In re Franklin Bank Corp., Securities Litigation 08-CV ...securities.stanford.edu/filings-documents/1040/...worked at Franklin Bank during the pertinent time frame. These confidential

Case 4:08-cv-01810 Document 100 Filed in TXSD on 03/06/2009 Page 1 of 78

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

In re FRANKLIN BANK CORP., )SECURITIES LITIGATION ) CIVIL FILE NO.

4:08-CV-01810

CLASS ACTION

DEMAND FOR JURY TRIAL

CONSOLIDATED AMENDED COMPLAINT


Lead Plaintiff, the Franklin Investor Group, by and through its attorneys, on behalf of itself

and the Class it seeks to represent, and for its Consolidated Amended Complaint, makes the

following allegations against Defendants based upon the investigation conducted by and under the

supervision of counsel, which included, inter alia, reviewing and analyzing information and financial

data relating to the relevant time period obtained from numerous public and non-public sources,

including, among others, United States Securities and Exchange Commission (the "SEC") filings for

Franklin Bank Corp. ("Franklin Bank" or the "Company"), annual reports, press releases, published

interviews, news articles, securities analysts reports and advisories about the Company, media

reports (such as Bloomberg, Dow Jones, and LEXIS-NEXIS), financial information submitted by

the Company to financial and banking regulators, interviews with former employees of the

Company, and discussions with accounting and damages experts. Lead Plaintiff believes that

substantial additional evidentiary support will exist for the allegations set forth herein after a

reasonable opportunity for discovery.

NATURE OF THE ACTION

1. The present action involves a massive financial fraud perpetrated by Defendants

which erased hundreds of millions of dollars in shareholder value. While these profound losses

caught unsuspecting shareholders off guard, they came as no surprise to Defendants, for Defendants

have admitted that the financial statements published throughout the relevant period contained

materially false information. Moreover, this Complaint reveals in particularized detail that the

Defendants acted with the requisite scienter in facilitating the illegal scheme.

2. Between January 31, 2007 and November 26, 2007, from all outward appearances,

everything seemed well at Franklin Bank Corp. During this period, after all, the Defendants

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repeatedly emphasized to investors that the Company faced no exposure to the growing storm of

subprime loans, and likewise assured the market that it was particularly conservative in accounting

for under- performing and non-performing loans. As a result, shares of the Company's common

stock traded at artificially inflated prices.

3. What investors could not have known, however, is that the financial statements

reported by the Defendants about the Company were complete works of fiction. As more of

Defendants' scheme was revealed, it became apparent that the failure to properly and timely reserve

for bad loans served as little more than a thin disguise for accounting fraud. As this fraudulent

scheme came to light, the Company was compelled to admit "that the accounting for certain

delinquent single family loans being serviced by third parties, other real estate owned, and the

Bank's newly created single family loan modification programs to mitigate foreclosure losses ...

should be revised." Form 8-K, filed May 19, 2008.

4. By admitting that the Company's financial statements were materially misleading,

the Company became obligated to "restate" the financial statements it had previously reported for

fiscal years 2006 and 2007. To be sure, a restatement is no minor event. In fact, reporting guidelines

mandated by the SEC clarify that a restatement is required for the correction of material errors in

previously issued financial statements. Thus, the restatement here constitutes an unqualified

admission that the originally published financial statements contained materially false statements.

These type of material false statements have no place in the corporate world, but they were the very

upshot of the regrettable state of affairs at the Company.

5. It must be emphasized that the Chief Executive Officer and the Chief Financial

Officer of Franklin Bank (Defendants Nocella and McCann) certified time and again during 2007

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and 2008that Franklin Bank had developed internal controls sufficient "to provide reasonable

assurance regarding the reliability of financial reporting and the preparation of the Company's

financial statements for external purposes." In fact, no such safeguards existed, and Defendants have

now conceded that the Company suffered from material weaknesses and/or significant deficiencies

in its internal controls due to the pervasive errors revealed in May 2008.

6. The facts and circumstances underlying the reality that the Defendants knowingly

issued financial statements containing material errors are confirmed in particularized detail by the

various confidential witnesses interviewed by counsel for the Franklin Investor Group, all of whom

worked at Franklin Bank during the pertinent time frame. These confidential witnesses reveal that

the Defendants played a direct and personal role in the weekly analysis of delinquent, distressed and

nonperforming loans and, in their sole discretion, decided what adjustments would be made to the

financial statements. By way of example: (i) despite direct knowledge that the Company faced

exposure to subprime loans due to a warehouse loan to Countrywide Financial, each Defendant

repeatedly assured investors that the Company maintained no investment in, or exposure to, loans

of this type; and (ii) despite direct knowledge by each Defendant that the default on the Countrywide

Financial loan required a $150 million write-off, no such action was taken and the market was not

even apprised of such event.

7. Each Defendants' experience in the banking industry precludes any argument thatany

of them lacked the requisite knowledge to understand the significance of accounting for a loan in a

bank.

8. Naturally, as news of the material falsity of the Company's financial statements

reached the market, the price of the Company's stock plummeted, and the Company was ultimately

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placed into receivership and forced to file for bankruptcy protection. In virtually no time, the

Company's stock was rendered worthless.

9. The preceding summary makes evident what the remainder of this Complaint

establishes convincingly: Defendants knowingly and/or recklessly issued false and misleading

financial statements during the relevant time frame that were not presented in accordance with

Generally Accepted Accounting Principles ("GAAP") and thus, as a matter of law, violated the

Securities Exchange Act of 1934 (the "1934 Act") by containing errors and irregularities which led

to the Company's announced restatement. Such failure to accurately report was the result of

intentional and reckless conduct by the Defendants, and directly caused Lead Plaintiff's losses.

JURISDICTION AND VENUE

10. Lead Plaintiff brings this action pursuant to the 1934 Act, as amended (15 U.S.C.

§§ 78j(b) and 78t(a)), and Rule IOb-5 promulgated thereunder (17 C.F.R. § 240.10b-5).

11. This Court has jurisdiction over the subject matter of this action pursuant to § 27 of

the 1934 Act (15 U.S.C. § 78aa) and 28 U.S.C. § 1331.

12. Venue is proper in this District pursuant to § 27 of the 1934 Act, 15 U.S.C. § 78aa,

and 28 U.S.C. § 1391(b) and (c). The Company maintained its principal executive office in this

District, and substantial acts in furtherance of the alleged fraud occurred within this District.

13. Defendants, directly or indirectly, used the means and instrumentalities of interstate

commerce in connection with the acts alleged in this complaint, including, but not limited to, the

mails, interstate telephone communications and the facilities of the national securities markets.

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THE PARTIES

A. Lead Plaintiff

14. Court-appointed Lead Plaintiff, the Franklin Investor Group, purchased Franklin Bank

common stock during the Class Period, as described in the certifications previously filed with the

Court, and was damaged thereby.

B. Franklin Bank

15. Franklin Bank was organized under the laws of Delaware and had its principal

executive offices at 9800 Richmond Avenue, Suite 680, Houston, Texas. During the Class Period,

the Company's shares were listed and actively traded on the NASDAQ under the symbol "FBTX."

According to its Form 10-Q filed December 20, 2007 for the period ending September 30, 2007,

there were 25,370,936 shares outstanding of the Company's common stock as ofNovember 8, 2007.

Due to its pending bankruptcy, neither the Company nor any subsidiary are named as a defendant.

C. Defendants

16. Defendant Lewis S. Ranieri served as a director since the Company was founded in

2001, and as Chairman of the Board during all time relevant to this litigation. He is the prime

originator and a founder of Hyperion Partners L.P. and Hyperion Partners R L.P. ("Hyperion") and

chairman and/or director of various other entities owned directly and indirectly by Hyperion. Mr.

Ranieri also serves as Chairman and President of Ranieri & Co., Inc., a private investment advisor

and management corporation, and is Chairman and a member of the Board of Directors of Hyperion

Capital Management, Inc., a registered investment advisor. Prior to forming Hyperion Partners, L.P.,

Mr. Ranieri had been Vice Chairman of Salomon Brothers, Inc. ("Salomon"). He is generally

considered to be the "father" of the securitized mortgage market. Mr. Ranieri helped develop the

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capital markets as a source of funds for housing and commercial real estate, established Salomon's

leadership position in the mortgage-backed securities area, and also led the effort to obtain federal

legislation to support and build the market. At Salomon, Mr. Ranieri had responsibility for the

firm's activities in the mortgage, real estate and government guaranteed areas.

17. Defendant Anthony J. Nocella ("Nocella") served as a director of the Company since

April 2002 and served as President since April 2002 and Chief Executive Officer since July 2002.

He served as the Chairman, Chief Executive Officer and President of Franklin Bank, S.S.B., - a

subsidiary of the Company - since April 2002. Nocella was co-founder, Vice Chairman and Director

of Bank United Corp and was Chief Financial Officer of Bank United Corp from its inception in

1988 until its merger with Washington Mutual in February 2001. He founded and managed

commercial banking and financial markets (mortgage banking and capital markets) and was

Chairman of the brokerage division of that bank. Mr. Nocella directed the issuance for the first

commercial mortgage-backed bonds (REMIC), and the first single-family residential REMIC issued

by Salomon Brothers and FNMA, and brought three companies public, Bank United Corp. (1996),

PSFS (1983) and Humana, Inc., formerly American Medicorp, Inc. (1970). From 1988 to 1990,

Nocella provided consulting services to Bank United Corp., as well as other financial institutions as

President of Nocella Management Company, a firm that specialized in asset and liability

management consulting for financial institutions. From 1981 to 1987, Mr. Nocella served as

Executive Vice President and Chief Financial Officer of Meritor Financial Markets. During his 13

years at Meritor (1974 to 1987), he also served as President of PSFS Management Company, the

holding company of the Philadelphia Saving Fund Society, the nation's largest savings institution

at the time. Nocella's other positions have included Controller and Director of Financial Services

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for American Medicorp, Inc., Senior Managing Auditor and Consultant for KPMG Peat Marwick

and adjunct professor of finance at St. Joseph's University and Drexel University. Nocella, a

Certified Public Accountant, received an undergraduate degree in accounting from LaSalle

University and an M.B.A. in computer science and finance from Temple University. He also

completed the Graduate banking Financial Management Program of the Wharton School at the

University of Pennsylvania. Nocella is a director and member of the Basel 11 Committee of the

America's Community Bankers, Past Chairman and a director of the Texas Bankers Association, and

delegate and Past President and Key Member of the Financial Executives Institute. Nocella also

serves on the National Association ofHome Builders Mortgage Roundtable. In the Company's 2006

Form 14A, it was revealed that Mr. Nocella's total compensation for the year in question was $1.27

million in cash, an amount which did not include additional benefits from stock and/or options.

18. Defendant Russell McCann ("McCann") was the Company's Chief Financial Officer

and Treasurer, and was the Chief Financial Officer of Franklin Bank, S. S.B. In such capacity, he was

responsible for asset and liability management, financial and managerial accounting, treasury,

funding and capital management. Prior to joining the Company, he was Senior Vice President and

Treasurer of Bank United Corp., where he was responsible for funding, risk management, capital

markets and asset and liability management. He was also a member of the Asset and Liability

Committee and Deposit Pricing Committee of Bank United. Prior to joining Bank United in 1989,

Mr. McCann was Vice President and Treasury Controller for United Savings. Prior to j oining United

Savings in 1986, Mr. McCann held various financial positions in investment banking firms. Mr.

McCann received his B.B.A. in Accounting from Stephen F. Austin State University. He is a

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Certified Public Accountant. In the Company's 2006 Form 14A, it was revealed that Mr. McCann's

total compensation for the year in question was $393,000.

19. Because of the Defendants' positions with the Company and Franklin Bank, S.S.B.,

each had access to the adverse undisclosed information about the Company's business, operations,

operational trends, financial statements, markets and present and future business prospects via access

to internal corporate documents (including the Company's operating plans, budgets and forecasts and

reports of actual operations compared thereto), conversations and connections with other corporate

officers and employees, attendance at management and Board of Directors meetings and committees

thereof and via reports and other information provided to them in connection therewith. Indeed, as

detailed herein by the confidential witnesses, there is no reasonable dispute the Defendants were

intimately involved in the day-to-day operations of the Company including, without limitation, the

analysis of nonperforming loans and application of relevant accounting principles thereto.

20. Moreover, banking operations are undoubtedly a core component of the Company's

corporate structure. As such, Defendants, in their capacities as Chairman of the Board of Directors,

Chief Executive Officer and Chief Financial Officer of the Company, are deemed to have intimate

knowledge of its operations. In re Campbell Soup Co. Sec. Litig., 145 F. Supp. 2d 574, 599 (D.N.J.

2001) ("Knowledge may be imputed to individual defendants when the disclosures involve the

company's core business."). On this very topic, Judge William C. Conner of the Southern District

of New York has observed,

[T]he fact that those statements concerned the core operations of the company supports theinference that the defendant[s] knew or should have known the statements were false whenmade. Indeed, if facts that contradict a high-level officer's public statements were availablewhen the statements were made, it is reasonable to conclude that the speaker had intimateknowledge of those facts or should have known of them. Accordingly, if a plaintiff can plead

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that a defendant made false or misleading statements when contradictory facts of criticalimportance to the company either were apparent, or should have been apparent, an inferencearises that high-level officers and directors had knowledge of those facts by virtue of theirpositions with the company.

In re Atlas Air Worldwide Holdings, Inc. Sec. Litig., 324 F. Supp. 2d 474, 489 (S.D.N.Y. 2004). It

cannot be disputed that a bank's loans, and the proper accounting treatment and disclosure of such

loans, "concern[] the core operations of the company."

21. Given their positions of authority and control within the Company, it is appropriate

to presume that the false, misleading and incomplete information conveyed in the Company's public

filings, press releases and other publications and statements as alleged herein are the collective

actions of those Defendants identified above. Ranieri, Nocella and McCann, by virtue of their roles

as Chairman of the Board, Chief Executive Officer and Chief Financial Officer, respectively, with

the Company, directly participated in the management of the Company and Franklin Bank, S.S.B.,

were directly involved in the day-to-day operations of the Company at the highest levels and were

privy to confidential proprietary information concerning the Company and its business, operations,

growth, financial statements, and financial condition, as alleged herein. Said Defendants were

involved in drafting, producing, reviewing and/or disseminating the false and misleading statements

and information alleged herein, were aware, or recklessly disregarded, that the false and misleading

statements were being issued regarding the Company, and approved or ratified these statements, in

violation of the federal securities laws.

