In re CFS-Related Securities

Full title: IN RE: CFS-RELATED SECURITIES FRAUD LITIGATION

Court: United States District Court, N.D. Oklahoma

Date published: Dec 21, 2001

Case Nos. 99-CV-825-K(J), 00-CV-111-K(J), 99-CV-828-K(J), 00-CV-839-K(J) 99-CV-829-K(J), 99-CV-862-K(J), 99-CV-863-K(J), 99-CV-864-K(J) 99-CV-873-K(J), 00-CV-104-K(J), 99-CV-874-K(J), 00-CV-110-K(J) 99-CV-889-K(J), 99-CV-919-K(J), 00-CV-837-K(J), 99-CV-943-K(J) 00-CV-838-K(J), 00-CV-847-K(J) (N.D. Okla. Dec. 21, 2001)

Opinion

Case Nos. 99-CV-825-K(J), 00-CV-111-K(J), 99-CV-828-K(J), 00-CV-839-K(J) 99-CV-829-K(J), 99-CV-862-K(J), 99-CV-863-K(J), 99-CV-864-K(J) 99-CV-873-K(J), 00-CV-104-K(J), 99-CV-874-K(J), 00-CV-110-K(J) 99-CV-889-K(J), 99-CV-919-K(J), 00-CV-837-K(J), 99-CV-943-K(J) 00-CV-838-K(J), 00-CV-847-K(J)

December 21, 2001

REPORT AND RECOMMENDATION

JOYNER, Judge

TABLE OF CONTENTS

I. INTRODUCTION

A. COMMERCIAL FINANCIAL SERVICES ("CFS")

B. THE MOVING DEFENDANTS

C. SUMMARY OF PLAINTIFFS' CLAIMS

1. The Core Fraud Alleged to Have been Committed by CFS

2. Plaintiffs' Claims

II. STANDING

A. How SHOULD A LACK OF STANDING BE RAISED — FED. R. Civ. P. 12(b)(1) OR 12(b)(6)?

B. SECONDARY PURCHASERS — CATEGORIES 6 AND 7

1. Federal Securities Claims

a. Federal, Not State, Law Governs

b. Section 10(b) and Rule 10b-5 Claims

i. Blue Chip's Purchaser/Seller Requirement

a) Birnbaum

b) Blue Chip

c) Conclusion

ii. Assignability

c. Section 12(a)(2) Claims

d. Control Person Liability Claims

2. Oklahoma Claims

a. Section 8-302 Does Not Apply

b. Section 2017(D), Read In Light of Other Statutory Provisions, Only Prohibits the Assignment of "Pure" Tort Claims

C. Express Versus Automatic Assignment

d. The Secondary Purchasers May Assert Their Predecessors' Rescission Claims under Oklahoma Law

3. Other State Law Claims

4. Maintenance and Champerty

5. Particularity

C. INVESTMENT ADVISORS — CATEGORY 2

D. SUBROGEES — CATEGORY 3

E. AFFILIATES — CATEGORY 4

F. GUARANTORS — CATEGORY 5

III. GUSTAFSON'S IMPACT ON PLAINTIFFS' CLAIMS

A. GUSTAFSON REQUIRES DISMISSAL OF PLAINTIFFS' CLAIMS UNDER § 12(a)(2) OF THE 1933 SECURITIES ACT

B. GUSTAFSON DOES NOT REQUIRE DISMISSAL OF PLAINTIFFS' CLAIMS UNDER § 408 OF THE OKLAHOMA SECURITIES ACT.

IV. APPLICABLE PLEADING STANDARDS

A. INTRODUCTION

B. FED. R. Civ. P. 8(a) AND 9(b)

C. THE REQUIRED STATE OF MIND (SCIENTER)

1. The PSLRA Did Not Alter the Level of Scienter Required for Claims Under § 10(b) of the 1934 Securities Act

2. Allegations Establishing a Motive and Opportunity Are Not Per Se Sufficient to Establish a Strong Inference of Scienter

D. GROUP PLEADING I GROUP PUBLISHED DOCTRINE

E. THE COMPLAINTS

V. RECOMMENDATION AS TO EACH MOVING DEFENDANT

A. MAYER, BROWN AND PLATT

B. CAROLINE BENEDIKTSON

C. ARTHUR ANDERSON

D. MIKE TEMPLE

E. GERTRUDE BRADY

F. BRUCE HADDEN

G. JAMES SILL

REPORT

The captioned cases are securities fraud cases brought by securities holders against individuals and entities allegedly involved with the sale of securities for the benefit of Commercial Financial Services, Inc. ("CFS"). Pursuant to Fed.R.Civ.P. 12(b)(6), the following defendants have filed motions to dismiss, arguing that plaintiffs have failed to state claims upon which relief can be granted: Arthur Anderson Worldwide as successor to Arthur Anderson, LLP ("AA"); Caroline Benediktson ("Benediktson"); Gertrude A. Brady ("Brady"); Bruce Hadden ("Hadden"); Mayer, Brown Platt ("MPB"); James D. Sill ("Sill") and Mike C. Temple ("Temple"). Defendants Brady and MBP also filed separate motions to dismiss for lack of standing.¹

1 See RR Exhibit A for a list of pending motions to dismiss plaintiffs' complaints. There are numerous motions to dismiss cross claims and third-party complaints. Argument on these motions to dismiss has not yet been heard, and this Report does not address any of the pending cross claims or third-party complaints.

The district judges assigned to the captioned cases have referred the cases for all further proceedings consistent with the undersigned's jurisdiction under 28 U.S.C. § 636. Pursuant to this general reference, the undersigned set for hearing on October 30, 2000; November 1, 2000 and November 3, 2000 all pending motions to dismiss the plaintiffs' complaints.² Having heard the parties' arguments, and having read their voluminous submissions, the undersigned hereby submits this Report, pursuant to 28 U.S.C. § 636(b)(1)(B) and Fed.R.Civ.P. 72(b), and recommends that all of the pending motions to dismiss be GRANTED IN PART and DENIED IN PART.

2 Those motions to dismiss listed on RR Exhibit A with asterisks were filed after the undersigned heard oral argument. The undersigned finds, however, that no additional oral argument is necessary on these motions, and that they should be decided with those that were pending on the date of oral argument.

I. INTRODUCTION A. COMMERCIAL FINANCIAL SERVICES ("CFS") ³

3 The facts an this section are based on the well-pled allegations in plaintiffs' complaints, which the court must accept as true for purposes of defendants' Rule 12(b)(6) motions to dismiss. Davis-warren Auctioneers. J.V. v. F.D.I.C., 215 F.3d 1159, 1161 (10th Cir. 2000).

CFS is a now-bankrupt Oklahoma Corporation which, until late 1998, was primarily in the business of purchasing and attempting to collect on defaulted credit card receivables. The captioned cases are all securities fraud cases. The securities at issue are asset-backed securities. An asset-backed security is a financial instrument which, unlike a traditional security, is secured by a discrete poor of assets and not the credit and assets of a company. The asset-backed securities in this case were to be backed by billions of dollars of charged-off credit card receivables.

In 1995, CFS began to use a relatively new financing model known as a securitization. From May 1995 to September 1998, CFS raised $1.6 billion by issuing 13 asset-backed securitizations. See RR Exhibit H for a schedule of securitizations. Plaintiffs allege that each securitization transaction was executed substantially as follows:

1. Using various lines of credit, CFS would purchase large packages of charged-off credit card receivables from "specified sellers," who were the major credit card issuers in the United States. Many of these purchases were made pursuant to "forward flow" contracts which obligated CFS to purchase charged-off credit card receivables on a continuing basis. These forward flow contracts guaranteed CFS a steady supply of receivables on which to collect, but they also generated a continuing obligation on CFS to pay for the receivables.

2. CFS would then create a special-purpose Oklahoma corporation, which was wholly owned by CFS, and was designed as a pass through corporation for each securitization.

a. These special purpose corporations were designed to create bankruptcy-remoteness between CES and the trusts discussed below so that a bankruptcy by CFS would not affect the trusts.

3. The special purpose corporation would create a Delaware business trust, with a separate trust company as trustee. CFS named these trusts with the following convention: "Securitized Multiple Asset Rated Trust" followed by the year and the number of the securitization for that year (e.g., SMART 1997-6).

a. In 1998, CFS began to establish trusts named "Global Rated Eligible Asset Trust" followed by the year and series (e.g., GREAT 1998-A). The GREAT trusts were designed as master trusts into which numerous SMART trusts could be folded. Thus, in 1998, several plaintiffs exchanged their SMART notes for notes issued by a GREAT trust.

4. Chase Securities, Inc. ("Chase") acted as placement agent for the sale of securities by the SMART/GREAT trusts. Chase also acted as the initial purchaser, and the trusts sold notes (i.e., securities) to Chase. Chase in turn sold the SMART/GREAT notes to investors in a private placement transaction.

a. The notes offered by the trusts were unregistered securities sold, through Chase, in private placement transactions. Consequently, only two classes of investors qualified to purchase the trusts' notes: "qualified institutional buyers" and "foreign investors." Sales of unregistered securities to foreign investors are governed by Securities Exchange Commission ("SEC") Regulation 5, which is codified at 17 C.F.R. § 230.901 — 230.905. Qualified institutional buyers are defined in SEC Rule 144A, which is codified at 17 C.F.R. § 230.144A. Rule 144A permitted the unlimited resale of the unregistered SMART and GREAT securities by Chase as long as the sales were made to a specific class of large institutional investors defined in the rule — primarily financial institutions owning at least $100 million in securities from non-affiliated issuers. Thus, all of the plaintiffs are either qualified institutional buyers under Rule 144A or foreign investors under Regulation S.

5. The securities sold by the trusts were unregistered securities. There was, therefore, no registration statement on file with the SEC which investors could consult. Consequently, prior to each transaction, investors were provided with due diligence books containing offering materials, including a private placement memorandum ("PPM"). A copy of the Private Placement Memorandum for the SMART 1997-4 transaction is attached as RR Exhibit E as an example PPM. The investors were also given an opportunity to request information from CFS.

a. Each PPM contains a detailed description of the transaction, along with voluminous disclosures of various risk factors. The PPMs contain Estimated Cash Recovery ("ECR") figures purporting to show CFS' expert projection of future revenues to be collected on the trusts' receivables. See Exhibit D to RR Exhibit E. The PPMs also contain financial statements prepared by Michael Temple and audited by Arthur Anderson, which indicated that CFS was financially sound. See Exhibit C to RR Exhibit E.

b. By way of example, the 1997-4 PPM attached to this Report as Exhibit E shows the following: CFS paid $76,300,000 for a pool of 427,879 charged-off credit-card receivables with a total amount due of $1,481,908,718. The trusts issued $176,000,000 worth of securities backed by this pool of receivables. The ECR for this pool of receivables was $319,319,742 (i.e., the amount CFS estimated it would be able to collect on the 427,879 receivables held by the trust). This amount was to be more than enough to pay back the investors with interest; pay CFS' cost of collecting on the receivables; and provide CFS a profit. See RR Exhibit E, pp. 1, 25 and 32.

6. CFS and Chase worked to ensure that the notes offered by the trusts received an "A" rating from rating agencies like Standard and Poor's Ratings Services, Duff Phelps Credit Rating Company, Moody's Investment Services and Fitch ICBA. An "A" rating is a statement from the rating agency that it believes an investor in the rated security will be paid on time and in full under the terms of the security. Without an "A" rating, the investor's obligation to purchase under the Purchase and Sales Agreement was never triggered.

7. Pursuant to a Contribution and Sale Agreement, CFS would sell portfolios of charged-off credit-card debt to the special-purpose corporation. The special purpose corporation would then sell the portfolios to its trust, and the trust would use the proceeds from the sale of its notes to purchase the portfolios from the special purpose corporation. The portfolios were sold to the trust at a profit to the special-purpose corporation and CES. CFS used the proceeds from these sales to retire the lines of credit initially used to purchase the receivables.

8. Upon receiving a portfolio of charged-off debt, the trust would execute a Sale and Servicing Agreement, pursuant to which the trust engaged CFS to collect on the portfolios the trust had just purchased. As its servicing fee, CFS received 15-25% of the amount collected for the trusts.

a. The Sale and Servicing Agreement required CFS to meet minimum collection targets in accordance with CFS' Credit and Collection Policy. CFS also had developed a set of Servicing Standards. Investors received copies of these policies prior to investing. If CFS failed to meet the monthly collections targets, the investors had the option of replacing CFS with a backup servicer.

b. CFS was also required to provide investors with monthly reports regarding its collection performance. These reports were included in due diligence books for subsequent transactions in an attempt to show CFS' successful collections.

9. The term for payment of the notes issued by the trusts was approximately four years. Each trust was to use net collections (i.e., the amount collected by CFS minus CFS's servicing fee) to make principal and interest payments on the notes it had issued through Chase. CFS was to keep any amount it collected in excess of that needed to retire the notes issued by the trusts. This amount is commonly referred to by all parties as the Residual (i.e., that portion of a portfolio's value that exceeded the face amount of the notes the portfolio backed).

B. THE MOVING DEFENDANTS

Due to the bankruptcy code's automatic stay provision, 11 U.S.C. § 362, CFS has not been named as a defendant by any of the plaintiffs in the captioned cases. The following defendants have, however, been sued by plaintiffs:

William Bartmann CFS' co-founder, Chairman of the Board of Directors, President, and member of CFS' Executive Committee.

Kathryn Bartmann CFS' co-founder, CEO and member of CFS' Executive Committee.

Jay Jones CFS' co-founder, Executive Vice President, Director of Technology Planning and member of CFS' Executive Committee.

Gertrude Brady* CFS' Director of Investor Relations and member of CFS' Executive Committee.

Michael Temple* CFS' CFO and member of CFS' Executive Committee.

Bruce Haden* CFS' Director of Business Development (bought and sold credit card receivables).

Caroline Benediktson* Director, Vice-President and General Counsel of CFS, and a member of CFS' Executive Committee.

Chase Securities, Inc. CFS' investment banker; securities placement agent and initial purchaser of the trusts' securities.

Mayer, Brown Platt* Outside counsel for CFS.

Arthur Andersen* Outside accounting firm for CFS.

Dimat Corporation An Oklahoma corporation with its principal place of business in Shawnee, Oklahoma. Now known as LJ, Inc.

James Sill* Incorporator of, President of, and attorney for Dimat Corporation.

* Denotes defendants who have filed the motions to dismiss being considered by this Report and Recommendation.

C. SUMMARY OF PLAINTIFFS' CLAIMS 1. The Core Fraud Alleged to Have been Committed by CFS

The plaintiffs in this litigation are all holders of SMART and/or GREAT securities issued, through Chase, by one of the SMART or GREAT trusts described above. Because the trusts had no assets other than their portfolios of charged-off credit card debt, the only way plaintiffs would receive any money from their investment was if CFS collected a certain percentage of the bad credit card debt in the trusts' portfolios. Plaintiffs allege, therefore, that central to their collective decisions to purchase the trusts' notes were representations made about CFS's ability to service the credit card debt in the trusts' portfolios. According to plaintiffs, CFS all but guaranteed a return on the investor's investment when it claimed that, with the assistance of a complex pricing model, it had projected the value (i.e., ECR) of each pool of charged-off receivables held by the trusts to be far in excess of what investors had paid for that pool of receivables.

Plaintiffs allege that almost from the inception, it became clear to CFS that its ECR model did not accurately predict the value of the credit card receivables held by the trusts, and that CFS would not be able to achieve its monthly collection targets based solely on its ability to collect from the credit card debtors. In fact, plaintiffs allege, the servicing fee CFS was receiving on the amount actually collected from the credit card debtors was not sufficient to cover CFS' overhead expenses each month. Thus, to make up the difference each month between what CFS was collecting from the credit card debtors and its monthly collection targets, plaintiffs allege that CFS began selling large amounts of the trusts' best performing loans to an unaffiliated company named Cadle, Inc. ("Cadle"). Cadle bought the loans outright, and CFS no longer had any obligation to service the loans sold to Cadle. CFS added the proceeds of these loan sales each month to the amount it had collected from the credit card debtors each month, and reported the total as meeting its monthly collections targets.

Cadle eventually refused to purchase any more loans from CFS. At that point, plaintiffs allege, CFS was in desperate need of cash to meet its monthly overhead and its monthly collections targets. According to plaintiffs, Cadle's withdrawal spawned the consideration of an initial public offering of stock in CFS, which never materialized, and what plaintiffs refer to as the Dimat fraud. Plaintiffs allege that the month after Cadle stopped purchasing loans, James Sill incorporated Dimat Corporation at Jay Jones' request. Plaintiffs allege that Dimat was a shell corporation with no business operations other than to purchase receivables from the trusts.

Once formed, Dimat immediately began purchasing worthless loans from CFS (i.e., loans with a $0 or negligible ECR) at premium prices. Unlike the loans sold to Cadle, plaintiffs allege that Dimat conditioned its purchases on CFS continuing to act as servicer on the loans. Plaintiffs allege that the sales to Dimat were made at the last possible moment each month in almost the exact amount needed to cover the shortfall between the amount CFS had collected from the credit card debtors and its monthly collections targets. Plaintiffs allege that Dimat's purchases were funded through a series of transactions whereby Jay Jones and William Bartmann funneled cash from each new securitization out of CFS and into Dimat. As owners of more than 80% of CFS stock, Jay Jones and William Bartmann would cause CFS to distribute cash to them; the cash would be transferred to the account of Calamity Jones Entertainment, Inc. ("Calamity Jones"), a company wholly-owned by Jay Jones; Calamity Jones would then make a loan to Dimat for the value of the receivables Dimat purchased from the trusts. Thus, plaintiffs allege that after the initial securitizations, CFS's securitizations became a classic Ponzi⁴ scheme, whereby CFS used cash from later securitizations to pay the principal and interest on the earlier securitizations. According to plaintiffs, CFS was not paying investors with proceeds collected from the credit card debtors, but with proceeds from each successive securitization. Plaintiffs allege that CFS itself was also living off the proceeds of the securitization transactions, and not off its servicing fees.

4 "A ubiquitous form of fraud named after Carlo Ponzi (1882-1949), an Italian immigrant who built a high interest rate loan scheme from $200 to $15 million by promising and payng 50% interest in 45 days and by paying his agents 10% commissions." Douglas M. Branson, chasing the Rouge Professional After the Private Securities Litigation Reform Act of 1995, 50 SMU L. Rev. 91, 102 n. 37 (1996) (citing Donald H. Dunn, Ponzi! The Boston Swindler (1975)). The hallmark of a Ponzi scheme is an ever-widening circle of victims as the new investors' capital is used to pay high returns promised to those who previously invested. "At some point, the swindler will not be able to find sufficient numbers of additional lenders or investors. it then becomes a matter of time before the bubble bursts. [V]arious kinds of Ponzi schemes are among the most frequently encountered forms of securities fraud." Id.

According to plaintiffs, the house of credit card debt created by CFS imploded on September 30, 1998 when the contents of an anonymous, whistle-blower letter was publicized. See RR Exhibit D for a copy of the letter. Prominent in the letter were allegations that in 1997 CFS's principals began selling some of the trusts' worthless receivables to an entity named Dimat, which was controlled by CFS's principals. According to the letter, the proceeds from these Dimat transactions were being recorded by CFS as collections to make it appear that CFS, as servicer of the trusts' receivables, was meeting its collections targets. These public disclosures resulted in an immediate ratings downgrade for all of the SMART and GREAT securitizations. As a result, CFS was unable to close any further securitizations. The flow of capital to CFS stopped, and CFS was forced to file bankruptcy, which is still pending.

The crux of the claims brought by plaintiffs against the named defendants is their allegation that, knowing the shortcomings in CFS' touted business model, defendants made numerous material misrepresentations and omissions about CFS's operations and about CFS's historic and future ability to service the portfolios of charged-off credit card debt held by the trusts. It is these material misrepresentations and omissions for which plaintiffs seek to hold each defendant liable.

2. Plaintiffs' Claims

Plaintiffs assert the following claims in their various complaints:

FEDERAL SECURITIES CLAIMS

1. Violation of § 12(a)(2) of the 1933 Act. See 15 U.S.C. § 771(a)(2).

2. Violation § 10(b) of the 1934 Act and SEC Rule 10b-5. See 15 U.S.C. § 78j(b); and 17 C.F.R. § 240.10b-5.

3. Violation of § 15 of the 1933 Act. See 15 U.S.C. § 77o.

4. Violation of § 20(a) of the 1934 Act. See 15 U.S.C. § 78t(a).

STATE SECURITIES CLAIMS (Blue Sky Laws)

5. Violation of § 408(a) 12(A) of the Oklahoma Securities Act. See 71 Okla. Stat. § 408[ 71-408](a)(2)(A).

6. Violation of § 408(b) of the Oklahoma Securities Act. See 71 Okla. Stat. § 408[ 71-408](b).

7. Violation of § § 25401 and 25501 of the California Corporation Code. See Cal. Corp. Code § § 25401 and 25501.

8. Violation of §§ 10-5-12 10-5-14 of the Georgia Securities Act of 1973. See Ga. Code Ann. §§ 10-5-12 and 10-5-14.

9. Violation of § § 2 and 10a of the Illinois Consumer Fraud and Deceptive Business Practices Act. See 815 III. Comp. Stat. 505/2 and 505/10a.

10. Violation of §§ 502.401 and 502.503 of the Iowa Uniform Securities Act. See Iowa Code §§ 502.401 and 502.503.

11. Violation of § § 2 and 11, Ch. 93A of the Massachusetts General Laws. See Mass. Gen. Laws ch. 93A, § § 2 and 11.

12. Violation of § 1-501 of the Pennsylvania Securities Act of 1972. See 70 Pa. Stat. Ann. § 1-501.

COMMON LAW FRAUD AND NEGLIGENCE CLAIMS (Oklahoma)

13. Common law fraud and deceit. See 76 Okla. Stat. § 2[ 76-2].

14. Aiding and abetting fraud.

15. Conspiracy to commit fraud.

16. Constructive fraud. See 15 Okla. Stat. § 59[ 15-59].

17. Negligence, including negligent misrepresentation and malpractice.

RR Exhibit B identifies which of these claims is being asserted against which defendant and in which case. The parties agree on the basic elements of these causes of action. See RR Exhibit C for a summary of the elements necessary to establish each of these causes of action. The parties disagree significantly, however, on how the elements should be applied and pled given the circumstances presented by this case.

The undersigned will first discuss the plaintiffs' standing to bring the various claims pled in their complaints. See Part II, infra. The undersigned will then discuss the impact of the United States Supreme Court's decision in Gustafson v. Alloyed Co., Inc., 513 U.S. 561 (1995) on the claims plaintiffs' have brought under § 12(a)(2) of the 1933 Securities Act and § 408 of the Oklahoma Securities Act. See Part III, infra. The undersigned will then outline the pleading standards applicable to this case under Fed.R.Civ.P. 9 and the Private Securities Litigation Reform Act. See Part IV, infra. Separate exhibits for each moving defendant are attached to this Report, and they contain the undersigned's detailed findings and recommendations as to each moving defendant. These findings and conclusions have been summarized in Part V, infra.

II. STANDING

The plaintiffs in the captioned cases fall into the following six general categories: (1) those who directly purchased SMART or GREAT securities; (2) those whose investment advisors purchased SMART or GREAT securities on their behalf; (3) insurers who have been subrogated to claims by insureds who directly purchased SMART or GREAT securities; (4) those who are suing on behalf of affiliated companies which directly purchased SMART or GREAT securities; (5) guarantors of a SMART or GREAT security; (6) secondary purchasers who purchased SMART or GREAT securities from original purchasers before public disclosure of the alleged fraud, and who did not obtain an express assignment of the sellers' claims; and (7) secondary purchasers who purchased SMART or GREAT securities from original purchasers after public disclosure of the alleged fraud, and who did obtain an express assignment of the sellers' claims. With regard to those plaintiffs finding themselves in categories 2-7, some of the moving defendants argue that these plaintiffs either do not have standing to assert any of the claims alleged in their complaints, or they have not pled facts sufficient to demonstrate their standing.

A. How SHOULD A LACK OF STANDING BE RAISED — FED. R. CIV. P. 12(b)(1) OR 12(b)(6)?

Certain of the defendants have moved to dismiss certain of the plaintiffs' claims for lack of standing. Some defendants have raised the standing issue in separate motions filed specifically under Fed.R.Civ.P. 12(b)(1). Other defendants have simply addressed the standing issue within the context of their general motion to dismiss for failure to state a claim, filed pursuant to Fed.R.Civ.P. 12(b)(6). The undersigned finds that standing issues are more appropriately raised and addressed pursuant to Rule 12(b)(1).

As defined by the United States Supreme Court, standing doctrine is a set of constitutional and prudential limitations on a federal court's power to act. Standing doctrine defines whether a litigant is entitled to have a federal court decide the merits of the dispute he has raised. Standing is at the heart of a federal court's subject matter jurisdiction. See Warth v, Seldin, 422 U.S. 490, 498-99 (1975). The undersigned finds, therefore, that attacks on a party's standing should be raised pursuant to Rule 12(b)(1), which authorizes a dismissal if the court lacks subject matter jurisdiction. As a practical matter, however, there is no real difference in the standards used to evaluate a Rule 12(b)(6) motion to dismiss for failure to state a claim and a Rule 12(b)(1) motion to dismiss for lack of standing. As with a Rule 12(b)(6) motion, a court deciding a Rule 12(b)(1) motion to dismiss for lack of standing must "treat all material allegations in the complaint as true and construe the complaint in favor of the plaintiff." Riggs v. City of Albuquerque, 91 6 F.2d 582, 584 (10th Cir. 1990). Accord Ash Creek Min. Co. v. Lujan, 969 F.2d 868, 870 (10th Cir. 1992); and Pennell v. City of San Jose, 485 U.S. 1, 7 (1988). The undersigned recommends, therefore, that the Court consider defendants' attacks on plaintiffs' standing under Rule 12(b)(1), and that the Court apply the standard announced by the Tenth Circuit in Riggs.

B. SECONDARY PURCHASERS — CATEGORIES 6 AND 7

Many of the plaintiffs purchased their securities on the secondary market. That is, they did not purchase their SMART or GREAT securities directly from Chase or the trust which issued them. Rather, these plaintiffs purchased their securities in the secondary market from someone who had earlier purchased the security from Chase or the issuing trust. Some of these plaintiffs allege that they purchased their securities prior to the public disclosure of the alleged fraud which forms the basis of the complaints at issue. These plaintiffs did not obtain an express assignment of any claims which the seller had arising out of the securities. Other plaintiffs purchasing SMART or GREAT securities in the secondary market allege that they purchased after the alleged fraud was publicly disclosed, and after CFS had filed for bankruptcy. These plaintiffs did, however, obtain an express assignment of all claims which the seller had arising out of the securities. The undersigned will refer to both groups as secondary purchasers.

1. Federal Securities Claims a. Federal, Not State, Law Governs.

The parties have all cited and relied upon federal law in support of their respective arguments regarding the secondary purchasers' standing to assert federal securities claims. No party has argued that state law should in any way control a party's ability to assign a federal securities claim. This is in accord with those cases which have directly addressed the choice of law issue.⁵ The undersigned will, therefore, apply federal law to the standing and assignment issues raised in connection with the secondary purchasers' federal securities claims.

5 Bluebird Partners, L.P. v. First Fidelity Bank, 85 F.3d 970, 973-74 (2nd Cir. 1996) (citing cases); In re Nucorp Energy Securities Litigation, 772 F.2d 1486 (9th Cir. 1985) (citing several cases); Lowry v. Baltimore Ohio R.R. Co., 707 F.2d 721, 727, 732, 739 746 (3rd Cir. 1983); Gardner v. Surnamer, 608 F. Supp. 1385, 1390 (E.D. Pa. 1985); AmeriFirst Bank v. Bomar, 757 F. Supp. 1365, 1371 n. 5 (S.D. Fla. 1991) (citing cases); In re Saxon Securities Litigation, 644 F. Supp. 465, 474 n. 16 (S.D.N.Y. 1985 (; and William K.S. Wang, Is A Seller's Rule 10b-5 Cause of Action Automatically Transferred to the Buyer?, 1988 Colum. Bus. L. Rev. 129, 130-33 (1988).

Neither the parties nor those decisions cited in footnote 5, supra, address the Supreme Court's decisions in O'melveny Myers v. F.D.I.C., 512 U.S. 79 (1994) and Atherton v. F.D.I.C., 519 U.S. 213 (1997).O'Melveny and Atherton each dealt with the issue of whether or not a federal rule of decision should be created to fill what the FDIC argued were gaps in a federal statute (i.e., the Financial Institutions Reform, Recovery and Enforcement Act). In each case, the Supreme Court held that a federal rule should not be created. These cases must, therefore, be reviewed to determine whether a decision to apply a federal rule of decision to the standing issues in this case comports with the Supreme Court's holdings in O'Melveny and Atherton.

In O'Melveny and Atherton, the EDIC had stepped into the shoes of a failed financial institution as the institution's receiver. InO'Melveny, the issue was whether the knowledge of the failed institution's directors should be imputed to the institution itself and then to the institutions s receiver (i.e., the FDIC). In Atherton, the issue was what general standard of care should be applied to directors of a federally-chartered financial institution. In both cases, the Supreme Court held that state law, and not federal law, provided the rule of decision. In both cases, the Supreme Court emphatically reasserted its holding in Erie R. Co. v. Tompkins, 304 U.S. 64, 78 (1938) that there is no general federal common law. In light of Erie the Supreme Court held that, absent direct action by Congress, federal courts should create federal rules of decision only in those rare instances where there would be a significant conflict between some federal policy or interest and use of state law. In O'Melveny and Atherton, the Court found no significant federal policy which would be threatened by use of a state rule of decision to decide the imputation of knowledge and standard of care issues raised in those cases.

Congress enacted the 1933 and 1934 federal securities Acts after the Great Depression to vindicate the very important federal interest of protecting investors and the nation's securities markets from fraud. Congress also enacted the 1933 and 1934 Acts against a backdrop of widely varying state securities laws. One force motivating Congress was a desire to establish standards of conduct in the securities markets that would be uniform throughout the nation. Congress created an express remedy for violations of § 12(a)(2) of the 1933 Act, and a private right of action has been implied, with approval of the Supreme Court, for violations of § 10(b) of the 1934 Act. See Kardon v. National Gypsum Co., 69 F. Supp. 512 (E.D. Pa. 1946); and SuDerintendent of Ins. v. Bankers Life Cas. Co., 404 U.S. 6, 13 n. 9 (1971). Undoubtedly, there is a significant federal interest in defining the class of persons who may assert rights under § 12(a)(2) and § 10(b) and whether, and under what circumstances, those rights may be assigned. The undersigned is convinced, therefore, that using a federal rule of decision to determine the standing of an individual to assert a § 12(a)(2) or a § 10(b) claim and to determine the assignability, and thus the value, of such claims does not violate the principles articulated by the Court in O'Melveny and Atherton.

b. Section 10(b) and Rule 10b-5 Claims

i. Blue Chip's Purchaser/Seller Requirement

Defendants argue that none of the secondary purchasers have standing to bring a Rule 10b-5 claim because none of them can satisfy the "purchaser-seller" requirement for Rule 10b-5 claims imposed by the United States Supreme Court in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975). Having reviewed Blue Chip in detail, the undersigned disagrees with defendants' narrow reading of the purchaser — seller rule adopted by the Supreme Court in that case.

In 1942 the SEC promulgated Rule 10b-5 under the authority granted it by § 10(b) of the 1934 Act. Section 10(b) does not provide an express private right of action for its violation. The Eastern District of Pennsylvania was the first court to imply a private right of action for violations of § 10(b) and Rule 10b-5. See Kardon v. National Gypsum Co., 69 F. Supp. 512 (E.D. Pa. 1946). Following the lead set by the court in Kardon, a majority of lower federal courts recognized an implied private right of action, and the Supreme Court ultimately approved this line of decisions in Bankers Life, 404 U.S. at 13 n. 9. This private right of action was limited to actual purchasers and sellers of securities by the Second Circuit in Birnbaum v. Newport Steel Co., 193 F.2d 461 (2nd Cir. 1952). Propriety of the Birnbaum rule was the central issue before the Supreme Court in Blue Chip. In Blue Chip, the Supreme Court affirmed and adopted the Second Circuit's Birnbaum rule, holding that a claimant must allege he was an actual purchaser or seller of securities in order to have standing to bring a Rule 10b-5 claim for damages. Because the parties have made numerous references to Birnbaum and Blue Chip in their papers, the undersigned will detail the facts and holdings of these cases below.

a) Birnbaum

In Birnbaum, a Mr. Feldmann owned 40% of the common stock of Newport Steel Corporation ("Newport"), which was enough to give him voting control over the company. Feldmann was also Newport's president and chairman of its board of directors. The remainder of Newport's common stock was owned by thousands of small investors. Follansbee Steel Corporation ("Follansbee") made an offer, which would have been highly profitable to all of Newport's stockholders, to merge with Newport. Feldmann, acting as president of Newport, rejected Follansbee's merger offer. Feldmann then immediately sold his own stock to Wilport Company at a price which was double the current market value. Birnbaum, 193 F.2d at 462.

Wilport was a conglomerate of manufacturers which used large amounts of steel in their manufacturing processes. Wilport was willing to pay Feldmann a premium because Wilport desired to obtain control over Newport so it would have a captive supply of steel. Birnbaum, 193 F.2d at 462. The individual stockholders sued Feldmann under Rule 10b-5, alleging that in various letters to stockholders he had made misrepresentations about the Follansbee merger offer and his own sale of stock to Wilport. The Second Circuit affirmed dismissal of the stockholders' claims, holding that Rule 10b-5 is aimed only at frauds perpetrated on a purchaser or seller of securities. Id. at 463. Because the stockholders did not allege a purchase or sale of stock during the relevant time period, they did not have a Rule 10b-5 claim. The Second Circuit viewed the case primarily as the breach of a fiduciary duty by a corporate insider, which § 16(b) of the 1934 Act, and not § 10(b) or Rule 10b-5, was specifically designed to redress. Id. at 464. The Supreme Court had no occasion to consider the Birnbaum rule until 25 years later when it considered and decided Blue Chip.

b) Blue Chip

Pursuant to a consent decree entered into with the government in an antitrust case, The Blue Chip Stamp Company ("Old Blue Chip") was merged into a newly formed corporation, Blue Chip Stamps ("New Blue Chip"). Pursuant to the decree, New Blue Chip was required to offer a substantial number of its shares of common stock to retailers who had used the stamp service in the past, and who were presumably damaged by the company's alleged anti-competitive practices. This was intended to reduce the holdings of the majority shareholders, who had engaged in the anti-competitive conduct. The offer was required to be made pursuant to a registered prospectus. Blue Chip, 421 U.S. at 726-27.

Manor Drug Stores ("Manor Drug") was one of the retailers to whom New Blue Chip offered its shares. Manor Drug received a prospectus that was so pessimistic about New Blue Chip's chances of success that Manor Drug was dissuaded from purchasing New Blue Chip shares. Manor Drug later learned that once the initial offer had been rejected by many of the retailers, New Blue Chip offered the rejected shares to the general public with a prospectus devoid of its earlier pessimism. The shares offered to the general public sold, and at a much higher price than that set by the consent decree for the offer to the retailers. Manor Drug brought a Rule 10b-5 claim against New Blue Chip. Blue Chip, 421 U.S. at 726-27. Relying on Birnbaum, the district court dismissed Manor Drug's claim because Manor Drug was neither a purchaser nor seller of the securities at issue. A divided panel of the Ninth Circuit reversed, finding the facts warranted an exception to the Birnbaum rule.

The Supreme Court granted certiorari in Blue Chip to "consider what limitations there are on the class of plaintiffs who may maintain a private cause of action for money damages for violation of Rule 10b-5 . . . ." Blue Chip, 421 U.S. at 727. A majority of the Supreme Court agreed that Manor Drug's Rule 10b-5 claim should be dismissed. Justice Rehnquist wrote the opinion of the Court, and his opinion is a resounding affirmation of the Birnbaum rule. Specifically, the Court held as follows:

The virtue of the Birnbaum rule, simply stated, in this situation, is that it limits the class of plaintiffs to those who have at least dealt in the security to which the prospectus, representation, or omission relates. And their dealing in the security, whether by way of purchases or sale, will generally be an objectively demonstrable fact in an area of the law otherwise very much dependent upon oral testimony. In the absence of the Birnbaum doctrine, bystanders to the securities marketing process could await developments on the sidelines without risk, claiming that inaccuracies in disclosure caused nonselling in a falling market and that unduly pessimistic predictions by the issuer followed by a rising market caused them to allow retrospectively golden opportunities to pass.

Blue Chip, 421 U.S. at 747.

Blue Chip is actually a collection of three opinions — an opinion of the Court written by Justice Rhenquist; a concurrence by Justices Powell, Stewart and Marshall; and a dissent by Justices Blackmun, Douglas and Brennan. In his opinion for the Court, Justice Rhenquist relied heavily on policy considerations in upholding Birnbaum. Justice Rhenquist believed the Birnbaum doctrine was necessary to prevent vexatious strike suits based almost entirely on unverifiable oral testimony about hazy historical facts. Justice Rhenquist was also troubled by the fact that these types of suits, even though ultimately baseless, would be very difficult to dispose of on a pre-trial basis. According to Justice Rhenquist, "[t]he very real risk of permitting those in [Manor Drug's] position to sue under Rule 10b-5 is that the door will be open to recovery of substantial damages on the part of one who offers only his own testimony to prove that he ever consulted a prospectus of the issuer, that he paid any attention to it, or that the representations contained in it damaged him." Blue Chip, 421 U.S. at 746. Justice Rhenquist's heavy reliance on policy prompted three justices to concur and "emphasize the significance of the text of the Acts of 1933 and 1934 and especially the language of § 10(b) and rule 10b-5." Blue Chip, 421 U.S. at 755 (Powell, J., concurring). Justice Powell, observed that § 10(b) and Rule 10b-5 contain the words "in connection with the purchase or sale" of a security. He agreed that the complaint should be dismissed because he could not find a purchase or a sale by Manor Drug, and he was unwilling to broaden the scope of the term "sale" to include "offers to sell." Id. at 756-57.⁶

6 The three dissenting justices in Blue chip felt that a general application of Birnbaum in all cases would produce inequitable results, as it was under the facts before them. The dissenters found it anomalous that Manor Drug could not recover because it was not a purchaser, when New Blue chip's alleged scheme was specifically designed to inhibit Manor Drug from buying in the first place. The dissenters would not mechanically apply Birnbaum. Rather, they would find fraud to be "in connection with the purchase or sale" of a security as long as there was a "logical nexus" between the alleged fraud and the sale or purchase of a security. Blue Chip, 421 US. at 771.

c) Conclusion

The secondary purchasers of the SMART and GREAT securities at issue in this case did "deal" in a security to which the fraud alleged in the complaints relates. They are not "bystanders to the securities marketing process" in the sense that the plaintiffs in Birnbaum and Blue Chip were. They are actual purchasers of the securities at issue. The undersigned finds, therefore, that neither Birnbaum nor Blue Chip raise any barrier to their assertion of a § 10(b) or Rule 10b-5 claim. See Gardner v. Surnamer, 608 F. Supp. 1385, 1392-93 (E.D. Penn. 1985).

Defendants rely heavily on Rose v. Arkansas Valley Environmental Utility Authority, 562 F. Supp. 1180 (W.D. Mo. 1983). Rose was decided in a factual setting not at all like this case, and the court tailored its holding to those facts. In Rose, three plaintiffs acquired stock as legatees of their mother's will. They then attempted to assert their own Rule 10b-5 claims in connection with those securities. The district court dismissed their personal Rule 10b-5 claims, finding that as legatees, they did not satisfy Blue Chip's actual purchaser requirement. The court in Rose was driven to this conclusion by the fact that these three plaintiffs had paid no consideration for their securities — they were gifts in a will. Rose, 562 F. Supp. at 1188-1190. The court specifically limited its holding to the situation before it with the following language:

I do not gainsay the idea that one who subsequently purchased a bond from an earlier holder might, in certain circumstances, be able to maintain an action against defendants such as these, based upon his or her own purchase and consequent injury, but that is not the situation with the present three plaintiffs.

Rose, 562 F. Supp. at 1190. The court also left open the possibility that the plaintiffs might be able to assert their dead mother's Rule 10b-5 claims if they could plead facts showing that their mother's Rule 10b-5 claim survived and was appropriately transferred to them. Id. The secondary purchasers in this case are actual purchasers for value of the SMART and GREAT securities at issue; they were not donees of the securities at issue. Rose is, therefore, distinguishable.

A different issue, not addressed by either Birnbaum or Blue Chip, is whether the plaintiff must be a buyer or a seller in the transaction in which the fraud occurs or whether it is enough to be a buyer or a seller in a related transaction (i.e., whether § 10(b) claims follow the security or must be expressly assigned). This separate issue is discussed next.

ii. Assignability

The Tenth Circuit tangentially addressed the assignability of Rule 10b-5 claims in U.S. Industries, Inc. v. Touche Ross Co., 854 F.2d 1223, 1234, n. 15 (10th Cir. 1988). In Touche Ross, a group of individual health spa owners acquired a public corporation and changed its name to Health Industries, Inc. ("HI"). The individual owners then transferred their assets to HI in exchange for HI stock. To obtain investment capital, HI entered into an agreement with U.S. Industries, Inc. ("USI"), pursuant to which USI would make a $4 million loan to HI, and give HI certain USI stock, in exchange for 80% of HI's stock. The original spa owners, and principals of HI, then set up Financial Enterprises of America, Inc. ("FEA") as a finance company which would purchase commercial paper (i.e., health membership contracts) from HI. USI's management eventually became concerned about conflicts of interest between HI and FEA. USI, as 80% shareholder in HI, caused HI to enter into an agreement to acquire FEA. As part of the agreement, FEA warranted that (1) no FEA officer, director or shareholder was ever an officer or director of HI; (2) no officer or director of HI had ever been a shareholder of FEA; and (3) no portion of the proceeds would be paid to an officer or director of HI. HI also assigned all of its claims against FEA to USI. Id. at 1226-29.

All of the warranties FEA made to HI when USI caused HI to acquire FEA were false. USI filed suit against FEA, alleging a series of violations of the federal securities law, including Rule 10b-5. FEA argued that USI's claims should be dismissed because USI lacked standing to assert them. FEA relied primarily on language in the agreement between HI and FEA which prohibited HI, without FEA's consent, from assigning its rights "under and in connection with" the stock transfer agreement between HI and FEA. Touche Ross, 854 F.2d at 1233-34. Finding that this language only precluded assignment by HI of its right to performance under the stock transfer agreement, the Tenth Circuit rejected FEA's argument that the language of the agreement in any way invalidated the assignment to USI of HI's securities claims against FEA. The Tenth Circuit specifically held that so long as assignment of the federal securities claims did not interfere with the parties' right to performance under the transfer agreement, which the Court found that it did not, "the assignment should be permitted." Id. at 1234, n. 15.

