UNITED STATES DISTRICT COURTFOR THE DISTRICT OF MASSACHUSETT S

DOUGLAS A. WILSON, Individually and OnBehalf of All Others Similarly Situated ,

Plaintiff,

V .

MICROFINANCIAL INCORPORATED ., PETERR. BLEYLEBEN, RICHARD F . LATOUR AndJAMES R. JACKSON, JR. ,

Defendants

CIVIL ACTION NO.O3 c V 11 3 -G3

AMENDED CLASS ACTIONCOMPLAINT FORVIOLATIONS OFFEDERAL SECURITIES LAW S

Jury Trial Demanded

Lead Plaintiffs have alleged the following based upon the investigation of their counsel ,

which included a review of United States Securities and Exchange Commission ("SEC") filing s

by MicroFinancial Incorporated ("MicroFinancial"), as well as regulatory filings and reports ,

securities analysts' reports and advisories about the Company, press releases and other publi c

statements issued by the Company, media reports about the Company, interviews with former

employees of the Company (as described in Appendix A attached hereto) and Lead Plaintiffs

believe that substantial additional evidentiary support will exist for the allegations set forth

herein after a reasonable opportunity for discovery.

NATURE OF THE ACTION

1 . This is a federal securities class action on behalf of a class (the "Class") consistin g

of all persons who purchased or otherwise acquired MicroFinancial securities between February

5, 1999, and October 30, 2002, inclusive (the "Class Period") seeking to pursue remedies unde r

the Securities Exchange Act of 1934 (the "Exchange Act")

2. Defendant MicroFinancial describes itself as a "specialized" commercial finance

company that "leases equipment" and provides other financing services to businesses an d

consumers . The Company operates primarily through its wholly-owned subsidiary, Leasecomn n

Corporation ("Leasecomm") . The vast majority of the Company's leasing transactions arise fro m

referrals by a nationwide network of purportedly "independent" vendors .

3 . Throughout the Class Period, Defendants represented that the Company' s

business and operations were being conducted in a profitable and lawful manner . Furtherinore ,

Microfinancial issued highly positive earnings reports, as well as forecasts for the Company' s

continued growth and profitability .

4. Unbeknownst to investors, however, Microfinancial was operating through a web

of vendors which were engaged in fraudulent sales practices. As detailed herein,

Microfinancial's vendors were engaged in massive and systemic fraud - in many instances ,

vendors were selling products that did not work or were not providing services as represented .

Microfinancial then pursued customers that did not pay on their leases with a vengeance . The

Company's collection efforts were extremely aggressive and included the filing of suit agains t

customers in Massachusetts regardless of where the customer resided . Throughout the collection

process, Microfinancial charged exorbitant fees, which it promptly recorded as revenue an d

income. The misdeeds of the Company's vendors was known to Defendants, or recklessly

disregarded by them. Indeed, this is not a case where a rogue vendor or employee engaged i n

wrongful conduct . This is a case where a company employed a network of vendors most o f

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which were engaged in fraudulent selling practices and those practices had to have been known

to Defendants because of the level of complaints received from customers of those vendors an d

the high level of defaults associated with clients of those vendors .

5. In addition, throughout the Class Period, Microfinancial materially overstated it s

revenues and earnings by improperly recognizing tens of millions of dollars of financing income ,

fees and other revenues arising from delinquent customer accounts and defaulted commercia l

leasing, rental and finance contracts that Defendants knew, or recklessly disregarded, wer e

uncollectible . Overwhelming evidence taken from the Company's own records (produced durin g

the course of federal and state regulatory investigations detailed below) demonstrates that

Microfinancial aggressively sought to enforce contracts that Defendants knew had been obtained

through misrepresentation and fraud . Indeed, interviews conducted with former Micro financial

employees revealed that Defendants turned a blind-eye to its vendor's deceptive practices an d

continued to accept thousands of lease contract referrals where the default rates on the contract s

often exceeded 30% and sometimes exceeded 50% . Defendants also materially understate d

MicroFinancial's credit losses on tens of thousands of delinquent customer accounts and certai n

third-party "dealer receivables" which Defendants never intended to collect but, in man y

instances, offset against the Company's funding of new contracts .

6. As a result, Defendants materially misrepresented the Company's current an d

future revenues and profits and issued financial statements that violated generally accepted

accounting principles ("GAAP") and SEC reporting requirements throughout the Class Period .

See ¶'J 89-161 .

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7 . On August 14, 2002, MicroFinancial disclosed in its Form 10-Q for the quarter

ended June 30, 2002, that it was the target of a combined federal and state inquiry into th e

Company's leasing and credit collection practices, among other things .

Then, just two months later on October 11, 2002, Microfinancial stunned th e

market by announcing that it was ceasing to make any new lease originations as part of a "ne w

business strategy." The press release stated in pertinent part as follows :

As part of this new business strategy, in recognition of the difficult financingenvironment, management intends to immediately de-emphasize new loanoriginations until new financing solutions are secured .

9. Market reaction to the Company's "new business strategy" announcement wa s

swift and severe . The Company's common stock lost 37% of its value to close at $2 .14 per share

on October 11, 2002 .

10 . The Class Period ends on October 30, 2002, when Microfinancial issued a pres s

release announcing its financial results for the period ended September 30, 2002 . The Compan y

announced, among other things, that it had recorded a "special" $35 million credit loss on its pas t

due and delinquent "dealer receivables" and lease financing contracts . Following this

announcement, the price of Microfinancial declined to $2 .02 per share .

11 . Subsequently, on March 10, 2003, Microfinancial issued a press release

announcing its preliminary results for the fourth quarter ending December 31, 2002 . Defendants

reported continuing declines in the Company's revenues and profits driven, in part, by sharpl y

higher credit losses on the Company's dealer receivables and lease-financing contracts . The

press release stated in pertinent part as follows :

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Preliminary fourth quarter revenue for the period ended December 31, 2002decreased 24 .0%, or $8 .9 million, to $28 .0 million compared to $36 .9 million lastyear. The net loss for the quarter was $7 .7 million, or ($0 .60) per diluted share, ascompared with net income of $2 .1 million, or $0.16 per diluted share in the prioryear's fourth quarter . The decline in net income for the quarter is primarily theresult of a 30 .4% decline in lease and loan revenues to $11 .2 million, a 46 .1 %decline in service fee and other revenues to $4 .0 million, and a 32.7% increase inthe provision for credit losses to $22.5 million as compared with the fourthquarter ended December 31, 2001 . [Emphasis added . ]

12. On or about May 22, 2003, the Federal Trade Commission ("FTC") and several

states filed civil actions against the Company. In particular, the FTC action sought "to secure

preliminary and permanent injunctive relief, including rescission of contracts, cessation of

collections and other equitable relief, for defendants ' unfair or deceptive acts or practices in

violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a)," among other things . [Emphasi s

added.]

13 . On May 29, 2003, Microfinancial issued a press release which announced th e

settlement of the FTC and state actions . The press release stated, in pertinent part, as follows :

"We are pleased to have resolved this costly and time consuming matter whichhas been ongoing for well over a year. Many of the issues raised were not due toLeasecomm's activities, but were attributable to the acts and statements ofindependent vendors and dealers . For the record, while we never sold equipmentdirectly, we felt it was in our best interest to settle because it was the onlycost-effective solution that enables the Company to move forward and focus onbusiness . "

14. The full extent of the Company's massive fraud became clear in the FTC's pres s

release of May 29, 2003, announcing terms of the settlement agreement between defendants an d

the FTC :

[ . . . The Company that . . .] allegedly used shady agents, deceptive contracts, andfalse claims to target thousands of would-be entrepreneurs will cancel $24million in judgments allegedly obtained through deception and will reform al l

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business opportunity financing contracts to settle charges by the Federal TradeCommission and an eight state task force that the practices violated federal andstate laws .

"Leasecomm knowingly participated in a scheme that used the 'get-rich-quick'allure of selling products on the Internet to take advantage of thousands ofconsumers who were ultimately forced into debt," Massachusetts AttorneyGeneral Tom Reilly said. "This agreement relieves the debts of customers who fellprey to these 'business opportunities ' and helps protect future consumers byrequiring Leasecomm to change its business practices . "

Leasecomm drafted its contracts to ensure that customers paid even when thevendors used misrepresentations or fraud, or when the products or services failedto perform as represented, according to the FTC complaint . The FTC alleges thatLeasecomm knows or should know that many of its vendors engage in deceptivepractices to sell their business ventures . In one case, a vendor signed up 1,882consumers for a "business opportunity,"and nearly 1,500 went into default, thecomplaint alleges. Nevertheless, Leasecomm aggressively collected from many ofthose customers . Leasecomm pursues its customers "even when the customershave been defrauded and received nothing of value," the complaint alleges .

According to the FTC, when consumers failed to pay, Leasecomm sued them . TheFTC alleges that Leasecomm has sued over 27,000 consumers in the past threeyears in Massachusetts courts, and, as of January, had 2,200 suits pending . Fewof the customers could afford the expense of litigation in a distant city and mostsuffered default judgments the FTC alleges . Although Leasecomm files its suitsin Massachusetts, it aggressively enforces its judgments in the consumer's localforum. "Had Leasecomm filed the suits in the local forum in the first instance,customers might have been able to appear and present a defense," the complaintsays . According to the FTC, Leasecomm adds to the consumer injury byimposing high collection fees, not only for late payments, but for everycollection call it makes and letter it sends . These practices substantially increasethe total payments due under the Leasecornm contract, the complaint says .[Emphasis added .]

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15 . During the Class Period, prior to the disclosure of the true facts about the

Company MicroFinancial completed its IPO generating over $49 .7 million in proceeds and ,

MicroFinancial insiders, including certain of the Individual Defendants (defined below), sol d

over 814,000 shares of their personally-held MicroFinancial common stock to the investin g

public at artificially inflated prices, realizing over $11 .2 million in illicit proceeds .

JURISDICTION AND VENUE

16. The claims asse rted herein arise under and pursuant to Sections 10(b) and 20(a) of

the Securities Exchange Act of 1934, as amended (the "Exchange Act") [15 U .S.C. §§ 78j(b) an d

78t(a)] and Rule 1 Ob -5 promulgated thereunder by the Securities and Exchange Commission

("SEC") [17 C .F.R. § 240 .1Ob-5] .

17 . This Court has jurisdiction of this action pursuant to Section 27 of the Exchange

Act [15 U .S.C . § 78aa] and 28 U .S .C. §§ 1331 and 1337 .

18 . Venue is proper in this District pursuant to Section 27 of the Exchange Act and 2 8

U.S.C. § 1391(b) and (c) . MicroFinancial maintains its headquarters in this District and many of

the acts and wrongs complained of herein occurred in this District .

19 . In connection with the acts and conduct alleged in this Complaint, defendants ,

directly or indirectly, used the means and instrumentalities of interstate commerce, including th e

mails and telephonic communications and the facilities of the New York Stock Exchange (the

"NYSE"), a national securities exchange .

PARTIES

20. Lead Plaintiffs the Louisiana State Employees ' Retirement System and Hardy W.

Hall (the "Lead Plaintiffs" or "plaintiffs") purchased the securities of MicroFinancial a t

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artificially inflated prices during the Class Period and have been damaged thereby. Lead

Plaintiffs' certifications have been previously filed in this litigation and are hereby incorporate d

by reference.

21 . Defendant MicroFinancial is a Massachusetts corporation with its principa l

executive offices at IOM Commerce Way, Woburn, Massachusetts . MicroFinancial is a

commercial finance company that purportedly leases and rents "microticket" equipment an d

provides other financing services .

22. (a) Defendant Peter R . Bleyleben ("Bleyleben"), was, at certain times pertinent t o

this action, MicroFinancial's Chief Executive Officer, President and Chairman of the Company' s

Board of Directors .

(b) Defendant Richard F . Latour ("Latour" ) was, at certain times pertinent to thi s

action, MicroFinancial 's President, Chief Operating Officer, ChiefFinancial Officer and a

Director .

(c) Defendant James R . Jackson, Jr. ("Jackson') was, at certain times pertinent t o

this action, MicroFinancial 's Chief Financial Officer and Vice President .

(d) Defendant Brian E . Boyle ("Boyle") was, at certain times pertinent to thi s

action, a Director of the Company. Mr. Boyle was the Chief Executive Officer of the Company

from 1985 to 1987 and Chairman of the Board of Directors from 1985 to 1995 .

(e) Defendants Bleyleben, Latour, Jackson and Boyle are referred to collectivel y

herein as the "Individual Defendants . "

23 . Because of the Individual Defendants ' positions with the Company, they had

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

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operational trends, financial statements, markets and present and future business prospects vi a

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

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

other corporate officers and employees, attendance at management and Board of Directors

meetings and committees thereof and via reports and other information provided to them i n

connection therewith .

24. It is appropriate to treat the Individual Defendants as a group for pleadin g

purposes and to presume that the false, misleading and incomplete information conveyed in th e

Company's public filings, press releases and other publications as alleged herein are the

collective actions of the narrowly defined group of defendants identified above . Each of the

Individual Defendants, by virtue of their high-level positions with the Company, directl y

participated in the management of the Company, was directly involved in the day-to-day opera-

tions of the Company at the highest levels and was privy to confidential proprietary informatio n

concerning the Company and its business, operations, growth, financial statements, and financia l

condition, as alleged herein . The Individual Defendants were involved in drafting, producing ,

reviewing and/or disseminating the false and misleading statements and information allege d

herein, were aware, or recklessly disregarded, that the false and misleading statements were being

issued regarding the Company, and approved or ratified these statements, in violation of th e

federal securities laws .

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

stock was, and is, registered with the SEC pursuant to the Exchange Act, and was, and is, trade d

on the New York Stock Exchange ("NYSE"), and governed by the provisions of the federa l

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securities laws, the Individual Defendants each had a duty to disseminate promptly, accurate and

truthful information with respect to the Company's financial condition and performance, growth ,

operations, financial statements, business, markets, management, earnings and present and futur e

business prospects , and to correct any previously-issued statements that had become materially

misleading or untrue, so that the market price of the Company's publicly-traded common stoc k

would be based upon truthful and accurate information . The Individual Defendants'

misrepresentations and omissions during the Class Period violated these specific requirement s

and obligations .

26. The Individual Defendants participated in the drafting, preparation, and/o r

approval of the various public and shareholder and investor reports and other communication s

complained of herein and were aware of, or recklessly disregarded, the misstatements containe d

therein and omissions therefrom, and were aware of their materially false and misleading nature .

Because of their Board membership and/or executive and managerial positions wit h

MicroFinancial, each of the Individual Defendants had access to the adverse undisclose d

information about MicroFinancial's business prospects and financial condition and performanc e

as particularized herein and knew (or recklessly disregarded) that these adverse facts rendered th e

positive representations made by or about MicroFinancial and its business issued or adopted b y

the Company materially false and misleading .

27. The Individual Defendants , because of their positions of control and authority a s

officers and/or directors of the Company, were able to and did control the content of the variou s

SEC filings, press releases and other public statements pertaining to the Company during th e

Class Period. Each Individual Defendant was provided with copies of the documents alleged

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herein to be misleading prior to or shortly after their issuance and/or had the ability and/or

opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the

Individual Defendants is responsible for the accuracy of the public reports and releases detailed

herein and is therefore primarily liable for the representations contained therein .

28. Each of the defendants is liable as a participant in a fraudulent scheme and course

of business that operated as a fraud or deceit on purchasers of MicroFinancial securities by

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

facts. The scheme : (i) deceived the investing public regarding MicroFinancial ' s business, sales

practices , operations and the intrinsic value of MicroFinancial common stock; (ii) allowed

defendants to successfully complete an initial public offering of MicroFinancial stock generating

proceeds of approximately $49 .7 million for the Company ; (iii) enabled certain MicroFinancial

insiders, including defendants Bleyleben, Latour, and Boyle , to collectively sell more than $11 .2

million of their personally-held MicroFinancial common stock to the unsuspecting market ; and

(iv) caused plaintiffs and other members of the Class to purchase MicroFinancial common stock

at artificially inflated prices .

29 . Defendant Deloi tte & Touche LLP ("D&T") is a firm of certified public

accountants that audited MicroFinancial's financial statements during the Class Period and issued

materially false and misleading audit opinions on these financial statements . Deloitte Touche

also consented to the use of its opinion on MicroFinancial 's financial statements fi led with the

SEC and otherwise disseminated to the investing public during the Class Period. Deloitte

Touche's participation in the materially false and misleading statements and omissions alleged

herein is described in 11162- 185 .

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PLAINTIFFS' CLASS ACTION ALLEGATION S

30. Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil

Procedure 23(a) and 23(b)(3) individually and on behalf of all persons , other than defendants ,

who purchased the securities of MicroFinancial during the Class Period and who were damaged

thereby. Excluded from the Class are defendants herein, members of the immediate family o f

each of the defendants, any person, firm, trust, corporation, officer, director or other individual o r

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-interes t

or assigns of any such excluded party .

31 . The members of the Class are so numerous that joinder of all members i s

impracticable . MicroFinancial sold 3 .4 million shares of MicroFinancial common stock t o

members of the investing public in the IPO and the stock of Microfinancial was actively on th e

NYSE during the Class Period. The precise number of Class members is unknown to plaintiffs

at this time but are believed to number in the thousands . In addition, the names and addresses o f

the Class members can be ascertained from the books and records of MicroFinancial or it s

transfer agent and the underwriters of the IPO. Notice can be provided to such record owners b y

a combination of published notice and first-class mail using techniques and a form of notic e

similar to those customarily used in class actions arising under the federal securities laws .

32. Plaintiffs will fairly and adequately represent and protect the interests of th e

members of the Class . Plaintiffs have retained competent counsel experienced in class actio n

litigation under the federal securities laws to further ensure such protection and intend t o

prosecute this action vigorously .

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33, Plaintiffs ' claims are typical of the claims of the other members of the Class

because plaintiffs' and all the class members' damages arise from and were caused by the sam e

false and misleading representations and omissions made by or chargeable to defendants .

Plaintiffs do not have any interests antagonistic to, or in conflict with, the Class .

34. A class action is superior to other available methods for the fair and efficien t

adjudication of this controversy. Since the damages suffered by individual class members may

be relatively small, the expense and burden of individual litigation make it virtually impossibl e

for the class members to seek redress for the wrongful conduct alleged . Plaintiffs know of no

difficulty which will be encountered in the management of this litigation which would preclud e

its maintenance as a class action.

35. Common questions of law and fact exist as to all members of the Class and

predominate over any questions affecting solely individual members of the class . Among the

questions of law and fact common to the Class are :

Whether the federal securities laws were violated by defendants ' acts as

alleged herein ;

ii . Whether defendants issued and disseminated statements that were

materially false and misleading ;

iii . The extent of injuries sustained by members of the Class and th e

appropriate measure of damages ; and

iv. Whether defendants acted with scienter.

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SUBSTANTIVE ALLEGATIONS

Background: The Government Investigations

36 . Defendant MicroFinancial describes itself as a "specialized" commercial financ e

company that "leases equipment" and provides other financing services to businesses an d

consumers . The Company operates primarily through its wholly-owned subsidiary, Leasecomm .

The vast majority of the Company's leasing transactions arise from referrals by a nationwid e

network of purportedly "independent" vendors .

