IN THE UNITED STATES DISTRICTNORTHERN DISTRICT OF TE)

(DALLAS DIVISION)

In re UNISTAR FINANCIAL SERVICES CORPSECURITIES LITIGATION

U.S . I)a S`L 1'.CT CO! ~ tTNORTIiiRN I STR,CT OF T EXA S

FILED

URTAUG

162000

CLERK,U.SDISTRICT COULBy

Deputy

Master File No .3-99-CV 1857

CLASS ACTION

CONSOLIDATED COMPLAIN T

NATURE OF ACTION

1 . This is a securities class action against Unistar Financial Service Corp . ("Unistar" or the

"Company") and certain of its senior executives and controlling shareholders, as well as its auditors, arisin g

from false statements issued between October 15, 1998 and July 20, 1999 (the "Class Period") regarding th e

Company's assets . These positive representations were false and caused Unistar's stock to trade at artificiall y

inflated levels during the Class Period and enabled the Defendants to : a) exchange $75 million worth o f

Unistar's artificially inflated common stock to satisfy a debt to Rockford Partners , Ltd. ("Rockford") a

Bermuda based venture capital firm ; and b) sell, exchange, or transfer 16 .2 million of their personal Unista r

shares while the stock was trading at artificially inflated prices . In truth, Unistar's business was not

succeeding as the Defendants knew. Shortly after these share transfers were completed, the price of Unista r

common stock collapsed approximately 55% in two days, and Unistar was suspended from trading when i t

was revealed that both the Texas Department of Insurance and the American Stock Exchange ("AMEX")

were conducting an inquiry into the Company's disclosure practices . Unistar has not traded on the AME X

since then .

JURISDICTION AND VENUE

2. The claims asserted herein arise under §§ 10(b) and 20(a) of the Securities Exchange Act of

1934 (" 1934 Act") and Rule I Ob-5 promulgated thereunder . Jurisdiction is conferred by §27 of the 1934 Act .

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Defendants used the instrumentalities of interstate commerce and the facilities of the national securitie s

markets . Unistar's stock was actively traded in an efficient market --the American Stock Exchange --unde r

the symbol UAI . Venue is proper here as Unistar's principal place of business is located in this district an d

certain of the acts giving rise to the violations complained of herein occurred in this district .

PARTIES

3 . On May 24, 2000, John Anderson, Albert J . Bianco, Lawrence E . Gallagher, Tom Hayes ,

Michael D. Myers, and Thaddeus Szymczak were appointed Lead Plaintiffs . Each of these persons

purchased shares of Unistar common stock during the Class Period as described in the certifications on fil e

with the Court, and was damaged thereby .

4. (a) Defendant Unistar maintains its executive offices at 4635 McEwen Road, Dallas ,

Texas, 75244 . Unistar claims to be a fully integrated insurance and financial service holding compan y

specializing in auto insurance, premium financing, and insurance claims management . During the Class

Period, Unistar had more than 24 million shares outstanding, is believed to have had in excess of 24 0

stockholders of the Company's common stock, and is believed to have had daily trading volume in its

common stock during the Class Period in excess of 25,000 shares per day . The stock traded at a Class Perio d

high of $61 .63 per share and a Class Period low of $27 per share before trading was suspended . Once trading

recommenced , the stock was delisted from the AMEX . It now trades sporadically on the Bulletin Board fo r

less than $1 .00 per share .

(b) Unistar is comprised of several subsidiaries including Unistar Insurance Company, Eagl e

Premium Finance Company, Great Southern General Agency, Inc ., and U.S . Fidelity Insurance Services, Inc .

(collectively, the "Subsidiaries") . The Subsidiaries were located in Dallas, Texas . By order of the

Commissioner of Insurance of the State of Texas dated October 18, 1999, each of the Subsidiaries was foun d

to be in a hazardous financial condition . In addition, the Texas Department of Insurance ("TDI") found

serious concerns about the fitness and competence of the Subsidiaries' officers and management due to, inter

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alia, the unsupported valuation of customer lists and other financial statement accounts . Unistar Insuranc e

Company has since been placed in temporary receivership in an action filed by the TDI . The Company was

found to have no hope of returning to solvency .

(c) On October 14, 1999, the U .S . Securities Exchange Commission ("SEC") gave Notice of

the SEC's Order initiating an investigation (the "Investigation"), styled, In the Matter of Unistar Financia l

Services Corporation (FW-1020-A). The Order relates primarily, but not exclusively , to international

wrongdoing by the Individual Defendants concerning the following :

(i) the filing of false and misleading financial information by Unistar, Marc A. Sparks, F .

Jeffrey Nelson and others concerning Unistar's assets and liabilities ; its current operations and business

prospects ; the assets of the companies that Unistar had acquired ; and transactions with related parties sinc e

at least January 1, 1996 ;

(ii) the manipulation of the prices of Unistar stock through payments to registere d

representatives and/or trading of Unistar stock by Sparks, Nelson, and others while in possession of material

non-public information ;

(iii) the transfer of shares of the Company without the filing of the proper registratio n

statements, or without seeking an exemption from the SEC, by Unistar, Sparks, Nelson, and others ;

(iv) the filing with the SEC of reports containing false and misleading financial informatio n

by Unistar, its predecessors and/or Sparks, Nelson, or others since or before the fiscal quarter ending Jun e

30, 1998 ;

(v) the failure of Unistar to implement adequate accounting controls with respect to th e

transactions and dispositions of its assets and the falsification by Unistar, Sparks, Nelson, or others with

respect to the books and records reflecting the transactions and disposition of Unistar's assets ;

(vi) the making of false statements by Sparks, Nelson, or other officers and directors in

connection with audits of the issuer and the preparation of documents or reports with the SEC ;

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(vii) the failure by Unistar, Sparks, Nelson, and others to timely file a statement require d

by Schedule 13D with respect to their ownership of more than 5% of Unistar' s common stock; and

(viii) making materially false or misleading statements including the failure to correc t

earlier statements with respect to the solicitation of a proxy .

5 . (a) Defendant Marc A. Sparks ("Sparks") is Unistar's CEO and Chairman of the Board .

During the Class Period, while in possession of material non-public information regarding Unistar, Spark s

sold or otherwise disposed of 4 .2 million shares of Unistar common stock , representing 63% of his tota l

share holdings .