While the court in Touche Ross did not spend a lot of time discussing assignment of Rule 10b-5 claims, it seems clear that the court had no problem with the general proposition that Rule 10b-5 claims can be assigned.⁷ The undersigned believes that this intuitive reaction by the court in Touche Ross is consistent with the remedial purpose of the federal securities laws. Litigation seeking a remedy for securities fraud is often protracted and expensive. Not all victims of securities fraud are able to bear the delay or expense of litigation. They should, therefore, be able to sell their securities in the marketplace for a price which reflects the value of any causes of action associated with the securities. Any other rule would compound the victim's injury and thwart the remedial purpose of the federal securities laws. Lowry v. Baltimore Ohio R.R. Co., 707 F.2d 721. 739-40 (3rd Cir. 1983) (Gibbons, J.,

7 Defendants rely primarily on footnote loin Grubb v. FDIC, 868 F.2d 1151 (10th Cir. 1989) to argue that the Tenth circuit would not approve of the assignment of Rule 10b-5 claims. In the Grubb footnote, the court stated that the "transfer" of a security from a corporation to one of its directors would not give the director standing as a direct purchaser under Blue Chip. Id. at 1160. The nature of the "transfer" inGrubb was never discussed. The undersigned finds the Tenth circuit's discussion in Touche Ross to be much more on point regarding the "assignability" of Rule 10b-5 claims, which the court was specifically addressing in that case. At most, the ambiguity created by the two statements in Grubb and Touche Ross establishes that the Tenth circuit has not squarely addressed the assignability of Rule 10b-5 claims.

Assignments are most often used to transfer intangible rights or claims. Tangible property is more often transferred by possession or by instruments which convey title such as a deed, bill of sale, or certificate of title. Like any other contract, whether an assignment has been made and the terms of the assignment depends on the actual intentions of the parties. Generally speaking, conduct which shows an intent to transfer a right or cause of action can operate as an assignment, and no particular form is necessary. If an assignment is valid, the assignee steps into the shoes of the assignor and asserts the rights of the assignor as if they were his own. Cf. AmeriFirst, 757 F. Supp. at 1370.⁸

8 See also Vermont Agency of Natural Resources v. U.S. ex rel. Stevens, 120 S.Ct. 1858, 1863 (2000); Ketchum v. Duncan, 6 Otto 659, 96 U.S. 659, 670-71 (1877); Furlong v. Shalala, 156 F.3d 384, 391-92 (2nd Cir. 1998); Pacific Coast Agr. Export Ass'n v. Sunkist Growers, Inc., 526 F, 2d 1196, 1207-1208 (9th Cir. 1975); Lone Mountain Production Co. v. Natural Gas Pipeline Co. of America, 710 F. Supp. 305, 309 (D. Ut. 1989), aff'd 984 F.2d 1551, 56 (10th cir. 1992); National Bank of Commerce of Tulsa v. ABC Const. co., 442 P.2d 269, 276-77 (Okla. 19661; and Cobb v. Baxter, 292 P.2d 389, 391-92 (Okla. 1956).

The parties have cited more than 30 cases on the assignability of Rule 10b-5 claims. The undersigned has reviewed them all. They are, however, too numerous to discuss in detail here. However, in the absence of more express precedent from the Tenth Circuit, other than that in Touche Ross, the undersigned has been able to distill the following rule from a review of the numerous cases cited by the parties, and the few law review articles⁹ on this topic: When a party sells a security before the basis for a Rule 10b-5 claim with regard to that security has been publically disclosed, an intent to assign any Rule 10b-5 claims can be inferred from the transfer of the security itself.¹⁰ When a party sells a security after the basis for a Rule 10b-5 claim with regard to that security has been publically disclosed, an intent to assign any Rule 10b-5 claims cannot be inferred from the transfer of the security itself — an express assignment is needed. To illustrate this rule, the undersigned will discuss a few of the cases cited by the parties.

9 See David C. Profilet, Express versus Automatic Assignment of Section 10(b) causes of Action, 1985 Duke L.J. 813 (1985); and William K.S. Wang, Is A Seller's Rule 10b-5 cause of Action Automatically Transferred to the Buyer?, 1988 Colum. Bus. L. Rev. 129 (1988).

10 The undersigned recognizes that whether this inferred intent forms the basis for an implied-intact contract or a quasi/constructive contract is open to some debate. An implied-in-fact contract is a contract created by the parties' conduct — one that is implied by the facts. A quasi-contract is one implied in law, regardless of a party's intent. Thus, quasi-contracts are the result of involuntary promises imposed by operation of law. Duty, and not a promise or agreement or intention of the person sought to be charged, defines the content of this involuntary promise. See, e.g., Booker v. Sears Roebuck Co., 785 P.2d 297, 308 n. 13 (Okla. 1989); and T S Inv. Co. v. Coury, 593 P.2d 503, 504 (Okla. 1979). For purposes of the motions to dismiss, however, the Court need not resolve the issue. It is enough that an agreement to assign is implied whether it be in law or in fact.

The undersigned is aware that many courts have, as defendants argue, held that § 10(b) claims are not assignable. However, the undersigned agrees with Judge Gerry's comments in In re National Smelting of New Jersey Inc. Bondholders' Litigation:

[O]ther courts have held that § 10(b) claims are not automatically assignable. Most have done so, however, in the context where a subsequent purchaser who paid a reduced price for the security because of public revelation of fraud, attempts to argue that the right to sue under § 10(b) runs with the security. Courts have been chary about according standing to such a purchaser since this would deprive the true victim, i.e., the purchaser who suffered the loss because of the fraud, of her cause of action and unduly benefit someone who had not been harmed. See, e.g., In re Nucorp Energy Securities Litigation, 772 F.2d 1486, 1490 (9th Cir. 1985) (holding that there is no automatic assignment of securities actions, "otherwise, we would remove the remedy from those to whom the statute provides it, i.e., those who were defrauded, by gratuitously giving it to those who were not defrauded and have suffered no injury under the securities law"); accord, In re Saxon Securities Litigation, 644 F. Supp. 465 (S.D.N Y 1985); Independent Investor Protective League v. Saunders, 64 F.R.D. 564 (E.D. Pa. 1974).

National Smelting, 722 F. Supp. at 176. See also Gardner, 608 F. Supp. at 1394, n. 8.

Many of the cases relied on by defendants involve a purchaser of a security who purchased the security after the public disclosure of a fraud in connection with the security.¹¹ In those cases, the courts held that Rule 10b-5 claims should not travel with the security because it is the seller who was harmed by the fraud in the form of a reduced price for his security. Requiring an express assignment in these circumstances insures that the purchase price takes into account the value of any potential Rule 10b-5 claims. Absent an express assignment, the claim stays with the injured party — the seller.¹²

11 See, e.g., Nucorp, 772 F.2d at 1490; In re Saxon Securities Litigation, 644 F. Supp. 465 (S.D.N.Y. 1985); Bluebird, 85 F 3d at 973;McEwen v. Digitran Systems. Inc. 49 F. Supp.2d 1293, 1295-96 (D. Ut. 1999); and Lowry, 707 F.2d at 722.

12 The undersigned is aware of the concerns raised by Judge Gibbons in Lowry. In his dissent, Judge Gibbons points out that an overwhelming majority of securities transfers take place in the two great securities exchanges in New York city in a market where buyers and sellers almost never see each other. Judge Gibbons argues that requiring an express assignment in this faceless market would be impractical. For that reason, he argues that, absent a declaration by the seller of his intent to retain his claims in connection with the security being sold, all securities fraud claims should be automatically assigned upon transfer of the security itself. Lowry, 707 F.2d at 741-42. As an initial matter, it must be pointed out that the SMART and GREAT securities at issue in this case were not traded on a national exchange. So, to the extent a different rule would be needed as to securities traded on a national exchange, the above recommendation should be limited to the facts of this case.
However, the undersigned is not persuaded, as was Judge Gibbons, that express assignments, when necessary, would be impossible or impractical in the securities exchanges. Even in a faceless market, buyers and sellers must agree, usually through an intermediary broker, to certain basic terms such as price and quantity. whether the seller agrees to also transfer his causes of action related to the security is but another term which the parties can address through their intermediaries. See Exoress versus Automatic Assignment, 1985 Duke L.J. at 824. Furthermore, Judge Gibbons' solution does not eliminate the need for the assignment issue to be considered when a security is traded on a national exchange. Rather, his solution simply places the onus on the seller in a faceless market to be sure he specifically addresses the assignment issue. A seller whose security's price has been affected by the public disclosure of a fraud should not be in danger of losing his fraud claim through his silence, thus compounding his injury. Rather, a seller in this situation should only lose his fraud claims if his intent to transfer them to the buyer is clearly expressed.

Where the price of a security has not been depressed because neither the seller nor the purchaser are aware of a fraud in connection with the security, neither the seller nor the buyer are aware that a Rule 10b-5 claim exists which could be assigned. Requiring an express assignment in these circumstances would, therefore, be unrealistic and unfair. Requiring an express assignment would, in the vast majority of cases where there is undisclosed fraud, leave the claim with the uninjured seller who received full value for his security and has no incentive to pursue the claim. When an undisclosed fraud is involved, a Rule 10b-5 claim should travel with the security until the fraud is disclosed. This insures that the claim stays with the injured party — the purchaser who purchased for full value unaware of the fraud which had infected the security. See AmeriFirst, 757 F. Supp. at 1370-72; Lowry v. Baltimore Ohio RR Co., 707 F.2d 721 (3rd Cir. 1983); and Farey-Jones v. Buckingham, 132 F. Supp.2d 92, 100-102 (E.D.N.Y. 2001).

As the Court in Gardner held, there are compelling reasons for the rule announced above:

If a subsequent buyer could not bring suit against a fraudulent seller "once removed" for damages suffered as a result of that fraud, the remedial purposes of the act would be compromised. Fraudulent sellers could insulate themselves from liability by concealing a fraud and then ensuring that the [initial] purchasers transferred the securities to another party. Where, as here, a plaintiff is within the class of purchasers or sellers [authorized by Blue Chip], the fraud was committed in connection with that sale or purchase of securities, and the plaintiff has been damaged by the fraud, a claim under § 10(b) or Rule 10b-5 has been stated.

Gardner, 608 F. Supp. at 1394 (internal citations omitted).

Defendants rely heavily on Smith v. Ares, 977 F.2d 946 (5th Cir. 1992) for the proposition that Rule 10b-5 claims can never be assigned. Smith does not, however, support defendants' position as strongly as defendants would have the Court believe. The court's holding in Smith was very narrow and tailored to the unique facts in that case. The court specifically held as follows:

We need not resolve and reserve for another day whether under other circumstances, some Rule 10b-5 claims may be expressly assigned. In this case, however, the trial court did not err in dismissing the claim based upon the purported assignment of the Rule 10b-5 action where the assignment appeared to have been made for the purpose of creating standing and pursuing a vexatious lawsuit [which the district court had previously dismissed on standing grounds].

Id. at 950-51. The court revealed the rationale for its holding when it stated that it was refusing to allow Mr. Smith to elevate form (i.e., an express assignment) over substance (i.e., a sham assignment designed to defeat the district court's prior ruling and perpetuate vexatious litigation which had been ongoing for years). Id. at 950. If Smith provides support for defendants' argument, it is a flimsy reed waiting to be broken when "other circumstances" present themselves. The undersigned finds that those circumstances are presented by this case. It is not at all clear from the court's language in Smith that it would bar assignments under the facts in this case.

Those secondary purchasers who do not have express assignments of their sellers' Rule 10b-5 claims allege that they purchased their SMART and GREAT securities prior to public disclosure of the facts which form the basis of the Rule 10b-5 claims asserted in the complaints. Those secondary purchasers who allege that they purchased their securities after this public disclosure, also allege that they have express assignments of their sellers' securities fraud claims. Based on the rule announced above, the undersigned finds that all of the secondary purchasers have pled facts sufficient to establish their standing to assert their sellers' Rule 10b-5 claims. Consequently, the undersigned recommends that defendants' motions to dismiss the secondary purchasers' Rule 10b-5 claims for lack of standing be DENIED.

c. Section 12(a)(2) Claims

Because the undersigned finds that plaintiffs' claims under § 12(a)(2) of the 1933 Securities Act should be dismissed for failure to state a claim, the undersigned need not discuss the assignability of plaintiffs' § 12(a)(2) claims. See Part III, infra.

d. Control Person Liability Claims

Section 15 of the 1933 Securities Act makes a person who controls a primary violator of § 12(a)(2) of the 1933 Act jointly and severally liable with the primary violator. Because the undersigned finds that plaintiffs' claims under § 12(a)(2) of the 1933 Securities Act should be dismissed for failure to state a claim, Part III, infra, the undersigned recommends that defendants' motions to dismiss plaintiffs' § 15 control person claims also be GRANTED.

Section 20(a) of the 1934 Securities Act makes a person who controls a primary violator of § 10(b) of the 1934 Act jointly and severally liable with the primary violator. Defendants have offered no argument as to why plaintiffs' § 20(a) claims should be treated any differently than plaintiffs' § 10(b) claims for purposes of standing. Thus, to the extent the secondary purchasers are able to assert their sellers' Rule 10b-5 claims, they are also able to assert their sellers' § 20(a) control person liability claims. Consequently, the undersigned recommends that defendants' motions to dismiss the secondary purchasers' § 20(a) claims for lack of standing be DENIED.

2. Oklahoma Claims

Many of the plaintiffs have filed claims under Oklahoma law: fraud, deceit, negligence, and violation of the Oklahoma Securities Act ("the Oklahoma claims"). Defendants argue that all of these claims must be dismissed pursuant to 12 Okla. Stat. § 2017[ 12-2017](D). Defendants argue that all of plaintiffs' Oklahoma claims are tort claims, and that § 2017(D) of the Oklahoma Pleading Code prohibits the assignment of all tort claims. Defendants argue, therefore, that none of the secondary purchasers are real parties in interest as to the Oklahoma claims being asserted. Plaintiffs argue that they are real parties in interest by virtue of 12A Okla. Stat. § 8-302[ 12A-8-302](a). The undersigned does not agree with either parties' reading of Oklahoma law. Section 8-302 of the Oklahoma Commercial Code does not apply. Nevertheless, Defendants focus entirely on § 2017(D) and ignore other statutory provisions in Oklahoma which have caused Oklahoma courts to limit § 2017(D)'s "no assignment" rule to "pure" torts causing wholly personal injuries and not to torts arising out of and causing injury to contract or property rights. The undersigned finds, as will be discussed below, that the Oklahoma claims being asserted by the secondary purchasers are in fact assignable despite § 2017(D) and § 8-302(a).

a. Section 8-302 Does Not Apply

Section 8-302 is in Article 8 of the Oklahoma Commercial Code, and Article 8 contains rules relating to investment securities. Section 8-302 provides as follows: "Except as provided in subsections [that do not apply], upon delivery of a certificated or uncertificated security to a purchaser, the purchaser acquires all rights in the security that the transferor had or had power to transfer." 12A Okla. Stat. § 8-302[ 12A-8-302](a) (emphasis added). The secondary purchasers argue that by virtue of this section they automatically obtained their seller's Oklahoma claims when they purchased the securities at issue. The undersigned does not agree.

Section 8-302(a) refers only to rights in "a security."¹³ Section 8-102(a)(15) contains a definition of security which is not broad enough to encompass choses in action related to a security. 12A Okla. Stat. § 8-102[ 12A-8-102](a)(15). See also In re Saxon Securities Litigation, 644 F. Supp. 465, 474 n. 16 (S.D.N.Y. 1985) (holding that language of section only deals with rights "in the security," and that a fraud claim is not a right in the security, but is itself a separate right). A review of Article 8 of the Oklahoma Commercial Code as a whole also demonstrates that the drafters were in no way focused on the general rights parties have in causes of action related to a security. The only claims which Article 8 attempts to deal with are "adverse claims," which are defined at 12A Okla. Stat. § 8-102[ 12A-8-102](a)(1). An adverse claim is a claim by a third party that he has a property interest in a security that is being violated while the security is in the possession of the defendant. Id. Section 8-303 establishes a protected (a/k/a bona fide) purchaser rule which protects purchasers from adverse claims under certain defined circumstances. These adverse claims are the only choses in action with which Article 8 is concerned.

13 Article 8 applies to "securities" which are held directly by the purchaser and "securities entitlements" which arise when a security is held indirectly through a securities intermediary. Part 3 of Article 8, which contains § 8-302. supplies rules for direct holders of securities, and Part 5 supplies rules for indirect holders. Plaintiffs do not attempt to establish whether they are direct holders of the securities at issue or whether they are indirect holders with a "securities entitlement." If they are indirect holders, § 8-302 would not be applicable. The complaints are, however, silent on this issue.

That Article 8 does not concern itself with claims like the Oklahoma claims being asserted by plaintiffs is confirmed by the Prefatory Note to the 1994 revisions of Article 8 of the Uniform Commercial Code. In discussing the scope of Article 8, the Prefatory Note states as follows:

Article 8 is in no sense a comprehensive codification of the law governing securities or transactions in securities. Although Article 8 deals with some aspects of the rights of securities holders against issuers, most of that relationship is governed not by Article 8, but by corporation, securities, and contract law. Although Article 8 deals with some aspects of the rights and duties of parties who transfer securities, it is not a codification of the law of contracts for the purchase or sale of securities. (The prior version of Article 8 did include a few miscellaneous rules on contracts for the sale of securities, but these have not been included in Revised Article 8). Although the new indirect holding system rules of Part 5 deal with some aspects of the relationship between brokers or other securities professionals and their customers, Article 8 is still not in any sense a comprehensive code of the law governing the relationship between broker-dealers or other securities intermediaries and their customers. Most of the law governing that relationship is the common law of contract and agency, supplemented or supplanted by regulatory law.

. . . .

Article 8 deals with the settlement phase of securities transactions. It deals with the mechanisms by which interests in securities are transferred, and the rights and duties of those who are involved in the transfer process. It does not deal with the process of entering into contracts for the transfer of securities or regulate the rights and duties of those involved in the contracting process.

7A Uniform Laws Annotated, Uniform Commercial Code, § 8-101, Prefatory Notes. The undersigned finds, therefore, that § 8-302 is limited to the transfer of interests in a security only, and not does contemplate the transfer of causes of action for fraud which arise during the process of negotiating for and entering into a contract for the transfer of a particular security. Section 8-302 does not, therefore, support the secondary purchasers' assignment argument.

b. Section 2017(D), Read In Light of Other Statutory Provisions, Only Prohibits the Assignment of "Pure" Tort Claims.

To determine whether plaintiffs' Oklahoma claims are assignable, the Court must reconcile the following conflicting statutory pronouncements by the Oklahoma Legislature. Fortunately, however, the courts in Oklahoma have already begun the process of reconciling these provisions, and have pointed the way to resolving the issue in this case.

1. Within its rule defining real parties in interest, the Oklahoma Pleading Code provides as follows: "The assignment of claims not arising out of contract is prohibited." 12 Okla. Stat. § 2017[ 12-2017](D) (emphasis added).¹⁴

14 Section 2017(D) is based on a prior statute which provided as follows: "Every action must be prosecuted in the name of the real party in interest, except as otherwise provided in this article but this section shall not be deemed to authorize the assignment of a thing in action, not arising out of contract." 12 Okla. Stat. § 221[ 12-221] (1981). The committee Notes to § 2017(D) indicate that § 2017(D) follows Oklahoma law as it was codified in prior § 221.

2. Oklahoma's Personal Property Code provides as follows:

a. "A thing in action is a right to recover money or other personal property, by judicial proceedings." 60 Okla. Stat. § 312[ 60-312].

b. "A thing in action, arising out of the violation of a right of property, or out of an obligation, may be transferred by the owner. Upon the death of the owner, it passes to his personal representatives, except where, in the case provided by law, it passes to his devisees or successors in office." 60 Okla. Stat. § 313[ 60-313].

3. Survival and Abatement — Oklahoma law provides as follows regarding the survival and abatement of claims under Oklahoma law:

a. "It has been very generally held throughout the United States that the true test of whether or not a cause of action is assignable depends upon whether or not, upon the death of the owner, it passes to and becomes enforceable by his personal representatives. In other words, whether or not, under the law of the particular state, it is such a cause of action as will survive . . ." Ashton v. Noble, 148 P. 1042, 1043 (Okla. 1915). "Assignability and survivability of causes of action are, as a general rule, convertible terms." State ex rel. Mitchell v. City of Shawnee, 31 P.2d 552, 554 (Okla. 1934).

b. Oklahoma's Civil Procedure Code provides as follows regarding the survival and abatement of actions: "In addition to the causes of action which survive at common law, causes of action for mesne profits, or for an injury to the person, or to real or personal estate, or for any deceit or fraud, shall also survive; and the action may be brought, notwithstanding the death of the person entitled or liable to the same." 12 Okla. Stat. § 1051[ 12-1051]. Actions for fraud survive under this statute. Thus, absent § 2017(D), claims for fraud would be assignable under the common law rule announced above in subsection a.

c. The Oklahoma Securities Act provides as follows: "Every cause of action under [§ 408] survives the death of any person who might have been a plaintiff or defendant." 71 Okla. Stat. § 408[ 71-408](e). Section 408 claims survive under this statute. Thus, absent § 2017(D), § 408 claims would be assignable under the common law rule announced above in subsection a.

In a line of cases beginning with Kansas City. M. O. Ry. Co. v. Shutt, 104 P. 51 (1909),¹⁵ the Oklahoma courts have read all of the above provisions, with the exception of § 408(e), together and have concluded that Oklahoma law only prohibits the assignment of "pure" torts. For purposes of assignment law in Oklahoma, a claim is not a "pure" tort, even if it sounds in tort, as long as it arises out of a contractual relationship. As long as a contract is the foundation out of which a cause of action arises, the cause of action, no matter how pled, is not a pure tort. It is also not required that there be a violation of the underlying contract as long as the asserted tort claim arises out of the underlying contractual relationship. Thus, "pure" torts are torts which do not fall on the property or business of the complaining party. Rather, they are torts which are personal in nature; those that inflict bodily harm (e.g., assault or battery) or injure one's reputation (e.g., libel or slander).¹⁶

15 In Shutt the court discusses §§ 4609, 4163 and 4224 of the 1903 Oklahoma Statutes. These statutes are the predecessors to 12 Okla. Stat. § 1051[ 12-1051], 60 Okla. Stat. § 313[ 60-313], and 12 Okla. Stat. § 2017[ 12-2017](D) respectively.

16 See Shutt, 104 P. at 53 (claim that spark from locomotive burned down barn is a pure tort and is not assignable); St. Louis S.F.R. Co. v. Mounts, 144 P. 1036, 1038 (Okla. 1914) (claim for negligent destruction of a stallion during transit is not a pure tort and is assignable); Ashton, 148 P. at 1043 (claim for unlawful occupancy and use of land is not a pure tort and is assignable); McCoy v. Moore, 91 P.2d 87, 88 (Okla. 1939) (claim for damage to vehicle caused by driver of another vehicle is a pure tort and is not assignable); Vogel v. Cobb, 141 P.2d 276, 279 (Okla. 1943) (claim for wrongful taking and use of subsurface water is not a pure tort and is assignable); Momand v, Twentieth-century Fox Film Corp., 37 F. Supp. 649, 657-58 (W.D. Okla. 1941) (claim under § 7 of the Sherman Anti-Trust Act is not a pure tort and is assignable); and Chimney Rock Limited Partnership v. Hong Kong Bank of Canada. 857 P.2d 84, 87-88 (Okla.App. 1993) (claim of interference with business relations is not a pure tort and is assignable).

Two Oklahoma cases are illustrative of the rule announced in the preceding paragraph — Mounts and Chimney Rock. In Mounts, John Cassidy purchased a stallion in another state and had it shipped on defendant's railroad to Oklahoma. During transit, the stallion died. Mr. Cassidy then assigned all claims against the railroad to Mounts. Mounts, as Mr. Cassidy's assignee, sued the railroad for negligently causing the stallion's death. Specifically, Mounts' cause of action sounded in tort and he was not in any way suing on the shipping contract itself. The Oklahoma Supreme Court found that Mr. Cassidy's negligence claim was assignable to Mounts because it arose "out of the contract of shipment and is not a pure tort, notwithstanding the action, as brought, is not on the contract and sounds in tort." Mounts, 144 P. at 1038 and Syl. ¶ 3.

In Chimney Rock, FM Bank ("FM") issued a letter of credit on behalf of its customer, Chimney Rock, for the benefit of the Bank of British Columbia ("BBC"). BBC attempted to draw on the letter of credit and FM refused to act on BBC's request. In the meantime, BBC was acquired by Hongkong Bank of Canada ("HKB"), and all of BBC's assets were assigned to HKB. HKB then sued FM for wrongful dishonor of the letter of credit. HKB also sued FM and Chimney Rock for wrongful interference with business relations and conspiracy to wrongfully interfere with business relations. Chimney Rock, 857 P.2d at 86. FM and Chimney Rock moved to dismiss the wrongful interference claims on the ground that § 2017(D) prohibited BBC's assignment of these claims to HKB. The Oklahoma Court of Appeals rejected this argument, finding that the alleged torts were not pure torts because they arose out of a contract (i.e., the letter of credit). Id. at 87-88. Mounts and Chimney Rock stand for the proposition that traditional tort claims, like negligence and interference with business relations, are assignable under Oklahoma law as long as those claims arise out of an underlying contractual relationship (e.g., a shipping contract or a letter of credit).

As the Prefatory Note to Article 8 of the Uniform Commercial Code notes, the transfer of a security is accomplished pursuant to the law of contract — a party offers consideration for a security, and if the owner of the security accepts, a contract for the transfer of that security has been formed. It is during this negotiation and contract formation stage that claims such as those being asserted by plaintiffs most often arise because this is the stage during which information is at a premium and misrepresentations and omissions are likely to occur. In this case, the secondary purchasers' predecessors in interest contracted for the purchase of SMART or GREAT securities. All of the claims the secondary purchasers assert, as assignees of their predecessors in interest, arise out of these underlying contracts for the purchase of securities. The undersigned finds, therefore, that none of secondary purchasers' Oklahoma claims are "pure" torts as that term has been defined by the courts in Oklahoma. These claims are, therefore, fully assignable under Oklahoma law. Consequently, the undersigned recommends that defendants' motions to dismiss the secondary purchasers' Oklahoma claims based on a lack of standing due to invalid assignments be DENIED.

c. Express Versus Automatic Assignment

The parties have not specifically addressed the express versus automatic assignment issue which was raised in connection with the assignment of the secondary purchasers' Rule 10b-5 claims. The undersigned has also found no cases from the Oklahoma Supreme Court directly on point regarding express versus automatic assignment. The undersigned finds, however, that the Oklahoma Supreme Court would apply the same rule announced, supra, regarding the assignability of the secondary purchasers' Rule 10b-5 claims. Daitom, Inc. v. Pennwalt Corp., 741 F.2d 1569, 1574 (10th Cir. 1984) (in the absence of an authoritative pronouncement from the State's highest court, the Court's task is to regard itself as sitting in diversity and predict how the State's highest court would rule). If a party sells a security before the basis for an Oklahoma claim with regard to that security has been publically disclosed, an intent to assign any Oklahoma claims can be inferred from the transfer of the security itself. However, if a party sells a security after the basis for an Oklahoma claim with regard to that security has been publically disclosed, an intent to assign any Oklahoma claims cannot be inferred from the transfer of the security itself — an express assignment is needed. See Discussion in Part II(B)(1)(b)(ii), supra.

d. The Secondary Purchasers May Assert Their Predecessors' Rescission Claims under Oklahoma Law

Plaintiffs seek damages on all of their claims. On some of their claims, plaintiffs first seek rescission, and seek damages in the alternative. Defendants argue that, regardless of whether these rescission claims are unassignable "pure" torts, which they are not (see discussion in Part II(B)(2)(b), supra), the secondary purchasers cannot assert any rescission claims because the very act of assigning the claim destroys it. Defendants argue that by selling securities to the secondary purchasers, the secondary purchasers' predecessors in interest "affirmed" the sale of the security and acted inconsistent with an intent to disaffirm the sale and seek rescission. As support for their argument, defendants rely principally on Soderberg v. Gens, 652 F. Supp. 560 (N.D. Ill. 1987). Under the facts of this case, the undersigned is convinced that the Oklahoma Supreme Court would not follow the holding inSoderberg, and that Oklahoma would allow the rescission claims at issue to be assigned.

The undersigned agrees with defendants that a party cannot both affirm a contract and seek rescission of a contract. See, e.g., Restatement of the Law of Restitution, § 68; Restatement (Second) of Contracts, § 380(2); and Davis v. Gwaltney, 291 P.2d 820, 825 (Okla. 1955). When a claim for rescission is based on fraud, as in this case, "the party defrauded will generally lose his right to rescind if, after discovery of the fraud, he takes any benefit under the contract or does any other act which implies an intention to abide by it or an affirmation of it."Davis, 291 P.2d at 825. The question is whether an assignment of a cause of action for recession is itself a taking of benefits under the contract or an act implying an intention to abide by the contract and limit themselves to seeking damages.

As discussed above, many of the secondary purchasers allege that they acquired their securities before the fraud which forms the basis of their rescission claims had been disclosed or discovered. Their predecessors in interest could not, therefore, have done anything "after discovery of the fraud," because they were unaware of the fraud. Defendants argument must, therefore, be directed primarily at those secondary purchasers who acquired their claims after the fraud which forms the basis of their rescission claims had been publicly disclosed or discovered.

The court in Soderberg addressed the same assignment issue raised by defendants, but stopped short of definitively deciding the issue. InSoderberg, the issue was whether a claim under § 12(2) of the 1933 Securities Act could be assigned. Because rescission is the only remedy for a violation of § 12(2), the court in Soderberg had to address whether a claim for rescission could be assigned. The court commented that the sale of a security to a third party could be viewed as an act of control over the security which is inconsistent with disaffirmance of the original transaction. Soderberg, 652 F. Supp. at 565. The Court actually held, however, that the right to sue for rescission under federal securities laws almost certainly cannot be assigned." Id. at 566. The court stopped short of making a definitive ruling on the issue because the seller/assignor in that case knew about the alleged fraud prior to the sale/assignment, but continued to accept benefits under the security in the form of dividend checks. Thus, the court found that any claim for rescission had been extinguished by the seller's acceptance of benefits prior to the sale/assignment. There was, therefore, no rescission claim to assign. Id.¹⁷

17 The secondary purchasers do not allege, and defendants do not argue, that the rescission calms of the secondary purchasers' predecessors in interest had been extinguished prior to their sale/assignment to the secondary purchasers. In any event, whether the secondary purchasers' predecessors in interest accepted sufficient benefits under the securities at issue to extinguish rescission claims with regard to the securities would, under the circumstances presented by this case, be a fact question not easily resolved on a motion to dismiss.

The court in Soderberg cites Gannett Co., Inc. v. Register Publishing Co., 428 F. Supp. 818, 824-26 (D. Conn. 1977); Restatement (Second) of Contracts, § 380(2); 6A C.J.S. Assignments § 35 (1975); and 6 Am. Jur. 2d Assionments § 31 in support of its semi-holding that rescission claims are not assignable. However, Gannett and § 380 of the Restatement of Contracts simply state the affirmance rule discussed above and do not apply that rule in the context of an assignment. That is, they do not specifically address whether an assignment is itself an affirmance, The C.J.S. and Am. Jur. references simply refer to a general rule that a mere naked right to rescind a transaction is not assignable. Other C.J.S. and Am. Jur. sections, however, make clear what is meant by a "naked" right to rescind when they state that "a party to a contract cannot assign its right to rescind without also assigning the other rights and obligations of the contract." 6 Am. Jur. 2d, Assignments § 55 (1999). See also 77 Am. Jur. 2d Vendor Purchaser § 555 (1997) ("the right to sue for the rescission of a voidable sale of real property may be assigned, either by implication or by direct words, where the right is incidental to some interest in the property passing from assignor to assignee."). Thus, the authorities cited by the court inSoderberg do not compel the conclusion that rescission claims are never assignable.

As the Am. Jur. citations above indicate, several courts have recognized that a right to rescission can be assigned as long as the assignment is incidental to, or occurs in connection with, the transfer of a property right to which the claim for rescission relates. See Assignability of Right to Rescind or of Right to Return of Money or Other Property as Incident of Rescission, 110 A.L.R. 849 (1937), supplemented by 162 A.L.R. 743 (1946). See also, Schoonmaker v. Price, 181 F.2d 111, 112 (5th Cir. 1950) (where assignor was induced by fraud to purchase stock, assignee was permitted to pursue an action to rescind the original stock purchase agreement); Glenney v. Crane, 352 S.W.2d 773 (Tex.App. 1962); Flick v. Murdock, 225 P. 119, 120 (Kan. 1924); and Norwest Financial Leasing. Inc. v. Morgan Whitney, Inc., 787 F. Supp. 895, 899-900 (D. Minn. 1992). The Oklahoma Supreme Court has not directly addressed the issue, but the undersigned predicts that the Oklahoma Supreme Court would follow this same rule because it is substantially similar to the rule regarding assignability of tort actions discussed, supra, in Part II(B)(2)(b).

The rescission claims at issue in this case were all transferred or assigned to the secondary purchasers in connection with the transfer of a property right (i.e., a security) to which the claim for rescission applies. The undersigned finds, therefore, that the rescission claims at issue were assignable to the secondary purchasers as an incident to the transfer of the securities at issue. Consequently, the undersigned recommends that defendants' motions to dismiss the secondary purchasers' Oklahoma rescission claims be DENIED.

3. Other State Law Claims

Certain plaintiffs have asserted claims under the securities statutes of California, Georgia, Illinois, Iowa, Massachusetts and Pennsylvania.See RR Exhibit B. Defendants do not address the law in these states regarding the assignability of claims. Defendants have, therefore, failed to establish any basis for the dismissal of these other state law claims on standing grounds. Consequently, the undersigned recommends that their motions to dismiss for lack of standing be DENIED as to plaintiffs' other state law claims.

4. Maintenance and Champerty

Defendants argue that all of the secondary purchasers' claims should be dismissed because the assignment of these claims to the secondary purchasers violates the prohibition against maintenance and champerty. At ancient common law, maintenance was the unlawful upholding of the suit of a stranger. Champerty is a species of maintenance. At ancient common law, champerty was understood as maintenance with an agreement to divide the proceeds of the suit. See 14 C.J.S. Champerty and Maintenance § 2 (1991). There is no allegation here that the secondary purchasers and their predecessors in interest have agreed to divide the proceeds of this litigation. Defendants are, therefore, actually raising a maintenance objection. In practice, however, it has become increasingly difficult to distinguish between the two terms because they are used interchangeably by most courts. See Susan Lorde Martin, Syndicated Lawsuits: Illegal Champerty or New Business Opportunity, 30 Am. Bus. L.J. 485 (1992).

The parties have not addressed what law governs defendants' maintenance defense. Defendants have demonstrated no reason why a federal common law rule should be developed in this area.¹⁸ Plaintiffs have cited primarily Oklahoma law — the law of the forum. Absent any other showing by defendants, the undersigned finds that a federal court should look to state law to determine whether a particular contract is champterous.¹⁹ No showing has been made by either party that any law other than the law of Oklahoma should apply to defendants maintenance defense. The undersigned will, therefore, apply Oklahoma law to determine defendants' maintenance defense.

18 See O'Melveny Myers v. F.D.I.C., 512 U.S. 79 (1994); andAtherton v. F.D.I.C., 519 U.S. 213 (1997) (absent direct action by Congress, federal courts should create federal rules of decision only in those rare instances where there would be a significant conflict between some federal policy or interest and use of state law).

19 See. e.g., Martin v. Morgan Drive Away, Inc., 665 F.2d 598, 603-605 15th Cir. 1982) (in determining whether the assignment of a federal antitrust claim was champterous, court applied law of the forum state). See also Gardner v. Surnamer, 608 F. Supp. 1385, 1391 (E.D. Pa. 1985) (a securities case).

The Oklahoma Supreme Court's view of the common law champerty/maintenance doctrine can be described as nothing short of hostile.²⁰ The Oklahoma Supreme Court has noted that "the doctrine of champerty and maintenance was rooted in an English society quite different from cultural conditions now obtaining." Mitchell v. Amerada Hess Corp., 638 P.2d 441, 444 (Okla. 1981). The Oklahoma Supreme Court has also noted that there has been a "general retreat of English and American authorities from the doctrine." Id. Consequently, the Oklahoma Supreme Court has held that the champerty doctrine should be strictly limited "in light of the fact that the rationale behind such a doctrine applies so nebulously to present conditions of society." Id. at 444-445.See also Worrell v. Roxana Petroleum Corp., 291 P. 47 (1930); andTemeron. Inc. v. Ferraro Energy Corp., 861 P.2d 319, 325 (Okla.App. 1993). In light of the fact that the torts of malicious prosecution and abuse of process have been recognized in Oklahoma, the Oklahoma Supreme Court has also noted that the demise of the champerty doctrine's vitality does not leave parties without remedies for vexatious litigation.Voiles, 911 P.2d at 1211-12. Given the doctrine's limited vitality and its nebulous applicability in modern jurisprudence, the undersigned finds no basis in Oklahoma law to apply the champerty/maintenance doctrine to the secondary purchasers' claims.

20 Oklahoma has defined "maintenance" as "an officious intermeddling in a suit which in no way belongs to the intermeddler, by maintaining or assisting either party to the action, with money or otherwise, to prosecute or defendant it." Voiles v. Santa Fe Minerals. Inc., 911 P, 2d 1205. 1211 (Okla. 1996). Oklahoma has defined "champerty" as "an officious intermeddling in a suit by a stranger, by maintaining of assisting either party with money or otherwise to prosecute or defend it, and dividing the proceeds obtained in the suit between the party and the stranger." Id.

The undersigned found only one case in which an Oklahoma court applied the common law doctrine of champerty and maintenance to void a contract.See Brown v. Durham, 53 P.2d 511 (Okla. 1936). In that case, a layman and a lawyer entered into a contract with each other. Pursuant to this contract, the layman and the lawyer formed a corporation which filed suits to recover illegal taxes on behalf of taxpayers. The layman was to solicit business for the corporation and the lawyer was to prosecute the tax cases on behalf of the corporation in a court of law. The layman and the lawyer agreed to divide the corporation's profits. When the layman sued the lawyer for breach of this contract, the Oklahoma Supreme Court refused to recognize the contract between the layman and the lawyer, finding that the contract was champterous and void as against public policy. Brown is, however, distinguishable from the facts of this case. The layman in Brown had no interest in the underlying tax lawsuits, apart from his agreement with the lawyer to share in the proceeds of those suits. Here, the secondary purchasers acquired a piece of personal property (i.e., a security), and they are bringing causes of action which directly impact the value of property which they own. Thus, the secondary purchasers have a direct interest in the claims they are bringing, and they did not just acquire an interest in the proceeds of a lawsuit belonging to a third party as did the layman in Brown.

As a general rule, if a cause of action is validly assignable, its assignment is not regarded as champterous. If, however, the cause of action is of a type that it is not assignable, its assignment would be champterous. 14 Am. Jur. 2d Chamnerty. Maintenance, and Barratry § 6 (2000). As discussed above, all of the secondary purchasers obtained their claims by way of valid assignments, either express or implied. "It is generally held that apart from statute, the taking, in good faith and for a valuable consideration, of a transfer or assignment of a right of action is not champerty; and subsequent litigation for the collection of the claim . . . assigned is not maintenance." 10 C.J.S. Champerty and Maintenance § 5 (1991). There is no suggestion that the secondary purchasers did not take in good faith and for value when they obtained their securities and assignment of claims from their predecessors in interest. The assignments at issue in this case cannot, therefore, be considered champterous. See, e.g., AmeriFirst Bank v. Bomar, 757 F. Supp. 1365, 1372 (S.D. Fla. 1991) (finding that assignment of Rule 10b-5 claim was not champterous). Consequently, the undersigned recommends that defendants' motions to dismiss the secondary purchasers' claims on the grounds of champerty and maintenance be DENIED.

5. Particularity

Defendants argue that the secondary purchasers' claims must be dismissed because they fail to plead with particularity from whom they purchased their securities. The undersigned is aware of no authority which requires a party to plead standing with the type of particularity defendants demand. Rule 9(b) applies to pleading fraud, not standing. Defendants' argument could be viewed as a motion for more definite statement under Fed.R.Civ.P. 12(e). Even viewed in that light, however, the undersigned finds no merit to defendants' argument. Plaintiffs' complaints on this issue are not "so vague or ambiguous that [defendants] cannot reasonably be required to frame a responsive pleading." The clarity which defendants demand must await discovery.

C. INVESTMENT ADVISORS — CATEGORY 2

Certain plaintiffs allege that they acquired their SMART or GREAT securities through an investment advisor who was authorized to make purchases of securities on their behalf. Defendants argue that these plaintiffs lack standing to assert Rule 10b-5 claims under Blue Chip because they were not actual purchasers of the securities at issue; the investment advisor was. The undersigned does not agree. Defendants ignore the agency relationship which plaintiffs allege.

The undersigned finds persuasive the court's holding in In re Fine Host Corp. Sec. Litig., 25 F. Supp.2d 61 (D. Conn. 1998).

Under well-settled principles of agency law, one who defrauds an agent is liable to the principal. Restatement (Second) of Agency § 315. In other words, a principal may sue when it is his agent who has been defrauded. Applying that general principle of agency law to this action, plaintiffs need only allege that an agent acting on their behalf reasonably relied on the alleged misrepresentations of the defendants. Plaintiffs have met that pleading requirement.

Fine, 25 F. Supp.2d at 71-72. See also Hallman v. Nailey, 166 P. 874, 878 (Okla. 1917) (holding that "if in negotiations with such agent, a fraud is perpetrated on the agent as to the matters so intrusted to the agent, the same would be a fraud on the principal").

Defendants argue that plaintiffs have failed to allege the particulars of the relationship they had with their investment advisors. Defendants intimate that these advisors may well have been brokers who were purchasing for their own accounts and then selling to plaintiffs. If this were true, plaintiffs would then be secondary purchasers and the assignment rules discussed above in Part II(B)(1)(b)(ii), supra, would apply. The Court need not, however, resolve this dispute at the motion to dismiss stage. Plaintiffs have alleged that their investment advisors were their agents and were authorized to buy the securities on plaintiffs' behalf and not their own behalf. These allegations, if true, are sufficient to confer standing. Plaintiffs are not required to plead standing with the type of particularity defendants demand.²¹ If defendants wish to inquire regarding the relationship plaintiffs had with their alleged investment advisors, they may do so during discovery. The undersigned recommends that defendants' motions to dismiss for lack of standing those Rule 10b-5 claims asserted by plaintiffs acquiring their securities through an investment advisor be DENIED.

21 certain defendants cite Hotmar v. Lowell H. Listrom Co., 808 F.2d 1384 (10th Cir. 1987) in support of their argument that plaintiffs have not sufficiently pled an agency relationship. Hotmar is not, however, a pleadings case. Rather, it is an affirmance of a trial court's directed verdict for defendant. The trial court held, after hearing evidence, that the plaintiff had failed to show that his broker had the requisite degree of "control" over plaintiff's securities account to support a churning claim against the broker. In other words, the court found that plaintiff failed to present sufficient evidence of an agency, but says nothing about how an allegation of agency is to be pled.