37. As disclosed by the Company for the first time on August 14, 2002 ,

MicroFinancial's leasing-financing and credit collection practices became the focus of a n

extensive FTC civil investigation, as well as civil investigations by several state Attorneys

General and other local law enforcement officials (the "Government Investigations") . The

Government Investigations centered on the Company's financing of purported "business

opportunity" leases . According to the Government Investigations, the Company's authorize d

dealers or vendors sold internet-based turn-key "business opportunities," which were nothin g

more than `get-rich-quick' schemes designed to promote the Company's financing of th e

transactions . According to the Government Investigations, consumers who signed contracts with

the Company based on the dealer's misrepresentations, often received nothing of value, but wer e

then obligated to pay thousands of dollars in ` lease payments' to the Company. When the

defrauded consumers stopped making payments under the contracts, the Company immediatel y

began an aggressive collection process culminating in the Company's bringing suit against th e

consumer in Massachusetts . During the "collection" process the Company continued to bill an d

accrue contractual revenues for these delinquent accounts for at least a year and in addition

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recorded "fee" income for every collection letter, telephone call and dunning notice sent which

amounted to millions of dollars per year. The Government Investigations estimated that over on e

three year period, from 2000 to 2002, the Company sued over 27,000 lessees of the Company's

products .

Defendants' Misrepresentations and OmissionsConcerning The Company's Lease-Financing Practices

38 . At all relevant times, MicroFinancial represented that the credit risks associated

with the its lease-financing activities were under the constant review of management an d

reflected advanced risk evaluation techniques using the Company's "proprietary" credit scorin g

systems and "complex" lease-pricing models . Indeed, according to the Company's 1998 Annua l

Form 10-K, these advanced credit granting techniques allowed it to target "owner-operated o r

other small commercial enterprises, with little business credit history and limited or poo r

personal credit history at the owner level ." [Emphasis added . ]

39. In fact, however, MicroFinancial's financing practices amounted to nothing mor e

than a grist-mill through which hundreds of thousands of small and home business owners wer e

duped into signing long-term "lease" contacts for equipment and services that were often entirely

worthless or at the very least, worth thousands of dollars less than the defrauded lessee' s

contractual obligations . According to defendants's own admissions,' since its founding in 1986 ,

MicroFinancial has financed more than 691,000 leases and has commenced 92,271 contrac t

actions due to subsequent defaults . The recently concluded Government Investigations further

`Defendants also admitted that in the more than 92,000 contract actions due to the onerous forum selectionclause in the Company's lease agreements only 1,654 lessees answered the complaints . See Leasecomm Corp . v.Crawford, 2003 Mass . App. Div. 58 (Mass . App . Div., 2003 )

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revealed that 27,000 of these contract actions were brought during the three year period fro m

2000 to 2002 alone, revealing a rapidly accelerating rate of delinquency that had nearly double d

from a historical average of 4,600 contract actions during the Company's first 14 years to an

average of 9,000 actions annually during 2000 through 2002 . These statistics alone ar e

undeniable evidence that defendants either knowingly or recklessly ignored any sound busines s

risk analysis with regard to MicroFinancial's extension of credit . As a result, each of defendants

publicly disseminated Class Period statements concerning the Company's purported credit

evaluation techniques were materially false and misleading.

40. Moreover, several former employees of the Company whose responsibilitie s

included credit extension and collection activities, during the relevant time period, confirmed tha t

any meaningful "credit analysis" of the risks associated with a potential lease transaction was

virtually non-existent . For example :

A former dealer service representative, CI 1, stated, "[For] credit card terminals -almost everybody got approved. [J]ust short filing bankruptcy a month ago,everyone was approved. They [defendants] were approving [credit for] on-linestuff. [W]hen they were approving [credit for] web sites and all that kind of crap .that was a huge ripoff. . . that was just murderous . There were fraudulent agentsout in the field, selling business opportunities on-line and all this other crap . "

A former collections agent, Cl 2, stated, "Basically, [defendants] knew they wereapproving people who they knew were lying on their credit applications . "

A former credit and sales support manager, Cl 3, stated, "I did review the credit ofdifferent vendors and . . . if you denied a credit score - they were not happy about it- and they would come and complain . . . and because they were a particularvendor you would have to approve it . . . "

A former customer service representative, Cl 4 stated, "People {who wereapproved had] the most horrible credit . It is a fact that [defendants] knew that [thelessee] probably wouldn't pay and then [the Company] would take them to courtand win on default . That's how [ . . .J Leasecomm made their money .

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Defendants' Misrepresentations And Omissions Concerning

MicroFinancial's Fraudulent Billing and Collection Practice s

41 . At a ll relevant times, MicroFinancial 's SEC filings described the Company' s

highly automated billing and collection practices as a key component of the Company's success .

The Company's quarterly earnings releases often touted "record revenues" and double-digi t

increases in the Company's fees and revenues. Indeed, the Company's annual SEC filings on

Form 10-K from 1998 through 2001, purported to show that the Company 's "other income" ha d

nearly doubled from $18 .2 million in 1998 to more than $36 .8 million during 2001, due i n

material part to the Company's billing and collection practices .

42. Defendants misrepresentations and omissions concerning the Company's doubling

of its revenues during the Class Period materially misled investors concerning the Company' s

current and future profitably and artificially inflated the price of MicroFinancial securities at all

relevant times . As detailed herein, defendants charade of profitability came to a sudden hal t

when the FTC and various states filed enforcement actions against the Company in May 2003 .

While a clearer picture of the Company's actual profitability does emerge from the Company' s

2003 Form 10-K filed with the SEC on March 30, 2004, wherein the Company reporte d

operating losses of more than $26 million and a decrease in "other revenues" to pre-1998 level s

of $17.7 million , defendants have never restated their financial statements from 1998 to 2001 and

continue to mislead investors concerning the true nature of the Company's financial result s

during those years .

43. That the Company's improper billing for late fees and unlawful collectio n

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practices grossly inflated the Company's financial results was confirmed by several of th e

Company's former employees. According to CI 4, a former customer service representative ,

Leasecomm charged excessive fees for loan defaults and attempted to collect these fees directl y

from the lessee's bank account in instances where the lessee had purportedly agreed to mak e

payments directly from a particular account . The Company charged an additional fee every time

it attempted to withdraw money from an individual's account to collect late fees . CI 6, a termer

collections agent, stated that lessee 's were also charged additional fees every time a collection

letter was sent. "Anything that had been done with the account there was a $5 charge or a $1 0

charge that kept accruing. . . . These were people that were already in default ." CW 7, a former

operation supervisor stated that Leasecomm's collections computer was programmed t o

repeatedly attempt to withdraw money from lessees' bank accounts, even if there was insufficient

funds in the account, which often times caused such accounts to become overdrawn. CI 7, a

former operations supervisor for the Company, fielded numerous calls from irate lessee's

concerning such onerous and unlawful practices .

Defendants' Knowledge Of The FraudulentBusiness Practices of MicroFinancial's Vendors

44 . At all relevant times, defendants represented that the Company 's network of

independent dealers underwent both an initial screening process and an "ongoing evaluation "

process , which purportedly included an examination of dealer portfolio performance , lessee

complaints, cases of fraud or misrepresentation, aging studies, number of applications an d

conversion rates for applications . According to defendants ' SEC filings and other publi c

statements, "This ongoing assessment enables the Company to manage its Dealer

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relationships, Including ending relationships with poorperforming Dealers." [Emphasi s

added.] Defendants failed to disclose however, that despite possessing evidence of seriou s

problems with its dealers, the Company rarely terminated it relationship with any of its dealers .

Instead, the Company continued accepting business from poor performing vendors and simpl y

reduced the payment it made to the vendor, retaining a larger share of the customers' payments

for itself

45 . Company documents produced during the course of the Government

Investigations revealed that defendants closely monitored computerized systems which tracke d

delinquent accounts, default rates, and customer complaints of vendor fraud or misrepresentation .

The documents revealed that the default rate with respect to particular business ventures ofte n

exceeded 30%, and with some vendors exceeded 50% . The documents also revealed that

defendants were receiving large numbers of customer complaints about misrepresentations o r

fraud concerning these business ventures and vendors . Yet, MicroFinancial took no effective

action- either to end its relationship with these vendors or discontinue solicitation of the busines s

venture. As a result each of the defendants' representations concerning the Company' s

monitoring and/or assessment of the performance of it independent vendors was materially fals e

and misleading .

46. The following examples set out some of the more egregious examples of th e

defendants' misrepresentations and omissions concerning certain of the Company's vendor

relationships .

47 . InfoDirect , Inc. - During the Class Period, MicroFinancial financed more tha n

1,800 computer leases sold by InfoDirect to participants in what the Government Investigations

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concluded was nothing more than a "pyramid scheme ." The Company's "dealer portfoli o

performance" reports examined by defendants on an on-going basis revealed that more tha n

1,400 of the InfoDirect lease contracts went into default early in the lease term . Furthermore ,

Company complaint files produced during the course of the Government Investigations reveale d

that the computers, when delivered at all, were `second-hand' low-end machines that were ofte n

defective - and worth far less than the thousands of dollars the Company charged through it s

lease agreements . Yet, the only action taken by MicroFinancial, in response to the hundreds of

InfoDirect complaints received, was to write letters to InfoDirect complaining about the poor

performance rate on the leases . Company documents further revealed that despite being on

notice that there were serious problems with InfoDirect's performance, MicroFinancial continue d

to finance InfoDirect business for nearly a year .' According to documents filed with the

California Secretary of State, hifoDirect's status as an active corporate entity was suspende d

during September 2000 . MicroFinancial went on to sue at least one-third of the defaulte d

InfoDirect lessees for non-payment .

48. Executive Credit Services , Inc. - According to the Government

Investigations, Executive Credit Services (or E-commerce Exchange Worldwide or ePenzio, as i t

was sometimes known) was a seminar marketer of virtual terminals and accounted for $1 6

million of the Company's lease-financing volume during 1999 -2000, with 9,000 customers and a

2 Defendlants were also on notice that in November 1998, InfoDirect and its organizers - Jason McComband Thomas Fletcher - were charged by the FTC with deceptive trade practices, which included unauthorizedcharges to consumer checking and credit accounts in connection with a "how to guide" marketing scheme concerninggovernment auctions . A consent order barring InfoDirect and its principals from engaging in those activities settledthe suit in April of 1999 . See FTC, et al v. Infodirect Inc, et al, 2 :98cvo9274, C. D . Cal. (Nov_ 18, 1998)

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default rate of over 30% . Again, Company documents produced during the course of th e

Government Investigations revealed that defendants were on notice of thousands of complaints

about ePenzio's software and websites never working . The documents also revealed that

MicroFinancial rejected virtually every claim .

49. Moreover, plaintiffs' investigation revealed that seminar marketers such a s

ePenzio routinely obtained signatures on the Company's lease agreements using fraudulent .

means - a fact that was generally known throughout the Company . A former MicroFinancial

customer service representative, CI 4, recounted the "sign-up" process in this manner, stating:

But what the vendor did to my knowledge, or what a lot of the vendors would do,is you know have a clip board and say sign here, here and here and peoplewouldn't see the Leasecomm lease agreements . So then they would get a welcomeletter from us, and they would call us and say `who the hell are you . '

50 . Furthermore, the Company's Form- IOK for the years 1998, 1999 and 200 0

misleadingly disclose that "E-Commerce" was the Company's single largest customer in each of

those years - while omitting any information concerning the thousands of complaints th e

Company received concerning its E-Commerce business or that the Company was experiencin g

extraordinarily high default rates on its E-Commerce portfolio . The fact that E-Commerce was

the Company's single largest customer coupled with the Company's material omissions in it s

Form 10-K reports is highly probative of Defendants' scienter in this matter . Thus, it is not

surprising with regard to the Company's financing of virtual terminals that Cl 4 commente d

further, stating:

[Defendant] Peter Bleyleben knew exactly what was going on . I mean I use todeal with the legal department all the time . I mean everybody knew . [E]verybodyin that Company knew exactly what was going on . Everybody that worked ther e

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knew that what Leasecomm was doing was unethical . But you know when youneed a job, you need a job - and that's a position that a lot of people were in .

Subseqently, ePenzio and its parent corporation announced multi-million charge-offs and losse s

related to ePenzio' seminar marketing activities and ceased selling virtual terminals sometim e

during 2002 .

51 . Roma Computer Solutions , Inc. Founded in 1999 by Jonathon Severn, as a

Nevada corporation doing business in California, Roma Computer was another seminar markete r

of virtual terminals that financed sham transactions with the Company' s leases during 2000 and

2001- until it was shut down by the Ventura County District Attorney on fraud charges i n

November 2001 . Local law enforcement officials estimated that Roma Computer hosted over

2,000 seminars annually with over 60,000 participants . Its customers were bilked out of $4,00 0

to $6,000 on average - most of which was financed through Company lease agreements .

Hundreds of complaints received by the Company were ignored according to the Government

Investigations .

52 . ThemeWare, Corp. - In 1999 , ThemeWare began marketing "turn-key

e-commerce businesses" through TV infomercials which, purportedly, gave home-busines s

owners access to "virtual product" warehouses accessed though ThemeWare hosted websites .

The business opportunities sold . by ThemeWare also purported to offer on-line credit card

services for resale of the products to consumers . The Company sought to enforce thousands o f

lease agreements used to finance the home business purchases despite knowing that ThemeeWare

had - in the words of one of the Company's former customer service representatives - "

completely disappeared off the face of the earth ." Plaintiffs' investigation revealed that hundred s

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of complaints received by the Company from lessees - claiming that ThemeWare products and

services had never been received at all and/or simply didn't work - were ignored . CI 4, a former

Company customer service representative, handled many of the ThemeWare complaints stating :

And then there was an issue with the virtual terminals because the [vendor]

companies [ . . . that] were suppose to be hosting the [web]sites - - completely

disappeared off the face of the earth [ . . .] . [Defendants] told us `just give them thi s

number' [the vendors phone number] . We had to tell [the customers] what we

were told to [say] . We ke[pt] getting call after call after call from people with the

Virtual Terminals that . . . . weren't able to process any of their credit cardtransactions or they didn't want it at all . So when people would call, I really wouldhave no idea what to say to them. I would have to say `we are working on it . We

are working on fixing the situation . '

ThemeWare - they were no place to be found . I don't even think that the people

from Leasecomm could get a hold of them . [ . . .] It was a commercial on TV- like

late night TV . . . . That's where it came from, and then they [Leasecomm] got

together with this company. I mean it was horrible because I would have to . . .

people would . . . [the lessees'] businesses wouldn't work out . . . and you know itwould be six months into the person's lease - and I would have to tell them thereis no way they can get out of it . [B]asically people would be like I'm not payingyou. And [ . . .] then what would happen they would go into collections .

Another former customer service representative, CI 5, stated that each of the customer

complaints confirmed major problems with ThemeWare' s performance , yet the Company

continued to finance ThemeWare leases :

They [customers] wouldn't be able to access it . It wouldn't work . Yeah, I heard

that from our customers . Yeah, [Leasecomm] kept selling it, and they'd say itwould work. But the customers would say, `I can't access this, I don't have apassword, I don't know how to get on here . '

53 . Additionally, defendants materially inflated the Company' s assets and earnings by

recording certain "dealer receivables," which the Company never intended to collect but instea d

offset against the funding of new contracts . Defendants' "kiting" scheme operated as follows ,

the Company entered into "recourse agreements " with certain of its poorly performin g

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vendors/dealers that allowed the Company to "charge-back" to the originating dealers, delinquen t

customer balances within a specified period following the lease's inception . These "dealer

receivables" were never actually intended to be collected by the Company, instead the Compan y

offset these balances when the same dealers submitted new lease contracts to the Company fo r

funding. Defendants' scheme collapsed when, under the weight of the Governmen t

Investigations, the Company and its dealers were forced to curtail their sham `lease origination '

activities during 2002. As a result the Company was `caught' holding millions of dollars in

worthless "dealer receivables" and millions more in delinquent customer receivables which i t

was unable to charge back to its dealers . As a result, during the third and fourth quarter of 2002 ,

the Company recorded over $55 million in losses and charge-offs related to assets whic h

defendants knew, or recklessly disregarded, were worthless from their inception .

MicroFinancial's Initial Public Offerin g

54. In February 1999, the Company completed its initial public offering (the "IPO") .

In the IPO, MicroFinancial sold 3 .4 million shares of common stock at $15 per share, thereby

generating approximately $49 .7 million in net proceeds . An additional 400,000 shares were sol d

by certain selling shareholders including defendants Bleyleben, Latour and Boyle.

55 . In connection with the IPO, MicroFinancial prepared and filed with the SEC a

registration statement (the "Registration Statement") which incorporated a prospectus (th e

"Prospectus") (the "Prospectus") . The Registration Statement was declared effective on or abou t

February 4, 1999 . The Registration Statement and Prospectus were materially false an d

misleading for several reasons, as detailed below.

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The Prospectus Issued In Connection WithThe IPO Was Materially False And Misleading

56. The Prospectus described MicroFinancial and its business in highly positive term s

stating in pertinent part as follows:

The Company, which operates primarily through its wholly-owned subsidiary,Leasecomm Corporation, is a specialized commercial finance company that leasesand rents "microticket" equipment and provides other financing services inamounts generally ranging from $900 to $2,500, with an average amount financedof approximately $1,400 and an average lease term of 45 months . The Company

pioneered the use ofproprietary software in developing a sophisticated,

risk-adjusted pricing model and automating its credit approval and collection

systems, including a fully-automated Internet-based application , credit scoring

and approval process. This has enabled the Company to better service its dealer

network, to develop economies of scale in originating and servicing over 200,000leases, contracts and loans and to operate on a nationwide basis in a historicallyfragmented market. The majority of the Company's leases are currently for

authorization systems for point-of-sale card-based payments, by, for example,debit, credit and charge cards ("POS authorization systems"). The Company

continues to develop other product lines , including leasing other commercialproducts and acquiring payment streams from residential security monitoringcontracts ("service contracts") .

STRATEGY

The Company's goal is to continue to significantly expand its business throughinternal growth, diversification of product offerings and selective acquisitions oflease portfolios and leasing companies, while maintaining or improving currentlevels of profitability. The principal strategies to achieve this goal include :

Utilizing and Enhancing its Advanced Technology and Servicing Capabilities .

The Company' s business is operationally intensive, due in part to the smallaverage amount financed . Accordingly, technology and automated processes arecritical in keeping origination and servicing costs to a minimum, while at thesame time providing quality customer service .

Employing Multi-Dimensional Credit Scoring . The Company has used its

proprietary software to develop a multi-dimensional credit scoring model which

generates pricing of its leases, contracts and loans commensurate with the risk

assumed, enabling it to underwrite a broad range of credit risks. By analyzing

both the quality and amount of credit history available with respect to both

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obligors and Dealers, the Company improves its ability to assess credit risk .

Emphasizing Service to Dealers . The Company has developed value-added

services that facilitate the sales of products by its Dealers and differentiate the

Company from its competitors. These value-added services include fastresponses to applications (including a fully automated Internet based

applications processing system), consistent underwriting, quick and reliable

funding following application approval and identifiable and dedicated support

from the Company's customer service employees .

Efficient Collections . The Company 's technology and its disciplined andpersistent approach to collections enable it to collect delinquent amounts, evenseveral years after the account originally became delinquent . The Companybelieves that, as a result of the small payments associated with microtickettransactions, the credit performance of its customers is driven by factors beyondmerely an ability to pay. Therefore, it is the Company's policy to pursue virtuallyall delinquent accounts in a lawful, reasonable and timely fashion and in manyinstances, to recover amounts due under the Company's leases, contracts and loansthrough litigation. The Company maintains a highly structured, well-defined andautomated system that enables a minimum number of personnel to maximize thecollection of delinquent payments .

