Buttonwood Tree Value Partners LP , et al. v. Sweeney., et al. 10-CV ...shareholdersfoundation.com/system/files/complaints/first_regional... · SWEENEY, MA.RIOM J. SWEENEY GARY M

Case 8:10-cv-00537-CJC -MLG Document 1 Filed 05/05/10 Page 1 of 54

CUNEO GILBERT & LADUCA LLPcaJon Tostrud (SB No. 199502)

1901 Avenue of the Stars, 2° FloorLos Angeles, California 90067 -;-Telephone: (310) [email protected]

î C9GREENFIELD & GOODMAN, LLC -tRichard D. GreenfieW

tf^250 Hudson Street-8 Floor n^New York, NY 10013 r- o .-Telephone: (917) 495-4446 [email protected]

(Additional Counsel on Signature Page)

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

S A C V -00537 QC hFILUBUTTONWOOD TREE VALUE Civil Action No.PARTNERS, LP and JOHNSORRELLS on Behalf of Themselvesand all Others Similarly Situated,

Plaintiffs,CLASS ACTION

VS. COMPLAINTJACK A. SWEENEY STEVEN J.SWEENEY, MA.RIOM J.SWEENEY GARY M. HORGAN, H.

TRIAL DEMANDEDANTHONY' GARTSHORE F. JURYDAVID HARE ELIZABETHTHOMPSON, BRED M. EDWARDS,DOROTHEA MONTOYATHOMAS E. MCCULLOVGH,

LAWRENCE J.SSHERMAN a

Defendants.

COMPLAINT

Buttonwood Tree Value Partners, LP ("Buttonwood") and John

Sorrells, on behalf of themselves and all others similarly situated, by their

Case 8:1 0-cv-0053 7-CJC -MLG Document 1 Filed 05/05/10 Page 2 of 54

1 undersigned counsel, allege the following based upon the investigation of

2 counsel, except as to the allegations specifically pertaining to their own

3 acts, which are based upon personal knowledge. The investigation of

4 counsel included, among other things, a review of the public filings of First

5 Regional Bancorp ("FRB" or the "Company") with the United States

6 Securities and Exchange Commission ("SEC"), press releases issued by the

7 Company, media and news reports about the Company, and publicly

8 available trading data for FRB's securities and reviews of minutes of the

9 Boards of Directors of FRB and its wholly-owned subsidiary, First

10 Regional Bank (the "Bank").

11 NATURE OF THE ACTION

12 1. This is a class action brought by plaintiffs on behalf of a class

13 consisting of all persons who purchased securities of FRB stock during the

14 period of approximately January 1, 2007 to January 29, 2010, inclusive

15 ("Class Period"). Those named as defendants in this action were all officers

16 and/or directors of FRB and/or of its subsidiary, First Regional Bank (the

17 "Bank") during at least part of the Class Period. FRB common stock is now

18 virtually worthless, having sold as recently as April 27, 2010 at

19 approximately $0.03 per share. Trading in FRB's stock was suspended on

20 January 29, 2010, and resumed on February 10, 2010. The NASDAQ Stock

21 Market announced on February 25, 2010 that it would delist the common

22 stock of FRB, and it has since traded on the OTC Bulletin Board (better

23 known as the "pink sheets" where "penny stocks" are traded). It is

24 anticipated that the Company will shortly file for protection from creditors

25 under the bankruptcy laws since it has now lost its principal asset, the Bank,

26 and is obligated for the repayment for trust preferred debt that remains

27 ' The exact parameters of the Class Period will be determined upon the28 conclusion of discovery with respect thereto.

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1 outstanding as well as other debt.

2 2. This action involves a fraudulent scheme perpetuated by the

3 defendants that concealed from plaintiffs and the investing public the true

4 financial and operating condition of FRB and the Bank, all of which

5 resulted in the closing of the Bank by the California Commissioner of

6 Financial Institutions ("CFI") on Friday, January 29, 2010. The Federal

7 Deposit Insurance Corporation ("FDIC") was appointed as receiver for the

8 Bank. At the crux of the defendants' fraudulent scheme was a practice

9 whereby they intentionally concealed the true state of affairs at FRB and the

10 Bank, FRB's only significant asset, which had, in the past, accounted for

11 virtually all its reported earnings and cash flow.

12 3. Defendants' manipulation of--- and, in particular, the publicly-

13 described financial and operating condition of FRB and the Bank---the

14 reported earnings, assets and shareholders' equity of FRB, was well-

15 concealed through most of the Class Period. Such deception, carried on by

16 the defendants while they held their respective positions with FRB and/or

17 the Bank, was the linchpin of a broader fraudulent scheme to profit from

18 such conduct and to misrepresent and withhold truthful material

19 information from the public about this scheme. In furtherance of this

20 fraudulent scheme, defendants engaged in, inter alia, the following

21 misconduct:

22 (a) throughout the Class Period, the defendants intentionally

23 failed to make adequate provisions for the Bank's known or

24 reasonably likely loan losses while knowing that, inter alia,

25 such loans were excessively concentrated in a few

26 borrowers and in the over-heated and highly volatile

27 commercial real estate industry in Southern California

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1 and/or that the borrowers were not able to re-finance or

2 honor their commitments to the Bank;

3 (b) throughout the Class Period, the defendants concealed the

4 fact that the Bank had expanded the scope of its lending

5 activities that its loan files, particularly, real estate-based

6 loan files, were in a serious state of disarray making

7 collection of such loans very difficult;

8 (c) throughout the Class Period, the defendants intentionally

9 filed with the SEC and otherwise disseminated to the

10 investing public financial statements and other documents

11 that falsely reported FRB's earnings when, had the truth

12 been disclosed, the defendants would have revealed that

13 FRB and the Bank was losing money;

14 (d) through most of the Class Period, in press releases and

15 otherwise, the defendants proclaimed that FRB and the

16 Bank were "well capitalized" when, in fact, the Bank was

17 so woefully capital deficient that its survival was in doubt;

18 (e) throughout the Class Period, defendants failed to disclose

19 publicly that they had not complied with material

20 provisions of the Company's Audit Committee Charter,

21 which had been adopted March 20, 2007 including the

22 requirements that the Audit Committee "monitor the

23 integrity of the Company's financial reporting process and

24 systems of internal controls regarding finance, accounting

25 and legal compliance;... monitor the performance of the

26 Bank's Chief Risk Officer and the internal audit

27 function;... monitor the Company's systems of disclosure

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1 controls and procedures, internal controls over financial

2 reporting..."

3 (fj through part of the Class Period, defendants failed to

4 disclose publicly that they had not complied with material

5 provisions of the Company's Code of Business Conduct

6 and Ethics, which had been adopted May 19, 2009

7 including the requirement that they and their subordinates

8 "comply with all applicable laws, rules and regulations

9 related to the disclosures the Company makes to the SEC

10 and to ensure that such disclosures are made fairly,

11 accurately and timely."

12 (g) through most of the Class Period, defendants failed to

13 disclose publicly and in a timely manner significant actions

14 taken by banking regulators including, in particular, that the

15 California Department of Financial Institutions (" DFI")

16 and/or the FDIC had warned the Boards of FRB and the

17 Bank of, inter alia, their seriously deficient controls,

18 lending concentrations, improper banking practices and

19 underlying risks to the Bank's survival; and through at least

20 part of the Class Period, defendants failed to disclose

21 publicly and in a timely manner that the FDIC had issued to

22 the Bank and the Officer Defendants a Report of

23 Examination dated April 23, 2007 in which they were

24 informed, formally, of unsafe and unsound banking

25 practices and violations of law and/or regulation; that on

26 February 28, 2008, the Board of the Bank had consented to

27 the entry by the FDIC of a Cease and Desist Order (issued

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1 March 3, 2008) and that on February 17, 2009, the

2 members of the Bank's Board of Directors had been

3 required to physically come to the offices of the DFI to

4 meet with its representatives and those of the FDIC and

5 enter into a further "cease and desist" order related to the

6 defendants' conduct as described herein and otherwise and

7 requiring the Bank to take corrective steps to address the

8 foregoing issues, as more specifically set forth below.

9 4. This extensive fraud injured plaintiffs and others who

10 purchased FRB securities during the Class Period in an amount which

11 cannot presently be determined.

12 JURISDICTION AND VENUE

13 5. This Court has jurisdiction over the subject matter of this

14 action pursuant to Section 27 of the Securities Exchange Act of 1934

15 ("Exchange Act"), 15 U.S.C. §78aa, and 28 U.S.C. §1331. The claims

16 asserted herein arise under Sections 10(b), 20(a) and 20A of the Exchange

17 Act and Rule IOb-5 promulgated by the SEC, 17 C.F.R. §240.1 Ob-5.

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

19 Exchange Act and 28 U.S.C. §1391(b) and (c). FRB's principal executive

20 offices were located in this District, defendants transacted business in this

21 District and many of the acts and transactions constituting the violations of

22 law alleged herein, including the preparation, issuance and dissemination of

23 materially false and misleading statements to the investing public, occurred

24 in this District.

25 7. In connection with the acts, conduct and other wrongs alleged

26 herein, defendants, directly and indirectly, used the means and

27 instrumentalities of interstate commerce, including the United States mails,

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1 interstate telephone communications and national securities markets.

2 THE PARTIES

3 A. THE PLAINTIFFS

4 8. Plaintiff Buttonwood is an investment partnership which

5 purchased 90,601 shares of FRB common stock between May 28, 2008 and

6 February 6, 2009, as set forth in the Certification filed with this Complaint,

7 and suffered damages as a result of the wrongful acts of defendants alleged

8 herein.

9 9. Plaintiff John Sorrells is an individual who purchased 28,000

10 shares of FRB common stock on May 30, 2008, as set forth in the

11 Certification filed with this Complaint, and suffered damages as a result of

12 the wrongful acts of defendants alleged herein.

13 B. THE DEFENDANTS

14 10. Defendants Jack A. Sweeney (as Chairman of the Board and

15 Chief Executive Officer of FRB), Lawrence Sherman (as Vice Chairman of

16 the Board of FRB), H. Anthony Gartshore (as President and Chief

17 Executive Officer of the Bank), F. David Hare (as Executive Vice

18 President), Steven J. Sweeney (as General Counsel and Executive Vice

19 President of the Bank), Gary M. Horgan (as Chairman of the Board),

20 Elizabeth H. Thompson (as Chief Financial Officer), Thomas E.

21 McCullough (as a Director, Executive Vice-President, Chief Operating

22 Officer and Secretary) and Dorothea Montoya (as Senior Vice President

23 and Chief Compliance Officer of the Bank) are collectively referred to

24 hereinafter as the "Officer Defendants." By virtue of their high-level

25 positions with the Company and/or the Bank, each of the Officer

26 Defendants directly participated in the management thereof, was directly

27 involved in the day-to-day operations of the Company and the Bank at the

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1 highest levels and was privy to confidential proprietary information

2 concerning FRB and the Bank and their business, operations, growth,

3 financial statements and financial condition.

4 11. As senior officers of FRB and/or the Bank, defendants Jack A.