D. SUBROGEES — CATEGORY 3

Certain plaintiffs allege that they have made payments pursuant to their insurance and reinsurance obligations and are subrogated to the claims of their insured. "[T]here are few doctrines better established than that a surety who pays the debt of another is entitled to all the rights of the person he paid to enforce his right to be reimbursed."Pearlman v. Reliance Ins. Co., 371 U.S. 132, 136-37 (1962). This rule is widely applied in this country and generally known as the right of subrogation. Id. "The right of subrogation is not founded on contract. It is a creature of equity; is enforced solely for the purpose of accomplishing the ends of substantial justice; and is independent of any contractual relations between the parties." Id. at 137 n, 12. See also Home Indem. Co. v. Coin, 61 P.2d 1067, 1069-70 (Okla. 1936); and Mid America Trailer Sales, Inc. v. Moorman, 576 P.2d 11 94. 1197-98 (Okla.App. 1977). The undersigned finds, therefore, that to the extent a plaintiff has been subrogated to its insured's securities fraud claims, it steps into the shoes of its insured and may assert the insured's securities fraud claims as its own. See. e.g., SIPC v. Vigman, 803 F.2d 1513, 1516 (9th Cir. 1986); and Appleton v. First Nat. Bank of Ohio, 62 F.3d 791, 794 (6th Cir. 1995) (both holding that the SIPC is subrogated to the claims of those to whom it pays federal insurance funds). See also, Musick, Peeler Garrett v. Employers Inc. of Wausau, 508 U.S. 286, 288-89 (1993) (recognizing that insurer is subrogated to Rule 10b-5 claims of its insured). Consequently, the undersigned recommends that defendants' motions to dismiss the subrogees' federal and state securities claims for lack of standing be DENIED.

E. AFFILIATES — CATEGORY 4

Certain plaintiffs allege that they are affiliates of owners or purchasers of the SMART or GREAT securities at issue. These plaintiffs are corporations whose wholly owned subsidiaries or sister corporations apparently own SMART or GREAT securities. Without more, the undersigned finds that these affiliated plaintiffs have not sufficiently alleged their standing and their claims should be dismissed.

Generally, the separate corporate status of a parent corporation and its subsidiary will be recognized. This is true even where the parent corporation owns all the shares in the subsidiary and the two enterprises share directors and officers. McKinney v. Gannett Co., Inc., 817 F.2d 659, 665-666 (10th Cir. 1987). Parent and subsidiary corporations are separate entities, having separate assets and liabilities. The parent's creditors have no claim to the Subsidiary's assets, and vice versa, A party seeking to overcome the presumption of separateness must pierce the corporate veil, or prove that the two entities should be substantively consolidated. Piercing the corporate veil in this manner is an equitable remedy applied by courts in those rare cases where the fiction of separate corporate status is being used to work an injustice. Id. at 666. Plaintiffs have, however, pled no facts which would permit the jury to ignore the legal separateness of the affiliated companies involved such that one corporation could assert the claims of another be they affiliated or not. Consequently, the undersigned recommends that defendants' motions to dismiss the affiliates' federal and state securities claims for lack of standing be GRANTED.

F. GUARANTORS — CATEGORY 5

Certain plaintiffs assert that they are guarantors of the SMART and GREAT securities at issue. Defendants argue that because these plaintiffs are not actual purchasers within the meaning of Blue Chip, they lack standing to assert Rule 10b-5 claims. From plaintiffs' allegations, it appears that these plaintiffs guaranteed a loan, the proceeds of which were used to purchase a SMART or GREAT security. The undersigned agrees with defendants and finds that a guarantor of the purchase price of a security is not an actual purchaser of a security as defined by the Supreme Court IF Blue Chip. Those plaintiffs who are, therefore, solely guarantors have no standing to assert a Rule 10b-5 claim. See generally Rayman v. Peoples Sav. Corp., 735 F. Supp. 842, 850 (N.D. Ill. 1990). Consequently, the undersigned recommends that defendants' motions to dismiss the guarantor plaintiffs' Rule 10b-5 claims for failure to properly allege standing be GRANTED.

The undersigned is aware that in Grubb the Tenth Circuit found that a guarantor had standing to assert a Rule 10b-5 claim. Grubb, 868 F.2d at 11 62. In Grubb, a Mr. Grubb formed a corporation and then guaranteed a portion of the loan that the corporation used to purchase securities. The Tenth Circuit found that the seller of the securities had made the alleged misrepresentations during direct negotiations with Mr. Grubb even before the corporation he formed to purchase the securities came into existence. The corporation Mr. Grubb formed was a shell corporation created for the sole purpose of facilitating the purchase which had already been negotiated between Mr. Grubb and the seller. The Tenth Circuit found that for all intents and purposes Mr. Grubb was the primary obligor on the money used to purchase the securities at issue. Based on these facts, the Tenth Circuit determined that Mr. Grubb was an "actual" purchaser of securities within the meaning of Blue Chip. Plaintiffs have pled no facts, similar to those which the Tenth Circuit found significant in Grubb, which would qualify a guarantor as an actual purchaser within the meaning of Blue Chip.

III. GUSTAFSON'S IMPACT ON PLAINTIFFS' CLAIMS

A. GUSTAFSON REQUIRES DISMISSAL OF PLAINTIFFS' CLAIMS UNDER § 12(a)(2) ²² OF THE 1933 SECURITIES ACT.

22 Cases typically refer to § 12 claims as either § 12(1) or § 12 (21 claims, In 1995, however, congress added another subsection to § 12. See Private Securities Litigation Reform Act of 1995. Pub.L. No. 104-67, § 105, 109 Stat. 737, 757. Section 12(1) and § 12(2) claims are now technically § 12(a)(1) and § 12(a)(2) claimsMaher v. Durango Metals, Inc., 144 F.3d 1302, 1303 n. 1 (10th Cir. 1998).

Section 12(a)(2) of the Securities Act of 1933 provides the purchaser of a security with a cause of action for rescission where the seller sells the security "by means of a prospectus or oral communication" which contains a material misstatement or omission. 15 U.S.C. § 771(a)(2). The question presented by defendants' motions to dismiss is whether the SMART or GREAT securities at issue in this case were sold "by means of a prospectus or oral communication." The undersigned finds that they were not sold "by means of a prospectus or oral communication," as that term has been defined by the United States Supreme Court in Gustafson v. Alloyd Co., Inc., 513 U.S. 561 (1995). Consequently, the undersigned recommends that plaintiffs' claims under § 12(a)(2) of the 1933 Act be dismissed for failure to state a claim upon which relief can be granted. See Fed.R.Civ.P. 12(b)(6).

A brief outline of the 1933 Securities Act will be helpful in resolving the § 12(a)(2) issue raised by defendants.

Section 2 defines terms used in the Act, including "prospectus," which is defined in § 2(a)(10). See 15 U.S.C. § 77b(a)(10),

Section 3 defines certain classes of securities which are exempt from all provisions of the Act (e.g., securities issued by the United States, securities issued by charitable organizations, etc.). 15 U.S.C. § 77c.

Section 4 defines certain transactions which are exempted from the Act's registration requirements (e.g., private transactions and transactions by individuals who are not issuers, underwriters or dealers), 15 U.S.C. § 77d.

Section 5 requires the filing of a registration statement with the SEC before a security can be sold, unless one of the exemptions in § 4 applies. 15 U.S.C. § 77e.

Section 7 specifies what information must be in a § 5 registration statement. 15 U.S.C. § 77g.

Section 10 defines the information required to be in a prospectus. 15 U.S.C. § 77j.

Section 11 imposes civil liability for false statements or material omissions in § 5 registration statements. 15 U.S.C. § 77k.

Section 12(a)(1) imposes civil liability for a failure to comply with § 5's registration statement requirements. 15 U.S.C. § 771(a)(1).

Section 12(a)(2) imposes civil liability for false statements or material omissions in prospectuses. 15 U.S.C. § 771(a)(2).

In Gustafson a majority of the United States Supreme Court (in a 5-4 decision) held that a "prospectus" is a document which relates to a public offering of securities by an issuer, and which contains the information required to be in a § 5 registration statement. A document is not a "prospectus" if, but for the exclusion of certain classes of securities by § 3, the document would not have to comply with § 10 of the 1933 Act, which defines the required content of prospectuses. The Supreme Court has, therefore, limited § 12(a)(2)'s applicability to transactions which must be registered under § 5 of the 1933 Act, or transactions in which a registration would have been required but for a § 3 exemption. Gustafson, 513 U.S. at 568-84. See also, Schwartz v. Celestial Seasonings, Inc., 178 F.R.D. 545, 554-557 (D. Co. 1998) (reading Gustafson in the same manner, while finding that its holding did not apply in a § 11 case).

The undersigned's reading of Gustafson is confirmed by two Tenth Circuit opinions. Perry v. Robinson, No. 96-6027, 1996 WL 606380 (10th Cir. Oct. 23, 1996); and Sheldon v. Vermonty, No. 99-3202, 2000 WL 1774038 (10th Cir. Dec. 4, 2000). The panel in Sheldon stated that the Supreme Court "indicated in dicta that only purchasers in the initial public offering could bring suit pursuant to section 12(2)." Sheldon, 2000 WL 1774038, at *3 (citing Joseph v. Wiles, 223 F.3d 1155, 1160-61 (10th Cir. 2000)). Applying this rule, the court went on to consider whether the issuance of stock in connection with a merger of two corporations amounted to an initial public offering. The Tenth Circuit reversed the district judge's Rule 12(b)(6) dismissal because it felt that, with additional factual development, plaintiff might be able to allege that the merger "actually resulted in an initial public offering of stock."Id.

The panel in Perry held as follows:

[T]he Supreme Court has recently clarified that, because actions under § 12(2) lie only when sellers of securities have made material misstatements or omissions "by means of a prospectus," such actions are limited to fraud in the sale of securities sold through public offerings. Gustafson v. Alloyd Co., 115 S.Ct. 1061, 1071 (1995). Because plaintiffs present no evidence that the securities here were part of a public offering . . . . the grant of summary judgment in favor of defendants on this claim was correct.

Perry, 1996 WL 606380, at *1. Sheldon and Perry confirm that the Tenth Circuit currently reads Gustafson as limiting liability under § 12(a)(2) to transactions involving a public offering of securities.²³

23 See also Maldonado v. Dominguez, 137 F.3d 1, 8 (5th Cir. 1998) (holding that "the Supreme Court conclusively decided that section 12(2) applies exclusively to 'initial public offerings'"); Whirlpool Financial Corp. v. GN Holdings, Inc., 67 F.3d 605, 609 n. 2 (7th Cir. 1995) (recognizing that "the Supreme Court held that a 'prospectus' for § 12(2) purposes includes only public offerings by issuers or their controlling shareholders," and dismissing a § 12(a)(2) claim because the case did not involve a "public offering"); and Glamorgan Coal Corp. v. Ratner's Group PLC, No. 93-Civ-7581, 1995 WL 4061 67, at *2-3 (S.D.N.Y. July 10, 1995) (citing several district court cases).

The Supreme Court's decision in Gustafson to limit § 12(a)(2) liability to transactions involving public offerings makes sense in light of the remedy which Congress provided for a violation of § 12. Section 12(a)(2) allows those who purchase securities sold "by means of a prospectus or oral communication" which contains a material misstatement or omission to rescind the purchase and recover the full purchase price without any proof of scienter by the seller or reliance by the buyer.Wertheim Co. v. Codding Embryological Sciences. Inc., 620 F.2d 764, 767 (10th Cir. 1980); Gilbert v. Nixon, 429 E.2d 348, 357 (10th Cir, 1970). The House Report accompanying the bill which eventually became the 1933 Act states as follows: "The statements for which parties are held liable under section 12(2), although they may never actually have been seen by the prospective purchaser, because of their wide dissemination, determine the market price of the security . . . ." H.R. Rep. No. 85, 73rd Cong., 1st Sess. 10, 1933 WL 983 (1933). "The absence of a reliance requirement in section 12(2) thus supports the view that the term 'prospectus' should be limited to documents held out to the public. Only for these documents does section 12(2)'s presumption of reliance through impact on the market price make sense." Peter V. Letsou, The Scope of Section 12(2) of the Securities Act of 1933: A Legal and Economic Analysis, 45 Emory L.J. 95, 116-17 (1996). See also ESI Montgomery County, Inc. v. Montenay Int'l Corp., 899 F. Supp. 1061, 1064-65 (S.D.N.Y. 1995) (recognizing that "it was only by distinguishing between public and private transactions that Congress was able to impose liability without regard to fraud or reliance").

As Judge Larimer observed in Vannest v. Sage, Rutty Co., Inc., 960 F. Supp. 651 (W.D.N.Y. 1997), the Supreme Court's decision inGustafson has been criticized for making a complex area of law even more confusing. Id. at 654 (citing several law review articles). The Supreme Court's simple conclusion that § 12(a)(2) applies only to public offerings does not make the process of determining what is and is not a public offering any simpler. The majority in Gustafson seems to equate public offerings with those that must be registered under § 5. However, not all public offerings must be registered. See 15 U.S.C. § 77c (Section 3). Nevertheless, since Gustafson, a majority of the courts addressing the issue have determined that offerings made pursuant to a private placement memorandum, as in this case, are not public. Vannest, 960 F. Supp. at 654 (citing several cases). The undersigned agrees with this line of authority.²⁴

24 See also Glamorgan Coal, No. 93-CIV-7651, 1995 WL 406167. at *2-3 (a 275 page private placement memorandum in an unregistered offering did not qualify as a prospectus); ESI, 899 F. Supp. at 1064-65 (same); and In re JWP Inc. Securities Litigation. 928 F. Supp. 1239. 1259 (S.D.N.Y. 1996).

The undersigned's conclusion that the SMART and GREAT offerings at issue in this case were not public offerings within the meaning ofGustafson is confirmed by the Supreme Court's holding in SEC v. Ralston Purina Co., 346 U.S. 119 (1953). Section 4(2) of the 1933 Act exempts from § 5's registration requirements all "transactions by an issuer not involving any public offering." 15 U.S.C. § 77d. In Ralston Purina, Ralston Purina offered unregistered stock to its key employees. Ralston Purina believed it was operating under § 4's private offering exemption. The SEC, however, believed the offering was a public offering. The SEC sued Ralston Purina, seeking to enjoin Ralston Purina's sale of unregistered securities. The case made its way to the Supreme Court and the Supreme Court granted certiorari to define the scope of § 4's private offering exemption. Ralston Purina, 346 U.S. at 120.

Ralston Purina argued that it offered its securities to about 500 employees a year. Ralston Purina defined these employees as "key" employees who were eligible for promotion, ambitious, leaders in areas of high responsibility, or who were sympathetic to management. Ralston Purina, 346 U.S. at 121-22. A majority of the employees to whom the offer was made were already Ralston Purina stockholders at the time of the offer. Id. at 124. To determine whether this type of offering was private or public, the Supreme Court began by looking at § 4's legislative history, and determined that it compelled a conclusion that "private" transactions are those where there is no practical need for the 1933 Act's protections, or where the public benefits from the Act's application would be too remote. Id. at 122. The Court then focused on the design of the 1933 Act, finding that it was designed to promote "full disclosure of information thought necessary to informed investment decisions." Id. at 124. Based on the Act's history and structure, the Court held that an offering "to those who are shown to be able to fend for themselves is a transaction 'not involving any public offering.'"Id. at 125. To fend for one's self in the Court's vernacular means that the offeree has access to the same kind of information that the 1933 Act would require in a § 5 registration statement. Because Ralston Purina had not shown that its "key" employees had access to the same kind of information registration would have disclosed, the Court found that the transaction at issue was public and subject to § 5's registration requirements. Id. at 126-27. It is notable that during its analysis, the Court refused to judge the publicness of a securities offering simply by looking at the number of offerees. Id. at 125.

Following the Supreme Court's lead in Ralston Purina, the Tenth Circuit has held that an offering is private only if limited to investors who have no need for the protection provided by registration. United States v. Arutunoff, 1 F.3d 111 2, 1118 (10th Cir. 1993). The Tenth Circuit has held that to determine if an offering is public or private, courts should focus on the following factors: (1) the number of offerees; (2) the sophistication of the offerees, including their access to the type of information that would be contained in a registration statement; and (3) the manner of the offering. Id. Thus, a placement of stock is private if it is offered to a relatively small number of sophisticated purchasers who are able to command access to information from the issuer that would otherwise be contained in a registration statement. The test is not a simple numerical test focused on the number of offerees. Instead, the court must weigh the facts of each case carefully to determine whether the offerees need the protection of the 1933 Act. Moldanado, 137 F.3d at 8. See also, Lively v. Hirschfeld, 440 F.2d 631, 632 (10th Cir. 1953); and Andrews v. Blue, 489 F.2d 367, 373-74 (10th Cir. 1973).

There are no allegations in plaintiffs' complaints regarding the number of offerees of the SMART and GREAT securities, and there are currently less than 300 named plaintiffs involved in this litigation. As the plaintiffs admit, the SMART and GREAT securities at issue were marketed primarily to large, sophisticated financial institutions with large securities portfolios and expertise. It is also evident from the complaints before the Court that plaintiffs had access to a large amount of information about CFS which would ordinarily have been in a § 5 registration statement, and there are no allegations to the contrary. The private placement memoranda at issue all expressly and repeatedly state that the SMART and GREAT offerings are not subject to the Act's registration requirements. The drafters of these memoranda clearly contemplated a private offering, and they characterized the offering as such in the very title of the offering document. Plaintiffs have not asserted any § 12(a)(1) claims for registration violations based on the alleged public nature of the transactions at issue. At most, plaintiffs argue that the transactions at issue were "public style" private transactions. In short, the undersigned finds that plaintiffs have failed to allege facts which, if true, would demonstrate that the SMART and GREAT transactions were public transactions within the meaning of Gustafson, Ralston Purina and Arutunoff. See ESI 899 F. Supp. at 1065; and Vannest, 960 F. Supp. at 654 (both applying a similar analysis and dismissing § 12(a)(2) claims).

Plaintiffs rely on Sloane Overseas Fund. Ltd. v. Sapiens International Corp., 941 F. Supp. 1369 (S.D.N.Y. 1996) for the proposition that the private placement memoranda in this case qualify as "prospectuses" for purposes of Gustafson. The undersigned finds no support in Sloane for plaintiffs' argument. Initially, it must be pointed out that the Supreme Court's focus in Gustafson was primarily on the nature of the transaction at issue (public verus private) and not on the nature of the particular document at issue, although a prospectus must contain at least that information which would be in a registration statement. It is true that in Sloane the Court had before it a document (i.e., an "offering circular") which functioned in a very similar manner to the private placement memoranda at issue in this case. It was, however, undisputed n Sloane that the transactions at issue were public. Unlike in this case, the defendants in Sloane never argued that the offering "was private, or was only made to people who do not 'need the protection of the Act.'"Id. at 1376-77. The court found, therefore, that the offering was public. Thus, in Sloane there was a public offering and a document related to that public offering which had the same information in it that a registration statement would have had. According to Gustafson, § 12(a)(2) liability can attach to misstatements or omissions in such a document no matter what name is given to the document. In this case, however, plaintiffs have alleged no facts which, if taken as true, would establish a public offering of SMART and GREAT securities within the meaning of Ralston Purina or Arutunoff.²⁵

25 The undersigned also finds unpersuasive Fisk v. Superannuities, Inc., 927 F. Supp. 718 (S.D.N.Y. 1996). cited by plaintiffs. Fisk involved a private placement memorandum similar to that at issue in this case, which was on its face designed to bring the offering within § 4(2)'s private offering exemption to registration. Id, at 730. The plaintiff in Fisk asserted a § 12(a)(2) claim based on misstatements in the private placement memorandum, and, on a motion to dismiss, he argued that based on the limited information available to him at the motion to dismiss stage, he had serious questions about "whether the offering was a bona fide private placement," Id. The plaintiff in Fisk alleged that he had reviewed a shareholder list and identified purchasers who he believed would not qualify as the sort of private investors defined in Ralston Purina. Id. Based on plaintiffs' allegations, the court denied the motion to dismiss, finding that plaintiff might be able to prevail if his allegations were true. Id. at 731. In this case, plaintiffs have not alleged that defendants offered the SMART and GREAT securities to the public or to persons who need the protections of the 1933 Act Fisk is therefore, distinguishable.

For the reasons discussed above, the undersigned recommends that defendants' motions to dismiss plaintiffs' claims under § 12(a)(2) of the 1933 Securities Act be GRANTED for failure to state a claim upon which relief can be granted. See Fed.R.Civ.P. 12(b)(6).

B. GUSTAFSON DOES NOT REQUIRE DISMISSAL OF PLAINTIFFS' CLAIMS UNDER § 408 OF THE OKLAHOMA SECURITIES ACT.

Defendants argue that § 408(a)(2) of the Oklahoma Securities Act should be limited to public offerings in the same way that the United States Supreme Court limited § 12(a)(2) of the 1933 Securities Act to public offerings in Gustafson. Defendants argue that the Supreme Court's holding in Gustafson must be applied to plaintiffs' § 408 claims because (1) the Oklahoma Supreme Court has held that § 408(a)(2) is the "corollary" to § 12(a)(2) of the 1933 Securities Act,²⁶ (2) the Tenth Circuit has held that "the language of § 408(a)(2) is substantially similar to the language of section 12(2) of the Federal Securities Act of 1933,²⁷ and (3) § 501 of the Oklahoma Securities Act provides that the act 'shall be so construed . . . to coordinate the interpretation and administration of [the act] with the related federal regulation."²⁸ For the reasons articulated by the Texas Court of Appeals in Anheuser-Busch Companies Inc. v. Summit Coffee Co. 934 S.W.2d 705 (Tex.Ct.App. 1996), the undersigned disagrees with defendants' argument and finds that Gustafson does not apply to § 408 of the Oklahoma Securities Act.

26 Southwestern Oklahoma Development Authority v. Sullivan Engine works, Inc., 910 P.2d 1052, 1059 (Okla. 1996). Prior to Sullivan, the United State's Supreme court held in Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994) that the private right of action implied by the federal courts under § 10(b) of the 1934 Securities Act did not extend to persons alleged to have aided or abetted a violation of § 10(b). In Sullivan, the Oklahoma Supreme court had to decide whether central Bank's holding should be applied to § 408 of the Oklahoma Securities Act. The Oklahoma Supreme court held thatCentral Bank did not apply to § 408 because § 408, unlike § 10(b) of the 1934 Securities Act, provided textual support for aider and abetter liability. The Oklahoma Supreme Court also noted in passing that Central Bank dealt with liability under § 10(b) of the 1934 Securities Act, but that § 12 of the 1933 Securities Act, and not § 10(b), was the federal corollary to § 408.

27 MidAmerica Fed. Sav and Loan Assoc. v. Shearson/American Express Inc., 886 F.2d 1249, 1255 n. 3 (10th Cir. 1989).

28 71 Okla. Stat. § 501[ 71-501], See. e.g., Buford white Lumber Co. Profit Sharin and Sav. Plan Trust v. Octagon Properties. Ltd., 740 F. Supp. 1553, 1569 (W.D. Okla. 1989).

A "familiar canon of statutory construction is that the starting point for interpreting a statute is the language of the statute itself. Absent a clearly expressed legislative intention to the contrary, that language must ordinarily be regarded as conclusive." Consumer Prod. Safety Comm'n v. GTE Sylvania Inc., 447 U.S. 102, 108 (1980). See also, Owen v. Magaw, 122 F.3d 1350, 1354 n. 1 (10th Cir. 1997). The Court must begin its analysis of § 408 with the language of the statute itself. If this language is materially different from the relevant federal securities statute, the Court must base its interpretation on the actual language used by the Oklahoma Legislature, regardless of whether the federal statute is seen as a corollary²⁹ to the Oklahoma statute. The Oklahoma Legislature did intend for courts to "coordinate" the interpretation of the Oklahoma Securities Act and the federal securities statutes, but the Oklahoma Legislature could not have intended for courts to ignore the plain language of the provisions it enacted, especially in those instances where the language in the Oklahoma Securities Act is materially different than that in the relevant federal securities statute.

29 A closer reading of § 408(a)(2) establishes that it is actually a hybrid of § 10(b) of the 1934 Securities Act and § 12(a)(2) of the 1933 Securities Act. Section 408(a)(2) is like § 10(b) in that it applies to all transactions, public or private, registered or exempt. On the other hand, § 408(a)(2) is like § 12(a)(2) in that the plaintiff does not have to prove scienter or reliance.

Section 408(a)(2) of the Oklahoma Securities Act is substantially similar to § 12(a)(2) of the 1933 Securities Act. However, § 408 is not limited to statements made "by means of a prospectus." Section 408 lacks the critical language "by means of a prospectus" which is present in § 12(a)(2). This is the language to which the United States Supreme Court attached so much significance in Gustafson. Section 408 replaces "by means of a prospectus" with "by means of any untrue statement of a material fact." It was the use of the term "prospectus" in § 12(a)(2) which caused the United States Supreme Court to limit liability under that section to public offerings. Section 408, on the other hand, applies to any offer or sale of a security by means of any materially false or misleading statement. The language in § 408 is very broad, and there is no indication, by the use of the term prospectus or otherwise, that it should be limited to initial public offerings as defendants argue. The official comments to the Uniform Securities Act section from which § 408 was derived state that the section applies regardless of whether the security is registered, exempted, or sold in violation of the registration requirements. 1956 Uniform Securities Act, 7B Uniform Laws Annotated, § 410(a)(2), Official Comments.

Section 408 is the only remedies provision in the Oklahoma Securities Act. It makes sense, therefore, that § 408 would apply to every securities transaction. Limiting § 408(a)(2) in the same manner the Supreme Court limited § 12(a)(2) in Gustafson would mean that the Oklahoma Securities Act would only contain a remedies provision for registered public offerings. Under defendants' interpretation, the Oklahoma Securities Act would contain no remedies provision for private transactions. There is nothing in the language or history of the Oklahoma Securities Act which suggests that the Oklahoma Legislature intended such a result. By limiting § 12(a)(2), the Supreme Court did not foreclose all federal remedies for fraud in private transactions — § 10(b) provides a remedy for fraud in private securities transactions. The undersigned recommends that the Court reject defendants' argument that all remedies for fraud under the Oklahoma Securities Act be foreclosed in private securities transactions.

Texas has adopted portions of the Uniform Securities Act, including the section which has been codified in Oklahoma as § 408. The Texas Court of Appeals was confronted by the same issue raised by defendants in this case: Does Gustafson apply to the Uniform Securities Act's civil liability provision? The Texas court refused to apply Gustafson to its version of § 408 because its version, like Oklahoma's, lacked the critical "prospectus" language which so informed the United States Supreme Court's decision in Gustafson. Anheuser-Busch, 934 S.W.2d at 707-708. The undersigned recommends that the Court followAnheuser-Busch's lead and refuse to apply Gustafson's construction of § 12(a)(2) of the 1933 Securities Act to § 408(a)(2) of the Oklahoma Securities Act. Consequently, the undersigned recommends that defendants' motions to dismiss be DENIED to the extent they seek dismissal of plaintiffs' § 408(a)(2) claims for failure to allege that the SMART and GREAT securities were offered in a public transaction.

IV. APPLICABLE PLEADING STANDARDS

A. INTRODUCTION

Dismissal pursuant to Fed.R.Civ.P. 12(b)(6) is appropriate only if plaintiffs can prove no set of facts which would entitle them to the relief they have requested. Grossman v. Novell, Inc., 120 F.3d 1112, 1118 (10th Cir. 1997). In considering defendants' motions to dismiss, the Court must accept as true all of the plaintiffs' well-pled factual allegations and view them in a light most favorable to plaintiffs. Maez v. Mountain States Tel. Tel., Inc., 54 F.3d 1488, 1496 (10th Cir. 1995). Dismissal is not appropriate merely because the Court disbelieves the complaints' factual allegations. Neitzke v. Williams, 490 U.S. 319, 327 (1989). Although the fact-specific inquiries common to securities cases generally preclude dismissal, the Court must grant a defendant's Rule 12(b)(6) motion if the complaint fails to comply with the pleading requirements of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub.L. No. 104-67, 109 Stat. 737, 758 (codified in large measure at 15 U.S.C. § 78u-4) or Fed.R.Civ.P. 9(b).

B. FED. R. CIV. P. 8(a) AND 9(b)

Absent some rule or statute requiring otherwise, a plaintiff's complaint need only contain "a short and plain statement of the claim showing that the [plaintiff] is entitled to relief." Fed.R.Civ.P. 8(a)(2). See Leatherman v. Tarrant County Narcotics Intelligence Coordination Unit, 507 U.S. 163, 168 (1993). Plaintiffs have asserted federal securities claims under § § 10(b) and 20 of the 1934 Securities Act, state securities claims, common law fraud claims, and negligence claims. Defendants have not argued that any special pleading rules apply to heighten Rule 8's pleading requirement as to plaintiffs' negligence claims. However, as to all other claims, defendants argue that Rule 8's pleading standard is heightened by Fed.R.Civ.P. 9(b) and the PSLRA.

Rule 9(b) of the Federal Rules of Civil Procedure provides as follows:

In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.

Fed.R.Civ.P. 9(b). Rule 9(b) applies to federal securities claims.Grossman, 120 F.3d at 1124. From its plain language, Rule 9(b)'s particularity requirement also applies to plaintiffs' common law fraud claims (i.e., fraud, deceit, constructive fraud and conspiracy to commit fraud). See 2 Thomas Lee Hazen, The Law of Securities Litigation, § 13.8.1, p. 591-94 (1995 2000 Supp.) (citing numerous cases in support of the proposition that Rule 9(b)'s particularity requirement "applies to Rule 10b-5 claims, as well as to any other securities claim sounding in fraud.").

The first sentence of Rule 9(b) requires that the "circumstances" constituting an alleged fraud be pled with particularity, while the second sentence of Rule 9(b) permits a "condition of the mind" like malice to be alleged generally. It has been universally held that the first sentence of Rule 9(b) "requires that to state a claim for securities fraud, '[t]he plaintiff must set forth what is false or misleading about a statement, and why it is false. In other words, the plaintiff must set forth an explanation as to why the statement or omission complained of was false or misleading.'" Grossman, 120 F.3d at 1124 (quoting In re GlenFed Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994) ( en banc). This has traditionally been referred to as "who, what, when and where" pleading. See DiLeo v. Ernst Young, 901 F.2d 624, 627 (7th Cir. 1990).

Prior to passage of the PSLRA in 1995, there was a split among the circuits as to how Rule 9(b) should be applied to the scienter element of § 10(b) claims. The split developed as some circuits emphasized the first sentence of Rule 9(b), while others emphasized the second sentence of Rule 9(b). In particular, the Second Circuit, the lodestar in the development of securities jurisprudence given that the nation's largest securities exchanges are within its jurisdiction, held that Rule 9(b) required a plaintiff to allege specific facts creating a "strong inference" of the requisite scienter. San Leandro Emergency Med. Plan v. Philip Morris, 75 F.3d 801, 812 (2nd Cir. 1996); Connecticut Nat. Bank v. Fluor Corp., 808 F.2d 957, 961-62 (2nd Cir. 1987). The Ninth Circuit in an en banc decision rejected the Second Circuit's "strong inference" requirement as inconsistent with the second sentence of Rule 9(b). The Ninth Circuit held that Rule 9(b) does not require any particularity in connection with an averment of scienter: "plaintiffs may aver scienter generally, just as the rule states . . . simply by saying that scienter existed." In re GlenFed, Inc. Securities Litigation, 42 F.3d 1541. 1545-47 (9th Cir. 1994) ( banc). The Tenth Circuit followed the Ninth Circuit's approach. Phelps v. Wichita Eagle-Beacon, 886 F.2d 1262, 1270 (10th Cir. 1989).³⁰

30 As to plaintiffs' state securities claims and common law fraud claims, plaintiffs are not required to aver scienter with any particularity. As will be discussed below, the second sentence of Rule 9(b) was altered by the PSLRA only for claims arising under chapter 2B of Title 15 of the United States Code (i.e., claims arising under §§ 78a to 78mm, like a § 10(b) claim which arises under § 78j). Plaintiffs' state securities claims and common law fraud claims do not arise under Chapter 2B of Title 15. The PSLRA's heightened pleading standard for scienter does not, therefore, apply to plaintiffs' state securities claims or common law fraud claims. Thus, the Tenth Circuit's interpretation of the second sentence of Rule 9(b) in Phelps applies, and permits plaintiffs to aver scienter generally with regard to their state securities claims and common law fraud claims. See also Schwartz v. Celestial Seasonings Inc., 124 F.3d 1246, 1252 10th Cir. 1997); and 12 Okla. Stat. § 2009[ 12-2009](B).

It was against this backdrop that Congress enacted the PSLRA in 1995. Section 21(D)(b) of the PSLRA provides as follows:

(b) Requirements for securities fraud actions

(1) Misleading statements and omissions

In any private action arising under this chapter in which the plaintiff alleges that the defendant —

(A) made an untrue statement of a material fact; or

(B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading;

the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.

(2) Required state of mind

In any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.

15 U.S.C. § 78u-4(b).

Subsection b(1) of § 78u-4 is a refinement of the first sentence of Rule 9(b), and it requires that a complaint alleging securities fraud specify each false or misleading statement on which the claim is based, and the reasons why each statement is false or misleading. If these allegations are made on "information and belief," the complaint must also state with particularity the facts which form the basis for the belief. Subsection b(2) modifies the second sentence of Rule 9(b) for securities fraud cases. No longer is a general averment of scienter permitted. If scienter is a required element of a securities fraud claim under Chapter 2B of Title 15 of the United States Code, a complaint attempting to plead such a claim must state "with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2).

C. THE REQUIRED STATE OF MIND (SCIENTER)

As has been previously discussed, a private right of action has been implied for violations of § 10(b) of the 1934 Securities Act. InErnst Ernst v. Hochfelder, decided prior to enactment of the PSLRA, the United States Supreme Court addressed the state of mind required for the private right of action implied under § 10(b) and Rule 10b-5. The main issue in Ernst Ernst was whether negligence was a sufficiently culpable state of mind to impose liability under § 10(b) of the 1934 Act. The Supreme Court held that it was not. Ernst Ernst v. Hochfelder, 425 U.S. 185, 194 (1976). The Supreme Court held that scienter was required and that scienter "refers to a mental state embracing intent to deceive, manipulate, or defraud." Id. at n. 1. The Supreme Court refused to decide whether recklessness was a sufficient level of scienter to impose liability under § 10(b). The Court noted, however, that "[u]ncertain areas of the law recklessness is considered to be a form of intentional conduct for purposes of imposing liability for some act."Id.

In the wake of Ernst Ernst, the federal circuit courts of appeal, beginning with the Seventh Circuit in Sundstrand Corp. v. Sun Chem. Corp., unanimously held that recklessness is sufficient to establish the scienter requirement imposed by the Supreme Court in Ernst Ernst for § 10(b) claims³¹ The following definition of recklessness, articulated by the Seventh Circuit in Sundstrand, became the generally accepted definition of recklessness in securities litigation: "Reckless conduct may be defined as a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it." Sundstrand, 553 F.2d at 1045. This is the recklessness standard the Tenth Circuit adopted.³² Mere carelessness is not enough. Recklessness is something more than just a heightened form of negligence; it is different in kind. Recklessness requires a conscious state of mind approximating actual intent.

31 See Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569-70 (9th Cir. 1990); In re Phillips Petroleum Sec. Litig., 881 F.2d 1236, 1244 (3d Cir. 1989); Van Dyke v. Coburn Enter. Inc., 873 F.2d 1094, 1100 (8th Cir. 1989); McDonald v. Alan Bush Brokerage Co., 863 F.2d 809, 814 (11th Cir. 1989); Heckbart v. Holmes, 675 F.2d 1114, 1117-18 (10th Cir. 1982);Broad v. Rockwell Intl Corp., 642 F.2d 929, 961-62 (5th Cir. 1981) (en banc); Mansbach v. Prescott, Ball Turben, 598 F.2d 1017, 1023-24 (6th Cir. 19791; Cook v. Avien, Inc., 573 F.2d 685, 692 (1st Cir. 1978): Rolf v. Byth Eastman Dillon Co., 570 F.2d 38, 47 (2d Cir. 1978); andSundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1044 (7th Cir. 1977). See generally In re Baesa Securities Litigation, 969 F. Supp. 238 241 (S.D.N.Y. 1997).

32 See Hackbart v. Holmes, 675 F.2d 2114, 1117 (10th Cir. 1982);Anixter v. Home-Stake-Products Company, 77 F.3d 1215 (10th Cir. 1996);O'Connor v. R.F. Lafferty Co., 965 F.2d 893, 899 (10th Cir. 1992); andC.E Carlson, Inc. v. SEC, 897 F.2d 1429, 1435 (10th Cir. 1988).

The Second Circuit added its own twist to the pleading of scienter in § 10(b) claims after Ernst Ernst. As discussed above, the Second Circuit had interpreted Rule 9(b) to require the pleading of facts that give rise to a "strong inference" of scienter. While this standard seems harsh at first blush, the Second Circuit recognized two distinct ways in which a plaintiff could plead scienter without direct knowledge of the defendants state of mind, which is almost never available. The first approach recognized by the Second Circuit allowed plaintiffs to allege facts establishing a motive to commit fraud and an opportunity to do so. The second approach recognized by the Second Circuit allowed plaintiffs to allege facts constituting circumstantial evidence of either reckless or conscious behavior. The Second Circuit held that allegations complying with either approach created a "strong inference" of scienter. See, e.g., Shields v. Citytrust Bankcorp, Inc., 25 F.3d 1124, 1128 (2nd Cir. 1994); and In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 268-71 (2nd Cir. 1993).

Since the passage of the PSLRA, two issues have sharply divided the federal circuit courts of appeal. The two issues are whether the PSLRA heightened the standard for scienter above the pre-enactment recklessness standard articulated in

Sundstrand, and whether the PSLRA adopts or leaves in place the Second Circuit's pre-enactment holding that allegations of motive and opportunity are alone sufficient to establish a "strong inference" of scienter.

The remainder of this Part IV(C) was written prior to the Tenth Circuit's recent decision in City of Philadelphia v. Fleming Companies, Inc., 264 F.3d 1245 (10th Cir. 2001). The following analysis is, however, directly supported and affirmed by the Tenth Circuit's decision in Fleming. In particular, the Tenth Circuit held in Fleming that the PSLRA did not heighten the pre-enactment recklessness standard used in the Tenth Circuit. Id. at 1259. Also, the Tenth Circuit held that motive and opportunity allegations are not alone sufficient to create a strong inference of scienter. Id. at 1261-63. The plaintiffs' allegations must be examined in their entirety to determine whether, taken as a whole, they give rise to a strong inference of scienter. Id. at 1263.

1. The PSLRA Did Not Alter the Level of Scienter Required for Claims Under § 10(b) of the 1934 Securities Act.

The Ninth Circuit's post-PSLRA decision in Silicon Graphics is often cited by commentators as interpreting the PSLRA to raise the pre-PSLRA recklessness standard from mere or simple recklessness to deliberate recklessness.³³ In re Silicon Graphics Inc. Securities Litigation, 183 F.3d 970 (1999). The undersigned agrees that the Ninth Circuit appears to have raised the substantive level of recklessness required to establish a § 10(b) claim from that articulated in Sundstrand to "deliberate recklessness," which cannot be easily distinguished from actual intent. The undersigned disagrees with the commentators, however, that the Ninth Circuit raised the substantive level of scienter because of language in the PSLRA. Rather, the Ninth Circuit reexamined its prior holdings in light of Ernst Ernst and Sundstrand and determined that the Supreme Court's decision in Ernst Ernst required something more than mere recklessness to establish scienter for a § 10(b) claim. According to the Ninth Circuit, "recklessness in the § 10(b) context is, in the words of the Supreme Court, a form of intentional conduct."Silicon Graphics, 183 F.3d at 977. After its re-analysis, the Ninth Circuit was convinced that the Supreme Court would recognize recklessness as an appropriate level of scienter under § 10(b) only "to the extent that it reflects some degree of intentional or conscious misconduct."Id. The court then coined the phrase "deliberate recklessness" as a short-hand reference describing this level of scienter. Id. That Ernst Ernst, and not the PSLRA, provides the rationale for the Ninth Circuit's adoption of a deliberate recklessness standard is confirmed by the Ninth Circuit's statement after Silicon Graphics that "the PSLRA did not alter the substantive requirements for scienter under § 10(b) . . . ."Howard v. Everex Systems. Inc., 228 F.3d 1057, 1064 (9th Cir. 2000).

33 See, e.g., Nicole M. Briski, Pleading Scienter Under The Private Securities Litigation Reform Act of 1995: Did Congress Eliminate Recklessness. Motive and Opportunity, 32 Loy. U. Chi. L.J. 155, 172-73 (2000); Bradley R. Aronstam, The Private Securities Litigation Reform Act of 1995's Paradigm of Ambiguity: A circuit Split Ripe for Certiorari, 28 Hofstra L. Rev. 1061, 1075-77 (2000); Kim Ferchau, The circuits Divide: Pleading Scienter Under The Private Securities Litigation Reform Act of 1995, 31 U. Tol. L. Rev. 449, 454-55 (2000); Eugene P. Caiola, Retroactive Legislative History: Scienter Under the Uniform Security Litigation Standards Act of 1998, 64 Alb. L. Rev. 309, 331-34 (2000); and Scott H. Moss, Private Securities Litigation Reform Act: The Scienter Debacle, 30 Seton Hall L. Rev. 1279, 1296-1302 (2000).

The PSLRA, quoted supra at Part IV(A), did not modify the substantive level of scienter required to establish a § 10(b) claim. The level of scienter required to state a § 10(b) claim must be distinguished from the level of particularity required to plead scienter. The PSLRA addresses itself to the latter issue, not the former. Specifically, the PSLRA states that when scienter is an element of a claim under Chapter 2B of Title 15 of the United States Code, the pleader must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). Nothing in the PSLRA defines the "required state of mind." For that reason, the Ninth Circuit, and all of the other circuits which have addressed the issue have looked to their pre-PSLRA definitions of scienter for § 10(b) claims.³⁴

34 See Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999);Press v. chemical Investment Services Corp., 166 F.3d 529 (2nd Cir. 1999); In re Advanta Corp. Securities Litigation, 180 F.3d 525 (3rd Cir. 1999); Phillips v. LCI Intern., Inc., 190 F.3d 609 (4th Cir. 1999);Williams v. WMX Technologies, Inc., 112 F.3d 175 (5th Cir. 1997); In re Comshare Inc. Securities Litigation, 183 F.3d 542 (6th Cir. 1999); In re Silicon Graphics Inc. Securities Litigation, 183 F.3d 970 (9th Cir. 1999); and Bryant v. Avado Brands, Inc., 187 F.3d 1271 (11th cir. 1999).

As discussed above, the Tenth Circuit has adopted the Sundstrand definition of recklessness as the appropriate level of scienter for § 10(b) claims in light of the Supreme Court's decision in Ernst Ernst. Hackbart v. Holmes, 675 F.2d 1114, 1117 (10th Cir. 1982). "For purposes of applying Rule 10b-5, the best definition of reckless behavior is conduct that is 'an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.'" Id. See also Anixter v. Home-Stake Production Co., 77 F.3d 1215, 1232-33 (10th Cir. 1996) ("This circuit still maintains that recklessness as defined in Hackbart is sufficient scienter for finding civil § 10(b) primary violations."). The undersigned finds that the Court is required to follow this precedent, and not the Ninth Circuit's recent interpretation of Ernst Ernst in Silicon Graphics. See In re Microstrategy, Inc. Securities Litigation, 115 F. Supp.2d 620, 632-634 (E.D. Va. 2000) (employing a similar analysis).

