Upload
others
View
3
Download
0
Embed Size (px)
Citation preview
•ORIGINAL
U.S. DISTRICT COURTNORTHERN DISTRICT OF TEXA S
FILED
UNITED STATES DISTRICTCOURT MAY 2 7 10
NORTHERN DISTRICT OF TEXA S
DALLAS DIVISIONCLERK, U.S. CT COURT
$y
In re UICI SECURITIES LITIGATIO N
This Document Relates To :
ALL ACTIONS .
§ Master File No. 3-04 -CV-I 149-P
§ CLASS ACTION
DEMAND FOR JURY TRIA L
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THEFEDERAL SECURITIES LAWS
's f X 1 0
BRIEF OVERVIEW
0
1 . Plaintiffs bring this action on behalf of all persons who acquired UICI (or th e
"Company") common stock between February 7, 2002 and July 21, 2003 (the "Class Period"), an d
allege that defendants UICI, its CEO Gregory Mutz ("Mutz"), its CFO Mark Hauptma n
("Hauptman "), UICI's Academic Management Services Corp. ("AMS") subsidiary, and AMS' s
CEO Lloyd Alcorn ("Alcorn") violated the Securities Exchange Act of 1934 (the "Exchange Act")
Defendants reported materially misleading income at UICI and at its AMS subsidiary (whic h
originated and serviced private and federally guaranteed student loans), told investors that AMS ha d
generated more earnings in two quarters than it had in the previous three years of operating, and
attributed the subsidiary's solid results then and thereafter to its ability to obtain reduced borrowing
costs to fund student loans through the capital markets . They did so not only to position the
subsidiary for a sale, but also to inflate UICI's stock price so that defendant Mutz could dispose of
$6.3 million - 55% of his entire UICI holdings - at artificially inflated prices . Defendants'
misleading statements inflated UICI's stock price until an audit of AMS's operations by a potential
suitor forced defendants to reveal that UICI would take a $65 million charge to earnings (68% of
UICI's total earningsfor 2000, 2001, and 2002 combined), because AMS was in violation of loan
covenants that put it in default on more than $440 million in indebtedness, which it secured through
the capital markets that AMS was using to fund its operations . This shocking news caused the New
York Stock Exchange to halt trading in UICI's stock, the price of which collapsed nearly 30% in a
single day of trading and down 43% from its Class Period high .
2. UICI is a holding company that operates through various subsidiaries . UICI' s
operations are focused primarily on insurance-based businesses but it has ventured into financia l
services within the last several years . After suffering several devastating business collapses in 199 8
and 1999 , defendants UICI and Mutz wanted to focus UICI' s business on its core- insurance
-1-
~ rd
operations . It sold three separate subsidiaries in 2000 and unsuccessfully sought to sell its AMS
(previously named Educational Finance Group ("EFG")) student loan subsidiary in 2001 . AMS's
sale was impo rtant to UICI as the subsidiary had lost nearly $40 million for UICI between 1999 and
2001 and suffered from severe internal controls problems that permi tted accounting manipulations
and abuse at the executive levels of the subsidiary .
3 . Given this history, defendants needed to improve AMS's results to make AMS a
viable acquisition candidate and to convince the market that AMS had turned the corner . Between
February 2002 and July 2003, defendants reported nearly $9 million in operating income at AMS
and attributed the growth to a favorable interest rate environment and to reduced borrowing costs
that AMS was securing through the capital markets . According to defendants, AMS's access to the
capital markets was "expand[ing] AMS's ability to originate affordable student loans," was
generating "significant quarter over quarter increases in income," and was leading to "big changes"
and "real strong results ." Indeed, each time that defendants reported AMS's results, they claimed
that the "significant improvement" in operating results "resulted primarily from increased student
loan spread income (i.e ., the difference between interest earned on outstanding student loans and
interest expense associated with indebtedness incurred to fund such loans) attributable to a favorable
interest rate environment" and "a reduction in interest expense on corporate borrowings ."
4. These statements not only sparked the interest of several suitors for AMS, but they
also helped drive UICI's stock price from $13 .50 to $21 .22 in just over two months . But what
defendants failed to disclose was that defendants AMS and Alcorn were manipulating the
subsidiary's loan balances and were improperly securing cheap funding through the capital markets
by doing so . Despite the fact that the financing documents underlying AMS's financing facilities (its
exclusive source of funding for student loans) required 100% collateral and upwards of 90%
federally guaranteed loans, AMS generally, and Alcorn specifically, utilized at least $263 million in
-2-
loans that should have been securing AMS's largest financing facility ($440 million) and increased
the percentage of ineligible private loans in the portfolio to 43% (35 .5% more than the Indenture
permitted) to fund the very facility that defendants claimed had contributed to its extraordinary
results - "the profit and asset margins spread at AMS" in the first two quarters of the Class Period .
And by doing so, they put AMS in default on more than $440 million in indebtedness - indebtedness
that was then immediately due and payable under the terms of the Indenture agreement governing
the facility .
5 . Then, after successfully positioning AMS to be sold (both Sallie Mae and Partheno n
Capital ("Parthenon") were interested suitors), and after Mutz had cashed out of 55% of his holdings
for proceeds of more than $6 .3 million, UICI stunned the market by disclosing that it was going to
take a $65 million charge to earnings because its AMS subsidiary was in default on the financing
facilities as the facilities were undercollateralized and contained an excessively large percentage of
alternative (i.e ., private) loans . UICI then terminated defendant Alcorn for his role in the collapse
and sold AMS to Sallie Mae for a mere $25 million. Defendants' misleading statements have caused
UICI investors to lose millions .
STATEMENT OF THE CAS E
Background to the Class Period
6. UICI is primarily an insurance company that operates exclusively through different
operating subsidiaries . For 20 years, UICI has focused its operations on insurance and insurance-
related businesses . It has, however, ventured into the area of financial services and, at the time of
the Class Period, issued student loans through its AMS subsidiary . It also held a 45% interest in
HealthAxis .com ("HealthAxis") - a technology service firm that provides web-based connectivity
and applications solutions for health benefit distribution and administration . But since nearly 60% of
-3-
HealthAxis's gross revenues were derived from UICI itself, AMS was virtually UICI's only
financial services subsidiary during the Class Period .
7. The Company' s ventures into businesses unrelated to insurance have historically been
disastrous . After UICI's largest division, the Self Employed Agency division ("SEA"), spiraled
downward in 1998, the Company turned its focus largely to financial services and the sub-prime
credit card business . The Company was looking to the sub-prime credit card business to change its
fortunes after its stock price had collapsed nearly 60% in value when UICI had announced that the
SEA division generated a $7 million loss in the first quarter of 1998 - down from a quarterly average
of $20 million in earnings throughout 1997 (more than 60% of UICI's earnings during the time),
because of an increase in reserves for continuing losses in managed care products .
8 . The credit card business was initially a success for UICI - or so it seemed . Between
January 1999 and December 1999, UICI reported dramatically increasing revenue and income an d
attributed its successful run to an expansion of high-risk credit cards - credit cards that it was issuing
to impoverished individuals with extremely poor or very little credit history . UICI's successful run
in this financial services business drove UICI's stock price up nearly 50% in nine months (from $20
per share in December 1998 to $30 per share in September 1999) and back to the levels at which its
stock traded prior to the SEA division's collapse in 1998 .
9. UICI's purpo rted success, however , did not last for long . Only 11 months after the
Company turned its focus on this division, the Company announced that it would record a $79
million charge in Q4-99 (more than 75% of all operating income attributable to the credit card
business) and attributed the charge to increased reserves for credit card losses and a write-down of
credit assets . The news sent UICI's stock price tumbling from nearly $30 per share to less than $5 in
the middle of 2000 . The Company's jaunt into financial services was a disaster, and led t o
-4-
L
innumerable internal squabbles and a host of lawsuits from the damage that resulted from th e
division's collapse .
10. But it gave UICI' s insurance operations a chance to recover . In less than two years,
UICI's SEA division had gone from losing $4.8 million in 1998 to generating earnings of $50 .4
million in 1999, $70 .9 million in 2000, and $74.8 million in 2001 . As its insurance operations
recovered, and despite the scandal that was UICI's credit card operations, UICI's stock price began a
new run - increasing more than 400% in just two years (from $3 per share in 2000 to $13 per share
in February 2002 - the start of the Class Period) .
UICI Returns Its Attention to Insurance
11 . During this time, UICI decided to focus its energies doing what it did best -
insurance . As a result, it sold off (or attempted to sell) virtually every business that was unrelated to
insurance or that was not turning a profit . It sold Winterbrook Healthcare ("Winterbrook") on
July 1, 2000 - Winterbrook re-priced insurance claims and had contributed negligible revenues to
UICI; it sold its National Motor Club ("NMC") subsidiary on July 27, 2000 - NMC provided
automobile-related services to its club members ; it sold its United CreditServ, Inc. ("UCS")
subsidiary on September 29, 2000 - UCS was the last entity involved in UICI's remaining credit
card division that had caused millions in losses for UICI ; and it tried unsuccessfully to sell AMS t o
AFSA (a subsidiary of Fleet) in early 2001 .
12. Having initially failed in its a ttempt to sell AMS, UICI took steps to insure that its
sale would not fail again . Like its other financial services operations, AMS was a drain on UICI' s
resources, was not within those niche markets in which UICI wanted to focus, and thus had to be
sold. The division lost $19 million in 1999, $24 million in 2000, generated income of only $5 .4
million in all of 2001, and faced an environment of intense competition and decreasing interest rates
- facts that would negatively impact AMS's revenues and income going forward . As a result of a
-5-
t k. S
gloomy future and, as discussed at ¶¶16-20, a horrific controls environment in EFG's cor e
operations , UICI acquired the remaining 25% interest in AMS on August 3, 2001, and began to take
steps to position the subsidiary for a sale .
AMS's Turbulent History
13 . UICI entered the student loan business in May 1997 through its EFG subsidiary .
UICI's EFG subsidiary acquired Academic Management Services Inc. ("AMSI") in June 1999 and
changed its own name to AMS Corporation one-year later in August 1999 .1 EFG paid $58 .2 million
for AMSI with a $30 million loan from Bank of America and a significant contribution from UICI .
Through this acquisition, UICI sought to grow - and grow fast . In a press release dated June 15,
1999, UICI noted that the acquisition "will further solidify EFG's position as one of the leading
providers of FFELP loans in the country" and that the "`combination of AMS's market position and
EFG's unique, low cost student loan products, should allow us to reach our goal of $1 .5 billion in
loan originations by 2001 ." '
14. AMSI, however, ran a much different (and more conservative) ship than EFG .
Whereas EFG originated approximately $700 million per year in student loans and offered federally
secured loans, private insured loans, and high-risk private uninsured loans, AMSI originated loans
totaling only $150 million per year and it limited its originations to federally secured loans and
tuition installment plans - a far more conservative portfolio . EFG's focus on private (i.e .,
alternative) loans dramatically increased its volume and, accordingly, served to advance defendants'
desire for rapid growth .
' When used herein, EFG and/or AMS refers to UICI's wholly-owned subsidiary (whichchanged its name in or about August 1999 from Educational Finance Group to AcademicManagement Services Corp.) and the entity named as a defendant in this action . "AMSI" refers tothe Academic Management Services entity that EFG acquired in June 1999 .
-6-
t Y • SV N
15 . There were other dramatic differences between AMSI and EFG . According to CW9,2
a controller at AMSI prior to the acquisition and who continued to hold that position throughout the
Class Period, both AMSI and EFG issued loans to students and retained loan servicing providers to
service the loans that they issued . AMSI used Sallie Mae as it sole servicer while EFG used Sallie
Mae as well as six other entities . These entities sent AMSI and EFG "Servicer Reports" that
identified, among other things, the number and amount of loans issued in the reporting period.
These reports served as the foundation for AMSI's financial reporting to UICI and to the entities
investing in EFG's loan financings, which EFG utilized to fund student loans .
16. These reports were critical to AMSI (before merging with EFG) as they enabled th e
company to reconcile the amount of loans being serviced to the amount of loans originated . The
reconciliation process was the only way that AMSI could track missing loans and/or mistakes by the
service providers . According to CW9, who was the individual responsible for the reconciliation at
AMSI prior to the merger, EFG did not have a similar reconciliation process . EFG had not
designated any individual to review the Servicer Reports and did not reconcile the Servicer Reports
to its books . In fact, CW9 (who had earlier experienced four to five mergers involving AMSI)
described the EFG/AMSI post-acquisition process as "very odd" because EFG made no attempt to
integrate its accounting operations with AMSI's accounting department for standard month-end
reports and information in connection with the acquisition . The reason for the non-existent post-
acquisition process was simple - EFG did not have an internal controls process to integrate .