22. As officers and controlling persons of a publicly-held company whose common stock

was, and is, registered with the SEC pursuant to the 1934 Act, and was traded on the NASDAQ, and

governed by the provisions of the federal securities laws, Defendants each had a duty to disseminate

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promptly, accurate and truthful information with respect to the Company's financial condition and

performance, growth, operations, financial statements, business, markets, management, earnings and

present and future business prospects, and to correct any previously-issued statements that had

become materially misleading or untrue, so that the market price of the Company's publicly-traded

common stock would be based upon truthful and accurate information. Defendants'

misrepresentations and omissions during the Class Period violate these specific requirements and

obligations.

23. Defendants participated in the drafting, preparation, presentation and/or approval of

the various public, shareholder and investor reports and other communications complained of herein

and were aware of, or recklessly disregarded, the misstatements contained therein and omissions

therefrom, and were aware of their materially false and misleading nature. Because of their Board

membership and/or executive and managerial positions with the Company, each of the Defendants

had access to the adverse undisclosed information about the Company's financial condition and

performance as particularized herein and knew (or recklessly disregarded) that these adverse facts

rendered the positive representations made by or about the Company and its business materially false

and misleading.

24. Defendants, because of their positions of control and authority as officers and/or

directors of the Company, were able to and did control the content of the various SEC filings, press

releases and other public statements pertaining to the Company during the Class Period. Each

Defendant was provided with copies of the documents alleged herein to be misleading prior to or

shortly after their issuance and/or had the ability and/or opportunity to prevent their issuance or cause

them to be corrected. Accordingly, each of the Defendants is responsible for the accuracy of the

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public reports and releases detailed herein and is therefore primarily liable for the representations

contained therein.

25. Each of the Defendants is liable as a participant in a fraudulent scheme and course

of business that operated as a fraud or deceit on purchasers of the Company common stock by

disseminating materially false and misleading statements and/or concealing material adverse facts.

The scheme: (i) deceived the investing public regarding the Company's business, operations,

management and the intrinsic value of its common stock; and (ii) caused Lead Plaintiff and other

members of the Class to purchase the Company's common stock at artificially inflated prices.

CLASS ACTION ALLEGATIONS

26. Lead Plaintiff brings this action as a class action pursuant to Rule 23(a) and (b)(3) of

the Federal Rules of Civil Procedure on behalf of a Class consisting of all persons who purchased

the common stock of the Company during the period from January 31, 2007 through May 19, 2008

(the "Class Period") and who were damaged thereby. Excluded from the Class are the Defendants

herein, the officers and directors of the Company, members of their immediate families, any affiliate

and/or subsidiary of the Company, any entity in which any excluded person has a controlling interest,

and the legal affiliates, representatives, heirs, controlling persons, successors, and assigns of any

excluded person.

27. Because the Company had in excess of twenty-five million shares of common stock

outstanding, and because the Company's common stock was actively traded during the Class Period,

members of the Class are so numerous that joinder of all members is impracticable. While the exact

number of Class members can only be determined by appropriate discovery, Lead Plaintiff believes

that Class members number at least in the thousands and that they are geographically dispersed.

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Record owners and other members of the Class may be identified from records maintained by the

Company or its transfer agent.

28. Lead Plaintiff's claims are typical of the claims of the members of the Class because

Lead Plaintiff and other Class members sustained damages arising out of Defendants' wrongful

conduct complained of herein.

29. Lead Plaintiff will fairly and adequately protect the interests of the Class members

and has retained counsel who are experienced and competent in class actions and securities litigation.

Moreover, Lead Plaintiff has no interests that are contrary to or in conflict with the interests of the

members of the Class it seeks to represent.

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

adjudication of this controversy, since joinder of all members is impracticable. Furthermore, as the

damages suffered by individual members of the Class may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class individually to redress

the wrongs done to them. There will be no difficulty in the management of this action as a class

action.

31. Questions of law and fact common to the members of the Class predominate over any

questions that may affect only individual members, in that Defendants have acted on grounds

generally applicable to the entire Class. Among the questions of law and fact common to the Class

are:

(a) whether the federal securities laws were violated by Defendants' acts and omissions

as alleged herein;

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(b) whether Defendants' publicly disseminated releases and statements during .the Class

Period omitted and misrepresented material facts, and whether Defendants breached any duty to

convey material facts or to correct material facts previously disseminated;

(c) whether Defendants participated in and pursued the fraudulent scheme and course of

business complained of;

(d) whether Defendants acted with scienter;

(e) whether the market prices of the Company common stock during the Class Period

were artificially inflated due to the material nondisclosures and misrepresentations complained of

herein; and

(f) whether members of the Class have sustained damages and, if so, what is the

appropriate measure of damages.

SUBSTANTIVE ALLEGATIONS

A. Background

32. The Company described itself as a Texas-based savings and loan holding company

with approximately $5.5 billion in assets, $2.6 billion in deposits and $432.7 million in stockholders'

equity as of December 31, 2006. Through its wholly-owned subsidiary, Franklin Bank, S.S.B., a

Texas state savings bank, the Company provided community banking products and services and

commercial banking services to corporations and other business clients and originated single family

residential mortgage loans. As of December 31, 2006, in addition to its corporate offices in Houston,

Texas, where it provided many of its banking services, the Company had 38 community, banking

offices in Texas, seven regional commercial lending offices in Florida, Arizona, Michigan,

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Pennsylvania, Colorado, California, Washington D.C., and mortgage origination offices in 19 states

throughout the United States.

B. Materially False And Misleading Statements Issued During the Class Period

33. Throughout the Class Period, Defendants made statements to the market which

included, though were not limited to, SEC filings, press releases, comments during analyst

conference calls and information set forth on the Company's website. As an initial matter, it is

critical to note that despite Defendants'repeated statements that the Company's financialstatements

were prepared in accordance with GAAP and Regulation S-X, and that the Company possessed

internal and reporting controls and procedures sufficient to insure the material accuracy of its

financial statements, they now concede that the financial statements issued by the Companyfor 2006

and 2007 were false and misleading, contained material errors, and were prepared without

adequate internal accounting controls. These facts are not in dispute.

34. The Class Period begins on January 31, 2007, with the Company filing a Form 8-K

with the SEC and issuing a press release announcing the Company's earnings for fiscal year 2006.

According to the Form 8-K and the press release detailing the purported results for 2006, the

Company's adjusted net income available to common stockholders was $15.5 million, an amount

which included interest income from loans of $264.9 million, net interest income of $88.9 million

after provision for credit losses of $3.8 million, and non-interest expense from real estate owned of

$1.5 million. Additionally, the press release states that Company assets were $5.5 billion, including

loans held for investment of $4.0 billion. Further, the Company reported stockholders equity of $433

million, including $67 million of retained earnings. Each of these numbers was repeated in the

Company's 2006 Form 10-K filed with the SEC on March 14, 2007, and signed by each of the

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Defendants. These financial statements were subj ect to a restatement contained in a Form 8-K issued

on August 6, 2008. Thus, there is no dispute that the financial statements presented in the 2006

Form 10-K, including those items identified above, were materially misstated.

35. During a January 31, 2007 conference call discussing these now admittedly false

results, Nocella stated,

earnings were lower than our expectations for the year primarily as a result of theinverted yield curve and our continued unwillingness to compromise our creditstandards by participating in the higher risk, non-traditional mortgage market.

36. Furthermore, in response to the following question from analyst Jon Arfstrom,

Nocella stated,

Arfstrom: Okay and just to be clear these - some of the more exotic products are notgoing on your balance sheet, you just take them in your warehouse and sell them?

Nocella: Yeah and we know that we never had anything like that but that's - we sellthem if we ever do anything except for sale, we'd probably broker it through in fact,it wouldn't even touch our balance sheet.

37. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, the Company's Form

10-K for fiscal year 2006 contained sworn certifications, signed by Defendants Nocella and McCann,

respectively, that attested to the effectiveness and accuracy of the Company's internal controls over

financial reporting. In relevant part, Defendants Nocella and McCann each certified that:

1. I have reviewed this Annual Report on Form 10-K of Franklin Bank Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statements made,in light of the circumstances under which such statements were made, not misleadingwith respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial informationincluded in this report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, the periodspresented in this report;

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4. The registrant's other certifying officer and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined inExchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosurecontrols and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused suchinternal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls andprocedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of theperiod covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control overfinancial reporting that occurred during the registrant's most recent fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, the registrant's internal control over financial reporting.

5. The registrant's other certifying officer and I have disclosed, based on our mostrecent evaluation of internal control over financial reporting, to the registrant'sauditors and the audit committee of the registrant's board of directors:

(a) All significant deficiencies and material weaknesses in the design oroperation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarizeand report financial information; and

(b) Any fraud, whether or not material, that involves management or otheremployees who have a significant role in the registrant's internal control overfinancial reporting.

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38. Additionally, Defendants Nocella and McCann each executed the Certification of

CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002, which attests:

In connection with the Annual Report of Franklin Bank Corp. (the "Company") on Form 10-K for the prior ending December 31, 2006 as filed with the Securities and ExchangeCommission on the date hereof (the "Report"), certifies, pursuant to 18 U.S.C. § 1350, asadopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) ofthe Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all materialrespects, the financial condition and results of operations of the Company.

39. The statements in the Company's January 31, 2007 press release, conference call, and

its 2006 Form 10-K were materially false and misleading because they failed to disclose and

misrepresented the following adverse facts:

(a) the Company's income, assets and shareholders equity were materially overstated;

(b) the Company's financial statements were not prepared in accordance with GAAP;

(c) the internal controls at the Company were inadequate because, at a minimum, theyfailed to cause proper accounting for Delinquent Loan Accounting, REO Accountingand Loan Modification Accounting, investment securities, and the accounting formonthly increases in the cash surrender value of certain bank-owned life insurance,which was in violation of GAAP;

(d) the sworn Sarbanes-Oxley certifications signed byNocella and McCann were plainlyfalse for the reasons set forth in subparagraphs (a) through (c); and

(e) the statements contain no disclosure of the Company's exposure to higher-risk non-traditional mortgage markets.

40. On April 26, 2007, the Company filed its Form 8-K with the SEC and issued a press

release announcing the Company's earnings for the first quarter of 2007. According to the Form 8-K

and press release detailing the purported results for 2007, the Company's adjusted net income

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available to common stockholders was $6.2 million, an amount which included interest income from

loans of $70 million, net interest income of $21.5 million after provision for credit losses of

$615,000 and non-interest expense from real estate owned of $521,000. Additionally, the press

release states that Company assets was $4.85 billion, including loans held for investment of $3.9

billion. Further, the Company reported stockholders equity of $440 million, including $72 million

of retained earnings. Each of these numbers were repeated in the Company's 2007 Form 10-Q filed

with the SEC on May 1, 2007. These financial statements were subject to the restatement contained

in the Form 8-K filed August 6, 2008. Thus, there is no dispute that the financial statements

presented in the 2007 first quarter Form 10-Q, including those items identified above, were

materially misstated. .

41. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, the Company's Form

10-Q for the first quarter of 2007 contained sworn certifications, signed by Defendants Nocella and

McCann, respectively, that attested to the effectiveness and accuracy of the Company's internal

controls over financial reporting. In relevant part, Defendants Nocella and McCann each certified

that:

1. I have reviewed this Quarterly Report on Form 10-Q of Franklin Bank Corp.;



4. The registrant's other certifying officer and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange Act Rules

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13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined inExchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:








42. The statements in the Company's April 26, 2007 press release and its Form 10-Q for

the first quarter of 2007 were materially false and misleading because they failed to disclose and


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(a) that the Company's income, assets and shareholders equity were materiallyoverstated;

(b) that the Company's financial statements were not prepared in accordance withGAAP;

(c) that the internal controls at the Company were inadequate because, at a minimum,they failed to cause proper accounting for Delinquent Loan Accounting, REOAccounting and Loan Modification Accounting, investment securities, and theaccounting for monthly increases in the cash surrender value of certain bank-ownedlife insurance, which was in violation of GAAP;



43. On July 24, 2007, the Company filed its Form 8-K with the SEC and issued a press

release announcing the Company's earnings for the second quarter of 2007. According to the Form

8-K and press release detailing the purported results for the second quarter of 2007, the Company's

adjusted net income available to common stockholders was $7.1 million, an amount which included

interest income from loans of $72.8 million, net interest income of $24.8 million after provision for

credit losses of $907,000 and non-interest expense from real estate owned of $406,000.

Additionally, the press release states that Company assets were $5.5 billion, including loans held for

investment of $4.1 billion. Further, the Company reported stockholders equity of $470 million,

including $79 million of retained earnings. Each of these numbers was repeated in the Company's

2007 Form 10-Q for the quarter ending June 30, 2007 filed with the SEC on August 9, 2007. These

financial statements were restated in a Form 8-K filed August 6, 2008. Thus, there is no dispute that

the financial statements presented in the Form 10-Q for the second quarter of 2007, including those

items identified above, were materially misstated.

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44. During a July 25, 2007 conference call discussing these results, Nocella, during the

question and answer session with analyst Paul Miller, stated,

Miller: Hey listen can just a more general question. I missed the first 5 minutes ofthe call so you might have addressed this, but you saw Countrywide's numbers comeout yesterday. They are starting to show some trouble. Like I said, you have beenthrough a lot of cycles and I think this cycle has been defined as very sloppyunderwriting, very easy credit. Are we starting to see some subprime issues? I meanhow do you think this cycle is going to play out and, how long do you think it's goingto play out?

Nocella: Yeah let me do two things. For the Countrywide side, this is not aCountrywide call, but I would say HELOCs are not a business, first of all I don'tthink we even had it to our home equity line of credit. That'.s not our business andyou probably know in Texas there is an 80% loan-to-value law for home equity loans.So the circle of 100% home equities and let alone securitized home equities, we don'thave any of that but as far as it playing out I think what you are seeing for the firsttime - at least in his write up, Angelo's write up, was an increase in the prime sideof business and I would say that we are, you are seeing some delinquency increase,which I would say it really doesn't make any sense because you are talking aboutsolid 80% loan-to-value even down to 70, 70% loan-to-value with 700 FICO scoresfrom time-to-time being delinquent and I would think that is completely new. I meanit's like cultural difference. And I don't know if that's what Angelo was talkingabout with the prime side, but on a sort of steady state basis you know, we arerunning about delinquencies, which are substantially lower than his level, than thelevel he talked about in the prime side. We don't have any subprime so I don't know.