5 Sweeney, Sherman, Gartshore, Steven J. Sweeney, Horgan, Thompson,

6 McCullough and Montoya had extensive duties to ensure the accuracy of

7 information disseminated to investors:

8 (a) As noted in American Institute of Certified Public

9 Accountants ("AICPA") auditing standard, Section 110.03, a public

10 company's management is responsible for preparing financial statements in

11 accordance with GAAP:

12 The financial statements are management's responsibility:...Management is responsible for adopting sound accountin

13 olicies and for establishing and maintaining internal controlsD will, among other things, initiate record, process, and

14 report transactions (as well as events ana conditions) consistentwith management's assertions embodied in the financial

15 statements. -The entity's transactions and the related assetsliabilities, and equity are within the direct knowledge anJ

16 control of management. The auditor's knowledge of thesematters and internal controls is limited to that acquired through

17 the audit. Thus the fair presentation of financial statements inconformity witA generally accepted accounting principles is an

18 implicit and integral part of managements responsibility.

19 (b) In Accounting Series Release 173 (July 2, 1975), the

20 SEC reiterated the duty of management to present a true representation of a

21 company's operations:

22 [.I]t is important that the overall impression created by thefinancial statements be consistent with the business realities of

23 the company's financial position and operations.

24 (c) Pursuant to the Sarbanes-Oxley Act of 2002 ("SOX")

25 and SEC rules promulgated thereunder, the chief executive officer and chief

26 financial officer of reporting corporations are required to certify as to the

27 accuracy and completeness of a company's financial statements. As such,

28 defendants Jack A. Sweeney, Gartshore and Thompson are liable to

8


i plaintiffs and others similarly situated as a result of their false certifications

2 as described herein.

3 12. Defendants Jack A. Sweeney, Sherman, Gartshore, Hare,

4 Horgan, McCullough, Marilyn J. Sweeney (as a Director of FRB), Fred M.

5 Edwards (as a Director of FRB) and Richard Schreiber (as a Director of

6 FRB), are collectively referred hereinafter as the "Director Defendants."

7 During the Class Period, FRB's Board of Directors was responsible for the

8 oversight and monitoring of (a) the integrity of its financial statements and

9 those of the Bank; (b) the Company's and the Bank's compliance with legal

10 and regulatory requirements; (c) the independent auditor's qualifications,

i i independence and performance; and (d) the Company's and the Bank's

12 internal accounting and financial controls. The FRB Board had final

13 decision-making authority regarding the public disclosure of the financial

14 and operating condition of FRB and the Bank. In addition to its

15 responsibilities to FRB and the Bank, the FRB Board had fiduciary

16 responsibilities to FRB stockholders, potential stockholders and the

17 investment community.

18 13. Because of the defendants' positions within the Company

19 and/or the Bank, they all had access to adverse undisclosed material

20 information about the true financial condition, earnings and expenses of

21 FRB and the Bank and, most significantly, the adequacy of the Bank's

22 capitalization. They were each were privy to such undisclosed information

23 from internal corporate documents, communications among themselves and

24 with other officers and employees of the Company and the Bank and

25 attendance at, and documents received during, meetings of management,

26 the Boards of Directors of FRB and the Bank. In the case of the Sweeney

27 Defendants, they also possessed such knowledge through intra-familial

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1 discussions. They each knew or were deliberately reckless in not knowing

2 of the adverse material facts which rendered the statements alleged herein

3 false and misleading.

4 14. The defendants, as officers and/or directors of the Company,

5 had a duty to disseminate complete, accurate and truthful information about

6 the financial condition, earnings and expenses and capitalization of FRB

7 and the Bank. The defendants had a duty to promptly correct any public

8 statements issued by FRB and/or the Bank that had become false and

9 misleading. The defendants, together with their legal counsel, were

10 involved in the drafting, producing, reviewing and/or dissemination of the

11 false and misleading statements alleged herein.

12 15. Because of their positions, their ability to exercise power and

13 influence with respect to FRB's course of conduct and their access to

14 material inside information about FRB and the Bank, the defendants were,

15 at the time of the wrongs alleged herein, controlling persons of FRB within

16 the meaning of Section 20(a) of the Exchange Act.

17 16. It is appropriate to treat the defendants as a group for pleading

18 purposes and to presume that the false, misleading and/or incomplete

19 information conveyed in the public filings, press releases and other

20 publications of FRB and the Bank as alleged herein are the collective action

21 of all the defendants identified above.

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24

25

26

27

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CLASS ACTION ALLEGATIONS 1

17. Plaintiffs bring this action as a class action pursuant to Rule2

23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of a class3

consisting of all persons and entities who purchased FRB securities during4

the Class Period and were damaged thereby ("Class"). Excluded from the5

Class are defendants herein, officers and directors of FRB and/or the Bank,6

members of their immediate families and the heirs, successors or assigns of7

any of the foregoing.8

18. The members of the Class are so numerous that joinder of all9

members is impracticable. While the exact number of Class members is10

unknown to plaintiffs at this time and can only be ascertained through11

appropriate discovery, they believe there are, at a minimum, more than 50012

members of the Class. FRB common stock traded in an open and efficient13

market.14

19. Common questions of law and fact exist as to all members of15

the Class and predominate over any questions affecting solely individual16

members of the Class. The following are questions of law and fact17

common to the Class:18

• whether defendants engaged in acts or conduct in violation of19

federal securities laws as alleged herein;20

, whether defendants' made misrepresentations and/or omissions21

of material facts regarding FRB and/or the Bank;22

. whether such misrepresentations and/or omissions of material23

facts were essentially linked to the damages sustained by24

plaintiffs and the members of the Class;25

, whether defendants acted knowingly or with deliberate26

recklessness in issuing false and misleading financial27

statements and information about the financial and operating28

11


1 condition of FRB and the Bank;

2 • whether the prices of FRB securities during the Class Period

3 were artificially inflated because of defendants' conduct

4 complained of herein; and

5 • whether the members of the Class have sustained damages and,

6 if so, what is the proper measure of damages.

7 20. Plaintiffs' claims are typical of the claims of the other

8 members of the Class and the other members of the Class sustained

9 damages arising out of defendants' wrongful conduct in violation of federal

10 law as complained of herein.

11 21. Plaintiffs will fairly and adequately protect the interests of the

12 members of the Class and have retained counsel competent and experienced

13 in class actions and securities litigation. Plaintiffs have no interests

14 antagonistic to, or in conflict with, those of the Class.

15 22. A class action is superior to other available methods for the

16 fair and efficient adjudication of the controversy since joinder of all the

17 members of the Class is impracticable. Furthermore, because the damages

18 suffered by most of the individual Class members may be relatively small,

19 the expense and burden of individual litigation makes it impracticable for

20 the Class members individually to redress the wrongs done to them. There

21 will be no difficulty in the management of this action as a class action.

22 23. Plaintiffs will rely, at least in part, upon the presumption of

23 reliance established by the fraud-on-the-market doctrine in that:

24 • defendants made public misrepresentations and omissions

25 during the Class Period;

26 • the omissions and misrepresentations were material;

27 • the Company's securities are traded in an efficient and open

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1 marketplace;

2 • the misrepresentations and omissions alleged would tend to

3 induce a reasonable investor to misjudge the value of the

4 Company's securities; and

5 • Plaintiffs and the other members of the Class purchased their

6 FRB securities between the time defendants failed to disclose

7 or misrepresented material facts and the time the truth

8 condition of FRB and the Bank were disclosed, without

91 knowledge of the omitted or misrepresented facts.

10 24. Based upon the foregoing, all purchasers of FRB securities

11 during the Class Period suffered similar injury, including injury through

12 their purchase of the securities at artificially inflated prices, and a

13 presumption of reliance applies.

14 25. In the years 2002, through the beginning of the Class Period,

15 the Bank had grown very rapidly beyond its core functions. In the process,

16 its assets grew to more than $2 billion and its lending and other banking

17 activities skyrocketed. However, as determined by the Bank's regulators,

18 such growth was not accompanied by "management with appropriate

19 qualifications and experience commensurate with their responsibilities

20 within the Bank."

21 26. In that regard, the Bank was recklessly lending money in too

22 concentrated a manner to too few borrowers in a too concentrated industry,

23 primarily commercial real estate in Southern California, some of which was

24 generated through improper arrangements with loan originators. This was

25 carried out with inadequate documentation and loan files necessary to

26 protect the Bank and, generally, the absence of reasonable controls and risk

27 management, all of which was known by each of the defendants.

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1 27. During this period, the Bank had taken on substantial fiduciary

2 responsibilities through its Trust Administrative Services ("TAS") Division

3 and through the handling of IRA accounts administered by third parties,

4 none of which activities the Bank was able to handle competently or

5 prudently.

6 28. Further, either as a result of the lack of oversight by the

7 Director Defendants, the lack of controls or otherwise, the Bank became a

8 vehicle for money laundering and otherwise facilitated criminal activity.

9 29. Throughout virtually the entirety of the Class Period, during

10 the times that they held their respective positions with FRB and/or the

I1 Bank, the defendants had knowledge of the foregoing while concurrently

12 proclaiming the health of their financial condition as well as falsely

13 proclaiming that the Bank was "well capitalized" when they knew or should

14 have known that it was not.15 SUBSTANTIVE ALLEGATIONS 16 30. Defendants violated the federal securities laws in several ways.

17 First, defendants issued false and misleading statements and controlled

18 persons who issued false and misleading statements in violation of Sections

19 10(b) and 20(a) of the Exchange Act.20

Defendants' False And Misleading Statements 21

31. During the Class Period, defendants issued a series of22

false and misleading statements in violation of Sections 10(b) and23

20(a) of the Exchange Act and Rule lOb-5. These statements fall2425 within several categories, discussed more fully below. First,

26 defendants issued false and misleading statements regarding the

27 financial statements of FRB and the Bank. Second, defendants issued

28 false and misleading statements regarding the prospects for FRB and

14


1 the Bank. Third, defendants failed to make timely public disclosure of

2 the fact that the Bank's regulators had warned the defendants on

3 multiple occasions that the Bank was not being operated properly as

4 indicated above and the impact thereof on FRB.

5 32. Throughout 2007, Defendants caused the Company to report

6 favorable earnings results, notwithstanding the fact that they knew that there

7 were increasing risks to the Company's loan portfolio. On or about April 17,8 2007, Defendants caused the Company to announce quarterly net profits of

9 approximately $9 million. At the time, Defendant Jack A. Sweeney falsely10

stated that "[i]t is gratifying to report another strong and profitable quarter as11

we made further progress toward our key objectives of sound growth,12

increased profitability and financial strength." He further boasted without13

justification that "our team of experienced banking professionals continues to1415 secure quality lending opportunities, and in line with our conservative

16 philosophy, we are keeping prime emphasis on maintaining our excellent

17 credit quality." The Defendants further represented falsely that the Company

18 had a "strong and liquid capital and liquid financial position" and remained

19 "optimistic" based on the Company's "continued momentum":

20 We remain alert and vigilant, and are prepared to take the steps

21 necessary to meet whatever economic challenges may emerge.In this regard, we benefit greatly from our strong capital and

22 liquid financial position, giving us the flexibility to react

23 quickly to changing conditions. We remain optimistic based onour continued momentum, our portfolio of high-quality earning

24 assets, our financial strength and our solid market position. As25 always, our primary objective remains clear — to maintain

26profitable growth on a prudent basis and, thereby, build furthervalue for our shareholders.

27 ...28 We remain alert and vigilant, and are prepared to take

15


1 the steps necessary to meet whatever economic challenges mayemerge.