2. Allegations Establishing a Motive and Opportunity Are Not Per Se Sufficient to Establish a Strong Inference of Scienter.

As discussed in Part IV(A), supra, prior to the PSLRA's passage, the circuits were split as to how Fed.R.Civ.P. 9(b) should be applied to allegations of scienter. The Second Circuit adopted a requirement that the plaintiff plead facts showing a "strong inference" that the required state of mind existed, while the Ninth and Tenth Circuits held that scienter could be alleged generally. Given that the PSLRA adopts the Second Circuit's "strong inference" approach, there has developed a raging debate as to whether the PSLRA is a wholesale adoption of the Second Circuit's scienter pleading jurisprudence. The debate has centered mostly around the issue of motive and opportunity allegations.

As discussed above in Part IV(B), supra, the Second Circuit held that a plaintiff could plead a strong inference of scienter by alleging facts that established a motive to commit fraud and an opportunity to do so. Because Congress obviously adopted the Second Circuit's "strong inference" jurisprudence, the question has become whether Congress also intended to adopt the Second Circuit's motive and opportunity jurisprudence. See n. 33, supra. Most of the circuits to address the issue have held that the PSLRA does not adopt the Second Circuit's motive and opportunity jurisprudence, and that allegations of motive and opportunity, while relevant to the PSLRA's "strong inference" inquiry, are not talismanic. See n. 34, supra ³⁵ That is, allegations of motive and opportunity should be considered as part of the total mix of a pleader's allegations, but they do not per se establish a strong inference of scienter. The undersigned finds that this view is the most faithful to the PSLRA's language and legislative history. The district court in In re Microstrategy, Inc. Securities Litigation, 115 F. Supp.2d 620 (E.D. Va. 2000), has conducted a thorough analysis of this issue, which the undersigned finds persuasive, and from which the undersigned will liberally and shamelessly borrow.

35 The Second. Third and Fifth Circuits have held that the PSLRA incorporates the Second circuit's pre-PSLRA jurisprudence, including its motive and opportunity jurisprudence. The First, Sixth, Ninth and Eleventh Circuits hold that the PSLRA does not incorporate the Second Circuit's motive and opportunity jurisprudence. These courts hold that a pleader must allege specific facts constituting circumstantial evidence of conscious behavior; a pleader cannot merely rest on allegations of motive and opportunity. See discussion at Microstrategy, 115 F. Supp.2d at 628-29.

When construing a statute, the analysis must begin with the language of the statute. Where the statutory language provides a clear answer, the analysis also ends there. Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 438 (1999), The PSLRA's text clearly and simply requires a court in a securities fraud case to determine if the allegations in the complaint raise a "strong inference" that the defendant acted with "the requisite state of mind." 15 U.S.C. § 78u-4(b). This "strong inference" standard, unadorned by judicially crafted per se tests, is the sole requirement imposed by the PSLRA for pleading scienter. On its face, the PSLRA neither mandates nor rejects a formal per se test for meeting its standard.

Many courts have attempted to divine the meaning of "strong inference" from the PSLRA's legislative history, which on this point is inconclusive at best and contradictory at worst. See, e.g., Novak v. Kasaks, 216 F.3d 300, 311 (2d Cir. 2000) ("[I]n our view, as is often the case with legislative history generally, the legislative history of the PSLRA contains conflicting expressions of legislative intent with respect to the pleading requirement.") (internal quotations omitted); Greebel, 194 F.3d at 195 ("The legislative history is inconclusive on whether the Act was meant to either embody or to reject the Second Circuit's pleading standards."); Advanta, 180 F.3d at 531 ("The Reform Act's legislative history on this point is ambiguous and even contradictory."). In the end, it is the text of the PSLRA that governs. What matters is not what Congress meant to say in passing the PSLRA but what it in fact said. Where the text is unambiguous and its meaning is clear, resort to extraneous sources is unnecessary, if not improper.³⁶ On its face, the PSLRA plainly requires a court to assess the factual allegations of the complaint to determine if together they give rise to a "strong inference" of scienter — no more, no less.

36 See Director, Office of workers' Compensation Programs, Dep't of Labor v. Greenwich Collieries, 512 U.S. 267, 280 (1994); Shannon v. United States, 512 U.S. 573 (1994); Connecticut Nat'l Bank v. Germain, 503 U.S. 249, 254 (1992); and Dowling v. united States, 473 U.S. 207, 218 (1985).

That the PSLRA speaks of inferences is reasonable, if not necessary, given that "it is seldom if ever possible to prove the state of a defendant's mind by direct evidence," and that, accordingly, "finders of fact have almost always had to rely on circumstantial evidence to determine intent." AUSA Life Ins. Co. v. Ernst Young, 991 F. Supp. 234, 247 (S.D.N.Y. 1997). Thus, where a complaint does not allege facts directly showing that the defendant acted with the requisite state of mind, the Court must take the factual allegations in the complaint and determine, through a deductive process, if it can be strongly inferred from them that the defendant acted with such a state of mind. This process involves essentially three steps.

First, the reviewing court must identify the factual allegations that, taken as true, are relevant to proving the defendant's state of mind. This is not the end of the endeavor, however, for it is also necessary to identify appropriate inferences from these alleged facts. The difficult second task is to assign probative weight to each fact and inference as it relates to proving state of mind. This is done by an appeal to logic, common sense, and human experience. The enterprise, moreover, entails a holistic examination of the interactions among all facts, for it is by examining how these facts combine that a fact-finder ultimately assesses whether a particular state of mind has been established under the applicable standard of proof. As a result of this holistic analysis, otherwise unremarkable facts may take on added significance when combined with each other, having what might be termed a synergistic effect on probative value. In other words, as the Supreme Court has noted, it is a "simple fact of evidentiary life" that "individual pieces of evidence, insufficient in themselves to prove a point, may in cumulation prove it. The sum of an evidentiary presentation may well be greater than its constituent parts." Bourjaily v. United States, 483 U.S. 171, 179-80 (1987). The third step, then, is to determine whether, in the light of logic, common sense, and human experience, these potentially synergistic combinations of facts and inferences — what in the vernacular of the law is called "the totality of the circumstances" — raise a "strong inference" that a defendant acted with the requisite state of mind, In this regard, the final step is assessing whether this inference is "strong" — that is, whether it is "[p]ersuasive, effective, and cogent," "compelling," or "capable of making a clear or deep impression . . . on the mind."

Microstrategy, 115 F. Supp.2d at 630-31 (footnotes omitted).

A court applying the PSLRA's "strong inference" standard to a complaint must take the factual allegations in the complaint as true, draw whatever inferences regarding the defendant's state of mind are supported by these allegations, and determine whether these inferences individually or cumulatively provide a strong (i.e., persuasive and cogent) inference that the defendant possessed the requisite state of mind. In doing so, a court should not consider each relevant factual allegation solely in isolation — though some allegations by themselves may suffice to raise a strong inference of the requisite state of mind — but rather, as a part of the overall factual picture painted by the complaint. This approach rejects the Second Circuit's formalistic, pre-PSLRA per se "motive and opportunity" test, as the text of the PSLRA says nothing about formal per se tests. Nevertheless, this approach does not preclude consideration of motive and opportunity in the ultimate determination of whether the complaint, as a whole, raises a "strong inference" of scienter. Thus, allegations of motive and opportunity are relevant, though not necessarily sufficient, to establishing a strong inference of scienter. If the totality of the circumstances alleged raises a "strong inference" of the requisite state of mind, it is immaterial whether plaintiffs satisfy their burden by pleading motive and opportunity. Microstrategy, 115 F. Supp.2d at 631-34.³⁷

37 See also Queen Uno Ltd. Partnership v. Coeur D'Alene Mines Corp., 2 F. Supp.2d 1345, 1359 (D. Colo. 1998) ("In short, the Reform Act requires that a court examine a plaintiff's allegations in their entirety, without regard to whether those allegations fail within a formalistic category such as motive and opportunity, to determine if the allegations permit a strong inference of fraudulent intent. If the facts alleged permit such an inference then a 10b-5 claim will by the Reform Act's plain language survive a motion to dismiss."); and In re Staffmark Inc. Securities Litigation, 123 F. Supp.2d 1160, 1163-65 (E.D. Ark. 2000) (applying an analysis very similar to that in Microstrategy).

D. GROUP PLEADING I GROUP PUBLISHED DOCTRINE

Prior to enactment of the PSLRA, some courts in cases of fraud by a corporation had relaxed the requirement in the first sentence of Fed.R.Civ, P. 9(b) that a party allege with particularity "who" made the alleged false or misleading statement. This doctrine became known as the "group pleading" doctrine, and the following formulation of the doctrine by the Ninth Circuit is the one most often quoted by courts employing it:

In cases of corporate fraud where the false or misleading information is conveyed in prospectuses, registration statements, annual reports, press releases, or other "group published information," it is reasonable to presume that these are the collective actions of the officers. Under such circumstances, a plaintiff fulfills the particularity requirement of Rule 9(b) by pleading the misrepresentations with particularity and where possible the roles of the individual defendants in the misrepresentations.

Wool v. Tandem Computers Inc., 818 F.2d 1433, 1440 (9th Cir. 1987) (citations omitted). Another common formulation can be found in In re Sahlen Associates. Inc., Securities Litigation, 773 F. Supp. 342 (S.D. Fla. 1991).

[N]o specific connection between the fraudulent representations and particular defendants is necessary in cases of corporate fraud brought against insiders and affiliates where the false information is disseminated in group-published documents. As long as the complaint describes the fraudulent acts in detail and provides the defendants with sufficient information to respond, a court may presume that these acts have been committed collectively by the officers and directors.

Id. at 362 (citations omitted). These holdings are based on the conclusion that it is reasonable to presume that documents like prospectuses, registration statements, annual reports, and press releases are the collective work of those individuals with direct involvement in the everyday activities of the company, and that a plaintiff cannot be expected to the false statements or omissions in these type of group published documents to a particular corporate insider without discovery.See Degulis v. LXR Biotech., Inc., 928 F. Supp. 1301, 1311-12 (S.D.N.Y. 1996); In re Oxford Health Plans, Inc., 187 F.R.D. 133, 142 (S.D.N.Y. 1999); and In re Livent Inc. Sec. Litig., 78 F. Supp.2d 194, 219 (S.D.N.Y. 1999). Thus, the group published doctrine is applicable only to clearly cognizable corporate insiders with active operational involvement in the company. See, In re GlenFed. Inc. Securities Litigation, 60 F.3d 591, 593 (9th Cir. 1995).

Relying on the Ninth Circuit's decision in Wool, the Tenth Circuit adopted the group published doctrine in Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1254 (10th Cir. 1997). The Tenth Circuit held that "[i]dentifying the individual sources of statements is unnecessary when the fraud allegations arise from misstatements or omissions in group-published documents such as annual reports, which presumably involve collective actions of corporate directors or officers."Id. Schwartz was decided in 1997 after the PSLRA was enacted. However, the Tenth Crcuit never cites or discusses the PSLRA. This is likely due to the fact that the appeal was filed in 1995 from the district court's November 6, 1995 order of dismissal. The PSLRA became effective on December 22, 1995, and § 108 of the PSLRA states that the "amendments made by this title shall not affect or apply to any private action . . . commenced before and pending on the date of enactment of this Act." P.L. No. 104-67, 109 Stat. 737, 758 (1995). That is, Congress intended the PSLRA to apply only to cases filed after its enactment. See In re Silicon Graohics. Inc. Securities Litigation, 970 F. Supp. 746, 754 (N.D. Cal. 1997). Because Schwartz was obviously filed before the PSLRA's enactment, the Tenth Circuit would not in its opinion have considered the PSLRA, or its impact on the group pleading doctrine.

The language of the PSLRA does not expressly address the group pleading doctrine. The legislative history³⁸ of the PSLRA makes no mention of the group pleading doctrine, which was well-established by the time Congress enacted the PSLRA. Consequently, whether the group pleading doctrine is still viable after the PSLRA's enactment is currently a matter of debate. No federal court of appeals has addressed the issue. Nevertheless, a majority of the district courts addressing the issue have found that the group pleading doctrine survives the PSLRA.³⁹ Some district courts, represented by Coates and Allison, have found that the group pleading doctrine is inconsistent with the PSLRA, and have refused to apply the doctrine to cases controlled by the PSLRA's pleading requirements.⁴⁰

38 See S. Rep, No. 104-98, reprinted at 1995 U.S.C.C.A.N. 679 and 1995 WL 372783; and H. Conf. Rep. 104-369, reprinted at 1995 U.S.C.C.A.N. 730 and 1995 WL 709276.

39 See In re Secure Computing Corp. Securities Litigation, 120 F. Supp.2d 810, 821-22 (N.D. Cal. 2000); Stanley v. Safeskin Corp., 2000 WL 33115908, at *4 (S.D. Cal. Sep 15, 2000); In re Ribozyme Pharmaceuticals, Inc. Securities Litigation, 119 F. Supp.2d 1156, 1165 (D. Colo. 2000); Schaffer v. Evolving Systems, Inc., 29 F. Supp.2d 1213, 1225 (D. cob. 1998); In re Baan Co. Securities Litigation, 103 F. Supp.2d 117-18 (D.D.C. 2000); In re Sunbeam Securities Litigation, 89 F. Supp.2d 1326, 1340-41 (S.D. Fla. 1999); In re Theragenics Corp. Securities Litigation, 105 F. Supp.2d 1342, 1358 (N.D. Ga. 2000); Danis v. USN Communications, Inc., 73 F. Supp.2d 923, 939 n. 9 (N.D. Ill. 1999); Giarraputo v. UNUM Provident corp., 2000 WL 1701294, at *20 (D. Me. Nov 08, 2000); Yadlosky v. Grant Thornton, L.L.P., 120 F. Supp.2d 622, 632 (E.D. Mich. 2000); In re Bank America Corp. Securities Litigation, 78 F. Supp.2d 976, 988 (E.D. Mo. 1999); In re AgriBiotech Securities Litigation, 2000 WL 1277603, at *3 (D. Nev. Mar. 02, 2000); In re Stratosphere Corp. Securities Litigation, 1 F. Supp.2d 1096, 1108 (D. Nev. 1998); In re Health Management, Inc. Securities Litigation, 970 F. Supp. 192, 209 (E.D.N.Y. 1997); In re Oxford Health Plans, Inc., 187 F.R.D. 133, 142 (S.D.N.Y. 1999); and In re SmarTalk Teleservices, Inc. Securities Litigation, 124 F. Supp.2d 487, 501-502 (S.D. Ohio 2000).

40 See In re Ashworth, Inc. Securities Litigation, 2000 WL 33176041, at *11-12 (S.D. Ca. Jul. 18, 2000); Allison v. Brooktree corp., 999 F. Supp. 1342, 1350 (S.D. Ca. 1998); In re Premiere Technologies Inc., 2000 WL 33231639, at *10-11 (N.D. Ga. Dec 08, 2000); Chu v. Sabratek Corp., 100 F. Supp.2d 827, 836-37 (N.D. Ill. 2000); Thompson v. Avondale Industries. Inc., 2000 WL 310382, at *1-2 (E.D. La. Mar 24, 2000); In re First Union Corp. Securities Litigation, 128 F. Supp.2d 871, 888 (W.D.N.C. 2001); Marra v. Tel-Save Holdings, Inc., 1999 WL 317103, at *5 (E.D. Pa. May 18, 1999); and Coates v. Heartland wireless communications, Inc., 26 F. Supp.2d 910, 915-16 (N.D. Tex. 1998).

In Coates the court focused on the fact that the PSLRA, when applicable, requires that a pleader "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2) (emphasis added). The court in Coates found that the emphasized language requires a level of defendant-specific pleading that is inconsistent with the group pleading doctrine. Coates, 26 F. Supp.2d at 916. The court further held that "[i]t is nonsensical to require that a plaintiff specifically allege facts regarding scienter as to each defendant, but to allow him to rely on group pleading in asserting that the defendant made the statement or omission." Id. The court in Allison reached a similar conclusion for the same reasons, holding that group pleading was suspect because the presumption underlying the group pleading doctrine cannot "be reconciled with the statutory mandate that plaintiffs must plead specific facts as to each act or omission by the defendant." Allison, 999 F. Supp. at 1350. The court in Allision found the group pleading doctrine objectionable because it "permits an inference of wrongdoing not based on defendant's conduct, but solely on defendant's status as an officer or director of a corporation," Id.

The majority of courts who continue to apply the group pleading doctrine after the PSLRA recognize that the group pleading doctrine has nothing to do with scienter, which is the section of the PSLRA focused on by Coates and Allision. The majority view recognizes that the doctrine is merely a rebuttable presumption that the contents of group-published documents are attributable to corporate insiders with knowledge of, and involvement in, the day-to-day affairs of a company. Because the doctrine raises a presumption, which may be rebutted at trial or on motion for summary judgment, and because the doctrine applies only to a limited class of corporate insiders, a majority of courts has been unwilling to find the doctrine inconsistent with the language of the PSLRA. See In re BankAmerica Corp. Sec. Litig., 78 F. Supp.2d 976, 988 (E.D. Mo. 1999); and In re Theragenics Corp. Securities Litigation, 105 F. Supp.2d 1342, 1358 (N.D. Ga. 2000).⁴¹

41 The district of Colorado is the only district court in the Tenth circuit to have addressed the issue, and it has aligned itself with the majority view and applies the group pleading doctrine to post-PSLRA cases. See, e.g., Ribozyme, 119 F. Supp.2d at 1165; and Schaffer, 29 F. Supp.2d at 1225.

Application of the group pleading doctrine does not dilute the PSLRA's pleading rules. 15 U.S.C. § 78u-4(b). The group pleading doctrine allows the reasonable inference that the corporate insiders are collectively the makers of statements in group-published documents. A plaintiff still has to specify each statement in the group-published document which is alleged to be false or misleading and the reasons why the statement is false or misleading. 15 U.S.C. § 78u-4(b)(1). A plaintiff must also allege facts which give rise to a strong inference that insiders in the position of the defendants, as to whom the doctrine is being applied, knew information that appeared in the group published document was false or misleading, or recklessly disregarded the false or misleading nature of that information. 15 U.S.C. § 78u-4(b)(2).

Courts rejecting the group published doctrine do not address the convincing reason for adopting the doctrine in the first place — that it is almost impossible, without some discovery, for a plaintiff to dissect a group-published document, like an annual report, and attribute each of the statements therein to a particular corporate manager. The group published doctrine simply recognizes that there is a strong inference, based on common sense and practical experience, that a document like an annual report is a collective product of a corporation's management team. It is, however, an inference like any other drawn from a complaint, that can be rebutted by evidence. Nevertheless, a pleader is entitled to all reasonable inferences at the pleading stage. Weatherhead v. Globe Intern., Inc., 832 F.2d 1226, 1228 (10th Cir. 1987). Congress' failure to address this well-established doctrine at the time it passed the PSLRA is at least some evidence that Congress did not disagree with its general application. Consequently, the undersigned finds the majority view more persuasive, and in the absence of any Tenth Circuit precedent to the contrary, recommends that the Court continue to apply the group pleading doctrine as recognized and applied by the Tenth Circuit inSchwartz.

E. THE COMPLAINTS

The undersigned has reviewed all of the plaintiffs' complaints as a whole as if they comprised one master complaint. In ruling on the motions to dismiss, the undersigned has attempted to rely on allegations which are common across all of the complaints dealing with a particular defendant. To the extent, however, that an allegation relied on by the undersigned is in one complaint but not another, the defendants may raise that issue in objections to this Report. The undersigned assumes, however, that the plaintiffs sponsoring the complaint without the allegation will be able to amend to make the allegation, and plaintiffs can address that issue in their responses to defendants' objections. However, in the absence of undue delay, bad faith, dilatory motive, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party, or futility of amendment, leave to amend should be freely given. Foman v. Davis, 371 U.S. 178, 182 (1962). The undersigned finds that none of the Davis factors are implicated in this case. Consequently, the undersigned recommends that in light of the policy of liberal amendment recognized in Fed.R.Civ.P. 15(a), the plaintiffs be given at least the limited opportunity to amend to add allegations to a complaint which already exist in another complaint on file in the CFS-Related Securities Fraud Litigation.

V. RECOMMENDATION AS TO EACH MOVING DEFENDANT

Attached to this Report are separate sections for each moving defendant. These sections are incorporated by references herein. These incorporated sections contain the undersigned's detailed findings and recommendations as to each moving defendant. These findings and recommendations are briefly summarized below.

A. MAYER, BROWN AND PLATT

For the reasons discussed in this RR, and the section relating to MBP, the undersigned recommends that MBP's motions to dismiss be GRANTED as to the following claims: (1) claims under 70 Penn. Stat. § 1-503, (2) claims under Oklahoma law for aiding and abetting fraud, (3) claims under Oklahoma law for civil conspiracy, and (4) claims under Oklahoma law for malpractice.

For the reasons discussed in this RR, and the section relating to MBP, the undersigned recommends that MBP's motions to dismiss be DENIED as to the following claims: (1) claims under § 10(b) of the 1934 Securities Act; (2) claims under § 408(a)(2)(A) of the Oklahoma Securities Act; (3) claims under § 408(b) of the Oklahoma Securities Act; (4) claims under the Blue Sky laws of Georgia, Iowa and Massachusetts; (5) claims under Oklahoma law for fraud, deceit and constructive fraud; and (6) claims under Oklahoma law for negligent misrepresentation.

B. CAROLINE BENEDIKTSON

For the reasons discussed in this RR, and the section relating to Ms. Benediktson, the undersigned recommends that Ms. Benediktson's motions to dismiss be GRANTED as to the following claims: (1) claims under § 15 of the 1933 Securities Act, and (2) claims under Oklahoma law for malpractice.

For the reasons discussed in this RR, and the section relating to Ms. Benediktson, the undersigned recommends that Ms. Benediktson's motions to dismiss be DENIED as to the following claims: (1) claims under § 10(b) of the 1934 Securities Act; (2) claims under § 20(a) of the 1934 Securities Act; (3) claims under § 408(a)(2)(A) of the Oklahoma Securities Act; (4) claims under § 408(b) of the Oklahoma Securities Act; (5) claims under Oklahoma law for fraud, deceit and constructive fraud; (6) claims under Oklahoma law for conspiracy to commit fraud; and (7) claims under Oklahoma law for negligent misrepresentation.

C. ARTHUR ANDERSON

For the reasons discussed in this RR, and the section relating to Arthur Anderson, the undersigned recommends that Arthur Anderson's motions to dismiss plaintiffs' aiding and abetting fraud claims under Oklahoma law be GRANTED.

For the reasons discussed in this RR, and the section relating to Arthur Anderson, the undersigned recommends that Arthur Anderson's motions to dismiss be DENIED as to the following claims: (1) claims under § 10(b) of the 1934 Securities Act; (2) claims under § 408(a)(2)(A) of the Oklahoma Securities Act; (3) claims under § 408(b) of the Oklahoma Securities Act; (4) claims under the Blue Sky laws of California, Georgia, Illinois, Iowa and Massachusetts; (4) claims under Oklahoma law for fraud, deceit and constructive fraud; and (5) claims under Oklahoma law for negligent misrepresentation and malpractice.

D. MIKE TEMPLE

For the reasons discussed in this RR, and the section relating to Mr. Temple, the undersigned recommends that Mr. Temple's motions to dismiss be GRANTED as to the following claims: (1) claims under § 12(a)(2) of the 1933 Securities Act; and (2) claims under § 15 of the 1933 Securities Act.

For the reasons discussed in this RR, and in the section relating to Mr. Temple, the undersigned recommends that Mr. Temple's motions to dismiss be DENIED as to the following claims: (1) claims under § 10(b) of the 1934 Securities Act; (2) claims uncer § 20(a) of the 1934 Securities Act; (3) claims under §§ 25401 and 25501 of the California Corporation Code; (4) claims under § 408(a)(2)(A) of the Oklahoma Securities Act; (5) claims under § 408(b) of the Oklahoma Securities Act; (6) claims under Oklahoma law for fraud, deceit and constructive fraud; (7) claims under Oklahoma law for conspiracy to commit fraud; and (8) claims under Oklahoma law for negligent misrepresentation.

E. GERTRUDE BRADY

For the reasons discussed in this RR, and the section relating to Ms. Brady, the undersigned recommends that Ms. Brady's motions to dismiss be GRANTED as to the following claims: (1) claims under § 12(a)(2) of the 1933 Securities Act; and (2) claims under § 15 of the 1933 Securities Act.

For the reasons discussed in this RR, and the section related to Ms. Brady, the undersigned recommends that Ms. Brady's motions to dismiss be DENIED as to the following claims: (1) claims under § 10(b) of the 1934 Securities Act; (2) claims under § 20(a) of the 1934 Securities Act; (3) claims under §§ 25401 and 25501 of the California Corporation Code; (4) claims under § 408(a)(2)(A) of the Oklahoma Securities Act; (5) claims under § 408(b) of the Oklahoma Securities Act; (6) claims under Oklahoma law for fraud, deceit and constructive fraud; (7) claims under Oklahoma law for conspiracy to commit fraud; and (8) claims under Oklahoma law for negligent misrepresentation.

F. BRUCE HADDEN

For the reasons discussed in this RR, and in the section relating to Mr. Hadden, the undersigned recommends that Mr. Hadden's motions to dismiss plaintiffs' claims under § 408(b) of the Oklahoma Securities Act be DENIED, and that his motions to dismiss plaintiffs' civil conspiracy claims be GRANTED.

G. JAMES SILL

For the reasons discussed in this RR, and in the section relating to Mr. Sill, the undersigned recommends that Mr. Sill's motions to dismiss plaintiffs' aiding and abetting fraud claims under Oklahoma law be GRANTED.

For the reasons discussed in this RR, and in the section relating to Mr. Sill, the undersigned recommends that Mr. Sill's motions to dismiss plaintiffs' claims under § 408(b) of the Oklahoma Securities Act and plaintiffs' civil conspiracy claims be DENIED.

REPORT AND RECOMMENDATION REGARDING THOSE CLAIMS PLED AGAINST MAYER BROWN PLATT TABLE OF CONTENTS

I. MBP'S LIABILITY UNDER § 10(b) OF THE 1934 SECURITIES ACT 1

A. MBP CAN ONLY BE HELD LIABLE UNDER § 10(b) FOR ITS OWN MISREPRESENTATIONS 1

1. Central Bank's Primary Violator Requirement 1

2. MBP's Opinion Letters 3

a. MBP's Negative Assurance Letters 4

b. MBP's Legal Opinion Letters 4

c. initial investors and MBP's Standing Argument 5

B. PLAINTIFFS HAVE ALLEGED SUFFICIENT FACTS TO ESTABLISH A PRIMA FACIE CASE OF § 10(b) LIABILITY AGAINST MBP 7

1. MBP's Legal Opinion Letters 7

2. MBP's Negative Assurance Letters 8

a. Plaintiffs Adequately Allege That MBP Made Misrepresentations 8

i. Plaintiffs Need Not Allege MBP's "Subjective Belief" 8

a) The Language and Function of MBP's Negative Assurance Letters 8

b) MBP's Limited Duty to Investigate or Disclose 10

c) Conclusion 13

ii. Plaintiffs' Well-Pled Allegations of Misrepresentations in the PPMs 13

a) Loan Sales 19

b) Vernick Disclosure 22

C) Financial and Statistical Data Exclusion 25

b. Plaintiffs Adequately Allege That MBP Made Misrepresentations "In Connection With" The Purchase or Sale of a Security 27

c. Plaintiffs Adequately Allege That MBP Made Misrepresentations With Scienter 29

d. Plaintiffs Adequately Allege That MBP Made Misrepresentations Upon Which Plaintiffs Relied 33

II. MBP'S BLUE SKY LIABILITY 34

A. OKLAHOMA SECURITIES ACT 34

1. Liability Under § 408(b)

2. Liability Under § 408(a)(2) 39

B. CLAIMS UNDER GEORGIA. IOWA, MASSACHUSETTS AND PENNSYLVANIA LAW 40

1. Georgia 40

2. Iowa 40

3. Massachusetts 40

4. Pennsylvania 43

III. FRAUD AND NEGLIGENCE CLAIMS 46

A. COMMON LAW FRAUD I DECEIT 46

B. AIDING AND ABETTING FRAUD 46

C. CONSTRUCTIVE FRAUD 47

D. CONSPIRACY TO COMMIT FRAUD 47

E. NEGLIGENCE 48

RECOMMENDATION 49

Mayer, Brown Platt ("MBP") has moved to dismiss all claims pled against it by plaintiffs. See RR Exhibit A for a list of MBP's motions to dismiss, and RR Exhibit B for a list of the claims pled against MBP.

MBP served as outside legal counsel for CFS in connection with the SMART and GREAT asset-backed securities offered by CFS and its affiliates. Plaintiffs allege that MBP held itself out to the investment community as the premier legal expert in the design and implementation of asset-backed securitizations. In particular, plaintiffs allege that Jason Kravit, the MBP partner in charge of the CFS account, authored a leading legal treatise on asset-backed securitizations, and that Mr. Kravit was instrumental in educating and providing assurances about asset-backed securitizations to CFS's key employees, rating agencies and investors.

Plaintiffs allege that MBP was substantially involved in the preparation of the offering documents, including the Private Placement Memoranda ("PPM"), issued by CFS and its affiliates in connection with each securitization. Plaintiffs also allege that from September 1997 to August 1998, MBP drafted documents for a planned initial public offering ("IPO") of equity in CFS. Plaintiffs allege further that MBP provided personal legal services to Mr. and Mrs. Bartmann, including the creation of several trusts as part of an estate plan. At a minimum, these allegations permit the inference that as a result of MBP's multifaceted representation of CFS and the Bartmanns, MBP acquired intimate knowledge of CFS' business and assisted CFS in the development of that business.

I. MBP'S LIABILITY UNDER § 10(b) OF THE 1934 SECURITIES ACT

A. MBP CAN ONLY BE HELD LIABLE UNDER § 10(b) FOR ITS OWN MISREPRESENTATIONS.

Plaintiffs allege substantial involvement by MBP in all aspects of the SMART and GREAT securitizations at issue. According to plaintiffs, MBP was involved from the design phase to the marketing and selling phase, and all phases between. Ultimately, however, it was CFS and its affiliates who issued the offering documents and sold the securities to investors. While many courts in the past would have held MBP liable under § 10(b) based solely on MBP's substantial participation in the acts of CFS and its affiliates, such a theory of liability was specifically repudiated by the Supreme Court in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 169 (1994).

1. Central Bank's Primary Violator Requirement

Prior to the United States Supreme Court's decision in Central Bank, a number of federal courts held that § 10(b) of the 1934 Securities Act imposed liability not only on sellers of securities who actually made a material misstatement, but also on secondary actors who aided and abetted a seller's violation of § 10(b). See Central Bank of Denver, 511 U.S. at 169 (citing several cases, including Kerbs v. Fall River Indus., 502 F.2d 731, 740 (10th Cir. 1974)), The Supreme Court addressed the legitimacy of secondary liability in Central Bank and held that Congress never intended to impose secondary liability under § 10(b). The Court held that the Act "does not itself reach those who aid and abet . . . [but] prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act." Id. at 177. According to the Court, allowing a § 10(b) cause of action based on aiding and abetting conduct would circumvent the "reliance" requirement of § 10(b) by allowing a plaintiff to prevail "without any showing that the plaintiff relied upon the aider and abettor's statements or actions." Id. at 180. The Court recognized, however, that secondary actors are not always free from liability under the Act. Secondary actors, like accountants and lawyers, may be held liable as primary violators of § 10(b) if all the requirements for primary liability are met, including "a material misstatement (or omission) on which a purchaser or seller of securities relies." Id. at 191. Thus, plaintiffs must establish MBP's primary liability under § 10(b); a showing that MBP aided or abetted a violation by CFS or its affiliates will not be sufficient to impose liability under § 10(b))¹

1 With the passage of the PSLRA in 1995, congress enacted § 20(e) of the 1934 Act, which restores to the SEC the authority to proceed against those who aid and abet securities fraud. See 15 U.S.C. § 78t(e), congress refused, however, to overturn Central Bank and provide a private cause of action against aiders and abettors.See 141 Cong. Rec. 59109-9166 (daily ed. June 27, 1995) (discussing Senator Bryan's rejected Amendment 1474 which was designed to overrule central Bank).

In the wake of Central Bank, federal courts split in their approach to determining when a secondary actor has committed a primary violation of § 10(b). Some courts, like the Ninth Circuit, have adopted a "significant role" or "substantial involvement" test. Applying this test, secondary actors are primarily liable for false or misleading statements made by others so long as the secondary actor had a significant role in the preparation of the false or misleading statement. See. e.g., In re Software Toolworks, 50 F.3d 615, 628 n. 3 (9th Cir. 1994) (accountant may be primarily liable based on its "significant role in drafting and editing" a letter sent by the issuer to the SEC). Other courts, including the Tenth Circuit, reject the "significant role" test and insist that, under Central Bank, primary liability may be imposed only when the secondary actor makes his own false or misleading statement that is communicated to investors. See e.g., Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1226-27 (10th Cir, 1996). These courts hold that anything short of an actual statement by the secondary actor is merely aiding and abetting, and no matter how Substantial that aid may be, it is not enough to trigger primary liability under § 10(b). See also Shapiro v. Cantor, 123 F.3d 717, 720 (2nd Cir. 1997). This Court is bound to follow the Tenth Circuit's formulation of Central Bank's holding announced in Anixter. Plaintiffs may, therefore, only hold MBP liable under § 10(b) for its own representations, and not for any representations by CFS or its affiliates. This is true regardless of how involved MBP may have been in drafting or preparing statements made by CFS or its affiliates.

In their role as counsel to an issuer of securities, lawyers often make representations about the transaction at issue, and these representations often take the form of formal opinion letters. A lawyer's

false and misleading representations in connection with the . . . sale of any security, if made with the proper state of mind and if relied upon by those purchasing . . . a security, can constitute a primary violation [of § 10(b)]. There is no requirement that the alleged violator directly communicate misrepresentations to plaintiffs for primary liability to attach. Nevertheless, for [a lawyer's] misrepresentation to be actionable as a primary violation, there must be a showing that he knew or should have known that his representation would be communicated to investors.

Anixter, 77 F.3d at 1226 (internal citations omitted). Thus, for lawyers to "use or employ" a "deception," as is required for liability under § 10(b), "they must themselves make a false or misleading statement (or omission) that they know or should know will reach potential investors." Id. While an attorney "representing the seller in a securities transaction may not always be under an independent duty to volunteer information about . . . his client, he assumes a duty to provide complete and nonmisleading information with respect to subjects on which he undertakes to speak." Rubin v. Schottenstein. Zox Dunn, 143 F.3d 263, 268 (6th Cir. 1998).

In light of Anixter, plaintiffs' § 10(b) claims against MBP must be based on representations by MBP which MBP knew or should have known would be communicated to investors in the SMART and GREAT securities. There are no allegations that the statements in the PPMs are in any way statements by MBP; they are statements made by CFS and its affiliates. Thus, MBP cannot be held liable for misrepresentations in the PPMs themselves.

2. MBP's Opinion Letters

MBP did issue opinion letters in connection with each securitization, and these opinion letters were circulated with the PPMs. In these letters, MBP made representations directly to investors about the PPMs. These are the type of affirmative representations required by Anixter, and to which liability under § 10(b) can attach if plaintiffs can establish the elements of a § 10(b) claim with respect to the letters (i.e., a misrepresentation, scienter, reliance and damages). Plaintiffs base their § 10(b) claims against MBP on the alleged false and misleading nature of the following opinion letters.

a. MBP'S Negative Assurance Letters

Beginning with the SMART 97-3 securitization, MBP issued an opinion letter, which the parties refer to alternatively as a § 10(b) or "Negative Assurance" letter. Subject to certain qualifications which will be discussed below, MBP's Negative Assurance Letters stated as follows:

[N]o facts have come to our attention which lead us to believe that as of its date, the [Private Placement] Memorandum (other than the financial and statistical data included or not included therein, as to which we express no opinion) contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

See RR Exhibit F. Plaintiffs allege that this letter is actionable because there were facts that came to MBP's attention which gave, or but for a reckless disregard of the facts would have given, MBP a reason to believe that the PPMs contained false and misleading statements.

b. MBP's Legal Opinion Letters

In addition to the Negative Assurance Letter discussed above, MBP also provided the following legal opinions on technical aspects of the securitization transactions:

(1) a Nonconsolidation Letter, which opines that the trusts' assets (i.e., the receivables) were obtained from CFS in a "true sale" and that the trusts are "bankruptcy remote" from CFS;²

(2) an Investment Company Act Letter, which opines that the trusts are not required to register under the Investment Company Act of 1940; and

(3) a Tax Letter, which opines that the notes issued by the trusts will be treated as "debt" for federal income tax purposes.

See No. 00-847, Doc. No. 19, Exhibits 4, 5 and 6.

2 See Main RR, Part I(A) for a discussion of the trusts.

In the Nonconsolidation letter, MBP states that: "For purposes of this opinion, we have assumed . . . there has been no (and there will not be any) fraud in connection with any of the Transactions." No. 00-847, Doc. No. 19, Exhibit 4, pp. 3-4. In the Investment Company Act Letter, MBP states that: "For purposes of this opinion, we have assumed without independent investigation that . . . there has not been any fraud, duress, undue influence or material mistake of fact in connection with the Transactions . . . ." Id. at Exhibit 5, pp. 2-3. In the Tax Letter, MBP states that in forming its tax opinion, it examined, and its opinion was based on, the Indentures, the Sale and Servicing Agreements, and the PPMs. Id. at Exhibit 6, pp. 1-2. Plaintiffs allege that all of these statements constitute a continuing representation by MBP that it was aware of no facts that rendered its reliance on the assumption of no fraud in the Transactions unreasonable or inappropriate. Consequently, plaintiffs allege that these opinion letters are also actionable because there were facts that came to MBP's attention which made it, or but for a reckless disregard of the facts would have made it, unreasonable for MBP to rely on the PPMs or any assumption that there was no fraud involved in the Transactions.

Whether plaintiffs have in fact alleged facts sufficient to state a claim under § 10(b) with respect to any of these letters will be discussed in Part (B), infra.

c. Initial Investors and MBP's Standing Argument

MBP's Negative Assurance and legal opinion letters were each addressed to the "Initial Investors." Initial Investors is a term defined, with minor variations, in the Sale and Servicing Agreement for each securitization. For example, with respect to the SMART 97-6 transaction, Initial Investor is defined as follows:

Each person that delivers an executed investor representation letter dated on the Closing Date in the form attached to the Indenture Trust Agreement, as applicable, in respect to its purchase of Securities from the Initial Purchaser on the Closing Date. The term Initial Investor shall not include any other Person, including any Person that acquires Securities from any Person that delivers such an investor representation letter on the Closing Date.

No. 00-847, No. 19, Exhibit 29, p. 14 (emphasis added).

MBP argues that certain plaintiffs have not directly pled that they were "Initial Investors." Consequently, MBP argues that these plaintiffs' complaints must be dismissed because, absent an allegation that they were proper addressees of the letters, these plaintiffs lack standing to sue based on the letters. The undersigned does not agree. While certain plaintiffs may not have specifically alleged that they are "initial Investors," they do allege that either they, their agents, or their predecessors in interest purchased securities from the trusts, which they would not have been able to do if they had not delivered a "representation letter," which is what makes one an Initial Investor.

MBP argues that the emphasized language in the definition of Initial Investor quoted above prevents the secondary purchasers and the investment advisor purchasers in this case from being able to rely on MBP's letters. The emphasized language does state that MBP's letters are addressed to those who purchase directly from the trusts by delivering an appropriate representation letter, and not to secondary purchasers who buy from Initial Investors. This statement does not, however, preclude the claims brought by the secondary purchasers and the investment advisor purchasers in this case. Those plaintiffs buying securities through an investment advisor allege that their investment advisor, who had to be an Initial Investor to purchase securities from the trusts, purchased as plaintiffs' agent. If a plaintiff's agent is an Initial Investor, that plaintiff is an Initial Investor. Those plaintiffs who purchased securities in the secondary market from an Initial Investor obtained the Initial Investors' claims by way of assignment. The secondary purchasers step into the shoes of the Initial Investors and are, therefore, asserting the Initial Investors' claims, not their own claims. Thus, a secondary purchaser need not allege that it is an Initial Investor, but that their predecessor in interest was an Initial Investor, which by definition the predecessor must have been if it bought a security from the trust. See Main RR, Part 11(B) and (C). The undersigned recommends, therefore, that MBP's motions to dismiss be DENIED to the extent they seek dismissal due to plaintiffs' failure to directly allege they are Initial Purchasers.

B. PLAINTIFFS HAVE ALLEGED SUFFICIENT FACTS TO ESTABLISH A PRIMA FACIE CASE OF § 10(b) LIABILITY AGAINST MBP.

The elements of a § 10(b) claim are as follows:

1. That MBP made an untrue statement of material fact, or failed to state a material fact;

2. That MBP's misrepresentation or omission occurred in connection with the purchase or sale of a security;

3. That MBP made the misrepresentation or omission with scienter (i.e., knowingly or recklessly); and

4. That plaintiffs relied on MBP's misrepresentation or omission, and sustained damages as a proximate result of MBP's misrepresentation or omission.

Anixter v. Home-Stake Product Co., 77 F.3d 1215, 1225 (10thCir. 1996);United Int'l Holdings. Inc. v. The Wharf (Holding's) Ltd., 210 F.3d 1207, 1220 (10th Cir. 2000). To resolve MBP's motions to dismiss, the Court must determine for each element outlined above whether plaintiffs have pled facts which would, if taken as true together with all reasonable inferences therefrom, permit a reasonable jury to find that the element has been established. Grossman v. Novell. Inc., 120 F.3d 1112, 1118 (10th Cir. 1997). From a review of the complaints, the undersigned finds that plaintiffs have pled facts sufficient to establish each element of their prima facie case under § 10(b).

1. MBP's Legal Opinion Letters

As discussed below, the undersigned finds that plaintiffs have sufficiently pled a cause of action under § 10(b) with regard to MBP's Negative Assurance Letters. Given that the undersigned recommends that plaintiffs' § 10(b) claims not be dismissed, the undersigned finds that the Court need not address whether there are additional bases supporting § 10(b) liability against MBP. The undersigned will, therefore, not address whether MBP's Nonconsolidation, Investment Company Act or Tax letters are also actionable under § 10(b). Should the Court disagree with the undersigned's recommendation with regard to MBP's Negative Assurance Letters, this matter can be recommitted to the undersigned, pursuant to Fed.R.Civ.P. 72(b), for a specific recommendation as to MBP's legal opinion letters.