(b) Defendant F. Jeffrey Nelson ("Nelson") was, at all relevant times, the President, Chief

Financial Officer, and Treasurer of Unistar . During the Class Period, while in possession of material non-

public information regarding Unistar, Nelson sold or otherwise disposed ofover 5 .4 million shares ofUnista r

common stock, representing 81% of his holdings .

(c) Nicole C . Caver ("Caver"), the wife of the former Unistar Director, Paul Caver, is a forme r

director of Unistar and, at certain times during the Class Period in conjunction with Nelson and Sparks, was

a controlling shareholder of Unistar . During the Class Period, Caver sold or otherwise disposed of 6 . 6

million Unistar shares, representing 100% of her holdings .

(d) The defendants named in ¶5 (a)-(c) are sometimes referred to herein as the "Individua l

Defendants . "

6. During the course of the Investigation, the SEC issued subpoenas to banks seekin g

documents relating to the Individual Defendants ' accounts . The SEC has since disclosed , in a veri fied

pleading supported by an affidavit of an SEC staff attorney, that the SEC has obtained information

concerning possible securities law violations by the Individual Defendants, including acquisitions by Unista r

of other corporations, unregistered sales of Unistar securities, manipulation ofUnistar stock prices, and sale s

ofUnistar stock by insiders, none of which was disclosed to the Plaintiffs or the investing public . See, Frank

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Jeffrey Nelson v ., United States Securities and Exchange Commission , Case No. 5 :00cv679 cg (W .D. Tx ,

San Antonio Division), pleading #4 .

7 . The SEC has further disclosed in the veri fied pleading that its staff has reason to believe that

while Unistar's share price was rising, Unistar insiders and affiliates, possibly including Nelson, sol d

thousands of the shares they controlled to the public without registration or a relevant exemption fro m

registration requirements . Most of the proceeds from the sale of Unistar securities were sent to offshor e

accounts, and some of the funds from thee offshore accounts were returned to Unistar affiliates in the Unite d

States . The SEC is seeking to trace all proceeds of the securities transactions .

8 . Unistar took its present form on August 17, 1998 when Defendants Sparks, Nelson, an d

Caver sold their closely-held insurance company, International Fidelity Holding Corporation ("IFHC") t o

Caldera, Inc ., a Canadian-based public shell corporation that had no assets or operations at the time . In

connection with the transaction, Sparks, Nelson, and Caver received 6 .6 million shares of Caldera each

(representing 98.9% of the shares then outstanding) . Nelson and Sparks then renamed the Compan y

"Unistar," and appointed a new Board of Directors (that included themselves and Nicole Caver's husband) .

Three weeks later, on September 9, 1998 , Unistar common stock began trading on the NASDAQ over-the-

counter market at a price of $26 per share . Thus, the Unistar shares that Sparks, Nelson, and Caver received

in exchange for IFHC in August, 1998 had a market value of more than $500 million when Unistar ' s stock

began trading . On May 17, 1999, Unistar stock listing moved to the AMEX .

9. Sparks, Nelson, and Caver, via their executive positions, ownership in Unistar, or Boar d

membership, were controlling persons of Unistar . Unistar controlled each of the Individual Defendants .

These controlling persons are each liable under §20(a) of 1934 Act .

10. Because of their positions, Sparks, Nelson, and Caver knew the adverse, non-publi c

information about the business of Unistar as well as its finances, prospects , regulatory compliance, an d

accounting procedures via access to internal corporate documents (including the Company's operating plans ,

5 1 \Umstar\Complamt INRE wpd

budgets and forecasts, and reports of actual operations compared thereto), conversations and connection s

with other corporate officers and employees, attendance at management and/or Board of Directors ' meeting s

and committees thereof and via reports and other information provided to them in connection therewith .

11 . Sparks had been one of three (3) shareholders of IFHC before that company was sold t o

Unistar in August 1998 for more than $500 million worth of Unistar stock . Sparks also was one of two (2 )

shareholders of U .S . Fidelity Holding Corp . ("USFHC") before that company was sold to Unistar i n

September 1998 for approximately $ 80 million in Unistar stock . According to the April 29, 1999 proxy

statement that Unistar filed with the SEC, Defendant Sparks disposed of 4.2 million Unistar shares (more

than 60% of his holdings during the Class Period) . Sparks has not disclosed when or how he sold the shares ,

but, based on Unistar's average trading price through April 29, the shares had (an inflated) market value o f

over $85 million .

12 . Nelson was one of three (3) shareholders of IFHC before that company was sold to Unista r

in August 1998 , and he was one of two (2 ) shareholders of USFHC before that company was sold to Unista r

in September 1998. According to the April 29, 1999 proxy statement that Unistar filed with the SEC, Nelso n

disposed of more than 5 .5 million shares of Unistar stock (more than 75% of his holdings) during the Clas s

Period . Nelson has not disclosed when or how he sold the shares, but, based on Unistar's average tradin g

price through April 29 , 1999, those shares had an average ( inflated ) market value of more than $ 100 million .

According to an August 1, 1999 St. Petersburg Times article, Nelson's former family-run company, Texa s

Central Life, has been insolvent since going into receivership in 1992 .

13 . During the Class Period, each Individual Defendant occupied a position that made him priv y

to non-public information concerning Unistar . Because of this access, each of these defendants actuall y

knew the adverse facts specified herein, that they were being concealed, and that the positive statement s

being made were false . Unistar's press releases and corporate reports to shareholders were eac h

group-published documents for which each defendant is equally responsible .

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14. Defendant Karlins Arnold & Corbit, P .C. ("KAC") is an accounting firm based in The

Woodlands, Texas . KAC served as an independent auditor of Unistar . KAC audited the publicly-filed

financial results for the year-ended December 31, 1998, and Unistar's balance sheet as of December 31,

1998 . KAC issued an unqualified (clean) audit report on Unistar's 1998 financial statements . KAC was

retained as Unistar's auditors after Unistar dismissed BDO Dunwoody LLP on February 23, 1999 . BDO

Dunwoody had performed the year-end audits of Caldera (the shell company into which Unistar merged) for

the years 1996 and 1997.