Miller: No I know you've been very - I think you guys have been one of moreconservative underwriters out there. I remember having many discussions with youwhere you didn't touch this Alt-A stuff and what not but we're concerned more aboutif this started leaking into the prime could we be going into a credit cycle?

Nocella: I don't know. I mean, I listen to what he has - - He has such a betterdatabase, you know, although our database if you cross the United States in terms ofthis, the $2 billion we put on it back in `04 and `05, I mean that, those loans that youare looking at they're just a little bit every place. So I, we are not seeing it assignificant as he sees it. But remember he did, Countrywide did pay option ARMSwhich, you know, Neg-AM and they secondly did a lot of simultaneous seconds,that's 100% CLTVs. They are two characteristics that we stayed away from.

45. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, the Company's Form 10-

Q for the second quarter of 2007 contained sworn certifications, signed by Defendants Nocella and

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that:









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46. The statements in the Company's July 24, 2007 press release, July 25, 2007

conference call, and its Form 10-Q for the second quarter of 2007 were materially false and

misleading because they failed to disclose and misrepresented the following adverse facts:

(a) the Company's income, assets and shareholders' equity were materially overstated;





47. On October 29, 2007, the Company filed its Form 8-K with the SEC and issued a

press release announcing the Company's earnings for the third quarter of 2007. According to the

Form 8-K and press release detailing the purported results for the third quarter of 2007, the

Company's income available to common stockholders was $7.5 million, an amount which included

interest income from loans of $74.3 million, net interest income of $24.8 million after provision for

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credit losses of $2.5 million, and non-interest expense from real estate owned of $540,000. Each of

these numbers was repeated in the Company's Form 10-Q for the quarter ending September 30, 2007

filed with the SEC on November 8, 2007. These financial statements were restated in a Form 8-K

filed August 6, 2008. Thus, there is no dispute that the financial statements presented in the third

quarter Form 10-Q, including those items identified above, were materially misstated.

48. During the October 30, 2007 conference call discussing these results, Nocella, during

the question and answer session with analyst James Ellman, stated,

Ellman: All right, if I could be clear on this. If the real estate market continues todeteriorate so your factors and your models deteriorate so you need to keep a higheramount. If you have to take a higher amount because the market deteriorates, youwould take a larger provision and you would call that none-core again?

Nocella: No we will not.

Cooper: No.

Nocella: Our core loss provision, the way we've done it, our loss provision is basedon the factors in the markets that we serve and the deterioration in the markets. Ourexample, let me just give you an example on our single-family. What we will do istake each subdivision or each marketplace, we will multiply the default times 2.5.Then we will multiply the expected default percentage in that marketplace times25%. And then we divide that into the factors and that is our balance. We do thatbasically on a quarterly basis to establish the severity risk of our portfolio and thatis how we get our factors. So the deterioration in the marketplace, I think we arepretty darned up-to-date.

49. Further, during the October 30, 2007 conference call, Nocella and McCann, during

the question and answer session with analyst Kris Dillon, stated,

Dillon: Okay. And can you comment on your outlook for loan loss reserves? Iknow it stands at about 42 basis points of loans right now. What level are youcomfortable with and whether there's a target ratio that you're looking for?

Nocella: Yes. I think during the talk we mentioned the factors. Russell? Do youwant to handle that?

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McCann: Yeah. I think you've got to break it down into our various portfolios. Ifyou look at our single family, right now we have 20 basis points versus that. That'sa pretty comfortable level given the characteristics of our portfolio.

50. Analyst Bruce Allen engaged in the following discussion with Nocella and McCann

during the October 30, 2007 conference call,

Good morning gentlemen, thanks for taking the call. I had a couple of questionsabout the mortgage book and I wanted to understand that a little bit better. I guessmaybe first high level if you could just give me some kind of qualitative on the mixof your book fixed floating, GSC eligible and then follow it up with in what percentwere originated your correspondence channel and your wholesale channel? What I'mtrying to drive at there is the underwriting and may be any differential performancein those loans?

Nocella: Okay while I'll lap some parts. They are a very, very small percentage lessthan 1 % of the portfolio would it been originated through a wholesale channel. Anyloans originated for the wholesale channel generally were sold into the secondarymarket. So most of the loans in the portfolio were for their corresponding purchases.

McCann: And the correspondence that we're talking about large banks such as WellsFargo, Bank of America Chase, Countrywide that too originated and we onlyoriginated prime level lending. Basically the metrics in the system are 72% loan tovalue, the FICO scores are approximately 715 across the board, and so very good.

Nocella: And when we purchase these loans, we have a credit model that we wouldrun these loans through. So it really looks at all factor of the loans LTV, tax income,whether its phased income or full income or full dart. And we take all those factorsinto place and then we run some valuation models behind that and then from therewe'll pull out for what the loans we'll do full due diligence on it.

51. Finally, during the October 30, 2007 conference call, Nocella and McCann, during

the question and answer session with analyst Brian Klock, stated

Klock: Okay, okay. And I know the question has been asked a few times, too, aboutthe reserve level and I guess when you think about it, I think, Russell, you said 20basis points is what - - is your factor for the one to four family portfolio. I mean, Iguess when you look at your portfolio doesn't have as long a history as say theWashington Mutual does because of your short history as a public company. Buttheir third quarter, their prime mortgage loan portfolio one to four family had charge-offs of 21 basis points.

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McCann: Yeah. That was a bummer for them but I don't think you can compare ourportfolio to Washington Mutual's. If you really look at what Washington Mutual'sportfolio did, they did pay option ABMs and a large amount. They did a largeamount of subprime. You know we don't have any of those in a portfolio.

Nocella: I refuse to put it inside. There's almost hardly any loans in their portfoliothat met our screen.

52. Pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002, the Company's Form 10-

Q for the third quarter of 2007 contained sworn certifications, signed by Defendants Nocella and



that:






(b) Designed such internal control over financial reporting, or caused suchinternal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting

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and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;






53. The statements in the Company's October 29, 2007 press release, the October 30,

2007 conference call, and its Form 10-Q for the third quarter of 2007 were materially false and

misleading because they failed to disclose and misrepresented the following adverse facts:

(a) the Company's income, assets and shareholders' equity were materially overstated;



(d) the sworn Sarbanes-Oxley certifications signed byNocella and McCann were plainlyfalse for the reasons set forth in subparagraphs (a) through (c);

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(f) there was no disclosure that Countrywide Financial had defaulted on its line of credit.

FRANKLIN BANK ANNOUNCES NEED FOR ADDITIONAL ALLOWANCE FORCREDIT LOSSES

54. On November 26, 2007, the Company issued a press release and filed a Form 8-K

stating,

Franklin Bank Corp. the parent company of Franklin Bank, S.S.B., announcedthat in response to unprecedented market condition changes in the past fewweeks, management has conducted a complete evaluation of Franklin Bank'sloan portfolio and reviewed appropriate qualitative factors.

Such evaluation and review included, among other things but not limited to, ananalysis of recent market value deterioration of housing by geography,increased Chapter 11 protection filings of national home builders, andworsening liquidity in the mortgage markets.

As a result of such evaluation and review, Franklin elected to increase itsallowance for credit losses by approximately $20.0 million ($13.5 million after-tax). This increase is over and above Franklin's annual credit costs. Franklin'smanagement anticipates credit costs for the commercial loan portfolio to rangebetween $5.0 million to $7.5 million for 2008 and believes these actions shouldensure the level of future earnings, as annual credit costs will be limited toexpected levels within its guidance.

Franklin Bank's allowance for credit losses of its total loans will increase from0.42% to 0.91%. The reserve for the builder finance portfolio will increasefrom 0.52% to 1.72% while the overall commercial loan reserve will increasefrom 0.61% to 1.33%. Franklin Bank's regulatory capital will remain in excessof the regulatory "well capitalized" requirements.

Real Estate Owned has been marked to market and is carried at net realizablevalue. This includes selling costs and is not related to the above reserves.Franklin anticipates Real Estate Owned to decrease by year end. Non-performing loans, both existing and potential, were part of the evaluation ofFranklin's loan portfolio and are believed to be adequately collateralized,including the costs of acquisition and sale.

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Franklin's management believes that this effort to anticipate issues, rather thanwait for them, should remove the perceived risk to our institution from both thebuilder finance and mortgage portfolios.

In addition, while conducting the evaluation and review described above,Franklin discovered that four loans related to one borrower totaling $13.5million should have been categorized in the third quarter Form 10-Q astroubled debt restructurings. As a result, Franklin will revise certain disclosuresand file an amendment on Form 10-Q/A to reflect treatment of such loans astroubled debt restructurings. Although this change will increase reportedamounts of investment in impaired loans and the allowance for impaired loans,it will not result in any change to reported net income for the period covered bythe report.

55. During a November 26, 2007 conference call Defendants Ranieri and Nocella made

the following opening remarks

Ranieri: Thank you, Tony. My name is Lewis Ranieri and good morning. As youknow, the subprime crisis has spread to other sectors of the housing market.Liquidity in the big banks is considerably strained and the mortgage market isstruggling to provide adequate financing to all sectors, and even the agency sectorthis time around is being affected. This is having a significant effect on housing andbuilders. Home sales are close to historic lows. Housing values have declinesignificantly in many markets, and as a result, some builders are experiencingliquidity squeeze. And a number of builders, as we stated in our press release, arechoosing to file bankruptcy.

We have had two of our builders file bankruptcy in the last couple of weeks.Fortunately, we are - - and we have looked at this hard, we remain well collateralizedin those two positions even after the market declined. But nonetheless, it is atroubling eventuality. We have evaluated these changes relative to the potential riskinherent in our portfolio and as a result of these changing market conditions haveconcluded that we are going to increase reserves by approximately $20 million.

We believe this action that we are taking will ensure the level of future earnings, asthe annual credit cost should be limited to the expected levels within our guidance.What we are trying to do here, we believe we are adequately reserved, we havelooked at this very hard. But given the circumstances and I will be happy to elaborateon this later that we are seeing, we are trying with the confines of the what theaccounting literate will allow us to do. Take this whole issue of the institution'smortgage portfolio, and its lending to builders off the table with the reserve that willcarry us not for a period, but into the future because frankly management and theBoard does not want to have to do this again.

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These are obviously difficult times, but I and the management are very experiencedin this. We have gone through these cycles before. I think you know ourbackgrounds and we believe that we can shepherd this institution through this cycleas we have done others and do the best for we, the shareholders.

Nocella: Well, thanks, Lew. I am now going to discuss how we changed our reservemethodology as a result ofrecent changing market conditions. First, we stretched ourentire portfolio using a number of characteristics. We evaluated the builder loanportfolio by geography in sub markets. We forecast a level of foreclosures to fall andmarket declines by market. For example, in some markets we estimated as high asa 50% decline in value from appraised values and a 50% default rate and includedestimated sales cost as part of the valuation. Then we added a 75 basis point reserveto the allowance, which we have targeted at the estimated reserve level under normalconditions which we commented on - - during the third quarter conference call. Weused qualitative factors according to the Financial Accounting Standard No. 5 andpeer group data for builder finance, banks, and mortgage originator banks to establishthis level of reserves.

We believe that our forecast charge-offs will be limited to our loss factors embeddedin our guidance calculations. We estimate commercial loan credit cost in 2008 to bebetween 5 million and $7.5 million. This means that we should have three to fouryears of reserves. We evaluated our entire portfolio and increased our reserves forthe commercial loan portfolio to 1.33% from 61 basis points and the reserves on asingle family portfolio to 43 basis points from 20 basis points.

Our builder finance reserves will stand at 1.72%. Secondly, we tested this result bystretching individual loans by geographies. We stretched the loans by up to 45% ofcurrent appraised value, including selling costs of underlying collateral. Then weadded 75 basis points against the builder book-of-business. In effect, we boxed thereserves using the peer group data, portfolio aggregate stress test, and an individualloan stress test. The rest of our portfolio was also stressed, for example, the single-family portfolio against qualitative factors to build the reserve levels and helpsafeguard future earnings levels.

56. The statements in Franklin Bank's November 26, 2007 press release, the conference

call, and the Form 8-K were materially false and misleading because they failed to disclose and


(a) that Franklin Bank's income, assets and shareholders' equity were materiallyoverstated in the 2006 Form 10-K and the Forms 10-Q for each of the first 3Q's of2007;

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(c) that the internal controls at the Company were inadequate because, at a minimum,they. failed to cause proper accounting for Delinquent Loan Accounting, REOAccounting and Loan Modification Accounting, investment securities, and theaccounting for monthly increases in the cash surrender value of certain bank-ownedlife insurance, which was in violation of GAAP;

(d) its massive exposure to delinquent loans served by Countrywide Financial, includingsubprime loans, under a warehouse credit line;


(f) there was no disclosure that Countrywide Financial had defaulted on its line of credit.

57. On December 20, 2007, the Company filed its Form 10-Q/A amending its prior third

quarter 2007 filing. Net income was not modified in the amended filing, but as noted by JP Morgan

in a research report dated the same day, "while the addition of these loans is NOT new news ...

mgmt noted that the $13.5 mil will also be classified as NPLs. This is new information and

adversely alters Franklin's reserve coverage and NPA outlook, in our view."

58. The statements in Franklin Bank's Form 10-Q/A were materially false and misleading

because they failed to disclose and misrepresented the following adverse facts:

(a) that Franklin Bank's income, assets and shareholders equity were materiallyoverstated in the 2006 Form 10-K and the Forms 10-Q for each of the first threequarters of 2007;


(c) that the internal controls at the Company were inadequate because, at a minimum,they failed to cause proper accounting for Delinquent Loan Accounting, REOAccounting and Loan Modification Accounting, investment securities, and theaccounting for monthly increases in the cash surrender value of certain bank-ownedlife insurance, which was in violation of GAAP;

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(d) its massive exposure to delinquent loans served by Countrywide Financial, includingsubprime loans, under a warehouse credit line;


59. On January 31, 2008 the Company issued a press release revealing,

During the fourth quarter of 2007 we significantly increased our allowance for creditlosses by approximately $23.5 million. While this increase obviously had a negativeimpact on our quarterly and yearly earnings, it was necessary and prudent given theturmoil in the housing markets nationwide, which has negatively impacted our homebuilder customers and many single family borrowers. We believe that this actionbetter positions us to weather the current challenging economic environment,"remarked Anthony J. Nocella, President and CEO of Franklin Bank Corp. "We alsorecorded a $65.0 million goodwill impairment as a result of our low stock price whichhas been driven by these current market conditions. Franklin Bank continues to bewell capitalized under all regulatory capital requirements," Nocella added.