17. Problems with this non-existent control process, which only increased defendants '
desire to abandon EFG through a sale, surfaced shortly after the acquisition and revealed significant
manipulations and abuse in EFG's operations . These manipulations occurred at EFG's top executive
2 All confidential witnesses are referred to throughout the complaint as "CW . "
-7-
levels . CW9 explained that Ernst & Young forced EFG to write-off over $9 million in loans in Q4-
99 that EFG's Servicer Reports revealed as unsupportable . According to CW9, he/she
unsuccessfully assisted Sean Fitzpatrick and others in Ernst & Young's Boston office in tracking
down the missing loans and suspects that records supplied to Ernst & Young in its previous year's
audit were manufactured . CW9 explained that defendant Mutz, Glenn Reed (UICI's General
Counsel) and defendant Alcorn were notified of the over $9 million write-off. Worse, Steve Galvin,
EFG's President and Chief Executive at the time of the merger, obligated EFG to options totaling
$750,000 without disclosing the obligation. CW9's department or group sent the wire transfer to
satisfy the obligation at the request of the bank involved in the transaction .
18 . UICI was fully aware of these problems . As CW9 explained, UICI in general, and
Mutz in particular, shut down EFG's entire operation in South Yarmouth, Massachusetts, moved
EFG's computers, files and personnel to AMS's headquarters in Swansea, Massachusetts, and fired
most of EFG's management except for key individuals, including Alcorn, Melvin "Bud" Merce r
("Mercer") (Portfolio Manager), and Joe Kunkel (Compliance Manager) . CW9 explained that in
December 1999/January 2000, he/she received a phone call from Bill Bianchi, AMS's Vice
President of Operations, who asked CW9 to travel to EFG on a Friday under the guise of an
accounting meeting and to wait until everyone was gone before moving EFG's assets . In fact, CW9
stated that he/she was present when defendant Mutz appeared in person and directed Alcorn, CW9
and others to shut down EFG . EFG's Board of Directors, including defendant Mutz, then
completely restructured EFG . They replaced Galvin with William A . ("Skip") Hastings as EFG's
President and Chief Executive, they appointed defendant Alcorn as Treasurer and Secretary of EFG,
and they appointed CW9 as controller of both EFG and AMSI . Not once did they disclose the
reasons for doing so .
-8-
19 . EFG's reorganization, however, was a direct result of its non-existent control s
environment . In fact, CW9 explained that defendant Alcorn delegated to him/her the task of creatin g
an internal control environment because EFG's controls were "a mess to put it mildly." Alcorn
instructed CW9 to focus strictly on accounting and not on portfolio management as EFG had n o
accounting system, no record keeping system, and no one keeping track of its operations . Other
evidence supports CW9's version of events . On April 4, 2000, Ernst & Young notified UICI's board
of directors that AMS's internal controls were a disaster in material aspects of its operations :
With respect to UICI's AMS operations, Ernst & Young LLP identified as materialweaknesses AMS' failure to maintain timely and accurate accounting records for thepurchasing and originating of student loans, the failure to reconcile on a regularperiodic basis its student loan receivables assets with the records of the student loanservicers, certain inadequacies in AMS' systems leading to delays in closing AMS'books on a timely basis, the lack of a formal review and approval process on the partof UICI (the parent) with respect to transactions entered into by AMS (thesubsidiary), and certain inadequacies in AMS' methodologies for accounting fordeferred student loan premiums and origination costs .
20. Not only did these problems significantly jeopardize EFG's operations, they als o
caused Bank of America to call its $30 million loan that EFG had used to purchase AMSI . In fact ,
Bank of America gave EFG only six months to generate the funds necessary to repay the loan, whic h
resulted in one of defendant Alcorn's early loan manipulations . According to CW9, Alcorn
generated the funds by selling in mid-2001 $ 100 million in loans securing one of EFG's special
purpose entities used to securitize EFG's loans ("EFG-III"), and used $ 10 million- $ 15 million
inappropriately from the sale (which should have been used to pay down the securitization ) to repay
the loan . The remaining $ 15 million-$20 million balance came in the form of operating cash and a
premium from Alcorn's sale of $100 million in loans .
21 . As the foregoing demonstrates , UICI's AMS subsidiary was a mess that defendants
had to eliminate from UICI 's operations . But to do so, they had to improve its performance to
prevent an enormous loss in the subsidiary, and they had to correct AMS's problems before
-9-
permitting a suitor to investigate its operations through due diligence . Accessing the markets for
cheap capital was the only approach .
AMS's Post-Merger Access to the Securities Markets for Low-Cost Funding
22. AMS (after the merger) generated its revenue in primarily two ways . It either
originated and serviced the loans and generated income on the spread (i.e ., the difference between
interest earned on outstanding student loans and interest expense associated with indebtedness
incurred to fund such loans) or it originated loans on the open market and resold those loans for a
profit . AMS's fortunes, based on both its revenues and its cost of capital, turned on market interest
rates .
23 . AMS initially funded its lending business primarily with secured lines of credit an d
commercial paper facilities extended or administered by various financial institutions . After initial
funding, AMS typically refinanced groups of loans on a more structured basis by transferring loans
to bankruptcy remote, special purpose entities, which, in turn, issued debt securities secured by the
loans . AMS operated through several special purpose entities, including EFG-II, III, and IV, EFG
Funding, AMS-1 2002, AMS-2 2002, and AMS-3 2003 . In 1999, the Company created through the
EFG special purpose entities approximately $1 .3 billion of such structured funding facilities in three
separate transactions and maintained this level throughout the Class Period . EFG-III and EFG
Funding, which originated on August 5, 1999, were governed by the same Indenture and were, by
far, the largest of AMS's special purpose entities, totaling $515 million - or almost 40% of all
facilities issued in 1999 .
The Start of the Class Period - Defendants Tell Investors that AMS Is Securing CheapCapital and Conceal Their Loan Manipulation s
24. Accessing the capital markets was critical for AMS to generate a profit as it gave the
subsidiary access to capital at a significantly reduced rate. As defendant Alcorn himself reported t o
-10-
the public on February 7, 2002 (the start of the Class Period), access to the capital markets enabled
AMS to compete in a very competitive student loan business and contributed to its growth :
"[T]he auction-rate note transaction expands AMS's ability to originate affordablestudent loans and adds to our funding base at a very competitive cost . In recentyears, AMS has become a regular participant in the capital markets in support of ourloan programs, and we plan to continue to access the capital markets in support ofour growth ."
25 . But the competitive cost came at a price . In return for access to the capital markets,
the financing documents underlying the commercial paper or securitizations required AMS to
collateralize the facilities with student loans and to do so with a very high rate of loans that were
federally guaranteed . The EFG-III facility required AMS to collateralize at 100% and to maintain a
student loan composition of no less than 92 .5% of federally guaranteed student loans . In other
words, the face amount of the student loans being held for collateral had to equal the face value of
the notes and AMS could include no more than 7 .5% of alternative (i.e ., private) student loans in the
collateral . Only by securing AMS's commercial paper or securitizations in this manner would AMS
be able to secure the favorable rates that the capital markets provided . Without it, AMS's portfolios
would consist of higher risk private loans that would significantly increase the cost of the
indebtedness that AMS incurred to fund its student loans - if it could fund it at all .
26. The demands of the capital markets, however, conflicted with those of UICI. Given
AMS's historically weak performance, its dismal outlook, its disastrous control environment, and its
history of high-level manipulation, UICI generally, and Mutz specifically, demanded that AMS
improve its performance to increase its attractiveness as an acquisition candidate . As CW1, an
executive who worked in AMS's compliance department, put it, UICI's expectations were too high
and AMS (and defendant Alcorn) had no choice but to expand its alternative loans if it were to
satisfy UICI's demands because alternative loans were far easier to secure than federally guaranteed
loans as the government limits the amount that each student can borrow to an amount far less than
-11-
k 0 9
their private loan counterparts . CW1, who built his/her career in the student loan industry ,
confirmed this obvious fact .
27. To expand its alternative loan program , however, AMS would have to access th e
capital markets again - and it did so on January 30, 2002 by selling $335 million of auction rate
notes ("AMS-1 2002") that would give AMS the flexibility to issue more student loans . More
student loans meant more spread income for AMS and more spread income meant better reported
results . Indeed, defendant Mutz claimed that the transaction "illustrate[d] the continued confidence
of the credit and capital markets in both UICI and AMS, even in this tougher economic period," and
defendant Alcorn noted that "the auction-rate note transaction expands AMS's ability to originate
affordable student loans and adds to our funding base at a very competitive cost ." He added that
"[i]n recent years, AMS has become a regular participant in the capital markets in support of our
loan programs, and we plan to continue to access the capital markets in support of our growth ."
28 . But defendants AMS and Alcorn failed to mention that they used loans that should
have been collateralizing EFG-III to collateralize AMS-1 2002 and then increased their alternativ e
loan program to generate the results that UICI and defendant Mutz were demanding despite the fact
that doing so would cause AMS to violate the covenants in the financing documents . As CW2, an
executive in the compliance department at AMS Servicing Group, put it, defendant Alcorn wa s
"piggybacking portfolios" by using collateral already securing one portfolio (e .g., EFG-III) as
collateral for a new portfolio (e .g., the auction rate notes) . As evidence of this, the $263 million
shortfall in collateral at EFG-III announced at the end of the Class Period is virtually identical to th e
$269 million in student loans that Alcorn and AMS used to collateralize the January 30, 200 2
auction rate notes . It is also very similar to the $220 million deficiency that CW9 raised wit h
defendant Alcorn in early 2002, as alleged at ¶¶48, 85 . Importantly, AMS had to use loans for
AMS-1 2002 that should have been collateralizing EFG-III because AMS had maxed out as o f
-12-
0 9
December 31, 2001 its $1 .3 billion in available financing and had very little, if any, available student
loans to collateralize future financings . As of that date, AMS had $1 .3 billion in financing facilities
and $1 .2 billion in student loan assets .
29 . As a result of this new facility and their focus on alternative loans, AMS and Alcorn
reported to UICI $4 .1 million in operating income in Q I -02 and $4 .4 million in Q2-02 - 150% of the
total operating income that AMS generated in all of FY-01 . Defendants AMS and Alcorn issued
these results to UICI knowing that UICI would disseminate them to the market, which UICI ha d
done in every quarter since Alcornjoined EFG in 1999 . In turn, UICI' s press releases and Securities
and Exchange Commission ("SEC") filings issued these misleading results separately and
consolidated the results into UICI' s own results. UICI issued to investors the following misleading
financial results in Q1-02 and Q2-02 :
01-02 02-02UICI Operating Income $17 .8 million $9.8 millionUICI Net Income $12 .1 million $5 .7 million
AMS Operating Income $ 4 .1 million $4.4 million
30. Both UICI's operating and net income and AMS's operating income were materiall y
misleading because several of AMS's commercial paper and securitization facilities were
undercollateralized and its largest facility, EFG-III, was undercollateralized by nearly 60% and
contained an inordinately high percentage (more than 40%) of alternative loans in violation of the
loan covenants in the governing Indenture . The interest rates that AMS was securing from the
capital markets, therefore, were artificially deflated . Only by gaining access to cheap capital and
increasing their focus on alternative loans were AMS and Alcorn able to generate these dramatic
(and extraordinarily improved) results . Indeed, given UICI's need to change its business plan in
2003 from originating and servicing loans to originating and selling loans because of the collateral
issues at EFG-III and other AMS special purpose entities (which resulted when defendants finally
disclosed the truth), the collateral issues that existed in Q1-02 and Q2-02 would have required th e
- 13 -
same. AMS's reported income, therefore, was misleading to the tune of $4 .1 million in Q1-02 an d
$4.4 million in Q2-02. Had it disclosed the truth about the components of AMS' s collateral , EFG-III
and the other entities would not have had the ability to access the capital markets and its incom e
would have been materially lower than the reported $8 .5 million in the combined periods . In fact ,
but for manipulating the collateral, AMS's operations would have been limited to originating an d
selling loans on the open market .
31 . Defendants knew or were reckless in disregarding that their statements were
misleading . AMS's reporting process for the "Monthly Financial Statement Package" that it sent t o
UICI and for its "Investor Reports" that AMS sent to its securitization investors to demonstrate
compliance with its one-for-one collateral requirements, puts defendants' scienter into perspective .
By early 2002, CW9 had essentially resolved many of the issues that AMS had faced with its
accounting controls environment in 2000 . But there was an aspect that CW9 could not address - the
controls environment surrounding AMS's monthly and quarterly "Investor Reports." As CW9
explained it, Alcorn had delegated to him/her the responsibility of establishing an accounting
controls environment for AMS and left the portfolio reporting environment to the portfolio group,
which consisted of Mercer and Paul Gennari ("Gennari") . The "Monthly Financial Statement
Package" was the responsibility of the accounting group and contained accurate information
throughout the Class Period .
32. Each month, CW9 specifically, and AMS generally, prepared the "Monthly Financial
Statement Package" that CW9 or the accounting manager, Kathy Healey, sent by electronic mail to
UICI executives, including Randy Fear (UICI Accounting), defendant Hauptman, and Pat
McCloughlin (UICI Board Member) . According to CW9, the "Monthly Financial Statement
Package" was approximately 30 pages in length and included income statements and balance sheets
for individual AMS entities, loan originations, loan sales and pay-off information, detaile d
-14-
information on funds borrowed by AMS to fund new loans, loan volume, and interest rate
information . While defendant Alcorn encouraged CW9 to use the Servicer Reports that were being
manipulated by the portfolio group as alleged at ¶¶33-35, CW9 declined and utilized original
Servicer Reports that he/she obtained directly from the servicer to reconcile with AMS's accounting
records to ensure that the amount of loans serviced reconciled with the amount of loans issued in a
given period. According to CW9, "all of the information in the financial statements was not
manipulated and matched the [hard copy] Servicer Reports" and "the loan information in the
financial statements was reconciled to the non-manipulated Servicer Reports on a monthly basis ."