15. Each of the defendants is liable for knowingly making false and misleading statements, and

for willfully participating in a fraudulent scheme and course of business that operated as a fraud on

purchasers of Unistar stock and damaged Class members in violation of the federal securities laws . All of

the Defendants pursued a common goal, i .e ., inflating the price of Unistar stock by making false and

misleading statements and concealing material, adverse information . The scheme and course of business

was designed to and did : (i) deceive the investing public, including plaintiff and other Class members ; (ii)

artificially inflate the price of Unistar stock during the Class Period ; (iii) cause Plaintiffs and other members

of the Class to purchase Unistar stock at inflated prices ; (iv) permitted certain of the Individual Defendants

to sell or otherwise dispose of 16.2 million shares of Unistar at artificially inflated prices ; and (v) permit

Unistar to utilize approximately $75 million worth of its common stock as an artificially inflated currency

to repay a debt to Rockford .

16. Each Defendant took active part in the described fraudulent scheme and course of business .

Each Individual Defendant sold or otherwise disposed of Unistar stock while in possession of material

adverse non-public information thus engaging in a deceptive and/or manipulative device . As a result, each

defendant made a false statement and employed a deceptive or manipulative device in furtherance of the

scheme.

SCHEME, MOTIVE, AND OPPORTUNIT Y

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17 . Each defendant is liable for making false statements (thus committing manipulative acts )

and for participating in a scheme to defraud purchasers ofUnistar stock by artificially inflating Unistar stoc k

throughout the Class Period to inflate Unistar's stock price .

18 . Each of the Individual Defendants participated directly in the management of the Company,

was involved directly in the daily operations of the Company at the highest levels, or was privy t o

confidential proprietary information concerning the Company and its operations, finances, and busines s

prospects as alleged herein. They were involved in drafting, producing , reviewing and/or disseminating th e

false and misleading statements alleged herein . Thus, they had the opportunity to commit the fraud allege d

herein .

19. Sparks and Nelson were the top executives ofUnistar . They ran Unistar as "hands-on" day-

to-day managers, dealing with important issues facing Unistar 's business , i .e ., accounting procedure ,

finances and regulatory compliance.

20. On or about September 30, 1998, Unistar acquired U .S . Fidelity Holding Compan y

("USFHC") from Rockford for 3 .975 million shares of Unistar . Rockford thus became the owner of

approximately 16 percent of Unistar . This was in violation of Texas law, under which regulatory approva l

is required prior to any shareholders acquisition of a 10% or greater stake in an insurance company such a s

Unistar . Unistar failed to obtain such approval and failed to report this ownership change to the Texa s

Department of Insurance .

21 . The Individual Defendants profited handsomely from their fraud through not only sustainin g

their executive positions, but also by selling or otherwise disposing of their Unistar stock at greatly inflate d

prices as further described herein .

FALSE STATEMENTS DURING THE CLASS PERIO D

22 . Unistar took its present form on August 17, 1998, when Defendants Sparks and Nelson ,

together with Caver, the sole shareholders of IFHC, sold IFHC to a Toronto-based shell company calle d

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Caldera . According to the annual report on Form 10-K that Unistar filed with the SEC on or about March

31, 1998, prior to purchasing IFHC, Caldera was "a dormant public shell with no operations or activity of

any sort ." Sparks, Nelson, and Caver sold IFHC to Caldera in exchange for 19 .8 million shares of that

company's stock, which, according to a Form 8-K the company filed with the SEC on August 31,1998,

represented nearly 99% of Caldera's then-outstanding and then-issued stock . Upon completion of the

transaction, the company was renamed Unistar, and Sparks and Nelson appointed themselves and Nicole

Caver's husband to the Board of Directors ; they also appointed Sparks as Unistar's Chairman and Chief

Executive Officer, and Nelson was President and Chief Financial Officer .

23 . According to an article that appeared in the St. Petersburg Times on August 1, 1999, the

transaction that started Unistar "still attracts skeptical attention from insurance experts and regulators,"

because IFHC's operating subsidiary, International Surety and Casualty, was at the time (and still is) under

administrative oversight with the Texas Department of Insurance . An August 4, 1999 article by Jonathan

Weill, a reporter with The Wall Street Journal's Texas Journal, states that administrative is "a form of

heightened regulatory security" and reports that according to former Texas Insurance Commissioner, Ethan

Bomer, International Surety "was inadequately capitalized, didn't keep its books up to date, wasn' t

collecting premiums in a timely manner from affiliated insurance agencies, and was paying office rents on

behalf of affiliates ." The St. Petersbur Times article further reports that at the time Unistar bought IFHC

in August 1998, the Company had little in the way of tangible assets, and the article quoted long-time

industry consultant, David Schiff, a columnist for SNL Insurance Daily, as stating that at the time of the

transaction, IFHC "had a negative book value of $10 million ." Nevertheless, Sparks, Nelson, and Ms . Caver

effectively sold IFHC to Unistar for more than $500 million worth of stock (based on the $26 per share price

at which Unistar stock began trading, three (3) weeks later, on September 9, 1998) .

24. On September 9, 1998, Unistar's stock began trading on the NASDAQ over-the-counter

exchange at a price of $26 per share .

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25 . On September 30, 1998 , just weeks after the Company's stock began trading, Unista r

acquired another insurance company , U .S . Fidelity Holding Co . ("USFHC"), for nearly 4 million shares of

its common stock, which based on the Company's stock price at the time, translated into a purchase pric e

of nearly $100 million . According to the Form 8-K the Company filed with the SEC on October 15, 1998 ,

immediately prior to the acquisition, USFHC was wholly-owned by Nelson and Sparks . Simultaneously with

or immediately prior to the transaction , Sparks and Nelson transferred their shares of USFHC to Rockford

partners, a British Virgin Island corporation, and Rockford Partners then sold USFHC to Unistar for $10 0

million worth of stock . According to the Company' s 8-K, "the consideration paid for USFHC by Unistar

was determined by Unistar based on its assessment of the value of USFHC operated as a wholly-owne d

subsidiary of Unistar ."

26. The foregoing was false and misleading in that Sparks and Nelson, as USFHC's former

owners, knew or absent recklessness should have known that USFHC was not worth anywhere near the pric e

that Unistar paid to acquire it .

27 . Furthermore, as Jonathan Weill reported in The Wall Street Journal 's Texas Journal on

August 3, 1999, Unistar violated Texas state insurance laws when it issued the shares of stock to an offshor e

firm, giving that firm a 16% stake in Unistar, which was not disclosed to state regulators, as Texas la w

requires .