Seeking to Develop New Products and Markets . The Company continues to seeknew product lines to which it can successfully apply its operating strategy, both inthe microticket market and, more recently, the lower end of the small-ticke tmarket . The Company originates leases for products that typically have limiteddistribution channels and high selling costs . The Company facilitates sales ofsuch products by making them available to Dealers ' customersfor a smallmonthly lease payment rather than a high initial purchase price. The Companybelieves that it can leverage the competitive advantage it has in its current marketsto products with similar characteristics . The Company intends to intensify itsmarketing effort, including increasing national awareness of the Leasecommbrand name, as part of its strategy to develop new product lines . [Emphasisadded . ]

57. The Prospectus also falsely described the Company ' s servicing and collectio n

functions as follows:

The Company's collection effort is a key component of its success . The Company

believes that its competitors have not energetically pursued collection of

microticket delinquent accounts due to the perceived high costs of collecting

relatively small monthly payments against equipment with low resale value . In

contrast, the Company can cost-effectively pursue such delinquencies due to its

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highly automated collection process . In addition to writing collection letters,making collection calls and reporting delinquent accounts to the creditreporting agencies, the Company litigates essentially all delinquent accountswhere necessary and obtains and enforces judgments through a network of over

1 00 lawfirms nationwide. The Company uses several computerized processes inits collection efforts, including the generation of daily priority call lists andscrolling for daily delinquent account servicing, generation and mailing ofdelinquency letters, routing of incoming calls to appropriate LRRs with instantcomputerized access to account details, generation of delinquent account listseligible for litigation, generation of pleadings and litigation monitoring .Collection efforts commence immediately, with repeated reminder letters andtelephone calls upon payments becoming 10 days past due, with a lawsuitgenerally filed if an account is more than 85 days past due .

58 . In a section of the Prospectus entitled "Risk Factors," the Company purported to

warn investors of risks that could negatively impact the Company and its stock price .

Specifically, the Company identified risk factors associated with customer defaults and certain

adverse consequences associated with the Company's collection policies . Defendants falsely

represented that MicroFinancial's internal review and monitoring policies adequately reserved

for estimated losses from defaults and that the Company was operating lawfully with respect t o

its collection procedures for past due lease payments. The Prospectus stated, in pertinent part, as

follows regarding these matters :

RISK OF DEFAULTS ON LEASE S

The credit characteristics of the Company's lessee base correspond to a high

incidence of delinquencies which in turn may lead to significant levels of defaults .

The Company 's receivables (including the entire lease receivable with the

exception of service contracts, as to which only the amount of the invoices

billed but not collected is included) which were contractually past due by 31

days or more at October 2, 1998 represented 25.1 % ofthe sum of the

Company's receivables due in installments plus investment in service contracts

plus loans receivable at September 30, 1998 . [ . . .] Under the Company's

charge-off policy, cumulative net charge-offs from the Company's inception to

September 30, 1998 have totaled 7 .45% of total cumulative receivables plus total

billed Bees . The credit profile of the Company's lessees heightens the

importance to the Company of both pricing its leases, loans and contracts for

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risk assumed, as well as maintaining adequate reserves for losses. Significant

defaults by lessees in excess of those anticipated by the Company in setting itsprices and reserve levels may adversely affect the Company's cash flow and

earnings. Reduced cash flow and earnings could limit the Company's ability torepay debt, obtain financing and effect Securitizations which would have amaterial adverse effect on the Company's business , financial condition and results

of operations .

Additionally, the Company utilizes its leases, contracts and loans as collateralunder its Credit Facilities and Securitizations . The Company's Credit Facilitiesand Securitizations provide for events of default in the event of delinquenciesbeyond certain levels . Actual defaults, as well as delinquencies under leases,contracts and loans above pre-determined thresholds, would reduce the amount ofcollateral available for financing under its Credit Facilities and futureSecurit:izations and would have a material adverse effect on the Company'sbusiness [ . . .] .

ADVERSE CONSEQUENCES OF COLLECTION POLIC Y

The Company's use of litigation as a means of collection of unpaid receivablesexposes it to counterclaims on its suits for collection, to class action lawsuits andto negative publicity surrounding its leasing and collection policies . The Companyhas been a defendant in attempted class action suits as well as counterclaims filedby individual obligors in attempts to dispute the enforceability of the lease,contract or loan . The Company believes its collection policies and use oflitigation comply fully with all applicable laws. Because of the Company'spersistent enforcement of its leases, contracts and loans through the use oflitigation, the Company may have created ill will toward it on the part of certainlessees and other obligors who were defendants in such lawsuits . The Company'slitigation strategy has generated adverse local publicity in certain circumstances .Adverse publicity at a national level could negatively impact public perception ofthe Company and may materially impact the price of the Common Stock . Anysuch class action suit, if successful, or any such adverse publicity, if widespread,could have a material adverse effect on the Company's business, financialcondition or results of operations. [Emphasis added.]

59 . In the Prospectus, MicroFinancial falsely represented that its allowance for credi t

losses, were $24 .4 million as of September 30, 1998 . The Prospectus further represented that th e

Company regularly reviewed its loss reserves for adequacy, as follows :

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The Company maintains an allowance for credit losses on its investment in leases,service contracts and loans at an amount that it believes is sufficient to provideadequate protection against losses in its portfolio . The allowance is determinedprincipally on the basis of the historical loss experience of the Company andthe level of recourse provided by such lease, service contract or loan, if any, andreflects management 's judgment of additional loss potential considering futureeconomic conditions and the nature and characteristics of the underlying leaseportfolio. The Company determines the necessary periodic provision for creditlosses taking into account actual and expected losses in the portfolio as a wholeand the relationship of the allowance to the net investment in leases, servicecontracts and loans. Such provisions generally represent a percentage of fundedamounts of leases, contracts and loans. The resulting charge is included in theprovision for credit losses .

Leases, service contracts, and loans are charged against the allowance for creditlosses and are put on non-accrual when they are deemed to be uncollectible .Generally, the Company deems leases, service contracts and loans to beuncollectible when one of the following occur: (i) the obligor files for bankruptcy ;(ii) the obligor dies and the equipment is returned; or (iii) when an account hasbecome 360 days delinquent . The typical monthly payment under the Company'sleases is between $30 and $50 per month . As a result of these small monthlypayments, the Company's experience is that lessees will pay past due amountslater in the process because of the small amount necessary to bring an accountcurrent (at 360 days past due, a lessee will only owe lease payments of between$360 and $600) .

The Company has developed and regularly updates proprietary credit scoringsystems designed to improve its risk based pricing . The Company uses creditscoring in most, but not all, of its extensions of credit . In addition, the Companyaggressively employs collection procedures and a legal process to resolve anycredit problems.

The Company seeks to protect itself from credit exposure relating to poorquality Dealers by entering into recourse agreements with its Dealers, underwhich the Dealer agrees to reimburse the Company for payment of defaultedamounts under certain circumstances, primarily defaults within the first monthfollowing origination and upon evidence of Dealer errors or misrepresentationsin originating a lease or contract . In case of Dealer error or misrepresentation,the Company will charge-back the Dealer for both the lessee 's delinquentamounts and attorney and courtfees. [Emphasis added.]

60. In the Prospectus, the Company reported assets of $208.8 million and

shareholders' equity of $27.3 million as of September 30, 1998 . These representations were

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materially false and misleading because the Company had failed to provide for material credi t

losses in its lease and rental contract portfolio that had already occurred and, as a result, its

reported assets and shareholders' equity were materially overstated .

61 . In Note B to the Prospectus, titled "Summary of Significant Accounting Policies, "

MicroFinancial represented that its financial statements were prepared in accordance with GAAP

and fairly presented the Company's financial condition , as follows :

Basis of Presentation

The consolidated financial statements include the accounts of the Company andits wholly-owned subsidiaries . All significant intercompany accounts andtransactions have been eliminated in consolidation .

Unaudited Interim Financial Statements

The interim financial data as of September 30, 1998, and for the nine monthsended September 30, 1997 and 1998, is unaudited ; however, in the opinion of theCompany, all adjustments necessary for a fair presentation of interim results ofoperations (consisting only of normal recurring accruals and adjustments) havebeen made to the interim consolidated financial statements . The consolidatedresults of operations for interim periods are not necessarily indicative of results ofoperations for the respective full year .

62. The statements referenced above in ¶' 56-61 were each materially false an d

misleading when made because they failed to disclose and misrepresented the following advers e

facts which were then in existence at the time of the issuance of the IPO :

(a) that the Company's billing and collection practices , including the practice o f

charging excessive fees, were unreasonable and constituted unfair or deceptive trade practice s

and resulted in the Company's accrual of tens of millions of dollars in fees and charges o n

delinquent lease contracts which defendants knew, or recklessly disregarded, were uncollectible ;

(b) that certain lease provisions, including the forum selection clause an d

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language concerning lease non-cancellability, waiver of lessee defenses, lease termination, and

rollover provisions, rendered the Company's lease contracts unenforceable, resulting in the

Company's accrual of tens of millions of dollars of uncollectible fees and revenues ;

(c) that many of its vendors, including InfoDirect, E-Commerce, Roma Computer

and Themeware, among others, employed fraud and misrepresentation on a massive scale in th e

leasing of computers , virtual terminals , and business opportunities financed by the Company;

(d) that the Company's allowance for credit losses for its lease and rental portfoli o

was materially understated in light of material credit losses that had already been incurred o n

certain dealer receivables and other delinquent customer receivables and/or in light of th e

material amount of future losses from lease and rental contracts in the Company's portfolio ;

(e) that defendants ' representation that the Company' s reserves were "adequate "

was lacking in any reasonable basis when made because the reserves did not reflect materia l

credit losses in MicroFinancial's lease and rental portfolio that had already occurred and/or losses

for certain dealer receivables and other delinquent receivables, and had such factors been take n

into account, the reserves could not adequately protect against the risk of material future losses ;

and

(f) based on the foregoing, defendants' opinions concerning the Company and it s

operations were lacking in a reasonable basis at all relevant times .

Materially False And MisleadingStatements Issued During The Class Period

63 . On March 31, 1999, MicroFinancial filed its Annual Report on Form 10-K for th e

year ended December 31, 1998 with the SEC which was, signed by defendants Bleyleben an d

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Latour (the "1998 10-K") . The 1998 10-K represented that the Company' s total assets were

$210.3 million and stockholders' equity was $29 .4 million at the end of 1998 . As of December

31, 1998, the Company reported that its allowance for credit losses was $19 .1 million . The 1998

10-K included the following representations concerning MicroFinancial's operations an d

business (MicroFinancial's Form 10-K for the years 1999, 2000 and 2001 included substantiall y

identical disclosures) :

The Company derives the majority of its revenues from leases originated and heldby the Company, payments on service contracts, rental payments from lesseeswho continue to rent the equipment beyond the original lease term, and feeincome. The Company fluids the majority of leases, contracts and loans throughits revolving credit and term loan facilities (the "Credit Facilities") and on-balancesheet Securitizations, and to a lesser extent, its subordinated debt program("Subordinated Debt") and internally generated funds .

In a typical lease transaction, the Company originates leases through its networkof independent Dealers . Upon approval of a lease application by the Company andverification that the lessee has both received the equipment and signed the lease,the Company pays the Dealer the cost of the equipment plus the Dealer's profit

margin.

The terms and conditions of all of the Company's leases are substantially similar .

In most cases, the contracts require lessees to : (i) maintain, service and operate theequipment in accordance with the manufacturer's and government-mandated

procedures ; (ii) insure the equipment against property and casualty loss ; (iii) pay

all taxes associated with the equipment ; and (iv) make all scheduled contract

payments regardless of the performance of the equipment . The Company's

standard lease forms provide that in the event of a default by the lessee, theCompany can require payment of liquidated damages and can seize and removethe equipment for subsequent sale, refinancing or other disposal at its discretion .

Any additions, modifications or upgrades to the equipment, regardless of thesource of payment, are automatically incorporated into and deemed a part of the

equipment financed .

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The Company provides financing to obligors under microticket leases, contractsand loans through its Dealers . Since the Company relies primarily on its networkof Dealers for its origination volume, the Company considers them its customers .The Company had over 1,242 different Dealers originating 67,080 Companyleases, contracts and loans in 1998 . E-Commerce accountedfor approximately11.6% of all originations in 1998. No other Dealer accounted for more than 10%of the Company's origination volume during such year .

The nature of the Company's business requires two levels of review, the firstfocused on the ultimate end-user of the equipment or service and the secondfocused on the Dealer. The approval process begins with the submission bytelephone, facsimile or electronic transmission of a credit application by theDealer. Upon submission, the Company, either manually or throughLeaseconunDirect(TM) over the Internet, conducts its own independent creditinvestigation of the lessee through its own proprietary data base and recognizedcommercial credit reporting agencies such as Dun & Bradstreet, TRW, Equifaxand TransUnion. The Company's software evaluates this information on atwo-dimensional scale, examining both credit depth (how much information existson an applicant) and credit quality (past payment history) . The Company is thusable to analyze both the quality and amount of credit history available with respectto both obligors and Dealers and to assess the credit risk . The Company uses thisinformation to underwrite a broad range of credit risks and provide financing insituations where its competitors may be unwilling to provide such financing . Thecredit scoring model is complex and automatically adjusts for differenttransactions . In situations where the amount financed is over $3,000, theCompany may go beyond its own data base and recognized commercial creditreporting agencies and obtain information from less readily available sources suchas banks. In certain instances, the Company will require the lessee to provideverification of employment and salary.

The second aspect of the credit decision involves an assessment of theoriginating Dealer. Dealers undergo both an initial screening process andongoing evaluation, including an examination of Dealer portfolio performance,lessee complaints, cases of fraud or misrepresentation, aging studies, number ofapplications and conversion rates for applications . This ongoing assessmentenables the Company to manage its Dealer relationships, including endingrelationships with poor performing Dealers .

Upon credit approval, the Company requires receipt of signed leasedocumentation on the Company's standard or other pre-approved lease formbefore funding . Once the equipment is shipped and installed, the Dealer invoicesthe Company, and thereafter the Company verifies that the lessee has received and

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accepted the equipment. Upon the lessee authorizing payment to the Dealer, thelease is forwarded to the Company's funding and documentation department forfunding, transaction accounting and billing procedures . [Emphasis added . ]

The Company performs all servicing functions on its leases, contracts and loans,including its securitized leases, through its automated servicing and collectionsystem. Servicing responsibilities generally include billing, processing payments,remitting payments to Dealers and investors in the Company's securitizationprograms (the "Securitizations"), preparing investor reports, paying taxes andinsurance and performing collection and liquidation functions .

The Company differentiates itself from its competitors in the way in which it

pursues delinquent accounts that it believes its competitors would not pursue due

to the costs of collection . The Company's automated lease administration system

handles application tracking, invoicing, payment processing, automated collection

queuing, portfolio evaluation and report writing . The system is linked with bank

accounts for payment processing and provides for direct withdrawal of lease,

contract and loan payments . The Company monitors delinquent accounts using its

automated collection process . The Company uses several computerized processes

in its collection efforts, including the generation of daily priority call lists andscrollingfor daily delinquent account servicing, generation and mailing of

delinquency letters, routing of incoming calls to appropriate employees withinstant computerized access to account details , generation of delinquent

account lists eligible for litigation , generation of pleadings and litigationmonitoring. Collection efforts commence immediately, with repeated reminderletters and telephone calls upon payments becoming 10 dayspast due, with alawsuit generallyfiled ifan account is more than 85 days past due. The

Company's collection efforts include one or more of the following: sendingcollection letters, making collection calls, reporting delinquent accounts to

credit reporting agencies and litigating delinquent accounts where necessary

and obtaining and enforcing judgments. [Emphasis added . ]

64. The 1998 10-K included defendants' representations that MicroFinancial' s

allowance for credit losses as of December 31, 1998, was adequate and that MicroFinancial' s

financial statements had been prepared in accordance with GAAP:

The Company maintains an allowance for credit losses on its investment in leases,service contracts and loans at an amount that it believes is sufficient to provideadequate protection against losses in its portfolio . The allowance is determinedprincipally on the basis of the historical loss experience of the Company and th e

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level of recourse provided by such lease, service contract or loan, if any, andreflects management's judgment of additional loss potential considering futureeconomic conditions and the nature and characteristics of the underlying leaseportfolio . The Company determines the necessary periodic provision for creditlosses taking into account actual and expected losses in the portfolio as a wholeand the relationship of the allowance to the net investment in leases, servicecontracts and loans. Such provisions generally represent a percentage of fundedamounts of leases, contracts and loans . The resulting charge is included in theprovision for credit losses . [Emphasis added . ]

The preparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates andassumptions that affect the reported amount of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amount of revenues and expenses during the reportedperiod. Actual results could differ from those estimates .

65. On April 29, 1999, MicroFinancial issued a press release announcing its financia l

results for the quarter ended March 31, 1999 . The Company reported revenues of $24 .45

million, net income of $3 .979 million and EPS of $0 .33. Defendants Latour and Bleyleben

commented on the Company's first quarter results, in pertinent part, as follows :

Latour -

Compared to the 4th Quarter1998 net income grew by 61% [ . . .] We now have

reported two quarterly results as a public company and they both exceededpublicly available earnings-per-share estimates provided by analysts known tous.

Bleyleben -

MicroFinancial's margin and profitability levels distinguish us from most anycompetitor we know of In the specialized financial intermediation area [ . . .]Withno Gain-on-Sale accounting and with all assets on our books our annualize dReturn on Average Assets of 7.3 % and Return on Revenues of 17 .7% is, as far aswe were able to determine, rarely seen by any other competitor in our field .

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[Emphasis added . ]

66. On February 22, 2000, MicroFinancial issued a press release announcing it s

financial results for the fourth quarter and twelve months ended December 31, 1999 . The

Company reported fourth quarter revenues of $27 .5 million, net income of $5.0 million

excluding a special credit loss provision and EPS of $0 .39 excluding the special provision .

Defendants attributed the special credit loss provision to a one-time event involving certai n

"collateralized loans" outside the Company's core product lines. Defendant Latour commented ,

"This [special provision] is a unique situation in our business and does not affect our core

business, which has had a tremendous year of increased revenues, profits and lease

origination . " [Emphasis added. ]

67. On March 30, 2000, MicroFinancial filed its Annual Report on Form 10-K for th e

year ended December 31, 1999 with the SEC which was signed by defendants Bleyleben an d

Latour, among others, and confirmed the Company's previously issued financial results (th e

"1999 10-K") . The 1999 10-K represented that the Company' s total assets were $265 .85 million

and that its stockholders ' equity was $78 .38 million at the end of 1999 . As of December 31 ,

1999, the Company reported that its allowance for credit losses was $41 .7 million . The 1999 10-

K also included the following representations concerning MicroFinancial's operations an d

business :

The Company derives the majority of its revenues from leases originated and heldby the Company, payments on service contracts, rental payments from lesseeswho continue to rent the equipment beyond the original lease term, and feeincome. The Company funds the majority of leases, contracts and loans throughits revolving credit and term loan facilities (the "Credit Facilities") and on-balancesheet Securitizations, and to a lesser extent, its subordinated debt program("Subordinated Debt") and internally generated funds .

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In a typical lease transaction, the Company originates leases through its network

of independent Dealers . Upon approval of a lease application by the Company

and verification that the lessee has both received the equipment and signed the

lease, the Company pays the Dealer the cost of the equipment plus the Dealer's

profit margin.

Total revenues for the year ended December 31, 1999 were $98 .5 million, an

increase of $22 million, or 28 .8%, from the year ended December 31, 1998, due

primarily to increases of $9 .2 million, or 49.5%, in rental and service contract

income; $8.2 million, or 17.3%, in income on financing leases and loans and $4.3

million, or 85% in service fee income over such amounts in the previous year's

period.

The Company seeks to protect itself from credit exposure relating to poor qualityDealers by entering into limited recourse agreements with its Dealers, underwhich the Dealer agrees to reimburse the Company for payment of defaultedamounts under certain circumstances, primarily defaults within the first monthfollowing origination and upon evidence of Dealer errors or misrepresentations inoriginating a lease or contract. In case of Dealer error or misrepresentation, theCompany will charge-back the Dealer for both the lessee 's delinquent amountsand attorney and court fees .

