

documents would be issued or disseminated to the investing public. Further, each

Defendant knowingly and substantially participated or acquiesced in the issuance

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or dissemination of such statements or documents as primary violations of the

federal securities laws.

45. As detailed above, Defendants participated in the fraudulent scheme

alleged herein by virtue of their receipt of information reflecting the true facts

regarding HomeBanc and/or their associations with the Company which made

them privy to confidential proprietary information concerning HomeBanc, and

their control over and/or receipt and/or modification of HomeBanc’s allegedly

materially misleading misstatements.

VII. MATERIALLY FALSE AND/OR MISLEADING STATEMENTSAND OMISSIONS DURING THE CLASS PERIOD

A. HOMEBANC’S FALSE AND/OR MISLEADINGSTATEMENTS AND OMISSIONS IN THE OFFERINGDOCUMENTS

46. On September 26, 2005, HomeBanc filed a shelf registration for the

sale of securities on Form S-3 with the SEC pursuant to Rule 415, triggering

undertakings under Item 512(a) of Regulation S-K. On February 3, 2006,

HomeBanc filed a Form 424B2 Prospectus and Prospectus Supplement with the

SEC in connection with the Offering. In the Prospectus documents, HomeBanc

told investors that “You should rely only on the information contained or

incorporated by reference in this prospectus supplement and the accompanying

prospectus.”

25


47. HomeBanc incorporated by reference into the Prospectus the

following documents listed below (and any future filings made with the SEC under

Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, including exhibits, until the

termination of the Offering):

• HomeBanc Corp.’s Annual Report on Form 10-K for the yearended December 31, 2004;

• HomeBanc Corp.’s Quarterly Reports on Form 10-Q for thequarters ended March 31, 2005 and June 30, 2005;

• HomeBanc Corp.’s Current Reports on Form 8-K filed on January6, 2005, January 25, 2005, February 28, 2005, March 3, 2005,April 5, 2005, April 6, 2005, April 15, 2005, May 26, 2005, June 3,2005, June 30, 2005, July 15, 2005, July 22, 2005, August 5, 2005,August 24, 2005, September 1, 2005, September 2, 2005 andSeptember 15, 2005; and

• the description of HomeBanc Corp.’s common stock contained inits registration statement on Form 8-A filed on July 14, 2004, as itmay be amended from time to time.

48. The Registration Statement, the Prospectus, and the Prospectus

Supplement, along with all of the documents incorporated by reference, are

collectively referred to herein as the “Offering Documents.”

49. The Offering Documents stated that the Company was offering 2

million shares of the Series A Preferred Stock at a public offering price of $25.00

per share. The Offering was a success for the Company as HomeBanc sold all 2

26


million shares at a per-share price of $25.00, reaping $50 million in gross

proceeds.

50. HomeBanc’s 2004 10-K, filed on March 31, 2005 (incorporated by

reference into the Offering Documents) stated that HomeBanc’s “business model

emphasizes retail prime residential mortgage loan originations,” “is built on a

foundation of people dedicated to delivering the right products,” and that the

Company strives to create “a culture based on ethics.” HomeBanc, in setting itself

apart from others, also boasted how it was superior to others in its industry:

Our industry, including other mortgage REITs, Internet-basedlending companies and finance and mortgage banking companies, isextremely competitive, due to relatively low entry barriers, theability of competitors to offer lower interest rates and fees, oroperate with less stringent underwriting standards to attractcustomers, and the ability of many lenders to participate in ourindustry on an opportunistic basis. We believe that our reputation, ourfocus on high-quality prime residential mortgage loans, ourcustomer service and strategic marketing alliances with realtors andhome builders, and our experience with credit evaluation and risk-based pricing, will, over time, provide us with significantadvantages over many of our competitors.

(Emphasis added).

51. This statement was materially false and misleading when made

because HomeBanc’s purported “experience with credit evaluation and risk-based

pricing” would not provide it significant advantages over its competitors because

Defendants were not even complying with their own credit evaluation and risk

27


policies. In truth, Defendants focused on what investors would buy, rather than

data and risk analysis. Further, the statements regarding the Company’s focus on

high-quality prime residential mortgage loans were materially false and misleading

when made because they failed to disclose that HomeBanc began purchasing

Mortgage Backed Securities in 2005 to compensate for slowing originations of the

Company’s high-quality prime residential mortgage loans. As such, competitors’

ability to operate with less stringent underwriting standards was not a true risk. In

truth, Defendants failed to disclose that HomeBanc risked losing key personnel to

competitors as the loans in its pipeline dried up.

52. HomeBanc’s 2004 10-K also represented that “ in each case, we

apply our loan underwriting guidelines and practices and other quality control

measures,” “we have retained prime, adjustable-rate mortgage loans that meet

our investment criteria,” and that it properly uses “credit scores of borrowers”

“in determining whether to make a loan.” (Emphasis added).


because HomeBanc did not comply with its “underwriting guidelines and

practices” – which were overly lenient in any event and allowed loans with

inadequate credit scores as long as the overall pools of loans averaged out to an

acceptable level. In truth, and undisclosed to investors, the Company had been

28


loosening underwriting standards as early as 2005. In addition, HomeBanc’s

statements regarding its retention of prime adjustable-rate mortgage loans were

materially false and misleading when made because the Company failed to disclose

that originations of prime, adjustable-rate mortgage loans had fallen off

substantially and that the Company was turning to the Mortgage Backed Securities

market to fill the void.

54. HomeBanc’s 2004 10-K also represented that “[t]he Company

maintains a reserve for losses that may arise in connection with the representations

and warranties the Company provides to the buyers of its mortgage loans,” and that

“[s]uch reserves are estimated based on historical losses adjusted for current

trends and information .”2


because Defendants did not base their loan loss reserves on a legitimate analysis of

historical losses and current trends. In truth, Defendants knowingly utilized a

2 HomeBanc’s loan loss reserves suddenly plummeted in the year leading up to the Offering,which substantially improved the financial results of the Company and thereby increased demandin the Company’s Offering. For instance, for the nine months ended September 30, 2004, theCompany’s provision for loan losses was 19.5%. For the twelve months ended December 31,2004, the Company’s provision for loan losses was over 16%. However, for the nine monthsended September 30, 2005, the Company’s provision for loan losses decreased dramatically to3.8%. This substantial decrease in loan loss reserves allowed the Company to recordsignificantly increased revenues of over $80 million. Had the Company maintained its provisionfor loan losses at or near the same percentage as it used in 2004, HomeBanc’s revenue wouldhave decreased by over $15 million, rendering the Company’s Offering much less attractive toinvestors since HomeBanc’s financial results would have been significantly diminished.

29


grossly inadequate loss reserve model and locked in loans at a loss that had to be

disposed of as “scratch and dent.”

B. HOMEBANC’S MATERIALLY UNTRUE ANDMISLEADING STATEMENTS AND/OR OMISSIONSAFTER THE OFFERING

i. Materially False and Misleading Statements and/orOmissions in HomeBanc’s Third Quarter 2005 10-Q

56. HomeBanc's Quarterly Report for the period ending September 30,

2005 (HomeBanc's third fiscal quarter for 2005), filed on November 14, 2005 (the

“Third Quarter 2005 10-Q”), contained the following statements, all of which

contained materially false and/or misleading information or omissions for the

reasons stated in the paragraphs that follow these statements.

57. With regard to the adequacy of its reserves, HomeBanc represented

that:

• “The Company maintains a reserve for contingencies thatrepresents estimated losses on repurchases and indemnificationsarising from representation and warranty claims and probableobligations related to disputes with investors on contractualobligations with respect to mortgage loans sold. The reserve isincluded in other liabilities in the condensed consolidated balancesheet. Further discussion on the reserve for contingencies isincluded in Note 8, “Commitments and Contingencies.”

• “The Company maintains a reserve for contingencies arising inconnection with loan sales to third parties. Total reserves,including valuation allowances, if any, related to individual

30


mortgage loans held for sale and reserves for contingency lossesanticipated in association with investor repurchase andindemnification requests, were $6.0 million and $4.5 million atSeptember 30, 2005 and December 31, 2004, respectively.”

“The increase in net gain on sale of mortgage loans was partiallythe result of an increase in sales volume from $594.9 millionduring the third quarter of 2004 to $690.3 million during the thirdquarter of 2005. Sales volume increased by 16%, which trailed the26% increase in overall originations because we typically retainapproximately 66% of loan balances originated. Gain on sale ispresented net of the provision for contingent loss reserves of $0.5million and $1.2 million for the third quarter of 2005 and 2004,respectively. The decrease in the provision for contingent lossreserves resulted from a change in the mix of products sold,including a decrease in the sale of uninsured governmentloans.”

(Emphases added.)

58. These statements attesting to the maintenance of a reserve for

“contingencies that represents estimated losses” and for “contingencies arising in

connection with loan sales to third parties” were materially false and misleading

when made because the Company failed to disclose that its loan loss reserve model

was nothing more than a stopgap measure containing only three market variables

and never intended for prolonged use. Moreover, the Company was forced to take

losses on “scratch and dent” loans just to maintain sales personnel.

59. With regard to HomeBanc’s growth in loan originations, business

condition, and reasons for success, HomeBanc represented that:

31


• “According to the Mortgage Bankers Association (“MBA”)projections as of October 26, 2005, total mortgage originations areexpected to remain virtually unchanged during 2005 comparedwith 2004 with a forecasted 15% increase in purchase moneymortgage originations being completely offset by a forecasteddecline in refinancing originations. These projections include theimpact of home equity and sub-prime lending, which haveexperienced substantial growth and are products in which theCompany does not participate to a significant degree. We believeourselves to be relatively well-positioned to take advantage ofthese market conditions due to our focus on the purchase moneyportion of the market and, therefore, expect to realize growth inoriginations of 15% in 2005 when compared with 2004.”

• “We believe that the fact that the growth in our loanoriginations continues to outpace growth in the overall marketwas largely due to continued success in developing ourstrategic marketing alliances and maintaining our focus on thepurchase money mortgage market, which has historicallyexhibited more stability than the refinance market. Similarly, loanapplication volume of $2.0 billion during the third quarter of 2005exceeded the $1.6 billion in volume during the third quarter of2004.”