Because the accounting group worked directly with original documents obtained directly from the
servicer, their reports were not subject to manipulation .
33 . The same was not true of the "Investor Reports ." The Servicer Reports that th e
servicing companies sent in "electronic" form, which the portfolio group utilized to prepare the
"investor reports," were easily manipulated. Initially, the electronic version of the Servicer Reports
was sent to AMS's Information Technology ("IT") department . The IT department then sent the
electronic information to Mercer whom Alcorn instructed to change the loan information before
sending it to Gennari, who was responsible for preparing and distributing AMS's Investor Reports
for every EFG entity other than EFG-III . According to CW9, who discovered the fraud in July 2003,
Alcorn directed Mercer to manipulate the tapes by having codes changed to give the appearance that
certain loans were affiliated with EFG-III when they were not . CW9 described these codes as six
digit numbers with two or three digit extensions . Thus, by the time Gennari received the tapes, the
EFG-III loan information had already been manipulated. CW9 confirmed that Gennari was unaware
of the manipulations .
34 . With respect to EFG-III, Alcorn prepared the reports himself after receiving a draft
from Gennari because, as defendant Alcorn told Gennari, it was just an easier means of preparation .
-15-
• C 7
Gennari performed the initial work and then emailed a spread sheet with the collateralizatio n
information to Alcorn who then fraudulently doctored the reports . CW9 stated that Alcorn would
fabricate loans, take loans from other entities and label them as EFG-III loans, falsely reclassify non-
federal loans as federal loans, and would manipulate the smallest details of the Investor Report s
(including school and loan types) to give the appearance of compliance . Given the intricate detail s
of the manipulation, CW9 explained that Alcorn must have devoted a significant amount of time to
rearranging the numbers for EFG-III . Alcorn then sent the false and manipulated EFG-III report
back to Gennari for publication to UICI and other institutions investing in AMS securitizations ,
including investment banks selling the securitizations and insurance companies that issued insuranc e
policies backing the securitizations .
35. The following diagram depicts how UICI received AMS's reports :
Servicer -"Servicer Reports" . CW9 Unmanipulated ,► UICI"Monthly Financia l
Statement Package"
"Servicer Reports" IT Departmen tElectronic
Bud Merce r
Paul Gennari
(EFG - III)
Alcorn
Manipulated -"Investor Reports"
-16-
0 9
36. As this diagram demonstrates , all defendants Mutz and Hauptman had to do to
discover Alcorn's manipulations was to look at the Monthly Financial Statement Package and the
corresponding Investor Reports . While the Monthly Financial Statement Package itself would have
alerted defendants to serious discrepancies in AMS's securitization balance and its required
collateral, a simple comparison of the Monthly Financial Statement Package to the Investor Reports
- both of which UICI, Mutz and Hauptman received throughout the Class Period, would have
revealed Alcorn's fraudulent activities . From early 2002 through July 2003, UICI, Mutz and
Hauptman were receiving both accounting and Investor Reports which, if compared, would have
shown the discrepancy in loan numbers . CW9 said that one could look at the two versions of the
reports line by line and clearly recognize Alcorn's manipulations .
37. Even with defendants accessing the capital markets improperly and focusing o n
increasing AMS's alternative loan program, defendants AMS and Alcorn reported to UICI disma l
results for Q3-02 ; $23.1 million in revenue and a $1 .6 million loss - and they did so knowing tha t
UICI would report these results to the market separately and in consolidated results for UICI .
Accordingly, UICI (with defendant AMS and Alcorn's knowledge) issued the following misleadin g
results to UICI' s investors through press releases and SEC filings :
03-02
UICI Operating Income $19 .2 million
UICI Net Income $16.2 million
AMS Operating Income (Loss) ($1 .6 million )
38. AMS's dismal results , which were misleading (and caused UICI' s results to be
misleading) in the same way as UICI's and AMS's results in the prior two quarters, increased UICI's
urgency to sell AMS and, as CW3, a former executive in AMS's Human Resources department, put
it, resulted in the rape of one company (AMS) by another (UICI) . According to the witness, UICI
was "not happy with AMS's returns or reporting and wanted money ." Defendants UICI and Mutz
moved Mutz's executive assistant, CW4, to AMS in August 2002 to communicate with Mutz during
-17-
the sales process, became significantly more involved in directing AMS's activities (including cal l
center operations and decisions relating to financing), fired AMS's former CEO Tim Clark durin g
Thanksgiving, and appointed defendant Alcorn as Clark's replacement . Defendant Alcorn then
established a "Swat Team" of middle-management from AMS to save the Company $3 million in
2003 to ward off the very real risk of bankruptcy. He told the team "You know the business, now
save the business . "
39. The Swat Team took their directive seriously and implemented draconian measures to
try to cut costs . According to CW5, a former Senior Loan Consultant at AMS, they cut the annua l
holiday party in December 2002, they cut back on overtime and bonuses, and they began laying-off
members of management in order to reach the $3 million goal set by Alcorn . These measures were
confirmed by CW3 who explained that he/she was terminated by defendant Alcorn in early 2003
(following other selective terminations) to "trim the fat" to make AMS a more attractive company to
sell to the highest bidder . In fact, defendant Mutz signed an indication of interest with Parthenon on
June 2, 2003 that started the process for Parthenon to acquire AMS . The fact that UICI sold AMS to
Sallie Mae just months later (on October 30, 2003) supports the witnesses' accounts that UICI was
desperate to sell AMS and was seeking the highest bidder .
40 . At the same time that UICI was intensifying its efforts to sell AMS, defendan t
Alcorn's plan to access the capital markets with improperly collateralized po rtfolios reared its head
with AMS employees other than CW9. According to CW1, the problems with AMS's
securitizations (which were disclosed by UICI at the end of the Class Period), were discovered by
others at AMS in October /November 2002 . In addition to the discovery made by CW9 in EFG-III in
early 2002 , CW1 explained that the problems existed at EFG-III , LP, EFG Funding, and at AMS-1
2000 . Consistent with the explanations of CW9, CW I noted that EFG-III was by far the biggest
special purpose entity with collateralization issues .
-18-
41 . According to C W I , Alcorn informed C W 1 in October or November 2002 that he ha d
received a letter from MBIA Insurance Corporation ("MBIA") regarding AMS's relationships with
Royal & Sun Alliance ("Royal") . As CW 1 explained, AMS's alternative loans were guaranteed by
two Royal insurance subsidiaries, which had refused to pay claims on loans it had insured for a
company unrelated to AMS. In response to litigation between MBIA and Royal, MBIA "put the
perception out on Wall Street" that all Royal insured paper was "worthless ." As a result, Royal
sought to ensure that every single student loan company with which it was doing business was
conforming to the covenants of the financing agreements . Adhering precisely to the covenants
meant that AMS had to have the correct proportion of federally guaranteed loans in the EFG entities
and the correct amount of collateral .
42. As CWI quickly determined , however, AMS had too many alternative loans in the
EFG entities, which resulted in AMS not conforming properly to the covenants - covenants that
permitted alternative loans of no more than 7 .5% ofthe portfolio . After researching the matter, CWI
verbally reported to Alcorn around late October 2002/early November 2002 that EFG-III was no
longer in compliance with the covenants, which defendant Alcorn already knew from his
unequivocal control of the collateral underlying each of the EFG facilities and his efforts to
manipulate EFG-III's loan portfolio to secure additional capital in January 2002 . CW1 also sent an
email to Alcorn at the same time explaining that the EFG-III entity held a higher percentage of
alternative loans than was allowed by the covenants . The e-mail explained that it would be
necessary to move "performing assets" (i .e ., federally guaranteed loans) into EFG-III to correct the
imbalance . While defendants AMS and Alcorn knew or recklessly disregarded that they were
violating the loan covenants since January and February 2002, as explained by CW9, CWI
explained that he personally provided defendant Alcorn actual knowledge that the same collateral
issues leading to AMS's demise in July 2003 existed in October 2002 and earlier .
-19-
0 0
Mutz Disposes of 55% of His UICI Holdings While Rushing to Sell AMS
43. At the same time that UICI was rushing to sell AMS, defendant Mutz continued t o
report solid results in the subsidiary . He told investors that UICI had generated $20 million i n
revenue in Q 1-03 (up from $12 million a year earlier), and that UICI's AMS division had generate d
operating income of $ 1 .5 million . While AMS's income had decreased from the prior year, Mut z
told investors on a conference call that "AMS [had] significant moves there" and that AMS was
"still getting the benefit of a tailwind" from the Federal Reserve's interest rate reaction to th e
tragedies of September 11, 2001 . These statements were materially misleading for the same reason s
that UICI's and AMS's repo rted results for FY-02 were misleading .
44. Then, only three days later (and just six weeks before UICI terminated his position as
President and CEO), Mutz cashed out 55% of his holdings for proceeds totaling $6 .3 million - at a
time when UICI's stock price had jumped 44% in the previous two months of trading and whe n
Mutz had sold only 9,600 shares (or 1 .1 % of his holdings) since he arrived at UICI in 1999 :
Date Shares Price Proceeds Common StockHoldings
Percentage of CommonStock Holdings Sol d
06-May-03 207,104 $13.67 $2,831,11 2
08-May-03 265,507 $13.18 $3,499,382
857,798 55 .1 %
45 . On May 22, 2003, UICI terminated Mutz's position as CEO . Not surprisingly, UICI
announced at the same time what defendants had been attempting to do since the credit card fiasco i n
1999, saying "that the Company has decided to concentrate its time, effort and resources in the thre e
niche health insurance markets in which it plays a significant leadership role ." And despite the fac t
that AMS had seemingly tu rned the corner from losses in 2000 to earn ings in 2002, UICI said that
"[g]oing forward, UICI will review all current activities that are not directly serving [its] three niche
markets -" self-employed health, student health, and limited benefit plans for low wage earners .
AMS's operations obviously did not fall within these "niche" markets .
-20-
46. The reason for AMS's omission from this list came to light just four weeks later on
July 21 , 2003 . That day, UICI announced that its AMS subsidiary had collapsed and that it was
suspending defendant Alcorn from his position with AMS . Much in the same way that UICI' s
subsidiary, SEA, collapsed in 1998 amid improper reserving practices, and UICI's other subsidiary ,
UCS, collapsed in 1999 for the same reason , AMS collapsed because it was accessing the capita l
markets improperly - which it had been doing since January 2002 . It did not have sufficient
collateral for its credit facilities (it was $263 million (59 .7%) undercollateralized for the EFG-II I
facility) and had improperly stocked its collateral with private loans (private loans comprised 43 .6%
of the portfolio when the Indenture permi tted only 7 .5%). UICI stated that it would take a $65
million charge to earnings because of the fiasco (68% of all the earnings that UICIgenerated in
fiscal years 2000, 2001, and 2002 combined), which caused the New York Stock Exchange t o
suspend its stock from trading . UICI 's stock price collapsed in turn - falling nearly 30% in a single
day of trading (from $16.85 on July 18 , 2003 to $12 per share on July 21, 2003) .
47. After disclosing these devastating facts, UICI then caused AMS to stop originatin g
and servicing loans and permi tted it only to originate and sell student loans on the open market,
which is a far less lucrative venture than originating and servicing loans . It then sold AMS to Sallie
Mae for $25 million - a pi ttance of the $65 million value that UICI carried on its books throughout
the Class Period .
Parthenon Discovers Defendant Alcorn's Fraudulent Activities During Due Diligenc e
48. CW9 was directly involved in discovering defendant Alcorn's fraudulent activities .
In connection with Parthenon's due diligence performed in June 2003 in connection with it s
potential purchase of AMS, Parthenon (specifically William Slocum and Jeffrey Stein) discovered
the discrepancy between the commercial paper balance in the facilities and the loans held to secure
those balances - the same discrepancy that CW9 had raised with Alcorn in February/March 200 2
-21-
and that C W 1 had raised with Alcorn in October/November 2002 (and which was obvious to anyone
who had access to and read the Investor Reports and Servicer Reports) . Messrs . Slocum and Stein
discovered the discrepancies when they inquired about an approximately $180 million intercompany
receivable balance due to EFG-III - a balance that was highlighted in the Monthly Financial
Statement Package that CW9's group sent to Hauptman . According to CW9, he (and independently
Alcorn) attempted to assure Parthenon that AMS was in compliance by providing them with the
same explanation that Alcorn had provided to CW9 more than a year earlier (i.e ., that certain loans
could be moved from various other entities to EFG-III) . Parthenon, however, asked for more
substantive proof, which prompted CW9 to investigate further .
49. When CW9 could not find the loans to account for the difference, he/she approache d
Alcorn. Alcorn responded by saying to CW9 "you don't understand" and then provided CW9 with
documents to justify the explanation . CW9 then discovered that the loans were being improperly
manipulated as alleged at ¶¶33-35, 85 . After alerting UICI to the collateral issues, CW9 discovered
the sordid details of Alcorn's manipulative scheme, including how he manipulated the electronic
versions of the Servicer Reports that served as the foundation for the Investor Reports distributed to
UICI and AMS's investors as alleged at id.