68 . Additionally, the 1999 10-K included defendants' representation tha t

MicroFinancial's allowance of credit losses as of December 31, 1999 was adequate and that

MicroFinancial's financial statements had been prepared in accordance with GAAP:

The Company maintains an allowance for credit losses on its investment in leases,service contracts and loans at an amount that it believes is sufficient to provideadequate protection against losses in its portfolio . The allowance is determinedprincipally on the basis of the historical loss experience of the Company and thelevel of recourse provided by such lease, service contract or loan, if any, andreflects management's judgment of additional loss potential considering futureeconomic conditions and the nature and characteristics of the underlying leaseportfolio . The Company determines the necessary periodic provision for creditlosses taking into account actual and expected losses in the portfolio as a wholeand the relationship of the allowance to the net investment in leases, servicecontracts and loans .

-37-

The preparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amount of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements and thereported amount of revenues and expenses during the reported period . Actualresults could differ from those estimates .

69. On July 24, 2000, MicroFinancial issued a press release announcing its financial

results for the second quarter and six months ended June 30, 2000. The Company reported. that

year-to-date net income was $10 .1 million vs . $8 .5 million for the same period in 1999, an

increase of $1 .6 mi ll ion, or 19%, and that year-to-date revenues increased to $59 . 6 million an

increase of $13 .4 million or 29% over the same period for 1999 . The press release included

comments by defendant Bleyleben regarding the Company's lease origination activities a s

follows :

Fundings for new contracts during the 2nd Quarter reached $ 47 .3M, another newrecord and 42 .5% higher than the same period in 1999. Year-to-date fundings are$84.6M or 32% higher than for the first 2 quarters in 1999 . During the 2n dQuarter we started to increase our prices and also tightened ourcredit-approval standards. This process continues into the 3rd Quarter and as aresult we believe that our funding growth rates going forward will not be ashigh as during the 2nd quarter [ . . .] [Emphasis added . ]

70. On August 14, 2000, MicroFinancial filed its quarterly report on Form 10-Q fo r

the quarter and six months ended June 30, 2000 . The Form 10-Q, signed by defendant s

Bleyleben and Latour, included the Company's previously announced second quarter financia l

results. In addition, defendants disclosed that losses related to certain miscellaneous "other

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receivables"3 totaled $1 .9 million at the end of the second quarter . The Form 10-Q also included

representations concerning the adequacy the Company 's allowance for credit losses and that th e

financial statements included therein reflected all material adjustments . The report stated, r

pertinent part, as follows :

For the six months ended June 30, 2000, the Company reserved $1 .9 millionagainst other receivables . The allowance reflects management's judgement of losspotential considering future economic conditions and the nature of the underlyingreceivables .

The Company maintains an allowance for credit losses on its investment in leases,loans and service contracts at an amount that it believes is sufficient to provide anadequate provision against losses in its portfolio . The allowance is determinedprincipally on the basis of the historical loss experience of the Company and thelevel of recourse provided by such leases, loans and service contracts, if any . Inaddition, the allowance reflects management's judgment of the additional losspotential considering future economic conditions and the nature andcharacteristics of the underlying lease portfolio . The Company determines thenecessary periodic provision for the credit losses taking into account actual andexpected losses in the portfolio as a whole and the relationship of the allowance tothe net investment in leases, loans and service contracts .

The accompanying unaudited consolidated financial statements have beenprepared in accordance with generally accepted accounting principles and themales and regulations of the Securities and Exchange Commission for interimfinancial statements . Accordingly, the interim statements do not include all of theinformation and disclosures required for the annual financial statements . In theopinion of the Company's management, the consolidatedfinancial statementscontain all adjustments , consisting only of normal recurring adjustments,considered necessaryfor a fair presentation of these interim results . [Emphasisadded . ]

' Whether these "other receivables," in fact, included certain "dealer receivables" which caused theCompany to incur more than $35 million in losses reported by defendants in the third quarter of 2002 was neveradequately disclosed in the Company's SEC filings .

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71 . On February 21, 2001, MicroFinancial issued a press release announcing its

financial results for the fourth quarter and year ended December 31, 2000. The Company

announced "record quarterly revenues ." The press release stated, in pertinent part, as follows :

Net income for the fourth quarter ending December 31, 2000 was $5 .5 million or$.43 per share vs. a loss $(2 .5) million or $(.20) per share for the same period inthe previous year . Quarterly revenues increased to $34.2 million, an all-timerecord and a 24 .4% increase from Q4 1999 . Net income for the year is $20 .9million or $1 .63 per share vs . $10 .7 million or $ .83 per share for the same periodin 1999, an increase of $10 .2 million or 95 .3% . Annual revenues increased to$127.3 million an increase of $28 .8 million or 29 .2% over the same period for1999. Total investment in leases, loans and service contracts increased to $465 .5 ,an increase of 23 .5% [ . . .] .

Defendant Bleyleben commented on the Company's results :

Due to the company's decision during the second quarter of 2000 to increasepricing and tighten its credit approval standards, dealer fundings of new contractsduring the fourth quarter were $24 .5 million vs . $36 .4 million for the same periodin 1999. Year-to-date fundings were $145 .4 million or 6% higher than similarfundings in 1999 . We strongly believe that our decision to increase pricing andtighten our credit approval process will result in a better performance in ouroverall, portfolio. We believe that the economic environment has changeddramatically during the last two quarters and have concluded that added focuson cash and asset-quality rather than dealer funding growth will be key tocreating shareholder value going forward[.] [Emphasis added . ]

72 . On March 30, 2001, MicroFinancial fi led its Annual Repo rt on Form 10-K for th e

year ended December 31, 2000 with the SEC which was signed by defendants Bleyleben an d

Latour, among others, and incorporated the Company's previously issued financial results (th e

"2000 10-K") . The 2000 10-K represented that the Company' s total assets were $342.6 million

and that stockholders' equity was $96 .0 million at the end of 2000 . As of December 31, 2000 ,

the Company reported that its allowance for credit losses was $40 .9 million . The 2000 10-K

included the following representations concerning MicroFinancial's operations and business :

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Substantially all leases originated or acquired by the Company are non-cancelable .During the term ofthe lease, the Company is scheduled to receive paymentssufficient, in the aggregate, to cover the Company's borrowing costs and thecosts of the underlying equipment, and to provide the Company with anappropriateprofit. The Company enhances the profitability of its leases,contracts and loans by charging late fees, prepayment penalties, loss anddamage waiverfees and other service fees, when applicable .

73 . Additionally, the 2000 10-K included defendants' representation that

MicroFinancial's allowance of credit losses as of December 31, 2000, was adequate and tha t

MicroFinancial's financial statements included in the report had been prepared in conformit y

with GAAP . The Form 10-K stated, in pert inent part, as follows :

The Company maintains an allowance for credit losses on its investment in leases,service contracts and loans at an amount that it believes is sufficient to provideadequate protection against losses in its portfolio . The allowance is determinedprincipally on the basis of the historical loss experience of the Company and thelevel of recourse provided by such lease, service contract or loan, if any, andreflects management's judgment of additional loss potential considering currenteconomic conditions and the nature and characteristics of the underlying leaseportfolio . The Company determines the necessary periodic provision for creditlosses, taking into account actual and expected losses in the portfolio, as a whole,and the relationship of the allowance to the net investment in leases, servicecontracts and loans .

The preparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amount of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reported period . Actualresults could differ from those estimates .

74. On October 15, 2001, MicroFinancial issued a press release announcing that the

Company's financial results for the third quarter ended September 30, 2001 were expected to b e

well below previously issued Company guidance and analyst expectations due to higher than

expected credit losses - attributable to "a worsening economic environment" -- of approximately

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$4 million. The press release stated, in pertinent part, as follows :

[ . . .] while revenues for the third quarter ending September 30, 2001 will be inexcess of a record breaking $36 .1 million, net income will fall short ofexpectations . Earnings will be between $0 .25 and $0.30 per share, on fullydiluted shares of 13,094,690 versus analysts' expectations of approximately $0 .43 .MicroFinancial expects year to date earnings for the period ending September 30,2001 to be between $1 .18 and $1 .22 [ . . . ]

"We analyzed our delinquency rates and our write-off trends and concluded thatwhile our write-off rates have not materially changed , our increased delinquencyrates argue for an increased funding of the allowance for credit losses of about $4million" says Dr. Peter Bleyleben, President and CEO .

"What we are seeing is the result of the combination of a worsening economicenvironment during most of 2001, culminating in September, with the higherdelinquency rates associated with the lower credit quality business we underwroteat higher prices primarily through the third quarter of 2000" adds Richard F .Latour, EVP, COO and CFO .

75. On February 25, 2002 , MicroFinancial issued a press release announcing it s

financial results for the fourth gLiarter and year ended December 31, 2001 . Defendants

announced "record" annual revenues of $154 . 1 million . The press release stated in pertinent pa rt

as follows :

Net income for the fourth quarter was $2 .1 million vs . $5 .5 million or $0.16 pershare vs . $0.43 per share for the same period in the previous year . The primaryreason for the drop in earnings for the quarter was an increase of $6 .2 million inthe provision for credit losses and an increase of $1 .6 million is SG&A expenses .The increase in the provision for credit losses was to accommodate for theincreased delinquency the Company has been experiencing from the lower gradecredit that had been written during fiscal 1999 and most of fiscal 2000 . [ . . .] Netincome for the year ending December 31, 2001 was $16 .3 million vs . $20.9million or $1 .26 vs . $1 .63 in fiscal 2000. Annual revenues increased by 10 .5% or$14.6 million for record revenues of $154.1 million .

Defendants LaTour and Bleyleben commented on the Company's results :

"Fiscal 2001 was a year of re-focus with our decisions to increase pricing andtighten the credit approval standards resulting in lower origination volume [ . . .], "

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says Richard F . Latour, President and COO . "As a result of the decision toincrease pricing and tighten its credit approval standards, dealer fundings of newcontracts during fiscal 2001 were $111 .1 million vs . $145 .4 million a decrease of$34.3 million or 23.6%. We believe that this decision will result in betterlong-term performance in our overall portfolio . [ . . .]," adds Peter R . Bleyleben,Chairman and CEO .

76. On March 29, 2002, MicroFinancial filed its Annual Report on Form 10-K for the

year ended December 31, 2001 with the SEC which was signed by defendants Bleyleben and

Latour, among others, and incorporated the Company's previously issued financial results (the

"2001 10-K") . The 2001 10-K represented that the Company's total assets were $361 .7 million

and that stockholders' equity was $110 .6 million at the end of 2001 . As of December 31, 2001,

the Company reported that its allowance for credit losses was $45 .0 million . The 2001 10-K

included the following representations concerning MicroFinancial's operations and business :

Substantially all leases originated or acquired by the Company are noncancelable .During the term of the lease, the Company is scheduled to receive paymentssufficient, in the aggregate, to cover the Company's borrowing costs and the costsof the underlying equipment, and to provide the Company with an appropriateprofit . The Company enhances the profitability of its leases, contracts and loansby charging latefees, prepayment penalties, loss and damage waiver fees andother service fees, when applicable. The initial noncancelable term of the lease isequal to or less than the equipment's estimated economic life and often providesthe Company with additional revenues based on the residual value of theequipment financed at the end of the initial term of the lease. Initial terms of theleases in the Company's portfolio generally range from 12 to 48 months, with anaverage initial term of 43 months as of December 31, 2001 . Substantially allservice and rental contracts are month-to-month contracts with expected terms of7 years for service contracts, 15 months for lessees that continue to rent theirequipment beyond the original term, and 22 months for other types of rentalcontracts .

Total revenues for the year ended December 31, 2001 were $154 .1 million, anincrease of $14.6 million, or 10.5%, from the year ended December 31, 2000, dueprimarily to increases of $1 .1 million, or 1 .6%, in income on financing leases and

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loans ; 510.0 million, or 27.5%, in rental and service contract income, and $3 .2million, or 11 .8%, in service fee and other income over such amounts in theprevious year's period. The increase in income on financing leases and loans wasdue to the increased number of leases originated . The increase in rental andservice contract income is a result of the increased number of lessees that havecontinued to rent their equipment beyond their original lease term, the acquisitionof the rental portfolio off Resource Leasing Corporation, and increasedoriginations in rental and service contracts . The increase in fee income and otherincome is the result of increased fees from the lessees related to the collectionand legal process emplhyed by the Company, and the addition of a new line ofbusiness of selling equipment out of existing inventory . [Emphasis added.]

77. On August 14, 2002, the Company filed its quarterly report on Form 10-Q for th e

three months ended June 30, 2002 . The Form 10-Q disclosed for the first time that defendant s

had been served with Civil Investigation Demands by federal and state authorities in connectio n

with an investigation of the Company's business practices . The Form 10-Q stated, in pertinent

part, as follows :

Leasecomm has been served with Civil Investigative Demands by the Offices ofthe Attorney General for the states of Kansas, Illinois, Florida, and Texas, and forthe Commonwealth of Massachusetts . Those Offices of the Attorney General, inconjunction with the Northwest Region Office of the Federal Trade Commission,the Offices of the Attorney General for North Carolina and North Dakota, and theVentura County, California, District Attorney's Office, have informed Leasecommthat they are seeking to coordinate their Government Investigations (collectively,the "Government Investigators") . At this time, the principal focus of theGovernment Investigations appears to be software license leases (principallyvirtual terminals) and leases from certain vendor/dealers whose activities includedbusiness opportunity seminars . Leasecomm has further been informed that theGovernment Investigations cover certain lease provisions, including the forumselection clause and language concerning the non-cancellability of the lease. Inaddition, the Government Investigations include, among other things, whetherLeasecomm's lease termination, or rollover, provisions, are legally sufficient ;whether a Leasecomm lease is an enforceable lease ; whether there were potentialproblems with its leases of which Leasecomm had knowledge ; whether the leasesare enforceable in accordance with their terms ; whether three day right ofrescission notices were required and, if required, whether proper notices weregiven; whether any lease prices were unconscionable ; whether the lease of asoftware license is the lease of a service, not a good ; whether any lease o f

-44-

satellites or computers are leases to consumers which must comply with certainconsumer statutes ; whether electronic fund transfer payments pursuant to a leaseviolate Reg . E; whether any Leasecomm billing and collection practices o rcharges are unreasonable, or constitute unfair or deceptive trade practices ;whether Leasecomm's course of dealings with its vendors/dealers makesLeasecomm liable for any of the activities of its vendors/dealers . In April, 2002,Leasecomm and the Government Investigators entered into provisional relief andtolling agreements which provide for Leasecomm to take certain interim actions,toll the running of the statute of limitations as of January 29, 2002, and requireadvance notice by Leasecomm of its withdrawal from the provisional reliefagreement and advance notice by each of the Government Investigators of itsintention to commence legal action .

Since the Government JWvestigations are in process , and no legal action hasbeen commenced against Leasecomm, there can be no assurance as to theeventual outcome. [Emphasis added . ]

78. Less than two months later, on October 11, 2002, the Company issued a pres s

release announcing that it was ceasing to make any new lease originations as part of a "ne w

business strategy." The press release stated, in pertinent part, as follows :

As part of this new business strategy, in recognition of the difficult financingenvironment, management intends to immediately de-emphasize new loanoriginations until new financing solutions are secured .

Richard Latour, President and Chief Operating Officer stated, "Based on athorough analysis of our strategic business strengths and the current financingenvironment, we have determined it is in our best interests to pursue a businessstrategy that leverages our core technology and services platform . The Companywill simultaneously continue to collect on our existing portfolio . Our intent is toreduce new lease originations and focus on a better credit quality lessee . Creditquality in the current lending environment has caused some of our coremicroticket financing business to become unattractive . As we re-prioritized ourbusiness objectives, we determined it was in the best interests of shareholders tofocus on our core strengths in an effort to maximize shareholder returns . "

The Company's new business strategy will de-emphasize loan originations and

result in approximately a 31% reduction in the workforce in this area. The

Company's collection, servicing and technology staff will essentially remainunaffected .

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The Company's existing revolving credit facilities have been converted tothree-year term loans, as provided for under the existing agreements .Management's goal is to create long term shareholder value by balancing thepursuit of several strategic alternatives over the next three years, including thecontinued collection of the existing portfolio, focusing the Microticket leasingbusiness on better quality lessees, and seeking to secure new financing . [Emphasisadded. ]

79 . Market reaction to the Company's "new business strategy" announcement was

swift and severe. The Company' s common stock lost 37% of its value to close at $2.14 per shar e

on October 11, 2002 .

80. The statements referenced above in IT 63- 78 were each materially false an d

misleading when made because they failed to disclose and misrepresented the following advers e

facts which were then in existence at the time of the issuance of the Offering :

(a) that the Company's billing and collection practices, including the practice o f

charging excessive fees, were unreasonable and constituted unfair or deceptive trade practice s

and resulted in the Company's accrual of tens of millions of dollars in fees and charges o n

delinquent lease contracts which defendants knew, or recklessly disregarded, were uncollectible ;

(b) that certain lease provisions, including the forum selection clause an d

language concerning lease non-cancellability, waiver of lessee defenses , lease termination, and

rollover provisions, rendered the Company's lease contracts unenforceable , resulting in the

Company's accrual of tens of millions of dollars of uncollectible fees and revenues ;

(c) that many of its vendors, including InfoDirect, E-Commerce, Roma Computer

and Themeware, among others, employed fraud and misrepresentation on a massive scale in th e

leasing of computers, virtual terminals, and business opportunities financed by the Company ;

{d) that the Company's allowance for credit losses for its lease and rental portfoli o

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was materially understated in light of material credit losses that had already been incurred on

certain dealer receivables and other delinquent customer receivables and/or in light of the

material amount of future losses from lease and rental contracts in the Company's portfolio ;

(e) that defendants' representation that the Company's reserves were "adequate "

was lacking in any reasonable basis when made because the reserves did not reflect materia l

credit losses in. MicroFinancial's lease and rental portfolio that had already occurred and/or losse s

for certain dealer receivables and other delinquent receivables, and had such factors been take n

into account, the reserves could not adequately protect against the risk of material future losses ;

and

(f) based on the lEoregoing, defendants' opinions concerning the Company and it s

operations were lacking in a reasonable basis at all relevant times .

81 . The Class Period ends on October 30, 2002. On that date, the Company issued a

press release announcing its financial results for the period ended September 30, 2002. The

Company announced that it had recorded a special $35 million credit loss on its past due and

delinquent accounts, The Company misleadingly attributed the additional credit losses to a

change in the Company 's loss reserve for accounts more than. 90-days past due. The press

release stated, in pertinent part, as follows :

Third quarter revenue for the period ended September 30, 2002 decreased 22%,or $8.8 million to $30.5 million compared to $39 .3 million last year . Net incomefor the third quarter, before an additional provision of $35 million discussedbelow, was $1 .4 million, or $0.11 per diluted share as compared with $3 .6 millionor $0.28 per diluted share in the prior year's third quarter . After the additionalprovision, earnings were a net loss of $19 .6 million, or ($1 .53) per diluted share .Besides the additional provision, the decline in earnings for the quarter isprimarily the result of a 29% reduction in lease and loan revenues to $12 .8 millionand a 43% decline in service fee and other revenues to $4 .4 million as compare d

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with the third quarter ended September 30, 2001 .

Additionally, gross lease investment was down 7 .8% or $34 .4 million from thesame period last year, caused in part by lower than anticipated lease originationvolumes.