60. The January 31, 2008 press release further discloses that,

Franklin increased its allowance for loan losses by $23.5 million to $40.3 million atDecember 31, 2007 from $16.8 million at September 30, 2007. The increase isprimarily the result of additional reserves recorded in the fourth quarter based onFranklin's previously announced evaluation of its loan portfolio and a review ofappropriate qualitative factors given the unprecedented market conditions prevalentin the industry nationwide. The $29.2 million provision for credit losses recordedduring the fourth quarter consisted of $19.6 million for commercial and consumerloans and $9.6 million for single family loans. For 2007, Franklin increased itsallowance for loan losses by $28.7 million, or 3.1 times net charge-offs of $9.2 millionfor the year. Net charge-offs for 2007 were 0.21% of average outstanding loanbalances.

61. The statements in the Company's January 31, 2008 press release, and related Form

8-K were materially false and misleading because they failed to disclose and misrepresented the

following adverse facts:

(a) the Company's income, assets and shareholders' equity were materially overstatedin the 2006 Form 10-K and the Forms 10-Q for each of the first three quarters of2007;


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(c) the internal controls at the Company were inadequate because, at a minimum, theyfailed to cause proper accounting for Delinquent Loan Accounting, REO Accountingand Loan Modification Accounting, investment securities, and the accounting formonthly increases in the cash surrender value of certain bank-owned life insurance,which was in violation of GAAP; and

(d) the statements contain no disclosure of the Company's exposure to higher risk non-traditional mortgage markets, including warehouse lines of credit which includedsubprime loans;

(e) there was no disclosure that Countrywide had defaulted on its line of credit.

62. In a press release dated March 14, 2008 and related Form 8-K, Franklin Bank

announced

that it will delay its filing its Annual Report on Form 10-K for the year endedDecember 31, 2007. In February 2008, the Company's Board of Directors learnedofpossible accounting, disclosure and other issues related to single-family residentialmortgages and residential real estate owned that could affect the Company's 2007financial statements. Upon learning of these matters, the Company's AuditCommittee commenced an independent internal investigation into these issues withthe assistance of independent legal and accounting advisors.

The Audit Committee's investigation is not yet complete. The Company and theAudit Committee are working diligently to complete the review and to finalize andfile the Form 10-K as promptly as possible.

At this time, Franklin is unable to estimate the potential accounting effects that mightresult from the investigation. However, Franklin does not believe that the expectedresults of the investigation will affect the status of Franklin Bank, S.S.B., Franklin'sbanking subsidiary, as a "well capitalized" institution under regulatory guidelines.

63. The statements in the Company's March 14, 2008 press release and related Form 8-K

were materially false and misleading because they failed to disclose and misrepresented the

following adverse facts:

(a) the Company's income, assets and shareholders' equity were materially overstatedin the 2006 Form 10-K and the Forms 10-Q for each of the first three quarters of2007;


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(c) the internal controls at the Company were inadequate because, at a minimum, theyfailed to cause proper accounting for Delinquent Loan Accounting, REO Accountingand Loan Modification Accounting, Investment Securities, and the accounting formonthly increases in the Cash Surrender value of certain bank-owned life insurance,which was in violation of GAAP; and

(d) the statements contain no disclosure of the Company's exposure to higher risk non-traditional mortgage markets, including warehouse lines of credit which includedsubprime loans;

(e) there was no disclosure that Countrywide had defaulted on its line of credit.

64. On March 26, 2008, Franklin Bank issued a press release and related Form 8-K

announcing

that it has received a letter from the staff of The American Stock Exchange ("AMEX")indicating that Franklin is not in compliance with AMEX Rules 134 and 1101 of thecontinued listing standards due to the previously announced delayed filing of itsannual report on Form 10-K for the year ended December 31, 2007. The AMEX letterrequires Franklin to submit a plan by April 3, 2008, advising AMEX of any actionFranklin has taken, or will take, to file its Form 10-K for the year ended December 31,2007, and bring Franklin into compliance by no later than June 17, 2008. Franklinintends to submit a Plan to AMEX by April 3, 2008.

65. On April 4, 2008, the Company issued a press release and filed a Form 8-K

announcing

that, on April 3rd, it submitted a plan, as required, to The American Stock Exchange("AMEX") advising AMEX of action Franklin has taken, or will take, to file its Form10-K for the year ended December 31, 2007, and bring Franklin into compliance byno later than June 17, 2008.

66. On April 22, 2008, the Company issued a press release and filed a Form 8-K

announcing

that the AMEX had accepted the Company's plan to bring it into compliance with theAMEX Company Guide and the Company's listing agreement (the "Plan"), whichPlan had anticipated a delay in the Company's filing its Form 10-Q. Subject to theCompany complying with and making progress under the Plan, the AMEX granted theCompany an extension until June 30, 2008 to file the Form 10-K and until July 31,

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2008 to file the Form 10-Q. Provided that the Company complies with the Plan andmakes progress under it, the AMEX will continue to list the Preferred Stock pursuantto such extension until July 31, 2008.

The Company is scheduled to appear before the Nasdaq Listing Qualifications Panel(the "Panel") on May 22, 2008 to present its arguments for continued listing of theCompany's common stock pending the filing of the Company's Form 10-K and Form10-Q. The NASDAQ Letter provides that the Panel will consider the AdditionalDeficiency in rendering a determination regarding the continued listing of theCompany's common stock. Pursuant to the NASDAQ Letter, the Company mustpresent its views with respect to the Additional Deficiency at its Panel hearing forsuch views to be taken into consideration by the Panel in rendering its determination.the Company will present its views with respect to the Additional Deficiency.

The Bank is required to submit to the FDIC, on a quarterly basis, its ConsolidatedReports of Condition and Income, referred to herein as "call reports." Amendmentsto previously filed call reports are required by the FDIC when changes to thepreviously filed versions become known. The Bank's call reports are prepared inaccordance with instructions issued by the Federal Financial Institutions ExaminationCouncil and include a balance sheet, income statement, changes in equity capital andother supporting schedules as of the end of the period covered by each call report.

The financial results reported in the Bank's call reports submitted to the FDIC reflectthe operations of the Bank only, and do not include holding company operations ofFranklin In addition, financial information contained in the Bank's call reports isunaudited and has not been reviewed by the Company's independent accountants. Aspreviously reported, the Company's filing of its annual report on Form 10-K,including its audited financial statements, for the year ended December 31, 2007, hasbeen delayed. While the Bank's call reports submitted on July 1, 2008 reflect the bestinformation available as of the time of their submission, the information in the Bank'scall reports is subject to possible revision in connection with the audit of theCompany's financial statements since the books and records of the Company for 2007have not yet been closed. Accordingly, the information contained in the AmendedSeptember Call Report, the Amended December Call Report and the Amended MarchCall Report is subject to these and the other qualifications contained in this pressrelease.

67. On May 1, 2008, Franklin Bank issued a press release and filed a Form 8-K

announcing

that it had submitted to the Federal Deposit Insurance Corporation (the "FDIC") itscall report for the quarter ended March 31, 2008. In addition, the Bank also submitted

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to the FDIC amended call reports for the periods ended September 30, 2007 andDecember 31, 2007.

As previously reported, the Company's filing of its annual report on Form 10-K forthe year ended December 31, 2007 has been delayed. Based on Franklin's ongoingreview and evaluation of its 2007 financial statements, certain changes to the Bank'spreviously submitted call reports are necessary.

The findings requiring the amendments to the Bank's call report for the period endedSeptember 30, 2007 will result in an amendment of the Company's Form 10-Qpreviously filed for that period (the "September Form 10-Q"). Accordingly, theinformation contained in the September Form 10-Q should no longer be relied upon.Franklin will file an amended Form 10-Q for the quarter ended September 30, 2007as soon as practicable.

FRANKLIN BANK ANNOUNCES RESTATEMENT

68. On May 19, 2008, Franklin Bank issued a press release and filed a Form 8-K

announcing

that the Audit Committee of its Board of Directors has completed its previouslyannounced independent investigation into certain accounting, disclosure and otherissues related to single-family residential mortgages and residential real estate ownedthat had been brought to the Board's attention in mid-February 2008. The AuditCommittee was assisted in its investigation by Baker Botts L.L.P., independent legalcounsel. Baker Botts L.L.P. retained an independent accounting firm to advise onaccounting matters.

During the course of its 10-week investigation, which was limited to a review ofspecified areas of the Company's single family residential business, the AuditCommittee conducted numerous interviews, reviewed email records for selectedperiods, and analyzed other documents and information provided by the Company.The Audit Committee identified, among other things, a number of accounting errorsin the areas described below:

(1) Franklin did not properly account for certain single familymortgage loan modification programs developed andimplemented as part of an effort to reduce delinquencies andmitigate foreclosure losses.

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(2) Franklin did not charge off certain uncollectable single familysecond lien loans.

(3) Franklin did not record, and in some instances did not write-down, certain Real Estate Owned (REO) and in-substanceforeclosures in connection with foreclosures in its single familymortgage portfolio.

(4) Franklin did not properly record certain mark-to-marketwritedowns on loans transferred from "Held for Sale" to "Heldfor Investment."

Franklin is in the process of completing the adjustments necessary to correct any ofthe above accounting errors that were not previously corrected in the call reportssubmitted by Franklin Bank, S. S.B. on April 30, 2008 as reported by Franklin on May1, 2008.

69. In addition, the May 19, 2008 press release further announced,

Anthony J. Nocella, Franklin's current Chief Executive Officer, will accelerate hispersonal plans to retire. Mr. Nocella, a founder and director of Franklin since 2002,will continue as a director of Franklin and will continue to serve as Chairman of theBank. Through his membership on the Executive Committee of the Bank, asdescribed below, Mr. Nocella will continue in a consultative capacity to assistFranklin until his retirement by December 31, 2008.

70. As evidenced by the testimony of the confidential witnesses herein, Nocella was

in fact terminated and did not simply "accelerate" his retirement. The May 19, 2008 press release

further advised that,

Franklin has been in communication with the FDIC and the Texas Department ofSavings and Mortgage Lending ("TDSML") regarding the investigation and relatedmatters. Franklin will continue to cooperate with the FDIC, the TDSML and otheragencies.

Franklin reported the commencement of the Audit Committee investigation to theEnforcement Division of the U.S. Securities and Exchange Commission ("SEC"),which has commenced an informal inquiry into the disclosure, accounting and otherissues that were investigated. Franklin intends to cooperate fully with the SEC. The

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SEC's inquiry is ongoing, and there can be no assurance that there will not beadditional issues or matters arising from that inquiry.

71. Finally, the May 19, 2008 press release stated,

Form 10-K and Form 10-Qs

Franklin is working diligently to complete and file its Form 10-K for the fiscal yearended December 31, 2007 and to amend and restate its Form 10-Q for the quarterlyperiod ended September 30, 2007. The timing of these filings is uncertain.

Subject to review of a written plan for the execution of the steps described above tobe prepared by Franklin's Board of Directors, Deloitte & Touche, Franklin'sindependent accountant, is expected to resume the audit of Franklin's financialstatements for 2007 so that Franklin's Form 10-K for that year may be completed andfiled with the SEC. Preparation of the Form 10-Q for the three months ended March31, 2008 is expected to begin following completion of the audit of Franklin's financialstatements for 2007. No prediction can be made at this time as to the completion datefor such reports.

72. On May 20, 2008, the Company issued a press release and filed a Form 8-K

announcing

that on May 14, 2008, the Company received an Additional Staff Determination letter(the "NASDAQ Letter") from the Listing Qualifications Staff of The NASDAQ StockMarket (the "NASDAQ") in connection with the Company's failure to file itsQuarterly Report on Form 10-Q for the period ended March 31, 2008 (the "Form 10-Q") with the Securities and Exchange Commission (the "SEC") as required byNASDAQ Marketplace Rule 4310(c)(14). The Company common stock trades on theNasdaq Global Select Market. Additionally, on May 15, 2008, the Company receiveda letter (the "AMEX Letter") from the staff of The American Stock Exchange (the"AMEX") in connection with the Company's failure to file its Form 10-Q as requiredby Sections 134 and 1101 of the AMEX Company Guide and its listing agreement. Asset forth in both the NASDAQ Letter and AMEX Letter, the Company's failure to filethe Form 10-Q serves as an additional basis for delisting the Company's commonstock and Preferred Stock, respectively (the "Additional Deficiency").

73. On July 23, 2008, the Company Bank issued a press release and filed a Form 8-K

announcing

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it had, received a letter from the NASDAQ Stock Market ("Nasdaq") indicating that,for the prior 30 consecutive business days, the Company's common stock had notmaintained the minimum bid price of $1.00 per share required for continued listing,as set forth in Nasdaq Marketplace Rule 4450(a)(5) (the "Minimum Bid Price Rule").This notification will not impact the listing of Franklin's common stock at this time.The Company's common stock will continue to trade on the NASDAQ Global SelectMarket under the symbol "FBTX."

In accordance with Nasdaq Marketplace Rule 4450(e)(2), Franklin has 180 calendardays from the date of the Nasdaq letter, or until January 20, 2009, to regaincompliance with the Minimum Bid Price Rule. To regain compliance, the closing bidprice of the Company's common stock must meet or exceed $1.00 per share for aminimum of ten consecutive business days. Nasdaq may, in its discretion, requireFranklin to maintain a bid price of at least $1.00 per share for a period in excess of tenconsecutive business days, but generally no more than 20 consecutive business days,before determining that Franklin has demonstrated an ability to maintain long-termcompliance. If the Company does not regain compliance, the Nasdaq staff will notifyit of the staffs determination to delist the Company's common stock, which decisionmaybe appealed to a Nasdaq Listings Qualification Panel.

Alternatively, the Company may apply to transfer its common stock to The NASDAQCapital Market if the Company satisfies all of the requirements, other than theminimum bid price requirement of Marketplace Rule 4310(c)(4), for initial inclusionon this market. If the Company elects to apply for this type of transfer and if theCompany's application is approved, it will have available to it the remainder of asecond 180 calendar day period to regain compliance with the Minimum Bid PriceRule while listed on The NASDAQ Capital Market.

The Company has previously disclosed receipt from Nasdaq of notifications ofnoncompliance with Nasdaq Marketplace Rule 4310(c)(14) (the "Reporting Rule")regarding the Company's failure to timely file its Annual Report on Form 10-K for theyear ended December 31, 2007 and its Quarterly Report on Form 10-Q for the threemonths ended March 31, 2008. As previously disclosed, Nasdaq has granted theCompany until September 15, 2008 to make these delayed filings. The July 23, 2008letter from Nasdaq has no effect on the Company's compliance with the ReportingRule.