2. MBP's Negative Assurance Letters

a. Plaintiffs Adequately Allege That MBP Made Misrepresentations.

i. Plaintiffs Need Not Allege MBP's "Subjective Belief"

a) The Language and Function of MBP's Negative Assurance Letters

MBP argues that plaintiffs have failed to allege facts sufficient to establish that its Negative Assurance Letters contain an actionable misrepresentation. The letters state that "no facts have come to [MBP's] attention which lead us to believe that the [PPM] . . . contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading." RR Exhibit F (emphasis added). MBP argues that the emphasized language limits the representation it was making to a representation about its own subjective belief. That is, MBP argues that by issuing a Negative Assurance Letter with "which leads us to believe" language in it, MBP was simply communicating to investors its subjective belief about the reliability of the PPMs; that MBP had not formed the subjective belief that the PPMs were false or misleading. MBP argues, therefore, that plaintiffs must allege and prove that MBP formed the actual, subjective belief that the PPMs were false or misleading. Building on this argument, MBP argues further that plaintiffs' § 10(b) claims must be dismissed because plaintiffs have not sufficiently alleged that prior to issuing each Negative Assurance Letter MBP had formed the actual, subjective belief that the relevant PPM was false or misleading. The undersigned disagrees with MBP's narrow view of the representation it made in its Negative Assurance Letters.

Plaintiffs have alleged that MBP is a partnership. The Negative Assurance Letters at issue were signed by "Mayer, Brown Platt, " without any reference to a particular member of the firm. Thus, a legal entity (i.e., a partnership) issued the Negative Assurance Letters. None of the parties have addressed how it is that a legal entity, as opposed to a human being, can form a subjective belief about anything. MBP seems to advocate for a standard of liability that no plaintiff under any set of facts could meet because no plaintiff will ever be able to establish that MBP, a legal entity, possessed a subjective state of mind. MBP cannot avoid liability for its Negative Assurance Letters simply by arguing that plaintiffs must allege a state of mind which MBP, a partnership, is incapable of forming.

While the Negative Assurance Letters cannot communicate a subjective belief held by the partnership, they do communicate something important to the investors. A cautious buyer of securities never completely trusts the information provided by the seller. Consequently, securities buyers use many techniques to obtain assurances that the seller's information is correct. One technique is to engage a third party who will offer its reputation as a bond that the sellers information is accurate. Lawyers and accountants are commonly engaged to play this role of reputational intermediary. See Ronald J. Gilson, Value Creation by Business Lawyers: Legal Skills and Asset Pricing, 94 Yale L.J. 239, 287-293 (1984). It is common for securities acquisition agreements to condition the buyer's obligation to complete the transaction on receipt of an opinion letter from the seller's counsel. The opinion requested from the seller's lawyer is normally an opinion stating that "we are not aware of any factual information that would lead us to believe that the agreement contains an untrue statement of a material fact or omits to state a fact necessary to make the statements made therein not misleading." Id. at 291. "The lawyer's opinion typically will state explicitly that the firm has made no independent investigation of the facts — i.e., that it has engaged in no information production concerning the accuracy of the information provided by the seller." Id. at 293. "Rephrased, the lawyer's statement is simply that a third party who has been intimately involved in the seller's production of information for the buyer does not believe the seller has misled the buyer." Id. at 292. The lawyer does not state positively that the seller's information is correct, only that nothing has come to his or her attention to indicate that the seller's information is incorrect. "It is quite clearly the lawyer's reputation — for diligence and honesty — that is intended to be placed at risk."Id. at 292. It is in this role of reputational intermediary that MBP issued the Negative Assurance Letters at issue in this case.

MBP's Negative Assurance Letters were drafted to assure investors of the absence of undisclosed facts, not the absence of a subjective belief.³ This interpretation is consistent with the "Negative Assurance" label MBP uses to describe the letters. It is the assurance of the absence of facts, as opposed to the affirmation of facts, which makes the assurance a negative assurance as opposed to a positive assurance. MBP was communicating to investors that, during its long and intimate representation of CFS, no facts had come to any of its lawyers' actual attention which would give one of its lawyers a reason to believe that the PPMs contained false or misleading statements.

3 The undersigned has found little authority discussing the precise language used by MBP in its Negative Assurance Letters, even though these types of letters are commonly issued in securities transactions. The absence of authority is likely due to the fact that in 1994 the united States Supreme Court struck down aiding and abetting liability under § 10(b) in Central Bank, and in 1996 the Tenth circuit adopted a broad reading of Central Bank in Anixter. Prior to central Bank andAnixter, law firms like MBP were frequently sued as alders and abetters of their client's fraud, and they were held directly liable for statements in their client's offering documents. After Central Bank andAnixter, § 10(b) plaintiffs must focus exclusively on a law firm's own statements if they wish to hold the firm directly liable. Consequently, letters like MBP's Negative Assurance Letters are just beginning to receive judicial scrutiny under the § 10(b) microscope.

A "no reason to believe" construction of MBP's Negative Assurance Letters is confirmed by the language of the letters themselves and by the Purchase Agreement that required MBP to issue the letters. The letters state that as of the date of each letter, no facts had come to MBP's attention which would "lead" it to believe the PPMs contained false or misleading statements. Notably, MBP's letters do not state that "no facts have come to our attention which have resulted in us forming the belief that the PPM is false or misleading." "Lead," the word actually used by MBP, means to "guide" or to "direct the attention toward" or to "tend towards."⁴ Thus, the letters state that MBP's lawyers were aware of no facts which would guide them or direct their attention toward the conclusion that the PPMs contained material misrepresentations (i.e., that they had no reason to believe that the PPMs were false or misleading). The Purchase Agreements⁵ in this case required an opinion letter from MBP "to the effect that [MBP] has no reason to believe that at the Closing Date the Final [PPM], and any supplements or amendments thereto, contains an untrue statement of material fact or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading . . . ." See, e.g., No. 99-829, Doc. No. 241, Exhibit 3, p. 14, § 8(a)(iii) (emphasis added). Plaintiffs may, therefore, satisfy § 10(b)'s misrepresentation or omission requirement with regard to MBP's Negative Assurance Letters by alleging that, given certain facts in their actual possession, MBP's lawyers did have a reason to believe that the PPMs were false or misleading. This conclusion is further confirmed by MBP's limited duty of disclosure under the federal securities laws.

4 See Webster's Third New International Dictionary of the English Language, 1282-82 (1993).

5 See GFF Corp. v. Associated Wholesale Grocers. Inc., 130 F.3d 1381, 1384-85 (10th Cir. 1997); and Cortec Indus. v. Sum Holding LP., 949 F.2d 42, 47-48 (2d Cir. 1991) (stock-offering memoranda and purchase agreements may properly be considered on a motion to dismiss a securities fraud action).

b) MBP's Limited Duty to Investigate or Disclose

Section 10(b) does not state whether silence may constitute a manipulative or deceptive device. Section 10(b) was, however, designed as a catch-all provision to prevent all manner of fraudulent practices. Not surprisingly, therefore, the United States Supreme Court has held that "silence in connection with the purchase or sale of securities may operate as a fraud actionable under § 10(b) despite the absence of statutory language or legislative history specifically addressing the legality of nondisclosure." Chiarella v. United States, 445 U.S. 222, 230 (1900). Liability for nondisclosure is, however, "premised upon a duty to disclose arising from a relationship of trust and confidence between the parties to a transaction." Id. Without a duty to disclose, silence cannot be made fraudulent. Section 10(b) does not itself create a relationship giving rise to a duty of disclosure. The duty must be preexisting or it must arise from the facts and circumstances surrounding the communication at issue. Windon Third Oil and Gas Drilling Partnership v. FDIC, 805 F.2d 342, 347 (10th Cir. 1986); S.E.C. v. Cochran, 214 F.3d 1261, 1264 (10th Cir. 2000).

The Tenth Circuit has recognized that how the Supreme Court's holding in Chiarella is to be applied to lawyers representing securities issuers is not yet settled in this circuit. Anixter, 77 F.3d at 1226 n. 12. It is clear, however, that § 10(b) does not require lawyers to be financial good-Samaritans and blow the whistle on their clients. The mere fact that a lawyer becomes aware of a fraud by his client does not impose on him a duty to broadcast that fraud to anyone who might buy his client's stock.⁶ imposing liability based simply on a lawyer's knowledge of a fraud would create liability under § 10(b) in the absence of a false or misleading representation by the lawyer, and a false or misleading statement is the sine qua non of a § 10(b) violation. Farlow v. Peat. Marwick, Mitchell Co., 956 F.2d 982, 988 (10th Cir. 1992).

6 with the passage of the PSLRA in 1995 Congress enacted § 10A of the 1934 Act, which does impose a limited whistle-blowing obligation on independent public accountants conducting audits required by the 1934 Act. See 15 U.S.C. § 78j-1. If. while conducting an audit required by the 1934 Act, an accountant "becomes aware of information indicating that an illegal act . . . has or may have occurred," he must disclose that fact to his client's board of directors. If appropriate action is not taken by the board of directors, then the accountant must disclose the illegal act to the SEC. Id.

While § 10(b) does not require lawyers to tattle on their clients, § 10(b) does prohibit lawyers from making false or misleading statements. Lawyers are rarely liable to non-clients for their work, unless they make statements which the lawyer knows, or should know, will be relied on by investors purchasing their client's securities. Schatz v. Rosenberg, 943 F.2d 485, 491-92 (4th Cir. 1991). Thus, many courts have held that lawyers owe investors a duty of full disclosure when they make statements on which they know investors will rely. Akin v. Q-L Investments, Inc., 959 F.2d 521, 531 (5th Cir. 1992). Chiarella may protect an attorney's silence in the face of a client's representations, but once the attorney joins in the making of representations, a duty of truthfulness and full disclosure applies. Alter v. DBLKM, Inc., 840 F. Supp. 799, 808 (D. Colo. 1993); Kline v. First Western Government Securities. Inc., 24 F.3d 480, 490-91 (3rd Cir. 1994).

MBP issued Negative Assurance Letters in each securitization. See RR Exhibit F. The letters were clearly written to give some level of assurance to the investors regarding the reliability of the PPMs. Plaintiffs allege that MBP's letters were specifically addressed to investors, and were included within the materials provided to investors. These allegations are sufficient to raise an inference that MBP knew its opinion letters would be communicated to investors, and that investors would rely on them in making their investment decisions. Having chosen to communicate with investors in this fashion, MBP owed the investors a duty of full disclosure.

Even if the Negative Assurance Letters only communicated a statement of belief, a statement of belief may be actionable under § 10(b) if it is not reasonably based on, or is inconsistent with, the facts at the time the statement is made. The following factual assertions are implicit in all statements of belief: (1) that the belief is genuinely held by the speaker, (2) that the speaker has a reasonable basis for his belief, and (3) that the speaker is not aware of any undisclosed facts tending to seriously undermine the accuracy of his belief. Grossman v. Novell, Inc., 120 F.3d 111 2, 1123 (10th Cir. 1997)⁷ In re Apple Computer Securities Litigation, 886 F.2d 1109, 1113 (9th Cir. 1989). A statement of belief can, therefore, be actionable under § 10(b) if the plaintiff can establish the falsity of any of the facts implicit in a statement of belief: that the speaker did not subjectively believe his statement of belief to be true, that the speaker did not have a reasonable basis for his statement of belief, or that the speaker was aware of certain undisclosed facts which tended to cast doubt on the accuracy of his statement of belief.⁸

7 In Grossman, a Tenth Circuit case, the CEO of Novell made a statement of belief regarding the merger of his company with another company. The Tenth Circuit held that the plaintiff in that case could establish that the CEO's statement of belief was false by showing that his statement of belief did not have a reasonable basis in fact (i.e., that it did not rest on a factual basis which justified the statement as accurate). Grossman, 120 F.3d at 1119, n. 6 1123 (citing Virginia Bankshares v. Sandberg, 501 U.S. 1083, 1093-94 (1991)).

8 See Eisenberg v. Gagnon, 766 F.2d 770, 776 (3d Cir. 1985);Herskowitz v. Nutri-System, Inc., 857 F.2d 179, 185 (3rd Cir. 1988);S.E.C. v. Infinity Group Co., 212 F.3d 180, 194 (3rd Cir. 2000); and Marx v. Computer Sciences Corp., 507 F.2d 485 (9th Cir. 1974).

When a statement of belief is based on underlying materials which on their face, or under the circumstances, suggest that they cannot be relied on without further inquiry, the failure to investigate further supports an inference that the speaker did not genuinely hold the belief expressed. Professionals expressing a belief on a subject have a duty to disclose information which casts doubt on their statements of belief. One court has described this duty as a duty "not to omit," which is in reality a facet of the general obligation to speak the full truth when one chooses to speak.⁹ This duty "not to omit" cannot be evaded simply by including a statement that the opinion is not based on an independent investigation. Whether or not an independent investigation has been conducted, a professional must disclose facts that have come to his actual attention when he knows, or should know, that those facts cast doubt on his statements of belief. If he does not, an inference is raised that he did not genuinely hold the belief expressed, and his statement of belief is misleading. Kline v. First Western Government Securities, Inc., 24 F.3d 480, 487 and 491 (3rd Cir. 1994) (relying on Eisenburg andHerskowitz).

9 See Rose v. Arkansas valley Environmental Utility Authority, 562 F. Supp. 1180, 1207 (W.D. Mo. 1983).

C) Conclusion

The general legal principles discussed in the preceding section, applicable in all § 10(b) cases brought against lawyers, establish that plaintiffs can satisfy § 10(b)'s misrepresentation or omission element with regard to MBP's Negative Assurance Letters by alleging that, given facts within its lawyers' actual knowledge at the time the Letters were issued, MBP did have a reason to believe that the PPMs were false or misleading. Plaintiffs need only allege that MBP lawyers were actually aware of facts that undermined the accuracy of the PPMs, and that MBP failed to disclose those facts in its Negative Assurance Letters or, absent disclosure, failed to investigate those facts to determine whether they materially impacted the accuracy of the PPMs.

ii. Plaintiffs — Well-Pled Allegations of Misrepresentations in the PPMs

Prior to the securitizations at issue in this case, no one had ever sold securities collateralized by credit card receivables. The success of these new securitizations depended solely on CFS' ability to successfully collect on the credit card receivables held by the trusts. Thus, the critical issue for potential investors was CFS' ability as a collector of charged-off credit card debt. CFS being aware of this, plaintiffs' allege that the essence of CFS' marketing pitch was that CFS had a unique ability, surpassing that of the original issuers of the credit cards, to collect on the receivables held by the trusts. Plaintiffs' allege that CFS claimed that it had special talent and expertise in resolving nonperforming debt, and that it had historically collected large sums of money on charged-off debt.

For each securitization, CFS estimated the amount it expected to collect on the pool of receivables held by each trust. To determine expected collections, CFS used a "proprietary" cash flow model which it used to calculate the Estimated Cash Recovery ("ECR") of each receivable held by the trusts. Plaintiffs allege that CFS told investors that the ECR model was based on numerous factors¹⁰ which had been identified from its historical experience as a collector of bad debt. CFS claimed that by considering these numerous factors, the FOR model could identify those receivables which were most characteristic of the type of debt which CFS had historicaliy found to be collectable. The ECR was, therefore, sold by CFS as a good faith estimate of the value of the receivables held by the trusts.

10 These factors included: whether the debtor is deceased or bankrupt; statutes of limitation; age of the debt; date of the most recent payment; whether there was a current telephone number for the deotor; the size of the outstanding balance; the issuer's collection success: and the issuer's extension and underwriting standards.

Pursuant to the Sale and Servicing Agreement between CFS and the trusts, CFS retained an interest in the receivables held in the trusts to the extent the value of the receivables exceeded that necessary to pay back the investors. CFS claimed that in its hands the receivables in each trust had an ECR well in excess of the amount needed to pay investors back. This difference between the ECR and the amount needed to pay back investors was referred to by CFS as the Residual. Plaintiffs allege that CFS used this alleged Residual to assure investors that each securitization was over-collateralized, and that CFS' and the investors' interests were directly aligned because CFS had an incentive to work hard to repay the investors out of collections so that CFS could begin to recover the Residual for itself. According to plaintiffs, CFS consistently touted the Residual as its most significant asset,

Plaintiffs allege that after the 1996 securitizations closed, CFS almost immediately began falling behind on its monthly collections targets. At that point, plaintiffs allege that it became clear to CFS that its ECR model did not accurately predict the value of the credit card receivables held by the trusts, and that CFS would not be able to achieve its monthly collection targets based solely on its ability to collect from the credit card debtors. Plaintiffs allege that in response, CFS inappropriately used "Puts" and loan sales to make up the difference each month between what CFS was collecting from the credit card debtors and its monthly collection targets.

Pursuant to the agreements entered into between CFS and the specified loan sellers, CFS had the option, under certain circumstances, of "putting back" a particular receivable with the seller. For example, CFS could return or "put" a receivable back to the seller if the credit card debtor turned out to be dead or if the debtor had filed bankruptcy before CFS bought the receivable from the seller. The seller would reimburse CFS for the sales price of any Putted receivables. Plaintiffs allege that the ECR assigned by CFS to a receivable was often significantly higher than the amount CFS paid the seller for the receivable. Thus, when CFS Putted a receivable, the original sales amount received from the seller was often significantly less than the ECR originally assigned to that receivable when the investors invested. Plaintiffs do not allege that Puts were improper. Rather, they allege that reporting the proceeds received from Puts as collections was improper because doing so made it appear, falsely, that CFS' ability to collect from the credit card debtors was better than it actually was.

Plaintiffs allege that through the first nine months of 1997, CFS sold large amounts of the trusts' best performing loans to an unaffiliated company named Cadle, Inc. ("Cadle"). In September 1997, Cadle refused to purchase any more loans from CFS. At that point, plaintiffs allege, CFS was in desperate need of cash to meet its overhead and monthly collections targets. According to plaintiffs, Cadle's withdrawal spawned the consideration of an initial public offering of stock in CFS, which never materialized, and what plaintiffs refer to as the Dimat fraud. Plaintiffs allege that the month after Cadle stopped purchasing loans, James Sill incorporated Dimat Corporation at Jay Jones' request. Once formed, Dimat immediately began purchasing worthless loans from CFS (i.e., loans with a $0 or negligible ECR) at premium prices. Sales to Dimat were made at the last possible moment each month in almost the exact amount needed to cover the shortfall between that month's collection target, and the amount CFS had received from Puts and from payments from the credit card debtors.

Plaintiffs allege that CFS reported the proceeds from the Cadle and Dimat loan sales as collections. Plaintiffs allege that CFS' reporting of the loan sale proceeds as collections was improper because doing so made it appear, falsely, that CFS' ability to collect from the credit card debtors was better than it actually was. Plaintiffs also allege that the loan sales to Cadle and Dimat violated the terms of the PPMs because the sales were not in accordance with CFS' Servicing Standards, and they were not in the best economic interest of the trusts or the investors as required by the PPMs. In particular, plaintiffs allege that the Cadle sales seriously reduced the number of receivables which could be converted and collected upon during the remaining term of the securitizations. Plaintiffs also allege that the Dimat sales were made to an affiliated company in violation of the PPMs' terms. See. e.g., RR Exhibit E, p. 24.

During the loan sales to Cadle, but before the loan sales to Dimat, Mitchell Vernick joined CFS as its CEO and President. Mr. Vernick, holder of a Wharton MBA, was the first outsider to join the top ranks of CFS management. Plaintiffs allege that within months of being hired, Mr. Vernick began to question the validity of CFS' business model. These concerns eventually led Mr. Vernick to resign within four months of being hired. Bill Bartmann requested that Jason Kravitt, the MBP partner in charge of the CFS account, investigate Mr. Vernick's resignation. Plaintiffs allege that during this investigation, Mr. Vernick tried to convince Mr. Kravitt that CFS' business model did not work and that CFS should not close another securitization. The securitizations did not stop, however, and MBP assisted in drafting a disclosure for subsequent PPMs about Mr. Vernick's resignation.

Plaintiffs allege that by the time they purchased their securities, MBP knew, or but for a reckless disregard of facts should have known, about loan sales to Cadle and Dimat and knew that CFS had to make the sales in order to meet its monthly collections targets. Plaintiffs allege, therefore, that MBP knew, or but for its recklessness should have known, that CFS' claims in the PPMs about its historical collections ability, its ECR model and the Residual were misleading. Plaintiffs allege that MBP knew, or but for its recklessness should have known, that CFS' historical collection performance was not as rosy as represented to investors; that CFS' collection ability was not supreme in the industry, and was in fact ineffective and overly expensive; that CFS' ECR model did not work and was not an accurate predictor of the value of the receivables held by the trusts; and that the securitizations were not over-collateralized because the Residual touted by CFS did not exist.

With its Negative Assurance Letters, MBP represented that its lawyers had no facts in their actual possession which gave them a reason to believe that the PPMs were false or misleading. Plaintiffs allege that this representation is false because MBP's lawyers were in actual possession of facts which gave them, or would have given them but for their recklessness, a reason to believe that the PPMs contained glaring omissions regarding the volume and purpose of CFS' loan sales and Puts. In particular, plaintiffs allege that the core representations underpinning the PPMs was that the trusts held receivables which backed the investors' notes and that CFS, with its excellent abilities as a loan collector, would collect on those receivables from the credit card debtors. See. e.g., RR Exhibit E, pp. 18 and 22-23. Plaintiffs allege that these core representations were misleading absent disclosures about the volume and purpose of CFS' loan sales. Absent disclosures about the volume and purpose of the loan sales, investors were mislead by the PPMs into believing that CFS would collect on the receivables from the credit card debtors using its revolutionary collections techniques, not by selling them. Absent disclosures in the PPMs regarding CFS reliance on loan sales to consistently meet collections targets, plaintiffs allege that statements in the PPMs about the ECR model and the Residual were misleading because the fact that CFS had to make loan sales demonstrated that the ECR model did not work and the Residual was potentially worthless.¹¹

11 The undersigned does not agree with MBP that these are the type of "vague statement[s] of corporate optimism," which the Tenth circuit has found not to be actionable under § 10(b) See Grossman v. Novell, Inc., 120 F.3d 1112, 1119-20 (10th cir. 1997)

With its Negative Assurance Letters, MBP also represented that its lawyers had no facts in their actual possession which gave them a reason to believe that the PPMs contained false statements. Plaintiffs allege that this representation is false because MBP's lawyers were in actual possession of facts which gave them, or would have given them but for their recklessness, a reason to believe that the following portions of the PPMs were false:

Statements About ECR

Statements About Mitchell Vernick

a. Plaintiffs allege that MBP knew, or but for its recklessness would have known, that statements in the PPMs implying that the ECR was a good faith estimate, albeit a subjective estimate, of the amount to be collected from the receivables held by the trusts were false. Plaintiffs allege that MBP knew, or but for its recklessness would have known, that the ECR model was not an accurate predictor of the value of the trusts' receivables See e.g., RR Exhibit E, pp. v-vi.

b. Plaintiffs allege that MBP knew, or but for its recklessness would have known, that statements in the PPMs that the ECR model was based on CFS' historical collections were false. Plaintiffs allege that MBP knew, or but for its recklessness would have known, that CFS' historical collections experience did not support the type of values the ECR model had assigned to the receivables See e.g., RR Exhibit E, p. 22.

c. Plaintiffs allege that MBP knew, or but for its recklessness would have known, that statements in the PPMs that the ECR model was an estimate of the amount CFS expected to collect over time based on its "own capabilities" were misleading. Given CFS' marketing pitch, plaintiffs allege that a reasonable investor would understand that CFS was going to use it "own capabilities" as a loan collector, not a loan seller, to collect on the loans. See, e.g., RR Exhibit E, p. 22.

a. Plaintiffs allege that MBP knew, or but for its recklessness would have known, that the disclosure in the PPMs it helped to draft about Mitchell Vernick's resignation from CFS was misleading. See, e.g., RR Exhibit H, p. 16.

b. Plaintiffs also allege that the Negative Assurance Letters' statement that MBP did not undertake "any independent investigation to determine the existence or absence" of facts is itself false because MBP did in fact conduct an independent investigation into the circumstances surrounding Mitchell Vernick's resignation. See RR Exhibit F, p. 2.

The undersigned finds that the allegations summarized in this section are sufficient to discharge plaintiffs' obligation under Fed.R.Civ.P. 9(b) and 15 U.S.C. § 78u-4(b)(1) to plead with particularity the "circumstances" constituting their § 10(b) claim against MBP. The allegations summarized in this section identify which MBP statements plaintiffs believe to be false or misleading and the reasons why plaintiffs believe those statements to be false or misleading. Nothing more is required by either Rule 9(b) or § 78u-4(b)(1) of the PSLRA,¹² MBP argues, however, that the Court should not accept the allegations summarized in this section as true because plaintiffs allegations are not well-pled.

12 certain plaintiffs allege that MBP was aware of additional false statements or omissions in the PPMs. See. e.g., No. 00-104, Doc. No. 125, pp. 20-30. The undersigned has, however, focused on the core allegations by all plaintiffs. Having found that these core allegations are sufficient to state a § 10(b) claim, the undersigned finds that the court need not address these additional allegations.

On a motion to dismiss, the plaintiff's well-pled allegations of fact must be taken as true. Allegations are not well-pled, however, if they are conclusory or based on unwarranted deductions of fact. This is especially true when the allegations of a compliant are contradicted by the very documents which form the basis of the plaintiff's claim (e.g., a Negative Assurance Letter or a PPM). Thus, if a document which forms the basis of the plaintiff's claim reveals facts which foreclose recovery as a matter of law, dismissal is appropriate. See GFF Corp. v. Associated Wholesale Grocers, Inc., 130 F.3d 1381. 1385 (10th Cir. 1997); Associated Builders, Inc. v. Alabama Power Co., 505 F.2d 97, 100 (5th Cir. 1974); and Northern Indiana Gun Outdoor Shows, Inc. v. City of South Bend, 163 F.3d 449, 454-55 (7th Cir. 1998). MBP argues that plaintiffs' allegations about loan sales are not well-pled because the PPMs disclose the fact that CFS could make loan sales; that the allegations regarding the PPMs' misleading Vernick disclosures are not well-pled because the actual language in the PPMs about Vernick's resignation is, as a matter of law, not misleading; and that the allegations regarding false or misleading statements in the PPMs about the ECR and Residual are not well-pled because in light of the Negative Assurance Letters' financial data exclusion MBP never made any representations about the ECR or Residual. The undersigned does not agree, and finds the allegations summarized in this section to be well-pled.

a) Loan Sales

MBP argues that the PPMs disclose the fact that CFS could sell loans held by the trusts under certain conditions, and that the proceeds of all loan sales would be treated as collections and deposited in the Collection Account. MBP argues that these disclosures in the PPMs preclude plaintiffs from arguing that the PPMs were misleading because investors were not told that CFS was making loan sales and reporting the proceeds as collections. The undersigned finds, however, that the PPMs' language regarding loan sales, and how the proceeds from loan sales are to be handled, is far from clear.

The PPMs provide that CFS, as the servicer of the trusts' receivables, may sell a de minimis amount of the receivables held by the trusts. The PPMs place the following conditions on sales of receivables from the trusts:

1. The sale must be consistent with CFS' Servicing Standards;

2. The sale must be in the best economic interest of the trusts and the investors;

3. The buyer must not be affiliated with CFS or the trusts;

4. The receivable must be sold for at least 75% of the ECR assigned to that receivable; and

5. The aggregate ECR for all receivables sold over the life of the securitization must be less than $5,000,000 (or a percentage of total ECR in some securitizations).

See. e.g., RR Exhibit E, p. 24. The PPMs do state that the "proceeds of any sale of Loans by the Servicer will be deposited in the Collection Account." Id. Plaintiffs admit, as they must, that they were aware that CFS could make loan sales under these conditions, and that the proceeds would be deposited in the "Collection Account." Plaintiffs argue, however, that they were never told that, and the PPMs do not say that, the proceeds from the sale of performing loans will be reported as collections. According to plaintiffs, the right to deposit an amount in the Collection Account does not translate under the PPMs into a right to report that amount as if it were collected from the credit card debtors.

Pursuant to the PPMs, payments of interest and principal on the investors' notes were to be made monthly based on the "Total Available Amount" for the preceding month. "Total Available Amount" is defined by the PPMs to include the following:

1. All "collections on the Loans (other than Non-Performing Loans)"

2. "Liquidation Proceeds;"

3. The proceeds of Puts;

4. All earnings on the "Reserve Account;" and

5. All immediately available funds in the "Collection Account."

See, e.g., RR Exhibit E, p. 4. "Liquidation Proceeds" is defined by the PPMs as "the aggregate amount received with respect to a Non-Performing Loan in any manner with respect to the liquidation of such Loan . . . ."Id. It is not clear from the definition of "Total Available Amount" how the proceeds from the sale of performing loans are to be treated.

The "Collection Account" is an account in the name of each trustee and for the benefit of the investors. The "Lock-Box Account" is maintained at the "Lock-Box Bank" and it is the account to which the credit card debtors were to make their payments, and to which CFS was required to send "Liquidation Proceeds" and any payments it happened to receive directly from the debtors. See, e.g., RR Exhibit E, pp. 7, 8, 46 and 53. Specifically, the "Servicing of Loans" section of the PPMs provides as follows:

[CFS] will deliver to the Lock-Box Bank for deposit in the Lock-Box Account all payments from obligors that are received by [CFS] relating to the Loans . . . and all Liquidation Proceeds within one Business Day after receipt thereof. The Lock-Box Bank will remit on a daily basis all collections received in the Lock-Box Account . . . to the Collection Account. "Collections" means with respect to any Loan . . . . all funds which are received by [CFS] . . . in payment of amounts owed in respect of such Loan . . . . or applied to amounts owed in respect of such Loan (including, without limitation, Liquidation Proceeds).

Id. at p. 46 (emphasis original). See also Id. at pp. 8 and 53. The term collections as defined in the "Servicing of Loans" section of the PPMs is referred to by the plaintiffs as capital "C" collections to distinguish it from small "C" collections referred to in the PPMs earlier definition of "Total Available Amount" discussed directly above.

MBP argues that the definition of collections in the "Servicing of Loans" section of the PPMs conclusively establishes that CFS was permitted for all purposes to report the proceeds of any loan sale as collections. MOP argues, therefore, that plaintiffs cannot be heard to argue that the PPMs are misleading because they do not disclose that CFS was selling loans and reporting the proceeds as collections. If the definition of collections in the "Servicing of Loans" section was the only statement on the issue, MBP's argument might be more persuasive. The undersigned finds, however, that the term "collections" as used in the PPMs is ambiguous.

One reasonable reading of the PPMs, consistent with plaintiffs' allegations, is that the definition of collections in the "Servicing of Loans" section of the PPMs is not intended to control throughout the entire PPM. Rather, the definition is limited to defining collections as used in the paragraph containing the definition. This interpretation is supported by the fact that the definition relied on by MOP is not contained in the PPMs' general definition section, but in a specific paragraph discussing the Lock-Box Bank's duties. See RR Exhibit E, pp. 1-1 1. If the broad definition of collections in the "Servicing of Loans" section of the PPMs were used as a general definition throughout the PPMs, the definition of "Total Available Amount," a term actually defined in the PPMs' general definition section, would be rendered confusing and nonsensical. As discussed above, "Total Available Amount" is the amount from which investors were to be paid monthly, and it was defined to include all "collections on the Loans (other than Non-Performing Loans)" and "Liquidation Proceeds" from the sale of Non-Performing Loans. If the definition of collections in the "Servicing of Loans" section applied to the whole PPM, there would be no need for the definition of "Total Available Amount" to list collections on the Loans and Liquidation Proceeds separately, as both of these items would be subsumed within the definition of collections in the "Servicing of Loans" section.

One reasonable reading of the quoted paragraph from the "Servicing of Loans" section of the PPMs is that the definition of collections in the last sentence of that paragraph only defines the term collections for purpose of the preceding sentence of the paragraph, which requires the Lock-Box Bank to remit on a daily basis all collections" received in the Lock-Box Account. It is reasonable to assume that the PPMs' drafters wanted to trigger the Lock-Box Bank's obligation to remit to the Collection Account whenever there was any money in the Lock-Box Account, and that :hey broadly defined what the Lock-Box Bank was to remit (i.e., collections) to achieve that purpose. The undersigned finds that the PPMs are, at best, ambiguous regarding whether proceeds from the sale of loans qualify as collections for all purposes. Given this ambiguity, the PPMs could be misleading absent additional disclosures about CFS' loan sales as alleged by plaintiffs.

It is also not clear from a reading of the PPMs as a whole that the sale of performing loans by CFS was ever contemplated. Even if they were, however, it is not the existence of a legal right to sell loans which plaintiffs allege was omitted from the PPMs. Rather, plaintiffs allege that what was not disclosed was the purpose for and the volume of the loan sales CFS was making, especially in the early months of a securitization. A right to sell a de minimis amount of loans over the course of a four year securitization as part of the normal administration of the securitization is one thing, and the right to sell performing loans on a monthly basis to meet your monthly collection targets is another. Plaintiffs allege that the later was occurring, and that the PPMs do not adequately disclose this fact. Given the ambiguity in the PPMs regarding collections and how proceeds from the sale of performing loans are to be treated, the undersigned finds that plaintiffs' allegations that the PPMs were misleading absent further disclosures regarding the purpose and volume of CFS' loan sales are well-pled.

b) Vernick Disclosure

The PPMs for the four securitizations following Mitchell Vernick's resignation contain the following disclosure:

At the request of the Chairman of the Board of CFS, effective May 30, 1997, Mitchell F. Vernick resigned from his position as Chief Executive Officer of CFS which he had held since January 13, 1997. Both the Chairman of the Board of CFS and Mr. Vernick considered his resignation appropriate in light of their different perspectives and opinions relating to a variety of issues concerning the business of CFS, including, among other matters, the management of the collection process, its capital market strategy and the value of the assets serviced by it.

RR Exhibit E. p. 16. Plaintiffs allege that this disclosure is misleading because it does not adequately disclose the real reasons for Mr. Vernick's departure from CFS. MBP argues that, as a matter of law, this disclosure adequately informs investors about the circumstances surrounding Mr. Vernick's departure from CFS.

While at CFS, Mr. Vernick was responsible for running the credit department, which was the department responsible for collecting from the credit card debtors. Mr. Vernick chose to leave CFS in May 1997, after only working for CFS for a little more than four months. Mr. Vernick wrote an unaddressed, hand-written resignation letter, although it is not clear to whom he gave a copy of the letter. See RR Exhibit G. As discussed above, William Bartmann, CFS' Chairman of the Board of Directors, engaged MBP to investigate Mr. Vernick's resignation, and MBP attorneys met with Mr. Vernick in Tulsa on May 28 and 29, 1997. Plaintiffs allege "upon information and belief" that Mr. Vernick communicated the substance of his hand-written letter to MBP attorneys during these meetings.¹³ It is the difference between what plaintiffs allege Mr. Vernick said were his reasons for leaving CFS and the reasons offered in the disclosure quoted above which plaintiffs allege make the disclosure in the PPMs misleadingly incomplete.

13 With regard to a § 10(b) claim, the PSLRA requires that plaintiffs "specify each statement alleged to have been misleading" and "the reason or reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1). When a plaintiff makes an allegation "upon information and belief" regarding these specific "statements," the PSLRA further requires plaintiff to "state with particularity all facts on which that belief is formed." Id. Thus, § 78u-4(b)(1) of the PSLRA does not apply to the allegation referenced in the text regarding Mr. Vernick reporting the contents of his resignation letter to MBP attorneys because the allegation in the text is not an "allegation regarding the statement or omission" alleged to be false or misleading. Rather, the allegation in the text relates to MBP's knowledge and should be evaluated, with the totality of the other allegations in the complaint, under § 78u-4(b)(2) when determining whether plaintiffs have stated "with particularity facts giving rise to a strong inference that [MBP] acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). In any event, even if § 78u-4(b)(1) applied to the allegation referenced in the text, the undersigned finds that plaintiffs have sufficiently stated with particularity the facts on which their belief rests.

Initially, plaintiffs point out that Mr. Vernick was employed at CFS pursuant to an employment contract which provided for compensation of $10 million to be paid over five years. Pursuant to this employment contract, Mr. Vernick would not receive his full salary if he resigned, but would receive full salary if he was fired without cause. Plaintiffs allege that when he left CFS, Mr. Vernick was paid his full $10 million salary, even though he had only worked for CFS for a little more than four months, and even though he resigned. Plaintiffs further allege that MBP attorneys recommended to CFS that it pay Mr. Vernick $10 million upon his departure. From these facts, plaintiffs reasonably infer that CFS paid Mr. Vernick his full salary as hush money so Mr. Vernick would soften his criticism of CFS. Plaintiffs allege that the fact that the head of collections at CFS was paid $10 million under the circumstances alleged is a material fact which should have been part of any disclosure about Mr. Vernick's departure from CFS, and that any disclosure not mentioning this $10 million payment is misleadingly incomplete. The undersigned agrees that, taking the facts alleged by plaintiffs as true, a reasonable juror could find that it would have been material for investors to know that while CFS was saying that Mr. Vernick and Mr. Bartmann had "different perspectives and opinions," CFS was paying Mr. Vernick $10 million to keep his perspectives and opinions to himself, and that a failure to disclose this fact, if true, makes the Vernick disclosure in the PPMs misleadingly incomplete.

Relying on Steiner v. Tektronix, Inc., 817 F. Supp. 867 (D. Or. 1992), MBP argues that contractual severance packages are typical and of no concern to investors. Steiner is, however, entirely distinguishable on its facts. In Steiner, plaintiff argued that senior management was motivated to mislead investors in order to maintain their "well-paying" and "prestigious" positions. The court did not agree, holding that there was an insufficient link between senior management's fear of unemployment and a motive to mislead investors. As evidence of this, the court pointed out that most senior managers are not worried about losing their jobs because they have contractual golden parachutes which provide large stock or cash severance packages. Id. at 885, n. 10. In this case, plaintiffs allege in essence that Mr. Vernick was paid hush money so that CFS could water down the nature of his concerns about CFS' business model without fear of him shouting to investors from the mountaintops what he really thought about CFS' business model. Given plaintiffs' allegations, a jury could find that it would be material for investors to know that CFS' former head of collections may have been silenced in the manner alleged by plaintiffs.

The undersigned has reviewed the Vernick resignation letter in detail, accepting as true plaintiffs' allegations that Mr. Vernick made the concerns expressed in this letter known to Mr. Bartmann and MBP attorneys. The primary reason for Mr. Vernick's resignation, as stated in the letter, was his concern that OPS' securitization model was not viable. Given these concerns, Mr. Vernick concluded that his professional integrity would no longer permit him to represent to investors that he thought they would be repaid in full. In particular, Mr. Vernick stated that he was certain that Base Case projections could not be met, and he was not even certain that Stress Case projections could be met.¹⁴ Mr. Vernick also stated that CFS' collections' overhead was so high that CFS could not continue to meet that overhead out of its servicing fees, and would have to continue to use cash from future securitizations to fund overhead; a practice which he believed must stop immediately. A reasonable jury could find that these concerns are not adequately addressed in the "different perspectives and opinions" disclosure which was included in the PPMs following Mr. Vernick's departure.

14 Base case and Stress Case are ECR models used by the ratings agencies. Base case used ECR values less optimistic than CFS' internal ECR values, and Stress case used worst-case-scenario ECR values. If Base Case were met, there would be enough collections to pay off investors with some left over for CFS. If only Stress case were met, there would only be enough collections to pay off investors with nothing left over for CFS.

MBP argues that the concerns expressed in Mr. Vernick's resignation letter are really nothing but a difference of opinion between himself and Mr. Bartmann regarding CFS' business operations. If this were true, MBP might have an argument that Mr. Vernick's difference of opinion with Mr. Bartmann regarding business strategy was not material and need not have been included in the PPMs. CFS chose, however, on MBP's recommendation to make a representation in the PPMs about Mr. Vernick's resignation in an attempt to allay the concerns of investors who knew about Vernick's departure. Having done so, that representation must be full and complete and not omit details which would make the representation misleading. In any event, a reasonable jury could find that Mr. Vernick's concerns did not relate just to a difference in business strategy, but instead related to the foundation upon which CFS was built. The undersigned finds, therefore, that plaintiffs' allegations that the Vernick disclosure in the PPMs is misleadingly incomplete are well-pled.

c) Financial and Statistical Data Exclusion

MBP's Negative Assurance Letters specifically state that by issuing the Letters MBP was not expressing any opinion with regard to the "financial and statistical data included or not included" in the PPMs. See. e.g., RR Exhibit F, p. 2. As discussed above, plaintiffs allege that the PPMs were false and misleading because they did not disclose (a) that CFS was consistently meeting its collections goals month after month with the proceeds of asset sales, including the sale of performing assets; (b) that CFS' ECR model was not an accurate predictor of the receivables' value; and (c) that in light of the loan sales and unsupportable ECR model, the securitizations were not over-collateralized (i.e., the concept of a Residual could not be supported). MBP argues that none of these core allegations is actionable because they are all based on "financial and statistical" data as to which MBP specifically did not opine in its Negative Assurance Letters. The undersigned does not agree.

In essence, MBP is asking the Court to define, without the benefit of a factual record, what the terms "financial and statistical" data mean in the context of the complicated securitization transactions at issue. If plaintiffs were basing their § 10(b) claims against MBP on misrepresentations in the audited financials which are part of the PPMs, the issue would be fairly clear, and the Court could probably rule as a matter of law that any allegation directed at MBP which is based on misstatements or omissions in the financial statements would be precluded by the "financial and statistical data" exclusion in MBP's Negative Assurance Letters. Plaintiffs' allegations against MBP are not, however, based on MBP's knowledge of misstatements or omissions in the financial statements attached to the PPMs. The issue is, therefore, more difficult to resolve on a motion to dismiss without a factual record.

The adjectives "financial" and "statistical" modifying the noun "data" are not self-defining. Their meaning must be determined in a context. For example, assume that the week before an offering of stock by company X, the CEO of company X tells the company's securities lawyer, who had issued a negative assurance letter with a "financial and statistical data" exclusion, that the financial statements attached to the offering materials are false because he has inflated company X's sales with proceeds from the sale of company X's manufacturing equipment. Is the attorney's knowledge of inflated sales a piece of "financial" or "statistical" datum such that the attorney would be justified in not amending his negative assurance letter to disclose the fact that sales had been inflated? Under these circumstances the undersigned concludes that a jury could find that the fact that sales had been inflated is not a piece of "financial" or "statistical" datum as contemplated by the lawyer's negative assurance letter. The undersigned finds the same to be true in this case. A fact finder could conclude that MBP's alleged knowledge that collections had been inflated with asset sales is not a piece of "financial" or "statistical" datum as contemplated by MBP's Letters. The same is true with MBP's alleged knowledge that the ECR model was not a reliable predictor of anything and that the concept of a Residual was not supportable. A fact finder could conclude, for example, that the terms "financial and statistical data" relate only to the traditional types of financial documents which are audited by the independent accountants involved in the securities transaction.

The cases cited by MBP on this issue are distinguishable on their facts.¹⁵ Initially, it must be pointed out that none of these cases involved a negative assurance letter of the type issued by MBP. Jansen stands for the unremarkable proposition that if a seller of securities explicitly tells you that he will not reveal facts a, b and c, then a buyer of the securities cannot premise a § 10(b) claim on a failure to disclose a, b or c. Jansen, 1 F.3d at 1077-78. The question in this case, of course, is whether what plaintiffs allege MBP failed to disclose is what they said they were not going to disclose (i.e., whether it is a, b or c).