As par ." of management 's ongoing analysis of its portfolio, it has determinedthat an additional allowance of $35 million is warranted . This additionalallowance will provide for 104% coverage of our 90-day past due accounts ascompared to previous quarters which had coverage in the 50 -60% range. Thisprovision will reserve against certain dealer receivables, as well as delinquentportfolio assets. In the past, dealer receivables had been offset, in someinstances, against the finding of new contracts. Since we have temporarily

suspended the funding of new deals we feel that the collection of these receivables

will be more difficult . Although the company will continue to pursue collections

on these accounts, management believes that the cost associated with the legal

enforcement would outweigh the benefits realized. [Emphasis added . ]

82 . Subsequently, on March 10, 2003, the Company issued a press release announcin g

its preliminary results for the fourth quarter ending December 31, 2002 . Defendants reporte d

continuing declines in the Company' s revenues and profits driven, in part, by sharply highe r

credit losses on the Company's dealer receivables and lease financing contracts . The pres s

release stated, in pertinent part, as follows :

Preliminary fourth quarter revenue for the period ended December 31, 2002decreased 24 .0%, or $8.9 million , to $28 .0 million compared to $36 .9 million lastyear. The net loss for the quarter was $7 .7 million, or ($0.60) per diluted share, ascompared with net income of $2 .1 million, or $0.16 per diluted share in the prioryear's fourth quarter . The decline in net income for the quarter is primarily theresult of a 30 .4% decline in lease and loan revenues to $11 .2 million, a 46.1 %decline in service fee and other revenues to $4 .0 million, and a 32.7% increase inthe provision for credit losses to $22.5 million as compared with the fourthquarter ended December 31, 2001 . [Emphasis added . ]

83 . On or about May 22, 2003, the FTC and several states filed civil actions agains t

the Company, based on the results of their joint Government Investigations . In particular, the

FTC action sought "to secure preliminary and permanent injunctive relief, including rescission

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of contracts, cessation of collections and other equitable relief, for defendants' unfair or

deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a),"

among other things . [Emphasis added . ]

84. On May 29, 2003, the Company issued a press release announcing the settlement

of the FTC and state actions :

"We are pleased to have resolved this costly and time consuming matter which

has been ongoing for well over a year . Many of the issues raised were not due toLeasecomm's activities, but were attributable to the acts and statements ofindependent vendors and dealers . For the record, while we never sold equipmentdirectly, we felt it was in our best interest to settle because it was the onlycost-effective solution that enables the Company to move forward and focus onbusiness." [Emphasis added . ]

85 . The full extent of the Company's massive fraud became clear in the FTC's press

release of May 29, 2003, announcing terms of the settlement agreement between defendants an d

the FTC :

[ . . . The Company . . .] allegedly used shady agents, deceptive contracts, and falseclaims to target thousands of would-be entrepreneurs will cancel $24 million injudgments allegedly obtained through deception and will reform all businessopportunity financing contracts to settle charges by the Federal TradeCommission and an eight state task force that the practices violated federal andstate laws . The law enforcement agencies charged that Leasecomm financed thepurchase of business opportunities such as work-at-home operations usingbusiness opportunity sellers as its agents . According to the FTC, the contractscontained provisions p arporting to waive consumers' defenses and allowingLeaseconim the right to sue consumers in Massachusetts, where it is based, ratherthan where consumers lived and purchased the business opportunity .

The FTC alleged that most consumers could not afford to travel to Massachusettsto contest Leasecomm's charges and had default judgments entered against themin the Massachusetts court. If they didn't pay, Leasecomm resorted to aggressivecollection measures such as wage garnishment and property attachment to collect,even though Leasecomm knew or should have known that their vendors useddeceptive practices to sell their business ventures and promote the financing,according to the FTC's complaint .

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Leasecomm is a wholly-owned operating subsidiary of MicroFinancialIncorporated. Both companies are based in suburban Boston, Massachusetts .

"Leasecomm's customers got a one-two punch," said Howard Beales, Director ofthe FTC's Bureau of Consumer Protection. "Leasecomm used sellers of highlysuspect business opportunities to sell its financing, and then claimed it had noresponsibility for their deception . Companies that try to hide behind the fine printin contracts and lie to consumers about what they're were signing, whether directlyor through agents, simply do not pass muster . "

"Leasecomm knowingly participated in a scheme that used the 'get -rich-quick'allure of sellingproducts on the Internet to take advantage of thousands ofconsumers who were ultimately forced into debt, " Massachusetts AttorneyGeneral Tom Reilly said. "This agreement relieves the debts of customers whofell prey to these 'business opportunities ' and helps protect future consumers byrequiring Leasecomm to change its business practices . " According to the FTC,the scheme worked as follows: Leasecomm Corporation financed businessopportunities, including Internet web malls, multilevel marketing programs,medical billing software, coupon clipping programs and similar, often worthless,get-rich-quick schemes sold by third-party vendors . Consumers typically madelittle or no up-front payments, but signed a contract, which Leasecomm called alease, requiring payments ranging from $3,000 - $4,000 over a three or four yearperiod. While consumers thought the contracts covered many items included aspart of a business venture -- training, Web site design, and consumer leads, forexample -- they didn't. They covered only one small part of the venture -- a"virtual terminal," for example .

Leasecomm drafted its contracts to ensure that customerspaid even when thevendors used misrepresentations or fraud, or when theproducts or servicesfailed to perform as represented, according to the FTC complaint . The FTCalleges that Leasecomm knows or should know that many of its vendors engage indeceptive practices to sell their business ventures . In one case, a vendor signed up1,882 consumers for a "business opportunity," and nearly 1,500 went into default,the complaint alleges . Nevertheless, Leasecomm aggressively collected frommany of those customers . Leasecomm pursues its customers "even when thecustomers have been defrauded and received nothing of value," the complaintalleges. When consumers argued that the lease really financed an entire businessventure that was fraudulent and that the virtual terminal was worthless without theother elements of the package, Leasecomm took the position that the consumerstill had an obligation to pay in full . When consumers set up their own internetWeb sites to share information on how to fight Leasecomm, company employeesfalsely posed as consumers and made misleading statements about otherconsumers' absolute obligation to pay Leasecomm, according to the complaint .

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According to the FTC, when consumers failed to pay, Leasecomm sued them . TheFTC alleges that Leasecomm has sued over 27,000 consumers in the past threeyears in Massachusetts courts, and, as of January, had 2,200 suits pending . Fewof the customers could afford the expense of litigation in a distant city and mostsuffered default judgments the FTC alleges . Although Leasecomm files its suitsin Massachusetts, it aggressively enforces its judgments in the consumer 's localforum . "Had Leasecomm filed the suits in the localforum in thefirst instance,customers might have been able to appear and present a defense," the complaintsays . According to the FTC, Leasecomm adds to the consumer injury byimposing high collection fees, not only for latepayments, but for everycollection call it makes and letter it sends . These practices substantially increasethe total payments due under the Leasecomm contract, the complaint says .Leasecomm, and its parent corporation, MicroFinancial, Inc ., have agreed to settlethe FTC charges and similar suits filed by members of the State Task Force,comprised of the attorneys general of Massachusetts, Florida, Illinois, Kansas,North Carolina, North Dakota and Texas, and by the District Attorney's Office forVentura County, California . "This is an excellent example of federal-state lawenforcement cooperation," Beales said .

The settlement will :

bar misrepresentations about the terms of any contract -- includingmisrepresenting that consumers cannot raise defenses against Leasecomm ;

* require disclosure of material facts about a contract, including disclosurethat Leasecomm, not the vendor, is financing the transaction ;

* require that if Leasecomm sues consumers, it does so "where thecustomer resides or signed the contract ; "

* require Leasecomm to vacate pending lawsuits filed in the wrong forumand correct any damage to the consumer's credit record;

* require that Leasecomm invalidate illegal provisions of existingcontracts, including waivers of defenses ; require that Leasecomm cancel andcease collections on approximately $24 million in final court judgments ;

* require that Leasecomm give consumers who are the target of more than2,000 pending Leasecornm lawsuits currently filed in Massachusetts the option ofhaving the suit conducted locally ;

* require that consumers who were unlawfully required to agree toelectronic funds transfers be given the option to switch to another payment

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method.

The settlement also contains certain bookkeeping and record keeping provisionsto allow the agency to monitor compliance with its order .

Undisclosed Adverse Information

86. The market for MicroFinancial's securities was open, well-developed an d

efficient at all relevant times . As a result of these materially false and misleading statements and

failures to disclose, MicroFinancial's common stock traded at artificially inflated prices durin g

the Class Period . Plaintiffs and other members of the Class purchased or otherwise acquired

MicroFinanciall securities relying upon the integrity of the market price of MicroFinancial' s

securities and market information relating to MicroFinancial, and have been damaged thereby .

87 . During the Class Period, defendants materially misled the investing public ,

thereby inflating the price of MicroFinancial ' s securities, by publicly issuing false and

misleading statements and omitting to disclose material facts necessary to make defendants '

statements, as set forth herein, not false and misleading . Said statements and omissions were

materially false and misleading in that they failed to disclose material adverse information an d

misrepresented the truth about the Company, its business and operations, including, inter al .ia :

{a) that the Company's billing and collection practices, including the practice o f

charging excessive fees, were unreasonable and constituted unfair or deceptive trade practice s

and resulted in the Company's accrual of tens of millions of dollars in fees and charges o n

delinquent lease contracts which defendants knew, or recklessly disregarded, were uncollectible ;

~(b) that certain lease provisions, including the forum selection clause an d

language concerning lease non-cancellability, waiver of lessee defenses, lease termination, and

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rollover provisions, rendered the Company' s lease contracts unenforceable, resulting in th e

Company's accrual of tens of millions of dollars of uncollectible fees and revenues ;

(c) that many of its vendors, including InfoDirect, E-Commerce, Roma Compute r

and Themeware, among others, employed fraud and misrepresentation on a massive scale in th e

leasing of computers , virtual terminals , and business opportunities financed by the Company;

(d) that the Company's allowance for credit losses for its lease and rental portfoli o

was materially understated in light of material credit losses that had already been incurred on

certain dealer receivables and other delinquent customer receivables and/or in light of th e

material amount of future losses from lease and rental contracts in the Company's portfolio ;

(e) that defendants' representation that the Company's reserves were "adequate "

was lacking in any reasonable basis when made because the reserves did not reflect material

credit losses in MicroFinancial's lease and rental portfolio that had already occurred and/or losses

for certain dealer receivables and other delinquent receivables, and had such factors been take n

into account, the reserves could not adequately protect against the risk of material future losses ;

and

~(f) based on the foregoing, defendants' opinions concerning the Company and it s

operations were lacking in a reasonable basis at all relevant times .

88 . 'Thus, at all relevant times, the material misrepresentations and omission s

particularized in this Complaint directly or proximately caused or were a substantial contributin g

cause of the damages sustained by plaintiffs and other members of the Class. As described

herein, during the Class Period, defendants made or caused to be made a series of materially fals e

or misleading statements about MicroFinancial's business, prospects and operations . These

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material misstatements and omissions had the cause and effect of creating in the market a n

unrealistically positive assessment of MicroFinancial and its business, prospects and operations ,

thus causing the Company's securities to be overvalued and artificially inflated at all relevant

times. Defendants' materially false and misleading statements during the Class Period resulted i n

plaintiffs and other members of the Class purchasing the Company's securities at artificiall y

inflated prices, thus causing the damages complained of herein.

MICROFINANCIAL'S FALSE AND MISLEADINGFINANCIAL STATEMENTS AND FINANCIAL DISCLOSURE S

89 . At all relevant times during the Class Period, defendants represented that

MicroFinancial's financial statements were prepared in conformity with GAAP, which ar e

recognized by the accounting profession and the SEC as the uniform rules, conventions an d

procedures necessary to define accepted accounting practice at a particular time . SEC Regulatio n

S-X states that financial statements filed with the SEC that are not prepared in compliance with

GAAP are presumed to be misleading and inaccurate . 17 C.F.R. § 210.4-01 (a)(1) .

90. In their quest to artificially inflate the price of MicroFinancial's stock and remain

in compliance with MicroFinancial's numerous debt covenants , defendants used improper

accounting practices in violation of GAAP and the SEC's financial reporting requirements to

falsely overstate its financial performance during the Class Period . First, MicroFinancia l

improperly recognized millions of dollars in fee revenue in violation of GAAP . Second,

MicroFinancial failed to timely reserve for uncollectible receivables in violation of GAAP and

the Company's own publicly disclosed accounting policies . Third, in violation of GAAP,

MicroFinancial failed to disclose the true nature of it operations and significant risks an d

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uncertainties . Finally, MicroFinancial continues its deceptive accounting by failing to restate it s

previously issued erroneous financial statements in accordance with GAAP . As a result ,

MicroFinancial's financial results during the Class Period were materially overstated and were

presented in violation of GAAP, the Company's own publicly disclosed accounting policies, and

SEC rules and regulations .

MicroFinancial's Improper Recognition and Reporting of Revenu e

91 . During the Class Period, MicroFinancial reported that certain of its revenues were

generated from fees related to "the collection and legal process employed by the Company . "

Indeed, MicroFinancial 's fee revenue was material to MicroFinancial's operating result s

because these fees represented at least 21 % of the Company's annual revenues during th e

Class Period . Moreover, MicroFinancial's fee revenue was significantly material to the

Company's pre-tax income because MicroFinancial did not incur any direct costs to generat e

fee-related revenue. Accordingly, every dollar of fee revenue recognized by MicroFinancial

generated a dollar ofpre-tax income . In fact, MicroFinancial 'sfee revenue represente d

between b4% and 139% of its annualpre-tax income between 1998 and 2001 . 4

92. Pursuant to GAAP, revenue should not be recognized until it is (1) realized o r

realizable and (2) earned . Concepts Statement 5, ¶¶ 83-84 ; Accounting Research Bulletin 43 ,

Chapter 1A, ¶1 ; Accounting Principles Board's ("APB") Opinion 10, ¶ 12 .

93. On December 3, , 1999 , the SEC staff issued Staff Accounting Bulletin ("SAB")

No. 101 providing expanded guidance on GAAP's principles of revenue recognition after studie s

' MicroFinancial reported a pre-tax loss in 2002, so a comparison of the Company's fee- related income toits pre-tax income in that year is not meaningful .

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on financial reporting, such as the 1999 Committee of Sponsoring Organizations (COSO) Report ,

indicated that a significant number of fraudulent financial reporting cases involved imprope r

revenue recognition .

94 . Pursuant to SAB No. 101 , revenue generally is realized or realizable and ea rned

when all of the following criteria are met :

• Persuasive evidence of an arrangement exists ;

• Delivery has occurred or services have been rendered ;

• The seller's price to the buyer is fixed or determinable ; and

• Collectibility is reasonably assured .

95 . Concerning the collectibility of revenue, numerous provisions of GAAP provide

that revenue is not to be recognized in those instances where the collectibility of such revenue i s

in doubt.' Concept Statement 5, ¶84g provides that "[i]f collectibility of assets received [i .e .,

receivables] for products, services or other assets is doubtful, revenues and gains maybe

recognized on the basis of cash received ." In addition, GAAP, in the AICPA's Statement of

Position ("SOP") No. 97-2, provides that revenue should not be recognized unless the

collectibility is probable, or likely to occur . 6

96. In it' s year-end ]Financial statements filed with the SEC, MicroFinancial disclosed

5 See, e .g ., Concepts Statement 5, ¶¶ 83-84 ; Accounting Research Bulletin 43, Chapter IA, 11 ; Accounting

Principles Board's ("APB") Opinion 10, ¶ 12 .

6 Sew e.g., SEC v . John F . Morell , et al ., 6/5/2002, (Recognizing revenue on the transaction . where

collectibility was not probable did not conform with GAAP and improperly inflated revenue and net income), SECv. J . Kenneth Str r, et al., 10/3/2002, (Under GAAP, contingent sales may not be recognized as revenue becausecollectibility of the sales price is not probable) .

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"[o]ther revenues such as loss and damage waiver and service fees related to leases, contacts an d

loans and rental revenues are recognized as they are earned ."

97. In addition, MicroFinancial's Forms 10-K disclosed the following during th e

Class Period :

1998 Form 10 -K

Throughout the term oaf the lease, the Company charges late fees, prepaymentpenalties, loss and damage waiver fees and other service fees, when applicable,which enhance the profitability of the lease .

The Company enhances the profitability of its leases, contracts and loans bycharging latefees, prepayment penalties, loss and damage waiver fees and otherservice fees, when applicable. [Emphasis Added ]

1999 Form 10 .-K

Throughout the term of the lease, the Company charges late fees, prepaymentpenalties, loss and damage waiver fees and other service fees, when applicable,which enhance the pro f tability of the lease .

The Company enhances the profitability of its leases, contracts and loans by

charging latefees, prepayment penalties , loss and damage waiver fees and otherservice fees, when applicable. [Emphasis Added]

2000 Form 10-K

Throughout the term of the lease, the Company charges latefees, prepaymentpenalties, loss and damage waiver fees and other service fees , when applicable,

which enhance the profitability of the lease.

The Company enhances the profitability of its leases, contracts and loans by

charging latefees, prepayment penalties, loss and damage waiver fees and otherservice fees, when applicable .

The increase in fee income is the result of increasedfees from the lessees

related to the collection and legal process employed by the Company.

[Emphasis Added]

2001 Form 10 -K

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Throughout the term of the lease, the Company charges latefees, prepaymentpenalties, loss and damage waiver fees and other service fees, when applicable,which enhance the profitability of the lease .

The Company enhances the profitability of its leases, contracts and loans bycharging latefees, prepayment penalties, loss and damage waiver fees and otherservice fees, when applicable.

The increase in fee income and other income is the result of increased feesfrom the lessees related to the collection and legal process employed by theCompany, and the addition of a new line of business of selling equipment out ofexisting inventory. [Emphasis Added]

98. In its 2002 Form 10-K, filed with the SEC after the Class Period, MicroFinancia l

disclosed :

In October, 2002, the Company was served with a Complaint in an action in theUnited States District Court for the Southern District of New York filed byapproximately 170 present and former lessees asserting individual claims . TheComplaint contains claims for violation of RICO (18 U.S. C. sec. 1964), fraud,unfair and deceptive acts and practices , unlawful franchise offerings, andintentional infliction of mental anguish . The claims purportedly arise fromLeasecomm's dealer relationships with Themeware, E-Commerce Exchange,Cardservice International, Inc ., and Online Exchange for the leasing of websitesand virtual terminals . The Complaint asserts that the Company is responsible forthe conduct of its dealers in trade shows, infomercials and web pageadvertisements, seminars, direct mail, telemarketing, all which are alleged toconstitute unfair and deceptive acts and practices . Further, the Complaintasserts that Leasecomm "s lease contracts as well as its collection practices andlate fees are unconscionable .

Leasecomm has been served with Civil Investigative Demands by the Offices ofthe Attorney General for the states of Kansas, Illinois, Florida, and Texas, andfor the Commonwealth of Massachusetts . Those Offices of the AttorneyGeneral, in conjunction with the Northwest Region Office of the Federal Trade

Commission, the Offices of the Attorney General for North Carolina and North

Dakota, and the Ventura County, California, District Attorney's Office, haveinformed Leasecomm that they are seeking to coordinate their investigations

(collectively, the "Government Investigators") . At this time, the principal focus

of the investigations appears to be software license leases (principally virtual

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terminals) and leasesfrom certain vendor/dealers whose activities includedbusiness opportunity seminars . Leasecomm has further been informed that theinvestigations cover certain lease provisions, including the forum selection clauseand language concerning the non-cancellability of the lease . In addition, theinvestigations include, among other things, whether Leasecomm' s leasetermination, or rollover, provisions, are legally sufficient ; whether a Leasecommlease is an enforceable lease; whether there were potential problems with itsleases of which Leasecomm had knowledge ; whether the leases are enforceablein accordance with their terms ; whether three day right of rescission notices wererequired and, if required, whether proper notices were given ; whether any leaseprices were unconscionable; whether the lease of a software license is the lease ofa service, not a good ; whether any lease of satellites or computers are leases toconsumers which must comply with certain consumer statutes; whether electronicfund transfer payments pursuant to a lease violate Reg . E; whether anyLeasecomm billing and collection practices or charges are unreasonable, orconstitute unfair or deceptive trade practices ; whether Leasecomm's course ofdealings with its vendors/dealers makes Leasecomm liable for any of the activitiesof its vendors/dealers . In April, 2002, Leasecomm and the GovernmentInvestigators entered into provisional relief and tolling agreements which providefor Leasecomm to take certain interim actions, temporarily stop the running of thestatute of limitations as of January 29, 2002, and require advance notice byLeasecomm of its withdrawal from the provisional relief agreement and advancenotice by each of the Government Investigators of its intention to commence legalaction. The tolling agreement has been extended several times and is set to expirein May, 2003 . [Emphasis Added]

99. As noted above, MicroFinancial's fee revenue represented a significant amount o f

its total revenue and pre-tax income during the Class Period . MicroFinancial's recognition of fee

revenue was improper and violated GAAP and its related disclosures were materially false an d

misleading because the collectibility of such fee revenue was not reasonably assured whe n

recognized, as defendants knew or recklessly ignored . As a result and contrary to

MicroFinancial 's publicly disclosed accounting policies, such revenues were not ea rned, as

contemplated under GAAP, when recognized .