• “We believe that the growth we realized in our loanoriginations exceeded overall growth within the industrybecause of continued success in developing our strategicmarketing alliances and maintaining our focus on the purchasemoney mortgage market, which has historically exhibited morestability than the refinance market. Similarly, loan applicationvolume was $6.2 billion during the first nine months of 2005,which exceeded the $5.2 billion in volume during the year-earlierperiod.”

(Emphases added.)

32


60. These statements touting HomeBanc’s growth in loan originations

were materially false and misleading when made because the Company failed to

disclose that it had begun purchasing Mortgage Backed Securities in 2005 to make

up for slowing loan originations on the Company’s balance sheet and that growth

was not based on “marketing alliances” or “continued success” but on the

Company’s violation of its own underwriting standard to provide loans even where

FICO requirements were not met.

61. With regard to HomeB anc’ s liquidity, HomeB anc stated:

“We presently believe our current cash balances, funds availableunder our financing arrangements (as described below) and cashflows from operations, including proceeds from sales of fixed-rate and adjustable-rate mortgage loans, will be sufficient for ourliquidity requirements for the next 12 months. Our investmentsand assets also generate liquidity on an ongoing basis throughmortgage principal and interest payments, prepayments and netearnings. Should our liquidity needs exceed these ongoing orimmediate sources of liquidity, we believe that our mortgage loanportfolio could be sold to raise additional cash, subject tolimitations on such sales needed to preserve our REIT status.”

(Emphasis added.)

62. This statement assuring that HomeBanc had sufficient “liquidity

requirements for the next 12 months” was materially false and misleading when

made because it failed to disclose that a substantial decrease in loan originations

was affecting the Company’s viability as a going concern. According to CW9,

33


“[HomeBanc] had a platform that could handle $5 billion a month, but we only had

about $500 million incoming loans, so expenses were way out of hand.” “The real

problem with respect to liquidity was a lack of operating capital.”

63. With regard to HomeBanc’s effectiveness and the condition of its

internal and disclosure controls, HomeBanc stated:

“HomeBanc’s management is responsible for establishing andmaintaining effective disclosure controls and procedures, as definedunder Rules 13a-15 and 15d-15 of the Securities Exchange Act of1934, as amended (the “Exchange Act”), that are designed to ensurethat information HomeBanc is required to disclose in the reports itfiles or submits under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in theSEC’s rules and forms. HomeBanc’s management has evaluated,with the participation of HomeBanc’s Chief Executive Officer andChief Financial Officer, the effectiveness of the design and operationof these disclosure controls and procedures as of the end of the periodcovered by this Report. Based on that evaluation, the Chief ExecutiveOfficer and the Chief Financial Officer have concluded that, as ofSeptember 30, 2005, HomeBanc’s disclosure controls andprocedures are effective in ensuring, to a reasonable assurancelevel, that all material information required to be disclosed andfiled in this Report was recorded, summarized and reportedwithin the time period required by the SEC’s rules and forms.”

[Emphasis added].

64. These statements were materially false and misleading when made

because the Company did not actually maintain “effective disclosure controls and

procedures.” In truth, HomeBanc had serious and systemic internal control

problems. Undisclosed to investors, the Company was not complying with its

34


stated underwriting practices and employed a grossly inadequate loan loss reserve

model. Further, the Company could not have had “reasonable” “disclosure

controls and procedures” because Defendants were able to conceal the myriad of

adverse true facts discussed above including HomeBanc’s poor liquidity, need to

buy loans on the open market as organizations fell, and that the Company was

forced to sell loans at a loss to maintain personnel.

ii. Materially False and Misleading Statements and Omissionsin HomeBanc’s March 2006 Earnings Call

65. On March 9, 2006, HomeBanc conducted a conference call in which

numerous analysts attended and asked questions. Defendants Flood and Race

conducted the call on behalf of HomeBanc.

66. Defendant Flood made the following statements:

“We believe that historically now for the last year and a half andgoing forward that we have an excellent opportunity to connectwith investors and deliver on expectations.” “We hope to be ableto enlighten a little bit today about why we think we can continueto perform favorably in challenging markets.” “I think the keypoint here is that the performance of the portfolio throughoutthe year and continued into the fourth quarter very consistentin terms of how we decided to fund to reduce risk returns andas well the credit profile, very comfortable finish in the year,that we accomplished I think that we have set out. Originationvolume for the year effectively up 14% against the flatmarketplace.” So, “[a]s you marry those ideas, you get thisorigination, asset, margin consistency and credit consistency

35


and that leads to – linked to this structure what we think isgoing to be a nice investment return.”

• “I want to say again, just remind you what we thought day one andwhat we still believe today, the key for success, we think aboutthis investment model, consistency in loan origination,consistency in the assets that you create, whether you are sellingthem or holding it for investment in terms of return and thenfinally consistency from a credit performance standpoint. Wefeel like in all three of those areas, we have had – have today afocus and we think links and connects very well to the investmentcommunity. And again, we are satisfied with the results for thefourth quarter.”

• “On the investment front, maintaining of our selective idea aboutwhat we have put into the portfolio in terms of kind of assets,adjustable rate mortgage, and the credit quality that's aligned to itso that we can continue to feel comfortable in terms of the creditperformance spent.”

• “From a returns standpoint, things are stabilizing now andmoderating growth on dividend, kind of getting to a reasonablerate based on where we've been, of course, in the last six quarters.We still think at the current rate we're offering a significantopportunity to investors and with that stabilization andmoderation, of course, and the efficiencies that have beendiscussed, improving GAAP earnings and narrowing the GAAPtax difference, it's just part of our evolution now.”

• “We are comfortable that there is good opportunity forshareholders to see this is a good time for the investments tostay in place and potentially to add to it.

(Emphases added.)

36


67. These statements touting the Company’s ability to deliver on

expectations, credit quality, consistency, stability, and the Company’s comfort

with its financial position were materially false and misleading when made because

they failed to disclose that HomeBanc knowingly utilized a grossly inadequate loss

reserve model, locked in loans at a loss that had to be disposed of as “scratch and

dent,” was suffering from default rates that were completely out of control, and

that HomeBanc’s entire business was in dire condition and faced an imminent

liquidity crisis.

68. Defendant Race also claimed that “Our FICO profile is very high

and always has been.” Indeed, “our FICO – average FICO as of 12/31 in the

portfolio was 730, extremely high FICO, it is just an evidence of our focus on the

prime market.”

69. This statement was materially false and/or misleading when made

because HomeBanc was not “focus[ed] on the prime market” or in a position to

tout a high FICO profile. In truth, the Company issued loans in violation of its

underwriting guidelines and was forced to purchase loans on the open market

because its originations of prime loans were slowing. Further, Defendants’

underwriting standards – with which the Company did not even comply – looked at

the FICO scores of pools of loans collectively, without regard to those individual

37


loans that that the Company originated despite their failure to meet minimum

FICO score requirements.

70. Also on that call, Defendant Race said: “ We are just trying to be

transparent as possible, get across our point in terms of what we think is best for

our connection to investors and really try to get some sense of stability in the

discussion in terms of how results take place.” (Emphases added.)


because the Company was not trying to be transparent or stable. In truth,

HomeBanc had improperly loosened and violated its own underwriting standards,

knowingly utilized a grossly inadequate loss reserve model, locked in loans at a

loss that had to be disposed of as “scratch and dent,” had serious and systematic

internal control problems, improperly focused on loan quantity instead of quality,

was suffering from default rates that were completely out of control, and failed to

disclose that its entire business was in dire condition and faced an imminent

liquidity crisis.

72. In addition, analysts were clearly lured into a false sense of security

by Defendants’ misrepresentations and omissions regarding HomeBanc’s business,

which internally was in serious trouble at the time of this call and long before, as

evidenced by this exchange after Flood’s comments:

38


Q: Robert Roll with RiverSource Investments: And lastly, just acomment, clearly the last two quarters you guys have really startedto differentiate yourselves in terms of financial performance versusthis group, and got to be commended for that and keep it up, and Ithink the stock will do what it should.

A: Patrick Flood: Thanks Rob. We really appreciate it.

(Emphasis added.)

73. Other analysts started to probe the reserves taken by Defendants

which were moving in the opposite direction of delinquencies, as evidenced by this

exchange in which Defendant Race falsely reassured the analyst that everything

was in perfect order regarding the reserves:

Q: Tom Basiello with Tigerhoff Management: “You took a reservereduction, 1% reserve reduction, in the quarter and yet, yourdelinquencies went from 7 basis points to 14, not a big move, butdefinitely in the opposite direction and your non-accruals as of the lastquarter's Q or 18 basis points, 90-day non-accrual. What's the logicbetween – logic in reducing reserves?

A: Kevin Race: The simple answer there is that we established areserve when the loans were originated based on the outstandingbalance pool on any given month based on the expected loss thatwould occur over the life of loans for that pool that got created thatmonth. Over time, you need to look back and say, the expectations ofprincipal balance of payments you have when you put those loans in aportfolio in the first place and because of high [indiscernible] weactually had loans that had paid off that we have established a reservefor in a prior period. And so, then, you start to have to look at thereserve in its totality based on the population that exists at period endand that's the basic difference.

Q: Tom Basiello: That would imply that you think the new

39


loans are going to have less loss?

A: Kevin Race: No, it just implies that the overall balance ofloans is lower at that point in time than you thought and theoutgoing payoff effect versus the incoming based on the same lossassumptions, the net of that caused a reduction.

Q: Tom Basiello: Thank you very much.

A: Kevin Race: Sure.

(Emphases added.)

iii. Materially False and Misleading Statements and Omissionsin HomeBanc’s 2005 Annual Report

74. HomeBanc's Annual Report for the period ending December 31, 2005

was filed on March 16, 2006. With regard to HomeBanc’s underwriting standards,

HomeBanc represented that:

Our business model emphasizes retail prime residential mortgageloan originations and is built on a foundation of people dedicatedto delivering the right products and consistently high levels ofcustomer satisfaction,” and “our Office of People and Culture isresponsible for creating a culture based on ethics.” “We offer awide variety of fixed- and adjustable-rate residential mortgage loanproducts to meet our different market and customer needs. Weoriginate FNMA/FHLMC mortgage loans, FHA/VA government-insured mortgage loans, adjustable-rate mortgage loans, whichincludes construction-to-permanent and second-lien mortgage loans(generally in connection with first-lien mortgage loans),nonconforming loans and a limited volume of sub-prime mortgageloans. In each case, we apply our loan underwriting guidelinesand practices and other quality control measures to seek betterreturns and consistency through our origination process.[Emphases added.]