15 See Jensen v. Kimble, 1 F.3d 1073 (10th Cir. 1993); Buford White v. Octagon Properties, Ltd., 740 F. Supp. 1553 (W.D. Okla. 1989); Fortson v. Winstead, McGuire, Sechrest Minick, 961 F.2d 469 (4th Cir. 1992); and Andreo v. Friedlander, Gaines, Cohen, Rosenthal Rosenberg, 651 F. Supp. 877 (D. Conn. 1986).

In Buford, the offering documents specifically stated that the financials incorporated into the offering documents were the sole responsibility of the issuer, they were unaudited, and that there was no representation that they complied with generally accepted accounting principals. Given these very precise disclosures, the court found that no plaintiff could have reasonably relied on any misstatements in the financial statements. Buford, 740 F. Supp. at 1566. The problem in this case, however, is that MBP's "financial and statistical data" limitation is not nearly as focused as the disclosures in Buford, and it is not at all clear, as it was in Buford, that the misstatements alleged by plaintiffs fall squarely within MBP's limitation. The same is true of theAndreo case where Peat Marwick specifically told investors that it had not verified the data on which the issuer's projections were based. The court held, therefore, that Peat Marwick could not be held liable because the projections turned out to be false or misleading. Andreo, 651 F. Supp. at 881. In Fortson, a lawyer issued a tax opinion regarding a securities offering. Buyers of the securities then sued the lawyer for failing to disclose that financial information in the offering documents was misleading. The court refused to impose liability on the lawyer, finding that a lawyer engaged only to issue a tax opinion does not also undertake to confirm the adequacy of the offering document's financial disclosures. Fortson, 961 F.2d at 475. In Fortson, it was clear that the misstatements alleged by plaintiffs were completely outside the scope of the topic on which the lawyer purported to make representations (i.e., the tax consequences of the transactions). As discussed above, given the ambiguous nature of the term "financial data" it is not at all clear that the misstatements alleged by plaintiffs are outside the scope of the topic on which MBP was making representations (i.e., whether it had any reason to believe that the PPMs contained a lie or omission).

The undersigned cannot find, therefore, that there are no set of facts which plaintiffs could prove at trial which would place their allegations outside of the financial and statistical data exclusion in MBP's letters. Consequently, the undersigned cannot recommend dismissal based on the financial and statistical data exclusion in MBP's letters.

b. Plaintiffs Adequately Allege That MBP Made Misrepresentations "In Connection With" The Purchase or Sale of a Security.

Plaintiffs must allege that MBP's alleged misrepresentations and omissions occurred "in connection with the purchase or sale of any security." 15 U.S.C. § 78j(b).

It is important to distinguish the role played by the "in connection with" requirement from that of causation and its subsidiary requirement, reliance. Whereas the "in connection with" element requires a nexus between the fraud and the purchase or sale of securities, the causation element requires a nexus between the fraud and the damages or between the purchase or sale and the damages.

C. Edward Fletcher, III, The "In Connection With" Requirement of Rule 10b-5, 16 Pepp. L. Rev. 913, 920 (1989) (footnotes omitted) (hereafter In Connection With).

Third parties such as lawyers, accountants, brokers, and credit agencies may commit fraud "in connection with" the purchase or sale of securities, even when those third parties are not themselves directly trading in the securities. See, e.q., Competitive Associates Inc. v. Laventhol, Krekstein. Horwath and Horwath, 516 F.2d 811, 815 (2nd Cir. 1975). As Professor Hazen has noted, "[a]ny statement that is reasonably calculated to affect the investment decision of a reasonable investor will be held to satisfy the "in connection with' requirement." In Connection With, 16 Pepp. L. Rev, at 932 (quoting T. Hazen, The Law of Securities Regulation, § 13.6 at 470 (1985)). This is consistent with the Tenth Circuit's holdings on this topic. The Tenth Circuit has held that a representation made to influence a party's investment decision or to induce a party to purchase a security is a representation made "in connection with" the purchase of a security.¹⁶

16 See United Intern. Holdings, Inc. v. Wharf (Holdings) Ltd., 210 F.3d 1207, 1221 (10th Cir. 2000) (citing SEC v. Jakubowski, 150 F.3d 675, 679 17th Cir. 1998) and Angelastro v. Prudential-Bache Secs., Inc., 764 F.2d 939, 943 (3d Cir. 1985)); and Arst v. Stifel. Nicolaus Co., Inc., 86 R3d 973, 977 (10th Cir. 1996) (holding that if defendant's allegedly deceptive conduct could not have had an impact on the plaintiff's decision to sell his shares, defendant's conduct was not in connection with the sale of a security).

Plaintiffs' allege that MBP issued its Negative Assurance Letters to influence the investors' decisions whether to purchase the SMART and GREAT securities at issue. In fact, plaintiffs' allegations support the inference that the letters served no other purpose. Plaintiffs allege that the Negative Assurance Letters were drafted by MBP in the first instance to satisfy the terms of the purchase agreements, pursuant to which the SMART and GREAT securities were sold. MBP's Negative Assurance Letters were a condition precedent to the investors' obligation to purchase the securities under the purchase agreements. See No. 99-829, Doc. No. 241, Exhibit 3, p. 14, § 8(a)(iii). The letters were, therefore, specifically drafted to trigger the investors' obligations to purchase the SMART and GREAT securities at issue. The undersigned finds, therefore, that plaintiffs have sufficiently alleged that the alleged misrepresentations and omissions in the Negative Assurance Letters were made "in connection with" the purchase or sale of a security.

c. Plaintiffs Adequately Allege That MBP Made Misrepresentations With Scienter.

Plaintiffs must allege that MBP made misrepresentations and omissions in its Negative Assurance Letters with scienter. Pursuant to the PSLRA, the totality of plaintiffs' allegations must also give rise to a "strong inference" that MBP made misrepresentations or omissions in its Negative Assurance Letters with scienter; a reasonable inference of scienter is not sufficient. See Main RR, Part IV. To establish scienter in a § 10(b) claim, plaintiffs must allege either that MBP knew the PPMs contained false or misleading statements and said otherwise in its Negative Assurance Letters, or that MBP was reckless when it issued the Letters. To establish recklessness, plaintiffs must allege that it was an extreme departure from the standards of ordinary care for MBP to issue Negative Assurance Letters stating that it had no reason to believe the PPMs contained false or misleading statements, and that this extreme departure from the standards of ordinary care created the risk that the investors would be mislead, and that MBP knew of this risk or that the risk was so obvious that MBP must have been aware of it. Id. at Part IV(C)(1).

The complaints at issue must be read as a whole to determine whether plaintiffs' allegations give rise to a strong inference of MBP's scienter. While certain allegations read in isolation may not give rise to a strong inference of scienter, taking each of plaintiffs' complaints as a synergistic whole, the undersigned finds that the complaints raise a strong inference that MBP acted with scienter. Following is a discussion which highlights those allegations in the complaints which form the core of this synergistic whole.

MBP's Multifaceted Representations of CFS

Plaintiffs allege that MBP, especially through Jason Kravitt, the MBP partner in charge of the CFS account, was intimately involved with the day to day management of CFS. Plaintiffs allege that this multifaceted representation of CFS and its principals gave MBP the opportunity to learn the intricate details of CFS' daily operations.

Mitchell Vernick's Resignation

Plaintiffs allege that in May 1997, after just four months on the job, Mitchell Vernick, CFS' President, CEO and manager of collections, concluded that CFS' securitization model did not work and that CFS should stop all securitizations. Mr. Vernick then resigned as a matter of professional integrity because he could no longer represent to investors that they would be repaid in full. Despite his resignation, Mr. Vernick was paid $10 million, his full contract salary for five years. In September 1997, while working on a draft prospectus for an IPO planned by CFS, plaintiffs allege that a MBP attorney wrote that Mr. Vernick "may have been paid off $10 million to leave." The fact that Mr. Vernick was paid $10 million was later disclosed in a draft prospectus for an IPO planned by CFS, although it was never disclosed in the PPMs.

Plaintiffs allege that Mr. Vernick shared the reasons for his resignation with Mr. Bartmann and other senior management at CFS. At Mr. Bartmann's request, MBP lawyers, including Mr. Kravitt, met with Mr. Vernick for several hours over the course of two days following his announced intention to resign. Plaintiffs allege that Mr. Bartmann told Mr. Kravitt of his conversation with Mr. Vernick and asked Mr. Kravitt to investigate the concerns Mr. Vernick had voiced to Mr. Bartmann and other senior management at CFS; concerns which were reflected in Mr. Vernick's handwritten resignation letter. See RR Exhibit G. At this meeting, plaintiffs allege that Mr. Vernick told Mr. Kravit in detail the concerns he had expressed to Mr. Bartmann and in his resignation letter. Plaintiffs allege further that during his meeting with Mr. Kravitt, Mr. Vernick used all information at his disposal to convince Mr. Kravitt that CFS should stop all securitizations. In particular, Mr. Vernick used information about CFS' actual collections performance, information which he had gathered while serving as head of collections. According to plaintiffs, Mr. Vernick wanted to convince Mr. Kravitt that CFS' ECR model was pure speculation without any foundation, historical or otherwise, and that CFS should stop closing securitizations.

Upon information and belief,¹⁷ plaintiffs allege that one piece of information Mr. Vernick showed Mr. Kravitt, and other MBP attorneys, was a chart summarizing CFS' collections performance. See No. 00-104, Doc. No. 109, Exhibit 5. According to plaintiffs, this chart demonstrates that CFS had never, in any month, collected from the credit card debtors anything close to its monthly collections targets, and that CFS was using the proceeds from asset sales and Puts to meet monthly collection targets. An unnamed MBP attorney wrote on the chart "selling/PUT to meet base?" Notes by another unidentified MBP attorney discussing the chart state as foflows: "Mitch showed chart that breaks CF [cash flow] into components . . . settlements[,] puts and conversion rates." Next to the words "conversion rates," in the attorney's handwriting are the words "disguised by sales."

17 See In. 23, supra.

According to plaintiffs, the chart shows that: (a) with respect to SMART 96-2, for the months of January, February and April 1997, the proceeds from loan sales made up 33%, 45% and 52% respectively of Base Case for those months; (b) with respect to SMART 96-3, for the months of January, February and April 1997, the proceeds from loan sales made up 9%, 39% and 32% respectively of Base Case for those months; and (c) with respect to SMART 96-4. for the month of April 1997, the proceeds from loan sales made up 43% of Base Case for that month. Plaintiffs also allege that the chart shows that CFS failed to meet its collections targets on SMART 96-2 and 96-3 in March 1997 because no loan sales were made that month in those securitizations. Immediately following his meeting with Mr. Vernick, plaintiffs allege that Mr. Kravit wrote "How much sales?" on another chart titled "SMART 96-2 Cumulative Contribution Cash Flow as a Percentage of Base Case and Stress Case for months 1-12, " and a month later he wrote "We should disclose ability of [CFS] to Sell the Loans, limits on it, policies how to decide, etc." Another MBP attorney working on the SMART 97-4 PPM also wrote: "Sale of loans and how to disclose JK?!"

The undersigned finds that plaintiffs' allegations regarding Mitchell Vernick raise a strong inference that MBP attorneys knew about the volume and purpose of CFS' loan sales.

Planned IPO

As part of a planned initial public offering of stock ("IPO") in CFS, plaintiffs allege that MBP researched the ability of CFS to obtain an exemption from registration under the Investment Company Act of 1940 ("ICA"). To evaluate any potential exemptions, plaintiffs allege that MBP had to determine the circumstances under which CFS sold loans, and the amount of loans it sold. For instance, MBP attorneys considered the fact that ICA rules would require registration if the loans were being sold for the purpose of generating gains or decreasing losses. These allegations support a strong inference that MBP lawyers spent a lot of time considering the nature and extent of CFS' loan sales.

On a draft prospectus in October 1997, the word "Diamet" is handwritten next to the section that states, "The Company buys receivables only for its own account and does not service or collect for third parties, except . . . the receivables in eight outstanding securitizations that it has sponsored." A later draft contains a similar statement, except that "[Diamet?]" is inserted into the text, and is not in the margin. Eventually, the question about Dimat was removed and the statement was revised to indicate that CFS "generally" does not service loans for third parties. These notations are strong indications that MBP attorneys knew that CFS was servicing loans which had been sold to a third party — Dimat.

Attorneys working on the ICA exemption continued to discuss the nature and purpose of CFS' loan sales to determine whether an exemption to registration would apply. Two lawyers asked of the loan sales "(is 1 out of 8) — primarily engaged?" These same lawyers expressed concern that the lawyers pushing for an ICA exemption in light of the loan sales were "being influenced by zealous advocacy for the client, fatigue, overwork and the stature of the main protagonist within the firm." One attorney working on a proposed prospectus for the planned IPO ultimately concluded that we "may need to disclose that, from time to time, the trust in a given securitization may sell some of its performing receivables in order to meet the monthly collection targets." These notations are strong evidence that MBP attorneys knew that CFS was selling performing loans and knew the purpose behind the sale of these loans — to meet monthly collection targets.

Plaintiffs allege that CFS' planned IPO essentially fell apart when Goldman Sachs, the investment banking firm with whom CFS intended to conduct the IPO, withdrew from the engagement under circumstances calling CFS' ECR model, and the performance of the securitizations, into question. In a memo to Mr. Bartmann and Caroline Benediktson regarding options facing CFS after Goldman Sachs' withdrawal, a MBP lawyer listed pros and cons for delaying the IPO. One of the pros listed was that a delay would give "CFS time to build additional track record with securitization model (or to modify model now), enhancing future acceptance of model by investment bankers." The same lawyer suggested that one of the steps CFS could take to make the IPO marketable in the future was to "consider revising Estimated Cash Recovery model to reflect CFS's actual collection experience." These allegations support an inference that MBP attorneys knew that CFS' ECR model did not reflect CFS' actual collection experience as CFS had represented to investors.

Motive

MBP is a national firm with a respected reputation, which is its most significant asset. As MBP argues, it is probably true that in the abstract MBP has no motive to do anything which would tarnish its valuable reputation. MBP is, however, a partnership composed of many individuals. Plaintiffs allege that at times MBP had as many as 200 lawyers working for CFS, and that it billed CFS for millions of dollars in fees. Individual lawyers often do have a motive to obtain and keep large clients such as CFS. It is, therefore, not without the realm of possibility that an individual lawyer in his desire to keep a large client may choose to ignore facts of which he is aware, or in his zeal to give the client what it wants, recklessly ignore facts. Plaintiffs allegations as a whole demonstrate that individual lawyers, like Jason Kravitt, certainly had a motive to continue to assist CFS in closing securitizations, and the Negative Assurance Letters were a necessary cog in CFS' securitization machine. The undersigned cannot, therefore, find as a matter of law that MBP had no motive to issue false or misleading Negative Assurance Letters.

Taking all of these allegations together, the undersigned finds that the allegations in plaintiffs' complaints give rise to a strong inference that MBP either (1) knew the PPMs were false or misleading, and said otherwise in its Negative Assurance Letters; or (2) knew of facts which put it on notice that the PPMs contained false or misleading statements, and that its failure to disclose these facts in its Negative Assurance Letters was an extreme departure from the standards of ordinary care which created a risk, known to MBP, that the investors would be mislead by MBP's Negative Assurance Letters. The undersigned recommends, therefore, that MBP's motions to dismiss be DENIED to the extent they seek dismissal of plaintiffs' § 10(b) claims for failure to adequately plead scienter.

d. Plaintiffs Adequately Allege That MBP Made Misrepresentations Upon Which Plaintiffs Relied.

Plaintiffs allege that in making their decision to purchase the SMART and GREAT securities at issue they, or their predecessors in interest whose claims they are asserting, relied on the truth of MBP's statement in its Negative Assurance Letters that MBP's lawyers did not have any reason to believe that the PPMs were false or misleading. This allegation is sufficient to survive a motion to dismiss. Neither Fed.R.Civ.P. 9 nor the PSLRA impose any special pleading requirements with regard to § 10(b)'s reliance element.

MBP tangentially argues that the Court should dismiss plaintiffs' § 10(b) claims because as a matter of law plaintiffs, in making their investment decisions, could not have relied on anything MBP said or did because they relied exclusively on the fact that the ratings agencies had given the SMART and GREAT securities an "A" rating. MBP's argument is, however, in reality an attack on the truthfulness of plaintiffs' allegation that they relied on MBP's Negative Assurance Letters; an attack not permitted at the motion to dismiss stage. Plaintiffs allege they relied on MBP's Letters, and MBP alleges that plaintiffs relied on the ratings agencies and not on the Letters. The trier of fact will have to determine the truth. Plaintiffs' allegation of reliance on the Letters is sufficient to survive a motion to dismiss, especially given that it is a reasonable inference that plaintiffs directly relied on the same type of representations on which the ratings agencies' "A" ratings were based.

In their briefs, plaintiffs argue that even if they had not directly relied on MBP's Negative Assurance Letters, as they allege they did, their § 10(b) claim would still be viable because the facts alleged in their complaints bring them within several "exceptions" to § 10(b)'s reliance requirement. See Joseph v. Wiles, 223 F.3d 1155, 1161-62 (10th Cir. 2000) (discussing these "exceptions"). In addition to their allegation of direct reliance on MBP's Negative Assurance Letters, plaintiffs argue (a) that they are entitled to a presumption of reliance under Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54 (1972) because this case primarily involves the omission of material facts by MBP;¹⁸ (b) that they are entitled to a presumption of reliance under the "fraud created the market" theory first articulated in Shores v. Sklar, 647 F.2d 462 (5th Cir. 1981);¹⁹ and (c) that their reliance on the ratings agencies' "A" rating is also reliance on MBP's Negative Assurance Letters because the "A" rating is based on the representations in MBP's Letters. Given that plaintiffs have adequately alleged direct reliance on MBP's Negative Assurance Letters, the undersigned finds that the validity of any of these "exceptions" to § 10(b)'s reliance requirement need not be addressed to resolve MBP's motions to dismiss.

18 In Affiliated Ute, the Supreme court held that the trier of fact in a § 10(b) case may presume reliance where the defendant fails to disclose material information. Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54 (1972). Thus, in an omissions case, positive proof of the investor's reliance on the omitted facts is not required to recover under § 10(b). All that is necessary is that the omitted fact be material. Often, however, a plaintiff alleges a mixture of misrepresentations and omissions. In these "mixed" cases, the Affiliated Ute presumption of reliance will apply only if the alleged omissions predominate over issues involving defendant's affirmative misrepresentations. See Joseph v. Wiles, 223 F.3d 1155, 1162 (10th Cir. 2000); Grubb v. FDIC, 868 F, 2d 1151, 1163 (10th Cir. 1989); Hoxworth v. Blinder, Robinson Co., Inc., 903 F.2d 186, 202 (3rd Cir. 1990); Sharp v. Coopers Lybrand, 649 F.2d 175, 188 (3rd Cir. 1981); and Professional Service Industries, Inc. v. Kimbrell, 841 F. Supp. 358, 360 (D. Kan. 1993) (refusing to apply Affiliated Ute presumption where investor's § 10(b) claims were primarily claims of misrepresentation).

19 Under this theory, if the plaintiff can show that the securities would have been legally or economically "unmarketable" but for the defendant's allegedly fraudulent conduct, plaintiff's reliance on the fraud that created a market for the otherwise unmarketable securities will be presumed. See Joseph v. Wiles, 223 F.3d 1155, 1163-64 (10th Cir. 2000); and T.J. Raney Sons. Inc. v. Fort Cobb, Oklahoma Irrigation Fuel Auth., 717 F.2d 1330, 1333 (10th Cir. 1983).

The undersigned recommends that MBP's motions to dismiss be DENIED to the extent they seek dismissal of plaintiffs' § 10(b) claims for failure to adequately plead reliance.

II. MBP'S BLUE SKY LIABILITY

A. OKLAHOMA SECURITIES ACT 1. Liability Under § 408(b)

Section 408(a)(2)(A) of the Oklahoma Securities Act ("OSA") imposes liability on those who offer or sell a security by means of any misstatement of material fact. See 71 Okla. Stat. § 408[ 71-408](a)(2)(A). Section 408(b) of the OSA imposes liability on "[e]very person who materially participates or aids in a sale . . . made by any person liable under [§ 408(a)(2)] . . . ." 71 Okla. Stat. § 408[ 71-408](b). See RR Exhibit C, pp. 7-11 for relevant excerpts of the OSA. The Oklahoma Supreme Court has held that to state a claim under § 408(b), plaintiff must allege: (1) that the defendant was a material participant or aided in the sale of securities by a seller, and (2) that the seller is liable²⁰ under § 408(a). Sullivan Engine, 910 P.2d 1052 at 1058. Plaintiffs have clearly alleged, and MBP does not argue otherwise, that CFS violated § 408(a)(2)(A) by selling the SMART and GREAT securities by means of a misstatement of material fact. Plaintiffs have, therefore, sufficiently alleged the second element of a § 408(b) claim as identified by the Oklahoma Supreme Court in Sullivan Engine.

20 To state a claim under § 408(b), plaintiffs need only allege that CFS is liable under § 408(a). Plaintiffs are not required to allege that CFS has already been adjudged to be liable under § 408(a). That is, plaintiffs do not have to produce a judgment of liability against a seller under § 408(a) before proceeding against an aider of the seller under § 408(b). South western Okla. Dev. Auth. v. Sullivan Engine works, Inc., 910 P.2d 1052, 1057-58 (Okla. 1996).

MBP's motions to dismiss are directed at the first element of plaintiffs' § 408(b) claim. Plaintiffs argue that MBP is liable under § 408(b) because MBP was a material participant in and aided in the sale of the SMART and GREAT securities by CFS. In particular, plaintiffs allege that:

1. CFS carried out all of the relevant securitizations under the constant tutelage of MBP;

2. MBP was intimately involved with the management of CFS, giving accounting and business, as well as, legal advice;

3. MBP designed and structured the securitizations and drafted the PPMs which were used by CFS to sell the securities;

4. MBP assisted in the preparation of due diligence materials for the investors to review;

5. MBP drafted the Negative Assurance Letters and legal opinion letters discussed above;

6. MBP attorneys attended and spoke at CFS-sponsored events designed to market and promote CFS and the securities;

7. MBP worked with the ratings agencies to ensure that the securities received an A rating; and

8. MBP answered questions posed directly by certain investors.

In short, plaintiffs allege that at all times MBP served CFS in a much broader capacity than merely drafting legal documents and providing legal advice. MBP moves to dismiss on the ground that these allegations are insufficient to establish the level of participation or aid required by § 408(b). The undersigned disagrees with MBP and finds that plaintiffs have sufficiently alleged that MBP materially participated in and aided the sale of securities by CFS.

Initially MBP argues, at least indirectly, that the Court's analysis of § 408(b) should be informed by the United States Supreme Court's holding in Central Bank of Denver. N.A. v. First Interstate Bank of Denver. N.A., 511 U.S. 164, 169 (1994). As discussed above, the court inCentral Bank held that § 10(b) "does not itself reach those who aid and abet . . . [but] prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act." Id. at 177. See Part 1(A)(1). supra, for a discussion of Central Bank. The Oklahoma Supreme Court has, however, rejected the argument that Central Bank's holding has any application to OSA § 408(b). Sullivan Engine, 910 P.2d at 1058-59. Section 10(b) does not expressly authorize a cause of action against aiders and abettors, and the Supreme Court in Central Bank simply held that the implied cause of action for aiding and abetting that had been created by the lower federal courts was not consistent with Congress' intent. As the Oklahoma Supreme Court has held, § 408, unlike § 10(b), has always expressly provided "for a private cause of action for those who materially participate or aid in the fraudulent sale." Sullivan Engine, 910 P.2d at 1059. Central Bank's holding does not, therefore, apply to § 408(b).

The undersigned is aware of only three cases directly addressing § 408(b)'s materially participates or aids" language. See Cook v. Westinghouse Credit Corp., No. 70, 081 (Okla.App. Oct. 16, 1990) (attached as Exhibit 19 to Doc. No. 109 in 00-104); Howell v. Ballard, 801 P.2d 127 (Okla.App. 1990); and Buford White v. Octagon Properties, 740 F. Supp. 1553 (W.D. Okla. 1989). The undersigned finds that all three cases support the denial of MBP's motions to dismiss.

In Cook, Pepco acted as general partner to various limited partnerships. Pepco wanted to sell interests in these limited partnerships. To accomplish this goal, Pepco approached Westinghouse Credit about providing financing for investments in the limited partnerships. Before financing the first loan, Westinghouse conducted an audit which raised the concern that the interests Pepco was selling might be securities which needed to be registered under the OSA. Westinghouse asked for an opinion letter from Pepco's outside counsel certifying Pepco's compliance with applicable securities laws. When Pepco's outside counsel refused to issue the letter, Pepco's inhouse counsel did. Westinghouse accepted the in-house counsel's opinion and issued the financing. The Oklahoma Department of Securities eventually issued a cease and desist order against Pepco, and ordered Pepco to make a recission offer to all investors. The investors then sued Westinghouse under § 408(b). The trial court granted summary judgment for the investors against Westinghouse, finding that Westinghouse had materially participated or aided in the sale of unregistered securities by Pepco.

On appeal the Oklahoma Court of Appeals, in an unpublished opinion,²¹ held that a bank that provides

21 Under Oklahoma law, an unpublished opinion by the Court of Appeals has no precedential value. See 20 Okla. Stat. § 30.5[ 20-30.5].

normal banking functions, such as lending, may not be held liable for their client's activities. However, this immunity does not continue when the financial institution departs from the normal money-lending function and actively participates in the affairs of the issuer or in the sales of the securities themselves.

No. 00-104, No. 109, Exhibit 19, p. 4. The court then went on to reverse the trial court's grant of summary judgment, holding as follows:

While Westinghouse did work in alternative ways to provide financing or refinancing to the limited partnerships, there exists a question of fact to be determined. Under the evidence reasonable minds could differ as to whether [Westinghouse's] activities extend beyond the normal banking function.

Id. If the evidence of Westinghouse's participation was enough to let the plaintiffs' § 408(b) claim go to the jury in Cook, the undersigned finds that the allegations in this case, which are more substantial than those in Cook, are sufficient to survive a motion to dismiss.

The undersigned also finds that plaintiffs' allegations fall within both exceptions to the general rule of non-liability for "normal" professional services which the court in Cook seemed to create. Plaintiffs certainly allege that MBP actively participated in CFS' affairs by being involved in nearly every aspect of CFS' corporate life, including the entire process of bringing the SMART and GREAT securities to market. Plaintiffs also allege that through its lawyers' presence at various investor pitch sessions, MBP actively participated in sales of the SMART and GREAT securities. As did the court

in Cook, the undersigned finds that reasonable minds could differ as to whether MBP's alleged activities extend beyond the normal "lawyering" function.²² Buford was a pre-Central Bank of Denver case in which the plaintiff raised an aiding and abetting claim under § 10(b) and a § 408(b) claim against a law firm. The plaintiffs in Buford alleged that the law firm had prepared a series of "prospectuses, offering circulars and related documents" in connection with its client's securities offering. Plaintiffs alleged further that these documents contained false and misleading statements of which the firm was aware. The law firm moved to dismiss the plaintiffs' claims for failure to state a claim. The trial court refused to dismiss the § 10(b) aiding and abetting claim, finding that the firm's alleged activities could be found by a jury to constitute "substantial assistance" in connection with its client's sale of securities in violation of § 10(b). Buford, 740 F. Supp. at 1566-67, n. 4. The court also refused to dismiss the § 408(b) claim, finding that the same "substantial assistance" supporting the § 10(b) claim qualified as "material aid" for purposes of § 408(b). Id. at 1569. In this case, plaintiffs allege that MBP was substantially more involved with CFS' securities transactions than the lawyers in Buford. If the § 408(b) allegations in Buford were sufficient to withstand a motion to dismiss, plaintiffs' allegations in this case certainly are.²³

22 See also, Howell, 801 P.2d at 129 (holding that participation in the "solicitation and negotiation" stages of a securities transaction is sufficient to trigger liability under § 408(b)); and Adams v. Arierican western Securities, Inc., 510 P.2d 838, 844 (Or. 1973) (en banc) (construing ORS 59.11513), which like § 408(b) imposes liability on any person who "participates or materially aids in [a] sale" by one who violates the Oregon Securities Act, and holding that it was for the jury to determine whether the lawyer performed services other than those "normally" performed by a lawyer for his client).

23 See also, the Buford court's discussion of plaintiffs' § 12 claims under the Securities Act of 1933. There, the court held that "it must be concluded that a law firm which is alleged to have prepared an offering memorandum but not to have any persona! contact with the plaintiff purchasers at best merely assists in another's solicitation efforts or participates in soliciting a purchase . . . ." Buford, 740 F. Supp. at 1559. This holding confirms the undersigned's finding that the court in Buford would have found that the MBP conduct alleged in this case qualifies as aiding and participating in CFS' sales of securities, especially considering that, unlike in Buford, the plaintiffs in this case do allege that MBP had personal contact with the investors.

The undersigned also finds that plaintiffs' allegations satisfy the test for "material" participation or aid articulated by the undersigned in ruling on James Sill's motions to dismiss. See Sill RR, Part II. Plaintiffs have clearly alleged that "but for" MBP's Negative Assurance Letters CFS' sales of securities could not occur. Plaintiffs have also adequately alleged facts from which it could be determined that MBP's conduct had the tendency, and in fact did, influence the plaintiffs' decisions whether to purchase the SMART and GREAT securities. Plaintiffs have, therefore, sufficiently alleged that MBP's participation and aid was "material." Id.

Given plaintiffs' allegations, the undersigned is not convinced that plaintiffs will be unable to prove any set of facts which establish that MBP materially participated in and aided CFS' sale of the SMART and GREAT securities. Consequently, the undersigned recommends that MBP's motions to dismiss plaintiffs' claims under § 408(b) of the Oklahoma Securities Act be DENIED.

2. Liability Under § 408(a)(2)

The plaintiffs in case numbers 99-829, 00-837, 00-838 and 00-839 purport to assert claims against MBP under § 408(a)(2) of the Oklahoma Securities Act. See 71 Okla. Stat. § 408[ 71-408](a)(2).

The complaints in the 837, 838 and 839 cases, which were all drafted by the same law firm, purport in Count III to state a claim under § 408(a) against "all Defendants" (i.e., Caroline Benediktson and MBP). MBP is not, however, specifically mentioned in the body of Count III, although Caroline Benediktson is. In its motions to dismiss, MBP pointed out this fact and stated that it was assuming the reference to "all Defendants" was error and that the plaintiffs in the 837, 838 and 839 cases did not intend to assert a § 408(a) claim against MBP. See No. 00-839, Doc. No. 24, p. 48 n. 32. In their response, the plaintiffs in 837, 838 and 839 do not argue that MBP's assumption was incorrect. In fact, these plaintiffs only discussed MBP's liability under § 408(b), and not under § 408(a). Id. at Doc. No. 31, pp. 20-21. The undersigned finds, therefore, that the plaintiffs in 00-837, 00-838 and 00-839 are not asserting claims against MBP under 71 Okla. Stat. § 408[ 71-408](a).

In Count VII of their complaint, the plaintiffs in 99-829 do specifically allege a cause of action against MBP under § 408(a). See Doc. No. 111, ¶¶ 319-27. To assert a claim under § 408(a)(2)(A), plaintiffs must allege that MEP "offered" or "sold" the SMART and GREAT securities. 71 Okla. Stat. § 408[ 71-408](a)(2)(A). "Offer" is defined to include any "solicitation of an offer to buy." Id. at § 2(t)(2). Thus, plaintiffs must allege that MBP successfully solicited an offer from plaintiffs to purchase SMART or GREAT securities. In its brief, MBP spends slightly over one page, which contains a long string-cite without any analysis, on the issue of whether it is a statutory seller under § 408(a). See No. 99-829, Doc. No. 183, pp. 31-32. In their response, plaintiffs spend one footnote discussing the issue, with even less analysis, and conclude by asking for leave to amend. Id. at Doc. No. 241, p. 32, n. 11. Given the lack of critical analysis by either party, the undersigned finds that the issue of whether

MBP is or is not a statutory seller under § 408(a) has not been properly raised by MBP's motion to dismiss in 99-829.²⁴

24 Deciding the issue of MBP's liability under § 408(a) is also not necessary in light of the undersigned's findings with regard to plaintiffs' § 408(b) claims. The undersigned has found that plaintiffs have stated a claim under § 408(b). There is, therefore, no reason to discuss whether MBP might also be liable under § 408(a) because a party liable under § 408(b) Is liable "to the same extent as" a party who is liable under § 408(a). If the Court disagrees with the undersigned's recommendation as to plaintiffs' § 408(b) claims against MBP, the court can remand the matter to the undersigned to determine, upon proper briefing by the parties, whether plaintiffs have sufficiently alleged that MBP is a statutory seller under § 408(a).

B. CLAIMS UNDER GEORGIA, IOWA, MASSACHUSETTS AND PENNSYLVANIA LAW

1. Georgia

MBP concedes that Georgia's Blue Sky Law is virtually identical to § 10(b). Thus, MBP's motions to dismiss plaintiffs' claims under Georgia law should be DENIED for the same reasons the undersigned recommended denial of the motions as to plaintiffs' § 10(b) claims. See No. 00-847, Doc. No. 38, p. 23; and Agapitos v. PCM Inv. Co., 809 F. Supp. 939, 948-49 (M.D. Ga. 1992).

2. Iowa

MBP concedes that Iowa's Blue Sky Law is substantially similar to Oklahoma's. Thus, MBP's motions to dismiss plaintiffs' claims under Iowa law should be DENIED for the same reasons the undersigned recommended denial of the motions as to plaintiffs' § 408(b) claims. See No. 00-847, Doc. No. 19, pp. 46-47 and Doc. No. 38, p. 23.

3. Massachusetts

Massachusetts law makes unlawful all "[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce. M.G.L.A. 93A § 2(a). "Trade or commerce" is defined to include "the offering for sale of any . . . security . . . ." Id. at § 1(b). The Liberty Company plaintiffs in 00-847 attempt to bring an action for violation of § 2(a") of Chapter 93A under § 11 of Chapter 93A, which provides as follows:

Any person who engages in the conduct of any trade or commerce and who suffers any loss of money . . . as a result of the use or employment by another person who engages in any trade or commerce of an unfair method of competition or an unfair or deceptive act or practice declared unlawful by section two . . . may, as hereinafter provided, bring an action . . . for damages.

No action shall be brought or maintained under this section unless the actions and transactions constituting the alleged unfair method of competition or the unfair or deceptive act or practice occurred primarily and substantially within [Massachusetts]. For the purposes of this paragraph, the burden of proof shall be upon the person claiming that such transactions and actions did not occur primarily and substantially within [Massachusetts].

M.G.L.A. 93A § 11 (emphasis added).

MBP argues that plaintiffs' claims under § 11 must be dismissed because plaintiffs do not engage in the "business" of purchasing or selling securities. Apparently, MBP interprets the "engages in the conduct of any trade or commerce to mean that the party bringing a § 11 claim must engage in the same type of trade or commerce in which the allegedly unfair or deceptive practice occurred. Such an interpretation is, however, inconsistent with the language of the statute quoted above, and its interpretation by Massachusetts courts. The language of § 11 only requires that the party bringing a claim under § 11 be engaged in "any" trade or commerce. Massachusetts courts have also frequently held that § 11 was intended to provide a private cause of action to a person who is engaged in business and who suffers a loss as a result of an unfair or deceptive act or practice by another person also engaged in business. Section 11's "trade or commerce" limitation serves only to distinguish "business" parties from regular "consumer" parties who have a separate cause of action, with different procedural requirements, under § 9 of Chapter 93A. Section 11 applies to claims brought by business persons, while § 9 applies to a person who participates in a commercial transaction on a private, nonprofessional basis. Lantner v. Carson, 373 N.E.2d 973, 976 (Mass. 1978); Manning v. Zuckerman, 444 N.E.2d 1262, 1263-64 (Mass. 1983). The undersigned finds, therefore, that plaintiffs' allegations as a whole are sufficient to establish that they are business persons engaged in "trade or commerce" within the meaning of § 11.

MBP argues that plaintiffs' claims under § 11 must also be dismissed because plaintiffs have not alleged facts sufficient to show that MBP's alleged deceptive acts or practices occurred "primarily and substantially" within Massachusetts. As § 11 indicates, MBP bears the burden of establishing that its conduct did not occur primarily and substantially within Massachusetts. Plaintiffs do not, therefore, have to allege that MBP's conduct occurred primarily and substantially in Massachusetts; the lack of primary or substantial contact with Massachusetts is a defense for MBP to raise, not an element of plaintiffs' claim under § 11. The Court cannot on a motion to dismiss, in the absence of a factual record, determine whether MBP will carry its burden of proof on this issue. Regardless, the fact that MBP may be able to raise a successful defense to a claim pled by plaintiffs does not establish that plaintiffs have not sufficiently pled that claim in the first instance.²⁵

25 Massachusetts' courts have outlined a "pragmatic [and] functional approach" for determining whether alleged misconduct occurred "primarily and substantially" in Massachusetts. This approach can be distilled to three principal inquiries: 11) where the defendant committed the deception; (2) where plaintiff was deceived and acted on the deception: and 13) the situs of plaintiff's losses due to the deception. The location of the person to whom the deceptive statements were allegedly made is, however, of special significance, as distinguished from the location of the person who uttered the deceptive statements. The vicitm's ingestion of a deceptive statement, and the subsequent effects from reliance on the deceptive statement, are what give the deceptive statement its venomous sting. The first factor is, therefore, the least weighty. Play Time, Inc. v. LDDS Metromedia Comm., Inc., 123 F.3d 23, 32-33 (1st Cir. 1997). The undersigned finds that the allegations in the complaint give rise to a reasonable inference that The Liberty Company plaintiffs acted on MBP's alleged deceptive acts in, and suffered losses in, Massachusetts. This is not a case, therefore, where the basis of the affirmative defense appears plainly on the face of the complaint, consequently, the defense cannot be considered on a motion to dismiss.See. e.g., Miller v. Shell Oil Co., 345 F.2d 891, 993 (10th Cir. 1965); and Bullington v. United Air Lines, Inc., 186 F.3d 1301, 1311 n. 3 (10th Cir. 1999).

MBP argues that plaintiffs' § 11 claim must be dismissed because Massachusetts' courts have limited § 11 liability against lawyers to claims brought only by their clients. Such an argument is not, however, supported by the case law in Massachusetts. An attorney can be held liable under § 11 outside of an attorney-client relationship if he is acting in a business context with the third-party.

[A]n attorney or law firm may incur [§ 11] liability to a nonclient or to an adversary of its client, if [the law firm] joins its client in marketplace communications to the adversary rather than merely relay[ing] its client's positions; and if those marketplace communications knowingly or carelessly turn out to be false, misleading, and harmful. In such situations the attorney has arguably crossed from traditional representation into active participation in trade and commerce. If the . . . law firm confines itself to the functions of traditional representation such as the commencement of litigation against the adversary, or the counseling about and drafting of testamentary documents, it has not acted in a "business context" or injected itself into trade or commerce so as to trigger [§ 11] exposure.

Coggins v. Mooney, No. CIV.A. 94-0844, 1998 WL 156998, at *5 (Mass.App.Ct. Apr 03, 1998), aff'd sub nom, Miller v. Mooney, 725 N.E.2d 545, 551 (Mass. 2000).

In light of the court's holding in Mooney, the issue is whether MBP injected itself into trade or commerce by joining CFS in making marketplace communications to plaintiffs. The allegations in plaintiffs' complaint certainly raise the inference that by issuing the Negative Assurance Letters discussed above, it joined CFS in making marketplace communications and injected itself into trade or commerce. See Kirkland Construction Co. v. James, 658 N.E.2d 699 (Mass.Ct.App. 1995), review denied by, 661 N.E.2d 935 (Mass. 1996) (attorney who affirmatively represented to a third party that his client would have financial resources to pay the third party upon completion of work by the third party could be liable under § 11 despite the fact there was no attorney-client relationship between the attorney and the third party because attorney had injected himself into trade or commerce).

For the foregoing reasons, the undersigned recommends that MBP's motions to dismiss plaintiffs claims under 93A M.G.L.A. § 11 be DENIED.

4. Pennsylvania

Under Pennsylvania law, like under § 10(b), it is unlawful "for any person, in connection with the offer, sale or purchase of any security . . . [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading . . ." 70 Penn. Stat. § 1-401. Section 1-401 does not itself create a private cause of action for its enforcement. The Pennsylvania legislature provided for a private cause of action in § 1-501, which provides that "[a]ny person who . . . offers or sells a security in violation of [§ 1-401] . . . shall be liable to the person purchasing the security from him, who may sue either at law or in equity . . ." Id. at § 1-501. By its own terms, this section applies to offers or sellers of securities, and plaintiffs have not alleged that MBP was the offeror or seller of the SMART or GREAT securities, CFS was. Thus, MBP cannot be held liable under § 1-501, and plaintiffs do not argue otherwise. Rather, plaintiffs attempt to hold MBP liable under § 1-503 as an aider and abettor of CFS' violation of § 1-501.

Section 1-503 provides as follows:

Joint and several liability; contribution; corporation's right of indemnification.

(a) Every affiliate of a person liable under section 501 . . . every partner, principal executive officer or director of such person, every person occupying a similar status or performing similar functions, every employee [sic] of such person who materially aids in the act or transaction constituting the violation, and every broker-dealer or agent who materially aids in the act or transaction constituting the violation, are also liable jointly and severally with and to the same extent as such person, unless the person liable hereunder proves that he did not know, and in the exercise of reasonable care could not have known, of the existence of the facts by reason of which the liability is alleged to exist.

(b) A corporation which is liable under this act shall have a right of indemnification against any of its affiliates whose wilful violation of any provision of this act gave rise to such liability. All persons civilly liable under this act shall have a right of contribution against all other persons similarly liable, based upon each person's proportionate share of the total liability, except that no person whose wilful violation of any provision of this act has given rise to any civil liability shall have any right of contribution against any other person guilty merely of a negligent violation.

70 Penn. Stat. § 1-503.

In their complaint plaintiffs allege that MBP is liable under the Pennsylvania Securities Act "because [MBP] aided and abetted the fraudulent sales perpetrated by CFS and its agents." See No. 00-847, Doc. No. 25, ¶ 404. Plaintiffs admit that in making this allegation they erroneously referred to § 1-501, and not § 1-503, of the Pennsylvania Securities Act. MBP argues that because plaintiffs referred to § 1-501, and not § 1-503, in their complaints plaintiffs are precluded from relying on § 1-503. The undersigned does not agree. A complaint is not subject to dismissal merely because a plaintiff's allegations do not support the particular legal theory it advanced in the complaint. Courts are under a duty to examine the complaint to determine if the allegations will support relief on any possible legal theory. 5 Wright Miller, Federal Practice and Procedure: Civil 2d § 1357, pp. 336-37 (1990); Perinoton Wholesale, Inc. v. Burger King Corp., 631 F.2d 1369, 1375 n. 5 (10th Cir. 1979) (citing Wright Miller);Bowers v. Hardwick, 478 U.S. 186, 202 (1986). Thus, the mere fact that plaintiffs referred to § 1-501, rather than § 1-503, will not subject their complaint to dismissal if the allegations in the complaint are sufficient to establish liability under § 1-503.