JURISDICTION AND VENUE
50. The claims asserted herein arise under and pursuant to §§10(b) and 20 (a) of the
Exchange Act [15 U.S.C . §§78j(b) and 78t(a)], and Rule I Ob-5 promulgated thereunder by the SEC
[17 C .F.R. §240 .10b-5] .
51 . Venue is proper in this district pursuant to §27 of the Exchange Act . Many ofthe acts
and transactions giving rise to the violations of law complained of herein, including the preparation
and dissemination to the investing public of false and misleading information , occurred in this
-22-
0 0
district . UICI has its principal place of business at 9151 Grapevine Highway, North Richland Hills ,
Texas .
52 . In connection with the acts, conduct and other wrongs complained of, the defendants ,
directly or indirectly, used the means and instrumentalities of interstate commerce, the United State s
mails, and the facilities of the national securities markets .
THE PARTIES
53. Lead Plaintiffs Charles Patterson and Josh Millet ("Lead Plaintiffs") purchased UIC I
common stock during the Class Period and were damaged thereby .
54. Defendant UICI is headquartered in No rth Richland Hills, Texas, and represents itsel f
as a diversified financial services company offering financial services, health administrative services
and insurance through its various subsidiaries and divisions to niche consumer and institutional
markets. UICI's stock is traded in an efficient market on the New York Stock Exchange and its
corporate offices are located at 9151 Grapevine Highway, North Richland, Texas 76180 .
55 . Defendant AMS is headquartered in Swansea , Massachusetts and, markets, originates,
funds and services primarily federally guaranteed student loans . During the Class Period, AMS was
a wholly owned subsidiary of defendant UICI and disseminated misleading statements to UICI's
investors through UICI's press releases and SEC filings, which were issued from North Richland,
Texas . AMS's corporate offices are located at 463 Swansea Mall Drive, Swansea, Massachusetts
02777 .
56 . Defendant Gregory T . Mutz was, during the Class Period, President, Chief Executiv e
Officer and a director of UICI until July 1, 2003, Vice Chairman of UICI after July 1, 2003, an d
Chairman and a director of AMS throughout the Class Period . During the Class Period, Mutz sol d
482,211 UICI shares for proceeds of $6 .3 million when he knew, or recklessly disregarded, that
-23-
0 0
UICI's financial results and AMS's financial results were misleading . Defendant Mutz can be
served at 8 Rock Ridge Road, Barrington, Illinois 60010 .
57. Defendant Mark D . Hauptman was UICI's Vice President and Chief Accounting
Officer until June 1, 2002, at which time he was promoted to Vice President and Chief Financial
Officer of UICI . Hauptman joined UICI in 1988 as Controller . He received a Bachelor of Science
degree in accounting in 1979 . During the Class Period , Hauptman sold 6,800 UICI shares for
proceeds of $104 ,532 when he knew, or recklessly disregarded , that UICI's financial results and
AMS's financial results were misleading . Defendant Hauptman may be served at 4109 Grace Lane,
Grapevine, Texas 76051 .
58 . Defendant Lloyd Alcorn was , during the Class Period , President and Chief Financia l
Officer of AMS until December 2002, at which time he was promoted to Chief Executive Officer .
UICI placed Alcorn on leave on or about July 21, 2003 and terminated his position with AMS on or
about August 15, 2003 . According to percipient witnesses, Alcorn was responsible for moving
collateral in and out of AMS's student loan portfolios and compiling the reporting data for certain
financial institutions and knew that the portfolios were under-collateralized and did not comply with
the loan eligibility provisions of the financing documents supporting the portfolios . Alcorn may be
served at 104 Whistling Wind Trail, McGregor, Texas 76657 .
59. Defendants Mutz, Hauptman, and Alcorn are collectively referred to herein as the
Individual Defendants .
60. Defendants are liable, jointly and severally, as direct participants in the wrongs an d
schemes complained of herein . Defendants had a duty to promptly disseminate accurate and truthful
information with respect to UICI's products, operations, financial condition and future business
prospects or to cause and direct that such information be disseminated so that the market price of
UICI's shares would be based on truthful and accurate information .
-24-
0 0
FALSE AND MISLEADING STATEMENT S
61 . The Class Period begins on February 7, 2002, when the Company issued a pres s
release entitled "UICI Completes $30 Million Bank Credit Facility ." In addition to announcing the
credit facility, the release also stated that AMS had completed the sale of $335 million auction rate
notes that, according to Mutz, illustrated the continued confidence of the credit and capital markets
in UICI and AMS during a rough economic environment . Defendant Alcorn used this press release
as an opportunity to explain how the capital markets provided AMS access to capital at competitive
rates and attributed AMS's growth to its access to the capital markets :
UICI (NYSE: UCI)(the "Company") today repo rted that it has completed twoseparate financings , the proceeds of which will be used for general corporatepurposes and to fund the student loan origination activities of UICI 's AcademicManagement Services Corp . ("AMS") subsidiary .
The Company also reported that on January 30, 2002 AMS completed the
sale of $335 .0 million in auction rate notes (the "Notes") backed by federally- and
privately-insured student loans held in the AMS portfolio . The Notes received creditratings of "AAA" from Moody's Investor Services and Fitch Inc ., representing thehighest investment grade rankings assigned by these organizations . Banc of AmericaSecurities, LLC acted as placement agent for the Notes . The proceeds from the saleof the Notes will be used to fund new student loans .
"These transactions illustrate the continued confidence of the credit andcapital markets in both UICI and AMS, even in this tougher economic period," saidGregory T . Mutz, President and CEO of UICI .
According to Lloyd C . Alcorn, Chief Financial Officer ofAMS, "the auction-rate note transaction expands AMS's ability to originate affordable student loans andadds to our funding base at a very competitive cost . In recent years, AMS hasbecome a regular participant in the capital markets in support of our loan programs,and we plan to continue to access the capital markets in support of our growth ."
62. Defendant Alcorn's statements attributing AMS's growth to the competitive rates that
it was obtaining through the capital markets were misleading . As the sole individual at AM S
responsible for collateralizing the portfolios that AMS issued in the capital markets, defendant
Alcorn knew that AMS was obtaining that "competitive" cost in a manner that violated th e
-25-
0 9
covenants in the financing documents. While the financing documents required AMS's financing
subsidiaries, such as EFG-III, to collateralize its portfolios at 100% and with at least 92 .5% federally
guaranteed loans, AMS generally and defendant Alcorn specifically, under-collateralized many of
the portfolios that it was using to secure capital from the markets and filled those portfolios with an
improperly high amount of alternative loans . For example, defendant Alcorn used $263 million in
student loans that should have been collateralizing AMS's EFG-III facility in order to collateralize
the new $335 million facility . As UICI explained in its 2001 Form 10-K, AMS had secured the
facility with $269 million in student loans and did so only weeks after announcing that the amount of
student loans outstanding for AMS totaled virtually 100% of the available indebtedness that AMS
had to secure its facilities . The $269 million in student loans, therefore, had to come from existing
facilities . By doing so, defendant Alcorn undercollateralized EFG-11I by nearly 60% and increased
its private loan concentration to over 40% - approximately 35% overconcentrated. As a result, AMS
was securing financing at rates much lower than the portfolios would have generated had AMS and
Alcorn disclosed the truth about the portfolios' composition . Defendant Alcorn did so in order to
improve the spread income that AMS was earning on the loans that it issued to students .
63 . Defendant Mutz's statements about the "continued confidence of the credit and
capital markets of both UICI and AMS" were also misleading because of the collateral issues facing
AMS as alleged above . Had the participants in the credit and capital markets known that AMS was
using the loans that should have been collateralizing AMS's EFG-III facility to collateralize different
facilities, their confidence would have been severely shaken or non-existent . Defendant Mutz either
knew of or recklessly disregarded the misleading nature of his statements given his knowledge of
serious internal control problems at UICI and AMS and the impact that those problems had on
AMS's student loan originations as alleged at ¶¶18, 19, 93, 95, 99, 100 .
-26-
64. On May 1, 2002, the Company issued a press release entitled "UICI Announces First
Quarter 2002 Results of Operations ." The press release reported $12 .1 million in net income for
UICI and attributed those results to a "significant quarter-over-quarter increase in operating results at
[AMS] ." In fact, the very AMS subsidiary that lost $19 million in 1999, $24 .6 million in 2000 and
made only $5 .2 million in all of 2001 reported $4 .2 million of operating income in one quarter -
nearly 80% of AMS's entire operating income for 2001, and more money than the subsidiary had
generated on an aggregate basis in the prior three years combined . Despite the fact that AMS was
accessing the capital markets improperly, UICI (with defendants AMS's and Alcorn's knowledge)
attributed the success to a favorable interest rate environment and reduced borrowing costs :
UICI (NYSE : UCI) (the "Company") today reported first quarter 2002revenues and net income in the amount of $308 .3 million and $12 .1 million ($0 .25per diluted share), respectively, compared to revenues and net income of $251 .2million and $12 .1 million ($0 .25 per diluted share), respectively, in 2001, includingincome or (loss) from discontinued operations in the 2002 and 2001 first quarter in
the amount of $67,000 ($-0- per diluted share) and $(897,000) ($(0 .02) per dilutedshare), respectively . . . .
The Company reported first quarter income from continuing operations of$12.1 million ($0 .25 per diluted share), compared to first quarter 2001 income fromcontinuing operations of $13 .0 million ($0 .27 per diluted share) .
In the first quarter of 2002, the Company also reported a significant quarter-over-quarter increase in operating results at the Company's Academic ManagementServices Corp . unit (which recorded $4 .2 million of operating income in the firstquarter of 2002 compared to operating income of $269,000 in the comparable 2001period) .
For the three months ended March 31, 2002, UICI's Academic ManagementServices Corp . subsidiary ("AMS") reported operating income of $4 .2 millioncompared to operating income of $269,000 for the comparable period in 2001 . Thesignificant improvement in operating results for the three months ended March 31,2002 resulted primarily from increased student loan spread income (i .e., thedifference between interest earned on outstanding student loans and interest expenseassociated with indebtedness incurred to fund such loans) attributable to a favorableinterest rate environment and a reduction in interest expense on corporateborrowings .
-27-
65. The next day, on May 2, 2002, defendant Mutz addressed analysts and investor s
during UICI's conference call . He repeated the financial results outlined in the Company's pres s
release and commented specifically on the success at UICI's AMS subsidiary and the very facility
that Alcorn had secured in January 2001 with loans that should have been collateralizing AMS' s
EFG-III portfolio in violation of the Indenture :
We had an excellent quarter in AMS . Interest spreads remained wide and AMSproduced $4.1 million of pre-tax, an excellent job there . . . .
AMS closed at $335 million student loan secure financing, federally guaranteedstudent loans, with B of A . That was a nice piece of financing that closed at 2 .1percent and it's now trading at between 1 .9 and 200 basis points . So it 's a low-costfinancing and again that is contributing with the profit and asset margins spreadat AMS.
AMS, all in all, just a real strong quarter . Some metrics . Loan portfolioincreased to $1 .5 billion. Big story, net spreads averaged 252 basis points for thefirst quarter versus 121 basis points in the first quarter , about 1 , that's about 130 bitsbigger, that ' s a big swing. We average a 200 basis point return on our average assetsfor the first quarter, versus 74 basis points, again 126 basis point swing over the firstquarter of a year ago . So really very exciting . Very exciting . Net student loaninterest income was $20.4 million, up from $6 .7 million in 2000 . For example, thefou rth quarter spread income , I'm just looking, was $7 .5 million . So big changes .
66. On May 11, 2002, the Company filed its Form 10-Q with the SEC and repeated th e
statements that UICI made to investors about its financial results and about the results at its AM S
subsidiary . Defendant Mutz executed the filing in his capacity as Chief Executive Officer an d
Director .
67. The statements above about UICI's income, the income at its AMS subsidiary, the
interest spreads, and the January 2002 financing that generated the "excellent quarter" for AMS wer e
misleading for the same reasons alleged at ¶¶30, 62 . While defendants attributed the significan t
improvement in operating results to a favorable interest rate environment and a reduction in interest
expense on corporate borrowings, they failed to disclose that AMS was securing a reduction i n
interest expense by accessing the capital markets with insufficient collateral and with portfolios
-28-
0 0
containing an improper allocation of federally guaranteed and alternative loans . Only by concealing
the true state of the collateral underlying AMS's financings was AMS able to secure the reduction i n
interest expense and the interest spreads that was supposedly driving AMS's "excellent results ."