40



because HomeBanc did not comply with its “underwriting guidelines and

practices” – which were overly lenient – and allowed loans with inadequate credit

scores as long as the overall pools of loans averaged out to an acceptable level. In

truth, and undisclosed to investors, the Company’s guidelines did not promote

“consistency” in loan origination because the Company had been loosening

underwriting standards as early as 2005.

76. With regard to the adequacy of its reserves, HomeBanc represented

that:

We maintain a reserve for losses that may arise in connection with therepresentations and warranties we provide to the buyers of its mortgageloans regarding, among other things, compliance with laws andregulations, loan conformity with the ultimate purchasers’ underwritingstandards and the accuracy of information. In the event of a breach ofthese representations or warranties or in the event of an early paymentdefault, we may be required to repurchase the loans and/or indemnify thepurchaser for damages caused by that breach. Such reserves areestimated based on historical losses adjusted for current trends andinformation.” [Emphasis added].

77. This statement attesting to the maintenance of “a reserve for losses”

was materially false and misleading when made because the Company failed to

disclose that its loan loss reserve model was nothing more than a stopgap measure

containing only three market variables and was never intended for prolonged use.

41


78. In regard to HomeBanc’s growth in loan originations, business

condition, ability to appropriately manage risk, and reasons for success, HomeBanc

represented that:

• “We believe that our focus on people development and ourcustomer-oriented process, coupled with our product offeringsand our emphasis on purchase money mortgage loans, distinguishour company and drive our profitability.”

• “We believe that our reputation, our focus on high-quality primeresidential mortgage loans, our customer service and SMAs withrealtors and home builders, and our experience with creditevaluation, will, over time, provide us with significantadvantages over many of our competitors.

• “We have risk management practices and programs to managethe interest rate risks associated with our mortgage origination andfinancing activities.”

• “Risk management is important to our business, and we haveestablished an asset and liability committee (“ALCO”), a riskmanagement committee (“RMC”) and a credit committee(“CRC”), each of which is comprised of senior officers, toevaluate, manage and monitor our risks.”

• “We believe that our primary risk exposures are interest raterisk, credit risk and liquidity risk. Interest rate risk and creditrisk are discussed under Item 7A—”Quantitative and QualitativeDisclosures Around Market Risk,” and liquidity risk is discussedseparately under the caption “—Liquidity and Capital Resources”below.”

(Emphases added.)

42


79. These statements touting the Company’s risk management practices

and significant advantages over competitors were materially false and misleading

when made because Defendants failed to comply with their own credit evaluation

and risk policies. In actuality, Defendants focused on what investors would buy

rather than on data and risk analysis and employed a loan loss reserve model,

which was nothing more than a stopgap measure containing only three market

variables.

80. In regard to HomeBanc’s liquidity and future liquidity prospects,

HomeB anc stated:

We presently believe our current cash balances, funds availableunder our financing arrangements (as described below) and cashflows from operations, including proceeds from sales of fixed-rateand adjustable-rate mortgage loans, will be sufficient for ourliquidity requirements for the next 12 months. Our investments andassets also generate liquidity on an ongoing basis through mortgageprincipal and interest payments, prepayments and net earnings. Shouldour liquidity needs exceed these ongoing or immediate sources ofliquidity, we believe that our mortgage loan portfolio could be sold toraise additional cash, subject to limitations on such sales needed topreserve our REIT status. We do, however, expect to continue theexpansion that we have undertaken, although the rate of expansion mayvary over time. From time to time, we may seek additional sources ofcapital through the issuance of debt or equity securities or by enteringinto new borrowing facilities. In the past, we have amended our creditfacilities to permit additional leverage as we aggregated mortgage loansin anticipation of our initial public offering or in anticipation ofsecuritizations of mortgage loans. We currently have no commitments forany financings other than through our current facilities, and we cannotensure that we will be able to access the capital markets or obtain any

43


additional financing at the times required and on terms and conditionsacceptable to us, if at all. If we fail to obtain needed additional financing,our growth would be slowed or suspended.”

[Emphasis added].


because HomeBanc was not in a financial condition to assure sufficient “liquidity

requirements for the next 12 months” as substantial decreases in loan originations

affected the Company’s viability as a going concern and default rates grew

completely out of control. According to CW9, a former HomeBanc Senior Vice

President of Secondary Markets who worked at HomeBanc prior to and throughout

the Class Period, “they had a platform that could handle $5 billion a month, but we

only had about $500 million incoming loans, so expenses were way out of hand.”

“The real problem with respect to liquidity was a lack of operating capital.”

82. In regard to HomeBanc’s effectiveness and condition of its internal

and disclosure controls, HomeBanc stated:

Management of HomeBanc Corp. is responsible for establishing andmaintaining adequate internal control over financial reporting.HomeBanc’s internal control system was designed to provide reasonableassurance to the Company’s management and Board of Directorsregarding the preparation and fair presentation of the Company’sfinancial statements for external purposes in accordance with U.S.generally accepted accounting principles. All internal control systems,no matter how well designed, have inherent limitations and may notprevent or detect misstatements in the Company’s financial statements.Therefore, even those systems determined to be effective can provide

44


only reasonable assurance with respect to financial statement preparationand presentation. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate. HomeBanc’s managementassessed the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2005. In making thisassessment, it used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) inits Internal Control-Integrated Framework. Based on ourassessment, we believe that, as of December 31, 2005, the Company’sinternal control over financial reporting is effective based on thosecriteria.

[Emphasis added].


because HomeBanc did not maintain adequate internal controls over financial

reporting as evidenced by the Defendants’ loosening of underwriting standards to

focus on what investors would by rather than on data and risk analysis, knowing

utilization of a grossly inadequate loan loss reserve model comprised of only three

market variables and intended as a mere stopgap measure, and locking in of loans

at a loss for the sole purpose of retaining sales personnel through commissions.

iv. Materially False and Misleading Statements in HomeBanc’sFirst Quarter Quarterly Report for 2006

84. HomeBanc's Quarterly Report for the period ending March 31, 2006

(HomeBanc's first fiscal quarter for 2006) was filed on May 10, 2006 (the “2006

45


1Q 10-Q”). In regard to HomeBanc’s adequacy of its reserves, HomeBanc

represented that:

The Company maintains a reserve for contingencies arising inconnection with loan sales to third parties. Total reserves, and reservesfor contingency losses anticipated in association with investor repurchaseand indemnification requests were $4.4 million and $4.8 million at March31, 2006 and December 31, 2005, respectively. The Companyrepurchased $4.3 million of loans sold to third parties during the firstquarter of 2006, compared to less than $0.1 million of loans repurchasedduring the first quarter of 2005. Charge offs related to contingencies forthe three months ended March 31, 2006 were $1.0 million, compared toless than $0.1 million for the three months ended March 31, 2005.[Emphasis added].


because the Defendants failed to disclose that the Company’s “reserve for

contingencies arising in connection with loan sales to third parties” was nothing

more than a stopgap measure containing only three market variables, which was

never intended for prolonged use.



We believe that our loan originations continue to outpace industrytrends as a result of our continued success in developing our SMAsand maintaining our focus on the purchase money mortgage market,which has historically exhibited more stability than the refinance market.The large increase in fixed-rate originations resulted from customersseeking to fix the interest rate of their mortgage loans for a longer periodof time as a result of the rising interest rate environment. [Emphasisadded].

46


87. These statements were materially false and/or misleading when made

because they failed to disclose that HomeBanc’s “loan originations continue[d] to

outpace industry trends” because the Company had improperly loosened and

violated its own underwriting standards. Further, Defendants knew but failed to

disclose that loan origination was falling and the Company was forced to purchase

loans on the open market. Defendants also continued to conceal that such trends

were unlikely to continue as the Company had begun locking in loans at a loss

solely to retain sales personnel, and that it had loosened its underwriting standards

to focus on what investors would buy rather than on data and risk analysis.

88. With respect to HomeBanc’s ability to appropriately manage risk, and

reasons for success, HomeBanc represented that: “We presently do not believe

that we have significant interest rate risk on our loans held for sale under most

of the interest rate scenarios we believe likely to occur.” [Emphasis added].


because Defendants had no basis from which to claim that they “presently do not

believe that we have significant interest rate risk on our loans.” In truth,

Defendants were not even complying with their own credit and evaluation risk

policies, had loosened underwriting standards to focus on investors in the

47


secondary markets, dramatically increasing the interest rate risk on their loans, and

were suffering from mounting default rates that were completely out of control.

90. In regard to HomeB anc’ s liquidity, HomeBanc stated:

We presently believe our current cash balances, funds availableunder our financing arrangements (as described below) and cashflows from operations, including proceeds from sales of fixed-rateand adjustable-rate mortgage loans, will be sufficient for ourliquidity requirements for the next 12 months. Our investments andassets also generate liquidity on an ongoing basis through mortgageprincipal and interest payments, prepayments and net earnings. Shouldour liquidity needs exceed these ongoing or immediate sources ofliquidity, we believe that our mortgage loan portfolio could be sold toraise additional cash, subject to limitations on such sales needed topreserve our REIT status.” [Emphasis added].


because HomeBanc was not in a financial condition to assure sufficient “liquidity

requirements for the next 12 months” as substantial decreases in loan originations

affected the Company’s viability as a going concern and default rates grew

completely out of control. According to CW9, a Former HomeBanc Senior Vice

President of Secondary Markets who worked at HomeBanc prior to and throughout

the Class Period, “they had a platform that could handle $5 billion a month, but we

only had about $500 million incoming loans, so expenses were way out of hand.”

“The real problem with respect to liquidity was a lack of operating capital.”