100. Indeed, numerous former Company employees stated that MicroFinancia l

continued to charge customers fees even after it was apparent that such fees would b e

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uncollectible . In fact, former MicroFinancial employees stated that the Company charged

customers fees after it received,judgements against the customers for non-payment .

101 . In fact, GAAP, in the AICPA's Accounting and Audit Guide ("AAG") of Financ e

Companies, which provides specific guidance on the accounting and financial reporting o f

finance companies provides :

Accruals or amortization of discount and, in accordance with FASB StatementNo. 91 , paragraph 17, amortization of deferred net fees or costs should thereforebe suspended if collectibility of interest or principal is not probable. Thefollowing are examples of events that could cause such uncertainty on consumerloans :

a. The borrower is in default under the terms of the loan

agreement, and interest or principal payments are past due (oftena stipulated number of days past due as established in companypolicies) .

b . The ability of the borrower to repay is in doubt because of events such asloss of employment or bankruptcy .

c. The loan terms have been renegotiated . [Emphasis Added ]

102. Nonetheless and in violation of GAAP, MicroFinancial recorded revenue whe n

the collectiblity of such revenue was not probable, as defendants knew or recklessly ignored .

103 . For example, CI 8, a "back-end" collector who was responsible for collectin g

monies due from customers after MicroFinancial received judgments against such customer s

stated , "Yeah, after the judgement, they were being charged fees on top [of what they alr{eady

owed] . They were charged $6 every time they got a call . . . . It seemed kind of shady. Every time

you called them, they would charge them a $6 fee - - like call after call. For instance, if th e

customer would hang up on you, they [MicroFinancial collectors] called back and charg e

another $6 again."

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104_ This practice was confirmed by other former MicroFinancial employees . For

example, CI 6, another MicroFinancial back- end collector said MicroFinancial would continu e

to charge its customers fees even after they were already in default . CI 12, a former

MicroFinancial collector stated MicroFinancial would continue to charge its customers fees eve n

after they were already in litigation .

105 . MicroFinancial's recognition of fee revenue on customers that previousl y

exhibited an unwillingness to pay monies due to MicroFinancial was improper and violate d

GAAF because the collectibility of such fee revenue was not reasonably assured when

recognized, as defendants knew or recklessly ignored .

106 . In fact, the AAG ofFinance Companies provides :

Delinquency fees conceptually should be recognized in income when chargeable,assuming the collectibil:ity is reasonably estimable . In practice, delinquency fees

generally are recognized in income when collected , because this approachsimplifies efforts to account for such relatively minor receipts . '

107. Indeed, MicroFinancial 's practice of indiscriminately charging customers fee s

could serve no purpose other than to artificially inflate the Company's operating results

during the Class Period . In fact, former MicroFinancial employees said it was Leasecomm' s

practice to repeatedly charge fees on accounts with direct deposit arrangements .

108 . In fact, MFI's practice of repeatedly charging customers fees during a

single day was not due to an innocent computer error . CI 7„ a former 1MFI Operation s

Supervisor, stated that Leasecomm's computer would repeatedly seek payment on an account

' The AAG on Finance Companies defines delinquency fees as amounts debtors pay because of latepayments on loans . Such fees generally are small and are intended to cover additional interest on preconzpul :e loans,

to compensate the lender for additional collection costs associated with delinquencies, or both .

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aurtng the course of a day and on each attempt, a late fee was charged. "It [Leasecom' s

computer] will keep trying to go get money. Every time it would charge those people fees and

then of course they would call cursing us out - [complaining because the fees caused thei r

account to be overdrawn] by $1,000 in one day . Why would you go in so many times, if yo u

couldn't get it thefirst time? It ain 't going to get there in one day. I mean come on now, but

that 's true. And those are the calls that I took. So yeah, so it wasn't a great company to wor k

for."

109 . Cl 9, another former MicroFinancial collections agent , said , "They continually

tried to go into that person 's bank account, and if the money wasn't there it would be like

$10." Another former MicroFinancial customer service representative, CI 5, also confirmed tha t

MicroFinancial continued to charge customers fees after their accounts were in litigation, " I

never agreed with what they were doing . I didn't think the customers were being treated fairly ."

110. In fact, MicroFinancial's practice of repeatedly charging customers fees during a

single day was not due to an innocent computer error. CI 7, a former operations supervisor for

the Company, stated that Leasecomm 's computer would repeatedly seek payment on an

account during the course of a day and on each attempt, a late fee was charged.

111 . The former supervisor stated, CI 7, stated, "I mean if you miss one payment or i f

you didn't have your direct deposit set up properly and it didn't go through, there was a $200

latefee for a payment that cost 30 bucks." Cl 7 said , "I didn't agree with the policy that the y

had for customers and, of course, being the manager I had to go along with it. I was just

having a hard time doing that . "

112 . Defendants were also aware of the Company's improper recognition of revenu e

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on wholly improper transactions by certain of its dealer/vendors who repeatedly engaged in

deceptive and fraudulent business practices to secure lease obligations from customers .

Defendants were aware or should have been aware of fraud by its dealers because the Company

purportedly assessed its dealers on a continual basis, as disclosed in each Form 10-K during the

Class Period as follows :

Dealers undergo both an initial screening process and ongoing evaluation,including an examination of Dealer portfolio credit quality and performance ,lessee complaints, cases of fraud or misrepresentation, aging studies , number ofapplications and conversion rates for applications. This ongoing assessmentenables the Company to manage its Dealer relationships , including endingrelationships with poorly performing Dealers . [Emphasis Added]

113. As noted in detail above, defendants were aware of the improper accountin g

practices associated with, at least, lease transactions by : 1) InfoDirect, which MicroFinancia l

continued to finance and recognize revenue on for nearly a year after learning of InfoDirect's

fraudulent business practices ; 2) Executive Credit Services, which accounted for $16 million o f

the Company's lease- financing volume during 1999-2000 ; and 3) Roma Computer, which

generated hundreds of customer complaints that the Government Investigations reveal were

ignored .

114. Indeed, the SEC issued numerous statements to its registrants, their auditors, an d

to accounting and auditing standards- setters warning them to be ever vigilant about the fairness

of financial reporting practices in general and revenue recognition practices in particular

after having witnessed alarming financial reporting abuses during the Class Period.

115 . In addition, former MicroFinancial employees also stated that the Company was

aware of its dealers' improper practices . Nonetheless and in violation of GAAP, MicroFinancial ,

as defendants knew or recklessly ignored, continued to recognize revenue on wholly imprope r

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transactions .

116. For example, CI 4 said that Leasecomm was aware that vendors were selling non-

existent virtual terminals :

We keep getting call after call after call from people with the Virtual Terminalsthat . . . . weren't able to process any of their credit card transactions or they didn'twant it at all. It was called the Internet Toolbox . The guy that played - you knowthe side kick - the guy from Tool Time - was actually the spokesperson for it . Sowhen people would call, I really would have no idea what to say to them . I would

have to say we are working on it . We are working on fixing the situation .' Andthat was towards the end, really, because then I moved on to a different

department . . . . and basically they [management] told us - oh just give them this

number [the vendor 's phone number] . I mean they would . . . we had to tell them

[the customer] what we were told to tell them.

[And] Theme Ware - thuy were no place to be found . I don't even think that thepeople from Leasecornm could get a hold of them .

117. In fact, CI 4 stated that Leasecomrn delayed as long as possible in responding to

customer complaints, often times taking no remedial action .

118. CI 6, a former Company collector , stated " What I remember was Virtual Credi t

Card Terminals, which I always thought weren 't on the up and up , but speaking with people

who had done it before basically what people were purchasing was air. It was a licensing

agreement and the funding for the licencing agreement , which could be manipulated at any

time. From my understanding there was actually no product that was actually purchased. "

119. CI 6 stated that adding insult to injury, MicroFinancial charged customers late

fees on non-ercisting Virtual Terminals!

120 . A former operations supervisor for the Company, CI 7, said, "There was nobody

to befound in these states who sold them the products . If you have a problem [with th e

vendor] there was a person you [were supposed to go to] and there was no such person.

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[Customers] would drive to the location and there was no such business established at that

location ." When asked if Leasecomm knew of such circumstances , CI 7 said, "I'm pretty sure

they did. I mean, even if I were to go to my manager and say `hey what am I suppose to do to

help this person, they really couldn 't give me a definite response . . . So I could tell something

was going on, and as time went on I was just like, you know this is not for me . Because I felt bad

for the people . "

121 . CI 11, a former MicroFinancial credit department employee, stated Leasecomm

allowed certain vendors more latitude than others , "I will admit there were sometimes where I

thought that things were fishy and ifI brought it up to the supervisor, the supervisor would

dismiss it. They would nod and say - No they're okay . [ . . .] But yeah, I noticed certain ones that

were fishy ." When asked if management would take action against problematic vendors, CI 1 1

stated, "they favored some of the vendors and of course if it was a vendor that brought in a lot

of volume, yeah they would sometimes let things slide . "

122 . In fact, certain AlicroFinancial collectors were instructed by their supervisors

NOT to call certain customers because they did not exist !

123 . For example a former "back-end collector for the Company, CI 8, said "What I

also noticed is that there were . . . some accounts we weren't suppose to collect on or call at all !

They had some weird names to them . They would have these high balances . . . . Basically, they

would give us a list of all of our accounts . I did notice that there were accounts that were

considered Leasecomm accounts but they were etitious accounts that were made up . Ve were

told not to call them because the accounts didn't - they weren' t real; .l was told that boxy

supervisor. They are not real accounts - they are considered Leasecomm accounts - like, som e

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of them would even say Leasecomm on them as the [customer] account name and some of

them would have fictitious names. They would show upon my scroll, and I just pass it by an d

not even call. .1 don't know what the reasoning was, but they were like $ 30,000 balances ,

$20,000 balances. I know I had at least like five or six usually. You know every week I 'would

go through my accounts I would see five or six I was told to leave alone, don't even bother

with them . So I don't know if they used that as far as trying to build up what the sales looked

like. " 1

124 . Concerning ThemeWare, CI 8 said, "The thing was they'd lease them somethin g

when they didn't have a product to sell . I don't know if anyone in Leasecoxnm corporate kne w

that they were fraudulent, but everybody who I worked with in collections and my supervisors

and everybody - we all knew it was a crock of shit. Yeah. It was obvious. We had you know

case after case ofhearing everyone say that no one ever set me up with anything . . . . Afte r

hearing all these excuses you would just know - - it just rang in your head - that okay - this i s

fraudulent. . . "

125. In fact, CI 4 stated, Peter Bleyleben knew exactly what was going on . I mean I

use to deal with the legal department all the time. I mean everybody knew. Everybody in that

Company knew exactly what was going on. Everybody that worked there knew that wha t

Leasecomm was doing was unethical. But you know when you need a job, you need a job -

and that 's a position that a lot ofpeople were in.

126. Nonetheless, MicroFinancial materially inflated its operating results b y

improperly recognizing revenue on uncollectible fees and fictitious lease transactions during th e

Class Period, as defendants knew, or recklessly ignored .

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127. Indeed, as the SEC's Staff Accounting Bulletin ("SAB") No. 99 provides : 8

Qualitativefactors may cause misstatements of quantitatively small amounts tobe material ; as stated in the auditing literature :

As a result of the interaction of quantitative and qualitative considerationsin materiality judgments, misstatements of relatively small amounts thatcome to the auditor's attention could have a material effect on the financialstatements .

Among the considerations that may well render material a quantitatively smallmisstatement of a financial statement item are :

whether the misstatement arises from an item capable of precise measurement or whether itarises from an estimate and, if so, the degree of imprecision inherent in the estimate

• whether the misstatement masks a change in earnings or other trends

• whether the misstatement hides a failure to meet analysts' consensusexpectations for the enterpris e

• whether the misstatement changes a loss into income or vice versa

• whether the misstatement concerns a segment or other portion of the registrant'sbusiness that has been identified as playing a significant role in the registrant'soperations or profitability

• whether the misstatement affects the registrant 's compliance with regulatoryrequirements

• whether the misstatement affects the registrant's compliance with loancovenants or other contractual requirements

• whether the misstatement has the effect of increasing management'scompensation, for example, by satisfying requirements for the award of bonusesor other forms of incentive compensation

• whether the misstatement involves concealment of an unlawful transaction.

This is not an exhaustive list of the circumstances that may affect the materialityof a quantitatively small misstatement . [Footnotes deleted, emphasis in bold

$ 17 C .F .R . Part 211

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added]

MicroFinancial's Uncollectible Accounts ReceivableAnd Manipulation of Accounts Receivable Reserves

128 . GAAP generally provides that financial statements account for existin g

uncertainties as to probable losses . Such loss contingencies should be recognized and reported as

a charge to income when : information existing at the date of the financial statements indicate s

that it is probable {ems, a likely chance) that an asset has been impaired or a liability has been

incurred, and the amount of such loss can be reasonably estimated . SFAS No . 5, ¶ 8 .

129 . GAAP, in SFAS No . 114, as amended SFAS No . 118, provides that a loan is

considered impaired when, based on current information, it is probable that the lender will not b e

able to collect all the principal and interest due under the contractual terms of the loa n

agreement . 9

130. In addition, SFAS No . 114 provides that :

[A] creditor shall measure impairment based on the present valueof expected future cash flows discounted at the loans's effectiveinterest rate, except that as a practical expedient, a creditor maymeasure impairment based on a loan's observable market price, orthe fair value of the collateral if the loan is collateral dependant'oRegardless of the measurement method , a creditor shall measureimpairment based on the fair value of the collateral when thecreditor determines that foreclosure is probable . [EmphasisAdded ]

131 . GAAP, in the AICPA's AAG on Finance Companies provides :

The amount of the provision can be considered reasonable when the allowance fo r

' Pursuant to SFAS No . 114, a loan is a contractual right to receive money on demand or on fixed ordeterminable dates that is recognized as an asset on the creditor's balance sheet .

10 A loan is collateral dependent if the repayment of the loan is expected to be provided solely by theunderlying collateral . SFAS No . 114, ¶ 13 .

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credit losses, including the current provision, is adequate to cover estimated lossesin the receivables portfolio .

132. In its 1998 year end financial statements, filed with the SEC in MicroFinancial' s

1998 Form 10-K, the Company disclosed :

The Company maintains an allowance for credit losses on its investment in leases,service contracts and loans at an amount that it believes is sufficient to provideadequate protection against losses in its portfolio . The allowance is determinedprincipally on the basis of the historical loss experience of the Company and thelevel of recourse provided by such lease, service contract or loan, if any, andreflects management's judgment of additional loss potential considering futureeconomic conditions and the nature and characteristics of the underlying leaseportfolio . The Company determines the necessary periodic provision for creditlosses taking into account actual and expected losses in the portfolio as a wholeand the relationship of the allowance to the net investment in leases, servicecontracts and loans . [Emphasis Added ]

133 . This disclosure was repeated in MicroFinancial's 1999, 2000, and 2001 year en d

audit financial statements .

134. In its Form 10-K: filed with the SEC during the Class Period , MicroFinancial also

disclosed :

Leases, service contracts, and loans are charged against the allowance forcredit losses and are put on non -accrual when they are deemed to beuncollectible. Generally, the Company deems leases, service contracts and loansto be uncollectible when one of the following occur : (i) the obligor files forbankruptcy; (ii) the obligor dies and the equipment is returned ; or (iii) when anaccount has become 360 days delinquent . The typical monthly payment underthe Company' s leases is between $30 and $50 per month . As a result of thesesmall monthly payments, the Company's experience is that lessees will pay pastdue amounts later in the process because of the small amount necessary to bringan account current (at 360 days past due, a lessee will only owe lease payments ofbetween $360 and $600) .

135 . Accordingly, at the time an MicroFinancial account became 360 days past due, the

entire amount of such loans should be charged off against its allowance for credit losses . Since

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MicroFinancial's allowance for credit losses was determined "principally on the basis of th e

historical loss experience of the Company," such allowance would not be fairly stated if th e

Company's historical loss experience was not accurately stated . Indeed, MicroFinancial' s

historical loss experience and its allowance for credit losses could only be fairly stated if th e

Company timely wrote off those accounts that were 360 days delinquent .

136. As then Deputy Chief Accountant of the SEC stated at a National AICP A

Conference on November 20, 2000 :

Further, financial institutions should have internal accounting controls that ensuretimely and accurate reporting for financial reporting purposes, in accordance withGAAP, including reporting of losses and changes in the credit quality of the loanportfolio in the periods in which those changes occur . Those internal accounting

controls should also ensure proper preparation and maintenance of

documentation to support loan loss allowances, in accordance with Financial

Reporting Release No . 28 (FRR 28) . Institutions should ensure that theirinternal controls incorporate the systematic analysis and procedural disciplinerequired by FRR 28 in determining the allowance for loan losses .

137 . As the SEC stated in 2001 when it issued its SAB No . 102 :

Since [1986], the Commission 's staff has continued to observe, in some cases,

insufficient documentation of allowances for loan losses . In the ordinary courseof its reviews of filings, the staff asked a number of registrants why significantfavorable or unfavorable trends in the quality of the loan portfolio, as evidenced

by statistical data presented in Management's Discussion and Analysis and/or inthe notes to the financial statements, did not correspond with decreases or

increases in the allowance for loan losses reported in thefinancial statements .

Loan loss estimates developed without a disciplined methodology or adequatedocumentation (of both a disciplined methodology and the resulting amounts ofloan loss provisions and allowances) can undermine the credibility of aninstitution's financial statements .

138. As defendants knew or recklessly ignored, MicroFinancial compounded its

improper recognition of revenue by failing to write off delinquent accounts in accordance with its

publicly stated accounting polices . As a result, MicroFinancial's financial results during the

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Class Period were materially inflated, presented in violation of GAAP, the Company's publicly

disclosed accounting policies, and SEC rules and regulations .

139. For example, CI 2 said, "I would have accounts that were like 10 years old' And

they would have judgments on them . I would have old, old accounts. I don 't know why. All I

know they had old, old accounts and they weren't really paying the bills ."

140. Another former collection agent for the Company, CI 10, confirmed the existenc e

of accounts that had not been written off after 360 days . "What I saw were receivables fo r

Virtual Terminal. . . which were basically an Internet sites . . . that were two, three, and four

years old. It wasn't the policy to write things off after a year .

141 . Cl 7 said, "Yes. There were accounts that were never getting written off • •

balances were in the $100,000s. I mean really large amounts because they would keep adding

on - they didn't care. "

142. CI 8 also con firmed that MicroFinancial failed to write off old receivables .

"Yeah, they were old. The ones I dealt with were like really old. . . . Some of them were a

couple of years old. They had judgments on them and they were trying to collect on the

judgments . . . . I know I had a couple of them that were close to five years old or so. "

143. In violation of GAAP , MicroFinancial understated its historical loss experienc e

and its allowance for credit losses by failing to timely write off those accounts that were at least

360 days delinquent .