74. On August 6, 2008, the Company issued a Form 8-K that contained restated unaudited

financial statements for the quarters ended March 31, 2007; June 30, 2007; September 30, 2007, and

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for the year ended December 31, 2006. In that Form 8-K, the Company cautioned that the restated

amounts remained subject to revision. The ultimate amount of the required restatements were never

disclosed prior to the Company being taken over by the FDIC in November of 2008.

75. On August 13, 2008, the Company issued a press release and filed a Form 8-K

announcing that it

received a letter (the "Nasdaq Letter") from the staff of The NASDAQ Stock Market("Nasdaq") regarding the Company's failure to file its Quarterly Report on Form 10-Qfor the period ended June 30, 2008 (the "June Form 10-Q") with the Securities andExchange Commission (the "SEC") as required by Nasdaq Marketplace Rule4310(c)(14). The Company's common stock is listed on Nasdaq. Additionally, onAugust 19, 2008, the Company received a letter (the "AMEX Letter") from the staffof The American Stock Exchange Inc. (the "AMEX") in connection with theCompany's failure to file the June Form 10-Q with the SEC as required by Sections134 and 1101 of the AMEX Company Guide and its listing agreement. TheCompany's Series A Non-Cumulative Perpetual Preferred Stock (the "PreferredStock") trades on the AMEX. The Company has previously disclosed receipt ofsimilar letters from the Nasdaq staff and AMEX staff, with respect to the Company'sfailure to file with the SEC its Annual Report on Form 10-K for the year endedDecember 31, 2007 and Quarterly Report on Form 10-Q for the period ended March31, 2008, and that such failures constituted a basis for delisting the Companys sharesof common stock and Preferred Stock from trading on their respective exchanges.Under the rules of Nasdaq and the AMEX, the failure to file the June Form 10-Qserves as an additional basis for delisting the Company's common stock and thePreferred Stock, respectively.

Both the Nasdaq Letter and the AMEX Letter were expected as a consequence of thefailure to file the June Form 10-Q and their issuance was in accordance with standardpractice of Nasdaq and the AMEX, respectively.

76. Although the Company never filed any Form l OQ's with the SEC regarding any of its

2008 operations, the Company did continue to file call reports with the Federal Deposit Insurance

Corporation (FDIC). In the call report for the quarter ending September 30, 2008, the Company

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admitted that it had charged off over $121 million in bad loans during 2008 and that it had provided

(charged to expense) over $213 million to the loan loss reserve during the same period.

77. On November 7, 2008, the Company issued a press release and filed a Form 8-K

revealing,

it was closed today by the Texas Department of Savings and Mortgage Lending (the"TDSML") and the Federal Deposit Insurance Corporation ("FDIC") was appointedas receiver of the Bank.

The Company's principal asset was its indirect ownership of the common stock of theBank, and, as a result of the receivership of the Bank, the Company has very limitedremaining tangible assets. As the owner of all of the capital stock of the Bank, theCompany would be entitled to the net recoveries, if any, following the liquidation orsale of the Bank or its assets by the FDIC. However, at this time, the Company doesnot expect that it will realize any recovery.

In addition to efforts to file the Company's delayed securities reports, the boards ofdirectors and officers of the Bank and the Company have worked diligently torecapitalize the Bank at a time of unprecedented disruption in the industry. Over thelast few months the Company has presented several recapitalization proposals to theFDIC, TDSML and the Office of Thrift Supervision, including a proposal on whichthe boards of directors and officers of the Bank and the Company continued to workthrough today, that would have strengthened the Bank's capital position and addressedother issues raised by the regulators. However, the Company and the Bank wereunable to bring such matters to conclusion prior to closure of the Bank.

ADDITIONAL FALSE STATEMENTS AND DESCRIPTIONOF DEFENDANTS' SCIENTER.

A. The Statements of Confidential Witnesses Compel a Finding of Scienter.

78. In addition to the admittedly false statements detailed above, and the indicia of scienter

created thereby, Lead Plaintiff's Counsel interviewed a number of former employees regarding the

Company's misconduct. These witnesses confirm that defendants acted with the requisite scienter.

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Confidential Witness No.1

79. CW 1 joined Franklin Bank in June 2007 as a senior manager when Franklin Bank

acquired Access Lending'. CW 1 participated in the Company Board Credit Committee Meetings and

Credit Committee. CW 1 recalled that within a month of his joining Franklin Bank, he had "figured

out" through his participation in various executive level meetings that the internal controls and

monitoring of the single family residential portfolio "was awful." "That area of the bank was really

poorly documented. Half the time they would say in meetings that we can't rely on this report or the

other. Nothing ever seemed to reconcile. The whole thing seemed like a cluster." CW 1 stated with

certainty that all of the Company executives were aware of the internal control problems with regard

to the single family residential portfolio. Defendant Ranieri was screaming at them on the phone to

get the internal controls in line. "Ranieri was heavily involved in the committees."

80. CW 1 understood that former Controller Clark Chrietzberg "blew the whistle

internally" on the Company's accounting loan loss reserves in the single family residential portfolio,

leading to the Company's subsequent announced need to restate financial results. Chrietzberg told

the Franklin Bank management "that our [loan loss reserve] policy is not correct under GAAP." CW 1

noted that this was a big problem "because Nocella and McCann had all signed off on the policy."

Chrietzberg discovered that the Company had used an aggregation method to calculate loss reserves.

CW 1 provided the following example; the Company had two mortgages outstanding, each in the

amount of $100,000. For loan number one, the home appraised at $150,000. For loan number two,

the home appraised at $50,000. Franklin would not take any reserve for the loan number two, and

' Mortgage warehouse lender, Access Lending, became a division of Franklin Bank, S.S.B.headquartered in Houston, Texas as a result of an asset sale to Franklin Bank.

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instead, would assume the cushion for the appraised amount of loan number one made up the

difference.

Confidential Witness No. 2

81. CW2 started at the Company as a Senior Vice President. CW2 described his

responsibility as providing mortgage lending to construction companies such as Toll Brothers,

Orleans, and DR Horton. In the Spring of 2008, CW2 was promoted to Executive Vice President.

During a portion of his tenure as Executive Vice President, CW2 reported to Tony Nocella until

Nocella's termination. Following the termination of Nocella CW2 reported to current Bank

President/CEO Andy Black.

82. Toward the end of 2007, "we [the Company] got hit with a $150 million write off."

The Mortgage and Lending Group ofthe Company supplied warehouse lines of credit to Countrywide

Financial and other entities. The warehouse lines of credit were collateralized by loan portfolios

originated by the borrowing entities.

83. CW2 revealed that Countrywide defaulted on its line of credit in approximately

September or October 2007. As a result of the Countrywide default, the Company was forced to take

possession of the loans collateralizing the warehouse line of credit. `By the time we got notice of the

default, we realized the portfolio was full of sub-prime dog shit." CW2 recalled that Chairman of

the Board Lewis Ranieri had often made a point of telling the investing public that the Company did

not get into sub-prime mortgages. "We didn't get directly into sub-prime, but Countrywide did and

we held those loans as collateral, " said CW2.

84. CW2 explained that the Company received reports from Countrywide on the quality

of the loans collateralizing the warehouse line of credit. CW2 stated the Company had the ability to

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restrict the types of loans that served as collateral for the warehouse lines of credit. Further, CW2

stated that the Company did not have controls in place to actually restrict and monitor the types and

quality of the collateral.

85. CW2 stated that the Company was "supposed to do spot checking and reviews of

Countrywide." In light of the problems with Countrywide noted in the national media, CW2 stated

that the Company, and specifically Defendant Nocella, should have been aware of the problems in

early 2007.

86. As a result of the "dog shit" portfolios received as a result of the Countrywide default

"we got hit with a $150 million write off overnight."

87. The Board Credit Meeting took place at least once a month, typically "a couple of

hours before the Board [of Directors] meeting." The Board Credit meeting would also meet on an

as-needed basis "if something needed to get approved." The purpose of the Board Credit meeting was

to review and approve any line of credit over $10 million. The minimum amount subject to review

was "different for each division." CW2 recalled that the minimum amount of a line of credit in the

Commercial Real Estate Division subject to review was $15 million. The minimum amount of a line

of credit for the Mortgage Bank Finance Group, which oversaw the Countrywide and other warehouse

lines of credit, was $10 million or $12 million.

88. The Board Credit Committee had six voting members that were responsible for voting

on whether the Company would issue credit. Among the voting members were Nocella, Ranieri,

Director Alan Master and Chairman of the Board of the Bank Robert Perro. Non-Voting members

of the Board Credit Committee included former Executive Vice President Dan Cooper and former

Executive Vice President Mike Davitt. Most of the Directors participated in the meeting via

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conference call. The meeting was held in a conference room on the 7th floor in the Houston

headquarters.

89. Prior to each Board Credit Committee meeting, the participants in the meeting received

a "Board Pack." The participants received the Board Pack "a couple of days before the meeting."

The Board Pack provided an agenda for the meeting and all topics to be discussed during the meeting.

CW2 estimated the Pack was approximately 10 to 35 pages, depending on the number of lines of

credit to review. The voting members of the Board Credit Committee were sent a "hard copy" of the

Board Pack via overnight delivery. Board Credit Committee Secretary Valerie provided the voting

members with the "hard copy" via overnight delivery.

90. The Management Loan Committee met every Thursday at 9:00 a.m. CST. Members

of the Management Loan Committee included Executive Vice President Mike Davitt, Executive Vice

President Dan Cooper, Senior Vice President of the Accounting Department Richard Gudetti,

Defendant Nocella, Defendant McCann, then-COO/Current CEO Andy Black and General Counsel

David Jones. The purpose of the Management Loan Committee was to go over loans of $10 million

and under. "The Management Loan Committee would go over loan extensions, modifications and

covenant waivers." Members of the Management Loan Committee received a meeting agenda on the

Tuesday prior to the meeting.

91. The Company's tax strategies and financial accounting "really involved three to five

people making the decisions." CW2 identified Nocella, McCann and Ranieri as being completely

responsible for "write downs and reserves to specific loans." CW2 recalled that when accounting

issues would come up during either the Board Credit or Management Loan Committee meetings, the

top executives would state simply that they would deal with it later.

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92. `By the time 2008 came around, and our stock was down to $1, and we were restating

our quarterly results, we knew some heads had to roll." CW2 recalled that former Executive Vice

President Dan Cooper was terminated approximately 30 days prior to Nocella being terminated.


93. CW3 was employed as a Vice President in the Warehouse Lending Division from 2005

until May 2008. CW3 submitted an Aging Report and Delinquency Report every Friday. CW3 stated

these reports were part of his Sarbanes Oxley compliance. CW3 described the reports as "effectively

the same data" but that the Delinquency Reports were "specific to accounts" while the Aging Reports

reflected the "overall portfolio." The Delinquency and Aging Reports were prepared for former Chief

Credit Officer Max Epperson, and his replacement Kelley Lee.

94. Knowledge regarding the rising delinquencies was presented to the Credit Committee

which consisted of several senior executives, including Dan Cooper, COO Andy Black, Executive

Vice President and Chief Credit Officer Kelley Lee and Nocella. CW3 stated that Credit Committee

met at least two times a week, on Tuesday and Friday, at 8 a.m. CST.

95. During the course of his employment, CW3 acknowledged that "of course" the

Company's senior executives knew the bank was facing rising delinquencies in its mortgage portfolio,

and that the Company "didn't disclose its delinquent loans."


96. CW4 worked for the Company from June 2007 until June 2008 as a senior member

of the Warehouse Lending Division.

97. The warehouse line of credit is provided to mortgage originators, collateralized by the

mortgages originated.

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98. CW4 confirmed McCann was "responsible for setting reserves for the warehouse

lines."

99. All lending groups at the Company "regularly reported on the portfolio status". CW4

reviewed the Aging Report every week in order to "update with major reviews." The Aging Report

of all lending activities was "available every day." CW4 gathered information for the aging report

from the Company ACT database, described as a contact database, and also from the Company

Warehouse Loan System ("WLS"). CW4 believed other lending divisions gathered their information

from the Company FiSery database in order to report aging. The Aging Reports were provided

regularly to every member of the Company Credit Committee.

100. CW4 and Senior Vice President Michael Rae were responsible for reporting on behalf

of the Warehouse Lending Division to the Company's Credit Committee. Members of the Credit

Committee included several members of the Company's Board of Directors, as well as Defendants

McCann and Nocella. The Credit Committee met every Tuesday and occasionally on Friday in a

Conference Room on the 7th Floor of the Company headquarters.

101. CW4 described the process of reviewing aging loans and credit quality as "portfolio

management." The Company's portfolio management "came down from Kelley and Tony Nocella."

"The directives for portfolio management" were all driven by the senior executives. CW4 was aware

of this portfolio management through attendance at the Credit Committee meetings. Every person

presenting information at the Credit Committee "would go through the entire lending process with

them."

102. In March 2008, the Company held an "all hands" meeting in the Company Lunch

Room on the 6th Floor. Nocella led this meeting. During the meeting, Nocella "brought to our

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attention that the bank needed to meet federal guidelines." From that point forward, "there were

auditors there all the time."

103. CW4 specifically recalled the Automated Finance account as it was denied credit while

CW4 was at Access. Because Access had turned it down, CW4 found it "interesting that the

Company picked it up."


104. CW5 worked for the Company in a variety of positions with a variety of

responsibilities from February 2004 until July 2007. CW5 described the role as essentially providing

executive assistance to Executive Vice President Dan Cooper and Senior Vice President of Asset

Acquisition Sharon Koehl. Among the various responsibilities, CW5 recalled working as a "Funder"

who put together Real Estate Owned packages, created a delinquent accounts database and provided

portfolio analysis.

105. Koehl was responsible for submitting reports to the Bank's most senior executives

regarding the Company's acquisition of loans. For example, Koehl provided the senior executives

with monthly reports regarding due diligence of loans to be acquired, production reports of mortgage

officers, reports regarding delinquent loans and reports regarding fraudulent loans. CW5 recalled that

the Company's senior executives met on the first Monday of each month, and that Koehl had to have

reports prepared by that date. The senior executives for which Koehl prepared these reports included

Defendants Nocella and McCann, and Former Chief Credit Officer Max Epperson.