48


92. With respect to HomeBanc’s effectiveness and the condition of its


HomeBanc’s management is responsible for establishing and maintainingeffective disclosure controls and procedures, as defined under Rules 13a-15 and 15d-15 of the Exchange Act, that are designed to ensure thatinformation HomeBanc is required to disclose in the reports it files orsubmits under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the SEC’s rules and forms.HomeBanc’s management has evaluated, with the participation ofHomeBanc’s Chief Executive Officer and Chief Financial Officer,the effectiveness of the design and operation of these disclosurecontrols and procedures as of the end of the period covered by thisReport. Based on that evaluation, the Chief Executive Officer andthe Chief Financial Officer have concluded that, as of March 31,2006, HomeBanc’s disclosure controls and procedures are effectivein ensuring, to a reasonable assurance level, that all materialinformation required to be disclosed and filed in this Report wasrecorded, summarized and reported within the time period requiredby the SEC’s rules and forms. HomeBanc has hired, and may continueto hire, finance, accounting, securitization and servicing personnel,including several senior executives to oversee these functions, in aneffort to continue to meet the requirements of being a public companyand to keep these functions on pace with the growth in our operations.Similarly, HomeBanc assesses, and may change, its technology solutionsfrom time to time to keep pace with growth in our operations. There wasno change in HomeBanc’s internal control over financial reportingidentified in connection with that evaluation that occurred during thethree months ended March 31, 2006 that has materially affected, or isreasonably likely to affect, HomeBanc’s internal controls over financialreporting. [Emphasis added].




49


problems. Undisclosed to investors, the Company wasn’t complying with its stated

underwriting practices and employed a grossly inadequate loan loss reserve model.

Further, the Company could not have had “reasonable” “disclosure controls and

procedures” because Defendants were able to conceal the myriad of adverse true

facts discussed above including HomeBanc’s poor liquidity, need to buy loans on

the open market as organizations fell, and that the Company was forced to sell

loans at a loss to maintain personnel.

94. Materially False and/or Misleading Statements and Omissions in

HomeBanc’s August 2006 Earnings Call

95. On August 8, 2006, HomeBanc conducted a conference call in which

multiple analysts attended and asked questions. Defendants Flood and Race


96. During the call, Defendant Flood made the following statements

regarding the Company’s financial condition:

“We still believe the retail business here at HomeBanc, thefundamentals are very solid. We think the platform that has beenput in place certainly is a premium in the industry. We have seencompanies get valued like that in the last year and we are hopefulwe will continue to be valued at a premium. On the creditfront, we just simply believe that we need to maintain adisciplined approach and not respond to the extreme

50


conditions by making decisions today that could linger for '07and '08. [Emphasis added].

“That's where we are focusing on investments of course, Kevinhas articulated our portfolio, we still think is in very goodshape across all fronts. And I think in terms of returns, I think thesecond quarter, nothing else tells us the possibility of progress thathappens with our model and our Phase II thinking, provided wehave volume to get it done. We are certainly are going to bechallenged to get in the short-run on that, but we think in the long-run, when we get the expenses, the volume picks back up. We aregoing to be able really bring the full model to fruition and weare going to be excited to see that take place. I am sure you will betoo. [Emphasis added].

97. Defendant Race made the following statement during the call:

Our margin and risk management performance continues to be a keystrength of HomeBanc and of our business model. That is driving thatresult in terms of REIT earnings and margins. [Emphasis added].

98. The preceding statements were materially false and misleading when

made because it was untrue that “the fundamentals [of the Company] are very

solid.” In reality, HomeBanc suffered from a liquidity crisis, stemming from

decreased loan originations and a default rate that had become completely out of

control, that threatened the Company’s viability as a growing concern. Moreover,

it was materially false and misleading to state that HomeBanc’s portfolio was “in

very good shape across all fronts” as the Company had begun purchasing

51


Mortgage Backed Securities in 2005 to compensate for slowing originations of the

Company’s high-quality prime residential mortgage loans.

v. Materially False and Misleading Statements and Omissionsin HomeBanc’s Second Quarter Quarterly Report for 2006

99. HomeBanc's Quarterly Report for the period ending June 30, 2006

(HomeBanc's second fiscal quarter for 2006), filed on August 9, 2006 (the “2006

2Q 10-Q”), contained the following statements, all of which contained materially

false or misleading information and/or omissions for the reasons stated in the

paragraphs that follow these statements.

100. In regard to HomeBanc’s adequacy of its reserves, HomeBanc

represented that:

The Company maintains a reserve for contingencies arising inconnection with loan sales to third parties. Reserves for contingencylosses anticipated in association with investor repurchase andindemnification requests were $3.7 million and $4.1 million at June 30,2006 and December 31, 2005, respectively. During the three-monthperiods ended June 30, 2006 and 2005, the Company repurchased $1.2million and $2.1 million, respectively, of loans sold to third parties.During the six-month periods ended June 30, 2006 and 2005, theCompany repurchased $5.5 million and $2.2 million, respectively, ofloans sold to third parties. The Company charged $0.2 million againstpreviously established contingency reserves during each of the three-month periods ended June 30, 2006 and 2005. The Company charged$1.2 million and $0.3 million, respectively, against previously establishedcontingency reserves during the six-month periods ended June 30, 2006and 2005. [Emphasis added.]

52



because the Company’s “reserve for contingencies” was based on a grossly

inadequate loss reserve model and HomeBanc was suffering from default rates that

were completely out of control.







violated their own underwriting standards. Further, Defendants knew but failed to


loans on the open market.

104. In regard to HomeBanc’s liquidity, HomeBanc stated:

We presently believe our current cash balances, funds availableunder our financing arrangements (as described below) and cashflows from operations, including proceeds from sales of fixed-rate

53


and adjustable-rate mortgage loans, will be sufficient for ourliquidity requirements for the next 12 months. Our investments andassets also generate liquidity on an ongoing basis through mortgageprincipal and interest payments, prepayments and net earnings. Shouldour liquidity needs exceed these ongoing or immediate sources ofliquidity, we believe that our mortgage loan portfolio could be sold toraise additional cash, subject to limitations on such sales needed topreserve our REIT status. [Emphasis added].

105. The foregoing statements were materially false and misleading when

made because they failed to disclose that HomeBanc was suffering from default

rates that were completely out of control, and failed to disclose that its entire

business was in dire condition and faced an imminent liquidity crisis. According

to CW9, Defendants had a platform that could support $5 billion a month but the

Company only had about $500 million incoming loans.



HomeBanc’s management is responsible for establishing and maintainingeffective disclosure controls and procedures. . . . HomeBanc’smanagement has evaluated, with the participation of HomeBanc’s ChiefExecutive Officer and Chief Financial Officer, the effectiveness of thedesign and operation of these disclosure controls and procedures as of theend of the period covered by this Report. Based on that evaluation, theChief Executive Officer and the Chief Financial Officer haveconcluded that, as of June 30, 2006, HomeBanc’s disclosure controlsand procedures are effective in ensuring, to a reasonable assurancelevel, that all material information required to be disclosed and filedin this Report was recorded, summarized and reported within thetime period required by the SEC’s rules and forms. . . . [Emphasisadded.]

54












vi. False and/or Misleading Statements and Omissions inHomeBanc’s Third Quarter Quarterly Report for 2006

108. HomeBanc's Quarterly Report for the period ending September 30,

2006 (HomeBanc's third fiscal quarter for 2006) was filed on November 9, 2006

(the “2006 3Q 10-Q”). In regard to HomeBanc’s adequacy of its reserves,


The Company maintains a reserve for contingencies arising inconnection with loan sales to third parties. Reserves for contingencylosses anticipated in association with investor repurchase andindemnification requests were $4.6 million and $4.1 million at September30, 2006 and December 31, 2005, respectively. During the three-monthperiods ended September 30, 2006 and 2005, the Company repurchased

55


$1.4 million and $2.7 million, respectively, of loans sold to third parties.During the nine-month periods ended September 30, 2006 and 2005, theCompany repurchased $6.9 million and $4.9 million, respectively, ofloans sold to third parties. The Company charged $0.2 million and $0.5million, respectively, against previously established contingency reservesduring each of the three-month periods ended September 30, 2006 and2005. The Company charged $1.4 million and $0.8 million, respectively,against previously established contingency reserves during the nine-month periods ended September 30, 2006 and 2005. [Emphasis added].




were completely out of control. The Company was also forced to lock in loans at a

loss that had to be disposed of as “scratch and dent” in order to stay afloat.



We believe that our loan originations continue to outpace industrytrends as a result of our continued success in developing our SMAsand maintaining our focus on the purchase money mortgage market,which has historically exhibited more stability than the refinance market.The large increase in fixed-rate originations resulted from customersseeking to fix the interest rate of their mortgage loans for a longer periodof time as a result of the rising interest rate environment. [Emphasisadded.]




56


violated its own underwriting standards. Further, Defendants knew but failed to



112. In regard to HomeBanc’s ability to appropriately manage risk, and

reasons for success, HomeBanc represented that:

We presently do not believe that we have significant interest rate riskon our loans held for sale under most of the interest rate scenarios webelieve likely to occur. [Emphasis added].


because Defendants had no basis from which to claim that they “presently do not

believe that we have significant interest rate risk on our loans.” In truth,

Defendants were not even complying with their own credit and evaluation risk

policies, had loosened underwriting standards to focus on investors in the

secondary markets, and were suffering from mounting default rates that were

completely out of control.


We presently believe our current cash balances, funds availableunder our financing arrangements (as described below) and cashflows from operations, including proceeds from sales of fixed-rateand adjustable-rate mortgage loans, will be sufficient for ourliquidity requirements for the next 12 months. Our investments andassets also generate liquidity on an ongoing basis through mortgage

57


principal and interest payments, prepayments and net earnings. 3

[Emphasis added].


made because they failed to disclose that HomeBanc was suffering from default


business was in dire condition and faced an imminent liquidity crisis. According

to CW9, Defendants had a platform that could support $5 billion a month but the

Company only had about $500 million incoming loans.



HomeBanc’s management is responsible for establishing and maintainingeffective disclosure controls and procedures, as defined under Rules 13a-15 and 15d-15 of the Exchange Act, that are designed to ensure thatinformation HomeBanc is required to disclose in the reports it files orsubmits under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the SEC’s rules and forms.HomeBanc’s management has evaluated, with the participation ofHomeBanc’s Chief Executive Officer and Chief Financial Officer, theeffectiveness of the design and operation of these disclosure controls andprocedures as of the end of the period covered by this Report. Based onthat evaluation, the Chief Executive Officer and the Chief FinancialOfficer have concluded that, as of September 30, 2006, HomeBanc’sdisclosure controls and procedures are effective in ensuring, to areasonable assurance level, that all material information required to

3 The language “Should our liquidity needs exceed these ongoing or immediate sources ofliquidity, we believe that our mortgage loan portfolio could be sold to raise additional cash,subject to limitations on such sales needed to preserve our REIT status” that had appeared inHomeBanc’s earlier filings was removed in this section.