68. On July 31, 2002, the Company issued a press release entitled "UICI Announces
Second Quarter and First Six Months 2002 Results of Operations ." The release announced that
UICI's income decreased substantially from the prior year but added that AMS's results ha d
increased from $5 . 5 million in the first six months of 2001 to $8 . 6 million in the first six months of
2002 (56%), which, like its Q 1-02 results, it attributed to a favorable interest rate environment and a
reduction in interest expense on corporate borrowings . The release also announced that it wa s
writing down its investment in and terminating its services with HealthAxis , UICI' s only other
financial services subsidiary :
UICI (NYSE: UCI) (the "Company") today reported second quarter 2002revenues and income from continuing operations in the amount of $348 .4 million and$5 .7 million ($0 .12 per diluted share), respectively, compared to revenues andincome from continuing operations of $273 .4 million and $13 .3 million ($0 .28 perdiluted share), respectively, in the second quarter of 2001 . For the six months endedJune 30, 2002, the Company generated revenues and income from continuingoperations of $656.7 million and $17.7 million ($0.37 per diluted share),respectively, compared to revenues and income from continuing operations of $524 .6million and $26.3 million ($0 .55 per diluted share), respectively, in the six monthsended June 30, 2001 . In the 2002 periods, the strong performance of the Company'sinsurance operations and improved results at its Academic Management ServicesCorp. subsidiary were offset by realized losses in the second quarter associated witha write down in the carrying value of WorldCom, Inc . fixed income securities, awrite down of the Company's investment in Healthaxis Inc . recorded in connectionwith the termination of a services agreement, and a significant increase in non-cashstock-based compensation expense attributable to the favorable market performanceof the Company's stock in the first six months of 2002 .
Overall, for the three and six months ended June 30, 2002, the Companyreported net income in the amount of $5 .7 million ($0 .12 per diluted share) and $12 .7million ($0.26 per diluted share), respectively, compared to net income of $12 .6million ($0 .27 per diluted share) and $24 .7 million ($0 .52 per diluted share) in thecorresponding 2001 periods .
-29-
0 0
In the first six months of 2002, the Company's Academic Management ServicesCorp. ("AMS") unit also reported a significant period- over-period increase inoperating income ($8 .6 million of operating income in the first six months of 2002compared to operating income of $5 .5 million in the comparable 2001 period) .
For the three and six months ended June 30, 2002, UICI's AMS unit reportedoperating income of $4 .4 million and $8 .6 million, respectively, compared tooperating income of $5 .2 million and $5 .5 million for the comparable periods in2001 . The significant improvement in operating results for the six months endedJune 30, 2002 resulted primarily from increased student loan spread income (i .e ., thedifference between interest earned on outstanding student loans and interest expenseassociated with indebtedness incurred to fund such loans) attributable to a favorableinterest rate environment and a reduction in interest expense on corporateborrowings . . . .
69. On August 14, 2002, the Company filed its Form 10-Q with the SEC and repeated the
statements that UICI made to investors about its financial results and about the results at its AM S
subsidiary . Defendants Mutz and Hauptman signed a sworn statement affirming the accuracy of the
Form I 0-Q and that the information contained in the filing fairly represented the financial condition
and results of UICI pursuant to §906 of the Sarbanes-Oxley Act of 2002 . They also signed the filing
in their capacities as UICI executives .
70 . The statements above about UICI's income and the income at its AMS subsidiary tha t
generated the "improved results" for AMS were misleading for the same reasons alleged at ¶¶30, 62 .
While defendants attributed the significant improvement in operating results to a favorable interest
rate environment and a reduction in interest expense on corporate borrowings, they again failed to
disclose that AMS was securing the reduction in interest expense only by accessing the capital
markets with insufficient collateral and with portfolios containing an improper allocation of federally
guaranteed and alternative loans . Only by concealing the true state of the collateral underlying
AMS's financings was AMS able to secure the reduction in interest expense and the interest spreads
that were supposedly driving AMS's "improved results ."
-30-
0 0
71 . On October 30, 2002, the Company issued a press release entitled "UICI Announces
Third Quarter and First Nine Months 2002 Results of Operations ." The release announced that
UICI's income was essentially flat - to slightly improved for the same period in the prior year .
And, while AMS had lost $1 .6 million during the quarter, the release added that AMS had seen
significant improvement for the nine-month period and attributed the improvement to the same thing
that drove AMS's first and second quarter results - improved spread income and cheap borrowing
costs. The poor quarterly performance was explained as a short-term anomaly in AMS's tuition
installment plan business combined with spending increases to hire more sales and marketing
employees - a statement directly contrary to witness accounts of severe cost-cutting at the
subsidiary :
UICI (NYSE : UCI) (the "Company") today reported third quarter 2002revenues and income from continuing operations in the amount of $381 .0 million and$16.2 million ($0.33 per diluted share), respectively, compared to revenues andincome from continuing operations of $267 .2 million and $14 .3 million ($0 .30 perdiluted share), respectively, in the third quarter of 2001 . For the nine months endedSeptember 30, 2002, the Company generated revenues and income from continuingoperations of $1,037 .7 million and $34 .0 million ($0 .70 per diluted share),respectively, compared to revenues and income from continuing operations of $791 .8million and $40 .5 million ($0 .85 per diluted share), respectively, in the nine monthsended September 30, 2001 .
Overall, for the three and nine months ended September 30, 2002, theCompany reported net income in the amount of $16 .2 million ($0.33 per dilutedshare) and $28.9 million ($0.59 per diluted share), respectively, compared to netincome of $11 .9 million ($0.25 per diluted share) and $36 .6 million ($0.77 perdiluted share) in the corresponding 2001 periods . Overall results in the nine monthsended September 30, 2002 included a goodwill impairment charge in the amount of$(5 .1) million (net of tax) ($(0 .11) per diluted share), which has been reflected as acumulative effect of a change in accounting principle in accordance with recentlyadopted Financial Accounting Standards Board ("FASB") Statement No . 142,Goodwill and Other Intangible Assets .
In the nine months ended September 30, 2002, UICI's AMS unit reportedoperating income of $7.0 million, compared to operating income of $4 .7 million inthe comparable 2001 period . The significant improvement in operating results forthe nine months ended September 30, 2002 resulted primarily from increased studen t
-31-
loan spread income (i .e., the difference between interest earned on outstandingstudent loans and interest expense associated with indebtedness incurred to fund suchloans) attributable to a favorable interest rate environment and a reduction in interestexpense on corporate borrowings . These increases in the nine months endedSeptember 30, 2002 were partially offset by lower realized gains on sale of loans andreduced yields on the trust balances associated with AMS' tuition installment planbusiness, in each case as compared to results in the corresponding 2001 period .
In the three months ended September 30, 2002, UICI's AMS unit reported anoperating loss of $(1 .6) million, compared to an operating loss of $(852,000) in theyear earlier quarter. In the third quarter of 2002, higher realized gains from studentloan sales and increased student loan spread income were more than offset bydisappointing results at AMS' student tuition installment business (attributableprimarily to a significant reduction in interest income earned on installment plan trustbalances) and a significant increase in corporate overhead associated with the hiringof additional sales and marketing personnel .
72 . On November 14, 2002, the Company filed its Form 10-Q with the SEC and repeated
the statements that UICI made to investors about its financial results and about the results at its AMS
subsidiary . Defendants Mutz and Hauptman signed a sworn statement affirming the accuracy of the
Form 10-Q and that the information contained in the filing fairly represented the financial condition
and results of UICI pursuant to §906 of the Sarbanes-Oxley Act of 2002 . They also signed the filing
in their capacities as UICI executives .
73 . The statements above about UICI's income and the income at its AMS subsidiary tha t
generated the "significant improvement in operating results" for AMS were misleading for the same
reasons alleged at ¶¶30, 62 . While UICI and AMS attributed the significant improvement in
operating results to a favorable interest rate environment and a reduction in interest expense on
corporate borrowings, they again failed to disclose that AMS was securing a reduction in interest
expense by accessing the capital markets with insufficient collateral and with portfolios containing
an improper allocation of federally guaranteed and alternative loans . In fact, CW1 confirmed in
October/November 2002, that he/she discovered that AMS was undercollateralized in its EFG-III,
EFG Funding and AMS-1 2002 subsidiaries and explained that those subsidiaries were
overconcentrated with private loans in violation of the financing documents . Only by concealing th e
-32-
0 0
true state of the collateral underlying AMS's financings was AMS able to secure the reduction i n
interest expense and the interest spreads that were supposedly driving AMS's significantly improve d
results .
74 . On January 3, 2003, defendant Mutz sold 9,600 UICI shares at $15 .60 per share fo r
proceeds of $149,760 .
75. On February 7, 2003, the Company issued a press release entitled "UICI Announces
2002 Full Year and Fourth Quarter Results of Operations ." UICI reported income of $51 .4 million
for FY-02, and listed AMS among those subsidiaries that reported increased operating income for
UICI . While the release noted that AMS's quarterly results were down slightly from the same period
in the prior year, it noted that for the full year AMS's operating income had increased from $5 .4
million to $7 .4 million (37%) :
UICI (NYSE: UCI ) (the "Company") today repo rted full year 2002 revenuesand income from continuing operations of $1,479 .0 million and $51 . 4 million ($1 .05per diluted share), respectively , compared to revenues and income from continuingoperations of $1,099 . 4 million and $52.2 million ($1 .09 per diluted share),respectively, in the full year ended December 31, 2001 . . . .
For the full year ended December 31, 2002, the Company reported increasesin operating income at its Self Employed Agency, Group Insurance and LifeInsurance Divisions and at its AMS unit, in each case compared to results reported inthe corresponding 2001 full year period . . . .
The Company reported fourth quarter 2002 revenues and income fromcontinuing operations in the amount of $428 .1 million and $17 .4 million ($0 .35 perdiluted share), respectively, compared to revenues and income from continuingoperations of $298.3 million and $11 .7 million ($0.24 per diluted share),respectively, in the fourth quarter of 2001 . Overall, for the three months endedDecember 31, 2002, the Company reported net income in the amount of $18 .0million ($0 .37 per diluted share), compared to net income of $6 .3 million ($0 .13 perdiluted share) in the fourth quarter of 2001 . In the 2002 fourth quarter, the solidperformance of the Company's Self Employed Agency and Group InsuranceDivisions was offset by losses at its Senior Market Division and a moderate fourthquarter 2002 over fourth quarter 2001 decrease in operating profit at AMS .
For the full year ended December 31, 2002, UICI's AMS unit reportedoperating income of $7 .4 million, compared to operating income of $5 .4 million in
-33-
0 0
2001 . The improvement in operating results for the full year ended December 31,2002 resulted primarily from increased student loan spread income (i .e ., thedifference between interest earned on outstanding student loans and interest expenseassociated with indebtedness incurred to fund such loans) attributable to a favorableinterest rate environment and a reduction in interest expense on corporateborrowings . These increases in 2002 were partially offset by lower realized gains onsale of loans and reduced yields on the trust balances associated with AMS' tuitioninstallment plan business, in each case as compared to results in 2001 .
In the three months ended December 31, 2002, AMS reported operatingincome of $423,000 compared to operating income of $756,000 in the three monthsended December 31, 2001 . In the fourth quarter of 2002, lower realized gains fromstudent loan sales and lower student loan spread income contributed to the decreasein operating income. These factors contributing to lower operating income in thefourth quarter of 2002 were offset somewhat by a decrease in overhead expenses inthe 2002 period compared to the corresponding period of the prior year .
76. On March 28, 2003, the Company filed its Form 10-K with the SEC and repeated the
statements that UICI made in its February 6, 2003 press release . Defendants Mutz and Hauptman
signed a sworn statement affirming the accuracy of the Form 10-K and that the information
contained in the filing fairly represented the financial condition and results ofUICI pursuant to §906
of the Sarbanes-Oxley Act of 2002 . They also signed the filing in their capacities as UICI
executives.
77. These statements, and the statements about UICI's and AMS's income were
misleading for the same reasons alleged at ¶¶30, 62 . While defendants attributed the significant
improvement in operating results to a favorable interest rate environment and a reduction in interest
expense on corporate borrowings, they again failed to disclose that AMS was securing a reduction in
interest expense by accessing the capital markets with insufficient collateral and with portfolios
containing an improper allocation of federally guaranteed and alternative loans . Only by concealing
the true state of the collateral underlying AMS's financings was AMS able to secure the reduction in
interest expense and the interest spreads that were supposedly driving AMS's significantly improved
results .
-34-
0 •
78 . On April 30, 2003, at the same time that defendants were hurrying to sell AMS, the
Company issued a press release entitled "UICI Announces First Quarter 2003 Results of
Operations." It reported $20 million in operating income at UICI for the first quarter of 2003 and
$4.5 million at AMS for the same period - down $2 .6 million from the prior year . And while the
release attributed the decrease to a decrease in spread income, it made no mention of its corporate
borrowings :
UICI (NYSE: UCI) (the "Company") today repo rted first quarter 2003revenues and income from continuing operations of $434 . 0 million and $20.0 million($0 .42 per diluted share ), respectively, compared to revenues and income fromcontinuing operations of $312.3 million and $12 .1 million ($0 .25 per diluted share),respectively in 2002. Overall , for the quarter ended March 31, 2003, the Companyreported net income in the amount of $21 .1 million ($0 .44 per diluted share),compared to net income of $7.0 million ($0.14 per diluted share) in 2002.
For the three months ended March 31, 2003, UICI's AMS unit reportedoperating income of $1 .5 million compared to operating income of $4 .1 million inthe year earlier period . The decrease in operating results for the three months endedMarch 31, 2003 resulted primarily from decreased student loan spread income (i .e .,the difference between interest earned on outstanding student loans and interestexpense associated with indebtedness incurred to fund such loans) .