144. As noted in the chart below prior to and early in the Class Period ,

MicroFinancial's annual net charge offs averaged approximately 10% of the prior year end tota l

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-,

investment in leases and loans ." After the end of the Class Period, however, MicroFinancial' s

charged off its receivable at more than twice that rate .

MicroFinancialAnalysis Of Allowance For Credit Losse s

1998 - 2002

20.00%

18.00%

16.00%

14.00%

12.00%

10.00%

8.00%1998 1999 2000 2001 2002

Allowance As A Percent Of Investment In Leases and Lo~

145. MicroFinancial's rate of charge offs after the end of the Class Period, otherwise

demonstrates that its rate of charge offs prior and early in the Class Period was artificially

understated .

146 . Indeed, as MicroFinancial's charge off rate increased, so did its reserve fo r

uncollectible accounts , as noted in the chart below :

" MicroFinancial's Forms 10-K discloses its total investment in its leases and loans includes leasereceivables, estimated residuals, loans receivables and investments in service contacts .

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MicroFinancialAnalysis Of Charge Offs

1997 - 200 3

25.00%

20.00%

15.00%

10.00%

5.00%

--~- Net Charge Off As a Percent Of Prior Year Investment ILeases And Loan s

147. As defendants knew or recklessly ignored, MicroFinancial's repo rted earnings

during the Class Period were artificially inflated by defendants' manipulation of the Company' s

charge-off rate and material understatement of its loss reserves . As a result, MicroFinancial filed

materially false and misleading financial statements with the SEC that failed to conform to th e

requirements of GAAP, and defendants disseminated financial statements of MicroFinancial tha t

were presumptively misleading and inaccurate .

MicroFinancial 's Failed To Disclose The True RisksAssociated With Its Operations And Its Contingent Liabilitie s

148 . GAAP provides that financial statements disclose significant risks and

uncertainties associated with an entity's operations . American Institute of Certified Public

Accountant's Statement of Position No. 94-6 .

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1997 1998 1999 2000 2001 2002 2003

149. GAAP also requires that financial statements disclose contingencies when it is a t

least reasonably possible (e ., a, greater than slight chance) that a loss may have been incurred .

SFAS No. 5, ¶ 10 . The disclosure shall indicate the nature of the contingency and shall give a n

estimate of the possible loss, a range of loss, or state that such an estimate cannot be made . Id.

150 . The SEC considers the disclosure of loss contingencies to be so important to a n

informed investment decision that it issued Article 10-01 of Regulation S-X [ 17 C .F .R. § 210 .10-

01], which provides that disclosures in interim period financial statements may be abbreviate d

and need not duplicate the disclosure contained in the most recent audited financial statements ,

except that "where material contingencies exist, disclosure of such matters shall be provided

even though a significant change since year end may not have occurred . "

151 . In violation of G-AAP, MicroFinancial's financial statements du ring the Clas s

Period failed to disclose that the Company engaged in improper billing and collection practice s

which exposed it to liability from government investigations and litigation by its lessees .

Defendants Continue Their Deceptive Financial Reportin gBy Failing To Restate MicroFinancial's Previously Issued Financial Statement s

152. GAAP provides that previously issued financial statements which are misstated a s

a result of an oversight or misuse of facts that existed at the time that the financial statement were

issued are to be retroactively restated . APB Opinion Nos . 9 and 20 .

153 . In violation of GAAP, MicroFinancial had improperly accounted for its materiall y

false and misleading Class Period financial statements by recording prospective charges during ,

at least , 2002 and 2003, rather than restating its Class Period financial statements in conformity

with GAAP.

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154. Pursuant to FASB Concepts Statement No . 2, ¶ 111 :

Information about an enterprise gains greatly in usefulness if it can be comparedwith similar information about other enterprises and with similar informationabout the same enterprise for some other period or some other point in time .

155 . By failing to restate its previously issued materially false and misleading financia l

statements in conformity with GAAP, defendants knowingly or recklessly continued their pattern

and practice of deceiving investors by denying them the ability to meaningfully compare the

Company's current operating performance against its comparable prior periods or with that of it s

competitors .

156. Defendants had the responsibility to select generally accepted accountin g

principles that were appropriate to reflect MicroFinancial's business activities . Defendants als o

had the responsibility to design, implement, and maintain a system of internal accountin g

controls that would provide accounting records to appropriately reflect the transactions of

MicroFinancial .

157. In fact, Section 13 of the Exchange Act of 1934 requires :

Every issuer which has a class of securities registered pursuant toSection 12 of this title and every issuer which is required to filereports pursuant to Section 15(d) of this title shall - -

A. make and keep books, records, and accounts, which, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the issuer; and

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

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

ii . transactions are recorded as necessary (a) to permitpreparation of financial statements in conformity

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with generally accepted accounting principles or anyother criteria applicable to such statements, and (b)to maintain accountability for assets ;

iii . access to assets is permitted only in accordance withmanagement's general or specific authorization ; and

iv. the recorded accountability for assets is comparedwith the existing assets at reasonable intervals andappropriate action is taken with respect to anydifferences .

158. Notwithstanding these regulations, defendants engaged in egregious violations o f

GAAP resulting in the material overstatement of MicroFinancial ' s operating performance durin g

the Class Period.

159 . In addition to the accounting improprieties stated above, MicroFinancial presente d

its financial statements during the Class Period in a manner which also violated at least th e

following provisions of GAAP :

a. Interim financial information is essential to provide investors and other s

with timely information as to the progress of the enterprise . The usefulness of such inforrr.Lation

rests on the relationship that it has to the annual results of operations . Accordingly, the Board

has concluded that each interim period should be viewed primarily as an integral part of ar e

annual period (APB Opinion No. 28) ;

b . The concept that financial reporting should provide information that i s

useful to present and potential investors and creditors and other users in making rationa l

investment, credit and similar decisions (Concepts Statement No. 1, ¶ 34) ;

The concept that financial reporting should provide information about th e

economic resources of an enterprise, the claims to those resources, and the effects of transactions ,

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events and circumstances that change resources and claims to those resources (Concepts

Statement No. 1, ¶ 40) ;

d. The concept that financial reporting should provide information about ho w

management of an enterprise has discharged its stewardship responsibility to owner s

(stockholders) for the use of enterprise resources entrusted to it . To the extent that management

offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for

accountability to prospective investors and to the public in general (Concepts Statement No . 1 ,

¶ 50) ;

e. The concept that financial reporting should provide information about an

enterprise's financial performance during a period . Investors and creditors often use information

about the past to help in assessing the prospects of an enterprise . Thus, although investment and

credit decisions reflect investors' expectations about future enterprise performance, thos e

expectations are commonly based at least partly on evaluations of past enterprise performance

(Concepts Statement No. 1, ¶ 42) ;

f. The concept that financial reporting should be reliable in that it represents

what it purports to represent . That information should be reliable as well as relevant is a notio n

that is central to accounting (Concepts Statement No . 2, It 58-59) ;

g. The concept of completeness, which means that nothing is left out of th e

information that may be necessary to ensure that it validly represents underlying events and

conditions (Concepts Statement No . 2, ¶ 79) ; and

h. The concept that conservatism be used as a prudent reaction to uncertaint y

to try to ensure that uncertainties and risks inherent in business situations are adequatel y

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considered . The best way to avoid injury to investors is to try to ensure that what is reported

represents what it purports to rep resent (Concepts Statement No. 2, ¶¶ 95, 97) .

160. Plaintiffs' incorporate by reference all allegations above insofar as they relate to

MicroFinancial's materially false and misleading interim financial statements .

161 . The Company' s Class Period Forms 10-K and 10-Q filed with the SEC were als o

materially false and misleading in that they failed to disclose known trends, demands ,

commitments, events, and uncertainties that were reasonably likely to have a materially advers e

effect on the Company's liquidity, net sales, revenues and income from continuing operations, a s

required by Item 303 of Regulation S-X .

DEFENDANT D&T'S PRIMARY ROLE IN THE FRAUD

162. Plaintiffs incorporate by reference all allegations above insofar as they relate t o

D&T's materially false and misleading audit opinions on MicroFinancial's 2000 and 2001 year-

end financial statements as if frilly set forth herein .

163. MicroFinancial was a significant client of D&T and a major source of income fo r

D&T's Boston office . Defendant D&T has served as MicroFinancial's auditor beginning since

the fiscal year ended December 31, 2000 when MicroFinancial's prior auditor,

Pricewaterhou.seCoopers LLP, "resigned."

164 . D&T served MicroFinancial in various capacities for many years which provide d

it with significant fees in the performance of such services . In fact,for fiscal 2000 though 2003,

the fees paid by MicroFinancial to D& T exceeded three quarters of a million dollars. Indeed,

such fees related, in part, to D&T's involvement in rendering important judgments in th e

preparation of MicroFinancial's Class Period financial statements .

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165. As a result of the: services rendered to the Company, D&T's personnel wer e

regularly present at MicroFinancial's offices and had continual access to, and knowledge of ,

MicroFinancia:l's internal accounting records, its confidential financial and non-public, busines s

documents and employees .

166. Given its intimate knowledge of MicroFinancial's financial reporting practice s

and the nature of the auditing and other services rendered to MicroFinancial, D&T knew of or

recklessly disregarded adverse facts concerning the Company's improper financial reporting

(detailed at length above) during the Class Period . Nonetheless, D&T knowingly, or recklessly,

issued false unqualified audit opinions on the Company's 2000 and 2001 year-end financia l

statements. In addition, D&T failed to take the steps required by GARS and SEC rules and

regulations to expose MicroFinancial's improper financial reporting and billing practices .

167. Indeed, the degree ofD&T's wrongful conduct is demonstrated by the issuance

of its unqualified audit opinion on MicroFinancial's year-end 2002 financial statements .

168. D&T's unqualified opinion on MicroFinancial's 2002 year-end financia l

statements updated and reaffirmed its unqualified opinion on MicroFinancial's 2001 year-en d

financial statements , despite the fact that , by this time, D& T knew or recklessly disregarde d

that, at least, its unqualified opinion on MicroFinancial's 2001 year-end financial statements

was materially false and misleading . Among other things, MicroFinancial had been served

with Civil Investigation Demands by federal and numerous state authorities in connection with

an investigation of the Company's business practices, which was focused on, inter alia, virtual

terminal leases, leases on certain vendor/dealers whose activities included business opportunit y

seminars, lease cancellation provisions, the legal sufficiency of lease termination provisions ,

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whether Leasecomzn leases are enforceable, whether Leasecomm had knowledge of the potential

problems with its leases , whether any lease prices were unconscionable, whether electronic fun d

transfer payments pursuant to a lease violated Reg . E; whether any Leasecomm billing and

collection practices or charges were unreasonable, or constituted unfair or deceptive trade

practices and whether Leaseconun's course of dealings with its vendors/dealers make s

Leasecomm liable for any of the activities of its vendors/dealers .

169. GAAS, in AU § 508, provides that "[d]uring the audit of the current -period

financial statements, the auditor should be alert for circumstances or events that affect th e

prior-period financial statements presented . . . or the adequacy of informative disclosure s

concerning those statements . . . . In updating his o r her report on the prior-period financia l

statements, the auditor should consider the effects of any such circumstances or events

coming to his or her attention .

170. As a result of these investigations , D&T was on notice of and knew or recklessly

ignored that MicroFinancial's Class Period financial statements were materially false an d

misleading. Despite this knowledge, D&T issued an unqualified opinion on MicroFinancial' s

2002 year-end financial statements which updated and reaffirmed D&T's unqualified opinion o n

MicroFinancial's 2001 financial statements . In fact, MicroFinancial's 2002 financial statement s

included multi-million dollar charges relating to the improper accounting alleged herein .

Nonetheless, D&T failed to take any steps required by GAAS in connection with

MicroFinancial's failure to restate its Class Period financial statements in order to, inter atria,

avoid liability for its participation in the fraud alleged herein.

171 . In fact, Section 10A of the Securities Exchange Act of 1934 requires auditors t o

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design procedures "to provide reasonable assurance of detecting illegal acts that would have a

direct and material effect on the determination on financial statement amounts.""

172. Indeed, the AICPA, which promulgated audited standards before Publi c

Companies Accounting Oversight Board was created by Sarbanes-Oxley, issued numerous

warnings to auditors during the Class Period about improper and/or aggressive revenue

recognition practices . As a result, the AICPA's SEC Practice Section's Professional Issues Task

Force issued its Practice Alert, Revenue Recognition Issues, in 1999 to, among others :

1) summarize GAAP' s revenue recognition criteria;

2) identify circumstances that may signal improper revenue recognition ; and

3) describe procedure that may prove effective in limiting improper revenuerecognition .

173 . This alert, and numerous documents issued and speeches given by the SEC and it s

staff during the Class Period, warned auditors to focus their attention on improper revenu e

recognition and accounting reserve practices . Nonetheless, D&T issued unqualified audi t

opinions on MicroFinancial's 2,000 and 2001 year-end financial statements when the Company' s

financial statements violated GAAP, as alleged herein .

174. Notwithstanding MicroFinancial's improper accounting, defendant D&T issued

unqualified audit opinions that falsely stated that the Company's 2000 and 2001 year-en d

financial statements were presented in conformity with GAAP when they were not, as allege d

herein. In fact, in performing such audits, defendant D&T was required by GAAS, in AU § 380 ,

to discuss the following matters with MicroFinancial's Audit Committee :

12 Illegal acts used in this context is defined by the Securities Exchange Act as "an act or omission

that violates any law, or any rule or regulation having the force of law . "

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1) The selection of and changes in significant accounting policies or theirapplication;

2) The effect of MicroFinancial 's accounting policies on revenue

recognition;

3) D&T'sjudgments about the quality, not just the acceptability, of theMicroFinancial's accounting principles as applied in its financialreporting ;

4) Any disagreements with the Company's management on the applicationof accounting principles relative to entity specific transactions ;

5) Any consultations with other accountants about auditing and accountingmatters ;

6) Any significant unusual transactions ;

7) Any material financial statement misstatement ;

8) MicroFinaricial's internal control polices and procedures ;

9) The disclosure that accompanied MicroFinancial's financial statementincluding its M anagement's Discussion and Analysis contained in theCompany' s Forms 10-K and 10-Q ;

10) MicroFinancial's management's accounting judgements, estimates anduncertainties ; and

11) Any D&T audit adjustments .

175. MicroFinancial 's 2001 and 2002 proxy statement disclosed that its Audit

Committee discussed the above matters with D&T . In addition, MicroFinancial's 2001 and 2002

proxy statement disclosed that :

1) Its Audit Committee met and held discussions with D&T about thematters enumerated in the proceeding paragraph ; and

2) The Audit Committee discussed D&T's independence .

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176. :Nonetheless, MicroFinancial issued materially false and misleading financial

statements during the Class Period that D&T knowingly, or recklessly falsely certified as bein g

presented in conformity with GAAP . In fact, MicroFinancial's Audit Committee discussed th e

above matters with D&T after the Company had been notified that Federal and numerous State

governmental agencies were investigating the Company's business and billing practices . Such

investigations required D&T to be ever more vigilant in its audit of MicroFinancial's financia l

statements and to reassess the propriety of the Company's financial reporting, which D&T di d

not .

177 . :During the Class Period, the following unqualified false and misleading D& T

audit reports, which stated that MicroFinancial's financial statements were presented i n

conformity with GAAP and that D&T's audit was performed in accordance with GAAS, were

filed with the SEC :I 3

2000

We have audited the accompanying consolidated balance sheet of MicroFinancialIncorporated (the "Company") as of December 31, 2000, and the relatedconsolidated statements of operations, stockholders' equity, and cash flows forthe year then ended . These financial statements are the responsibility of theCompany's management . Our responsibility is to express an opinion on thesefinancial statements based on our audit . The financial statements of the Companyfor the nears ended December 31, 1999 and 1998 were audited by other auditorswhose report, dated February 21, 2000, expressed an unqualified opinion on thosestatements .

We conducted our audit in accordance with auditing standards generally acceptedin theUnited States of America. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statements are

13 D&T's unqualified audit report on MicroFinancial's fiscal 2002 financial statements were alsofalse and misleading in that it improperly reaffirmed MicroFi nancial's false and misleading 2001 year- end financialstatements, as alleged herein .

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free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements . Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation . We believe that our audit provides a reasonable basis forour opinion .

In our opinion, such 2000 financial statements present fairly, in all materialrespects, the financial position of the Company as of December 31, 2000, and theresults of its operations and its cash flows for the year then ended inconformity with accounting principles generally accepted in the United States ofAmerica.

2001

We have audited the accompanying consolidated balance sheets of MicroFinancialIncorporated and subsitharies (the "Company") as of December 31, 2000 and2001, and the related consolidated statements of operations, stockholders' equity,and cash flows for the years then ended. These financial statements are theresponsibility of the Company's management . Our responsibility is to express anopinion. on these financial statements based on our audits .

We conducted our audits in accordance with auditing standards generally acceptedin the United States of America. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis ,evidence supporting the amounts and disclosures in the financial statements . Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation . We believe that our audits provide a reasonable basis forour opinion.

In our opinion, such consolidated financial statements present fairly, in all

material respects, the financial position of the Company as of December 31, 2000

and 2001, and the results of their operations and their cash flows for the years then

ended in conformity with accounting principles generally accepted in the United

States of America .

178 . In issuing unqualified audit opinions on MicroFinancial's annual financia l

statements during the Class Period, D&T knew or recklessly disregarded that such financia l

statements violated numerous provisions of GAAP and were materially false and misleading and

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inherently unreliable as set forth in IT 82-163 above .

179 . In fact, D& T was put on notice that MicroFinancial's financial reporting

practices wereproblematic, as MicroFinancial was notified that numerous governmental

agencies were auditing the Company's business and billing practices .