28 . On or about March 31, 1999, Unistar filed its annual report on Form 10-K for the year ende d

December 31, 1998 . It was signed by Defendants Sparks and Nelson . Annexed to the 10-K was an

independent auditor's report prepared by Defendant KAC . The report, which was signed by KAC, was dated

March 9, 1999, KAC's report stated, inter alia , that KAC conducted its audit "in accordance with Generally

Accepted Auditing Standards," which, among other things, require that auditors "plan and perform the audi t

to obtain reasonable assurance about whether the financial statements are free of material misstatement . "

KAC stated that, in its opinion, "the consolidated financial statements . . . present fairly in all materia l

10 1 \Umstar\Complamt INRE .wpd

respects the financial position of Unistar Financial Service Corp . as of December 31, 1998 . . . in conformity

with Generally Accepted Accounting Principles . "

29. The financial statements in Unistar's 10-K included a balance sheet that valued th e

Company's customer lists at $86 million, and the Company's Bermuda insurance license at $5 million,

cumulatively representing more than 60% of the Company's purported assets of $149 million . The financia l

statements also state that customer lists are amo rt ized on a straight- line basis over forty (40) years and ,

according to the notes to the financial statements, "Management reviews on an annual basis the carrying

value of customer lists in order to determine whether an impairment has incurred . Impairment is based on

several factors, including the company's projection of future undiscounted operating cash flows . If an

impairment of the carrying value were to be indicated by this review, the company would adjust the carryin g

value of goodwill to its estimated fair value . "

30 . The foregoing representations were false and misleading in, interalia , the following respects :

There was no basis for the Company's valuation of customer lists at $86 million or a Bermuda license at $ 5

million, and financial statements reflecting the foregoing valuations did not comply with Generally Accepte d

Accounting Principles ("GAAP") . GAAP are those principles recognized by the accounting profession a s

the conventions, rules and procedures necessary to define accepted accounting practice at a particular time .

Regulation S-X (17 CFR 210 .4-01(a)(1)) states that financial statements filed with the SEC which are not

prepared in compliance with GAAP are presumed to be misleading and inaccurate . Reg S -X requires that

interim financial statements must also comply with GAAP, with the exception that interim financia l

statements need not include disclosure which would be duplicative of disclosures accompanying annua l

financial statements . (17 C .F .R. §210.10-01 (a)) . Also improper was the Company 's policy of amo rt izing

the customer list over a period of forty (40) years . As reported in Jonathan Weill's August 4, 1999 Wal l

Street Journal Texas Journal article, "analysts say customer turnover rates in the non-standard auto insurance

industry typically exceed 33% a year, making the customer list virtually worthless after about 3 years ." The

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article goes on to quote Patrick Shouvlin, a partner at Price Waterhouse Coopers in New York and Chairma n

of the American Institute of Certified Public Accountants Insurance Commi ttee, who stated that "40 year s

for some thing like that is excessive ."

31 . The TDI conducted an investigation of the Subsidiaries ' financial affairs, including th e

financial statements that were received by Defendant KAC . The TDI found that the value levied on custome r

lists for the sub-standard automobile insurance policies by Great Southern of over $2 .7 million had, in fact,

no supported value. In addition , the TDI found that a receivable carried by Great Southern of over $4 .7

million from U.S . Fidelity Insurance Services, an affi liated managing general agent of the agency that was

insolvent, also had no suppo rted value . Defendant KAC found, required , nor provided , any disclosure

concerning either of these material financial matters concerning the Subsidiaries .

32. Customer lists of sub- standard automobile insurance policies are vi rtually wo rthless and are

recognized as carrying little, if any, value . Such customers rarely remain with any one company for ver y

long. To amo rt ize such a customer list over forty (40) years, or to permit a company to amort ize such a list

over forty (40) years, violates both GAAP and GAAP's standards . According to GAAP, as set forth i n

Accounting Principles Board Opinion ("APB") No . 17, intangible assets which have a limited term o f

existence because of their nature should be amortized by systematic charges to income over the term o f

existence or other period expected to be benefitted . See APB No. 17, ¶12 . A meaningful review test of the

Subsidiaries' records and customer base would have shown that the majority of the company's customer s

would not renew their policies and rarely remained a customer for more than three (3) years . In fact, most

customers did not remain after more than one (1) year . Due to the fact the customer lists had a life of onl y

three years, Unistar's use of 40 years caused its assets and earnings to be overstated . Unistar recorded

amortization expense of only $537,581 in 1998, all or nearly all of which was recorded in the fourth quarte r

of 1998 . Had Unistar used an amo rt ization period in accordance with GAAP of three years, instead of 4 0

years, the 1998 amo rt ization expense would have been $ 7 .2 million instead of $537,581 . The net

12 1 \Umstar\ Complamt INRE wpd

unamortized balance in customer lists would have been less than $80 million instead of the $86 .68 million

reported by Unistar and net earnings would have been a loss of at least $2 million instead the income of $ 1 . 0

million which Unistar reported . Had Unistar properly analyzed and reported the valuation not the custome r

lists, it would have written off most, if not all, of the costs associated with these lists resulting in a hug e

multi-million dollar loss for 1998 .

33 . Policy renewals for all Unistar customers were kept on a sequential basis . For example, a

customer's first, or initial, policy would be coded as "0001," the first renewal "0002," the second renewal

"0003," etc . Since most policies sold by the Subsidiaries were for periods of one (1) year or less, a customer

policy code of "0002" would most likely represent a customer who had been with the Company for two (2)

years, or more likely less than two (2) years . A simple review or test of the customer's policies woul d

immediately indicate that the Company's customer lists were virtually worthless due to the short duration

of the customer's relationship with the Company .

34 . On March 3 1, 1999, the Company also filed its quarterly reporton Form 10-Q for the perio d

ending September 30, 1998 . This report, which was signed by Defendants Sparks and Nelson, contained a

balance sheet which valued customer lists at $86 .7 million, more than 60% of the total assets listed on th e

balance sheet . As described in paragraphs 28-31, these financial statements were materially false an d

misleading in violation of GAAP .

35 . On May 31, 1999, Unistar filed its quarterly report on Form 10-Q for the first quarter ende d

on March 3 1, 1999 . The report was signed by Defendants Sparks and Nelson . The Company's balance sheet

listed total assets of over $179 million, nearly half of which (over $ 86 million ) were attributed to the

"customer list," and then an additional $5 million was attributed to a "license, Bermuda reinsurance ."