The Miller Anderson and Morgan Stanley plaintiffs argue that § 1-503 provides them a private cause of action against a non-seller who aids and abets a seller in a violation of § 1-401. MBP argues that § 1-503 by its own terms does not provide a separate, private cause of action in favor of plaintiffs. Rather, MBP argues, § 1-503 provides a seller who has been found liable under § 1-501 a right to contribution and indemnity under the circumstances stated in § 1-503. The undersigned agrees with MBP's reading of § 1-503.

The cases which have considered whether § 1-503 creates a separate cause of action for aiding and abetting a violation of § 1-401 are in considerable disarray and in direct conflict with each other. The undersigned finds, however, that the weight of considered authority, as opposed to dicta, is against recognizing a cause of action for aiding and abetting under § 1-503.

The only Pennsylvania state court opinion, as opposed to a Pennsylvania federal district court opinion, cited to the Court which considers the issue is Brennan v. Reed. Smith. Shaw and McClay, 450 A.2d 740, 747 (Pa.Super.Ct. 1982). In that case, however, the plaintiff had already been sued by the investors under § 1-501 and found liable. Plaintiffs then brought an action against their securities lawyer. In its opinion, the court in Brennan struggled with whether the action against the lawyer was one for malpractice or an action for contribution. There is nothing in the court's discussion of § 1-503 which clearly suggests that an independent action, as opposed to an action for contribution, is authorized by § 1-503.

The following federal district court cases all hold that § 1-503 gives a seller that has been held liable under § 1-501 a right to contribution and indemnity, and that § 1-503 does not create a separate cause of action for aiding and abetting a violation of § 1-401 by a seller. See Penturelli v. Spector Cohen Gadon Rosen, 640 F. Supp. 868, 871-72 (E.D. Penn. 1986); Schor v. Hope, No. 91-0443, 1992 WL 22189, at *3-4 (E.D. Pa. Feb. 4, 1992); In re Securities Litigation, 892 F. Supp. 676, 688-89 (W.D. Penn. 1995); and Klein v. Boyd, 949 F. Supp. 280, 283 (E.D. Penn. 1996)²⁶ The undersigned finds that these cases more consistently interpret the language of § 1-503, which does not clearly impose liability for aiding and abetting a violation of § 1-401.²⁷ The undersigned recommends, therefore, that the Court GRANT MBP's motions to dismiss plaintiffs' claims under 70 Penn. Stat. § 1-503.

26 The Kilen decision was originally affirmed by the Third circuit. However, on March 9, 1998 the Third circuit vacated its decision and set the matter for en banc review. To date no en banc decision has been rendered. See Klein v. Boyd, Nos. 97-1143 and 97-1261, 1998 WL 55245 (3rd Cir. Feb 12, 1998). In an earlier opinion, the Third circuit was called upon to decide which statute of limitations to apply to a § 10(b) claim — the state limitations period for general fraud or the state limitation period for blue sky claims. In discussing claims under Pennsylvania's blue sky laws, the court held that § 1-503 only "affects joint and several liability, contribution and a corporation's right to indemnification . . . ." Gruber v. Price waterhouse, 911 F.2d 960 (3rd Cir. 1990). This statement is similar to a statement made by the court a decade earlier in Biggans v. Bache Halsey Stuart Shields, Inc., 638 F.2d 605 (3rd Cir. 1980). There the court held that the "sole source of civil liability for any acts in violation of [§ 1-401] of the Pennsylvania Securities Act . . . is found in [§ 1-501] . . . ." Id. at 609. Thus, Biopans and Gruber are the Third circuit's last comments on § 1-503, given that its decision in Kilen was vacated, and both of those decisions support the conclusion that § 1-503 does not create a private cause of action for aiding and abetting a violation of § 1-401.

27 But see, Bull v. American Bank and Trust Co. of Pa., 641 F. Supp. 62, 86 n. 5 (E.D. Penn. 1986) (suggesting in dicta that direct liability under § 1-503 "might also exist" as to non-sellers); Carroll v, John Hancock Distributors, Inc., No. Civ. A. 92-5907, 1994 WL 87160, at *5 (E.D. Penn. Mar 14, 1994) (holding without any discussion that § 1-503 imposes liability on aiders and abettors); St. Julien v. Andrews, No. Civ. A. 972236, 1998 WL 134223, at *4 (E.D. Pa. Mar, 24, 1998) (relying on a prediction of how the Third Circuit's en banc decision inKlien might turn out); and Jairett v. First Montauk Securities Corp., No. Civ. A. 00-1889, 2001 WL 267869, at *12 (E.D. Pa. May 14, 2001) (holding that the plain language of § 1-503 "seems" to contemplate a private suit by an investor against a non-selling broker).

III. FRAUD AND NEGLIGENCE CLAIMS UNDER OKLAHOMA LAW

Various plaintiffs assert claims under Oklahoma law for fraud, deceit, constructive fraud, aiding and abetting fraud, conspiracy to commit fraud, negligent misrepresentation, and malpractice. As to these causes of action, MBP argues, as it did in connection with plaintiffs' § 10(b) claims, that they should be dismissed because plaintiffs have not properly alleged (1) standing, (2) an actionable misstatement or omission by MBP, (3) scienter (where required), or (4) reliance. For the reasons discussed above in connection with plaintiffs' § 10(b) claims, the undersigned does not agree with MBP. The undersigned finds that plaintiffs have sufficiently alleged these elements in connection with their state law claims.

A. COMMON LAW FRAUD I DECEIT

Common law fraud claims and claims for deceit under 76 Okla. Stat. § 3[ 76-3] are treated identically under Oklahoma law. See RR Exhibit C, pp. 13-14. The elements of these claims are substantially similar to a § 10(b) claim. Id. Thus, for the reasons discussed above in connection with plaintiffs' § 10(b) claim, the undersigned recommends that MBP's motions to dismiss plaintiffs' common law fraud and deceit claims under Oklahoma law be DENIED.

B. AIDING AND ABETTING FRAUD

The undersigned agrees with the Western District of Oklahoma and finds no authority in Oklahoma for recognizing a common law claim for aiding and abetting fraud. See Eastwood v. National Bank of Commerce, 673 F. Supp. 1068, 1081 (W.D. Okla. 1987). The undersigned recommends, therefore, that MBP's motions to dismiss plaintiffs' claims under Oklahoma law for aiding and abetting fraud be GRANTED. See RR Exhibit C, pp. 14.

C. CONSTRUCTIVE FRAUD

Constructive fraud is statutorily defined in Oklahoma as "any breach of duty which, without an actually fraudulent intent, gains an advantage to the person in fault, or any one claiming under him, by misleading another to his prejudice, or to the prejudice of anyone claiming under him." 15 Okla. Stat. § 59[ 15-59](1) (emphasis added). Thus, to state a claim under § 59, a plaintiff must establish that the defendant owed some form of duty to the plaintiff. Roberts Ranch Co. v. Exxon Corp., 43 F. Supp.2d 1252, 1259 (W.D. Okla. 1997). MBP argues that plaintiffs' must allege that this duty arose out of a "special confidential or fiduciary relationship" between MBP and plaintiffs, and that plaintiffs' constructive fraud claims should be dismissed because they do not allege such a relationship. The undersigned disagrees with MBP's narrow reading of the type of duty required to state a claim under § 59.

The Western District of Oklahoma considered § 59 in Roberts and held that § 59 requires the plaintiff to allege that the defendant violated some duty to the plaintiff, "such as a fiduciary duty or a "duty based upon a confidential relationship or a special relationship of trust."' Roberts, 43 F. Supp.2d at 1259 (citing Buford). See also Uptegraft v. Dome Petroleum Corp., 764 P.2d 1350 (Okla. 1988); andFaulkenberry v. Kansas City Southern Railway Co., 602 P.2d 203, 206 (Okla. 1979). The court in Roberts recognized that this duty can arise in a number of contexts, including when one undertakes to speak and conveys only partial information to the other party. Roberts, 43 F. Supp.2d at 1259 n. 12. "Under Oklahoma law, a duty to speak may arise from partial disclosure if, under the circumstances, partial disclosure is misleading. One conveying a false impression by the disclosure of some facts and the concealment of others is guilty of fraud even though his statement is true as far as it goes, since concealment is in effect a false representation that what is disclosed is the whole truth." Id. (citing Uptegraft). See also RR Exhibit C, p. 15. Oklahoma law on this point is consistent with the discussion of federal law in Part 1(B)(2)(a)(i)(b), supra. The undersigned finds that plaintiffs have sufficiently alleged a breach of the duty of full disclosure MBP owed to the investors once MBP chose to speak to the investors. The undersigned recommends, therefore, that MBP's motions to dismiss plaintiffs' constructive fraud claims be DENIED.

D. CONSPIRACY TO COMMIT FRAUD

A civil conspiracy is an agreement between two or more persons to do an unlawful act, or to do a lawful act by unlawful means. Unlike its criminal counterpart, the agreement itself does not create liability. To be liable, the conspirators must actually pursue an independently unlawful purpose or use an independently unlawful means. A conspiracy between two or more persons to injure another is not enough; an underlying unlawful act is also necessary. The conspirators' agreement may be established by direct or circumstantial evidence. However, unless there is direct evidence of an agreement, the conspirators' agreement must be established by clear and convincing evidence. See Brock v. Thompson, 948 P.2d 279, 294 (Okla. 1997); Shadid v. Monsour, 746 P.2d 685, 689 (Okla.App. 1987); Dill v. Rader, 583 P.2d 496 (Okla. 1978); andWright v. Cies, 648 P.2d 51, 52-53 n. 2 (Okla.App. 1982). See also RR Exhibit C, pp. 14-15.

MBP argues that plaintiffs' conspiracy claims must be dismissed because plaintiffs fail to plead in any detail the existence of an agreement between MBP and anyone else to injure plaintiffs. In response, plaintiffs have not pointed the Court to any specific allegations which establish the type of agreement required to impose liability on MBP for civil conspiracy. The undersigned recommends, therefore, that MBP's motions to dismiss plaintiffs' civil conspiracy claims be GRANTED.

E. NEGLIGENCE

Plaintiffs assert negligent misrepresentation and malpractice claims against MBP. MBP argues that the negligent misrepresentation claims must be dismissed because it owed no duty to plaintiffs, and that the malpractice claims must be dismissed because MBP owed no duty of professional responsibility to plaintiffs, who were not MBP's clients. The undersigned agrees that the malpractice claims should be dismissed, but finds that plaintiffs have properly stated negligent misrepresentation claims. See RR Exhibit C, pp. 16-17 for the elements of these Causes of action.

As discussed above, the undersigned finds that under Oklahoma law a duty of full disclosure arises when one volunteers to speak and provides information to influence another but fails to disclose the whole truth.Roberts, 43 F. Supp.2d at 1259 n. 12; Ragland v. Shattuck Nat. Bank, 36 F.3d 983, 991 (10th Cir. 1994); MSA Tubular Products v. First Bank and Trust Co., 869 F.2d 1422 (10th Cir. 1989). "Although a party may keep absolute silence and violate no rule of equity, yet, if he volunteers to speak and to convey information which may influence the conduct of the other party, he is bound to disclose the whole truth." Uptegraft, 764 P.2d at 1353-54. See also Bradford Securities Processing Services. Inc. v. Plaza Bank and Trust, 653 P.2d 188 (Okla. 1982); and Restatement (Second) Torts § 552 (1977). The undersigned finds that plaintiffs have sufficiently alleged a breach of the duty of full disclosure MBP owed to the investors once MBP chose to speak to the investors. The undersigned recommends, therefore, that MBP's motions to dismiss plaintiffs' negligent misrepresentation claims be DENIED.

Plaintiffs argue that under Oklahoma law, malpractice claims are not necessarily limited to claims brought by clients. The undersigned finds, however, that in those cases relied on by plaintiffs in which a court allowed a claim against a lawyer by a nonclient, the court was simply finding that the non-client had stated a negligent misrepresentation claim against the lawyer. The issue in those cases was whether it was reasonably foreseeable to the lawyer that the communications to his client, in the form of an opinion letter or otherwise, would be detrimentally relied upon by a nonclient. If such reliance was reasonably foreseeable, the courts applied ordinary tort analysis, and found that the lawyer owed a duty to the non-client. Whether the breach of such a duty by a lawyer is "malpractice" in the general sense is not relevant; the duty exists. See Vanguard Production, Inc. v. Martin, 894 F.2d 375 (10th Cir. 1990).

The undersigned finds that under Oklahoma law, a technical "malpractice" action is limited to an action brought by a client for breaches of duty arising out of an attorney-client relationship.Whitehead v. Rainey, Ross, Rice Binns, 997 P.2d 177, 179 (Okla. 1999). Plaintiffs do not allege that there was an attorney-client relationship between themselves and MBP. Consequently, the undersigned recommends that MBP's motions to dismiss plaintiffs' malpractice claims be GRANTED.

RECOMMENDATION

For the reasons discussed above and in the Main RR, the undersigned recommends that MBP's motions to dismiss be GRANTED as to the following claims: (1) claims under 70 Penn. Stat. § 1-503, (2) claims under Oklahoma law for aiding and abetting fraud, (3) claims under Oklahoma law for civil conspiracy, and (4) claims under Oklahoma law for malpractice.

For the reasons discussed above and in the Main RR, the undersigned recommends that MBP's motions to dismiss be DENIED as to the following claims: (1) claims under § 10(b) of the 1934 Securities Act; (2) claims under § 408(a)(2)(A) of the Oklahoma Securities Act; (3) claims under § 408(b) of the Oklahoma Securities Act; (4) claims under the Blue Sky laws of Georgia, Iowa and Massachusetts; (5) claims under Oklahoma law for fraud, deceit and constructive fraud; and (6) claims under Oklahoma law for negligent misrepresentation.

REPORT AND RECOMMENDATION REGARDING THOSE CLAIMS PLED AGAINST CAROLINE BENEDIKTSON TABLE OF CONTENTS

I. MS. BENEDIKTSON IS NOT ENTITLED TO A DISMISSAL OF PLAINTIFFS' COMPLAINTS ON STATUTE OF LIMITATIONS OR DUE PROCESS GROUNDS 1

II. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF LIABILITY AGAINST MS. BENEDIKTSON UNDER § 10(b) OF THE 1934 SECURITIES ACT 2

A. PLAINTIFFS ADEQUATELY ALLEGE THAT Ms. BENEDIKTSON MADE MISREPRESENTATIONS 3

1. Ms. Benedikison "Made" Statements for Purposes of § 10(b) 3

a. Ms. Benediktson Made Statements for § 10(b) Purposes When She Signed the Transaction Documents and Legal Opinion Letters at Issue 3

b. Under the Group Pleading Doctrine, Ms. Benediktson is Presumed for § 10(b) Purposes to Have Made the Statements Contained in the Transaction Documents At Issue 5

2. Summary of the Misrepresentations Allegedly Made by Ms. Benediktson 6

B. PLAINTIFFS ADEQUATELY ALLEGE THAT Ms. BENEDIKTSON MADE MISREPRESENTATIONS "IN CONNECTION WITH" THE PURCHASE OR SALE OF A SECURITY 8

C. PLAINTIFFS ADEQUATELY ALLEGE THAT Ms. BENEDIKTSON MADE MISREPRESENTATIONS WITH SCIENTER 9

D. PLAINTIFFS ADEQUATELY ALLEGE THAT MS. BENEDIKTSON MADE MISREPRESENTATIONS ON WHICH THEY RELIED 14

III. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF CONTROL PERSON LIABILITY AGAINST MS. BENEDIKTSON UNDER § 20(a) OF THE 1934 SECURITIES ACT. 14

IV. MS. BENEDIKTSON'S LIABILITY UNDER THE OKLAHOMA SECURITIES ACT 18

V. FRAUD AND NEGLIGENCE CLAIMS UNDER OKLAHOMA LAW 19

A. COMMON LAW FRAUD / DECEIT 19

B. CONSTRUCTIVE FRAUD 19

C. CONSPIRACY TO COMMIT FRAUD 19

D. NEGLIGENCE 19

RECOMMENDATION 20

Caroline Benediktson has moved to dismiss all claims pled against her by plaintiffs. See RR Exhibit A for a list of Ms. Benediktson's motions to dismiss, and RR Exhibit B for a list of the claims pled against her.

Plaintiffs allege that Ms. Benediktson served as general corporate counsel for CFS, and that she was an officer of CFS, serving as Vice President and Assistant Secretary to CFS. Plaintiffs allege that Ms. Benediktson also served as one of only three directors of CFS during 1997 and 1998. Plaintiffs further allege that Ms. Benediktson served on CFS' Executive, Strategic Planning and Credit Committees. It is also alleged that Ms. Benediktson served as a corporate officer for various other entities created and owned by CFS.

Plaintiffs allege that Ms. Benediktson was substantially involved in the entire securitization process from the transactions' initial structure to their actual implementation. According to plaintiffs, Ms. Benediktson played a key role in drafting, editing, and delivering to investors the transaction documents, including the Private Placement Memoranda ("PPM"), and the due diligence materials provided by CFS and its affiliates in connection with each securitization. Plaintiffs also allege that Ms. Benediktson provided legal opinion letters addressed to the investors and the rating agencies. According to plaintiffs, Ms. Benediktson was also CFS' main contact with Chase Securities, the underwriter for the securitizations. Plaintiffs further allege that beginning in September 1997, Ms. Benediktson actively assisted Mayer, Brown and Flatt ("MBP") in the drafting of various documents for a planned initial public offering ("IPO") of equity in CFS.

Plaintiffs allege that from 1996 forward, Ms. Benediktson was empowered by CFS to perform all acts necessary to execute the securitization transactions sponsored by CFS. Exercising this authority, plaintiffs allege that Ms. Benediktson signed numerous documents on behalf of CFS, including the Contribution and Sale Agreements, pursuant to which CFS sold loans to the bankruptcy-remote trusts, and tne Sale and Servicing Agreements, pursuant to which CFS agreed to service the loans held by the trusts. See Main RR, p. 4. For her efforts, CFS paid Ms. Benediktson an annual salary and bonuses of $1 million. There is, therefore, a reasonable inference that Ms. Benediktson was, as plaintiffs allege, at the apex of CFS and that she had access to information, and the authority to speak and act for CFS, that no one other than William Bartmann or Jay Jones had.

I. MS. BENEDIKTSON IS NOT ENTITLED TO A DISMISSAL OF PLAINTIFFS' COMPLAINTS ON STATUTE OF LIMITATIONS OR DUE PROCESS GROUNDS.

In one of her briefs, Ms. Benediktson states that there are "additional issues bearing upon dismissal which need not now be decided." No. 00-104, Doc. No. 75, p. 1. The first "additional" issue identified by Ms. Benediktson is whether the claims pled in plaintiffs' complaints are barred by the applicable statute of limitations. The second "additional" issue identified by Ms. Benediktson is what appears to be a due process concern given the fact that her alleged liability arises out of her status as a corporate officer of CFS and the fact that OPS has not been joined as a party in this action. After discussing these issue for two full pages, Ms. Benediktson concludes by reiterating her belief that plaintiffs' claims should be dismissed for other reasons "without now considering the two issues discussed above." Id. at p. 3.

In their response brief, plaintiffs spend more than four pages discussing the statute of limitations and due process issues identified by Ms. Benediktson in her brief. Plaintiffs argue that because both issues are fact-dependent, the Court ought to resolve them now, despite Ms. Benediktson's statements to the contrary. No. 00-104, Dcc. No. 89, pp. 10-14. Given, however, the myriad other issues which are actually and expressly raised by the defendants' motions to dismiss, the undersigned declines to address issues which Ms. Benediktson herself is not inclined to brief fully. Not having adequately raised them, the undersigned finds that Ms. Benediktson is not entitled to dismissal of plaintiffs' complaints on either statute of limitation or due process grounds.

II. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF LIABILITY AGAINST MS. BENEDIKTSON UNDER § 10(b) OF THE 1934 SECURITIES ACT.

The elements of a § 10(b) claim are as follows:

1. That Ms. Benediktson made an untrue statement of material fact, or failed to state a material fact;

2. That Ms. Benediktson's misrepresentation or omission occurred in connection with the purchase or sale of a security;

3. That Ms. Benediktson made the misrepresentation or omission with scienter (i.e., knowingly or recklessly); and

4. That plaintiffs relied on Ms. Benediktson's misrepresentation or omission, and sustained damages as a proximate result of Ms. Benediktson's misrepresentation or omission.

Anixter v. Home-Stake Product Co., 77 F.3d 1215, 1225 (10th Cir. 1996);United Int'l Holdings, Inc. v. The Wharf (Holdings) Ltd., 210 F.3d 1207, 1220 (10th Cir. 2000). To resolve Ms. Benediktson's motions to dismiss, the Court must determine for each element outlined above whether plaintiffs have pled facts which would, if taken as true together with all reasonable inferences therefrom, permit a reasonable jury to find that the element has been established. Grossman v. Novell, Inc., 120 F.3d 1112, 1118 (10th Cir. 1997). From a review of the complaints, the undersigned finds that plaintiffs have pled facts sufficient to establish each element of their prima fade case under § 10(b).

A. PLAINTIFFS ADEQUATELY ALLEGE THAT Ms. BENEDIKTSON MADE MISREPRESENTATIONS.

Fed.R.Civ.P. 9(b) and 15 U.S.C. § 78u-4(b)(1) required that complaint stating a § 10(b) claim specify each statement alleged to be false or misleading and the reasons why the statements are false or misleading. See Main RR, Part IV(B). plaintiffs allege that the transaction documents signed by Ms. Benediktson as an officer of CFS, and the legal opinions she issued as CFS' general counsel, contain several misrepresentations and omissions. See, e.g., Amended Complaint, No. 00-847, Doc. No. 25, ¶¶ 453-54; and Amended Complaint, No. 00-838, Doc. No. 8, ¶¶ 208-211, 216 and 219-20. Plaintiffs have, therefore, identified with particularity which statements they believe to be false or misleading and the reasons why they believe Them to be false or misleading. Ms. Benediktson does not argue otherwise, focusing almost exclusively on plaintiffs' scienter and reliance allegations. The undersigned finds, therefore, that plaintiffs have complied with Rule 9(b) and 15 U.S.C. § 78u-4(b)(1), and have specifically alleged the statements which they belief are false or misleading.

1. Ms. Benediktson "Made" Statements for Purposes of § 10(b).

a. Ms. Benediktson Made Statements for § 10(b) Purposes When She Signed the Transaction Documents and Legal Opinion Letters at Issue.

Ms. Benediktson argued at oral argument that any alleged misstatements in the transaction documents which she signed were misstatements made in her capacity as an officer of CFS, and not in her personal capacity. Consequently, Ms. Benediktson argues that she cannot be held personally liable under § 10(b) for any misstatements in the transactions documents she signed on behalf of CFS. In other words, Ms. Benediktson argues that she did not "make" a statement in her personal capacity within the meaning of § 10(b). See Tr. of Nov. 3, 2000 Proceedings, pp. 141-42. The undersigned does not agree.

When "a corporate officer signs a document on behalf of the corporation, that signature will be rendered meaningless unless the officer believes that the statements in the document are true." Howard v. Everex Systems, Inc., 228 F.3d 1057, 1061 (9th Cir. 2000). For example, a director who signs a false Form 10-K can be held primarily liable under § 10(b) for making a false statement, so long as the plaintiff can establish the director's scienter. See AUSA Life Ins. Co. v. Dwyer, 928 F. Supp. 1239, 1255-56 (S.D.N.Y. 1996); and F.N. Wolf Co., Inc. v. Estate of Neal, No. 89-Civ-1223-CSH, 1991 WL 34186, at *8 (S.D.N.Y. 1991) (holding that a "director signing a document filed with the SEC . . . "makes or causes to be made' the statements contained therein" under § 18(a) of the Exchange Act). The "affixing of a signature is not a mere formality, but rather signifies that the signer has read the document and attests to its accuracy . . . ." United States v. Gomez-Gutierrez, 140 F.3d 1287, 1288-89 (9th Cir. 1998).

Key corporate officers should not be allowed to make false statements knowingly or recklessly, yet still shield themselves from liability to investors simply by insuring that they were not involved in the preparation of the false statements; at least one corporate officer would just stay out of the loop until it was time for the statement to be signed. If an officer could avoid liability under these circumstances, the securities laws would be significantly weakened. By placing responsibility on corporate officers to ensure the validity of corporate statements which they sign, investors are protected from misleading information. While Central Bank did hold that a private cause of action could not be brought under § 10(b) against aiders and abettors, there is a significant difference between mere participation in a scheme to misrepresent, and those who directly attest to the truth of a statement by signing it. By requiring a signing corporate officer to stand behind the statements she signs, the public will be assured that it can trust that corporate statements are accurate. See Howard, 228 F.3d at 1062. The undersigned finds, therefore, that when Ms. Benediktson signed the transaction documents and legal opinions at issue, she made a statement for purposes of § 10(b), and she can be held liable for those statements as long as plaintiffs can establish the other elements of a § 10(b) claim. See also In re Reliance Securities Litigation, 135 F. Supp.2d 480, 503-503 (D. Del. 2001); and In re Independent Energy Holdings PLC Securities Litigation, 154 F. Supp.2d 741, 767 (S.D.N.Y. 2001) (following Howard)¹

1 See also City of Philadelphia v. Fleming Companies, Inc., 264 F.3d 1245, 1250 (10th Cir. 2001). In Fleming piaintiffs brought § 10(b) claims against officers and directors of Fleming who had signed publiciy filed documents which were allegedly faise. In deciding the appeal, the Tenth circuit did not even pause to consider whether the Fleming officers and directors had "made" the statements in the documents which they signed. The court clearly assumed that the officers and directors had made these statements and then proceeded to consider whether the officers and directors had scienter when the allegedly false statements were made. Id. Had the court found plaintiffs' allegations of scienter sufficient, the court would have imposed liability on those officers and directors who had signed the allegedly false documents.

b. Under the Group Pleading Doctrine, Ms. Benediktson is Presumed for § 10(b) Purposes to Have Made the Statements Contained in the Transaction Documents At Issue. Even if she had not signed the transaction documents at issue, Ms. Benediktson could be held liable for misrepresentations in those documents under the group pleading doctrine. See, PLC Securities Litigation, 154 F. Supp.2d at 767-68. The group pleading doctrine allows a plaintiff to rely on a presumption that statements in prospectuses, registration statements, annual reports, press releases, or other group-published information, are the collective work of those individuals with direct involvement in the everyday business of the company. "Identifying the individual sources of statements is unnecessary when the fraud allegations arise from misstatements or omissions in group-published documents . . . which presumably involve collective actions of corporate directors or officers." Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1254 (10th Cir. 1997). The group pleading presumption only applies with respect to clearly cognizable corporate insiders with active operational involvement in the company. In re GlenFed Inc. Securities Litigation, 60 F.3d 591, 593 (9th Cir. 1995).See generally Main RR, Part IV(D).

The allegations in plaintiffs' complaints give rise to the reasonable inference that the PPMs, due diligence materials, Contribution and Sale Agreements and the Sale and Servicing Agreements at issue in this case are documents in which CFS' management team had substantial input. These are the types of documents which typically are the product of collective decision making by a company's senior management. The undersigned finds, therefore, that plaintiffs have sufficiently alleged that the transaction documents at issue are the type of group-published documents to which the group pleading doctrine's presumption applies. See Adler v. Berg Harmon Associates, 816 F. Supp. 919, 927-28 (S.D.N.Y. 1993) (applying the group pleading doctrine to a PPM).

To some extent there were two distinct, but closely related, aspects to CFS' "business." The first aspect of CFS' "business" was the continual formation, marketing and execution of securitization transactions. The second aspect of CFS' "business" was the servicing (i.e., collecting on) the receivables that backed each securitization. The transaction documents at issue grow out of, and were directly related to, CFS' securitization business.

As discussed above, plaintiffs allege that Ms. Benediktson was substantially involved in the entire securitization process: she helped develop their structure; she played a key role in drafting, compiling and editing the PPMs, other transaction documents and due diligence materials; she provided legal opinion letters regarding the securitizations; and she was the CFS contact person for MBP and Chase Securities regarding the securitizations. These allegations, if true, are sufficient to establish that Ms. Benediktson was a corporate insider who had active operational involvement with CFS' securitization business. Plaintiffs have, therefore, sufficiently alleged that Ms. Benediktson is the type of corporate insider to which the group pleading doctrine's presumption applies. See, e.g., Adler, 816 F. Supp. 927-28 (applying the group pleading doctrine to a corporate insider who was directly connected to an allegedly fraudulent PPM). The undersigned finds, therefore, that plaintiffs are entitled to a presumption that the alleged misrepresentations in the PPMs and other transaction documents at issue were made by Ms. Benediktson and those other corporate insiders at CFS with direct involvement in CFS's securitization business.

2. Summary of the Misrepresentations Allegedly Made by Ms. Benediktson

Other than to argue that she did not make them, Ms. Benediktson does not in her briefs argue that plaintiffs have failed to adequately allege that the transaction documents and Ms. Benediktson's legal opinions contain misrepresentations. Generally, plaintiffs allege that Ms. Benediktson made misrepresentations in the following categories, and that these representations are false for the same reasons that the representations in MBP's Negative Assurance Letters are false. See MBP RR, Part 1(B)(2)(a)(ii).

1. The Sale and Servicing Agreements falsely stated that CFS had not made any "untrue statements of material fact" in any of the transaction documents.²

2. The Sale and Servicing Agreements falsely stated that CFS did not have actual knowledge of any fact (other than matters of a general economic nature) which after due inquiry would have had a material adverse effect on CFS' business or the securities to be held by the investors.

3. The Sale and Servicing Agreements falsely stated that the ECR represented CFS' good faith best estimate of the amount to be collected on each receivable.

4. Certain PPMs falsely stated that CFS was no longer providing management services for third parties.

5. Certain PPMs misleadingly failed to disclose that the Residual had been marked down to zero.

6. The PPMs falsely stated that CFS' management estimated that CFS' servicing fees under the Sales and Servicing Agreement were adequate compensation relative to the costs of collection over the expected collections period.

2 Plaintiffs also allege that the legal opinions issued by Ms. Benediktson state that she relied on the transaction documents in forming her opinion. Plaintiffs argue that these statements include an implied statement by Ms. Benediktson that the transaction documents are not false or misleading or she would not be relying on them to form any opinions. Plaintiffs argue, therefore, that the implied statements in Ms. Benediktson's legal opinions are also false. However, because this same alleged misrepresentation was expressly made by Ms. Benediktson in the Sale and Servicing Agreement, the court need not determine whether it was also impliedly made in Ms. Benediktson's legal opinion letters.

There is a full discussion of CFS' ECR model and its use of the Residual in the Report and Recommendation regarding those claims pled against MBP. See MBP RR, Part 1(B)(2)(a)(ii). The undersigned directs the Court to that Report for a detailed discussion of ECR and the Residual. By way of summary, however, plaintiffs allege that representations in the transaction documents about the ECR and Residual are false because after CFS closed its first all-credit-card-debt securitization in 1996, CFS almost immediately began falling behind its collection targets. As a response to this collection target miss, plaintiffs allege that CFS began to sell performing loans to Cadle and report those sales as if they were collections from the credit card debtors. When Cadle refused to purchase additional loans, plaintiffs allege that CFS insiders, Mr. Jones and Mr. Bartmann, created Dimat Corporation as a way of funneling money from new securitizations into older securitizations. That is, CFS began selling worthless loans to Dimat, and these loans were paid for with funds from Mr. Bartmann and Mr. Jones, which they received because they continued to close new securitizations. As it did with the sales to Cadle, CFS reported the sales to Dimat as if they were collections from the credit card debtors.Id. Plaintiffs allege that these activities made the core representations underpinning the transaction documents misleading.

Plaintiffs allege that the core representations underpinning each securitization were that the trusts would hold credit card receivables which backed the investors' notes, and that CFS, with its excellent abilities as a loan collector, would collect on those receivables from the credit card debtors. Plaintiffs allege that these core representations were misleading absent disclosures about the volume and purpose of CFS' loan sales. Absent disclosures about the volume and purpose of the loan sales, investors were mislead into believing that CFS would collect on the receivables from the credit card debtors using its revolutionary collections techniques, not by selling them. Absent disclosures in the transaction documents regarding CFS' reliance on loan sales to consistently meet collections targets, plaintiffs allege that statements in the transaction documents about the ECR and the Residual are misleading because the fact that CFS had to make loan sales demonstrated that the ECR model did not work and that the Residual was potentially worthless. See MBP RR, Part 1(B)(2)(a)(ii).

The MBP Report and Recommendation also contains a discussion about Mitchell Vernick and his hiring and departure from CFS. See MBP RR, Part 1(B)(2)(a)(ii). Plaintiffs allege that statements in the transaction documents about why Mr. Vernick left CFS, within months of joining the company, were misleading because they attributed his departure to a difference in business strategy between himself and Mr. Bartmann. Plaintiffs allege, however, that the real reasons offered by Mr. Vernick for his leaving CFS went well beyond business strategy and instead related to the foundation upon which CFS' house of credit cards was built. Id.

Plaintiffs allege that statements about the servicing fee being sufficient to fund CFS' collections efforts are false because CFS was in fact running a very expensive collections operation, and CFS was missing its collection targets. Plaintiffs allege that in fact CFS was using cash from subsequent securitizations to fund its collection operations, and that it was not living off of its servicing fees.

The undersigned finds that plaintiffs have adequately alleged that Ms. Benediktson made various misrepresentations. The question discussed below is whether plaintiffs have adequately alleged that Ms. Benediktson made these alleged misrepresentations with scienter.

B. PLAINTIFFS ADEQUATELY ALLEGE THAT Ms. BENEDIKTSON MADE MISREPRESENTATIONS "IN CONNECTION WITH" THE PURCHASE OR SALE OF A SECURITY.

Plaintiffs must allege that Ms. Benediktson's alleged misrepresentations and omissions occurred "in connection with the purchase or sale of any security." 15 U.S.C. § 78j(b). Any statement that is reasonably calculated to affect the investment decision of a reasonable investor will be held to satisfy the "in connection with" requirement. A representation made to influence a party's investment decision or to induce a party to purchase a security is a representation made "in connection with" the purchase of a security. United Intern. Holdings. Inc. v. Wharf (Holdings) Ltd., 210 F.3d 1207, 1221 (10th Cir. 2000) (citing SEC v. Jakubowski, 150 F.3d 675, 679 (7th Cir. 1998) andAngelastro v. Prudential-Bache Secs., Inc., 764 F.2d 939, 943 (3d Cir. 1985)); and Arst v. Stifel. Nicolaus Co., Inc., 86 F.3d 973, 977 (10th Cir. 1996) (holding that if defendant's allegedly deceptive conduct could not have had an impact on the plaintiff's decision to sell his shares, defendant's conduct was not in connection with the sale of a security), The statements made in the transaction documents and legal opinions at issue were clearly made to induce the investors to purchase the SMART and GREAT notes being offered by CFS and its affiliates, and Ms. Benediktson does not argue otherwise. The undersigned finds, therefore, that plaintiffs have sufficiently alleged that Ms. Benediktson's alleged misrepresentations occurred in connection with the purchase or sale of a security.

C. PLAINTIFFS ADEQUATELY ALLEGE THAT MS. BENEDIKTSON MADE MISREPRESENTATIONS WITH SCIENTER.

Plaintiffs must allege that Ms. Benediktson made the misrepresentations identified in Part 11(A) with scienter. Pursuant to the PSLRA, the totality of plaintiffs' allegations must give rise to a "strong inference" that Ms. Benediktson made these misrepresentations with scienter; a reasonable inference of scienter is not sufficient. See Main RR, Part IV. To establish scienter in a § 10(b) claim, plaintiffs must allege either that Ms. Benediktson knew the transaction documents contained false or misleading statements, or that Ms. Benediktson was reckless. To establish recklessness, plaintiffs must allege that it was an extreme departure from the standards of ordinary care for Ms. Benediktson to make the statements she did, and that this extreme departure from the standards of ordinary care created the risk that investors would be mislead, and that Ms. Benediktson knew of this risk or that the risk was so obvious that Ms. Benediktson must have been aware of it. Id. at Part IV(C)(1).

The complaints at issue must be read as a whole to determine whether plaintiffs' allegations give rise to a strong inference of Ms. Benediktson's scienter. While certain allegations read in isolation may not give rise to a strong inference of scienter, taking each of plaintiffs' complaints as a synergistic whole, the undersigned finds that the complaints raise a strong inference that Ms. Benediktson acted with scienter.

Ms. Benediktson argues that plaintiffs' allegations fail to raise a strong inference of scienter primarily because all plaintiffs allege is that she must have known fraud was afoot because she was a corporate officer, with access to a lot of information, who signed the transaction documents. The undersigned agrees, for the reasons stated in Ms. Benediktson's briefs, that if this were all that plaintiffs alleged, they would not have alleged facts sufficient to raise a strong inference that Ms. Benediktson acted knowingly or recklessly at the time she made the statements discussed in Part 11(A). The undersigned disagrees, however, with Ms. Benediktson's characterization of plaintiffs' allegations. Plaintiffs have alleged more than that Ms. Benediktson was a corporate insider who must have known fraud was afoot.

Plaintiffs allege that Ms. Benediktson knew that representations in the transaction documents about the ECR model, the Residual and Mr. Vernick's resignation were false or misleading because she knew that CFS was selling off the trusts' assets in large numbers to meet its collections targets. As support for these allegations, plaintiffs allege the following:

1. Plaintiffs allege that collections were at the core of CFS' business, and that CFS generated detailed internal reports on a daily basis that consistently showed a shortfall in collections. Plaintiffs argue that they are entitled to the reasonable inference that high-level officers are intimately familiar with their company's core business, particularly when that core business is in trouble. Plaintiffs allege that Ms. Benediktson was a high-level officer, director, committee member, and general counsel in charge of the securitizations with access to all information about CFS' business. Plaintiffs argue, and the undersigned agrees, that they are entitled to an inference that Ms. Benediktson, as a high-level officer was aware that CFS was missing its collections targets and looking for a way to remedy that problem. See, e.g., In re Aetna Inc. Securities Lit., 34 F. Supp.2d 935, 952-53 (E.D. Pa. 1999); and Danis v. USN Comm., Inc., 73 F. Supp.2d 923, 938-40 (N.D. Ill. 1999).

2. Plaintiffs allege that from 1996 forward, Ms. Benediktson was very involved with the preparation of the transaction documents used to close each securitization, and that she was one of just three executives at CFS empowered to do all acts necessary to execute the securitizations transactions, which she in fact exercised by personally executing the necessary transaction documents to close several securitization transactions. Plaintiffs argue, and the undersigned agrees, that based on these allegations they are entitled to an inference that Ms. Benediktson was informed about information relating to the representations contained in the transaction documents which she helped to prepare and then executed.

3. Plaintiffs allege that when Mr. Vernick, CFS' president and CEO, decided to resign he reported his concerns about CFS' securitization model to Ms. Benediktson. See MBP RR, Part 1(B)(2)(a)(ii)(b), regarding Mr. Vernick's concerns. In particular, plaintiffs allege that Mr. Vernick conveyed to Ms. Benediktson his belief that Base Case projections could not be met, and his doubts about whether Stress Case projections could even be met. Id. According to plaintiffs, Mr. Vernick also conveyed to Ms. Benediktson his belief that CFS' collections' overhead was so high that CFS could not continue to meet that overhead out of its servicing fees, and would have to continue to use cash from future securitizations to fund overhead; a practice which he believed must stop immediately. Ms. Benediktson also knew that Mr. Vernick was leaving with $10 million after only four months of work at CFS.

4. Plaintiffs allege that Ms. Benediktson prayed a crucial role in executing the asset sales to Cadle and Dimat. According to plaintiffs, Ms. Benediktson prepared, reviewed and approved the Financial Asset Sale Agreements ("FASAs") pursuant to which the trusts' assets were sold to Cadle and Dimat. Ms. Benediktson also signed many of these FASAs herself and was responsible for communicating with the trusts to obtain requisite powers of attorney.

5. Plaintiffs allege that an IPO planned by CFS fell apart when Goldman Sachs, the investment banking firm with whom CFS intended to conduct the IPO, withdrew from the engagement under circumstances calling CFS' ECR model, and the performance of the securitizations, into question. In a memo to Mr. Bartmann and Ms. Benediktson regarding options facing CFS after Goldman Sachs' withdrawal, a MBP lawyer listed pros and cons for delaying the IPO. One of the pros listed was that a delay would give "CFS time to build additional track record with securitization model (or to modify model now), enhancing future acceptance of model by investment bankers." The same lawyer suggested that one of the steps CFS could take to make the IPO marketable in the future was to "consider revising Estimated Cash Recovery model to reflect CFS's actual collection experience." These allegations support a strong inference that Ms. Benediktson knew that CFS' ECR model did not reflect CFS' actual collection experience as CFS had represented to investors. See MBP RR, Part 1(B)(2)(c), for a more detailed discussion of CFS' planned IPO.

6. With regard to Dimat, plaintiffs allege that:

a. Ms. Benediktson knew, based on her conversations with Charles Welsh, director of CFS' collections department, and the general rumors circulating around the entire collections department, that Dimat was a company unknown in the collections industry.

b. Ms. Benediktson was involved with the preparation, negotiation and execution of the loan sale agreements between Dimat, CFS and the trusts. As a result of this involvement, plaintiffs allege that Ms. Benediktson knew that:

i. As a condition to its purchase of loans from the trusts, Dimat required that CFS remain as the servicer of the loans, and that the servicing agreements which were executed with Dimat were not at all like the lengthy, detailed servicing agreements CFS executed with the trusts as part of the initial securitizations. In particular, plaintiffs allege that the servicing agreements with Dimat gave CFS sole discretion to settle any debtor's account, and there was no requirement that CFS report on its collections efforts to Dimat.

ii. Dimat was paying between 29¢ and 30¢ on the dollar for the worthless loans it was purchasing, which was well above the market rate of 10¢ to 17¢ for the best loans. Given that CFS was to remain as the servicer of the loans, there was no rational, economic reason why the loans would be worth so much more to Dimat than they were to the trusts.

c. After directing her paralegal, Denise Monroe, to determine exactly who was behind Dimat, Ms. Benediktson learned that Dimat was a corporation incorporated by James Sill, a Shawnee, Oklahoma lawyer who was associated with CFS executive Jay Jones. Ms. Benediktson then learned, based on correspondence from Mr. Sill, that there was some direct connection between Mr. Jones and Dimat. Mr. Sill's letters stated that it was "technically" correct that CFS and Dimat were not affiliated, but that Dimat had received loans from Mr. Jones and Calamity Jones Entertainment, Inc., a company owned by Mr. Jones and incorporated for Mr. Jones by Ms. Benediktson.³

d. Based on notes by Mr. Welsh, plaintiffs allege that there was a general level of rumor and speculation throughout the entire collections department at CFS that Dimat was a sham company created and controlled by Mr. Bartmann and Mr. Jones. According to plaintiffs, the rumors were so widespread that even the front line account officers (i.e., those making the phone calls to collect from the debtors) were discussing it. According to plaintiffs, the rumors were so widespread that there is a reasonable inference that Ms. Benediktson heard them as well.

e. Plaintiffs allege that Mr. Welsh, as the head of CFS' collections department, had done quite a bit of research regarding the loans being sold to Dimat, and that as a result of this research he had many concerns which he shared with Ms. Benediktson. In particular: (1) the fact that Dimat was buying worthless loans for top dollar; (2) the fact that Dimat was the only purchaser of loans from the trusts; (3) the fact that the loan sales only occurred at the end of the month and in the amount of that month's collection shortfall; (4) the fact that Mr. Bartmann and Mr. Jones were taking personal distributions from CFS in about the same amount as the money being paid by Dimat for the loans it was purchasing; (5) the fact that the servicing agreement with Dimat did not require CFS to collect a certain amount each month but simply required CFS to use its "best efforts;" (6) the fact that CFS was collecting at a level of less than 1% of Dimat's investment, and no one from Dimat had ever inquired about this dismal collections rate; and (7) the fact that none of CFS' senior management seemed to care, as they did with loans not owned by Dimat, about the poor collections performance on the loans owned by Dimat. Plaintiffs also allege that Ms. Benediktson discussed Mr. Welsh's concerns with Michael Temple, CFS' Chief Financial Officer.