79. UICI repeated these statements in its Form 10-Q, which it filed with the SEC o n
May 9, 2003. Defendants Mutz and Hauptman signed a sworn statement affirming the accuracy of
the Form I 0-Q and that information contained in the filing fairly represented the financial condition
and results of UICI pursuant to §906 of the Sarbanes-Oxley Act of 2002 . They also signed the filing
in their capacities as UICI executives .
80. On May 1, 2003, defendant Mutz addressed analysts and investors during UICI' s
quarterly conference call . In addition to repeating UICI's financial results, Mutz told investors tha t
AMS had made significant moves, that it was still operating in a favorable interest rate environment
and that he felt "good about what we have there and the steps we're taking" :
-35-
AMS significant moves there . We reported 1 .5m in income. Very few loan
sales in the first quarter . Essentially, the first quarter a year ago we had loan spreads,
student loan interest spread of about 218 basis points . In the first quarter of `03 that
dropped to $137 basis points . What happened is the first quarter of `02 was after
9/11 . The Fed drove-down rates very significantly . We had a pretty high reset rateJuly 1 of `01, and we had an unusual set of circumstances that resulted in a lot of
money flowing to the bottom line. The - we are still getting the benefit of a tailwind .Rates are still below the reset rate July 1 of `02, but less so than the previous year .
We anticipate for everybody's knowledge that basically in my view over along period of time the rough base spread ought to be around 100 basis points, and sowe still are probably 37 basis points over what I would call should be what I wouldcall normal kinds of spreads .
In the MPP business, we had, the good news is we went from 165m inaverage trust account balances in the first quarter, or excuse me, in the full year of`02. And we're up to 207m average trust cash balances in `03 . The bad news is the
trust yield fell from 2 .5 percent over the full 2002 year to 1 .57 percent . Now these
are very short-term investments, and very high quality . And so we will be at the very,
very low end of duration, the very high end of quality . And so we'll be essentially ashort-term Fed fund repo kind of - that'll be the kind of rates we generate there .
On the student loan side we had average loan assets increase to 1 .6b at the
end of `03, up from 1 .45b at the end of `02. And so that's, I am pleased with that . Wecontinue to work hard at the AMS shop, and I feel good about what we have thereand the steps we're taking .
81 . From May 6 to 8, 2003, defendant Mutz sold 472,611 shares at $13 .18-$13 .67 per
share for proceeds of $6.3 million . Defendant Mutz utilized the proceeds from the sale to relieve
himself of any financial obligation that he owed to UICI and its founder Ron Jensen . The sales
represented more than 55% of defendant Mutz's holdings and came only weeks before UICI
terminated Mutz's position as CEO and disclosed the serious problems at its AMS subsidiary .
82. On May 22, 2003, the Company announced that it terminated defendant Mutz and
that it was exiting those business lines that did not focus on insurance, including AMS :
UICI (the "Company") today reported that its Board of Directors, at ameeting held on May 21, 2003, has named Gregory T . Mutz (a director of the
Company and the Company's current President and Chief Executive Officer) as itsVice Chairman of the Board, effective July 1, 2003 . As the Board's Vice Chairman,
Mr. Mutz will continue to assess the Company's senior markets/long term careinitiative, oversee the Company's student loan funding operations and assist theCompany with respect to regulatory and other strategic initiatives .
-36-
0 0
At its May 21 meeting, the UICI Board also appointed William J . Gedwed tosucceed Mr . Mutz as the Company's President and Chief Executive Officer, effectiveJuly 1, 2003 . Mr. Mutz will continue to serve as UICI' s President and CEO throughJune 30 , 2003 to assist in the transition .
Mr. Gedwed (age 47) formerly served as the Company's Executive VicePresident with responsibility over the Company's Self Employed Agency Division,the Company's largest operating unit . Mr. Gedwed resigned from the Company inFebruary 2001 to pursue other business interests, but he continued to serve theCompany as a member of its board of directors, a position he has held continuouslysince June 2000 .
Ronald L. Jensen (UICI's Founder and Chairman of the Board) alsoannounced that the Company has decided to concentrate its time, effo rt and resourcesin the three niche health insurance markets in which it plays a significant leadershiprole . Through six separate operating divisions , the Company is the largest marketerand underwriter to the self employed health market niche ; is the largest marketer andunderwriter of student health insurance ; and is the largest marketer and underwriterof limited benefit insurance plans for entry level, high turnover , hourly employees .Mr. Jensen related that he believes that generally the niche markets are underservedand present real opportunities to provide affordable health insurance and relatedinsurance products . Going forward , UICI will review all current activities that are notdirectly serving these three niche markets . In order to help in the transition and inimplementing the Board's game plan, Mr . Jensen has agreed to take a much moreactive role in UICI' s day-to-day activities for the foreseeable future, especiallyworking with UICI's agency field forces .
83 . Then, on July 21, 2003, only weeks after terminating Mutz as CEO, the Company
announced that its AMS subsidiary was in violation of covenants in the financing agreements that
enabled AMS to access the capital markets to fund its student loans, that it was suspending defendant
Alcorn, and that it anticipated taking a $65 million impairment charge as a result of the violations . It
also disclosed that EFG-III and EFG Funding were undercollateralized by $263 million (59 .7% of
the $440 million outstanding total) and were overconcentrated with ineligible private loans by $59
million (33% of the $177 million loans in the portfolio, which was permitted to have only 7 .5% or
$13.3 million in the portfolio) :
UICI (the "Company") today announced the discovery of a shortfall in thetype and amount of collateral supporting two of the securitized student loan financingfacilities entered into by three special financing subsidiaries of AcademicManagement Services Corp. ("AMS"), UICI's wholly-owned subsidiary . The threespecial financing subsidiaries involved are EFG-III, LP, EFG Funding LLC an d
-37-
0 0
AMS-1 2002, LP . In addition, all seven special financing subsidiaries of AMS andAMS may have failed to comply with their respective reporting obligations under thefinancing documents .
AMS (based in Swansea, MA) is engaged in the student loan origination andfunding business, student loan servicing business, and tuition installment paymentplan business . AMS finances its student loan origination activities through the sevenspecial financing subsidiaries, each of which issues debt securities, includingcommercial paper (through EFG Funding LLC), auction rate notes (through EFG-II,LP, EFG-IV, LP, AMS-1 2002, LP, and AMS-3 2003, LP), and floating rate notes
(through EFG-IV, LP and AMS-2 2002, LP) . The commercial paper issued by EFGFunding LLC is supported by a liquidity facility provided by Bank of America andFleet Bank and the underlying variable funding note issued by EFG-III, LP has thebenefit of a financial guaranty insurance policy issued by a monoline insurer ratedAAA/Aaa. The notes issued by each of EFG-II, LP, EFG-IV, LP and AMS-1 2002,LP also have the benefit of a financial guaranty insurance policy issued by amonoline insurer rated AAA/Aaa.
The problems at EFG-III, LP and EFG Funding LLC are of three types :insufficient collateral, a higher percentage of alternative loans (i .e ., loans that areprivately guaranteed as opposed to loans that are guaranteed by the federalgovernment) included in the existing collateral than permitted by the loan eligibilityprovisions of the financing documents and deficiencies with respect to reportingrequirements . Specifically, it is believed that certain reports concerning the collateralwere misstated, that as of June 30, 2003, the variable funding note underlying thecommercial paper issued by EFG Funding LLC (approximately $440 millionoutstanding) was under collateralized and $59 million (exclusive of accrued interest)ofthe existing collateral was not in compliance with the loan eligibility requirements .The under collateralization will be partially addressed by the transfer by AMS toEFG- III, LP of approximately $190 million of federally-guaranteed student loan andother qualified assets that meet loan eligibility requirements under the financingdocuments (which transfer will reduce the under collateralization from $263 millionto $73 million) and the possible transfer by AMS to EFG-III, LP of $34 .4 million ofuninsured student loans that do not meet loan eligibility requirements under thefinancing documents . These transfers will not fully resolve the shortfalls in type andamount of collateral .
The problems at AMS-1 2002, LP consist primarily of approximately $17million of alternative student loans (exclusive of accrued interest) in excess of theloan eligibility requirements for such loans in the financing documents as of June 30,2003, and a deficiency in various reporting requirements .
UICI has no obligations with respect to the indebtedness of the specialfinancing subsidiaries or with respect to the obligations of AMS relating to suchfinancings . UICI believes, based on its ongoing investigation, that the previouslypublished consolidated financial statements of AMS, as incorporated in UICI'sconsolidated financial statements, are accurate and fairly presented . However, UICIwill assess the impact of the events at AMS on the carrying value of UICI'sinvestment in AMS, which, at March 31, 2003, was approximately $65 .0 million .
-38-
0 0
Any impairment in UICI's carrying value may be reflected as a charge to UICI'searnings in the second quarter of 2003 .
UICI is committed to working with all of the financial institutions involved todevelop a plan to assess and resolve all of the issues associated with AMS'securitized student loan financings . There can be no assurance, however, that such aplan can be effectuated and that the required waivers and agreements by all of theinterested parties can in fact be obtained. UICI is prepared to invest additionalcapital into AMS under appropriate circumstances as part of the effort to avoid lossesto any party and to protect UICI's investment in AMS .
The former president of AMS has been put on leave and relieved of allresponsibilities pending the completion of the ongoing investigation . Gregory T.Mutz, Vice Chairman of UICI, has been authorized by the Board of Directors ofUICI to personally manage for the indefinite future the situation and to address theissues and matters at AMS. A failure to resolve the collateral and reporting issuesdiscussed above in a timely manner could have a material adverse effect on AMS .
84. This revelation caused trading in UICI stock to be halted on the New York Stock
Exchange and ultimately to plummet to less than $12 per share, a decline of 45% from its Class
Period high of $21 .22 per share .
DEFENDANTS' SCIENTE R
85. Defendant Alcorn knew, at all times during the Class Period, that AMS was in
violation of loan eligibility requirements, as he was personally responsible for collateralizing AMS-1
2002, which was originated in January 2002, with $263 million in loans that should have been
collateralizing AMS's EFG-III facility . According to CW1, who worked in AMS's compliance
department and who directly communicated with Alcorn about collateral issues facing AMS, Alcorn
was the individual responsible for moving collateral in and out of the various financing facilities and
was solely responsible for creating the reports that AMS would supply to investors - the very reports
that caused AMS to violate its reporting requirements . CW9 confirmed this fact with respect to
EFG-III as alleged at ¶34. CW9 added that he/she personally raised a $220 million collateral
deficiency in EFG-III with defendant Alcorn in February or March 2002 and discovered in July 2003
that defendant Alcorn had been manipulating EFG-III's loans and its Investor Reports as alleged at
¶¶28, 48 . According to the witness, defendant Alcorn directed Mercer to manipulate the electronic
-39-
0 0
Servicer Reports that served as a foundation for AMS's Investor Reports and further manipulated the
Investor Reports, for EFG-III specifically, to create the appearance that AMS was in compliance
with its one-for-one collateral requirement and its 92 .5% federal loan requirement as alleged at ¶¶33-
35 .
86. Other confidential witnesses confirm CW1's account as well as CW9's account .
CW7 (who worked in AMS's finance department as an accounting clerk) explained that employees
were told that Alcorn was suspended because he "gave bad information regarding collateral" and
CW2 added that Alcorn's suspension resulted from his attempt to "piggyback portfolios" (i.e ., use
the same collateral for different financings) to secure financing for AMS's student loans .
87. Given that the failure of AMS to conform to the covenants could have resulted in
MBIA either suing AMS or the investors pulling money out of the EFG-III, LP entity and also could
have precluded AMS from accessing the capital markets for further borrowings (facts of whic h
Alcorn was fully aware given his position as CFO, his experience as a Vice President at Moody's
Investor Service, Vice President in investment banking at Lehman Brothers Inc . and a securities
analyst at Salomon Brothers), the proper level of loans and the appropriate percentages were a factor
about which Alcorn was acutely aware . Alcorn therefore either knew or recklessly disregarded that
AMS was in violation of loan eligibility requirements at the time that he was disseminating
statements to UICI investors about AMS .
88. Beyond his direct involvement in manipulating the collateral securing the financin g
facilities and manipulating the Investor Reports to give the appearance that EFG-III was in
compliance with its one-for-one collateral requirement and its 92 .5% federal loan requirement,
Alcorn also knew that AMS was in violation because CWI directly reported the problem to Alcorn
in late October or early November of 2002 as alleged at ¶42 . Defendant Alcorn's manipulative
efforts to give the appearance of compliance as explained by CW9 and the direct report of non-
-40-
0 0
compliance by CW1 creates a strong inference that defendant Alcorn knew that every statement in
UICI's press releases and SEC filings regarding AMS's income, especially income characterized as
"spread income," was materially misleading as the cost of the funds were artificially low given
AMS's non-compliance . He also knew that UICI's statements about its income were similarly
misleading given that AMS's results were incorporated into UICI results .