36 . The foregoing was false and misleading for the reasons set fo rth in paragraphs 27-29 above .

Unistar repo rted net income of $1 .37 million for the qua rter ended March 31, 1999, based on amo rtization

of customer lists of only $550,576 . Had the Company properly reported its amortization of customer list s

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in accordance with GAAP, it would have reported amortization expense of at least $7 .1 million and a net loss

of more than $2 million . Had the Company properly reported the value of the customer lists, it would have

reported a loss in the tens of millions of dollars .

37. On May 17, 1999, Unistar announced that trading for the Company's shares moved to the

AMEX. In a PR Newswire release that the Company issued, Defendants Sparks was quoted as saying, "this

is an exciting time for Unistar . We are extremely enthusiastic about the privilege of listing our company on

the American Stock Exchange . . . . We believe by listing on the American Stock Exchange our shareholders

would have less chance for volatile price swings and market churning . "

38. On the strength of Defendants' misrepresentations concerning Unistar's true value, the stock

price soared above $60 per share on July 6, 1999.

39. On June 30, 1999, Unistar was one of the companies added to the Russell 2000 small stock

index for the coming year .

40 . Between July 13 and July 16, 1999, Unistar's stock price plummeted from $60 per share to

just $27 per share, a drop of 55% over three (3) days . Following the drop, Unistar issued a press release on

the PR Newswire in which Defendant Sparks was quoted as saying, "[T]here has been no material adverse

development in our business affairs, nor any undisclosed news to account for the recent unusual market

decline in our stock price ." A July 15, 1999 Bloomberg article quoted Defendant Sparks as blaming the

Company's stock price decline on a "handful of illegal short-sellers" engaged in a "malicious attach" on the

Company, nonetheless Sparks assures the market, "we're completely on track with our business plan ." But,

as The Wall Street Journal reported on July 21, 1999, according to documents filed with the Texas

Department of Insurance, one piece of news that had not been disclosed in Unistar's filings was that the

Company had plans to sell its insurance unit (i .e ., the businesses formerly known as IFHC, that Defendants

Sparks and Nelson sold to the company several months earlier for approximately $560 million) to another

entity controlled by Sparks and Nelson, this time for just $3 million .

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41 . According to a July 22, 1999 report on the Bloomberg newswire, Defendants Sparks sai d

Defendants did not disclose the planned sale of the insurance unit in financial filings because they decide d

it was too small to be a material transaction .

42 . On July 23, 1999, Unistar announced that the AMEX had suspending trading of Unistar's

stock pending a review of the recent volatility of the Company's trading price . The Company also announce d

that, as a result ofthe AMEX suspension, the Company has reconsidered a previously announced two-for-on e

stock split, which was to be payable in the form of a common stock dividend . According to a July 26, 199 9

article in Best's Insurance News , Defendant Sparks said that AMEX's review of Unistar was standard

procedure in a case of trading halt with a new listing . The article also quoted Mike Shokouhi, a spokesma n

for the NASDAQ/AMEX group, who stated that "ultimately , review determines whether a company wil l

continue to be listed ." Mr. Shokouhi (according to the article) declined comment on the reasons for th e

Unistar review .

43 . On July 26, 1999, in the wake of widespread criticism concerning the Unistar insurance

company transaction, Defendants withdrew the proposed sale of the Company' s insurance unit .

44. As of August 18, 1999, trading in Unistar's stock had yet to resume and the AMEX ha d

given no public indication of whether the stock would ever trade again . Nevertheless, Defendants Spark s

and Nelson profited handsomely from Defendants' artificial inflation of Unistar's stock price during the

Class Period . The 8-K report dated August 31, 1998 that Unistar filed with the SEC states that Sparks and

Nelson (along with Nicole Caver) received 6 .8 million Unistar shares each for the sale of IFHC to what was

then known as Caldera. According to a proxy statement dated April 29, 1999 and filed with the SEC, as of

April 29, 1999, Sparks owned just 2.36 million shares of Unistar stock, and Nelson owned less than 1 . 2

million shares . The proxy did not list Nicole Caver as owning any shares of the Company . Defendants

Sparks and Nelson have not disclosed when or how they disposed of more than 10 million shares of Unista r

stock . According to a July 21, 1999 Wall Street Journal article, Sparks says that such disclosure was not

15 1 \Umstar\Complamt INRE wpd

necessary . While the public is not aware of the exact amount of profits that the Individual Defendants

realized from their Class Period sales of Unistar stock, it is clear that those profits were several hundred

million dollars, as Unistar's stock trading price averaged approximately $30 million per share, between

September 9, 1998 and April 29, 1999, and during that time, only closed one day below $20 per share .

45 . In short, over the course of the Class Period, Defendants turned their formerly closely-held ,

low-asset insurance company into a grossly over-valued public company allowing them to reap hundred s

of millions of dollars from the sale of shares to unsuspecting investors at artificially inflated prices .

COUNT I

AGAINST ALL UNISTAR AND INDIVIDUAL DEFENDANTSFOR VIOLATIONS OF SECTION 10(b)

OF THE EXCHANGE ACT

46. Plaintiffs repeat and incorporate all allegations in the foregoing paragraphs as if fully se t

forth herein .

47. During the Class Period, Unistar and the Individual Defendants issued releases, statements ,

and reports that misrepresented Unistar's financial results and condition, and inflated the market price o f

Unistar's common stock throughout the Class Period . These reports contained untrue statements of materia l

facts and omitted to state material facts necessary in order to make the statements made not misleading, i n

violation of Section 10(b) of the Exchange Act and Rules I Ob-5, promulgated thereunder .

48. Unistar and the Individual Defendants engaged in acts, practices, and courses of busines s

that operated as a fraud and deceit upon the Plaintiff and the Class ,

and employed devices, schemes, and artifices to defraud and engaged in facts, practices, an d

course of conduct in an effort to maintain artificially high market prices for Unistar's common stock i n

violation of Section 10(b) of the Exchange Act and Rule l0b-5 .

49. Unistar and the Individual Defendants, by acting as described above, did so knowingly an d

intentionally or in such a reckless manner as to constitute a willful deceit and fraud upon the Plaintiff and

16 1 \Umstar\Complamt.[NRE wpd

the Class . They acted with scienter . With knowledge or reckless disregard of Unistar's true financia l

condition , Unistar and the Individual Defendants caused the reports, statements, and releases to contai n

misstatements and omissions of fact as alleged herein .