58


be disclosed and filed in this Report was recorded, summarized andreported within the time period required by the SEC’s rules andforms.4 Similarly, HomeBanc assesses, and may change, its technologysolutions from time to time to keep pace with growth in our operations.There was no change in HomeBanc’s internal control over financialreporting identified in connection with that evaluation that occurredduring the three months ended September 30, 2006 that has materiallyaffected, or is reasonably likely to affect, HomeBanc’s internal controlsover financial reporting. [Emphasis added].











vii. Materially False and Misleading Statements in HomeBanc’sJanuary 2007 Earnings Call

4 The language “HomeBanc has hired, and may continue to hire, finance, accounting,securitization and servicing personnel, including several senior executives to oversee thesefunctions, in an effort to continue to meet the requirements of being a public company and tokeep these functions on pace with the growth in our operations” that had appeared inHomeBanc’s earlier filings was removed in this section.

59


118. On January 16, 2007, HomeBanc conducted a conference call in

which numerous analysts attended and asked questions. Defendant Race


119. Defendant Race made the following statements during the call in

regard to the Company’s financial condition:

• “We have built over the last two years a $6 billion investmentportfolio of high-quality assets..., “and it provides the foundationof earnings for our business.” [Emphasis added].

• “The bottom line is that we sit at this period of time with what webelieve is an estimated fair value that's well in excess of wherethe stock is certainly being valued today, where it's in excess ofthe stated book value of the balance sheet. And we think that is oneof the strengths of the picture here, that in the current environment,with the -- the part of the cycle that we're in is gettingunfortunately missed. But we believe that if you look at thosenumbers specifically, our total book value of -- at the end ofSeptember was $4.72 per common share.”

• “The loan portfolio has significant value over book. It is -- it'sstructured in terms of its financing, which is good, because theloans are funded permanently, which is a positive from a liquidityperspective.” [Emphasis added].

• “I want to just remind everyone that we have a lot to work withhere and a lot to build on at Home-Banc. We've got a --notwithstanding the current environment, we've got a high-qualityfranchise that's been built over a number of years. It has a trackrecord of growth, and we're committed to return it to profitabilityin terms of our origination franchise. We have a $6 billioninvestment portfolio that I talked about earlier that has $4.5 billionof assets that were self-originated, has a history of stability in

60


terms of margin performance, and it will provide an earningsfoundation as we rebuild and going forward into later in '07 andinto '08. Third, we have a balance sheet that, we believe, hassignificant value. It's not reflected, certainly, in where thestock is trading, but in the balance sheet itself that I've alluded to,and that we have that strength of the balance sheet to build on interms of its valuation. And as we return performance, we believewe'll be recognized.

(Emphases added.)

120. The foregoing statements and representations touting HomeBanc’s

position and claiming that its balance sheet and loan portfolio had significant value

that was not reflected in the stock price were materially false and misleading when

made. These statements failed to disclose to HomeBanc’s investors that

HomeBanc improperly loosened and violated its own underwriting standards,


loss that had to be disposed of as “scratch and dent,” had serious and systematic

internal control problems, improperly focused on loan quantity instead of quality,

was suffering from default rates that were completely out of control, and failed to


liquidity crisis. The Company’s dying loan business and portfolio of high-risk

loans led the Company into bankruptcy.

viii. Materially False and Misleading Statements and/orOmissions in HomeBanc’s February 2007 Earnings Call

61


121. On February 27, 2007, HomeBanc conducted a conference call

attended by numerous analysts. Defendant Race conducted the call on behalf of

HomeBanc.

122. Defendant Race made the following statements during the call:

• “Needless to say, 2006 was a difficult year for the industry as wellas HomeBanc. There were a number of factors in play this pastyear. The Fed clearly was the issue early in the year as thecontinued increase in rates effectively inverted the curve and reallyput a chilling effect on the housing side. The housing slowdownvolume for the industry was down about 20%, likewise for us aswell. Towards the end of the year you saw a growing fallout fromthe subprime sector in terms of credit that we were all monitoringand an extreme increase in early payment defaults for that sector aswell. And then lastly, as you've seen in a number of the companiesearly in '07, liquidity issues have arisen again, primarily in thesubprime sector but they are all environmental factors that cameout of the '06 time frame.

• On a positive front at HomeBanc, although we faced somechallenges and I'll talk about those, we have avoided some of themore systemic issues, which in many cases to be honest are verydifficult to recover from. We've steered clear of the credit side aswe were very disciplined on staying in the prime area and avoidedthe auction ARM product altogether. We have had no issue withthe early default on question that's come back to haunt many in theindustry and our liquidity plan by design-- and I'll talk a little bitmore about that later-- has served us well. So, although thebottom line is not what I would like it to be this year, I do believewe have taken the steps we can, controlled to position theCompany for our recovery and we've given our best approachto using the resources we have to provide effectively we're onthe way to do that. And lastly, it's important to note that many ofthe decisions that we made in the past around credit, around

62


staying away from the option ARM product, around our portfoliomanagement discipline, our ability to provide liquiditycontingency which we have acted upon, they provided us with theability to fight another day notwithstanding the environment and Iam grateful for that. And I expect with help from some help fromthe Fed this year with the market beginning to rationalize in termsof the housing market, we believe and I fully expect that a lot ofthe fruits of our work will really provide the results thatshareholders really deserve beginning in the 2008 time frame.[Emphasis added].

123. In response to one analyst’s question of whether there “has there been

any change in underwriting or pricing on the front-end?”, Race unequivocally

responded:

No. I think what we tried to do on the underwriting side was just to makethe decision process more effective, quicker and by doing that weactually were able to reduce our costs, but no, in terms of underwritingstandards we monitor what the rating agencies are focused on, to theextent we're selling loans that are securitized, what the agencies arefocused on and there's been a lot more scrutiny around underwritingstandards in general and we reflect those because we effectively are aseller of those assets in the marketplace, but no, there's not been achange in our fundamental philosophy there and that's I thinkhonestly that maybe that's one of the keys that we've had to workwith here is we did not stray from our view on credit over the lastcouple years and it probably cost us some volume, but I think itspositioned us at least as well as it can be in this year.” [Emphasisadded].


because it was untrue that the Company’s “liquidity plan by design . . . has served

us well.” In fact, substantial decreases in loan originations and out of control

63


default rates affected the Company’s viability as a going concern. Further,

Defendants’ preceding representation that “there’s not been a change in our

fundamental [underwriting] philosophy” was materially false and misleading when

made because Defendants had loosened underwriting standards to focus on what

investors would by rather than on data and risk analysis, knowingly utilized a

grossly inadequate loan loss reserve model comprised of only three market

variables and intended as a mere stopgap measure, and locked in of loans at a loss

for the sole purpose of retaining sales personnel through commissions.

125. In discussing the loss in earnings for the quarter, analyst Jim Delise

with Cambridge Place Investments expressed some frustration with Defendant

Race during the call, saying “It just seems like a little bit of-- I mean it seems like a

bit of a non-sequitur to suddenly see the losses increasing out of something that we

had been encouraged to believe in the past had been an asset and as we hear our

losses are increasing, as these are reversed we're being encouraged to believe that

hey, but wait a second you'll get it back in the future.” “I had hoped for a little bit

more clarity.”

ix. Materially False and/or Misleading Statements andOmissions in HomeBanc’s 2006 Annual Report

64


126. HomeBanc's Annual Report for the period ending December 31, 2006

was filed on March 15, 2007. In regard to HomeBanc’s underwriting standards,


Our business model emphasizes retail prime residential mortgage loanoriginations and is built on a foundation of people dedicated todelivering the right products and consistently high levels ofcustomer satisfaction,” and “our Office of People and Culture isresponsible for creating a culture based on ethics.” “We offer awide variety of fixed- and adjustable-rate residential mortgage loanproducts to meet our different market and customer needs. Weoriginate FNMA/FHLMC mortgage loans, FHA/VA government-insured mortgage loans, adjustable-rate mortgage loans, whichincludes construction-to-permanent and second-lien mortgage loans(generally in connection with first-lien mortgage loans),nonconforming loans and a limited volume of sub-prime mortgageloans. In each case, we apply our loan underwriting guidelinesand practices and other quality control measures to seek betterreturns and consistency through our origination process.” [Emphasesadded.]

127. These statements and representations were materially false and

misleading when made because HomeBanc did not comply with its “underwriting

guidelines and practices” – which were overly lenient in any event, and allowed

loans with inadequate credit scores as long as the overall pools of loans averaged

out to an acceptable level. In truth, and undisclosed to investors, the Company’s

guidelines did not promote “consistency” in loan origination because the Company

had been loosening underwriting standards as early as 2005. Defendants’ claims

that they were focused on the “right products” and had a “culture based on ethics”

65


were materially false and misleading because Defendants were willing to violate

the Company’s own guidelines, buy loans on the market, sell loans at a loss, and

mislead investors to stay afloat at any cost.

128. In regard to the adequacy of HomeBanc’s reserves, the Company

represented that:

We maintain a reserve for losses that may arise in connection with therepresentations and warranties we provide to the buyers of our mortgageloans regarding, among other things, compliance with laws andregulations, loan conformity with the ultimate purchasers’ underwritingstandards, the accuracy of information and early payment defaults. In theevent of a breach of these representations or warranties, we may berequired to repurchase the loans and/or indemnify the purchaser forlosses incurred as a result of the breach. Any losses related to theserepresentations and warranties are charged against the reserve.Management estimates the contingent loss reserves based uponhistorical losses incurred as a result of breaches of representationsand warranties with adjustments made for current trends andmarketplace developments. We provide for these losses at the timeloans are sold.” [Emphasis added].


because they failed to disclose to HomeBanc’s investors that HomeBanc


loss that had to be disposed of as “scratch and dent,” was suffering from default


business was in dire condition and faced an imminent liquidity crisis.