89. Confidential witnesses have also established that UICI and its executives, includin g
defendant Mutz and defendant Hauptman, either knew of or recklessly disregarded the misleading
nature of their statements throughout the Class Period . Defendant Hauptman received the very
"Monthly Financial Statement Package" that caused CW9 to question the dramatic deficiency in
EFG-III's collateral in early 2002 . Those reports, which CW9 explained that he/she and Kathy
Healey forwarded to defendant Hauptman by electronic mail, showed that a $400 million
securitization was secured by only $180 million in loans . Defendant Hauptman's certain comparison
of the Monthly Financial Statement Package with the corresponding Investor Reports that UICI
received clearly revealed Alcorn's manipulations . Since the discrepancies were clear from the face
of the reports (both CW9 and Parthenon employees raised questions after reviewing them),
Hauptman's receipt of the reports raises a strong inference that he knew or recklessly disregarded
that AMS was under-collateralized and that UICI's financial results, as well as AMS's financial
results, were misleading as a result .
90. As a certifying Chief Financial Officer, defendant Hauptman certified under Rule
13a-14 of the Securities Exchange Act of 1934 and under §906 of Sarbanes-Oxley Act that UICI
financial results "fully complie[d]" with the federal securities laws and that the "information
contained in [those reports] fairly present[ed], in all material respects, the financial condition and
results of operations of the Company" for each reporting period during the Class Period following
his appointment in June 2002 as UICI's Chief Financial Officer . Indeed, defendant Hauptman wen t
-41-
so far as to certify for UICI' s Form 10-K during the Class Period that in addition to not omittin g
information that would make the report misleading, he had designed "disclosure controls an d
procedures to ensure that material information relating to the registrant , including its consolidated
subsidiaries, is made known to us by others within those entities" and that he had "evaluated th e
effectiveness of the registrant's disclosure controls and procedures" at least by October 2002 . Since
ensuring that UICI' s controls were adequate was his responsibility ("[t]he registrant's othe r
certifying officer and I are responsible for establishing and maintaining disclosure controls an d
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant"), his failure t o
review the Monthly Financial Statement Package and/or question the deficiencies clearly evident i n
the package was a reckless act that mislead investors about the true state of UICI's financial results .
91 . Defendant Mutz also recklessly disregarded that UICI's financial results would
mislead investors . As alleged at ¶¶17-19, defendant Mutz was intimately familiar with EFG's
operations and its non-existent internal controls since EFG merged with AMS in 1999 . He had
personal knowledge that those inadequate controls resulted in manipulations and fraudulent activity
at the subsidiary level, including an over $9 million write-off in December 1999 and undisclosed
options obligation at the executive level in 2000 as alleged at ¶17. In fact, as alleged at ¶18, Mutz
personally directed defendant Alcorn, CW9 and others to shutdown EFG's operations in South
Yarmouth, Massachusetts, and transfer its assets to AMS's facilities in 2000 as a result of thes e
problems, and directed a restructuring of AMS's operations as a result . As a result of these harsh
measures, defendant Mutz was intimately familiar with the need to create internal controls at AMS .
92. UICI' s auditors also put defendant Mutz on notice that AMS suffered from materia l
weaknesses in its controls . On April 4, 2000, Ernst & Young identified to UICI's Board o f
Directors, including defendant Mutz, "material weaknesses" in AMS's and UICI's internal control s
and explained that AMS had failed to, among other things, maintain accurate records for purchasin g
-42-
and originating student loans and that UICI lacked a formal review and approval process for the
transactions entered into by AMS . These inadequate controls existed in 2000 and continued
throughout the Class Period . Indeed, despite the fact that UICI noted in SEC filings that it had
addressed the weaknesses (which Ernst & Young reported that it could not confirm or deny), UICI
disclosed after the Class Period that "a significant deficiency in AMS's internal controls over
financial reporting detracted from AMS's ability to timely monitor and accurately assess the impac t
of certain transactions relating to AMS's securitized student loan financing facilities ." Defendant
Mutz therefore either knew that his Class Period statements relating to AMS's income and the
capital markets were misleading or was reckless in disregarding that his statements would mislead
investors .
93 . Defendant Mutz's knowledge of, or reckless disregard for, the misleading nature o f
UICI's and AMS's financial results is also demonstrated by his failure to investigate the adequacy
AMS's internal controls after April 4, 2000 . In fact, after Ernst & Young notified Mutz that AMS
suffered from non-existent controls, he did virtually nothing to ensure that AMS was developing an
adequate internal controls process . He did not personally oversee the controls development process
nor did he enlist the assistance of UICI's accounting department to assist in the development .
Instead, defendant Mutz hired a consultant by the name of Debra Greer to work with CW9 on
developing the controls process . Between 2000 and 2001, CW9 reported to Debra Greer on the
process that his/her group was developing, who, in turn, conveyed the information to Mutz . Debra
Greer's relationship with UICI, however, came to an end in 2001 - before the Class Period .
Thereafter, defendant Mutz limited his involvement in AMS's internal controls (starting in late 2002
or early 2003) to a quarterly conference call with CW9, defendant Alcorn, and others where he asked
CW9 whether controls were in place at AMS so that the accounting information that AXIS was
supplying to UICI was accurate . CW9, who had developed AMS's accounting controls process (but
- 43 -
0 0
not the reporting controls process for AMS's investor reports), confirmed that the accounting
controls were sufficient and that AMS's accounting results were accurate . He/she did not report on
the reporting controls process for the investor reports (which was not his/her responsibility) and
never heard Mutz inquire about (nor Alcorn offer any information for) this reporting controls
process . This is true despite the fact that Mutz himself certified under Rule 13a-14 of the Securitie s
Exchange Act of 1934 that he had designed "disclosure controls and procedures to ensure tha t
material information relating to [UICI], including its consolidated subsidiaries, is made known to us
by others within those entities" and that he had "evaluated the effectiveness of the registrant's
disclosure controls and procedures" by at least October 2002 . According to CW9, defendant Mutz
never investigated AMS's internal controls, especially AMS's "disclosure controls," and limited his
sole inquiry to whether internal controls were in place that would ensure accuracy - decidedly
reckless given AMS's history of horrific controls, which history was known to Mutz . Had Mutz
inquired further, he would have discovered that while CW9's group had firmed-up AMS's
accounting controls, defendant Alcorn had not done the same with AMS's reporting controls and, in
fact, was manipulating the investor reports that AMS was sending to UICI .
94. Defendant Mutz was also personally involved in AMS's day-to-day operations .
According to CW8 (a manager in AMS's human resources department), defendant Mutz, his
assistant Dan Einhorn, and UICI marketing executive John McCarthy began increasing their
exposure at AMS in late 2002 in order to position AMS for a sale . Consistent with their claims that
UICI would "review goodwill and intangible assets for impairment as of November 1 of each year,"
and consistent with their due diligence for the sale ofAMS, UICI and defendant Mutz either knew or
recklessly disregarded throughout the Class Period that AMS was undercollateralized and in default
on nearly half a billion dollars in indebtedness . CW3 confirmed CW8's account by explaining that
Mutz was at AMS frequently in late 2002 and frequently met with defendant Alcorn, Judith Grass i
-44-
• •
(Exec. VP of Sales - now CEO of AMS) and Claudia Shutz (Sr . VP of Call Center Ops .) about
AMS's operations . Defendant Mutz therefore recklessly disregarded the misleading nature of hi s
statements throughout the Class Period .
95 . Defendant Mutz's scienter is also supported by his own statements about hi s
responsibilities as a CEO. In an interview with Dennis B . Sullivan and Ben DiSylvester of Th e
Robert E . Nolan Co . (transcript published January 1, 2002), Mutz demonstrated his thorough
understanding of his responsibilities as CEO, including those prescribed by the securities laws tha t
he violated . As stated in the transcript, Mutz acknowledged his duty that he had to attest to the
accuracy of UICI' s quarterly financial statements and represented that UICI maintained the inte rnal
controls necessary for him to do so :
I am more cautious and more careful as a result of all the new rules andrequirements . I realize that on a quarterly basis I'm assuming additional civilliability exposure and criminal exposure by certifying UICI's financial statements.
There is a requirement that I certify the quarterlyfinancials and a variety of otherthings . There is a need to put in place formal processes that the board has reviewedand can rely on that deal with how all this is going to get done in a consistent andquality manner . UICI has set up quarterly formal financial reviews, complianceand certification meetings, which the key and appropriate people in the companywill attend. Furthermore, our new process now requires that there be a writtenrecord stating that we considered and reviewed the books and records and that theyare appropriate and accurate and fairly reflect the results of UICI.
CEOs also must become more involved in the organization's accounting, booksand records . Ultimately, CEOs are the responsible public company steward formaking sure that the financial statements are accurate .
-45-
UICI MANAGEMENT'S RESPONSIBILITY FOR ANDKNOWING FAILURE TO IMPLEMENT AND MAINTAI N
ADEQUATE INTERNAL ACCOUNTING CONTROL S
96. UICI had a responsibility to maintain sufficient accounting controls to accuratel y
report its financial results . As noted by the American Institute of Certified Public Accountant s
("AICPA") professional standards :
[F]inancial statements are management's responsibility . . . . Management isresponsible for adopting sound accounting policies and for establishing andmaintaining internal control that will, among other things, record, process,summarize, and report transactions (as well as events and conditions) consistent withmanagement's assertions embodied in the financial statements . The entity'stransactions and the related assets, liabilities and equity are within the direct
knowledge and control of management . . . . Thus, the fair presentation of financialstatements in conformity with generally accepted accounting principles is an implicitand integral part of management's responsibility .
Statements on Auditing Standards , AU §110.03 .
97. According to SEC rules, to accomplish the objectives of accurately recording ,
processing, summarizing and reporting financial data, a company must establish an internal contro l
structure . Section 13(b)(2) of the Exchange Act states, in pertinent part, that every reportin g
company must :
(A) make and keep books, records, and accounts, which, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of theissuer ;" and "(B) devise and maintain a system of internal accounting controlssufficient to provide reasonable assurances that - (i) transactions are executed inaccordance with management's general or specific authorization ; (ii) transactions arerecorded as necessary (I) to permit preparation of financial statements in conformitywith generally accepted accounting principles .
15 U.S.C . §78m(b)(2)(A)-(B)(ii)(I) .
98. Contrary to the requirements of GAAP and SEC rules, UICI failed to implement and
maintain an adequate internal accounting control system . Since the beginning of 2000 at the latest ,
UICI management knowingly tolerated the existence of inadequate internal controls and/o r
-46-
recklessly disregarded their obligation to implement adequate controls to ensure that the value of its
assets were recorded in compliance with GAAP .
99. UICI management was made aware of its inadequate controls for AMS by a lette r
dated April 4, 2000 from its auditor at the time, Ernst & Young LLP. The letter stated that :
[D]uring the course of and in connection with Ernst & Young LLP's audit of theCompany's consolidated financial statements as of, and for the year ended,December 31, 1999, Ernst & Young LLP had noted certain matters involving theCompany's internal controls and its operations that Ernst & Young LLP consideredto be "reportable conditions" and "material weaknesses" under standards establishedby the American Institute of Certified Public Accountants .
In particular, Ernst & Young LLP identified material weaknesses at theCompany's former United CreditServ, Inc . credit card operations and UICI'sAcademic Management Services Corp. (formerly Educational Finance Group, Inc .)subsidiary ("AMS") and a reportable condition with respect to UICI . With respect toUICI's credit card operations, Ernst & Young LLP identified as material weaknessesthe failure to maintain credit card account-by-account detail of a liability account andthe failure to conduct regular periodic reconciliations of that account, lack ofsegregation of duties with respect to preparation and review of the calculation of thecredit card loan loss reserve, certain credit card aging matters, and failure to maintaina proper review and approval process for general ledger entries . With respect toUICI's AMS operations, Ernst & Young LLP identified as material weaknessesAMS' failure to maintain timely and accurate accounting records for thepurchasing and originating of student loans, thefailure to reconcile on a regularperiodic basis its student loan receivables assets with the records of the studentloan servicers, certain inadequacies in AMS' systems leading to delays in closingAMS' books on a timely basis, the lack of a formal review and approval process onthe part of UICI (the parent) with respect to transactions entered into by AMS (thesubsidiary), and certain inadequacies in AMS' methodologiesfor accounting fordeferred student loan premiums and origination costs. With respect to UICI, Ernst& Young LLP identified as a reportable condition that the likelihood was high thatrelated party transactions would not be properly recorded.
100. Despite having been informed of the existence of its inadequate internal controls fo r
AMS, UICI stated in its Form I0-Q for the period ended June 30, 2003 that only then had it :
determined (and has so advised the Audit Committee of its Board of Directors andKPMG LLP, its independent auditors) that a significant deficiency in AMS' internalcontrol over financial reporting detracted from AMS' ability to timely monitor andaccurately assess the impact of certain transactions relating to AMS' securitizedstudent loan financing facilities, as would otherwise be expected in an effectivefinancial reporting control environment .
-47-
• •
CLASS ACTION ALLEGATIONS
101 . Plaintiffs bring this lawsuit pursuant to Rule 23(a) and (b)(3) of the Federal Rules o f
Civil Procedure, on behalf of themselves and on behalf of a class of persons who purchased UICI
stock during the Class Period (the "Class") . Excluded from the Class are defendants herein,
members of the immediate families of each of the defendants, any person, firm, trust, corporation,
officer, director or other individual or entity in which any defendant has a controlling interest or
which is related to or affiliated with any of the defendants, and the legal representatives, agents,
affiliates, heirs, successors-in-interest or assigns of any such excluded party .