50. During the Class Period, Unistar and the Individual Defendants, individually and in concert ,

directly and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails ,

engaged in and participated in a continuous course of conduct and conspiracy to circulate false and/o r

material information regarding Unistar's financial condition . Unistar and the Individual Defendants

employed devices, schemes, and artifices to defraud, while in possession of material, adverse, non-publi c

information, and engaged in acts, practices, and a course of conduct as alleged herein in an effort to assur e

investors of Unistar's value and performance . This included the making of, or the participation in th e

making of, untrue statements of material facts and omitting to state material facts necessary in order to make

the statements made about Unistar and its financial condition in light of the circumstances under which they

were made, not misleading, as set forth more particularly herein, and engaged in transactions, practices, an d

a course of business which operated as a fraud and deceit upon the purchasers of Unistar stock during th e

Class Period .

51 . The Individual Defendants were motivated to commit the aforementioned acts in order t o

enable them to dispose of millions of shares of their own Unistar holdings at artificially inflated prices as

was set forth above .

52 . Each of the Individual Defendants' primary liability and controlling-person liability arise s

from the acts that each of the Individual Defendants was an officer and director of Unistar during the Clas s

Period and was privy to and participated in the creation, development, and dissemination of Unistar's publi c

statements concerning earnings and assets .

53 . Unistar and the Individual Defendants have engaged in some or all of the unlawful acts ,

plans, schemes, transactions, and activities to defraud as alleged herein . In the course of their participatio n

17 1 \Umstar\Complamt IN RE wpd

in the unlawful acts, plan, schemes, transactions, and activities to defraud, said Defendants agreed to perfor m

and did perform, or substantially assisted in the performance of acts in furtherance of the unlawful schem e

to defraud the Plaintiffs and the Class . Unistar and the Individual Defendants are sued as direct participants ,

and also as co-conspirators in the illegal practices complained of herein, in that they prepared, approved of

or disseminated materially misleading statements or omissions, or provided false or misleading informatio n

to the investing public .

54. As a result ofthe materially false and misleading information and failure to disclose materia l

facts, as set forth above, the market prices of Unistar securities during the Class Period was artificiall y

inflated .

55 . In ignorance of the fact that the market price of Unistar's publicly traded securities wer e

inflated artificially and distorted, and relying directly or indirectly on the false and misleading statements

made by Defendants, and upon the integrity of the market in which the securities trade, and the truth of an y

representations made to appropriate agencies and to the investing public, at the times at which any statement s

were made, and/or on the absence of material adverse information that was known to or recklessl y

disregarded by Defendants but not disclosed in public statements by Defendants during the Class Period ,

Plaintiffs acquired Unistar securities during the Class Period at artificial prices and were damaged thereby .

56. Atthe time of said misrepresentations and omissions , Plaintiffs were ignorant oftheir falsity ,

and believed them to be true . Had Plaintiffs and the marketplace known of the truth concerning Unistar' s

financial results and condition, Plaintiffs would not have purchased or otherwise required their Unista r

common stock during the Class Period, or, if they had acquired Unistar common stock during the Clas s

Period, they would not have done so at the artificially inflated prices at which they purchased their Unista r

stock during the Class Period .

57 . By virtue of the foregoing, Unistar and the Individual Defendants have violated Sectio n

10(b) of the Exchange Act, and Rule I Ob-5 promulgated thereunder .

18 1 10mstar\Complamt INRE wpd

58 . As a direct or proximate result of the Defendants' wrongful conduct, Plaintiffs suffere d

damages in connection with their purchases of Unistar's common stock during the Class Period .

COUNT I I

AGAINST THE INDIVIDUAL DEFENDANTS FOR VIOLATIONOF SECTION 20(a) OF THE EXCHANGE AC T

59. Plaintiffs repeat and incorporate the allegations in the foregoing paragraphs as if fully se t

forth herein .

60. Because of their executive positions with Unistar, as well as their ownership of IFHC and

USFHC prior to Unistar's purchases of those companies, the Individual Defendants had access to the advers e

confidential and material information about Unistar's financial condition, yet approved the misleadin g

statements and omissions as particularized herein and acted to conceal them . The Individual Defendants ,

because of their respective positions of control and authority as principal executive officers of Unistar, wer e

able to and did, directly or indirectly, control the content of Unistar's various publicly disseminated reports ,

press releases, and statements . The Individual Defendants had and exercised the power and influence to

cause Unistar to engage in the illegal practices complained of herein . Any acts attributed to Unistar wer e

caused and/or influenced by the Individual Defendants by reason of their domination and control of Unistar .

61 . As officers of a publicly-held company , the Individual Defendants had a duty to disseminate

accurate and truthful information with respect to Unistar's business, operations, and financial performanc e

so that the market price of Unistar's securities would be based on truthful, accurate, and timely disclosur e

of all material information, as well as a duty to disclose all known material information concerning Unista r

or abstain from trading their own Unistar shares .

62. The Individual Defendants were controlling persons of Unistar within the meaning of

Section 20(a) of the Exchange Act and, pursuant to said Section 20(a), are jointly and severally liable wit h

Unistar's violations of Section l 0(b) of the Exchange Act and Rule I Ob-5 promulgated thereunder .

19 11Umstar\Complamt INRE wpd

COUNT III

FOR VIOLATION OF SECTION 10(b) OF THE EXCHANGEACT AND RULE 10b-5 AGAINST KA C

63 . Plaintiffs repeat and incorporate each and every allegation set forth in the foregoin g

paragraphs as if fully set fo rth herein .

64. Defendant KAC, a public accounting firm, was engaged by Unistar to provide a n

independent audit of Unistar' s financial statements as of and for the year ended December 31, 1998 - the

first annual financial statements issued by Unistar after the Company was created . KAC issued unqualifie d

opinions on these financial statements, disseminated to the market in Unistar ' s 1998 Form 10-K. KAC' s

opinions stated in pertinent part that : (i) Unistar's financial statements "present fairly, in all material respects ,

the financial position of Unistar" as of December 31, 1998 ; (ii) Unistar' s financial statements were presente d

"in conformity with generally accepted accounting principles ;" and (iii) KAC performed its audits of

Unistar's financial statements "in accordance with generally accepted auditing standards ." These

representations were materially false .