66


130. With respect to HomeBanc’s growth in loan originations, business

condition, ability to appropriately manage risk, and reasons for success, HomeBanc

represented that:

• “We believe that our focus on people development and ourcustomer-oriented process, coupled with our product offeringsand our emphasis on purchase money mortgage loans, distinguishour company and drive our profitability.”

• “We believe that our reputation, our focus on high-quality primeresidential mortgage loans, our customer service and SMAs withrealtors and home builders, and our experience with creditevaluation, will, over time, provide us with significantadvantages over many of our competitors.

• “We have risk management practices and programs to managethe interest rate risks associated with our mortgage originationand financing activities. We enter into derivative financialinstrument transactions solely for risk management purposes. Thedecision of whether or not to mitigate interest rate risks, or aportion thereof, is determined by senior management through theapplicable committee and is based on the risks involved and otherfactors, including the financial effect on income, asset valuationand compliance with the REIT income tests. In determiningwhether to mitigate a risk, we may consider whether other assets,liabilities, firm commitments and anticipated transactions alreadyoffset or reduce the risk. All of our derivative financial instrumentsare entered into with a view towards reducing the potential foreconomic losses that we could incur.”

(Emphases added.)


made because the Company was not performing successfully over competitors

67


because of a focus on “prime” mortgage and an adequate “risk management

practice.” In truth, HomeBanc improperly loosened and violated its own

underwriting standards, knowingly utilized a grossly inadequate loss reserve

model, locked in loans at a loss that had to be disposed of as “scratch and dent,”

improperly focused on loan quantity instead of quality, was suffering from default



132. In regard to HomeBanc’s liquidity, HomeBanc stated:

We presently believe our current cash balances, funds availableunder our financing arrangements (as described below) and cashflows from operations, including proceeds from sales of fixed-rateand adjustable-rate mortgage loans, will be sufficient for ourliquidity requirements for the next 12 months and beyond.5 Ourinvestments and assets also generate liquidity on an ongoing basisthrough mortgage principal and interest payments, prepayments and netearnings. [Emphasis added].

133. These representations were materially false and misleading when

made because they failed to disclose to HomeBanc’s investors that HomeBanc was

suffering from default rates that were completely out of control, and failed to


liquidity crisis.

5 The language “and beyond” that is underlined above is language that did not appear inHomeBanc’s 2005 Annual Report, but was added to this 2006 Annual Report.

68


134. In regard to HomeBanc’s effectiveness and the condition of its


HomeBanc’s management assessed the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2006. Inmaking this assessment, it used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in itsInternal Control-Integrated Framework. Based on our assessment, webelieve that, as of December 31, 2006, the Company’s internalcontrol over financial reporting is effective based on those criteria.”[Emphasis added].


made because they failed to disclose to HomeBanc’s investors had serious and

systemic internal control problems. The Company could not adequately monitor

financial reporting because, for example, they based loan loss reserves on an

inadequate temporary model. Moreover, the Company had issued loans that did

not comply with its own underwriting standards and therefore presented a risk to

HomeBanc and to its future business. Also undisclosed, the Company was selling

loans at a loss simply to maintain personnel and faced a liquidity crisis because its

loan originations were falling and personnel were leaving.

x. Materially False and Misleading Statements and Omissionsin HomeBanc’s First Quarter Quarterly Report for 2007

136. HomeBanc's Quarterly Report for the period ending March 31, 2007

(HomeBanc's first fiscal quarter for 2007) was filed on May 10, 2007 (the “2007

69


1Q 10-Q”), and contained the following statements. In regard to the adequacy of

reserves, the Company represented that:

The Company maintains a reserve for contingencies arising inconnection with loan sales to third parties. Reserves for contingencylosses anticipated in association with investor repurchase andindemnification requests were $5.7 million and $5.2 million at March 31,2007 and December 31, 2006, respectively. During the three-monthperiods ended March 31, 2007 and 2006, the Company repurchased$15.5 million and $4.3 million, respectively, of loans sold to third partiesand charged $0.4 million and $1.0 million, respectively, againstpreviously established contingency reserves. [Emphasis added].




were completely out of control.

138. With respect to HomeBanc’s growth in loan originations, business





70



violated their own underwriting standards. Further, Defendants knew but failed to



140. In regard to HomeBanc’s ability to appropriately manage risk and

reasons for the Company’s success, HomeBanc represented that:

We presently do not believe that we have significant interest rate riskon our loans held for sale under most of the interest rate scenarios webelieve likely to occur. [Emphasis added].


because Defendants had no basis to believe the Company did not have “significant

interest rate risk.” In truth, HomeBanc had improperly loosened and violated their

own underwriting standards, knowingly utilized a grossly inadequate loss reserve

model, locked in loans at a loss that had to be disposed of as “scratch and dent,”

improperly focused on loan quantity instead of quality, was suffering from default




We presently believe our current cash balances, funds availableunder our financing arrangements (as described below) and cashflows from operations, including proceeds from sales of fixed-rateand adjustable-rate mortgage loans and the net proceeds from the

71


sale of our MBS, will be sufficient to support our liquidityrequirements for the foreseeable future. Our investments and assetsalso generate liquidity on an ongoing basis through mortgage principaland interest payments, prepayments and net earnings. As we review andconsider various strategic alternatives, including potential changes in ouroperating model, and as we implement our new business strategies,significant additional expenditures of cash likely will be required,perhaps in both the short- and long-term. From time to time, we may seekadditional sources of capital through the issuance of debt or equitysecurities or by entering into new borrowing facilities. [Emphasisadded].


made because they failed to disclose to HomeBanc’s investors that HomeBanc was

suffering from default rates that were completely out of control, that its entire

business was in dire condition and that the Company faced an imminent liquidity

crisis. Moreover, the Company lacked operating capital as sales volume was

dropping and the Company was losing loan officers.



HomeBanc’s management is responsible for establishing and maintainingeffective disclosure controls and procedures, as defined under Rules 13a-15 and 15d-15 of the Exchange Act, that are designed to ensure thatinformation HomeBanc is required to disclose in the reports it files orsubmits under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the SEC’s rules and forms.HomeBanc’s management has evaluated, with the participation ofHomeBanc’s Chief Executive Officer and Chief Financial Officer, theeffectiveness of the design and operation of these disclosure controls andprocedures as of the end of the period covered by this Report. Based on

72


that evaluation, the Chief Executive Officer and the Chief FinancialOfficer have concluded that, as of March 31, 2007, HomeBanc’sdisclosure controls and procedures are effective in ensuring, to areasonable assurance level, that all material information required tobe disclosed and filed in this Report was recorded, summarized andreported within the time period required by the SEC’s rules andforms. Similarly, HomeBanc assesses, and may change, its technologysolutions from time to time to keep pace with growth in our operations.There was no change in HomeBanc’s internal control over financialreporting identified in connection with that evaluation that occurredduring the three months ended March 31, 2007 that has materiallyaffected, or is reasonably likely to affect, HomeBanc’s internal controlsover financial reporting. [Emphasis added].





underwriting practices and employed an inadequate loan loss reserve model.






xi. Materially False and/or Misleading Statements andOmissions Regarding Defendants’ Compliance withSecurities Laws

73


146. Defendants also certified that they had fully complied with the federal

securities laws. Indeed, in every Quarterly and Annual Report discussed in this

Complaint, Defendant Race and Defendant Flood (until his resignation in January

2007) executed certifications pursuant to Sections 302 and 906 of the Sarbanes-

Oxley Act of 2002 attesting to the accuracy of the Company’s financial statements

and the adequacy of the Company’s internal controls over financial reporting.

147. In the Section 302 Certification, Defendants certified that they

“reviewed” the filings, that the “report does not contain any untrue statement of a

material fact or omit to state a material fact,” that the financial information “fairly

present[ed]” the Company’s financial condition, that Defendants had “designed”

and “evaluated the effectiveness” of “disclosure controls and procedures,” and had

disclosed all internal control deficiencies and “fraud, whether or not material”

148. In the Section 906 Certification, Defendants certified that the financial

reports “fully complie[d] with the requirements of Section 13(a) or 15(d) of the

Securities Exchange Act of 1934; and . . . fairly presents, in all material respects,

the financial condition and results of operations of the Company.”

149. These certifications were materially false and misleading because, as

discussed in detail above, the Company’s filings contained materially false and

74


misleading information and the Defendants did not design effective internal control

procedures.

VIII. THE TRUTH FINALLY BEGINS TO EMERGE

A. THE MAY 2007 10-Q HINTS AT HOMEBANC’SPROBLEMS

150. In HomeBanc’s May 10, 2007 10-Q described above, which repeated

Defendants’ prior materially false and misleading position that HomeBanc was

strong and doing well, and failed to disclose the deep and systemic problems it had

been experiencing, the Company also reported negative results in a number of

areas of the Company’s financials including:

(i) a consolidated net loss attributable to holders of common stock of $23.8million, or $0.42 per diluted share, for the quarter;

(ii) investment portfolio assets comprised of mortgage loans held forinvestment and securities held to maturity and available for sale of $4.5billion at quarter-end, a decrease from $5.9 billion for the same period of2006;

(iii) mortgage origination volume of $1.1 billion for the quarter, adecrease of 13% from $1.2 billion for the same period of 2006; and

(iv) net interest income after provision for loan losses of $5.6 million forthe quarter, a more than 80% decrease from $28.8 million for the sameperiod of 2006.

151. The 10-Q also revealed that investors “should not rely upon”

HomeBanc’s business strategy, but attempted to reassure investors by outlining a

number of steps or alternatives to improve its business.

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152. Defendants further attempted to alleviate the concern of investors by

hinting at a possible sale of the Company in stating that HomeBanc continues to

explore “any number of strategic alternatives that may be available” to the

Company. HomeBanc also misleadingly stated that “[w]e presently believe our

current cash balances, funds available under our financing arrangements . . . and

cash flows from operations, including proceeds from sales of fixed rate and

adjustable rate mortgage loans and the net proceeds from the sale of our MBS will

be sufficient to support our liquidity requirements for the foreseeable future.”