106. Vice President of Loss Mitigation Craig Wolfe oversaw the Company Real Estate

Owned ("REO") Group. Wolfe would "get his hands on the REO when it was acquired from

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foreclosure." Wolfe would then receive a BPO or a Broker Price Opinion. Next, the property would

"go into the REO list."

107. CW5 created forms to be completed for REO transactions. The purpose of the forms

was "for everyone to be well aware of all of the REO transactions." As a result, "on every form in

the REO file" is a signature from Dan Cooper, Max Epperson and Defendant Nocella. "Anytime we

listed an REO on the MLS, anytime we reduced the list price on the REO, any time we received an

offer on the REO — those guys would have to sign a form." CW5 also created a form that showed the

"pay-off amount of the REO property, and how that pay-off amount compared to the amount of the

loan — so we could see how much the bank is losing or gaining on the sale." Nocella, Epperson and

Cooper all had to sign this form.

108. CW5 stated that the Company's top executives received monthly and quarterly reports

specifically reporting on the Company's "Held For Sale" portfolio, its "Held For Investment"

portfolio and its entire portfolio. CW5 stated that sections of the report were clearly entitled "Held

for Sale" or "Held for Investment." The report broke down the holdings by general ledger code.

CW5 believed the general ledger code for the Held for Sale Portfolio was either 02 or 03. The

Company maintained it's Held for Sale portfolio in an SADE database. The Company identified its

Held for Investment loans as follows: the first two numbers indicated the first year of the loan. For

example, a loan beginning in 2005 would start with 05. The Held for Investment loans were then

assigned a six digit number, which would indicate each loan the Company had done within a given

year. Therefore, the first loan in 2004 would be labeled 04-000001.

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109. CW5 recalled with certainty that "Tony [Nocella] would have to approve" moving

assets between the Held for Sale Portfolio and the Held for Investment Portfolio. Epperson would

also have to approve moving assets.

B. The Company Violated GAAP

110. During the Class Period, Defendants repeatedly represented that the Company's

financial statements were prepared in conformity with GAAP. These representations were materially

false and misleading when made because Defendants, in violation of GAAP, knowingly or recklessly

employed improper accounting practices which falsely inflated the Company's assets reported on the

balance sheet, falsely overstated income, and understated expenses during the Class Period. The

knowing and/or reckless violations of GAAP are direct evidence of Defendants' scienter. Moreover,

each Defendants' experience in the banking industry precludes any argument that any of them lacked

the requisite knowledge to understand the significance of accounting for loans made by a bank.

111. GAAP, as set forth in the Public Company Accounting Oversight Board ("PCAOB")

Professional Standards of U.S. Auditing Standards ("AU") AU 411.02, are those principles

recognized by the accounting profession as the conventions, rules, and procedures necessary to define

accepted accounting practices at a particular time. As set forth in Financial Accounting Standards

Board ("FASB") Statements of Concepts ("Concepts Statement") No. 1, one of the fundamental

objectives of financial reporting is that it provide accurate and reliable information concerning an

entity's financial performance during the period being presented. Concepts Statement No. 1,

paragraph 42, states:

Financial reporting should provide information about an enterprise's financialperformance during a period. Investors and creditors often use information about thepast to help in assessing the prospects of an enterprise. Thus, although investment and

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credit decisions reflect investors' and creditors' expectations about future enterpriseperformance, those expectations are commonly based at least partly on evaluations ofpast enterprise performance.

112. Indeed, compliance with GAAP is a basic fundamental obligation of publicly traded

companies. As set forth in SEC Rule 4-01(a) of SEC Regulation S-X, "[f]inancial statements filed

with the [SEC] which are not prepared in accordance with [GAAP] will be presumed to be misleading

or inaccurate." 17 C.F.R. § 210.4-01(a)(1).

113. Management is responsible for preparing financial statements that conform with

GAAP. As noted by the PCAOB Professional Standards in U.S. Auditing Standards ("AU") Section

110.03:

The financial statements are management's responsibility. The auditor'sresponsibility is to express an opinion on the financial statements. Management isresponsible for adopting sound accounting policies and for establishing andmaintaining internal control that will, among other things, initiate, record, process,and report transactions (as well as events and conditions) consistent withmanagement's assertions embodied in the financial statements. The entity'stransactions and the related assets, liabilities and equity are within the directknowledge and control of management. The auditor's knowledge of these matters andinternal control is limited to that acquired through the audit. Thus, the fairpresentation of financial statements in conformity with generally accepted accountingprinciples is an implicit and integral part of management's responsibility. Theindependent auditor may make suggestions about the form or content of the financialstatements of draft, in whole or in part, based on information from managementduring the performance of the audit. However, the auditor's responsibility for thefinancial statements he or she has audited is confined to the expression of his or heropinion on them.

114. Despite the clear and unequivocal requirement and obligation that financial statements

be prepared in compliance with GAAP, the Defendants caused Franklin Bank, in violation of GAAP,

to improperly account for the Company's credit delinquencies; improperly account for the Company's

assets impairment; to fail to classify and properly account for real estate owned; and to improperly

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account for loans on which the original terms of payment for the loan had been modified. As set forth

below, Franklin Bank was required under GAAP to (i) timely record any loss attributable to

uncollectible loans, (ii) timely record any loss attributable to the reduction in realizable value of real

estate owned, (iii) properly account for losses and impairments attributable to changes in asset values

of investment securities, (iv) properly account for changes in the value of bank owned life insurance

cash surrender values, and (v) design, implement, and maintain a system of internal accounting

controls that would accurately safequard its assets and reflect the Company's business. Franklin Bank

intentionally failed to fulfill these GAAP requirements.

115. Defendants cannot, and do not, dispute that they violated GAAP. Indeed, on August

6, 2008, in a press release, Franklin Bank revealed that its financial statements for the year ended

December 31, 2006, for the quarter ended March 31, 2007, for the quarter ended June 30, 2007, and

for the quarter ended September 30, 2007 required restatement. The financial statements for the year

ending December 31, 2007 were substantially delayed to incorporate findings related to the required

restatement. Ultimately, the financial statements for the year ended December 31, 2007 were never

issued.

116. Restatements are necessary only in rare and unusual circumstances. Financial

Accounting Standards Board Statement No. 154 (FASB 154) Accounting Changes and Error

Corrections contains the criteria under which restatements are necessary. Specifically, GAAP dictates

that an error in recognition, measurement, presentation or disclosure in financial statements resulting

from mathematics mistakes, mistakes in the application of GAAP or oversight or misuse of facts that

exist at the time the financial statements were prepared, requires restatement of the previously issued

financial statements.

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117. In the facts revealed by Franklin Bank, there has been no change in the reporting entity,

and none of the changes in accounting principles specifically identified by FASB 154 requiring

retroactive application were employed in the Company's financial reporting. Rather, the reason for

restating the financial statements, as revealed by the Company, is for the sole purpose of correcting

material errors.

118. The restatement required to correct the previously reported financial position and

results of operation of Franklin Bank proves that the Company and its management failed to comply

with Section 13 (b)(2)(A) of the 1934 Act which requires that issuers "make and keep books, records,

and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and

dispositions of the assets of the issuer."

119. As a result of the accounting improprieties, the Company's reported financial results

violated, among other things, the following provisions of GAAP for which Defendants are necessarily

responsible:

a. The principle that financial reporting should provide information that is usefulto present and potential investors in making rational investment decisions and that information shouldbe comprehensible to those who have a reasonable understanding of business and economic activities(FASB Statement of Concepts No. 1, ¶ 34);

b. The principle of materiality, which provides that the omission or misstatementof an item in a financial report is material if, in light of the surrounding circumstances, the magnitudeof the item is such that it is probable that the judgment of a reasonable person relying upon the reportwould have been changed or influenced by the inclusion or correction of the item (FASB ConceptsStatement No. 2, ¶ 132) (SEC Staff Accounting Bulletin No. 99);

C. The principle that "financial reporting should provide information about theeconomic resources of an enterprise, the claims to those resources, and effects oftransactions, events,and circumstances that change resources and claims to those resources" (FASB Statement ofConcepts No. 1, ¶ 40);

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d. The principle that financial reporting should provide information about howmanagement of an enterprise has discharged its stewardship responsibility to owners (stockholders)for the use of enterprise resources entrusted to it. To the extent that management offers securities ofthe enterprise to the public, it voluntarily accepts wider responsibilities for accountability toprospective investors and to the public in general (FASB Concepts Statement No. 1, ¶ 50);

e. The principle that financial reporting should provide information about anenterprise's financial performance during a period. Investors and creditors often use informationabout the past to help in assessing the prospects of an enterprise. Thus, although investment andcredit decisions reflect investors' expectations about future enterprise performance, those expectationsare commonly based at least partly on evaluations of past enterprise performance (FASB ConceptsStatement No. 1, ¶ 42);

f. The principle that financial reporting should be reliable in that it representswhat it purports to represent. The notion that information should be reliable as well as relevant iscentral to accounting (FASB Concepts Statement No. 2, ¶¶ 58-59);

g. The principle of completeness, which means that nothing is left out of theinformation that maybe necessary to ensure that it validly represents underlying events and conditions(FASB Concepts Statement No. 2, ¶ 79);

h. The principle that conservatism be used as a prudent reaction to uncertaintyto try to ensure that uncertainties and risks inherent in business situations are adequately considered.The best way to avoid injury to investors is to try to ensure that what is reported represents what itpurports to represent (FASB Concepts Statement No. 2, ¶¶ 95, 97);

i. The principle that contingencies that might result in gains are not reflected inaccounts since to do so might be to recognize revenue prior to its realization and that care should beused to avoid misleading investors regarding the likelihood of realization of gain contingencies(FASB No.5, Accounting for Contingencies);

j. The principle that financial statements disclose contingencies when it is at leastreasonably possible (e.g., a greater than slight chance) that a loss may have been incurred (SFAS No.5, ¶ 10) and that financial statements disclose significant risks and uncertainties associated with anentity's operations (AICPA's Statement of Position No. 94-6);

k. The principle that loss contingencies be recorded in the financial statementswhen it is probable that an asset has been impaired or a liability has been incurred at the date of thefinancial statements and the amount of the loss can be reasonable estimated (SFAS No. 5 ¶ 8);

1. The principle that "interim financial reporting should be based upon the sameaccounting principles and practices used to prepare annual financial statements" (APB No. 28, ¶10).

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120. As set forth herein, Defendants violated these fundamental principles of GAAP.

A. Violations of GAAP Relating to Credit Delinquencies and Real Estate Owned

121. As detailed above, the Company disclosed on August 6, 2008 that the bank continued

to recognize interest income on certain single family loans serviced by third parties that were

delinquent for more than 90 days, on which the payments were made by the servicer to the Company

even though the borrower had not made payments to the servicer, rather than placing these loans on

non-accrual status. Under GAAP, interest should not be accrued on loans for which payment in full

of principle and interest is not expected, -or, generally, upon which payment of principle and interest

has been in default for a period of 90 days or more.

122. Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies"

("SFAS 5") provides the accounting rules which must be followed by financial institutions to properly

account allowances for credit losses and allowances for REO losses. Paragraph 8 of SFAS 5 states:

An estimated loss from a loss contingency (as defined in paragraph 1), shall be accrued by acharge to income if both the following conditions are met:

a. Information available prior to issuance of the financial statements indicatesthat it is probable that an asset had been impaired or a liability had beenincurred at the date of the financial statements. It is implicit in this conditionthat it must be probable that one or more future events will occur confirmingthe fact of the loss.

b. The amount of the loss can be reasonably estimated.

Accounting by Creditors for Impairment of a Loan, was issued to standardize themyriad of methods utilized by financial institutions to apply SFAS No. 5 toaccounting for the allowance for loan losses. SFAS No. 114 made it clear thataccrued interest must be included in the analysis for impairment of assets. It is notsufficient to analyze only the impairment of loan principal, but rather it is requiredthat all terms of the loan contract be considered in the impairment analysis. As such,a borrower's inability to meet interest requirements of a loan agreement must beincorporated into the analysis of impairment of the loan. Failure to comply with this

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standard in accounting for accrued interest resulted in the improper recording ofinterest income, the under-reporting of bad debt expense and the failure to writedown the value of impaired assets.

123. As stated in the Company's Summary of Significant Accounting Policies in its notes

to consolidated financial statements in its December 31, 2006 Form 10-K, real estate acquired

through foreclosure is accounted for at the lower of carrying value or fair value less estimated costs

to sell at the time of foreclosure. Declines in a property's fair value below its carrying value

subsequent to foreclosure would be charged to current operations.

124. SFAS 114 states that this provision is required to be used by financial institutions to

ensure that the allowance for loan losses and the expenses related to uncollectible loans is properly

determined and disclosed. Consideration of credit delinquencies is an integral part of the analysis

used to determine the amount of uncollectible loans.

125. As disclosed in the press related dated August 6, 2008, which contains unaudited

restatements of summarized financial statements for the reporting periods December 31, 2006; March

31, 2007, June 30, 2007, and September 30, 2007, the Company restated the previously issued

financial statements to reduce the interest income improperly recognized; increase the amount of

reported non-accrual loans (losses related to loans); and increase the reported amount of REO (and

reduction in pre-tax income as a result of properly valuing the REO).

B. Violations of GAAP Relating to Modification of Loan Terms

126. SFAS No. 114 also incorporates the required accounting for loans where the terms of

the loan have been modified. Paragraph 8 of SFAS No. 114 states:

A loans is impaired when, based on current information and events, it is probablethat a creditor will be unable to collect all amounts due according to thecontractual terms of the loan agreement. As used in the Statement and in

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Statement 5, as amended, all amounts due according to the contractual termsmeans that both the contractual interest payments and the contractual principalpayments of a loan will be collected as scheduled in the loan agreement. For aloan that has been restructured in a troubled debt restructuring, the contractualterms of the loan agreement refers to the contractual terms specified in the originalloan agreement, not the contractual terms specified by the restructuring agreement.

127. As disclosed in a press release dated August 6, 2008, which contained unaudited


31, 2007; June 30, 2007; and September 30, 2007, the Company determined it did not properly

account for single family loan modifications in the third and fourth quarters of 2007. As a result the

June 30, 2007 and September 30, 2007 interest income and the provision for loan losses required

material adjustments.

C. Violations of GAAP Regarding failure to ProperlyProvide an Allowance for Credit Losses

128. The Company failed to provide an adequate allowance for credit losses and the

corresponding charge off against income related to its impairment in its investment in loans as

required by SFAS No. 114. SFAS 114 states that a loan is impaired when, based on current

information and events, it is probable that the creditor will be unable to collect all amounts due to the

contractual terms of the loan agreement.