2

3 33. Barely six days later, on April 23, 2007, the FDIC issued a

4 "Report of Examination" in which it found serious internal control

5 deficiencies. The report found the following unsafe and unsound banking

6 practices and violations of law and/or regulation:78 (a) operating in violation of section 326.8 of the FDIC's Rules and

Regulations, 12 C.F.R. § 326.8, regarding a satisfactory Bank Secrecy Act9 ("BSA") and Anti-Money Laundering ("AML") compliance program with

10 respect to Individual Retirement Accounts administered by third parties;

11 (b) operating in violation of section 353.3 of the FDIC's Rules and12 Regulations, 12 C.F.R. § 353.3, regarding Suspicious Activity Report13 ("SAW') procedures to identify, monitor, and report suspicious activities

with respect to Individual Retirement Accounts administered by third14 parties;

15(c) operating without adequate customer due diligence with respect to

16 Individual Retirement Accounts administered by third parties;17

(d) operating with a board of directors which has failed to provide adequate18 supervision over and direction to the active management of the Bank; and1920 (e)operating with inadequate internal routine and controls policies.

21

2234. On or about July 18, 2007, the Company announced net income

23 of $8.3 million for the quarter ending June 30, 2007. In a press release

24 issued with the Company's financial results, Defendant Jack A. Sweeney

25 stated deceptively that "First Regional continues to achieve solid

26 profitability despite a challenging environment... While we continue to

27 outperform others in the industry, we are not immune from these pressures."

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1 35. On or about October 23, 2007, Defendants caused the Company

2 to announce net income of $8.1 million for the quarter ending September 30,

3 2007. In a press release Defendant Jack A. Sweeney stated deceptively that

4 "[i)n view of the current challenging environment for financial institutions,

5 we believe that First Regional continues to demonstrate strong

6 performance." He further represented that the Company "registered

7 substantial profits and growth in our assets, deposits and net loans."

8 36. On February 6, 2008, Defendants caused the Company to issue

9 a press release reporting its financial results for the year ending December

10 31, 2007. The Company reported net income of $33.6 million, and $2.7711

12 per share. The annual income as reported by Defendants for 2007, as well

13 as the quarterly results previously announced during 2007, were grossly

14 inflated due to the Defendants' failure to adequately reserve for the Bank's

15 loan losses and to mark down underperforming or impaired assets. The

16 Company would later write down amounts that far exceeded all of its

17 announced income for 2007.

18 37. Defendant Jack A. Sweeney stated falsely that the Company's

19 "prudent reserves and strong capital base give us the financial strength to

20 weather adverse conditions and respond to opportunities that emerge." In

21 the Company's annual report, Defendants caused the Company to report that

22 it "continued [its]consistent record of profitability, including new year-end

23 highs in total assets, net loans and total deposits."

24 38. The Company reported total loans of $2.05 billion, and

25 allowances for loan losses of $22.7 million, or approximately 1.11 % of its

26 loan portfolio. The Company did not increase its loan loss reserve ratio

27 over the prior year (ending December 31, 2006), in which it had maintained

28 a substantially identical ratio of 1.12%, notwithstanding the fact that, by

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I March 2008, it was well known to the Defendants, and the general public,

2 that default rates were substantially increasing, particularly in the

3 Company's geographic area of operations. Defendants misrepresented, in

4 FRB's 10-K, that the Company's underwriting practices were prudent and

5 sufficient to minimize the risk of loss to the Company:6

We have adopted underwriting and credit monitoring

7 procedures and credit policies, including the establishment and

8 review of the loan loss reserve, that management believes are

9 appropriate to minimize this risk by assessing the likelihood ofnonperformance, tracking loan performance and diversifying

10 our credit portfolio.

11 The reality was, as the Defendants were aware, that the Company's underwriting

12 practices were woefully insufficient to minimize the risk of loss, as FRB would,

13 belatedly, take write-downs and increase its loan loss reserves in amounts that would

14 dwarf the false profits announced for 2007.

15 39. On March 3, 2008, the FDIC issued a Cease and Desist Order to the Bank

16 which required it to cease and desist from the various unsafe and unsound banking

17 practices and violations of law and/or regulation set forth in the FDIC's Report of18

Examination dated April 23, 2007, described above. Among other things, the March 3,19

2008 Cease and Desist Order required that the Bank's Directors operate the Bank in a20

safe and sound manner; comply with applicable laws and regulations; and restore all2122 aspects of the Bank to a safe and sound condition, including asset quality, capital

23 adequacy, earnings, management effectiveness, liquidity, and sensitivity to market risk.

2440. Defendants continued to make false and misleading statements

25 about the Company's prospects throughout 2008, notwithstanding the fact

26 that the Bank's loan portfolio was becoming increasingly impaired. In a

27 press release containing the Company's purported financial results for the

28 quarter ending March 31, 2008, issued on or about April 28, 2008, the

18


1 Company announced net income of $4.8 million per share, when it should

2 have been reporting substantial losses. Defendant Gartshore represented that

3 "we are being even more selective on loan transactions, and will continue to

4 make loan loss provisions as necessary based on our ongoing analysis of

5 First Regional's loan portfolio performance and economic conditions in

6 general." This representation was false, as the Bank's officers were not

7 sufficiently selective in making and documenting the Bank's loans, and had8

failed to reserve adequately for its potential and likely loan losses.

9 Additionally, Defendant Gartshore stated that "we look to the future with a10

sense of confidence and determination," when there was, in fact, no basis for11

confidence or optimism."12

41. On July 24, 2008, the Company issued its purported financial13

14 results for the quarter ending June 30, 2008. Although the Company

15 reported net losses and did increase the Bank's loan loss reserves to 1.90%

16 of outstanding loans, Defendants misrepresented that they "anticipate[d a]

17 quick return to profitability" and that the Bank remained "highly

18 capitalized." The Company's 1.90% loan loss reserves were, as Defendants

19 knew, still grossly inadequate to account for the substantial impairment of

20 the Bank's loan portfolio, in light of the particular sub-standard nature of the

21 loans as well as the prevailing and well-known catastrophic macroeconomic

22 conditions, particularly in Southern California. In an accompanying press

23 release, Defendants stated:Our second quarter loan loss provision followed an

24 exhaustive review of our loan portfolio, and reflects our25 realistic assessment of the economic environment and its

26impact on collateral values and borrower performance. Itshould be emphasized that the loan loss provisions we have

27 made relate to only a small number of land and real estate28 development loans •, the vast majority of our loan portfolio

19


1 continues to be well-secured and to perform as agreed. FirstRegional's approach has always been to confront challenges

2 fully, directly, and realistically, and we believe we have3 accomplished this in the second quarter. Consistent with the

conservative and prudent basis on which First Regional has4 always operated, and especially in light of current economic5 conditions, we remain highly selective on loan transactions.

While we believe we have dealt effectively with our loan6 problems, the economic future remains unclear, and7 additional loan loss provisions will be made if called for by8 our ongoing analysis of First Regional's loan portfolio

performance and economic conditions in general. (emphasis9 added)

10 The representations that, inter alia, the Company had "dealt

11 effectively with [its] loan problems" and that the "vast majority of12 its loan portfolio" was "well-secured" and "perform[ing] as agreed"13 were simply false and known to be false or made in reckless14 disregarded the truth by the Defendants, as the Company's loan15 portfolio was substantially impaired well in advance of July 2008.16

42. On October 30, 2008, the Company issued its purported17

financial results for the quarter ending September 30, 2008, reporting18

net income of $1.2 million. At the time, Defendants caused the19

20 Company to misrepresent that "First Regional's approach has

21 always been to confront challenges fully, directly, and realistically"

22 and that the Defendants "perform ongoing analyses of our loan

23 portfolio and economic conditions, and make loan loss provisions as

24 necessary." In reality, the Company and the Defendants had not

25 adequately assessed the catastrophic impairment of the Bank's loan

26 portfolio, and had dramatically underreserved for underperforming

27 and nonperforming assets.

28 43. On February 17, 2009, the Directors of the Bank consented to

20


1 a further Cease and Desist Order requiring the Bank to:

2(a) Retain qualified management, and continue the active involvement of

3 its board of directors in managing the Bank's activities;4

(b) Increase its capital ratios based on a pre-determined schedule, and5 develop a comprehensive capital plan to assure compliance with that6 schedule;

7 (c) Eliminate from its books any assets classified loss and a portion of any8 assets classified doubtful that have not already been charged-off or collected,9 and develop a comprehensive plan to reduce classified assets based on a pre-

determined schedule;10

11 (d) Create and implement a plan to increase the diversification of theBank's lending activities;

12

13 (e). Create and implement a comprehensive profit plan to improve the

14 Bank's earnings performance; and

15 (f). Update or revise the Bank's written policies in the areas of credit16 administration and liquidity management.

17 44. Although the Defendants who were Directors of the Bank18

provided written assurances to both the FDIC and the CFI that the Bank1920 would comply with the requirements of the foregoing Cease and Desist

21 Orders and the guidance provided to them following the regulators'

22 examinations of the Bank, they merely paid "lip service" thereto. Further,

23 their and the Bank's practices were so well-entrenched and its financial

24 condition so precarious that these Directors could not extract the Bank from

25 its predicament, ultimately leading to the CFI's closing of the Bank on

26 January 29, 2010.

27 45. On February 24, 2009, the Company disclosed that it had

28 entered into an agreement with the FDIC and DFI, consenting to the

21


1 issuance of an Order to cease-and-desist certain practices set forth

2 therein and outlining certain "areas the Bank agrees to address."

3 Defendants caused the Company to misrepresent that this

4 development represented nothing more than an agreement that merely

5 "formalize[d] many of the initiatives which the Bank has already

6 adopted, and provide[d] useful milestones for measuring the Bank's

7 progress as it moves forward." Defendants further misrepresented

8 that "First Regional Bank continues to maintain "'well capitalized'

9 ratios, the highest standards established by banking regulators," when,

10 in fact, the Bank was insufficiently capitalized. The truth was that the11

agreement with the FDIC and DF I reflected the fact that FRB was12

seriously undercapitalized and that there were major operational13

14 deficiencies that required correction. In fact, the regulatory Order

15 called specifically for the Bank to increase its Tier 1 leverage ratio to

16 10% by September 30, 2009.

1746. On March 16, 2009, Defendants filed with the SEC

18 FRB's Report on Form 10-K for the period ending December 31,

19 2008. The Company announced losses of $10.2 million, and that it

20 had increased its provisions for loan losses, increasing the loan loss

21 ratio over that of prior years. FRB's losses for 2008 were grossly

22 understated and its loan loss reserves were still grossly inadequate,

23 however, in light of the catastrophic impairment of the Company's

24 assets that was well known to the Defendants well in advance of

25 March 2009. The loan loss reserves were not increased sufficiently to

26 reflect a growing percentage of the Bank's underperforming assets, as

27 its loan loss reserves were increased at a much lower level than the

28 increase in underperforming assets.