180. In certifying such financial statements, D&T also falsely represented that its audi t

was conducted in accordance with GAAS. These statements were materially false and

misleading in that the audit conducted by D&T was knowingly or recklessly not performed i n

accordance with GAAS in the following respects :

(1) D&T violated GAAS Standard of Reporting No . 1 that requires the audit

report to state whether the financial statements are presented in accordance with GAAP. D&T's

opinion falsely represented that MicroFinancial's 2000 and 2001 financial statements wer e

presented in conformity with GAAP when they were not for the reasons herein alleged ;

(2) D&T viollated GAAS Standard of Reporting No. 4 which requires that,

when an opinion on the financial statements as a whole can not be expressed, the reasons therefo r

must be stated. D&T was required to have stated that no opinion could be issued by it on

MicroFinancial's , 2000 and 2002 financial statements or issued an adverse opinion stating tha t

such financial statements were not fairly presented . D&T also failed to require MicroFinancial to

restate its Class Period financial statements to correct the Company's improper reporting of

revenue and uncollectible receivables and allowed MicroFinancial to make material financia l

misrepresentations to its shareholders and the public during the Class Period . D&T's failure to

make such a qualification, correction, modification and/or withdrawal of its audit opinions was a

violation of GRAS, including the fourth standard of reporting ;

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(3) D&T violated GAAS General Standard No.2 which requires that an

independence in mental attitude is to be maintained by the auditor in all matters related to th e

assignment ;

(4) D&T violated GAAS and the standards set forth in SAS No . 1 and SAS

No. 53 by, among other things, failing to adequately plan its audit and properly supervise th e

work of assistants and to establish and carry out procedures reasonably designed to search .for and

detect the existence of errors and irregularities which would have a material effect upon the

financial statements ;

(5) D&T violated GAAS General Standard No . 3 that requires that due

professional care must be exercised by the auditor in the performance of the audit and th e

preparation of the audit report ;

(6) D&T violated GAAS Standard of Field Work No . 2, which requires the

auditor to make a proper study of existing internal controls, including accounting, financial an d

managerial controls, to determine whether reliance thereon was justified, and if such controls ar e

not reliable, to expand the nature and scope of the auditing procedures to be applied . The

standard provides that a sufficient understanding of an entity's internal control structure b e

obtained to adequately plan the audit and to determine the nature, timing and extent of tests to b e

performed . AU § 150 . 02. In all . audits, the auditor should perform procedures to obtain a

sufficient understanding of three elements of an entity' s internal control structure: the contro l

environment , the accounting system, and control procedures . AU § 319 .02. The control

environment, which includes management's integrity and ethical values, is the foundation o f

internal control and provides discipline, structure and sets the tone of an organization . After

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obtaining an understanding of an entity's internal control structure, the auditor assesses th e

entity's control risk. AU § 319 . 02 . Control risk is the risk that a material misstatement in an

assertion by management contained in a company's financial statements will not be prevented or

detected on a timely basis by an entity' s internal control structure policies or procedures . AU §

319.29 . The ultimate purpose of assessing control risk is to aid the auditor in evaluating the risk

that material misstatements exist in the financial statements . AU § 319 .61 . The failure t o

properly evaluate the Company's internal control procedures associated with the recognition o f

revenue and uncollectible accounts receivable was a violation of GAAS ;

(7) D&T violated S tandard of Field Work No . 3, which requires sufficient

competent evidential matter to be obtained through inspection, observation, inquiries an d

confirmations to afford a reasonable basis for an opinion regarding the financial statements unde r

audit . D&T knew or recklessly disregarded that it did not obtain sufficient competent evidentia l

matter as to MicroFinancial's reported Class Period revenues, uncollectible receivables o r

financial statement disclosures ;

(8) D&T violated auditing standard AU § 342 in that it failed to perform th e

audit procedure required to determine that MicroFinancial's accounting estimates, including th e

Company's reserve for uncollectible accounts , were adequate . AU § 342 provides that i n

establishing the reasonableness of an accounting estimate, the auditor normally concentrates on

key factors and assumptions including the significance of the accounting estimate and it s

susceptibility to misstatement and bias . As noted above , GAAP requires an entity's bad debt

reserve to reflect, at a given point in time, the estimated probable loss inherent in the entity' s

receivables and further provides that events that occur subsequent to the balance sheet date, but

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prior to the issuance of the financial statements, provide additional evidence with respect to

conditions that existed on the balance sheet date and affect the estimates inherent in the proces s

of preparing financial statements . Nonetheless, during the Class Period, D&T falsely certifie d

that MicroFinancial's receivables, were fairly stated, when they were not, as D&T knew o r

recklessly disregarded ;

(9) D&T violated auditing standard AU § 431 which provides that if

management omits from the financial statements, including the accompanying notes, informatio n

that is required by generally accepted accounting principles, the auditor should express a

qualified or an adverse opinion and should provide the information in his report ;

(10) D&T violated auditing standard AU § 330 which requires auditors to

confirm accounts receivables . Had it done so, D&T would have learned, if it didn't alread y

know, about the problems associated with the collectibility of the Company's receivables ; and

(11) D&T violated auditing standard AU § 508 which requires auditors to issue

a qualified or adverse opinion when inappropriate accounting principles causes a client' s

financial statements to be materially misstated .

181 . D&Ts opinions, which represented that each of MicroFinancial's 2000 and 200 1

financial statements were presented in conformity with GAAP , were materially false an d

misleading because D&T knew or was reckless in not knowing that such financial statement s

violated the principles of fair repo rting and GAAF . In the course of rendering its unqualified

audit certifications on MicroFinancial's 2000 and 2001 financial statements , D&T knew it wa s

required by GAAS to obtain reasonable assurance about whether the financial statements were

free of material misstatement and was required to adhere to each of the herein described

- 88 -

standards and principles of GAAS , including the requirement that the financial statement s

comply in all material respects with GAAP . D&T also was required by GAAS to exercise

professional skepticism , a process that requires a questioning mind , including an increased

recognition of the need to corroborate management representations and explanations . D&T, in

issuing and reissuing its unqualified opinions , knew or recklessly disregarded that by doing ; so it

was engaging in gross departures from GAAS , thus making its opinions false, and issued such

certification knowing or recklessly disregarding that GAAS had been violated .

182 . D&T's unqualified opinion on MicroFinancial's 2002 and 2001 year-end financial

statements updated and reaffirmed D&T's unqualified opinion on MicroFinancial's fiscal 200 1

year-end financial statements . At the time D&T reaffirmed its unqualified opinion on

MicroFinancial's fiscal 2001 year-end financial statements, it was on notice that numerous

governmental agencies were investigating MicroFinancial's billing and business practices .

Accordingly, D& T was on constructive notice, if it didn't already know, that MicroFinancial' s

recognition of'revenue during the Class Period may have been improper.

183 . Nonetheless , D&T improperly failed to take the steps required by GAAS in

connection with MicroFinanciai's failure to correct its misstated Class Period financial

statements .

184. As a result of its failure to accurately report on MicroFinancial's Class Perio d

financial statements, D&T utterly failed in its role as an auditor as defined by the SEC . SEC

Accounting Series Release No . 296, Relationships Between Registrants and Independen t

Accountants, Securities Act Release No . 6341, Exchange Act Release No . 18044, states in part :

Moreover, the capital formation process depends in large part on the confidence o f

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investors in financial reporting. An investor's willingness to commit his capital toan impersonal market is dependent on the availability of accurate, material andtimely information regarding the corporations in which he has invested orproposes to invest. The quality of information disseminated in the securitiesmarkets and the continuing conviction of individual investors that suchinformation is reliable are thus key to the formation and effective allocation ofcapital . Accordingly, the auditfunction must be meaningfully performed andthe accountants ' independence not compromised. The auditor must be free todecide questions against his client's interests if his independent professionaljudgment compels that result . [Emphasis added . ]

ADDITIONAL SCIENTER ALLEGATION S

185 . As alleged herein, defendants acted with scienter in that defendants knew that th e

public documents and statements issued or disseminated in the name of the Company wer e

materially false and misleading ; knew that such statements or documents would be issued or

disseminated to the investing public ; and knowingly and substantially participated or acquiesced

in the issuance or dissemination of such statements or documents as primary violations of th e

federal securities laws. As set forth elsewhere herein in detail , defendants , by virtue of their

receipt of information reflecting the true facts regarding MicroFinancial, their control over ,

and/or receipt and/or modification of MicroFinancial ' s allegedly mate rially misleadin g

misstatements and/or their associations with the Company which made them privy to confidential

proprietary information concerning MicroFinancial, participated in the fraudulent scheme alleged

herein .

186. While defendants were issuing false and misleading statements about

MicroFinancial and its business : (i) the Company completed an IPO for 47 .9 million; and i(ii)

certain of the the Individual Defendants, together with other high-level MicroFinancial insiders ,

directly or indirectly, disposed of over $11 .2 million worth of personally-held stock, benelittin g

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from the artificial inflation in MicroFinancial's stock price their fraudulent scheme had created .

The Individual Defendants and other insiders sold shares during the Class Period as follows :

Insider Date of Sale Shares Price Proceeds

Peter R. Bleyleben ,

Chairman on or about 2/5/99 129,550 $15 .00 $1,943,250 .0 0

5/18/01 - 5/31101 53,600 $14 .40 $771,840 .0 0

6/1/01 - 6/29/01 8,400 $13 .10 $110,040 .0 0

7/2/01 - 7131/01 8,400 $14 .77 $124,068 .0 0

811/01 - 8131/01 9,200 $12 .35 $113,620 .0 0

914/01 - 9128101 6,000 $12 .53 $75,180 .00

10/1/01 - 10/31/01 9,200 $9.90 $91,080 .00

11/1/01 - 11/30/01 8,400 $9 .38 $78,792 .00

1213101 - 12/31/01 8,000 $9 .48 $75,840 .00

'/z/02 - 1/31/02 8,400 $8 .50 $71,400 .0 0

2/1/02 - 2/28/02 8,000 $696 $55,680 .0 0

4/1/02 - 4/30102 8,800 $8 .11 $71,368 .0 0

5/1/02 - 5/15/02 4,400 $8 .50 $37,400 .00

Total 270,350 $3,619 ,558.00

Richard F . Latour ,

COO on or about 2/5199 35,450 $15.00 $531,750 .00

5116/01 - 5/23/01 15,000 $14.05 $210,750 .00

9/5/01 5,000 $13.59 $67,950 .0 0

Total 55,450 $810,450.00

Torrence C .

Harder, Director on or about 215199 130,250 $15 .00 $1,953,750.00

6/4/01 5,000 $15 .80 $79,000 .0 0

7/31/01 5,000 $14 .60 $73,000 .00

811101 - 8/31/01 78,500 $12.51 $982,035 .00

9/4/01 -9/10/01 17,400 $13 .45 $234,030 .0 0

Total 236,150 $3,321,815.00

Steven J . Lacreta ,

Officer 7/30101 6,000 $15 .41 $92,460 .00

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John R . Pluml.ee ,

Officer on or about 2/5/99 3 ,725 $15 .00 $55,875.00

8/27/01 - 8/28/01 6,000 $12 .50 $75,000 .00

11/2/01 - 11 /12/01 11,940 $ 10 .00 $119,400 .00

Total 21,665 $250 ,275.00

Brian E . Boyle ,

Director on or about 2/5/99 198,550 $ 15 .00 $2,978,250 .0 0

6/12/02 - 6 /24/02 9,000 $7 .60 $68,400 .00

9/16/02 3,000 $5 .06 $15,180 .00

9/23/02 3,000 $4 .71 $14,130 .0 0

9/30/02 3 ,000 $4.48 $13,440 .00

10/7/02 3,000 $4 .00 $12,000 .0 0

10/14/02 3,000 $ 1 .94 $5,820 .00

Total 222,550 $247,470 .00

Stephen Obana, VP

ofLeaseconim on or about 2/5/99 1,950 $ 15 .00 $29 ,250.0 0

(-r_' n d Total 8 14,1 1 5 $10 .25 $8,371,278 .60

Applicability Of Presumption Of Reliance :Fraud-On-The-Market Doctrine

187. At all relevant times, the market for MicroFinancial' s securities was an efficient

market for the following reasonLs , among others :

(a) MicroFinancial's stock met the requirements for listing, and was listed and

actively traded on the NYSE, a highly efficient and automated market ;

(b) As a regulated issuer, MicroFinancial filed periodic public reports with th e

SEC and the NYSE ;

(c) MicroFinancial regularly communicated with public investors via establishe d

market communication mechanisms, including through regular disseminations of press release s

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on the national circuits of major newswire services and through other wide-ranging public

disclosures, such as communications with the financial press and other similar reporting services ;

and

(d) MicroFinancial was followed by several securities analysts employed by

major brokerage firms who wrote reports which were distributed to the sales force and certain

customers of their respective brokerage firms. Each of these reports was publicly available and

entered the public marketplace .

188 . As a result of the foregoing, the market for MicroFinancial's securities promptly

digested current information regarding MicroFinancial from all publicly available sources and

reflected such :information in MicroFinancial's stock price . Under these circumstances, all

purchasers of MicroFinancial's securities during the Class Period suffered similar injury tIxough

their purchase of MicroFinancial's securities at artificially inflated prices and a presumption of

reliance applies .

NO SAFE HARBOR

189. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint .

Many of the specific statements pleaded herein were not identified as "forward-lookin g

statements" when made . To the extent there were any forward-looking statements, there were no

meaningful cautionary statements identifying important factors that could cause actual results to

differ materially from those in the purportedly forward-looking statements . Alternatively, to the

extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein,

defendants are liable for those .false forward-looking statements because at the time each of thos e

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forward-looking statements was made, the particular speaker knew that the particular forward-

looking statement was false, and/or the forward-looking statement was authorized and/or

approved by an. executive officer of MicroFinancial who knew that those statements were fals e

when made .

FIRST CLAIM

Violation Of Section 10(b) OfThe Exchange Act And Rule 10b-5

Promulgated Thereunder Against All Defendant s

190. Plaintiffs repeat and reallege each and every allegation contained above as if full y

set forth herein .

191 . During the Class Period, defendants carried out a plan, scheme and course o f

conduct which was intended to and, throughout the Class Period, did : (i) deceive the investing

public, including plaintiffs and other Class members, as alleged herein ; (ii) enable the Individual

Defendants and other MicroFinancial insiders to sell more than $6 .8 million worth of their

personally-held shares of MicroFinancial common stock at artificially inflated prices ; and (iii )

cause plaintiffs and other members of the Class to purchase MicroFinancial's securities at

artificially inflated prices . In furtherance of this unlawful scheme, plan and course of conduct,

defendants, and each of them, took the actions set forth herein .

192. Defendants (a) employed devices, schemes, and artifices to defraud; (b) mad e

untrue statements of material fact and/or omitted to state material facts necessary to make th e

statements not misleading ; and (c) engaged in acts, practices, and a course of business whic h

operated as a fraud and deceit upon the purchasers of the Company's securities in an effort t o

maintain artificially high market prices for MicroFinancial's securities in violation of Section

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10(b) of the Exchange Act and Rule 1Ob-5 . All defendants are sued either as primar y

participants in the wrongful and illegal conduct charged herein or as controlling persons a s

alleged below.

193. Defendants, individually and in concert, directly and indirectly, by the use, mean s

or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a

continuous course of conduct to conceal adverse material information about the business ,

operations and future prospects of MicroFinancial as specified herein .

194 . These defendants employed devices, schemes and artifices to defraud, while i n

possession of material adverse non-public information and engaged in acts, practices, and a

course of conduct as alleged herein in an effort to .assure investors of MicroFinancial's value and

performance and continued substantial growth, which included the making of, or th e

participation in the making of, untrue statements of material facts and omitting to state materia l

facts necessary in order to make the statements made about MicroFinancial and its busines s

operations and future prospects in the light of the circumstances under which they were made ,

not misleading, as set forth more particularly herein, and engaged in transactions, practices and a

course of business which operated as a fraud and deceit upon the purchasers of MicroFinancia l

securities during the Class Period.

195 . Each of the Individual Defendants ' primary liability, and controlling person

liability, arises from the following facts : (i) the Individual Defendants were high-level executive s

and/or directors at the Company during the Class Period and members of the Company' s

management team or had control thereof ; (ii) each of these defendants, by virtue of hi s

responsibilities and activities as a senior officer and/or director of the Company was privy to and

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participated in the creation, development and reporting of the Company's internal budgets, plans ,

projections andlor reports; (iii) each of these defendants enjoyed significant personal contact an d

familiarity with the other defendants and was advised of and had access to other members of th e

Company's management team, internal reports and other data and information about th e

Company's finances, operations, and sales at all relevant times; and (iv) each of these defendant s

was aware of the Company's dissemination of information to the investing public which the y

knew, or recklessly disregarded, was materially false and misleading .

196. The defendants had actual knowledge of the misrepresentations and omissions o f

material facts set forth herein, or acted with reckless disregard for the truth in that they failed t o

ascertain and to disclose such facts, even though such facts were available to them. Such

defendants' material misrepresentations and/or omissions were done knowingly or recklessly an d

for the purpose and effect of concealing MicroFinancial's operating condition and future busines s

prospects from. the investing public and supporting the artificially inflated price of its securities .

As demonstrated by defendants' overstatements and misstatements of the Company's business ,

operations and earnings throughout the Class Pe riod, defendants , if they did not have actual

knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtai n

such knowledge by deliberately refraining from taking those steps necessary to discover whether

those statements were false or misleading .

197. As a result of the dissemination of the materially false and misleading informatio n

and failure to disclose material facts, as set forth above, the market price of MicroFinancial' s

securities was artificially inflated during the Class Period. In ignorance of the fact that market

prices of MicroFinancial's publicly-traded securities were artificially inflated, and relyin g

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directly or indirectly on the false and misleading statements made by defendants, or upon th e

integrity of the market in which the securities trade, and/or on the absence of material adverse

information that was known to or recklessly disregarded by defendants but not disclosed i n

public statements by defendants during the Class Period, plaintiffs and the other members of th e

Class acquired MicroFinancial securities during the Class Period at artificially high prices an d

were damaged thereby .

198 . 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 the truth regarding the problem s

that MicroFinancial was experiencing, which were not disclosed by defendants, plaintiffs an d

other members of the Class would not have purchased or otherwise acquired their MicroFinancia l

securities, or, if they had acquired such securities during the Class Period, they would not hav e

done so at the artificially inflated prices which they paid .

199. By virtue of the foregoing, defendants have violated Section 10(b) of th e

Exchange Act, and Rule 1Ob-5 promulgated thereunder .

200. As a direct and proximate result of defendants' wrongful conduct, plaintiffs an d

the other members of the Class suffered damages in connection with their respective purchase s

and sales of the Company' s securities during the Class Period.

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SECOND CLAIM

Violation Of Section 20(a) O fThe Exchange Act Against Individual Defendant s

201 . Plaintiffs repeat and reallege each and every allegation contained above as if full y

set forth herein.

202. The Individual Defendants acted as controlling persons of MicroFinancial within

the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level

positions, and their ownership and contractual rights, participation in and/or awareness of th e

Company's operations and/or intimate knowledge of the false financial statements filed by th e

Company with the SEC and disseminated to the investing public, the Individual Defendants ha d

the power to influence and control and did influence and control, directly or indirectly, th e

decision-making of the Company, including the content and dissemination of the variou s

statements which plaintiffs contend are false and misleading . The Individual Defendants were

provided with or had unlimited access to copies of the Company's reports, press releases, publi c

filings and other statements alleged by plaintiffs to be misleading prior to and/or shortly afte r

these statements were issued and had the ability to prevent the issuance of the statements o r

cause the statements to be corrected .

203 . In particular, each of these defendants had direct and supervisory involvement in

the day-to-day operations of the Company and, therefore, is presumed to have had the power to

control or influence the particular transactions giving rise to the securities violations as allege d

herein, and exercised the same .

204. As set forth above, MicroFinancial and the Individual Defendants each violate d

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Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint . By virtue

of their positions as controlling persons, the Individual Defendants are liable pursuant to Sectio n

20(a) of the Exchange Act. As a direct and proximate result of defendants' wrongful conduct ,

plaintiffs and other members of the Class suffered damages in connection with their purchases o f

the Company's securities during the Class Period .

WHEREFORE , plaintiffs pray for relief and judgment, as follows :

(a) Determining that this action is a proper class action, designating plaintiffs a s

Lead Plaintiffs and certifying plaintiffs as class representatives under Rule 23 of the Federal

Rules of Civil Procedure and plaintiffs' counsel as Lead Counsel ;

(b) Awarding compensatory damages in favor of plaintiffs and the other Class

members against all defendants, jointly and severally, for all damages sustained as a result o f

defendants' wrongdoing, in an amount to be proven at trial, including interest thereon ;

(c) Awarding plaintiffs and the Class their reasonable costs and expenses incurre d

in this action, including counsel fees and expert fees ; and

(d) Such other and further relief as the Court may deem just and proper .

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JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

Dated: April 21, 2004

By: gjtgOThomas G. Shapiro BBO #454680Theodore M. Hess-Mahan BBO 4557109Matthew L. Tuccillo BBO #643336SHAPIRO , HABER & URMY75 State StreetBoston MA 02109(617) 439-393 9

CAULEY GELLER BOWMAN& RUDMAN LL PSamuel H. RudmanRussell J. Gunyan200 Broadhollow Road, Suite 406Melville, New York 11747(631) 367-7100

SCHYFFRIN & BARROWAYMarc WillnerThree Bala Plaza East , Suite 400Bala Cynwyd, PA 1900 4(610) 667-7706

Attorneys for Plaintiffs

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