129. As disclosed in a press release dated August 6, 2008, which contained unaudited


31, 2007; June 30, 2007; and September 30, 2007, the Company failed to provide sufficient

allowances for credit losses for the year ending 2006 and during each of the quarters in 2007. The

insufficient allowances resulted from improper delinquent loan accounting, improper real estate

owned accounting and improper loan modification accounting.

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D. Summary of Significant Accounting Policies (SSAP)

130. The Company specifically detailed its accounting policies purportedly used in

preparing its consolidated financial statements in the SSAP to Consolidated Financial Statements in

its Form 10-K for the year ended December 31, 2006 and the Form 10Q for the first, second and third

quarter of 2007.

131. The Defendants, two of whom are CPA's and the other the self-described "father of

securitized mortgages," were aware not only of GAAP requirements, but were also aware of those

accounting policies the Company specifically stated were used in preparing its annual and quarterly

financial statements. Defendants Nocella and McCann also signed verifications accompanying all

financial statements with the SEC during the Class Period stating that based on their knowledge, the

financial statements fairly presented in all material respects the financial conditions, results of

operations, and cash flows for the periods presented therein.

132. The financial statements were materially misstated during the Class Period, and

violated both GAAP and the Company's own accounting policies.

133. The foregoing GAAP and SSAP policies were simple and basic accounting principles

and requirements of which Defendants were well aware; were aware that they were being violated;

and were aware such information was being hidden from investors.

134. The basic accounting methodology for the loans relevant here is not esoteric or

complicated. Rather, it consists of simple and unambiguous principles of which Defendants were

well aware. As evidenced herein, Defendants schemed to subvert the Company's actual financial

position and results of operations by, for example, using unacceptable methodology in calculating the

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Company's loan loss reserves through utilization of the "Aggregation" method noted by CW 1. There

is no excuse or explanation for this violation of the federal securities laws.

E. Lack of Effective Internal Controls

135. As discussed above, Defendants were obligated by law to use the generally accepted

accounting principles that were appropriate to reflect the business activities of Franklin Bank.

Management also had the responsibility to design, implement, and maintain a system of internal

accounting controls that would provide accounting records that reflect the transactions that were

consummated by the entity. Additionally,

Section 13 of the 1934 Act requires that:

Every issuer which has a class of securities registered pursuant to Section 12 of thistitle and every issuer which is required to file reports pursuant to Section 15(d) of thistitle shall - -

A. make and keep books, records, and accounts, which, inreasonable detail, accurately and fairly reflect the transactionsand dispositions of the assets of the issuer; and

B. devise and maintain a system of internal accounting controlssufficient to provide reasonable assurances that - -

i. transactions are executed in accordance withmanagement's general or specificauthorization;

ii. transactions are recorded as necessary (a) topermit preparation of financial statements inconformity with generally accepted accountingprinciples or any other criteria applicable tosuch statements, and (b) to maintainaccountability for assets;

access to assets is permitted only in accordancewith management's general or specificauthorization; and

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iv. the recorded accountability for assets iscompared with the existing assets at reasonableintervals and appropriate action is taken withrespect to any differences.

136. As revealed by the unequivocal testimony of CW 1, Defendants were well aware ofthe

lack of adequate internal controls. The Company's Class Period SEC filings used the following

language to fraudulently stated that the Company implemented adequate internal controls:

Franklin management is responsible for the preparation, integrity, and fair presentationof the consolidated financial statements included in this annual report. Theconsolidated financial statements and notes included in this annual report have beenprepared in conformity with United States generally accepted accounting principles,and as such, include some amounts that are based on Management's best estimatesand judgments.

Franklin's Management is responsible for establishing and maintaining effectiveinternal controls over financial reporting. The system of internal control overfinancial reporting, as it relates to the financial statements, is evaluated foreffectiveness by Management and tested for reliability through a program of internalaudits and Management testing and review. Actions are taken to correct potentialdeficiencies as they are identified.

137. Contrary to such repeated assertions, the myriad of accounting problems recounted

herein resulted from, and remained undisclosed due to, lack of adequate internal controls. That this

was so constitutes a failure of the Company and its management to comply with Section 13 (b)(2)(B),

which requires that issuers must "devise and maintain a system of internal accounting controls

sufficient to provide reasonable assurances that—

i. transactions are executed in accordance with management's general or specificauthorization;

ii. transactions are recorded as necessary (i) to permit preparation of financialstatements in conformity with generally accepted accounting principles or anyother criteria applicable to such statements, and (ii) to maintain accountabilityfor assets;

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iii. access to assets is permitted only in accordance with management's generalor specific authorization; and

iv. the recorded accountability for assets is compared with the existing assets atreasonable intervals and appropriate action is taken with respect to anydifference."

138. Moreover, the SEC has issued an interpretation of the requirements in Financial

Reporting Release 28 demanding that a financial institution maintain documentation of the

methodology used to determine the allowance for loan losses. Topic 6: Interpretations of Accounting

Series Releases and Financial Reporting Releases L.2.b states:

the staff would normally expect to find that registrants maintain written supportingdocumentation for the following decisions, strategies, and processes:

Policies and procedures:Over the systems and controls that maintain an appropriate loan lossallowance, andOver loan loss allowance methodology;Loan grading system or process;Summary of consolidation of the loan loss allowance balance;Validation of the loan loss allowance methodology; andPeriodic adjustments to the loan loss allowance process.

139. With regard to internal controls of registrants over maintenance of the allowance for

loan losses, Topic 6: Interpretations of Accounting Series Releases and Financial Reporting Releases

L.2.b states:

in order for a registrant's loan loss allowance methodology to be effective, theregistrant's written policies and procedures for the systems and controls that maintainan appropriate loan loss allowance would likely address the following:

Roles and responsibilities of the registrant's departments and personnel(including the lending function, credit review, financial reporting, internalaudit, senior management, audit committee, board of directors, and others, asapplicable) who determine or review, as applicable, the loan loss allowanceto be reported in the financial statements;

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The registrant's accounting policies for loans and loan losses, including thepolicies for charge-offs and recoveries and for estimating the fair value ofcollateral, where applicable;The description of the registrant's systematic methodology, which should beconsistent with the registrant's accounting policies for determining its loanloss allowance; andThe system of internal controls used to ensure that the loan loss allowanceprocess is maintained in accordance with GAAP.

The staff would normally expect an internal control system for the loan loss allowanceestimation process to:

Include measures to provide assurance regarding the reliability and integrityof information and compliance with laws, regulations, and internal policiesand procedures;Reasonably assure that the registrant's financial statements are prepared inaccordance with GAAP; andInclude a well defined loan review process.

140. Despite Defendants repeatedly certifying to the SEC that the Company had proper

internal controls, Franklin Bank's management failed to institute policies outlined in the Staff

Accounting Bulletin Interpretations referenced above.

141. Likewise, had the Company properly maintained an internal control environment as

was required by the SEC and certified to the SEC by Defendants, it would have created an

environment in which the fraud would not have easily come into existence and which could not have

flourished for long, much less years, without detection.

142. More to the point, Section 302(a) of the Sarbanes-Oxley requires that the signing

officers of SEC registrants assume responsibility for the establishment and maintenance of internal

controls and that they evaluate them periodically, and within 90 days prior to the issuance of financial

reports.

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143. In the Company's Form 10-K for the year ended December 31, 2006, Defendants

McCann and Nocella signed certifications which contained representations that they and other

certifying officers were responsible for establishing and maintaining disclosure controls and

procedures and internal controls over financial reporting for the Company and had:

Designed such disclosure controls and procedures, or caused such disclosure controlsand procedures to be designed under our supervision, to ensure that materialinformation relating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period in whichthis report is being prepared.

144. By including such certifications, Defendants McCann and Nocella demonstrated

complete awareness of the requirements under Sarbanes-Oxley. Notwithstanding and in direct

contravention of Defendants McCann and Nocella representations, the Company's internal controls

were not effective "to ensure that material information" was included in the Company's financial

reporting. Similar certifications were executed by Defendants McCann and Nocella with all three of

Franklin Bank's 2007 Forms 10-Q.

145. The number of periods which have been identified as requiring restatement

demonstrates the lack of effectiveness, or even the lack of existence, of the internal controls at

Franklin Bank.

F. Defendants Violated the Company's Code of Ethics.

146. The Company's purported Code of Ethics provides:

The Company and the Bank each have a paramount interest in maintaining thetrust, confidence and esteem of its customer and depositors, the general publicand regulatory authorities. The maintenance of such trust, confidence andesteem requires that the Company and its directors, officers, and employeesexercise sound judgment and exhibit the utmost integrity in all actions relatingto or reflecting upon the activities of the Company. Therefore, the Company,acting through its Board of Directors, has promulgated and adopted this Code

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of Ethics and Business Conduct (the "Code"). All references to the "Company"apply to the directors, officers, and employees of the Company and allreferences to the "Bank" apply only to Franklin Bank, S.S.B. This Codesupplements and does not replace the other polices of the Company that requireadditional or higher standards of ethical conduct.

GENERAL POLICY

1. STATEMENT OF POLICY. The Company expects the highestpossible standard of ethical conduct from its directors, officers and employees.Each director, officer and employee of the Company occupies a position oftrust and confidence. Each such person has a fiduciary duty to act for theprimary benefit of the Company in all matters connected with his or her officeof employment. Fraud, dishonesty or criminal conduct on the part of anyemployee, officer or director will not be tolerated. Accordingly, each director,officer and employee must conduct himself or herself in such a manner as toavoid conflict of interest between such person's personal financial interests andthe best interests of the Company and the Bank's depositors. Compliance withthis Code is a term and condition of employment.

2. SANCTIONS FOR NONCOMPLIANCE. Compliance with this Codeis mandatory for every director, officer and employee of the Company. Thosewho violate the standards in this Code or direct others to do so will be subjectto disciplinary action, up to and including termination of employment.Additionally, the violation of this Code may also be a violation of a legalrequirement or prohibition, and may carry civil and/or criminal sanctions.

CODE OF ETHICS

1. Each director, officer and employee shall carry out his or herresponsibilities honestly and with integrity, maintaining andpromoting high standards of ethical conduct.

2. Each director, officer and employee, acting in his or herrespective capacity, are responsible for full, fair, accurate,timely and understandable disclosure in the periodic reportsrequired to be filed by the Company with the SEC.Accordingly, it is the responsibility of directors, officers, andemployees promptly to bring to the attention of the AuditCommittee any material information by which he or she maybecome aware that affects the disclosures made by theCompany in its public filings or otherwise assist the Audit

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Committee in fulfilling its responsibilities as specified in theCompany's Audit Committee Charter.

3. Each director, officer and employee shall promptly bring to theattention ofthe Audit Committee any information he or she mayhave concerning (a) significant deficiencies in the design oroperation of internal controls which could adversely affect theCompany's ability to record, process, summarize and reportfinancial data or (b) any fraud, whether or not material, thatinvolves management or other employees who have asignificant role in the Company's financial reporting,disclosures or internal controls.

4. Each director, officer and employee shall promptly bring to theattention of the CEO, the Senior Vice President-Legal or theSenior Vice President-Internal Audit Coordinator and to theAudit Committee "any information he or she may haveconcerning any violation of this Code.

147. The commitments and statements set forth in the Code of Ethics Charter as described

and quoted in the preceding paragraphs were not adhered to because:

(a) the Company's financial statements were materially overstated;

(b) the Company's financial statements were not prepared in accordance withGAAP;

(c) the internal controls at the Company were inadequate because, at a minimum,they failed to cause proper accounting for delinquent loans, real estate owned,loan modifications and cash surrender of life insurance were in violation ofGAAP.

NO SAFE HARBOR

148. The federal statutory safe harbor which protects forward-looking statements under

certain circumstances does not apply to any of the allegedly false statements pleaded in this

Complaint. Further, none of the statements pleaded herein which might otherwise be considered

forward-looking statements were identified as "forward-looking statements" when made. Nor was

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it stated that actual results "could differ materially from those projected." Nor were any of the

arguably forward-looking statements contained in this Complaint accompanied by meaningful

cautionary statements identifying important factors that could cause actual results to differ materially

from the statements made therein. Defendants are liable for any forward-looking statements pleaded

because, at the time each of those statements was made, the speaker knew the statement was false and

had been authorized and/or approved by an executive officer of Franklin Bank who knew the

statement was false when made.

APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD-ON-THE -MARKET DOCTRINE

149. At all relevant times, the market for the Company's securities was an efficient market

for the following reasons, among others:

(a) the Company's stock met the requirements for listing, and was listed andactively traded on the NASDAQ, a highly efficient and automated market;

(b) As a regulated issuer, the Company filed periodic public reports with the SEC;

(c) The Company regularly communicated with public investors via establishedmarket communication mechanisms, including through regular disseminationsof press releases on the national circuits of major news wire services andthrough other wide-ranging public disclosures, such as communications withthe financial press and other similar reporting services; and

(d) Franklin Bank was followed by several securities analysts employed by majorbrokerage firms who wrote reports which were distributed to the sales forceand certain customers of their respective brokerage firms. Each of thesereports was publicly available and entered the public marketplace.

150. As a result of the foregoing, the market for the Company's securities promptly digested

current information regarding the Company from all publicly available sources and reflected such

information in the Company's stock price. In these circumstances, all purchasers of the Company's

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securities during the Class Period suffered similar injury through their purchase of the Company's

securities at artificially inflated prices and a presumption of reliance applies.

LOSS CAUSATION

151. At all relevant times, the material misrepresentations and omissions particularized in

this complaint directly or proximately caused or were a substantial contributing cause of the damages

sustained by Lead Plaintiff and other members of the Class.

152. During the Class Period, Defendants' misstatements and omissions had the cause and

effect of creating in the market an unrealistically positive assessment of Franklin Bank and its

business, operations, performance, and prospects, thus causing the Company's common stock to be

overvalued and artificially inflated at all relevant times. Defendants' materially false and misleading

statements during the Class Period resulted in Lead Plaintiff and other members of the Class

purchasing the Company's common stock at artificially inflated prices that did not reflect the stock's

true value, thus contributing to the damages complained of herein.

153. As previously discussed, Franklin Bank concealed the true extent of its financial

decline throughout the Class Period through its failure to reveal, at a minimum, (i) the internal

controls at the Company were inadequate and (ii) the Company failed to properly account for

Delinquent Loan Accounting, REO Accounting and Loan Modification Accounting, investment

securities, and the accounting for monthly increases in the cash surrender value of certain bank-owned

life insurance, which constituted a violation of GAAP.