22


1 47. On or about April 30, 2009, Defendants caused the

2 Company to report its purported financial results for the quarter

3 ending March 31, 2009. Defendants caused the Company to report an

4 operating loss of $3.2 million. Defendants caused the Company to

5 misrepresent that its "risk of loss" was adequately protected by

6 collateral and that it had properly reserved for the risk of future losses:7

8 Most of our nonperforming assets are secured by real estate,and thus our risk of loss is mitigated by the value of the

9 underlying collateral even in the present soft market. As

10 required by applicable accounting standards, we have alreadymade loan loss provisions to reflect our updated estimates of

11 such potential losses, and we will continue to make loan loss

12 provisions as necessary based on our ongoing analysis of FirstRegional's loan portfolio performance and economic conditions

13 in general.14

15 The foregoing statements were misrepresentations, in that the Defendants

16 had not caused the Bank to reserve adequately for losses and, as Defendants

17 knew or should have known, due to the prevailing market conditions, the

18 collateral securing the Bank's loans was inadequate to prevent substantial

19 losses.

20 48. In the Company's Report on Form 10-Q for the quarter (filed21 on or about May 15, 2009), Defendants represented that FRB's quarterly22 loss "was substantially reduced from the immediately preceding fourth

23 quarter of 2008," and which, more importantly, they represented "reflect[ed]24 the company's progress in mitigating the credit problems arising from the25

current deep economic recession." The reality was that the Defendants and26

the Company had not come close to mitigating the Bank's credit problems27

arising from the recession and from their own imprudent lending and28

23


1 documentation practices. In fact, the Bank's loan portfolio was

2 catastrophically impaired, and the Company and the Bank were

3 undercapitalized and on the verge of collapse.

4 49. As of June 30, 2009, the Company and the Bank remained

5 significantly undercapitalized, and the Defendants had failed to comply with

6 the earlier FDIC Order requiring the Bank to increase its Tier 1 leverage

7 ratio to 10%.8 50. By July 13, 2009, the FDIC and DFI had commenced a

9 regulatory examination of the Bank that would be completed in September

10 2009. The investigation would ultimately reveal that FRB and the Bank11

remained severely undercapitalized, that the Defendants had failed to12

adequately reserve for the Bank's loan losses, and that its announced13

financial results were, accordingly, woefully inaccurate.14

51. On or about July 30, 2009, the Defendants reported FRB's1516 purported financial results for the quarter ending June 30, 2009. In

17 reporting operating losses on July 30, 2009 for the second quarter and first

18 half of 2009, Defendant Gartshore, with the collaboration of other

19 Defendants, blamed the Company's operating losses for the first six months

20 of 2009 primarily as follows: "Operating results continue to be adversely

21 impacted by historic lows in interest rates resulting from the Federal

22 Reserve's aggressive actions directed at reviving the economy during the

23 past twelve months. These actions have significantly impacted the yield on

24 First Regional's loan portfolio, which consists almost entirely of variable-

25 rate notes that adjust immediately upon any change in interest rates."

26 Concurrently, in the same News Release, FRB maintained the Defendants

27 long-proclaimed fiction that the Bank "Exceeds all financial ratio

28

24


1 requirements for `Well Capitalized' status. 2 As each of the Defendants

2 knew, the Bank was continuing to under-reserve for bad and questionable

3 loans which, while impacted by lower interest rates, in fact had badly

4 deteriorated in collectability due to, inter alia, their excessively high loan-to-

5 equity ratios, excessive concentration and inadequate documentation.

6 52. Additionally, Defendants caused the Company to make

7 misleading statements about FRB's prospects, suggesting that it would

8 overcome the ongoing difficult economic conditions. In the accompanying

9 News Release, Defendants stated that "we continue to make steady progress

10 confronting our challenges." Defendant Gartshore falsely represented that11

we are confident that [] totals [of underperforming assets] will decline as12

13 we complete the asset resolution transactions which we have in process."

14 He further represented unjustifiably that " we look to the future with

15 continued confidence and resolve" and falsely that the Bank's "strong

16 capital base provides the solid foundation which enables us to offer

17 customers and prospects creative solutions to their loan and deposit needs,

18 and an unmatched level of personal service which has long been our

19 hallmark."

2053. Defendants caused the Company to further report that "[a]s

21 required by applicable accounting standards, we have made loan loss

22 provisions to reflect our latest estimates of such potential losses, so the

23 anticipated impact of such losses is already reflected in our financial

24 results." This statement was false, as the Bank's loan loss reserves did not

25

26 2 A bank is "well capitalized" if it has a total risk-based capital ratio of10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or more, has a

27 leverage capital ratio of 5.0% or more. As a result of the materialoverstatement of the value of the Bank's loan portfolio, although it appeared

28 to be well capitalized, it was not.

25


I accurately reflect potential losses associated with its outstanding loans. The

2 Company also failed to contemporaneously disclose that it and the Bank

3 remained severely undercapitalized, and that the Bank was not in

4 compliance with the earlier FDIC Order to improve its leverage ratio.

5 54. The July 30, 2009 News Release continued to "sugar-coat" the

6 Company's continuing decline in its operations. Defendant Gartshore was

7 quoted as stating: "As reported earlier, most of our nonperforming assets

8 are secured by real estate, meaning that our risk of loss is limited by the

9 value of the underlying collateral even in the present soft market." Such

10 statement was wholly unjustified since he and the other Defendants knew,

I1 in fact, that the Bank's security was woefully inadequate to secure its

12 outstanding loans, even after the Defendants had made additional

13 provisions for loan losses.

14 55. On August 5, 2009, the SEC informed the Defendants

15 and Company that it had very serious questions about FRB's16 financial reporting practices and the contents of certain previous

17 filings by the Company with the SEC. Although the comments18

were specifically directed to the Company's Report on Form 10-K19

for the period ending December 31, 2008 and Report on Form 10-Q20

for the period ending March 31, 2009, they apply, in substance, in21

22 equal force to all of the Company's financial reporting during the

23 Class Period. The SEC, among other things: (1) demanded that the

24 Company "provide an expanded description of the specific actions [it

25 was] taking to comply with the provisions of the" Cease and Desist

26 Order issued by the FDIC and DFI, and to specifically (a) "disclose

27 whether there were any changes made to [its] allowance for loan loss

28 methodology, and (b) "disclose the extent of any financial statement

26


1 impact of complying with any of the requirements of the order"; (2)

2 questioned why non-performing loans were still represented to be

3 accruing interest; and (3) noted that the Company's loan loss reserves

4 had not grown at a rate commensurate with the percentage of

5 underperforming loans (citing the "continued deterioration" of the

6 Company's loan portfolio), and requested an explanation; and (4)

7 demanded that the Company revise its future filings to "disclose the

8 fact that the cease and desist order entered into in February require[d

9 the Company] to maintain and bolster [its] capital due to the finding

10 that [it was] operating with insufficient capital given the level of risk11

present in [its] loan portfolio", and (5) instructed the Company to12

"revise future filings to provide a discussion of [its] underwriting13

14 policies and procedures for all major loan products in each lending

15 category"; (6) demanded clarification as to how the Company defined

16 "sub-prime" and to what extent its portfolio consisted of interest-only

17 and/or other alternative mortgages; and (7) explain why reserves for

18 loan losses (on an annualized basis) were lower in the first quarter of

19 2009 than in 2008.

2056. On November 17, 2009, the Company issued its Report on

21 Form 10-Q for the quarter ending September 30, 2009, and restated its

22 financial results as set forth in its Report on Form 10-Q for the period ending

23 June 30, 2009. The Company disclosed for the first time that it and the Bank

24 were dramatically undercapitalized, and that the Bank's loan loss reserves

25 had previously been inadequate, increasing its loan loss reserves, as of June

26 30, 2009, by a staggering $69.9 million. Specifically, the Company

27 determined that "the allowance for loan losses as of June 30, 2009 should be

28 increased by $69,889,000," and announced "an additional $50,587,000 in

27


1 loan charge-offs, $1,279,000 in interest reversal on impaired loans,

2 $1,161,000 million in losses on foreclosed properties that were deemed to

3 have existed as of June 30, 2009 and a $20,670,000 cost of establishing a

4 valuation allowance for deferred tax assets."

5 57. The charge-offs and increases to loan loss reserves announced

6 in November 17, 2009 far exceeded the previously announced net earnings

7 for 2007 ($33.6 million), and also far exceeded the previously announced net

8 loss for 2008 (a mere $10.2 million). Although these charges were ascribed

9 to the quarter ending June 30, 2009, it cannot seriously be suggested that all

10 of these charges, and the necessity of doubling the loan loss reserves,11

suddenly became necessary in or around June 2009. The massive scope of12

these adjustments made it perfectly clear that the Defendants had not13

previously devalued the assets of FRB and the Bank on in their balance1415 sheets, nor adequately increased their loan loss reserves, during 2007 and

16 2008.57. After having de-accentuated the increasing deterioration and

17 continued uncollectability of the Bank's outstanding loans, under pressure

18 from regulators, the Defendants were finally forced to acknowledge how

19 badly they had managed FRB and the Bank. Nevertheless, they still failed to

20 own up to the fact that the Bank and FRB were on the brink of collapse.

21 Once again, they falsely represented that "most of our nonperforming assets

22 are secured by real estate, and thus our risk of loss is mitigated by the value

23 of the underlying collateral even in today's distressed market." In making

24 such deceptive statement, Defendants knew but did not disclose what they

25 have known throughout the Class Period; namely, that such collateral was

26 grossly insufficient to secure the Bank's loans and protect it against loss,

27 particularly in a deteriorating real estate market, which had been prevalent

28 throughout the Class Period.

28


1 58. On Friday, January 29, 2010, the California Commissioner of

2 Financial Institutions closed the Bank, and appointed the FDIC as its

3 receiver. With the assistance of the FDIC, substantially all of the assets and

4 liabilities of the Bank were assumed by First Citizens Bank of Raleigh,

5 North Carolina.6

Defendants' Concealment of the Dire Financial Condition of FRB and7 the Bank and their Failure to Make Timely and Complete Public8 Disclosure of Actions Taken by Regulators

9

1059. Throughout the Class Period, the financial condition of the

Bank was materially overstated, all of which was reflected on FRB's

12 statements. As alleged more fully below, these financial statements grossly

13 overstated the Bank's earnings, assets and net worth and, in particular, the

14 capital ratios upon which were based the Officer Defendants' oft-repeated

15 claims that the Bank was "well capitalized." Concurrently, they concealed

16 the fact that they had dramatically underreserved for the Bank's likely and

17 potential loan losses, as they were legally required to do.