153. Despite HomeBanc’s attempts to alleviate investors’ concerns and

release its poor financial results among more positive (though materially false and

misleading) information, HomeBanc’s stock still plummeted on this news. The

price of HomeBanc’s common stock fell 16.8% in two days from $2.08 on May 9,

2007 to $1.73 on May 11, 2007, and continued to decline in the days following the

announcement. Similarly, the price of HomeBanc’s Preferred Stock dropped

18.4% from $20.90 on May 9, 2007 to a closing price of $17.05 on May 11, 2007,

and continued to decline in the days following the announcement.

154. Thereafter, during the first two weeks of July, HomeBanc remained

silent regarding the date of its 2007 second quarter earnings release. As the days

passed, the market was wary of an impending announcement of delisting or, even

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worse, dissolution of the Company. By mid-July, HomeBanc’s common stock fell

to under $1.00, and HomeBanc’s Series A Preferred Stock was trading at

approximately $14.

155. On July 30, 2007, HomeBanc filed a Definitive Proxy Statement with

the SEC which contained a detailed disclosure of payments to officers and

directors “upon termination or change of control.” This filing, in conjunction with

the Company’s continued silence regarding its 2007 second quarter financial

results, caused the investing public to question HomeBanc’s future viability, and

the price of the Company’s stock declined again. HomeBanc common stock,

which had closed at $0.83 per share the prior trading day, dropped to a closing

price of $0.72 per share on the day of the filing.. Within 72 hours, the Company’s

common stock dropped to $0.43 per share – a decline of more than 48%.

Similarly, the Series A Preferred Stock had closed at $12.65 per share the day prior

to the filing, dropped to a closing price of $10.89 per share on the day of the filing,

and, within 72 hours, dropped to a closing price of $5.20 per share.

B. HOMEBANC COLLAPSES

156. On August 6, 2007, HomeBanc filed a Form 8-K with the SEC that

revealed that the New York Stock Exchange notified HomeBanc (on August 3,

2007) that it had suspended the listing of the Company’s common stock and Series

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A Preferred Stock effective immediately, and that the decision to suspend the

listings was reached in view of the “abnormally low” trading price of HomeBanc’s

common stock, which closed at $0.30 on Friday, August 3, 2007.

157. That same 8-K contained a second amendment to the Master

Repurchase Agreement, which stated that HomeBanc was required to provide J.P.

Morgan with “daily and weekly reports regarding margin calls, liquidity position,

operating budget and asset dispositions.”

158. This disclosure, along with the fact that J.P. Morgan was requiring

HomeBanc to provide daily and weekly reports regarding margin calls, liquidity

position, operating budget and asset dispositions, caused the investment

community to question whether or not the repeated reassurances and statements

described above were truthful. These revelations resulted in the price of

HomeBanc’s common stock dropping by 50%, to close at $0.15 per share on

Monday, August 6, 2007, and the Series A Preferred Stock to drop by 65% from

$5.30 to $1.83 on the same day. HomeBanc common stock was down to $0.02 per

share within a week of this announcement.

159. On August 7, 2007, HomeBanc announced that it was unable to

borrow any additional amounts under its credit facilities to satisfy its mortgage

loan funding obligations, and on August 9, 2007, HomeBanc filed a voluntary

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petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S.

Bankruptcy Court for the District of Delaware.

XI. CONTROL PERSON ALLEGATIONS

160. During the Class Period, the Defendants, as senior executive officers

and/or directors of HomeBanc, were privy to confidential, proprietary and material

adverse non-public information concerning HomeBanc, its operations, finances,

financial condition and present and future business prospects via access to internal

corporate documents, conversations and connections with other corporate officers

and employees, attendance at management and/or board of directors meetings and

committees thereof, and via reports and other information provided to them in

connection therewith. Because of their possession of such information, the

Defendants knew or were severely reckless in disregarding that the adverse facts

specified herein had not been disclosed to, and were being concealed from, the

investing public.

161. The Defendants are liable as direct participants in the wrongs

complained of herein. In addition, the Defendants, by reason of their status as

senior executive officers and/or directors, were “controlling persons” within the

meaning of §20(a) of the Exchange Act and had the power and influence to cause

the Company to engage in the unlawful conduct complained of herein. Because of

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their positions of control, the Defendants were able to and did, directly or

indirectly, control the conduct of HomeBanc’s business.

162. The Defendants, because of their positions with the Company,

controlled and/or possessed the authority to control the contents of its reports, press

releases and presentations to securities analysts and, through them, to the investing

public. The Defendants were provided with copies of the Company’s reports and

publicly disseminated documents alleged herein to be misleading, prior to or

shortly after their issuance and had the ability and opportunity to prevent their

issuance or cause them to be corrected. Thus, the Defendants had the opportunity

to either prevent or commit the fraudulent acts alleged herein.

163. As senior executive officers and as controlling persons of a publicly

traded company whose securities were, and are, registered with the SEC pursuant

to the Exchange Act, and were traded on the NYSE and governed by the federal

securities laws, the Defendants had a duty to disseminate promptly accurate and

truthful information with respect to HomeBanc’s financial condition and

performance, growth, operations, financial statements, business, products, markets,

management, earnings, and present and future business prospects, to correct any

previously issued statements that had become materially misleading or untrue, so

the market price of HomeBanc’s securities would be based on truthful and accurate

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information. The Defendants’ misrepresentations and omissions during the Class

Period violated these specific requirements and obligations.

164. Defendants are liable as participants in a fraudulent scheme and

course of business that operated as a fraud or deceit on purchasers of HomeBanc’s

publicly traded securities by disseminating materially false and misleading

statements and/or concealing material adverse facts.

XII. CLASS ACTION ALLEGATIONS

165. Plaintiff brings this action on his own behalf and as a class action

pursuant to Federal Rules of Civil Procedure (“FRCP”) 23(a) and (b)(3) on behalf

of a class (the “Class”) consisting of all persons or entities who purchased or

otherwise acquired HomeBanc Series A Preferred Stock or common stock during

the period September 26, 2005 through August 3, 2007, inclusive (the “Class

Period”). Excluded from the Class are Defendants or non-parties named herein,

members of the Defendants’ immediate families, and any person, firm, trust,

corporation, officer, director or other individual or entity in which any Defendant

has a controlling interest or which is related to or affiliated with any of the

Defendants, and the legal representatives, agents, affiliates, heirs, successors-in-

interest or assigns of any such excluded party.

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

members is impracticable. HomeBanc issued approximately 2 million shares of

Series A Preferred Stock to members of the investing public in the Offering, and as

of September 20, 2007, there were approximately that many shares outstanding.

Subsequent to the Offering, and throughout the Class Period, the Company’s Series

A Preferred Stock was listed and actively traded on the NYSE under the symbol

“MBpA”.6H In addition, as of May 7, 2007, there were approximately 51.45

million shares of the Company’s common stock outstanding. During the Class

Period, the Company’s common stock was listed and actively traded on the NYSE

under the symbol “HMB”. 7

167. The precise number of Class members is unknown to Plaintiff at this

time but is believed to number in the thousands, at a minimum. In addition, the

names and addresses of the Class members can be ascertained from the books and

records of HomeBanc and/or its transfer agent. Moreover, notice can be provided

to such record owners by a combination of published notice and first-class mail

using techniques and a form of notice similar to those customarily used in class

actions arising under the federal securities laws.

6 HomeBanc’s Series A Preferred Stock symbol was changed from “HMBpA” to “HMBNP” onAugust 6, 2007 due to a change in listing from the NYSE to the OTC US market.

7 HomeBanc’s common stock symbol was changed from “HMB” to “HMBN” on August 6, 2007due to a change in listing from the NYSE to the OTC US market.

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168. Plaintiff will fairly and adequately represent and protect the interests

of the members of the Class. Plaintiff has retained competent counsel highly

experienced in class action litigation under the federal securities laws to further

ensure such protection, and intends to prosecute this action vigorously.

169. Plaintiff’s claims are typical of the claims of the other members of the

Class because Plaintiff’s and all the Class members’ damages arise from and were

caused by the same materially false and misleading representations and omissions

made by or chargeable to Defendants. Plaintiff does not have any interests

antagonistic to, or in conflict with, the Class.

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

efficient adjudication of this controversy. Since the damages suffered by

individual Class members may be relatively small, the expense and burden of

individual litigation make it virtually impossible for the Class members to seek

redress for the wrongful conduct alleged. Plaintiff is not aware of any difficulty in

the management of this litigation which would preclude its maintenance as a class

action.

171. Common questions of law and fact exist as to all members of the

Class and predominate over any questions affecting solely individual members of

the Class. Among the questions of law and fact common to the Class are:

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(a) Whether the federal securities laws were violated by

Defendants’ acts as alleged herein;

(b) Whether Defendants’ statements during the Class Period

omitted and/or misrepresented material facts about, among other things,

HomeBanc and its business and financial condition, performance, prospects,

operations and management of the Company; and

(c) The extent of damages sustained by members of the Class and

the appropriate measure of such damages.

XIII. STATUTORY SAFE HARBOR

172. The statutory safe harbor provided for forward-looking statements

under certain circumstances does not apply to any of the allegedly materially false

statements pleaded in this Complaint. Many of the specific statements pleaded

herein were not identified as “forward-looking statements” when made.

173. 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.

174. Alternatively, to the extent that the statutory safe harbor does apply to

any forward-looking statements pleaded herein, Defendants are liable for those

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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 HomeBanc who knew that those

statements were materially false and misleading when made.

XIV. LOSS CAUSATION

175. Defendants’ wrongful conduct, as alleged herein, directly and

proximately caused the economic loss suffered by Plaintiff and the Class.

176. During the Class Period, Plaintiff and the Class purchased securities

of HomeBanc at artificially inflated prices. The price of HomeBanc’s securities

significantly declined when the misrepresentations made to the market, and/or the

information alleged herein to have been concealed from the market, and/or the

effects thereof, were revealed, removing the artificial inflation in the price of the

stock, causing investors’ losses.

177. The decline in the price of HomeBanc’s securities after the truth came

to light was a direct result of the nature and extent of Defendants’ fraud finally

being revealed to investors and the market. The timing and magnitude of

HomeBanc’s securities price declines negate any inference that the loss suffered by

Plaintiff and the other Class members was caused by changed market conditions,

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macroeconomic or industry factors or Company-specific facts unrelated to the

Defendants’ fraudulent conduct. The economic loss suffered by Plaintiff and the

other Class members was a direct result of Defendants’ fraudulent scheme to

artificially inflate the prices of HomeBanc’s securities and the subsequent decline

in the value of HomeBanc’s securities when Defendants’ prior misrepresentations

and other fraudulent conduct were revealed.