KAC was motivated to engage in the shenanigans alleged herein to generate audit fees and develo p

a client base in publicly-traded companies in the Dallas area .

65 . In fact, Unistar's annual financial statements materially overstated Unistar's results o f

operations and did not "present fairly, in all material respects, the financial position of Unistar" at the en d

of 1998 . Unistar's balance sheet grossly overvalued its customer lists and Bermuda licenses, and Unistar' s

income statements improperly amo rt ized those assets over forty (40) years . Both representations violate d

GAAP .

66. In addition , KAC's opinions stated falsely that "we conducted our audit in accordance with

generally accepted auditing standards ." For the reasons detailed herein, KAC failed to perform its audit o f

Unistar ' s 1998 fi nancial statements in accordance with generally accepted auditing standards ("GAAS") .

20 1 \Umstar\Complamt .INRE wpd

Asa result, KAC improperly provided false, misleading and unqualified opinions about the fair presentation ,

in conformity with GAAP, of Unistar's financial statements .

67 . KAC, either knowingly or with reckless disregard for the truth , opined falsely that Unistar' s

balance sheet repo rted earnings complied with GAAP . As a result of KAC's materially false opinions o n

Unistar's financial statements, the price at which Unistar's securities traded during the Class Period wa s

inflated, with Plaintiffs injured as a result . KAC was aware in the course of its audit of several items whic h

atthe very least should have alerted KAC and its auditors to the possibility that Unistar' s financial statements

were misstated :

(a) Unistar' s prior auditors, BDO Dunwoody, had resigned in response to

correspondence from Unistar . A strained relationship with a predecessor auditor is a specific risk facto r

which auditors should consider in determining whetherthere might be fraud involved in financial statement s

under audit . AU §316.17a .

(b) The resignation had occurred on February 25, 1999, at the same time BDO

Dunwoody would have been performing audit procedures on Unistar's financial statements for 1998 . KAC

issued its clean audit opinion on March 9, 1999 . Thus, if KAC is to be believed, in twelve (12) days KAC

was retained by a new client and performed audit procedures necessary to obtain sufficient, competen t

evidential support for the amounts in Unistar's financial statements .

(c) By far, the largest asset on Unistar's balance sheet was the customer lists . As such,

KAC's responsibility with respect to obtaining sufficient, competent evidential matter to support the amoun t

and valuation of this account was a priority of the audit .

(d) KAC knew that Unistar was amortizing the customer lists over 40 years, th e

maximum permitted by GAAP (APB No . 17, ¶29) . Because this was an estimate, KAC was required by

GAAS to evaluate the reasonableness of Unistar's estimate of the useful life of the customer lists (AU §342) ,

including reviewing and testing the process used by Unistar management in developing the estimate .

21 1 \Unistar\Complaint WRE wpd

(e) KAC knew that the amo rt ization period selected would determine whether Unistar

reported a profit or a loss in 1998 and the first quarter of 1999 and thus, the estimate of the useful life o f

customer lists was of upmost importance . See AU §316.17c .

(f) KAC knew that a significant portion of management ' s compensation was derived

from selling Unistar shares, the proceeds of which were dependent upon the share price of Unistar stock .

This is a specific risk factor that auditors are required to recognize . AU §316 .17 .

(g) Despite reporting net income of $1 .0 million for 1998, Unistar had negative cash

flows from operations of $4 .7 million. One risk factor KAC was required to consider, pursuant to GAAS,

was Unistar's inability to generate cash flows while generating earnings . AU §316.17c .

68. KAC was required by GAAS to obtain evidential matter supporting the valuation for and

amortization of Unistar's customer lists and Bermuda licenses, i .e ., to obtain reliable evidence that the list

and license that Unistar recorded as assets accurately reflected the amounts that should be so recorded unde r

GAAP . This should have been done by:(]) con firming the valuations and amo rt ization practices with other

insurers and industry experts and by examining other competent evidence ; and (2) examining and testing

Unistar's value attributed to the substandard automobile insurance customer list .

69. KAC's unqualified opinion was false and/or misleading in at least three (3) respects : (1 )

KAC had not conducted its audit in accordance with GAAS ; (2) KAC had no reasonable basis to believe that

its audits provided a reasonable basis for its opinion(s) ; and (3) the financial statements Unistar's 10-K di d

not present fairly in all material respects the financial position of Unistar as of December 31, 1998, and th e

results of its operations and its cash flows for the year-ended December 31, 1998 were not presented i n

conformity with GAAP .

KAC'S VIOLATIONS OF GAAS

70. In its audits of Unistar' s 1998 financial statements , KAC failed to adhere to the followin g

GAAS that are detailed in the AICPA Accountants Professional Standards AU § 150, among others :

22 1 \Umsta \Complamt INRE wpd

(a) The standard that, " In all matters relating to the assignment, an

independence in mental attitude is to be maintained by the auditor or auditors," was violate d

because the auditors accepted Unistar's inflated valuation of its customer lists and Bermud a

licenses (and its amortization of those assets), without exercising adequate professiona l

scrutiny (General Standards No . 2) ;

(b) The standard that, "due professional care is to be exercised in th e

performance of the audit and the preparation of the report," was violated because, inter alia ,

KAC either knew or was reckless in not knowing that Unistar's financial statements faile d

to reflect the true value of Unistar' s assets (General Standard No. 3) . AU §230 . 07 furthe r

states: "Due professional care requires the auditor to exercise professional scepticism .

Professional scepticism is an attitude that includes a questioning mind and a critica l

assessment of audit evidence . The auditor uses the knowledge, skill, and ability called for

by the profession of public accounting to diligently perform in good faith and with integrity ,

the gathering and objective evaluation of evidence."

(c) The standard that, "The report shall state whether the financial statements

are presented in accordance with generally accepted accounting principles," was violate d

because the financial statements were not prepared in accordance with GAAP (Standard s

of Reporting No . 1) ; and

(d) The standard that, "sufficient competent evidential matter is to be obtaine d

through inspection, observation, inquiries, and confirmations to afford a reasonable basi s

for an opinion regarding the financial statements under audit " (Al §326 . 01), was violate d

because KAC failed to obtain such evidential matter to afford a reasonable basis for, inte r

alia, the valuation of Unistar's customer lists and licenses . AU §326 .25 further states : "In

evaluating evidential matter, the auditor considers whether specific audit objectives have

23 1 \Umstar\Complaint INRE wpd

been achieved. The independent auditor should be thorough in his or her search for

evidential matter and unbiased in its evaluation ." Clearly, KAC's testing of the evidence

relating to Unistar's asset valuation and amortization was not thorough, and KAC's

evaluation thereof was not unbiased .