60. FRB's financial statements issued and disseminated during the1819 Class Period, including the reported earnings, assets and capital of it and the

20 Bank, also contained misrepresentations regarding compliance with

21 Generally Accepted Accounting Principles ("GAAP"), SEC regulations and

22 Sarbanes-Oxley ("SOX") and thus were materially false and misleading.

2361. According to SEC regulations, public companies must prepare

their financial statements in accordance with GAAP. GAAP are the24

principles recognized by the accounting profession as the conventions, rules25

and procedures necessary to define accepted accounting practices at a26

particular time. GAAP is also a term used to broadly describe the body of27

principles that governs the accounting for financial transactions underlying28

29


1 the preparation of a set of financial statements. GAAP are derived from a

2 variety of sources, including promulgations of the Financial Accounting

3 Standards Board and its predecessor, the APB, and AICPA. Other sources

4 include the general body of accounting literature consisting of textbooks,

5 articles, papers, etc. GAAP standards are the official standards accepted by

6 the SEC. By failing to comply with GAAP, FRB's financial statements

7 were and are presumptively in violation of those regulations .3

8 62. The Defendants also deceived the investing public in the

9 Management Discussion and Analysis Section of FRB's financial

10 statements failed to disclose that the financial statements of FRB and the

11 Bank were not prepared in compliance with GAAP.

12 63. The financial statements' Item 7 of Form 10-K and Item 2 of

13 Form 10-Q, MD&A of Financial Condition and Results of Operations,

14 required issuers such as FRB to furnish information required by Item 303 of

15 Regulation S-K (17 C.F.R. §229.303). On May 18, 1989, the SEC issued

16 an interpretive release, Securities Act release No. 6835, 54 Fed. Reg. 22427

17 (May 18, 1989), which stated in part:

18 The MD&A requirements are intended to provide, in onesection of a filing, material historical and prospective textual

19 disclosure enabling investors and other users to assess thefinancial condition and results of operations of the registrant,

20 with particular emphasis on the registrant's prospects for thefuture. As the Concept Release states:

21The Commission has long recognized the need for

22

23 3 SEC Rule 4-01(a) of SEC regulation S-X states that "[f]inancialstatements filed with the Commission which are not prepared in accordance

24 with [GAAP] will be presumed to be misleading or inaccurate, despitefootnote or other disclosures, unless the Commission has otherwise

25

rovided." 17 C.F.R. §210.4-01(a)(1). Regulation S-X requires that interimfinancial statements must also comply with GAAP. 17 C.F.R.210.10-

26 01(a). The SEC also regulates statements by registrants "t at canreasonably be expected to reach investors and the trading markets, whoever

27 the intended primary audience." Public Statements by CorporateRepresentatives SEC Release Nos. 33-6504 34-20560, 3 Fed. Sec. L. Rep.

28 (CCH) ¶23,1201'3, at 17,096, 1984 SEC LEXIS 2559, at *2 (Jan. 13, 1984).

30


a narrative explanation of the financial statements1 because a numerical presentation and brief

accompanying footnotes alone may be insufficient2 for an investor to judge the quality of earnings and

the likelihood that past performance is indicative3 of future performance. MD&A is intended to give

the investor an opportunity to look at the company4 through the eyes of management b pproviding both

a short and long-term analysis of he business of5 the company. The Item asks management to

discuss the dynamics of the business and to6 analyze the financials.

78 (Footnotes omitted.)

64. Securities Act Release No. 6349, 23 S.E.0 Docket 962 (Sept.9

28, 1981) provides that:10

It is the responsibility of management to identify and address11 those key variables and other qualitative and quantitative

factors which are peculiar to and necessary for an12 understanding and evaluation of the individual company.

13 65. Under SEC regulations, the management of a public company

14 such as FRB has a duty "to make full and prompt announcements of

15 material facts regarding the company's financial condition. "4The

16 Defendants violated this regulation throughout the Class Period by

17 deliberately and/or recklessly misrepresenting the true financial and

18 operating condition of the Bank and FRB, concealing the material

19 shortcomings in the Bank's management and controls and making timely

20 disclosure of the regulators' warnings and requirements of remedial steps

21 that the Bank and its Directors had been required to take, but were not

22 adequately taking.

23 66. Defendants failed to explain in the MD&A sections of FRB's

24 annual and quarterly SEC filings that they had caused FRB's financial

25 statements as publicly disseminated to not be in compliance with GAAP.

26

27 4 Timely Disclosure of Material Corporate Developments, Exchange ActRelease No. 34-8995, 3 Fed. Sec. L. Rep. (CCH) 123,120A, at 17,095, 17

28 C.F.R. §241.8995, 1970 WL 10576 (Oct. 15, 1976).

31


1 Moreover, Defendants violated the basic precepts noted above by (a)

2 concealing from the public a complete understanding of material facts

3 relating to FRB's financial and operating condition and, most significantly,

4 that the Bank's condition had deteriorated to the point of being subject to

5 being closed.

6 67. Due to all these accounting improprieties set forth above, the

7 Defendants presented FRB's financial results and statements in a manner

8 which violated GAAP including the following fundamental accounting

9 principles:

10 (a) The principle that interim financial reporting should be

11 based upon the same accounting principles and practices used to prepare

12 annual financial statements (APB No. 28).

13 (b) The principle that financial reporting should provide

14 information that is useful to present and potential investors, creditors and

15 other users in making rational investment, credit and similar decisions

16 (FASB Statement of Financial Accounting Concepts No. 1).

17 (c) The principle that financial reporting should provide

18 information about the economic resources of an enterprise, the claims to

19 those resources and effects of transactions, events and circumstances that

20 change resources and claims to those resources (FASB Statement of

21 Financial Accounting Concepts No. 1)

22 (d) The principle that financial reporting should provide

23 information about how management of an enterprise has discharged its

24 stewardship responsibility to owners (stockholders) for the use of enterprise

25 resources entrusted to it. To the extent that management offers securities of

26 the enterprise to the public, it voluntarily accepts wider responsibilities for

27 accountability to prospective investors and to the public in general (FASB

28

32


1 Statement of Financial Accounting Concepts No. 1).

2 (e) The principle that financial reporting should provide

3 information about an enterprise's financial performance during a period.

4 Investors and creditors often use information about the past to help in

5 assessing the prospects of an enterprise. Thus, although investment and

6 credit decisions reflect investors' expectations about future enterprise

7 performance, those expectations are commonly based at least partly on

8 evaluations of past enterprise performance (FASB Statement of Financial

9 Accounting Concepts No. 1).

10 (f) The principle that financial reporting should be reliable

11 in that it represents what it purports to represent. That information should

12 be reliable as well as relevant is a notion that is central to accounting

13 (FASB Statement of Financial Accounting Concepts No. 2).

14 (g) The principle of completeness, which means that

15 nothing is left out of the information that may be necessary to insure that it

16 validly represents underlying events and conditions was violated (FASB

17 Statement of Financial Accounting Concepts No. 2).

18 (h) The principle that conservatism be used as a prudent

19 reaction to uncertainty to try to ensure that uncertainties and risks inherent

20 in business situations are adequately considered. The best way to avoid

21 injury to investors is to try to ensure that what is reported represents what it

22 purports to represent (FASB Statement of Financial Accounting Concepts

23 No. 2).

24 68. While the Defendants in office became acutely aware by early

25 2008, if not much earlier, that the Bank was an operational "basket case" it

26 was not until after substantial regulatory intervention from the FDIC, DFI

27 and SEC that they took any action to restate FRB's reported financial

28

33


1 results. Even when they did so, they attempted to characterize their actions

2 as charges taken solely in a single quarter in 2009, when they should have

3 caused FRB to fully restate its financial results for the Class Period, so as to

4 properly reflect FRB's and the Bank's true financial and operating

5 condition during at least the previous two years. Pursuant to GAAP, as set

6 forth in APB Opinion No. 20,5 restatements are required to correct material

7 accounting errors that existed at the time the financial statements were

8 issued and are permitted for the purpose of correcting improper accounting

9 only when it results in material misstatements. Had the Defendants caused

10 such a restatement to have taken place, they would have admitted (and

11 informed the investing public) that each document issued by FRB or the

12 Bank publishing the original financial statements for the restated periods

13 contained untrue statements and/or omissions of material fact. The

14 Defendants failed to cause such a restatement to take place, thereby

15 continuing their deception of the investing public.

16 69. The Defendants also caused the Bank and FRB to make false

17 and misleading statements regarding the absence of effective internal

18 controls.

19 70. In their Form 10-Q certifications issued during the Class

20 Period, defendants Jack A. Sweeney, Thompson and Gartshore each

21 variously certified that FRB had in place functioning disclosure controls

22 and procedures to ensure that material information relating to it and the

23 Bank was accurate and that they had disclosed to FRB's auditors and the

24 Audit Committee of FRB's Board all significant deficiencies in the design

25 s As of December 2005, APB O inion No. 20 was superseded by SFAS No.p26 154 "Accounting Changes and Error Corrections a replacement of APB

Opinion No. 20 and FASB Statement No. 3," which carried forward0for27 without change the guidance contained in APB Opinion No

reporting the correction of an error in previously issued financial28 statements.

34


1 or operation of internal controls which could adversely affect FRB's ability2 to record, process, summarize and report financial data and have identified3 for FRB's auditors any material weaknesses in internal controls and any4 fraud, whether or not material, that involves management or other5 employees who had a significant role in the internal controls or FRB and/or

6 the Bank. Such certifications were wholly unjustified and falsely made by

7 such Defendants. 6 Indeed, throughout the Class Period, each of them, as8 well as the other Director Defendants knew that the internal controls at FRB

9 and the Bank were grossly inadequate, a fact pointed out to the Board of the

10 Bank and other of the Defendants as early as the FDIC's examination of the

11 Bank in early 2007. Similar false certifications were made by such

12 Defendants in the Forms 10-K filed with the SEC during the Class Period.

13 71. The foregoing certifications were false and misleading because14 (a) FRB's SEC filings did not identify deficiencies or material weaknesses15 in its and the Bank's internal controls relating to, inter alia, real estate

16 lending and the accounting therefore; money laundering, loan origination

17 and concentration and risk management generally; (b) FRB's SEC filings

18 did not disclose the fraudulent scheme alleged herein; (c) no proper19

evaluation and report were ever conducted b the certifyingp y Eying officers for the20 u

purpose of identifyingp rp Eying and eliminating the Company's and the Bank's21

internal control problems; and (d) Defendants wholly failed to maintain22

23 6 Disclosure Controls are controls and procedures designed to

24 reasonably assure that information required to be disclosed inreports filed under the Exchange Act, is recorded, processed,

25 summarized and reported within the time periods specified inthe SEC's rules and forms. Disclosure Controls are also

26 designed to reasonably . assure that such information isaccumulated and communicated to management to allow timely

27 decisions regarding required disclosure.

28

35


1 effective internal controls over financial reporting designed to provide

2 reasonable assurance regarding the reliability of the financial reporting of

3 FRB and the Bank and the preparation of financial statements for external

4 purposes in accordance with GAAP as required by Public Company

5 Accounting Oversight Board Auditing Standard No. 2.

6 DEFENDANTS ENGAGED IN A SCHEME TO DEFRAUD

7 72. The conduct alleged above also gives rise to liability under

8 Rule lOb-5(a) and (c). Defendants are liable as participants in a scheme,

9 plan and course of conduct to conceal the true operating and financial

10 condition of FRB and the Bank from approximately January 1, 2007 and11

continued throughout the Class Period. Such scheme operated as a fraud12

and deceit on Plaintiffs and members of the Class by failing to disclose13

material facts and misleading them regarding (a) the Company's and the14

Bank's financial results; (b) their compliance with their own internal15

policies and procedures; and (c) their compliance with the guidance and16

17 conditions placed on the Bank's operations as a result of its regulators'

18 guidance and the Cease and Desist Orders referred to above.

1973. As detailed below, Defendants each knowingly or with

20 deliberate recklessness committed manipulative or deceptive acts in

21 furtherance of the scheme including (a) causing and/or permitting the

22 dissemination of false and misleading news releases and other

23 communications to the investing public; (b) preparing, approving and

24 signing SEC filings that overstated the operating and financial results of

25 FRB and the Bank and understated their exposure to losses on the Bank's

26 outstanding loans in its financial results; (c) preparing, approving and

27 signing SEC filings that overstated and misrepresented the assets, earnings

28 and net worth of FRB and the Bank; (d) failing to take steps to correct the

36


1 lack of sound internal controls and the deficiencies and material weaknesses

2 therein; and (e) failing to make timely and adequate disclosure of the Cease

3 and Desist Orders and the likely consequences thereof given the

4 circumstances of FRB and the Bank.