XV. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE

178. At all relevant times, the market for HomeBanc stock was an efficient

market for the following reasons, among others:

(a) HomeBanc stock met the requirements for listing, and was listed

and actively traded, on the NYSE, a highly efficient market;

(b)As a regulated issuer, HomeBanc filed periodic public reports with

the SEC and the NYSE;

(c) HomeBanc stock was followed by securities analysts employed

by major brokerage firms who wrote reports which were distributed to the sales

force and certain customers of their respective brokerage firms. Each of these

reports was publicly available and entered the public marketplace; and

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(d) HomeBanc regularly issued press releases which were carried

by national newswires. Each of these releases was publicly available and entered

the public marketplace.

179. As a result, the market for HomeBanc securities promptly digested

current information with respect to the Company from all publicly-available

sources and reflected such information in HomeBanc’s stock price. Under these

circumstances, all purchasers of HomeBanc securities during the Class Period

suffered similar injury through their purchase of stock at artificially inflated prices

and a presumption of reliance applies.

XVI. COUNT I FOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10B-5 PROMULGATED THEREUNDERAGAINST THE DEFENDANTS

180. Plaintiff repeats and realleges the allegations set forth above as though

fully set forth herein. This claim is asserted against all Defendants.

181. During the Class Period, HomeBanc and the Defendants, and each of

them, carried out a plan, scheme and course of conduct which was intended to and,

throughout the Class Period, did: (i) deceive the investing public, including

Plaintiff and other Class members, as alleged herein; (ii) artificially inflate and

maintain the market price of HomeBanc securities; and (iii) cause Plaintiff and

other members of the Class to purchase HomeBanc securities at artificially inflated

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prices. In furtherance of this unlawful scheme, plan and course of conduct,

Defendants HomeBanc and the Defendants, and each of them, took the actions set

forth herein.

182. These 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 securities in an effort to maintain artificially high

market prices for HomeBanc securities in violation of § 10(b) of the Exchange Act

and Rule 10b-5. The Defendants are sued as primary participants in the wrongful

and illegal conduct charged herein. The Defendants are also sued as controlling

persons of HomeBanc, as alleged herein.

183. In addition to the duties of full disclosure imposed on Defendants as a

result of their making of affirmative statements and reports, or participation in the

making of affirmative statements and reports to the investing public, they each had

a duty to promptly disseminate truthful information that would be material to

investors in compliance with the integrated disclosure provisions of the SEC as

embodied in SEC Regulation S-X (17 C.F.R. § 210.01 et seq.) and S-K (17 C.F.R.

§ 229.10 et seq.) and other SEC regulations, including accurate and truthful

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information with respect to the Company’s operations, financial condition and

performance so that the market prices of the Company’s publicly traded securities

would be based on truthful, complete and accurate information.

184. HomeBanc and the Defendants, individually and in concert, directly

and indirectly, by the use of 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, business practices,

performance, operations and future prospects of HomeBanc as specified herein.

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 HomeBanc’s value and performance and substantial growth, which included the

making of, or the participation in the making of, untrue statements of material facts

and omitting to state material facts necessary in order to make the statements made

about HomeBanc 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 HomeBanc’s

securities during the Class Period.

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185. Each of the Defendants’ primary liability, and controlling person

liability, arises from the following facts: (i) each of the Defendants was a high-

level executive and/or director at the Company during the Class Period; (ii) each of

the Defendants, by virtue of his responsibilities and activities as a senior executive

officer and/or director of the Company, was privy to and participated in the

creation, development and reporting of the Company’s operational and financial

projections and/or reports; (iii) the Defendants enjoyed significant personal contact

and familiarity with each other and were 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 financial condition and performance at all

relevant times; and (iv) the Defendants were aware of the Company’s

dissemination of information to the investing public which they knew or were

severely reckless in disregarding was materially false and misleading.

186. These Defendants had actual knowledge of the misrepresentations and

omissions of material facts set forth herein, or acted with a severely reckless

disregard for the truth in that they failed to ascertain and to disclose such facts,

even though such facts were readily available to them. Defendants’ material

misrepresentations and/or omissions were made knowingly or severely recklessly

and for the purpose and effect of concealing HomeBanc’s operating condition,

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business practices and future business prospects from the investing public and

supporting the artificially inflated price of its stock. As demonstrated by their

overstatements and misstatements of the Company’s financial condition and

performance throughout the Class Period, the Defendants, if they did not have

actual knowledge of the misrepresentations and omissions alleged, were severely

reckless in failing to obtain such knowledge by deliberately refraining from taking

those steps necessary to discover whether those statements were false or

misleading.

187. 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 HomeBanc securities was artificially inflated during the Class Period.

Unaware of the fact that the market price of HomeBanc shares was artificially

inflated, and relying directly or indirectly on the false and misleading statements

made by the 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

were severely recklessly disregarded by the Defendants but undisclosed to the

public, Plaintiff and the other members of the Class acquired HomeBanc securities

during the Class Period at artificially inflated high prices and were damaged

thereby.

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188. At the time of said misrepresentations and omissions, Plaintiff and

other members of the Class were unaware of their falsity, and believed them to be

true. Had Plaintiff and the other members of the Class and the marketplace known

of the true performance, business practices, future prospects and intrinsic value of

HomeBanc, which were not disclosed by the Defendants, Plaintiff and other

members of the Class would not have purchased or otherwise acquired HomeBanc

securities during the Class Period, or, if they had acquired such securities during

the Class Period, they would not have done so at the artificially inflated prices

which they paid.

189. By virtue of the foregoing, HomeBanc and the Defendants each

violated § 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

190. As a direct and proximate result of the Defendants’ wrongful conduct,

Plaintiff and the other members of the Class suffered damages in connection with

their purchases of the Company’s securities during the Class Period.

XVII. COUNT II FOR VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT AGAINST THE DEFENDANTS

191. Plaintiff repeats and realleges the allegations set forth above as if set

forth fully herein.

192. The Defendants were and acted as controlling persons of HomeBanc

within the meaning of §20(a) of the Exchange Act as alleged herein. By virtue of

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their high-level positions with the Company, participation in and/or awareness of

the Company’s operations and/or intimate knowledge of the Company’s actual

performance, the Defendants had the power to influence and control and did

influence and control, directly or indirectly, the decision-making of the Company,

including the content and dissemination of the various statements which Plaintiff

contends are false and misleading. Each of the Defendants was provided with or

had unlimited access to copies of the Company’s reports, press releases, public

filings and other statements alleged by Plaintiff 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.

193. In addition, each of the Defendants had direct 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.

194. As set forth above, HomeBanc and the Defendants each violated

§10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint.

By virtue of their controlling positions, the Defendants are liable pursuant to

§20(a) of the Exchange Act. As a direct and proximate result of Defendants’

wrongful conduct, Plaintiff and other members of the Class suffered damages in

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connection with their purchases of the Company’s securities during the Class

Period.

XVIII. REQUEST FOR RELIEF

WHEREFORE, Plaintiff, individually and on behalf of the Class, requests

judgment as follows:

(A) declaring this action to be a class action properly maintained pursuant

to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure;

(B) awarding Plaintiff and other members of the Class damages together

with interest thereon;

(C) awarding Plaintiff and other members of the Class their costs and

expenses of this litigation, including reasonable attorneys’ fees, accountants’ fees

and experts’ fees and other costs and disbursements; and

(D) awarding Plaintiff and other members of the Class such other and

further relief as may be just and proper under the circumstances.

XIX. JURY DEMAND

Plaintiff hereby demands a trial by jury.

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Dated: August 5, 2009 LAW OFFICES OF DAVID A. BAIN, LLC

/s/ David A. Bain Georgia Bar No. 0324491050 Promenade II1230 Peachtree St., NEAtlanta, GA 30309Tel: (404) 724-9990Fax: (404) [email protected]

Liaison Counsel for the Class

Lewis S. KahnKAHN SWICK & FOTI, LLC650 Poydras Street, Suite 2150New Orleans, LA 70130Tel: (504) 455-1400Fax: (504) [email protected]

Kim E. MillerKAHN SWICK & FOTI, LLC12 E. 41st St., 12th FloorNew York, NY 10017Tel: (212) 696-3730Fax: (504) [email protected]

-and-

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David A.P. BrowerBROWER PIVEN, P.C.488 Madison AvenueNew York, NY 10022Tel: (212) 501-9000Fax: (212) [email protected]

Co-Lead Counsel for Lead Plaintiff andthe Class

Maya SaxenaJoseph E. White, IIISAXENA WHITE P.A.2424 North Federal Highway, Suite 257Boca Raton, FL 33431Tel: (561) 394-3399Fax: (561) 394-3382

Additional Counsel for the Class

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CERTIFICATE OF SERVICE

I hereby certify that on this 5th day of August, 2009, I electronically filed the

foregoing CONSOLIDATED AMENDED CLASS ACTION COMPLAINT

FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS with the Clerk

of Court using the CM/ECF system, which will automatically send an e-mail

notification of such filing to the following attorneys of record:

Christopher S. Jones [email protected] , [email protected]

David J. George dgeorge @csgrr.com, [email protected]

Emily Louise Shoemaker [email protected] ,[email protected]

John Garrett Parker [email protected] ,[email protected] , [email protected]

Joseph E. White , III [email protected] , [email protected],[email protected]

Kenneth J. Vianale [email protected] , [email protected],[email protected]

Martin D. Chitwood [email protected]

Maya Saxena [email protected]

Paul J. Geller [email protected], [email protected]

Robert C. Schubert [email protected]

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Robert Ware Killorin [email protected]

Willem Frans Jonckheer [email protected]

William K. Whitner [email protected] ,[email protected]

/s/ David A. Bain .Georgia Bar No. 032449LAW OFFICES OF DAVID A. BAIN, LLC1050 Promenade II1230 Peachtree Street, NEAtlanta, GA 30309Tel: (404) 724-9990Fax: (404) [email protected]

Liaison Counsel for the Class

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