102. This action is properly maintainable as a class action for the following reasons :
(a) The Class is so numerous that joinder of all Class members is impracticable .
UICI had approximately 47 million shares of common stock outstanding . Members of the Class ar e
scattered throughout the United States .
(b) There are questions of law and fact which are common to members of the
Class and which predominate over any questions affecting only individual members . The commo n
questions include, inter alia, the following :
(i) Whether the defendants' acts as alleged herein violated the federal
securities laws ;
(ii) Whether defendants participated in and pursued the common course o f
conduct complained of herein ;
(iii) Whether documents, SEC filings, press releases and other statements
disseminated to the investing public and UICI' s common stockholders during the Class Perio d
misrepresented material facts about the operations, financial condition and earn ings of UICI ;
-48-
• •
(iv) Whether the market price of UICI stock during the Class Period was
artificially inflated due to material misrepresentations and the failure to correct the materia l
misrepresentations complained of herein ; and
(v) To what extent the members ofthe Class have sustained damages an d
the proper measure of damages .
(c) Plaintiffs' claim is typical of the claims of other members of the Class an d
plaintiffs have no interests that are adverse or antagonistic to the interests of the Class .
(d) Plaintiffs are committed to the vigorous prosecution of this action and have
retained competent counsel experienced in litigation of this nature . Accordingly, plaintiffs are an
adequate representative of the Class and will fairly and adequately protect the interests of the Class .
(e) Plaintiffs anticipate that there will not be any difficulty in the management of
this litigation as a class action .
103 . For the reasons stated herein, a class action is superior to other available methods fo r
the fair and efficient adjudication of this action and the claims asserted herein . Because of the siz e
of the individual Class members' claims , few, if any, Class members could afford to seek lega l
redress individually for the wrongs complained of herein .
COUNT I
For Violations of Section 10(b) of the Exchange Act and Rule 10b-5Promulgated Thereunder Against All Defendants
104. Plaintiffs repeat and reallege the allegations set forth above as though fully set forth
herein .
105 . This Count is brought by plaintiffs pursuant to § 10(b) of the Exchange Act and Rul e
IOb-5 promulgated thereunder by the SEC against UICI and the Individual Defendants .
106. The defendants: (a) employed devices, schemes, and artifices to defraud ; (b) made
untrue statements of material fact and/or omitted to state material facts necessary in order to mak e
-49-
the statements made not misleading ; and (c) engaged in acts, practices, and a course of business
which operated as a fraud and deceit upon the purchasers of UICI shares in an effort to maintain
art ificially high market prices for UICI' s shares in violation of § 10 (b) ofthe Exchange Act and Rule
IOb-5 . UICI, AMS and the Individual Defendants are sued either as primary pa rt icipants in the
wrongful and illegal conduct charged herein or as controlling persons as alleged below .
107. As a result of their affirmative statements and reports, or participation in the makin g
of affirmative statements and reports to the investing public, defendants 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 Regulations 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 UICI's shares, operations, financial condition and earnings
so that the market price of UICI's shares would be based on truthful, complete and accurate
information .
108. UICI and the Individual Defendants, individually and in concert, directly an d
indirectly, by using the means and instrumentalities of interstate commerce and/or of the mails,
engaged and participated in a continuous course of conduct to conceal adverse material information
about the business , operations and future prospects of UICI as specified herein . The defendants
employed devices , schemes and art ifices 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 ofUICI's value and performance and continued substantial growth, which
included the making of, or the participation in the making of, untrue statements of material facts and
omitt ing to state material facts necessary in order to make the statements made about UICI and its
business operations and future prospects , in the light of the circumstances under which they were
made, not misleading, as set forth more part icularly herein , and engaged in transactions, practice s
-50-
and a course of business which operated as a fraud and deceit upon the purchasers of UICI stock
during the Class Period .
109. The primary liability and controlling person liability of the defendants named in this
Count arises from the following facts : (i) each of the Individual Defendants was a high-level
executive and/or director at UICI or AMS during the Class Period and/or was a member of UICI's
and/or its subsidiaries' management team ; (ii) each of the Individual Defendants, by virtue of his
responsibilities and activities as a senior officer and/or director of UICI or AMS, was aware of the
true financial condition of UICI and AMS ; (iii) the Individual Defendants were advised of and had
access to other members of UICI's and AMS's management team, internal reports and other data and
information about UICI's and AMS's finances, operations, policies and practices at all relevant
times; and (iv) each of the defendants was aware of UICI's dissemination of information to the
investing public which they knew or recklessly disregarded was materially false and misleading .
110 . The Individual Defendants had actual knowledge of the misrepresentations an d
omissions of material facts set forth herein . Such defendants' material misrepresentations or
omissions were done knowingly and for the purpose and effect of concealing UICI's and AMS's
operating condition and future business prospects from the investing public and supporting the
artificially inflated price of their stock, as demonstrated by said defendants' overstatements and
misstatements of UICI's business, operations and future earnings prospects throughout the Class
Period. Defendants knew that UICI's financial statements were materially misstated throughout the
Class Period .
111 . As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts by all defendants, as set forth above, the market price of UICI
stock was artificially inflated during the Class Period . In ignorance of the fact that market price of
UICI stock was artificially inflated, and relying directly or indirectly on the false and misleadin g
-51-
., r r . •
statements made by defendants, or upon the integrity ofthe market in which the shares trade, and the
truth of any representations made to appropriate agencies as to the investing public, at the times at
which any statements were made, and/or on the absence of material adverse information that was
known by defendants but not disclosed in public statements by defendants during the Class Period,
plaintiffs and the other members of the Class acquired UICI stock during the Class Period at
art ificially high prices and were damaged thereby .
112 . At the time of said misrepresentations and omissions , plaintiffs and other members of
the Class were ignorant of their falsity and believed them to be true . Had plaintiffs and the other
members of the Class and the marketplace known of the true financial condition and business
prospects of UICI, which were not disclosed by defendants , plaintiffs and other members of the
Class would not have purchased UICI stock during the Class Period , or, if they had purchased such
stock during the Class Period , they would not have done so at the a rtificially inflated prices which
they paid .
113. By virtue of the foregoing, UICI and the Individual Defendants have violated § 10(b )
of the Exchange Act and Rule I Ob-5 promulgated thereunder .
114. As a direct and proximate result of the wrongful conduct of the defendants named i n
this Count, plaintiffs and the other members of the Class suffered damages in connection with thei r
purchases of UICI stock during the Class Period .
COUNT II
Violation of Section 20(a) of the Exchange ActAgainst Defendants UICI and Mutz
115 . Plaintiffs repeat and reallege the allegations set forth above as if set forth fully herein .
116. Defendant UICI acted as a controlling person of AMS within the meaning of §20(a)
of the Exchange Act as alleged herein . Throughout the Class Period, UICI held a 100% equity
interest in AMS. By virtue of its participation in AMS's operations and/or intimate knowledge of it s
-52-
internal financial condition, business practices and products, UICI had the power to influence and
control and did influence and control, directly or indirectly, the decision-making of AMS, including
the content and dissemination of the various statements which plaintiffs contend are false and
misleading . UICI was provided with or had unlimited access to copies of AMS's statements alleged
by plaintiffs to be misleading prior to and/or shortly after these statements were issued and had th e
ability to prevent the issuance of the statements or cause the statements to be corrected .
117 . Defendant Mutz acted as a controlling person of UICI and AMS within the meanin g
of §20(a) of the Exchange Act as alleged herein . By virtue of his high-level position, substantial
stock holdings and participation in UICI's and AMS's operations and/or intimate knowledge of their
internal financial condition, business practices and products, defendant Mutz had the power to
influence and control and did influence and control, directly or indirectly, the decision-making of
UICI and AMS, including the content and dissemination of the various statements which plaintiffs
contend are false and misleading. Defendant Mutz was provided with or had unlimited access to
copies of AMS's 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 .
118. In particular, defendants UICI and Mutz had direct involvement in or intimat e
knowledge of the day-to-day operations of AMS and therefore are presumed to have had the powe r
to control or influence the particular transactions giving rise to the securities violations as allege d
herein, and exercised the same .
119. As set forth above, AMS and Alcorn violated § 10(b) of the Exchange Act and Rul e
I Ob-5 by their acts and omissions as alleged in this Complaint . By virtue of their positions a s
controlling persons, defendants UICI and Mutz are liable pursuant to §20(a) of the Exchange Act .
-53-
.~ r„ ry ! S
120 . As a direct and proximate result of the wrongful conduct of defendants , plaintiffs and
other members of the Class suffered damages in connection with their purchase of UICI stock during
the Class Period .
PRAYER FOR RELIE F
WHEREFORE, plaintiffs , on behalf of themselves and the Class, pray for judgment as
follows :
A . Declaring this action to be a class action properly maintained pursuant to Rule 23 o f
the Federal Rules of Civil Procedure ;
B . Awarding plaintiffs and other members of the Class damages together with interest
thereon;
C . Awarding plaintiffs and other members of the Class costs and expenses of thi s
litigation, including reasonable attorneys' fees, accountants' fees and experts' fees and other cost s
and disbursements ; and
D. Awarding plaintiffs and other members of the Class equitable/injunctive and suc h
other and further relief as may be just and proper under the circumstances .
JURY DEMAND
Plaintiffs demand a trial by jury .
DATED: May 27, 2005 PROVOST & UMPHREY LAW FIRM, LLPJOE KENDAL LState Bar No. 11260700WILLIE C. BRISCOEState Bar N . 01788
ILLIE C . BRISCO E
3232 McKinney Avenue, Suite 700Dallas, TX 75204Telephone : 214/744-3000214/744-3015 (fax)
-54-
0 0
LAWSON, FIELDS & CALHOUN, P .C .
ERIC G. CALHOUNState Bar No. 03638800GARY B. LAWSONState Bar No . 12058490RICHARD J . PRADARITS, JR .State Bar No. 1622545014135 Midway, Suite 250Addison, TX 75001Telephone : 972/490-0808972/490-9545 (fax )
Co-Liaison Counse l
LERACH COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLP
WILLIAM S . LERACH
DARREN J . ROBBINSDOUGLAS R. BRITTONTHOMAS E . GLYNN401 B Street, Suite 1600San Diego, CA 92101Telephone : 619/231-1058619/231-7423 (fax)
COHEN, MILSTEIN, HAUSFELD& TOLL, P .L.L.C .
STEVEN J. TOLLDANIEL S . SOMMERSMATTHEW K. HANDLEY1100 New York Avenue, N.W.Suite 500 Wes tWashington , DC 20005Telephone : 202/408-4600202/408-4699 (fax)
Co-Lead Counsel for Plaintiffs
S \CasesSD\UIC1 04\CPT00021259 AMD doe
-55-
~Y ! •
DECLARATION OF SERVICE BY MAI L
I, the undersigned, declare :
That declarant is and was, at all times herein mentioned, a citizen of the United State s
and a resident of the County of San Diego, over the age of 18 years, and not a party to or intereste d
party in the within action ; that declarant's business address is 401 B Street, Suite 1600, San Diego ,
California 92101 .
2. That on May 27, 2005, declarant served the FIRST AMENDED CONSOLIDATE D
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS by deposi ting a true
copy thereof in a United States mailbox at San Diego, California in a sealed envelope with postag e
thereon fully prepaid and addressed to the parties listed on the attached Service List .
3. That there is a regular communication by mail between the place of mailing and the
places so addressed .
I declare under penalty of perjury that the foregoing is true and correct . Executed this 27th
day of May, 2005, at San Diego, California .
~ V-~le- ~~ ~ ~KATHLEEN R. JO
UICI 04 (LEAD)
Service List - 5/27/2005 (04-0179)
Page 1 of 1
Counsel For Defendant(s )
Wayne M . Secore Robert R. SummerhaysGene R . Besen Debra L . GoldsteinDavid B . Dyer Yolanda Cornejo Garci aSecore & Waller, L .L.P. * Well, Gotshal & Manges LLP*12221 Merit Drive , Suite 1100 200 Crescent Court , Suite 30 0Dallas , TX 75251 Dallas, TX 7520 1
972/776-0200 214/746-7700972/776-0240 (Fax) 214/746-7777 (Fax )
Counsel For Plaintiff(s )
Steven J . Toll Gary B. LawsonDaniel S . Sommers Eric G. CalhounMatthew K. Handley Richard J . Pradarits, Jr .
Cohen, Milstein, Hausfeld & Toll, P .L .L.C . Lawson, Fields & Calhoun, P .C.1100 New York Ave ., N .W., Suite 500 14135 Midway, Suite 25 0Washington, DC 20005-3964 Addison, TX 7500 1
202/408-4600 972/490-0808202/408-4699 (Fax) 972/490-9545 (Fax )
Darren J . Robbins Joe Kendal lDouglas R . Britton Willie C . Brisco eThomas E Glynn Provost Umphrey Law Firm, LLPLerach Coughlin Stoia Geller Rudman & 3232 McKinney Avenue, Suite 70 0Robbins LLP Dallas, TX 75204401 B Street, Suite 1600 214/744-3000San Diego, CA 92101-4297 214/744-3015(Fax)
619/231-105 8619/231-7423 (Fax)
*Denotes service via facsimile and U .S . mail