5 LOSS CAUSATION

6 74. Defendants' scheme operated as a fraud or deceit on Plaintiffs

7 and the members of the Class because the false and misleading statements

8 artificially inflated the prices of FRB's securities throughout the Class

9 Period, even after the Defendants began to publicly reveal some of the

10 problems being encountered by FRB and the Bank in late 2009. Indeed, the11

Defendants' false and misleading representations concerning the financial12

and operating results of FRB and the Bank plus the non-disclosures of13

material facts concerning the Defendants' violation of bank regulators' and14

15 SEC policies and accounting regulations caused and maintained the

16 artificial inflation in FRB securities prices throughout the Class Period and

17 until the truth was slowly revealed to the market.

75. When Defendants' prior misrepresentations and fraudulent1819 conduct began to be disclosed and started to become apparent to the market,

20 FRB's securities prices declined as the prior artificial inflation evaporated.

76. The totality of the circumstances around the declines in the21

trading prices of FRB securities combine to negate any inference that the22

economic loss suffered by Plaintiffs and the other members of the Class23

was caused by changed market conditions, macroeconomic or industry24

factors (i.e. the sub-prime debacle and the related impact upon the real25

estate sector) or FRB-specific facts unrelated to Defendants' fraudulent26

conduct as described above.27

77. As a result of their purchases of FRB securities during the28

37


1 Class Period, Plaintiffs and other members of the Class suffered economic

2 loss, i.e., damages, under the federal securities laws. The economic loss

3 was a direct result of the Defendants' fraudulent scheme to artificially

4 inflate the prices of FRB's securities and the subsequent significant decline

5 in the value of FRB's securities when the truth was revealed.

6 78. The resulting decline in the market prices of FRB securities

7 was foreseeable at the time of Defendants' misrepresentations. Indeed,

8 despite being aware of the consequences of their fraudulent conduct,

9 Defendants nevertheless knowingly engaged in the alleged misconduct,

10 which, when the truth finally emerged and the Bank was closed, caused the11 FRB securities' market values to collapse and become near worthless.12 PRESUMPTION OF RELIANCE13 79. At all relevant times, the market for FRB's publicly traded14 securities was an efficient market for the following reasons, among others:15

(a) Until it was suspended from trading thereupon (and16

trading moved to the OTC Bulletin Board), the Company's common stock17

met the requirements for public listing and was listed and traded on the18

NASDAQ, a highly efficient market.19

(b) As a regulated issuer, the Company filed reports with20

the SEC.21

(c) The Company regularly issued press releases, which22

were carried by national news wires. Each of these releases was publicly23

available and entered the public marketplace.24 80. As a result, the market for the Company's publicly traded25 securities promptly digested current information with respect to FRB from26 all publicly available sources and reflected such information in the price of27 the Company's securities. Under these circumstances, all purchasers of the28

38


i FRB's publicly traded securities during the Class Period suffered similar

2 injury through their purchase thereof at artificially inflated prices and a

3 presumption of reliance applies.

4 NO SAFE HARBOR

5 81. The statutory safe harbor provided for forward-looking

6 statements under certain circumstances does not apply to any of the

7 allegedly false statements pleaded in this Complaint. None of the specific

8 statements or the practices underlying them as alleged herein are forward

9 looking. Many of the specific statements alleged herein were not identified

i o as "forward-looking statements" when made. To the extent there were any

11 forward-looking statements, there were no meaningful cautionary

12 statements identifying important factors that could cause actual results to

13 differ materially from those in the purportedly forward-looking statements.

14 Alternatively, to the extent that the statutory safe harbor does apply to any

15 forward-looking statement, these statements are actionable because, at the

16 time any forward-looking statement was made, the particular speaker knew

17 that the particular forward-looking statement was false and/or the forward-

18 looking statement was authorized and/or approved by an executive officer

19 of FRB and/or the Bank who knew that those statements were false when

20 made.

21CLAIMS FOR RELIEF

22

23 COUNT I

24 (Violations of Section 10(b) of the Exchange Act and Rule 10b-5Promulgated Thereunder Against All Defendants)

25

26 82. Plaintiffs repeat and restate each and every allegation

27 contained in the foregoing paragraphs as if fully set forth herein.

28 83. During the Class Period, during the time periods when they

39


1 were directors and/or officers of FRB and/or the Bank, Defendants carried

2 out a plan, scheme and course of conduct which was intended to and,

3 throughout the Class Period, did: (a) deceive the investing public, including

4 Plaintiffs and the other members of the Class, as alleged herein; (b)

5 artificially inflate the market price of FRB's securities; and (c) cause

6 Plaintiffs and the other members of the Class to purchase FRB securities at

7 artificially inflated prices.

8 84. In furtherance of this unlawful scheme, plan and course of

9 conduct, Defendants, individually and jointly, took the actions set forth

1 o herein. Indeed, Defendants: (a) employed devices, schemes and artifices to

11 defraud; (b) made untrue statements of material fact and/or omitted to state

12 material facts necessary to make the statements made not misleading; and

13 (c) engaged in acts, practices and a course of conduct which operated as a

14 fraud and deceit upon the purchasers of FRB securities in an effort to create

15 and maintain artificially high market prices for such securities in violation

16 of Section 10(b) of the Exchange Act and Rule lOb-5 promulgated

17 thereunder. Each of the Defendants was a direct, necessary and substantial

18 participant in the common course of conduct alleged herein.

19 85. In addition to the duties of full disclosure imposed on

20 Defendants as a result of their making affirmative statements and reports to

21 the investing public, Defendants had a duty to promptly disseminate truthful

22 information that would be material to investors in compliance with the

23 integrated disclosure provisions of the SEC as embodied in SEC Regulation

24 S-X (17 C.F.R. §210.1-01, et seq.) and Regulation S-K (17 C.F.R. §229.10,

25 et seq.) and other SEC regulations, including accurate and truthful

26 information with respect to the Company's financial condition, earnings

27 and expenses and management integrity so that the market prices of the

28

40


1 Company's securities would be based on truthful, complete and accurate

2 information.

3 86. Defendants, directly and indirectly, by the use, means or

4 instrumentalities of interstate commerce and/or of the mails, engaged and

5 participated in a continuous course of conduct to misrepresent and to not

6 disclose, inter alia, adverse material information about the financial and

7 operating condition of FRB and the Bank, the quality of and problems

8 within the Bank's loan portfolio, the lack of internal controls and effective

9 risk management at FRB and the Bank and management integrity as

10 detailed herein.

11 87. Defendants employed devices, schemes and artifices to defraud

12 while in possession of material adverse non-public information and engaged

13 in acts, practices and a course of conduct as alleged herein in an effort to

14 deceive and/or mislead concerning, inter alia, the operating and financial

15 condition of FRB and the Bank, the deteriorated circumstances of the

16 Bank's real estate loan portfolio, and management competence and

17 integrity. Said schemes, devices, acts and artifices included: (a) the making

18 of or participation in the making of untrue statements; (b) the omitting of

19 material facts necessary in order to make the statements made, in light of

20 the circumstances under which they were made, not misleading; and (c)

21 engaging in transactions, practices and a course of conduct which operated

22 as a fraud and deceit upon the purchasers of FRB's securities during the

23 Class Period.

24 88. Defendants' material misrepresentations, omissions and acts in

25 furtherance of the fraud were done knowingly or with deliberate

26 recklessness and for the purpose and effect of misrepresenting, inter alia,

27 the operating and financial condition of FRB and the Bank, as well as the

28

41


1 other material problems referred to herein, to the investing public and

2 thereby artificially inflating the price of FRB's securities.

3 89. As a result of the above alleged fraudulent scheme and

4 dissemination of the materially false and misleading information regarding

5 the foregoing issues, the market prices of FRB's securities were artificially

6 inflated prior to and during the Class Period. In ignorance of the fact that

7 market prices of these securities were artificially inflated and relying,

8 directly or indirectly, on the false and misleading statements made by

9 Defendants or upon the integrity of the market in which the securities

10 traded and/or on the absence of material adverse information, Plaintiffs and

11 the other members of the Class acquired FRB securities during the Class

12 Period at artificially high prices and were damaged thereby.

13 90. By virtue of the foregoing, Defendants have violated Section

14 1 O(b) of the Exchange Act and Rule l Ob-5 promulgated thereunder.

15 91. At the time of said misrepresentations and omissions, Plaintiffs

16 and the other members of the Class were ignorant of their falsity and had no

17 reason to believe that the Defendants' public representations regarding FRB

18 and the Bank were not true. Had Plaintiffs and the other members of the

19 Class and the marketplace known of the true operating and financial

20 condition of the Company and of its other problems as referred to herein,

21 issues, Plaintiffs and the other members of the Class would not have

22 purchased or otherwise acquired FRB securities or, if they had purchased

23 and/or otherwise acquired such securities during the Class Period, they

24 would not have done so at the artificially inflated prices that they paid.

25 92. As the truth about the extent and severity of the deterioration

26 of the financial and operating condition of FRB and the Bank started to be

27 released and become apparent to the public, the market prices of FRB

28

42


1 securities plummeted. This price decline occurred as the markets continued

2 to digest the impact and meaning of Defendants' schemes and their impact

3 on FRB and the Bank. All or a significant portion of the decrease in the

4 market prices of FRB securities stock was due to the disclosure, revelation

5 and/or leakage of information inconsistent with Defendants' prior financial

6 disclosures and other public filings and releases.

7 93. As a direct and proximate result of Defendants' wrongful

8 conduct, Plaintiffs and the other members of the Class suffered damages in

9 connection with their respective purchases and sales of the Company's

10 securities during the Class Period.

11 COUNT H12 (Violations of Section 20(a) of the Exchange Act Against The13 Individual Defendants)

14 94. Plaintiffs repeat and restate each and every allegation15 contained in the foregoing paragraphs as if fully set forth herein.16 95. The Defendants acted as controlling persons of FRB within the17 meaning of §20(a) of the Exchange Act. By reason of their high-level18 positions with the Company, their ownership of FRB stock, their19 participation in and/or awareness of the actual condition of FRB and the20 Bank during the Class Period and/or their intimate knowledge of the21 fraudulent scheme described herein, the false financial statements and other22 deceptive documents filed with the SEC and disseminated to the investing23 public and their participation in the fraudulent acts and/or awareness o24 such acts, these Defendants had the power and authority to control an25 cause FRB and its employees to engage in the wrongful conduct26 complained of herein. By reason of such conduct, the Defendants name27 herein are liable to Plaintiffs and the members of the Class pursuant to28

43


1 §20(a) of the Exchange Act.

2 96. As set forth above, Defendants each violated Section 10(b) and

3 Rule 10b-5 by their acts and omissions as alleged in this Complaint. By

4 virtue of their positions as controlling persons of FRB, the Defendants are

5 liable to Plaintiffs and the members of the Class for their damages pursuant

6 to Section 20(a) of the Exchange Act.

7 97. As a direct and proximate result of the Defendants' wrongful

8 conduct, Plaintiffs and the other members of the Class suffered damages in

9 connection with their purchases of FRB securities. during the Class Period.