154. Franklin Bank's efforts to conceal the true extent of its operating problems began to

unravel in the fall of 2007 and spring of 2008, especially after the November 26, 2007 announcement

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containing additional disclosures regarding problem loans; the disclosure of an additional $20 million

increase in allowance for credit losses and the May 19, 2008 restatement announcement.

155. All told, the final disclosure of the extent of the problems directly related to the fraud

set forth in this Complaint was not fully revealed (if at all) until Franklin Bank finally announced the

completion of its Audit Committee investigation and the resulting restatement on May 19, 2008.

156. As a result of these various partial disclosures of the "relevant truth(s)" concealed by

the fraud set forth in this Complaint, Franklin Bank's share price fell from$19.00 on January 30, 2007

until it was rendered worthless during 2008.

157. By comparison, as shown in the attached Exhibit A, the stock price for Franklin

Bank's peers, as represented by the ACBQ Index', declined on average only 26.5% during the same

span. In percentage terms, Franklin Bank's shares lost 46.6% more than the share prices of its two

primary peers. These investor losses, therefore, were not attributable to economic or industry forces,

but, rather, were primarily caused by the revelations of Franklin Bank's previous overstatement of

its financial results.

158. The extent of Franklin Bank's problems related to the prior misstatements begin to be

revealed in the second half of 2007 in a series of progressive, partially corrective disclosure events,

including those mentioned above. These disclosures led to significant investor losses that were

substantially caused by the market's reaction to revelations making clear the prior overstatement of

financial condition.

'The NASDAQ Americas Community Bankers Index is a market value weighted index made up ofover 500 NASDAQ listed financial institutions.

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159. Through fall/winter 2007 and early 2008, Franklin Bank had begun to reach the limit

on its ability to continue to conceal its financial problems and "relevant truth" began to be revealed.

160. On November 26, 2007, the Company announced it would increase its allowance for

credit losses by $13.5 million, after tax. The Company's share price declined 17% on the day, and

another 3.5% the following day. A number of analysts, including RBC Capital Markets and Stene

Agee lowered their recommendations based upon on this news. Thus, the primary cause for the

decline in share price was the result of partial disclosure of the previous fraudulent misstatements.

161. On December 20, 2007, the Company announced that some $13.5 million in loans

were being reclassified as non-performing. On this news, the stock price fell more than 5%. Thus,

the primary cause for the decline in share price was the result of partial disclosure of the previous

fraudulent misstatements.

162. On February 1, 2008, following a conference call, during which Defendants discussed

an increase in loan loss allowance, the stock price fell some 13%. Further, on March 17, 2008, the

Company announced its internal investigation into accounting disclosure and other areas, causing

another stock price drop of almost 19%. Thus, the primary cause for the decline in share price was

the result of the partial disclosure of the previous fraudulent misstatements.

163. In April, 2008, the Company announced its agreement with AMEX to file its Form 10-

K, requested a hearing before the NASDAQ listing qualifications panel, and discussed with AMEX

its compliance plan. These partial disclosures, which were related to the Company's loan loss

problems, caused the stock price to drop 7% on April 4, 2008, 4.5% on April 7, 2008 and 14% on

April 22, 2008. Thus, the primary cause for the decline in share price was the result of the partial

disclosure of the previous fraudulent misstatements.

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164. On May 2, 2008 and May 5, 2008, the Company's stock price decreased 23% and

18%. Respectively, on analyst reports of erosion in asset quality, and the lowering of EPs targets.

Thus, the primary cause for the decline in share price was the result of the partial disclosure of the

previous fraudulent misstatements.

165. On May 19, 2008, the Company announced the conclusion of the Audit Committee

investigation and the restatement which caused the stock price to decline some 3%. Thus, the primary

cause for the decline in share price was the result of the partial disclosure of the previous fraudulent

misstatements.

166. Shortly thereafter, the Company's stock became worthless.

COUNT I

Alleged For Violations Of Section 10(b) Of The 1934 Act And Rule 10-5 PromulgatedThereunder Against Defendants

167. Lead Plaintiffs repeat and reallege the allegations set forth above as though fully set

forth herein. This claim is asserted against all Defendants.

168. During the Class Period, Defendants, and each ofthem, carried out a plan, scheme and

course of conduct which was intended to and, throughout the Class Period, did: (i) deceive the

investing public, including Lead Plaintiffs and other Class members, as alleged herein; (ii) artificially

inflate and maintain the market price of the Company's common stock; and (iii) cause Lead Plaintiffs

and other members of the Class to purchase the Company's stock at artificially inflated prices that

did not reflect the stock's true value. In furtherance of this unlawful scheme, plan and course of

conduct, Defendants took the actions set forth herein.

169. These Defendants: (a) employed devices, schemes, and artifices to defraud; (b) made

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untrue statements of material fact and omitted to state material facts necessary to make the statements

not misleading; and (c) engaged in acts, practices and a course of business which operated as a fraud

and deceit upon the purchasers of the Company's common stock in an effort to maintain artificially

high market price for the Company's common stock in violation of Section I O(b) of the 1934 Act and

Rule l Ob-5. These Defendants are sued as primary participants in the wrongful and illegal conduct

charged herein. The Individual Defendants are also sued herein as controlling persons of the

Company, as alleged below.

170. In addition to the duties of full disclosure imposed on Defendants as a result of their

making of affirmative statements and reports, or participation in the making of affirmative statements

and reports to the investing public, they each had a duty to promptly disseminate truthful information

that would be material to investors in compliance with the integrated disclosure provisions of the SEC

as embodied in SEC Regulation S-X (17 C.F.R. § 210.01 et seq.) and S-K (17 C.F.R. § 229.10 et seq.)

and other SEC regulations, including accurate and truthful information with respect to the Company's

operations, financial condition and performance so that the market prices of the Company's publicly

traded securities would be based on truthful, complete and accurate information.

171. Defendants, individually and in concert, directly and indirectly, by the use of means

or instrumentalities of interstate commerce and of the mails, engaged and participated in a continuous

course of conduct to conceal adverse material information about the business, performance,

operations, and prospects of Franklin Bank as specified herein. Defendants employed devices,

schemes and artifices to defraud, while in possession of material adverse non-public information and

engaged in acts, practices, and a course of conduct as alleged herein in an effort to assure investors

of Franklin Bank's value and performance and substantial growth, which included the making of, or

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the participation in the making of, untrue statements of material facts and omitting to state material

facts necessary in order to make the statements made about Franklin Bank and its business,

operations, performance, and prospects in the light ofthe circumstances under which they were made,

not misleading, as set forth more particularly herein, and engaged in transactions, practices and a

course of business which operated as a fraud and deceit upon the purchasers of Franklin Bank stock

during the Class Period.

172. The Defendants' primary liability, and controlling person liability, arises from the

following facts, among other things: (i) each was a high-level executive and director at the Company

during the Class Period; (ii) by virtue of their responsibilities and activities as a senior executive

officer and director of the Company, were privy to and participated in the creation, development and

reporting of the Company's internal budgets, plans, projections and reports; and (iii) each was aware

of the Company's dissemination of information to the investing public which he knew or recklessly

disregarded was materially false and misleading.

173. Defendants had actual knowledge of the misrepresentations and omissions of material

facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and

to disclose such facts, even though such facts were readily available. Defendants' material

misrepresentations and omissions were done knowingly or recklessly and for the purpose and effect

of concealing the truth regarding the Company's business, operations, performance, and prospects

from the investing public and supporting the artificially inflated price of its stock. As demonstrated

by their overstatements and misstatements of the Company's financial condition and performance

throughout the Class Period, Defendants, if they did not have actual knowledge of the

misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by

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deliberately refraining from taking those steps necessary to discover whether those statements were

false or misleading.

174. As a result of the dissemination of the materially false and misleading information and

failure to disclose material facts, as set forth above, the market price of the Company's common stock

was artificially inflated during the Class Period. In ignorance of the fact that the market price of the

Company's shares was artificially inflated, and relying directly or indirectly on the false and

misleading statements made by Defendants, or upon the integrity of the market in which the securities

trade, and/or on the absence of material adverse information that was known to or recklessly

disregarded by Defendants but not disclosed in public statements by Defendants during the Class

Period, Lead Plaintiffs and the other members of the Class purchased the Company's common stock

during the Class Period at artificially inflated high prices and were damaged thereby.

175. At the time of said misrepresentations and omissions, Lead Plaintiff and other

members of the Class were ignorant of their falsity, and believed them to be true. Had Lead Plaintiff

and the other members of the Class and the marketplace known the truth regarding the business,

operations, performance, prospects, and intrinsic value of Franklin Bank, which were not disclosed

the Company's securities during the Class Period, or, if they had acquired such securities during the

Class Period, they would not have done so at the artificially inflated prices which they paid.

176. By virtue of the foregoing, Defendants each violated Section l O(b) of the 1934 Act and

Rule lOb-5 promulgated thereunder.

177. As a direct and proximate result of Defendants' wrongful conduct, Lead Plaintiff and

other members of the Class suffered damages in connection with their purchases of the Company's

securities during the Class Period.

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COUNT II

Alleged For Violations Of Section 20(a) Of The 1934 Act Against Defendants

178. Lead Plaintiffs repeat and reallege the allegations set forth above as if set forth fully

herein. This claim is asserted against the Defendants as previously defined.

179. The Defendants were and acted as controlling persons of Franklin Bank within the

meaning of Section 20(a) of the 1934 Act as alleged herein. By virtue of their high-level positions

with the Company, participation in and awareness of the Company's operations and intimate

knowledge of the Company's actual performance, the Individual Defendants had the power to

influence and control and did influence and control, directly or indirectly, the decision-making of the

Company, including the content and dissemination of the various statements which plaintiffs contend

are false and misleading. The Defendants were provided with or had unlimited access to copies of

the Company's reports, press releases, public filings and other statements alleged by plaintiffs to be

misleading prior to and/or shortly after these statements were issued and had the ability to prevent the

issuance of the statements or cause the statements to be corrected.

180. In addition, the Defendants had direct involvement in the day-to-day operations of the

Company at the highest levels and, therefore, are presumed to have had the power to control or

influence the particular acts and transactions giving rise to the securities violations as alleged herein,

and exercised the same.

181. As set forth above, each Defendant violated Section 10(b) and Rule l Ob-5 by their acts

and omissions as alleged in this Complaint. By virtue of their positions as controlling persons of the

Company, the Individual Defendants also are liable pursuant to Section 20(a) of the 1934 Act. As

a direct and proximate result of Defendants' wrongful conduct, Lead Plaintiff and other members of

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the Class suffered damages in connection with their purchases of the Company's securities during the

Class Period.

PRAYER FOR RELIEF

WHEREFORE, Lead Plaintiff, individually and on behalf of the Class, prays for judgment

as follows:

(i) Determining that this action is a proper class action under Rule 23 of the Federal Rules

of Civil Procedure;

(ii) Awarding plaintiffs and members of the Class damages in an amount to be determined

at trial, together with interest thereon;

(iii) Awarding plaintiffs and members of the Class pre judgment and post judgment

interest, as allowed by law, as well as attorneys' and experts' fees and other costs; and

(iv) Awarding such other and further relief as this Court may deem just and proper

including any extraordinary equitable and/or injunctive relief as permitted by law or equity to attach,

impound or otherwise restrict the Defendants's assets to assure plaintiffs have an effective remedy.

JURY DEMAND

Plaintiffs demand a trial by jury.

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Dated: March 6, 2009Respectfully Submitted,

CAULEY WILLIAMS BATESBOZEMAN & PULLIAM, PLLC

jd%I, a^i ^t/vutis^ J. Allen CarneyArkansas Bar No. 94 22Admitted Pro Hac Vice11311 Arcade Drive, Suite 200Little Rock, Arkansas 72212(501) 312-8500 telephone(501) 312-8505 facsimile

Attorney in Charge for Lead PlaintiffFranklin Investor Group

Of counsel:

CAULEY WILLIAMS BATESBOZEMAN & PULLIAM, PLLC

Darrin WilliamsArkansas Bar No. 94069Admitted Pro Hac ViceRandall K. PulliamArkansas Bar No. 98105Texas Bar No. 24048058Admitted Pro Hac Vice11311 Arcade Drive, Suite 200Little Rock, Arkansas 72212(501) 312-8500 telephone(501) 312-8505 facsimile

and

Liaison Counsel:

HAGANS BURDINE MONTGOMERY& RUSTAY, PC

William Fred HagansState Bar No. 08685500Federal Bar No. 2457

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Jennifer RustayState Bar No. 24002124Federal Bar No. 239803200 Travis, Fourth FloorHouston, Texas 77006Telephone: 713.222.2700Telecopier: 713.547.495 0

CERTIFICATE OF SERVICE

I hereby certify that I have e -filed this pleading and accordingly forwarded a true andcorrect copy of the foregoing upon all known counsel pursuant to all applicable rules ofprocedure and/or The Southern District ' s Administrative Procedures for Electronic Filing inCivil and Criminal Cases.

^rt2L--Allen Carney

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Case 4:08-cv-01810 Document 100-2 Filed in TXSD on 03/06/2009 Page 1 of 1

I

COMPARATIVE RETURNS Page 1/24Range.;Jq.44. Period Daily 474 Day Period

Securities Crnc Prc Appr Total Ret Difference Annual Eq

1 FBTXO S.F• urt.• USP -94.67 % -94.67 % -67.12 -89.54 %

2 ACBQ Index USO -27, 55 % -27.55 % -21.98 %

3( - No dividends or coupons)

— -- -- 20

0

-20

. . .... . -60

i

-80FRANKLIN BANK

NASDAQ AMER COMM BKRS

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2MAR 30 27APR 25MAY 22JUN 20JUL 17AUG 145EP 120CT 9NOV ?DEC 4JAN08 1FEB 29 28MAR 25APRAustralia 61 2 9777 8600 Brazil 5511 3048 4500 Europe 44 20 7330 7500 Germany 49 69 9204 1210 Hong Kong 852 2977 6000Japan 81 3 9201 8900 Singapore 65 6212 1000 U.S. 1 212 318 2000 Copyright 2009 Bloomber g Finance L.P.

SN 798193 H195-865-0 06-Mar-2009 10,26:36

EXHIBITaa3

Documents

In re Franklin Bank Corp., Securities Litigation 08-CV ...securities.stanford.edu/filings-documents/1040/...worked at Franklin Bank during the pertinent time frame. These confidential