71 . As a result of the improper and misleading practices set fo rth above , KAC's representation s

that Unistar ' s 1998 annual financial statements were presented in accordance with GAAP, that Unistar' s

financial statements "presented fairly" Unistar 's financial position , and that KAC had conducted its audit

in accordance with GAAS, were materially false and misleading .

72 . As described above, KAC knew or, in the absence of recklessness , should have known that

its opinions regarding Unistar's financial statements were materially false and misleading . Yet, KAC caused

those opinions to be disseminated to the public .

73 . KAC violated Section 10 (b) of the Exchange Act and SEC Rule I Ob-5 in that KAC :

(a) employed devices, schemes and artifices to defraud ;

(b) made untrue statements of material facts or omitted to state material facts necessary

in order to make the statements made, in light of the circumstances under when they were made, no t

misleading ; or

(c) engaged in acts, practices, and a course of business that operated as a fraud or decei t

upon Plaintiffs in connection with their purchases of Unistar securities during the Class Period .

74 . Plaintiffs have suffered damages in that, in reliance on the integrity of the market, they pai d

artificially inflated prices for Unistar securities . Plaintiffs would not have purchased Unistar securities at

the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsel y

inflated by KAC's misleading statements .

BASIS OF ALLEGATIONS

75 . Because the PSLRA, §21 D(c) of the 1934 Exchange Act required complaints to be filed in

24 1 1Umstar\Complamt INRE wpd

conformance with Rule 11 . Plaintiffs have asserted the allegations in this Complaint based upon the

investigation of his counsel, which included a review of Unistar's SEC filings, securities analysts' reports,

fact sheets, and advisories about the Company ; press releases issued by the Company, and media reports

about the Company . Based on the foregoing, Plaintiffs believe that substantial, additional evidentiar y

support will exist for the allegations in ¶¶2 and 5-25, after a reasonable opportunity for discovery .

PRAYER FOR RELIEF

WHEREFORE, Plaintiffs pray for a judgment :

Declaring the action to be a proper class action pursuant to Rule 23 ;

2 . Awarding Plaintiffs damages, post judgment interest, and attorney's fees and other costs ;

and

3 . Awarding such other relief as this Court may deem just and proper .

JURY DEMAND

Plaintiffs demand a trial by jury .

DATED : August, 2000.

25 1 \Umstar\Complamt INRE wpd

DREIER BARITZ & F

William Bjederman IfTexas Bar No . : 0079493 52720 First National Center120 N. Robinson AvenueOklahoma City, OK 73102(405) 235-1560/FAX: (405) 239-211 2

- and -

MILBERG WEISS BERSHAD HYNES &LERACH LL PWilliam LerachTravis DownsJames Hai l600 W. Broadway, Suite 1800San Diego, CA 9210 1CO-LEAD COUNSEL FOR PLAINTIFFS

- and -

STANLEY MANDEL & IOLA, L .L .P .Marc R. Stanley3100 Monticello Avenue, Suite 750Dallas, TX 75205(214) 443-4310/FAX: (214) 443-0358LOCAL COUNSEL FOR PLAINTIFFS

26 1 \Umstar\Complamt INRE wpd

CERTIFICATE OF MAILIN G

7.7_-

This is to ce rt ify that on the / (Y day of August , 2000 , I mailed a true and correct copyof the above and foregoing instrument , first -class mail, to the following :

See attached Attorney Service List .

27 1 \Unistar\Complaint INRE.wpd

Attorney Service List -- Unistar

Mr. James Hai lMILBERG WEISS BERSHAD HYNES & LERACH, LLP

Suite 1800 , 600 West BroadwaySan Diego , CA 9210 1

Mr. Al YatesLAW OFFICES OF ALFRED G. YATES, JR .

429 Forbes Avenue, Ste . 519

Pittsburgh, PA 1521 9

Mr. Christopher H . McGrath

BROBECK PHLEGER & HARRISON, LLP

550 West C Street, Ste . 1300

San Diego, CA 9210 1

Mr. Paul R . Besse tteBROBECK, PHLEGER & HARRISON, LLP

111 Congress Avenue, Ste. 2100

Austin, TX 7870 1

Mr. Steven E. Cauley

CAULEY & GELLER, LLP

2200 N. Rodney Parham Road, Ste . 218Li tt le Rock , AR 72212

Mr. William B . Federman

DREIER, BARITZ & FEDERMAN

120 North Robinson, Suite 2720

Oklahoma City, OK 7310 2

Mr. Roger B . Greenber gGREENBERG PEDEN SIEGMYER & OSHMAN

12 Greenway Plaza, 10th Floo r

Houston, TX 77046-120 3

Mr. John G . EmersonWHITTINGTON VON STERNBERG EMERSON & WILSHER

2600 S . Gessner , Ste . 600

Houston, TX 7706 3

Mr. Jeffrey R. Krinsk

FINKELSTEIN & KRINS K

The Koll Center, Suite 1250

501 West BroadwaySan Diego , CA 92101-3579

Mr. Paul J . Geller

SHEPHERD & GELLER

7200 W. Camino Real, Ste . 203Boca Raton, FL 3343 3

Mr. Jeffrey H. Squir eKIRBY, MCINERNEY & SQUIRE, LL P

830 Third Avenue, 10th FloorNew York, NY 1002 2

Mr. Brian MurrayRABIN & PECKEL LLP

275 Madison AvenueNew York, NY 1001 6

Mr. Shane T. RowleyWOLF HALDENSTEIN ADLER FREEMAN & HERZ, LLP

270 Madison Avenue

New York, NY 1001 6

Mr. Leo W . DesmondLAW OFFICES OF LEO W . DESMOND

2161 Palm Beach Lake Blvd., Ste . 204West Palm Beach , FL 3340 9

Mr. Robe rt K. WiseWORSHAM, FORSYTHE & WOOLDRIDGE, LL P

Energy Plaza , 30th Floor1601 Bryan StreetDallas, TX 75201