10 PRAYER FOR RELIEF

11 WHEREFORE, Plaintiffs pray for relief and judgment, as follows:

12 A. Determining that this action is a proper class action, certifying

13 Plaintiffs as Class representatives under Rule 23 of the Federal Rules of

14 Civil Procedure and appointing their counsel as Class Counsel;

15 B. Awarding compensatory damages in favor of Plaintiffs and the

16 other members of the Class against Defendants for all damages sustained as

17 a result of Defendants' wrongdoing in an amount to be proven at trial,

18 including pre judgment and post judgment interest thereon;

19 C. Awarding Plaintiffs and the other members of the Class their

20 reasonable costs and expenses incurred in this action, including counsel fees

21 and expert fees; and

22 D. Such other and further relief as the Court may deem just and

23 proper.

24

25

26

27

28

44


1 Demand For Trial By Jury

2 Pursuant to Rule 38(b) of the Federal Rules of Civil Procedure,

3 Plaintiffs hereby demand trial by jury of all issues that may be so tried.

4 DATED: May 3, 2010

5 CUNE GILBERT & LADUCA LLP6

7 J Yostrud (5 0.901 Avenue of the Stars, 2" Floor

8 Los Angeles, California 90067Telephone: (310) 461-1620

9 [email protected]

1011 OF COUNSEL:

12 Richard D. Greenfield (RG4046)GREENFIELD & GgODMAN, LLC

13 250 Hudson Street, 8 FloorNew York, N.Y. 10013

14 (917) 495-4446

15 Jonathan W. CuneoMatthew E. Miller

16 CUNEO GILBERT & LaDUCA, LLP17

507 C Street, N.E.Washington DC 20002

18 (202) 789-3960

19 COUNSEL FOR PLAINTIFFS AND THE CLASS

20

21

22

23

24

25

26

27

28

45


UNITED STATES DISTRICT COURT1

CENTRAL DISTRICT OF CALIFORNIA

3 BUTTONWOOD TREE VALUEPARTNERS, LP et al Civil Action No.

5 Plaintiffs,

6 vs.

7CLASS ACTION

8 JACK A. SWEENEY et al

Defendants.9

10

li

1? JURY TRIAL DEMANDED

13

14 CERTIFICATION OF PROPOSED LEAD PLAINTIFF

15I, John Norberg, on behalf of plaintiff Buttonwood Tree Value Partners, LP

16("Buttonwood") hereby certify that:

17

18 1. I have reviewed the attached Complaint and hereby authorize Richard D.

19 Greenfield and such other counsel designated therein to act on Buttonwood'sbehalf in this matter in applying for Lead Plaintiff status and for all other

20 purposes.

21 2. Buttonwood did not acquire the securities that are the subject of this action at th-

22 direction of its counsel or in order to participate in this private action or any

23other litigation under the federal securities laws.

24 3. Buttonwood is willing to serve as a Lead Plaintiff either individually, with a co-plaintiff or as part of a group. A Lead Plaintiff is a representative party who acts

25 on behalf of other Class members in directing the action, and whose duties may

26 include providing testimony at deposition and trial, if necessary.

27 4. I represent and warrant that I am authorized to execute this Certification forButtonwood on behalf of certain purchasers of the securities of First Regional

28 Bancorp ("FRB") (including, as the case may be, Buttonwood, any co-owners,any corporations or other entities, and/or any beneficial owners).


1 5. Buttonwood will not accept any payments for serving as a representative partyon behalf of the Class beyond its pro rata share of any recovery, except such

2 reasonable costs and expenses directly relating to the representation of the Classas ordered or approved by the Court.

4 6. I understand that this is not a claim form, and that Buttonwood's ability to sharein any recovery as a member of the Class is unaffected by its decision to serve asa representative party or Lead Plaintiff.

6 7. During the Class Period as set forth in the Complaint, Buttonwood purchased

7 90,000 shares of FRB common stock at a. cost of $ 449 7 020.2 1, net of salesproceeds. These shares were owned by Buttonwood beneficially and all of the

8remaining shares, following such sales, became virtually worthless.

9 8. During the three years prior to the date of this Certification, Buttonwood has

10 not sought to serve and Buttonwood has not served as a representative party fora class in an action filed under the federal securities laws.

11I declare under penalty of perjury, under the laws of the united States, that the

12 information set forth herein is accurate.13

14 Executed this 16"1XI day of April, 2010.

15Buttonwood Tree Value Partners, LP

16 By: Signature""" Title

17 v

18

19

20

21

T)

23

24

25

26

27

,g


1 UNITF.,:I15TA'T'ES DISTRICT COURT

CENTRAL DIST 2ICT OF CALIFORNIA

3 1r U01D .TR°FE... V AXU E,-_------

4 0 ARTNERS, Lp et al Civil -Action. No.Iaintiffs,

5

6 S.

7 CLASS ACTION8 ACK A. SWEENEY et al

9 )efendants.

IU

11

12

13BURY TRIAL DEMANDED

14 CERTIFICATION OF PROPOSED LEAD PLAINTIFF15

_ _

I, John 1-1. Sorrells, hereby certify that:If

17 1. 1 have revic}uGd the attached C`'otnptai»t and Hereby auiltorize Richard D.

18 Greenfield and such other counsel designated therein to act on my behalf in this19

matter in applying for.tead Pla!i:ntiff status and for a1I other purposes,

2. 1 did not acquire the securities that are the Subject of this ac tion at the directionof my counsel or in, orderto Participate in this private action or any other

21 litigation under the federal securities. laws:

2 2 11 am willing to serve as a :Lead Plaintiff either Individually or as pact of a group.23 A lead Plaintiff i5 a repre5enitive party who acts on behalf of other Class

members in directing; the action, and whose duties may include preivid ng24 testimony at deptasition.,.nd trial, if necessary.

25 4. I represent and warrattt that 1 aln authorized to execute this Certification on26 behalf of certain purchasers of the securities of First Regional Bancorp (" 1"R13")

(including.. as the case may be, myself, an}• co-owners, any corporations or other27 entities, and/or any beneficial owners}.

28 5. 1 w111 not accept any paynyents for serving as a representative party on behalf ofthe Class beyond my pro raja share of any recovery, except such reasonable


1 costs and expenses (including lost .wages) directly relating to the representationof the Class as ordered orâllproved by the Court.

6. 1 understand that this a claim form,. and that my ability to share in anyrecovery as a member of the Class is unaffected by nay decision to serve as a

;t representative party or Lead Plaintiff,7. During the C'la'ss Period as set forth in the Complaint, I pure cased 28,000 shares

of FRB common stack at a oos.t of $99,630.91.. These shares were owned by me.

6 beneficially and all of them became virtually worthless.

7 8. [,wring the three treats prior to the date of this Certification. l have not sought to

A serve and I have not served. as a representative party for a class in an action.

9filed tinder the federal securities laws.

1 declare under penalty of perjury, under the laws of the United States, that the

10 infctgntion set f'orti; herein is ac curate.

11 ^ Yµ

12 Executed this day of April, 2010.

13

14 "' Signature

1; JoSo]Tells1^

16

17 I

Is

10

21

24

1 ..L:i

26

27

28

May 05 2010 11:42RM310- l-,56-9622 p.1Case 8:10-cv-00537-CJC -MLG Document 1 Filed 05/05/10 Page 50 of 54

UNITED STATES DISTRICT COURT, CENTRAL DISTRICT OF CALIFORNIACIVIL COVER SHEET

I (a) PLAINTIFFS (Check box if you are representing yourself 0) DEFENDANTSBUTTON-WOOD TREE VALUE PARTNERS, LP and JOHN SORRELLS on Jack A., Steven J., and Marilyn J. Sweeney; Gary M. Horgan. H. Anthony

Behalf of Themselves and all Others Similarly Situated Gattshore, F. David. Ham, Elizabeth Thompson, Fred M. Edwards, DorotheaMontoya, Thos. E. Mccullough, Richard Schreiber, and Lawrence J. Sherman

(b) Attorneys (Firm Name, Address and Telephone Number. If you are representing Attorneys (If Known)yourself; provide same.)

UnknownJon Tostntd (SB No. 199502), CUNEO GILBERT & LADUCA LLP1901 Avenue of the Stars, 2nd Floor, Los Angeles, California 90067.(310) 461-1620

II. BASIS OF JURISDICTION (Place an X in one box only.) Ell. CITIZENSHIP OF PRINCIPAL PARTIES - For Diversity Cases Only(Place an X in. one box for plaintiff'and one for defendant.)

0 1 U.S. Government Plaintiff 1(3 Federal Question (U.S. PTF DEF PTF DEFGovernment Not a Party) Citizen of This State q 1 q 1 Incorporated or Principal Place 04 04

of Business in this State

q 2 U.S. Government Defendant q 4 Diversity (Indicate Citizenship Citizen of Another State [12 0 2 Incorporated and Principal Place q 5 05of Partics in Itom RI) of Business in Another State

Citizen or Subject of a Foreign Country q 3 03 Foreign Nation q 6 06

IV. ORIGIN (Place an X in one box only.)

36 Original 0 2 Removed from q 3 Remarried from q 4 Reinstated or q 5 Transferred from another district (speci£-y): q 6 Multi- q 7 Appeal to DistrictProceeding State Court Appellate Court Reopened District Judge from

Litigation Magistrate Judge

V, REQUESTED IN COMPLAINT: JURY DEMAND: Sl(Ycs 0 No (Chock 'Yes' only if demanded in complaint)

CLASS ACTION under F.R.C.P. 23: d71

Yes q No Cl MONEY DEMANDED IN COMPLAINT: S N/A

VL CAUSE OF ACTION (Cite the U . S. Civil Statute under which you are filing and write a brief statement of cause. Do not cite jurisdictional statutes unless diversity.)

Securities Fraud, under 15 U.S.C. §§ 78j(b) and 78t, and Rule 106-5, 17 C.F . R. § 240.106-5

;

V.

' 111

' NATURE OF SUIT (Place an an X i7ry4n5one box only.)

ym'sup̂ i' ^! f -ri ' _r _.-t i t. 3 i7iE11 ... -y .it

#i,^( to li f ^y t 1̂ 9' Slif! P

ll^ ^t a ia:,".;1°;'w^ vuv..x.

sl c5 ql ^^^1^^1i ^{ Il alllr ^1 I,`_ ^^^^^^

q 400 State Reapportionment O 110 Insurance N'_ ". ^= rl^n z g M "^ '^ 1 31 tcr̂„ L7 710 Fair Labor Standardsq 410 Antitrust 13120 Marine 0510Airplane W s art q 510 Mohonsto Act0 430 Banks and Banking q 130 Miller Act

13315 Airplane Product p 370 Other Fraud Vacate Sentence 1:3720 Laboa'MgmL0 450 CommercenCC q 140 Negotiable Instrument Liability 0 371 Truth in Lending Habeas Corpus Relations

Rates/etc. 0 150 Recovery of q 320 Assault, Libel & q 384 Other Personal 0 530 General

13730 LaboriMgmt0 460 Deportation Overpayment & Slander Property Damage q 535 Death Penalty Reporting &13470 Racketeer Influenced Enforcement Of 0 330 Fed. Employers' 13 385 Property Damage q 540 Mandamus/ Disclosure Act

and Corrupt Judgment Liability Product Liabilit Other q 740 Railway Labor ActP q 340 Marine *"^-=—'" I^1 q 550 Civil Rights 11990 Odier LaborOrganisations 0151 Medicare Act 1MIr gq 345 Marine Product

[5 480 Consumer Credit 0 152 Recovery of Defaulted 0 422 Appeal 28 USC q 555 Prison Condition Litigationq490 Cable/Sat TV Student Loan (Excl.

Lrebiltty 158 ¢^^1 rt q 791 Empl Ret, IncE3350 Motor Vehicle10 Selective Service Veterans 0 423 Withdrawal 28 (11

x Sectart ActEl 355 Motor Vehicle S x' 't $ o: r p' :^' r . 1 ^_850 Securities/Conmadities/ 0 153 Recovery of Product Liability USC 157 q 610 Agriculture i;IBn.

Exchange Overpayment of q 360 Other Personal1„. 13620 Other Food & q 820 Copyrights1:1875 Customer Challenge 12 Veteran 's Benefits Injury

[1441 Voting Drug q 830 PatentUSC 3410 0 160 Stockholders' Suits q 362 Personal .Fnjury. 11442 Employment 0625 Drug Related 0 840 nTrademar_k_ _ s

Q 890 Other Statutory Actions q 190 Other Contract Mad Malpractice 0 443 Housing/Acco- Seizure of =a+ : art13891 Agricultural Act 0 195 Contract Product 0 365 Personal injury- mrnodations Property 21 USC 13861 HIA (139510q 892 Economic Stabilizatioa Liability Product Liability 12444 Welfare 881 13862 black Lung (923)

Act q 196 Franchise 1-1368 Asbestos Personal 0445 American with q 610 Liquor Laws 13863 I)IWCIDI W Wq 893 Environmental Mattersofflo"'S OHIO 1 Trif my Product Disabilities - 13640 R.R. & Trek (405(8))q 894 Energy Allocation Act 0 210 Land Condemnation Liability Employment 13650 Airline Reg& 0 864 SS1D Title XVIq 895 Freedom of Info. Act O 220 Foreclosure = r+? J ! 0,11. q 446 American with q 660 Occupational 11865 RSI f 405(t)q 900 Appeal ofFee Determi- 0 230 Rent Lease & Ejectment 13 462 Naturalization Disabilities - Safety /Health

nation Under Equal 0 240 Torts to Land Applfeation Other 0 690 Other 0 870 Taxes (U.S. PlaintiffAccess to Justice 0 245 Tort Product Liability [5 463 Habeas Carpus- q 440 Other Civil or Defendant)

q 950 Constitutionality of q 290 All Other Real Property Alien Detainee Rights 13871 IRS-Third Party 26States Statutes C3465 Other Immigration USC 7609

Actions

SACk'10-0051FOR OFFICE USE ONLY: Case Number:

AFTER COMPLETING THE FRONT SIDE OF FORM CV 71, COMPLETE THE INFORMATION REQUESTED BELOW.

CV-71 (05/08) CIVIL COVER SHEET Page 1 of 2

May 05 2010 11:42AM 310-556-9622 p.2


UNITED STATES DISTRICT COURT, CENTRAL DISTRICT OF CALIFORNIACIVIL COVER SHEET

VIII(a), IDENTICAL CASES: Has this action been previously filed in this court and dismissed, remanded or closed? I(No oyesIf yes, I ist case number(s):

VII I(b). RELATED CASES: Have any cases been previously filed in this court that are rel steel to the present case? r(No 0 YesIf yes, list case number(s):

Civil cases are deemed related if a previously filed case and the present ease:(Check all boxes that apply) q A, Arise from the same or closely related transactions, happenings, or events; or

O B, Call for determination of the same or substantially related or similar questions of* law and fact; or

q C. For other reasons would entail substantial duplication of tabor if heard by different judges; or0 D. Involve the same patent, trademark or copyright, and one of the factors idcntilied above in a, b or c also is present.

IX. VBN . (When completing the following information, use an additional sheet ifnecessary.)

(a) List the County in this District; California County outside of this District; State if other than California; or Foreign Country, in which EACH reamed plaintiff resides.0 Check here if the government, its agencies or employees is a named plaintiff. If this box is checked, go to item (b).

County in this District:* California County outside of this District; State, if other than California; or Foreign Country

Orange County (Buttonwood Tree Value Partners, LP has its principal Virginia (John Sorrells)

place of business in Orange County)

(b) List the Count}' in this District; California County outside of this District; State if other then California; or Foreign Country, in which EACH named defendant resides.C3 Check here if the government, its agencies or employees is a named defendant If this box is checked, go to item (c).

County in this District" California County outside of this District; State, if other than California; or Foreign Country

Los Angeles County (upon information and belief, all defendants reside in

Los Angeles County)

c) List the County in this District; California County outside of th s District; State if other than California; or Foreign Country, in which EACH claim arose.Note: Inland condemnation cases, use the location of the tract of land Involved.

County in this District :* California County outside ofthis District; State, if other than California; or Foreign Country

Los Angeles County N/A

* Us Angeles, Orange, San Bernardino, Riverside. Ventura, Santa Barbara, or San Lail Obispo CountiesNote; In land condemnation cases. use the location of the traXvolved

X. SIGNATURE OF ATTORNEY (OR PROPER): ^ Date May 5, 2010

Notice to Counsel/Parties: The CV -71 (JS-44) Civil Cover Sheet and the information contained herein neither replace nor supplement the filing and service of plcadi ngsor other papers as required by Inv. This form, approved by the Judicial Conference ofthe United States in September 1974, is required pursuant to Local Rule 3-1 is not filedbut is used by the Clerk of the Ceuurt for the purpose of statistics, venue and initiating the civil docket sheet (For more detailed instructions, see separate instntetions sheet)

Key to Statistical codes relating to Social Security Cases:

Nature of Suk Code Abbreviation Substantive Statement of Cause of Action

861 HIA Al l claims for health insurance benefits (Medicare) under Title 18, Part A, of the Social Security Act, as amended.Also, include claims by hospitals, skilled nursing facilities, etc., for certification as providers of ser y ices under theprogram. (42 U.S .C.1935FF(b))

862 HL All claims for "Black Lung" benefits under Title 4, Part B, of the Federal Coal Mine Health and Safety Act of 1969.(30 U.S.C. 923)

663 DIWC All claims filed by insured workers for disability insurance benefits under Title 2 of the Social Security Act, asamended; plus all claims filed for child 's insurance benefits based on disability. (42 U.S.C, 405(8))

863 DiW W All claims filed for widows or widowers insurance benefits based on disability under Title 2 of the Social SecurityAct, as amended. (42 U.S.C. 405(8))

864 SSID All claims for supplemental security income payments based upon disability filed under Title 16 of the Social SecurityAct, as amendod.

865 RSI All claims for retirement (old age) and survivors benefits under Title 2 of the Social Security Act, as amended. (42U.S.G.(g))

CV-71 (05108) CIVIL COVER SHEET Page 2 of 2


UNITED STATES DISTRICT COURTCENTRAL DISTRICT OF CALIFORNIA

NOTICE OF ASSIGNMENT TO UNITED STATES MAGISTRATE JUDGE FOR DISCOVERY

This case has been assigned to District Judge Cormac J. Carney and the assigneddiscovery Magistrate Judge is Marc Goldman.

The case number on all documents filed with the Court should read as follows:

SACV10- 537 CJC (MLGx)

Pursuant to General Order 05-07 of the United States District Court for the CentralDistrict of California, the Magistrate Judge has been designated to hear discovery relatedmotions.

All discovery related motions should be noticed on the calendar of the Magistrate Judge

NOTICE TO COUNSEL

A copy of this notice must be served with the summons and complaint on all defendants (if a removal action isfiled, a copy of this notice must be served on all plaintiffs).

Subsequent documents must be filed at the following location:

U Western Division [XI Southern Division U Eastern Division312 N. Spring St., Rm. G-8 411 West Fourth St., Rm. 1-053 3470 Twelfth St., Rm. 134Los Angeles, CA 90012 Santa Ana, CA 92701-4516 Riverside, CA 92501

Failure to file at the proper location will result in your documents being returned to you.

CV-18 (03/06) NOTICE OF ASSIGNMENT TO UNITED STATES MAGISTRATE JUDGE FOR DISCOVERY


Name &: Address:CUNEO GILBERT & LADUCA LLPJon. Tos=d (SB No. 1.9950")

r

^.1901 Avenue of the Stars, 2nd FloorLos Angeles, California 90067 ,^^"Y G,

Telephone: (310) 461-1620'Q

; TITED STATES DISTRICT COURTCENTRAL DISTRICT OF CALIFORNIA

BUTTONWOOD TREE VALUE PARTNERS, LP CASENUMBER

and JOHN SORRELLS on Behalf of Themselves and ^^

all others Similarly Situated,PLAINr1Yr(S) SACC /

^ 1 0_ 0 0

5 3 7 (^- C°,Gâ

V.

JACK A. SWEENEY,

SUlvIA40NS

DEFENDANT(S). I

TO: DEFENDANT(S):

A lawsuit has been filed against you.

Within Z) days after service of this summons on you (not counting the day you received it), you

must serve on the plaintiff an answer to the attached 9 complaint 11 amended complaintO counterclaim D cross-claim or a motion under Rule 12 of the Federal Rules of Civil Procedure. The answeror motion must be served on the plaintiff's attorney, Jon Tostrud , whose address is1901 Avenue of the Stars, 2nd Floor, Los Angeles, CA 90067 If you fail to do so,

judgment by default will be entered against you for the relief demanded in the complaint. You also must fileyour answer or motion with the court.

Clerk, U.S,1 Dist'ri6t Court

CHRISTOPHER POW 'S

Dated: May 5, 2010 3r^ Deputy Clerk

rSEAL

k {^` (Seal of the Court)

IrUse. 60 days if the defendant is the United Stares or a United States agency, or is an oêer or employee of the United States. Allowed

60 days by Rule 12(a)(3)).

CV-0IA (12107)SUMMONS


CUNEO GILBERT & LADUCA LLPJon Tostrud (SB No. 199502)1901 Avenue of the Stars, 2' FloorLos Angeles, California 90067Telephone: (310) [email protected]

GREENFIELD & GOODMAN, LLCRichard D. Greenfield250 Hudson Street-8 FloorNew York, NY 10013Telephone: (917) 495-4446whitehatrd ,earthlink.net

(Additional Counsel on Signature Page)

UNITED STATES DISTRICT COURTCENTRAL DISTRICT OF CALIFORNIA

BUTTONWOOD TREE VALUE Civil Action No.PARTNERS, LP and JOHNSORRELLS on Behalf of Themselvesand all Others Similarly Situated,

Plaintiffs, CLASS ACTIONVS. COMPLAINT

JACK A. SWEENEYSTEVEN J.SWEENEY, MARILl' HORGAN, H.SWEENEY GARY M.ANTHON-V GARTSHORE F. JURY TRIAL DEMANDEDDAVID HARE ELIZABETHTHOMPSON, kRED M. EDWARDS,DOROTHEA MONTOYATHOMAS E. MCCULLOffGH,RICHARD SCHREIBER, andLAWRENCE J. SHERMAN.

Defendants.

COMPLAINTButtonwood Tree Value Partners, LP ("Buttonwood") and John

Sorrells, on behalf of themselves and all others similarly situated, by their

Documents

Buttonwood Tree Value Partners LP , et al. v. Sweeney., et al. 10-CV ...shareholdersfoundation.com/system/files/complaints/first_regional... · SWEENEY, MA.RIOM J. SWEENEY GARY M