3 Plaintiffs allege that some of Mr. Sills' letters were Sent directly to Ms. Benediktson. Plaintiffs allege that others were sent to Bruce Hadden, the person responsible for selecting the loans that would be sold. Some plaintiffs allege "upon information and belief" that Mr. Hadden forwarded Mr. Sill's letters to Ms. Benediktson. Ms. Benediktson argues that this type of information and belief pleading violates 15 With regard to a § 10(b) claim, the PSLRA requires that plaintiffs "specify each statement alleged to have been misleading" and "the reason or reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1). When a plaintiff makes an allegation "upon information and belief" regarding these specific statements, the PSLRA further requires plaintiff to "state with particularity all facts on which that belief is formed."Id. Thus, § 78u-4(b)(1), of the PSLRA does not apply to plaintiffs' allegation that Mr. Hadden forwarded Mr. Sill's letters to Ms. Benediktson because this allegation is not an "allegation regarding the statement or omission" alleged to be false or misleading. Rather, the allegation relates to Ms. Benediktson's knowledge and should be evaluated, with the totality of the other allegations in the complaint, under § 78u-4(b)(2) when determining whether plaintiffs have stated "with particularity facts giving rise to a strong inference that [Ms. Benediktson] acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). In any event, even if § 78u-4(b)(1) applied to the allegation that Mr. Hadden forwarded Mr. Sill's letters to Ms. Benediktson, the undersigned finds that plaintiffs have sufficiently stated with particularity the facts on which their belief rests.

Taking all of these allegations together, the undersigned finds that the allegations in plaintiffs' complaints give rise to a strong inference that Ms. Benediktson either (1) knew the transaction documents were false or misleading; or (2) knew of facts which put her on notice that the transaction documents contained false or misleading statements, and that her failure to disclose these facts was an extreme departure from the standards of ordinary care which created a risk, known to Ms. Benediktson, that the investors would be mislead by the transaction documents. The undersigned recommends, therefore, that Ms. Benediktson's motions to dismiss be DENIED to the extent they seek dismissal of plaintiffs' § 10(b) claims for failure to adequately plead scienter.

D. PLAINTIFFS ADEQUATELY ALLEGE THAT Ms. BENEDIKTSON MADE MISREPRESENTATIONS ON WHICH THEY RELIED.

Ms. Benediktson argues that many plaintiffs cannot sufficiently allege that they personally relied on any statement made by her because they purchased their securities through an investment advisor. According to Ms. Benediktson, in these situations it was the investment advisor who relied on her alleged statements, not the plaintiffs. This argument is part of Ms. Benediktson's general non-assignability of § 10(b) claims argument, which the undersigned has rejected in Part 1(C) of the Main RR. Plaintiffs allege that their investment advisors were acting as their agents when they purchased the securities at issue. As such, plaintiffs' agent's reliance is attributable to plaintiffs.

Plaintiffs allege that in making their decision to purchase the SMART and GREAT securities at issue they, or their predecessors in interest whose claims they are asserting, relied on the truth of Ms. Benediktson's statements in the transaction documents. This allegation is sufficient to survive a motion to dismiss. Neither Fed.R.Civ.P. 9 nor the PSLRA impose any special pleading requirements with regard to § 10(b)'s reliance element.

III. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF CONTROL PERSON LIABILITY AGAINST MS. BENEDIKTSON UNDER § 20(a) OF THE 1934 SECURITIES ACT.

Section 20(a) of the 1934 Securities Act provides as follows:

Every person who, directly or indirectly, controls any person liable under any provision of this chapter [including § 10(b)] or of any rule or regulation thereunder [including SEC Rule 10b-5] shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

15 U.S.C. § 78t(a). Plaintiffs allege that Ms. Benediktson is jointly liable under this section with CFS for CFS' alleged violations of the 1934 Securities Act.

To state a prima facie case of control person liability under § 20(a), plaintiffs must establish (1) that CFS committed a primary violation of the securities laws, and (2) that Ms. Benediktson had "control" over CFS. Maher v. Durango Metals, Inc., 144 F.3d 1302, 1305 (10th Cir. 1998). Plaintiffs need not show that Ms. Benediktson actually or culpably participated in CFS' alleged primary violation. Rather, once the plaintiffs establish their prima facie case, the burden shifts to Ms. Benediktson to show lack of culpable participation or knowledge. Id. Ms. Benediktson's reliance on the Second Circuit's decision in SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2nd Cir. 1976) is, therefore, misplaced. Ms. Benediktson cites the First Jersey case for the proposition that liability under § 20(a) requires a showing that in some meaningful sense she was a culpable participant in the fraud allegedly perpetrated by CFS. See No. 00-837, Doc. No. 17, p. 7. InMaher, the Tenth Circuit confirmed that it had "expressly rejected" such a requirement in First Interstate Bank v. Pring, 969 F.2d 891, 897 (10th Cir. 1992), rev'd on other grounds sub nom., Central Bank v. First Interstate Bank, 511 U.S. 164 (1994). Whether Ms. Benediktson was a culpable participant in CFS' alleged fraud, which of course plaintiffs allege with their § 10(b) claims against her, is relevant to Ms. Benediktson's defense to plaintiffs' § 20(a) claims, but it is not relevant to plaintiffs' prima facie case.

Plaintiffs allege that CFS committed primary violations of § 10(b) of the 1934 Securities Act. The question is, therefore, whether plaintiffs have also adequately alleged that Ms. Benediktson had "control" over CFS. Ms. Benediktson argues that plaintiffs cannot allege that she had control over CFS because CFS was controlled lock, stock and barrel by William Bartmann, Kathryn Bartmann, and Jay Jones, the founders and 80% + shareholders of CFS. However, neither one's title nor the amount of stock one owns is determinative of the control issue.⁴ Rather, the focus is on the nature of the actual relationship between the defendant and the alleged primary violator.

4 "It is well known that actual control sometimes may be exerted through ownership of much less than a majority of the stock of a corporation . . . ." H.R. Rep. No. 1383, 73d Cong., 2d Sess. 28 (1934) (1934 WL 1290).

As the legislative history to § 20(a) indicates, "[i]t would be difficult if not impossible to enumerate or to anticipate the many ways in which actual control may be exerted." H.R. Rep. No. 1383, 73d Cong., 2d Sess. 26 (1934) (1934 WL 1290). Thus, when it enacted § 20(a) Congress expressly declined to define "control," wishing to keep the concept flexible. Heeding this intent, the Tenth Circuit has held that § 20(a) is a remedial statute which must be "construed liberally."Maher, 144 F.3d at 1305. Given that Congress intended for "control" to be defined flexibly by the courts, the determination of whether a particular individual is a control person is necessarily an intensely factual question, requiring scrutiny of the defendant's participation in the day-to-day affairs of the alleged primary violator. Factual questions of this nature are ordinarily not subject to resolution on a motion to dismiss. Id. at 1306.

A good example of the type of allegations which are subject to resolution on a motion to dismiss is presented by Maher. In Maher the defendant (i.e., the alleged control person) had an option to acquire a seat on the board of directors, and a controlling interest in, the primary violator. The Tenth Circuit dismissed the plaintiff's § 20(a) claim holding that the plaintiffs's allegations regarding the defendant's inchoate right to acquire control over the primary violator were insufficient to establish that the defendant had actual control over the primary violator. Maher, 144 F, 3d at 1305-06. Plaintiffs' allegations in this case are not at all like those in Maher. Rather, plaintiffs allege that given her high rank and intimate involvement with the very transactions which form the basis for CFS' alleged primary violations, Ms. Benediktson is a control person of CFS. Ms. Benediktson argues that she is not a control person because the Bartmanns and Mr. Jones were the actual control persons of CFS. This is generally the type of factual dispute which cannot be resolved on a motion to dismiss where there is no factual record. See, e.g., Stadia Oil Uranium Co. v. Wheelis, 251 F.2d 269, 275-76 (10th Cir. 1957) (upon competing factual inferences, fact of control is one for the trier of fact).

The Tenth Circuit has interpreted "control" as only requiring "some indirect means of discipline or influence [over the primary violator] short of actual direction." Maher, 144 F.3d at 1305 (quoting fromRichardson v. MacArthur, 451 F.2d 35, 41-42 (10th Cir. 1971)). The SEC defines control as "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise." 17 C.F.R. § 230.405. A plaintiff must, therefore, allege facts which establish that the control person actually participated in the general operations of the primary violator and that the control person had the power to control the specific transaction underlying the securities violation alleged to have been committed by the primary violator. Maher, 144 F.3d at 1305, n. 8; Wenneman v. Brown, 49 F. Supp.2d 1283, 1290 (D. Ut. 1999).⁵

5 The undersigned recognizes that the Tenth circuit has left unresolved the issue of whether it is sufficient to merely allege that the control person had the power to control the general affairs of the primary violator, or whether a § 20(a) plaintiff must also allege that the control person in fact exercised that power. Maher, 144 F.3d at 1305, n. 8. In this case, however, plaintiffs allege that Ms. Benediktson had the power and that she in fact exercised the power to control CFS' affairs. The court need not, therefore, decide whether an allegation that she merely possessed the power, without exercising it, would be sufficient to state a § 20(a) claim.

Plaintiffs allege that Ms. Benediktson was an officer and director of CFS who was at the pinnacle of CFS' senior management team. Ms. Benediktson is correct that a director is not automatically liable as a control person. Nevertheless, it is not at all uncommon for the control of a corporation to rest with a group of persons, such as members of the corporation's senior management. Accordingly, while "a person s being an officer or director does not create any presumption of control, it is a sort of red light." 4 Louis Loss Joel Seligman, Securities Reciulation 1724 (1990) (emphasis in original). Plaintiffs also allege that Ms. Benediktson served on CFS' Executive, Strategic Planning and Credit Committees. Ms. Benediktson argues that these allegations should be discounted because plaintiffs do not allege when these committees met or what was discussed at these meetings, if anything. While that may be true, Ms. Benediktson's membership on these committees at least entitles plaintiffs, at the pleading stage, to the reasonable inference that she participated in CFS' general operations through her membership on these committees and through her position as a director, vice president and general counsel of CFS.

Plaintiffs have also alleged that Ms. Benediktson had and exercised the power to control the securitization transactions which are the very transactions which form the basis for the securities violations alleged to have been committed by CFS. As discussed above, plaintiffs allege that Ms. Benediktson was substantially involved in all aspects of the securitization process from determining the transactions' initial structure to their actual implementation. Plaintiffs allege that Ms. Benediktson played a key role in drafting, editing, and delivering to investors the transaction documents, including the Private Placement Memoranda ("PPM"), and the due diligence materials provided by CFS and its affiliates to potential investors. Plaintiffs further allege that Ms. Benediktson was CFS' main contact with Chase Securities, the underwriter for the securitizations, and MBP, CFS' outside securities counsel. Ms. Benediktson was empowered, and did, perform all acts necessary to execute the securitization transactions. There is, therefore, a reasonable inference that Ms. Benediktson was on equal footing with Mr. Bartmann and Mr. Jones, who she admits were control persons, as far as her ability to direct CFS' policies regarding the securitization transactions.

The undersigned finds, therefore, that plaintiffs have sufficiently alleged a prima fade case of control person liability against Ms. Benediktson under § 20(a) of the 1934 Securities Act. See In re Leslie Fay Companies. Inc. Securities Litigation, No. 92-Civ-8036-WCC, 1993 WL 438927, at *5 (S.D.N.Y. Oct. 27, 1993) (plaintiff properly stated a § 20(a) claim against a high-ranking officer who also was a director who had signed at least one of the misstatements allegedly made by the primary violator); and In re Storage Technology Corp. Securities Litigation, 630 F. Supp. 1072, 1079 (D. Co. 1986) (same).

Ms. Benediktson relies primarily on the Tenth Circuit's decision inWilson v. Al McCord Inc., 858 F.2d 1469 (10th Cir. 1988). Her reliance is, however, misplaced. The position which plaintiffs allege Ms. Benediktson occupied at CFS is not at all like the position occupied by the defendant in Wilson. The defendant in Wilson, Rosemary McCord, was the wife of Al McCord, the driving force behind, and the namesake of, the alleged primary violator (i.e., Al McCord Incorporated). Ms. MoCord was an officer, director and minority shareholder of the primary violator. However, the only evidence of her involvement with the day-to-day affairs of the primary violator was that as its secretary she attested to the primary violator's documents by signing them. In fact, the Tenth Circuit noted that Ms. McCord testified without contradiction that she had a full time job as a school teacher, and that her priorities were as a wife and mother, and that she did not know any more about her husband's business than he knew about the school children she taught. Id. at 1474-75.Wilson might stand for the proposition that signing corporate documents does not alone establish corporate control, but as discussed above plaintiffs have alleged that Ms. Benediktson did substantially more at CFS than simply attest to the accuracy of its documents by signing them. Consequently, the undersigned recommends that Ms. Benediktson's motions to dismiss plaintiffs' claims under § 20(a) of the 1934 Securities Act be DENIED.

IV. MS. BENEDIKTSON'S LIABILITY UNDER THE OKLAHOMA SECURITIES ACT

Ms. Benediktson argues that plaintiffs' claims under the Oklahoma Securities Act should be dismissed because these claims cannot be asserted in light of the United States Supreme Court's holding inGustafson v. Alloyd Co., Inc., 513 U.S. 561 (1995), and because claims under the Oklahoma Securities Act cannot be assigned in light of 12 Okla. Stat. § 2017[ 12-2017](D). The undersigned has rejected these arguments for the reasons stated respectively in the Main RR, Parts III(S) and II(B)(2). Consequently, the undersigned recommends that Ms. Benediktson's motions to dismiss plaintiffs' claims under the Oklahoma Securities Act be DENIED.

V. FRAUD AND NEGLIGENCE CLAIMS UNDER OKLAHOMA LAW

Various plaintiffs assert claims under Oklahoma law for fraud, deceit, constructive fraud, conspiracy to commit fraud, negligent misrepresentation, and malpractice. As to these causes of action, Ms. Benediktson argues, as she did in connection with plaintiffs' § 10(b) claims, that they should be dismissed because plaintiffs have not properly alleged (1) standing, (2) scienter (where required), or (3) reliance. For the reasons discussed above in connection with plaintiffs' § 10(b) claims and in the Main RR, the undersigned does not agree with Ms. Benediktson. The undersigned finds that plaintiffs have sufficiently alleged standing, scienter, and reliance in connection with their state law claims.

A. COMMON LAW FRAUD / DECEIT

Common law fraud claims and claims for deceit under 76 Okla. Stat. § 3[ 76-3] are treated identically under Oklahoma law. See RR Exhibit C, pp. 1314. The elements of these claims are substantially similar to a § 10(b) claim. Id. Thus, for the reasons discussed above in connection with plaintiffs' § 10(b) claims, the undersigned recommends that Ms. Benediktson's motions to dismiss plaintiffs' common law fraud and deceit claims under Oklahoma law be DENIED.

B. CONSTRUCTIVE FRAUD

The undersigned recommends that Ms. Benediktson's motions to dismiss plaintiffs' constructive fraud claims be DENIED for the same reasons the undersigned recommends that MBP's motions to dismiss these claims be denied. See MBP RR, Part III(C).

C. CONSPIRACY TO COMMIT FRAUD

Ms. Benediktson does not address plaintiffs' civil conspiracy claims.

D. NEGLIGENCE

The undersigned recommends that Ms. Benediktson's motions to dismiss plaintiffs negligent misrepresentation claims be DENIED for the same reasons that the undersigned recommended that MBP's motions to dismiss these claims be denied. See MBP RR, Part III(E).

The undersigned recommends that Ms. Benediktson's motions to dismiss plaintiffs malpractice claims be GRANTED for the same reasons that the undersigned recommended that MBP's motions to dismiss these claims be granted. See MBP RR, Part III(E).

RECOMMENDATION

For the reasons discussed above and in the Main RR, the undersigned recommends that Ms. Benediktson's motions to dismiss be GRANTED as to the following claims: (1) claims under § 15 of the 1933 Securities Act, and (2) claims under Oklahoma law for malpractice.

For the reasons discussed above and in the Main RR, the undersigned recommends that Ms. Benediktson's motions to dismiss be DENIED as to the following claims: (1) claims under § 10(b) of the 1934 Securities Act; (2) claims under § 20(a) of the 1934 Securities Act; (3) claims under § 408(a)(2)(A) of the Oklahoma Securities Act; (4) claims under § 408(b) of the Oklahoma Securities Act; (5) claims under Oklahoma law for fraud, deceit and constructive fraud; (6) claims under Oklahoma law for conspiracy to commit fraud; and (7) claims under Oklahoma law for negligent misrepresentation.

REPORT AND RECOMMENDATION REGARDING THOSE CLAIMS PLED AGAINST ARTHUR ANDERSON TABLE OF CONTENTS

I. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF LIABILITY AGAINST ARTHUR ANDERSON UNDER § 10(b) OF THE 1934 SECURITIES ACT 3

A. AA's ALLEGED MISREPRESENTATIONS 4

B. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED THAT AA ACTED WITH THE REQUISITE SCIENTER 5

1. Motive and Opportunity Allegations Are Not Necessary in Pleading Scienter 6

2. Scienter Pleading Requirements in the Tenth Circuit 7

a. Scienter Must Not be Evaluated Piecemeal 8

b. Asset Sales, Dimat and Exceptions 9

C. ECR Model 10

d. Magnitude of the Accounting Error 11

e. CFS Servicing Fees 11

f. GAAS, GAAP, and "Red Flags" 11

C. PLAINTIFFS' ALLEGATIONS SATISFY THE OTHER PLEADING REQUIREMENTS OF A § 10(b) CLAIM 12

1. Plaintiffs Have Pled that the Misrepresentations Were "In Connection With" the Purchase or Sale of a Security 12

2. Plaintiffs have Adequately Pled Reliance 15

3. Materiality: AA Has Not Met the Requirements for Applicability of the "Bespeaks Caution" Doctrine 17

4. Agreed-Upon Procedures 19

D. PLAINTIFFS HAVE PLED THEIR ALLEGATIONS WITH SUFFICIENT PARTICULARITY 20

1. Plaintiff's Have Adequately Substantiated Their "Information and Belief" 21

2. Plaintiffs Claims are Not Based Solely on Aider and Abettor Allegations 21

a. Plaintiffs' Allegations that AA's Participation in the Drafting of the Audit Footnotes Constitutes a Primary Violation is Foreclosed by Central Bank 22

b. Plaintiffs Have Alleged Claims That are Not Premised on Aider and Abettor Allegations 23

3. Plaintiffs Do Not Plead Fraud by Hindsight 24

4. The "Group Pleading" Doctrine Is Not Applicable to the Claims Pled Against AA 24

II. PLAINTIFFS' STATE LAW CLAIMS ARE NOT SUBJECT TO DISMISSAL 25

RECOMMENDATION 25

Arthur Anderson Worldwide as successor to Arthur Anderson, LLP ("AA") has moved to dismiss all federal claims pled against it by plaintiffs.See RR Exhibit A for a list of AA's motions to dismiss, and RR Exhibit B for a list of the claims pled against AA.

Plaintiffs allege that AA was CFS' outside auditor from 1988 to 1998. Plaintiffs further allege that copies of CFS' audited financial statements were included in the offering materials used to market the SMART and GREAT securities to potential investors, including plaintiffs. CFS' audited financial statements indicate that AA audited the statements in accordance with generally accepted auditing standards ("GAAS"). According to plaintiffs, AA represented that its audit was conducted to determine whether CFS' financial statements were free of material misstatement. AAs audit included an examination of the amounts and disclosures in CFS' financial statements, an assessment of the accounting principles CFS used, and an examination of the estimates made by CFS' management. For each financial statement issued by CFS, AA issued an unqualified audit opinion which concluded that CFS' financial stalements presented a fair picture of CFS' financial position.

Plaintiffs argue that the Residual reflected as an asset on CFS' financial statements was of particular interest to potential investors including plaintiffs. Plaintiffs describe the residual as the amount of money which CFS was to retain after plaintiffs were paid in full and any amounts owed to CFS for collections were paid. See Main RR, p. 5. In general, plaintiffs argue that by showing any value for a residual, even one dollar, CFS was assuring plaintiffs that they would be paid in full on their investment.

In the Combined Financial Statements for the Years Ended December 31, 1996 and 1995 (hereafter "the 1996 financial statement"), the amount of "retained interests in loans sold" was reported as $2,323,921. The "securitization reserve accounts (restricted cash)" was reported as $12,460,088, and the "loan securitization receivables, net" was reported as $51,171,182. See Exhibit C to RR Exhibit E. Plaintiffs allege that these three entries comprised a "residual," and that the financial statements indicated that the Residual was a positive number in the millions.

According to plaintiffs, OPS contemplated making a public offering sometime in the latter part of 1997. Plaintiffs allege that when CFS informed AA about the potential public offering, AA insisted that third party valuation for the Residual must be obtained, and when it could not be obtained, AA insisted on restating the previously issued audited financial statements for 1996. Released November 19, 1997, the reaudited 1996 financial statements combine the three entries noted above into one entry listed as "securitization retained interests." The dollar amount for this entry was listed at $7,181,184, and the value of CFS' assets were decreased by approximately $58 million. See RR Exhibit I. Plaintiffs assert that a reasonable inference is that on the restated financial statements the three entries were purposefully combined to hide the actual value of the Residual.

The audit notes in the reaudited 1996 financial statements indicate that due to the lack of a liquid secondary market, the value was restated at the "low end of the range of fair values . . ." RR Exhibit I, p. 4. Total assets and net income for the year ended December 31, 1996 were reduced by approximately $57.8 million. Plaintiffs contend that the number on the reaudited financials is still deceptive. Plaintiffs allege that the actual value of the Residual was zero, but that AA actively concealed that amount by combining the previous three entries into one entry to suggest that the Residual was still a positive number. Plaintiffs additionally contend that William Bartmann threatened to fire AA over the Residual value issue and that rather than be fired AA agreed to the audit note which indicated that the Residual was restated at the low end of a range of fair values.

Plaintiffs allege that by December 1996, Charles Welsh had noted that CFS' projected performance goals were virtually impossible. By January of 1997, CFS was relying upon loan sales to meet collection requirements. In September 1997 the DIMAT sales began.

Plaintiffs allege that AA noted numerous exceptions¹ beginning in 1997. Plaintiffs contend that the exceptions were caused because the entity paying on the "collection" did not match the identity of the individual or entity that owed the amount. Plaintiffs contend that the exceptions occurred because CFS began selling portions of the trust portfolio to make up for any shortfalls in collections. Plaintiffs allege that this was not permitted under the agreements, but that AA "explained" the exceptions as appropriately explained by management at CFS.

1 Plaintiffs note that AA entered into contracts with some plaintiffs to perform limited procedures to test portions of the collection process used by CFS. Plaintiffs contend that in April 1997, June 1997, and November 1997 (two times) exceptions were noted by AA.

Plaintiffs additionally contend that the work AA performed to test CFS' collections caused AA to become completely familiar with the accounts which CFS used to funnel money out of collections and distribute it to the trusts. Plaintiffs contend that one reasonable inference is that AA learned that rather than meeting its collections targets by collecting from the credit card debtors, CFS relied upon loan sales for as much as 20% of "collections" each month.

Plaintiffs assert that AA's partner and the Chief Financial Officer of CFS agreed to an auditing procedure to test the CFS collections model, but that CFS refused to provide the necessary information to AA to test the model. Plaintiffs contend that GAAS required that the ECR model be tested.

Plaintiffs allege that AA knew that CFS had to meet or exceed monthly collection targets for the securitizations to succeed, but that AA knew that as much as 20% of purported collections were actually asset sales. Plaintiffs allege that AA knew CFS relied on sales of loans to meet its collection requirements.

Plaintiffs allege that AA knew of the existence of Dimat. Plaintiffs allege that when Mitchell Vernick resigned from CFS in May 1997, he met with Kevin Corbett, a partner with AA, and informed Mr. Corbett that he was uncomfortable with the representations being made to CFS investors, and that he had concerns about CFS' viability and the ECR model.

AA argues that it audited CFS, the company which serviced and attempted to collect on the charged off credit card debt for the trusts which issued the securities purchased by plaintiffs. AA emphasizes that it did not audit the trusts that issued the securities, and that AA had no knowledge or information with regard to any fraud. AA argues that plaintiffs have merely alleged a violation of GAAP (generally accepted accounting principles) and GAAS (generally accepted auditing standards), and that mere violations of such procedures are not actionable as fraud.

I. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF LIABILITY AGAINST ARTHUR ANDERSON UNDER § 10(b) OF THE 1934 SECURITIES ACT

The elements of a § 10(b) claim are as follows:

1. That AA made an untrue statement of material fact, or failed to state a material fact;

2. That AA's misrepresentation or omission occurred in connection with the purchase or sale of a security;

3. That AA made the misrepresentation or omission with scienter (i.e., knowingly or recklessly); and

4. That plaintiffs relied on AA's misrepresentation or omission, and sustained damages as a proximate result of AA's misrepresentation or omission.

Anixter v. Home-Stake Product Co., 77 F.3d 1215, 1225 (10th Cir. 1996);United Int'l Holdings, Inc. v. The Wharf (Holdings) Ltd., 210 F.3d 1207, 1220 (10th Cir. 2000). To resolve AA's motions to dismiss, the Court must determine whether, for each element outlined above, plaintiffs have pled facts which would, if taken as true together with all reasonable inferences therefrom, permit a reasonable jury to find that the element has been established. Grossman v. Novell. Inc., 120 F.3d 1112, 1118 (10th Cir. 1997). From a review of the complaints, the undersigned finds that plaintiffs have pled facts sufficient to establish each element of their prima fade case under § 10(b).

A. AA's ALLEGED MISREPRESENTATIONS

Plaintiffs allege that AA issued an Unqualified Audit Report regarding CFS on February 22, 1997, with regard to the 1995 and 1996 financial statements; on November 10, 1997, with regard to the restated 1995 and 1996 financial statements; and on February 4, 1998, with regard to the 1996 and 1997 financial statements. Each PPM had attached an Unqualified Audit Report, but not all of the Unqualified Audit Reports were attached to each PPM.

With each Unqualified Audit Report, AA represented that it had conducted an audit of CFS in accordance with GAAS, and represented that the respective financial statements were free of material misstatements. AA stated that an audit "includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation." Plaintiffs argue that this statement is an assertion that AA audited CFS's ECR model, which plaintiffs claim is a false statement. Plaintiffs allege that the financial statements incorrectly indicated that CFS would collect more than enough to pay off all principal and interest owing on the notes. Plaintiffs allege that the financial statements incorrectly indicated that the servicing fees provided to CFS under the servicing agreements were sufficient, when CFS should have recorded a liability for such fees.

Certain plaintiffs also allege that statements made by AA in connection with the agreed-upon procedures constitute additional misrepresentations.

B. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED THAT AA ACTED WITH THE REQUISITE SCIENTER.

In the Main RR, the undersigned articulates the scienter standard to be applied to this case. See Main RR, Part IV(C). In general, reckless behavior is an extreme departure from the standards of ordinary care which presents a danger of misleading buyers or sellers that is either actually known to the defendant or is so obvious that the defendant must have been aware of it. Motive and opportunity, alone, do not establish scienter, but may be considered within the mix of allegations to determine if scienter is sufficiently alleged. City of Philadelphia v. Fleming Companies. Inc., 264 F.3d 1245, 1261-62 (10th Cir. 2001).

AA initially alleges that plaintiffs cannot satisfy even "the most lax scienter pleading standard." AA argues that plaintiffs do not allege motive and opportunity by AA to commit the fraud, and they do not assert that AA knowingly or recklessly committed fraud.

The undersigned has reviewed the complaints filed by plaintiffs and concludes that, taking the allegations in plaintiffs' complaints as true together with all reasonable inferences therefrom, plaintiffs have sufficiently alleged scienter.

Plaintiffs allege that AA acted as CFS' outside auditor for ten years. Plaintiffs allege that AA demanded that CFS' financial statements be restated for the 1996 calendar year when AA learned that CFS was planning an initial public offering of stock. Plaintiffs allege that the reason AA insisted upon a restatement of the 1996 financials was because AA knew that the original 1996 financials were incorrect.

Plaintiffs assert that AA knew that the Residual had a value of zero, but that AA agreed to include language in the notes to the audited financial statements indicating that the Residual was at the low end of a range of fair values. Plaintiffs allege that in fact AA hid the actual zero value of the Residual. Plaintiffs allege that AA agreed to hide the true value of the Residual because Mr. Bartmann threatened to fire AA, and that the language in the notes was a compromise between AA and CFS.

Plaintiffs allege that AA performed several agreed upon procedures with regard to the trusts and identified numerous instances in which the paying entity could not be matched up with the collection amount, and that the reason for this was that the collection amount was received from a bulk sale, not from a credit card debtor. Plantiffs allege that AA recklessly accepted an explanation from CFS' management as to the reasons for the exceptions AA had identified. Plaintiffs allege that the exceptions were caused by loan sales, and that AA knew that CFS could not meet its collections targets unless sales of the trusts' assets were reported as "collections."

Plaintiffs allege that Mitchell Vernick discussed his suspicions with Kevin Corbett, the AA partner in charge of the CFS account. Plaintiffs argue that AA had a duty to test the ECR model, but that when AA attempted to test the model, CFS denied necessary information and the model was never adequately tested. Plaintiffs allege that CFS' denial of the necessary information to AA should have made AA suspicious of the efficacy of the ECR model.

1. Motive and Opportunity Allegations Are Not Necessary in Pleading Scienter.

AA asserts that plaintiffs have not sufficiently alleged motive and Opportunity. AA argues this point, in part, because at the time AA's brief was filed, and at the time of oral argument, whether or not "motive and opportunity" were sufficient to meet the pleading requirements in the Tenth Circuit was not established. This issue has been discussed in the Main RR. Furthermore, in City of Philadelphia, the Tenth Circuit erased any remaining questions.

We agree with the middle ground chosen by the First and Sixth Circuits, and arguably by the Eleventh Circuit. These circuits have determined that courts must look to the totality of the pleadings to determine whether the plaintiffs' allegations permit a strong inference of fraudulent intent. Allegations of motive and opportunity may be important to that totality, but are typically not sufficient in themselves to establish a "strong inference" of scienter.

Id. at 1262. As noted, allegations of motive and opportunity, although not sufficient in and of themselves, will be considered along with any other allegations of fraudulent intent.

Plaintiffs allege that AA received hundreds of thousands of dollars in fees from AA. AA argues that it had no motive because the mere receipt of professional fees is insufficient to raise a strong inference of fraud, and the potential exposure to liability from the fraud would have made participation in the fraud alleged highly irrational. AA's argument has some appeal. However, as discussed in the section dealing with MBP, AA is a partnership composed of many individuals. An individual certainly may have a motive to obtain and keep a large client such as CFS. It is, therefore, not outside the realm of possibilities that a partner, in his desire to keep a large client, could choose to ignore facts of which he is aware, or in his zeal to give the client what it wants, recklessly ignore facts. Plaintiffs allegations as a whole suggest that individuals from AA, such as Kevin Corbett, may have had a motive to continue to assist CFS in closing securitizations, and the audited financial statements were a necessary part of that process. Plaintiffs additionally allege that because AA had failed to conduct earlier audits of CFS which adequately complied with GAAS and GAAP, AA had a motive to continue to perpetrate the fraud to conceal prior mistakes.

The undersigned cannot find, as a matter of law, that AA had no motive to make false representations in the financial statements.

2. Scienter Pleading Requirements in the Tenth Circuit

AA asserts that plaintiffs' complaints present no facts giving rise to a strong inference of scienter, but rather that plaintiffs rely upon conclusory allegations of GAAP and GAAS violations. AA asserts that mere allegations of violations of GAAS and GAAP are insufficient to establish a securities fraud violation.

The most recent Tenth Circuit case to discuss GAAS and GAAP violations supports, in part, AA's recitation of the law.

"[A]llegations of GAAP violations or accounting irregularities, standing alone, are insufficient to state a securities fraud claim." Novak, 216 F.3d at 309. Only where such allegations are coupled with evidence that the violations or irregularities were the result of the defendant's fraudulent intent to mislead investors may they be sufficient to state a claim.

City of Philadelphia, 264 F.3d at 1260. The Tenth Circuit has held, as argued by AA, that mere allegations of GAAP or GAAS violations are not sufficient, by themselves, to establish a securities fraud claim. What is necessary is that a plaintiff assert that the violations were the result of the defendant's fraudulent intent to mislead investors.

In this action, plaintiffs fall within the area defined by the Tenth Circuit. Plaintiffs make several allegations that GAAP and GAAS were violated, but plaintiffs additionally assert that the violations were made to mislead investors and were intentional. For example, plaintiffs assert that AA knew that the Residual had a zero value but hid the fact that the amount was zero by accepting the note in the audited financials that the Residual was a number falling at the low end of a range of fair values. Plaintiffs allege that the Residual was the number that investors were concerned with in deciding whether to invest and that AA knew that investors looked at that number. Plaintiffs allege that GAAP and GAAS were violated by AA to intentionally hide a fact in order to mislead investors.

AA refers the Court to Queen Uno Ltd. Partnershirj v. Coeur D'Alene Mines Corporation, 2 F. Supp.2d 1345 (D. Cir. 1998) as supporting its argument that mere assertions of GAAP and GAAS are insufficient to establish scienter. The allegations against the auditors in Queen Uno were described by the court as "sparse," and, according to the court consisted of: (1) the auditor participated in the fraudulent scheme to retain the company's business (motive); (2) the auditor had access to confidential information and must have known that the company paid double for a certain property over other bidders, that a company director resigned due to the acquisition of that property, and that the company spent millions on that property; and (3) the auditor must have violated GAAP and GAAS because it knew of the company's misrepresentations and failed to account for or require their disclosure. Id. at 1360. As noted by the court in Queen Uno, the allegations with regard to the auditors are fairly sparse. The "motive" argument was discounted for the reasons discussed, to some degree, in this Report. Additionally, to a degree, the remaining allegations against the auditor were circular in that GAAP and GAAS were allegedly violated because the auditor must have known of the fraud since the auditor had access to information. In this action, plaintiffs assert that AA actually knew certain information, and that GAAS and GAAP were intentionally violated when it hid that information from potential investors.

a. Scienter Must Not be Evaluated Piecemeal .

Plaintiffs plead numerous facts and argue that based on those various facts a strong inference arises that AA knew or was reckless in not knowing that CFS was running a ponzi scheme. AA primarily focuses on the separate facts and allegations made by plaintiffs, suggesting that a fact, by itself, does not establish the requisite scienter.

For example, AA argues that no single case supports plaintiffs' position that scienter can be established by alleging that an auditor requested necessary information from an audit and was refused the requested information. However, this is not plaintiffs' sole argument. Plaintiffs allege that AA requested certain information from CFS and was denied the information. Plaintiffs allege that the denial of the information which was requested to test the ECR model, should have raised suspicions with AA. Plaintiffs allege that AA was required to audit the ECR model and that AA represented, in the audit papers, that the ECR model had been tested, yet AA failed to adequately test the ECR model. However, the allegations related to the ECR model are not the only allegations made by plaintiffs. Plaintiffs additionally allege, as discussed above, that AA noted audit exceptions which were not properly explained, that AA intentionally hid the true value of the Residual, that Mr. Bartmann threatened to fire AA over the Residual, that AA had a motive to assist in the fraud, and that Mr. Vernick disclosed CFS' shortcomings to AA.

AA focuses on each allegation, separately, and argues that that allegation, by itself, cannot support a strong inference of scienter. of course plaintiffs' complaints do not consist of "that allegation by itself." The undersigned is not, however, required to consider each isolated allegation. Rather, the Court's task is to determine whether the sum of plaintiffs' allegations are sufficient to raise a strong inference of scienter. The complaints at issue must be read as a whole to determine whether plaintiffs' allegations give rise to a strong inference of AA's scienter, While certain allegations read in isolation may not give rise to a strong inference of scienter, taking each of plaintiffs' complaints as a synergistic whole, the undersigned finds that the complaints raise a strong inference that AA acted with scienter.

b. Asset Sales, Dimat and Exceptions

AA argues that plaintiffs make a conclusory allegation with no factual support that because AA performed certain unspecified agreed-upon procedures, AA knew that asset sales were being used to enhance CFS' collection rates.

Plaintiffs allege that AA knew about Dimat and that AA knew that asset sales were made and reported by CFS as "collections." Plaintiffs rely in their complaints, in part, on an internal e-mail from Scott A. MacDonald, CFS' controller, to William Bartmann, dated December 23, 1998.² Plaintiffs note that the internal e-mail states that all sales were reviewed by AA, and that AA "tested' sales payments by both Cadle and Dimat. Plaintiffs additionally allege that AA was unable to match payor names to the collections because the "collections" were actually bulk sales³ Plaintiffs allege that CFS' "explanation" of the exceptions as record-keeping errors was suspicious. Plaintiffs allege that AA had a responsibility under the "agreed upon" procedures to test CFS' collections. Plaintiffs assert that AA, pursuant to GAAS, should have been alerted to possible related-party transactions and should have viewed with skepticism any transactions to unrelated parties. Plaintiffs allege that AA either actually knew or should have known that CFS was unable to make collection targets without asset sales.

2 In its reply brief, AA argues that the e-mail is self-serving and designed to "spread the blame." AA additionally argues that the e-mail is vague and states "I do not know for sure," and "I assume." AA is correct that the language of the e-mail is, in some instances, vague. However, the e-mail contains enough references to support a reasonable inference that AA knew about sales to Dimat and that AA tested asset sales. AA's arguments that the e-mail is self-serving are arguments addressed to the weight of the evidence which is not an issue to be considered at the motion to dismiss stage.

3 AA notes that plaintiffs' allegations are pled on information and belief. Plaintiffs allege that AA did not match payor names to the cash transaction history, and that AA explained the exceptions as record keeping errors. Plaintiffs' allegations are not related to an alleged misrepresentation made by AA and are, therefore, not controlled by the "information and belief" requirements under the PLSRA. Information and belief allegations are discussed below in Parts 1(B)(2)(c) and 1(D)(1).

c. ECR Model

AA asserts that plaintiffs make an impermissible conclusory allegation that AA knew of substantial problems with the ECR model. Primarily, AA's argument is premised on requirements related to "information and belief" pleading.

AA asserts that plaintiffs' "information and belief" allegations that Mr. Vernick disclosed his skepticism of the validity of the ECR model to Kevin Corbett of AA cannot be considered by the Court because plaintiffs fail to plead facts which support their "information and belief" pleading. The undersigned disagrees with AA's interpretation of the requirements of "information and belief" pleading under the PSLRA.

With regard to a § 10(b) claim, the PSLRA requires that plaintiffs "specify each statement alleged to have been misleading" and "the reason or reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1). When a plaintiff makes an allegation "upon information and belief" regarding these specific "statements," the PSLRA further requires plaintiff to "state with particularity all facts on which that belief is formed." Id. Thus, § 78u-4(b)(1) of the PSLRA requires that if the allegedly misleading statement or omission is plead upon information and belief, the plaintiff must state with particularity the facts forming the basis of the information and belief allegations. This requirement, therefore, does not apply to the allegation regarding Mr. Vernick's disclosure to Mr. Corbett that he was skeptical of the ECR model because this allegation is not an "allegation regarding the statement or omission" alleged to be false or misleading. Rather, the allegation relates to AA's knowledge and should be evaluated, along with the totality of the other allegations in the complaints, under § 78u-4(b)(2), when determining whether plaintiffs have stated "with particularity facts giving rise to a strong inference that [AA] acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2).

Plaintiffs allege that AA knew that the ECR model was fundamental in running CFS' business and that it was essential to investors. Plaintiffs assert that pursuant to GAAS, AA was required to design and implement audit procedures to adequately test the ECR model. Plaintiffs assert that Mr. Vernick disclosed his skepticism regarding the ECR model to Mr. Corbett. Plaintiffs allege that CFS refused to provide information necessary to test the ECR model to AA; information related to the receivables that actually remained in the trusts. Plaintiffs assert that CFS' actions raised audit "red flags" and imposed additional obligations upon AA to evaluate the ECR model.

d. Magnitude of the Accounting Error

Plaintiffs assert that the "sheer magnitude of the accounting error" can raise a strong inference that the accountant either knew or was reckless in not knowing of fraud. Plaintiffs refer to AA's failure to include asset sales which totaled over $60 million and comprised approximately 20% of collections per month as a huge error. Plaintiffs additionally note that AA certified CFS' financial statements although they contained substantial fraud and CFS collapsed shortly thereafter.

AA argues that no court has ever accepted the "sheer magnitude" of the accounting error alone as an indication of scienter. The cases referenced by AA suggest only that the sheer magnitude of the error, alone, cannot establish scienter. See, e.g., In re Livent. Inc. Sec. Litig., 78 F. Supp.2d 194 (S.D.N.Y. 1999). Plaintiffs do not rely solely upon the sheer magnitude of the error.

e. CFS Servicing Fees

AA argues that plaintiffs allege, without factual support, that AA knew that servicing fees received by CFS were insufficient to cover collection costs.

Plaintiffs assert that Mitchell Vernick disclosed to Kevin Corbett his concern that CFS' overhead could not be covered absent revenue from asset sales. Plaintiffs assert that this disclosure should have alerted AA to CFS' fraud. Plaintiffs additionally allege that AA's failure to record CFS' servicing agreements as a liability was a violation of GAAS and GAAP.

F. GAAS, GAAP, and "Red Flags"

Plaintiffs allege numerous GAAS and GAAP violations by CFS and numerous "red flags" that should have alerted AA to the fraud. AA argues that plaintiffs make only conclusory allegations of GAAP or GAAS violations, which are insufficient to support the pleading requirements of scienter.

The parties refer the Court to several cases. Generally, the cases referenced by the parties are similar to the recent holding by the Tenth Circuit in City of Philadelphia. Mere allegations that GAAS or GAAP were violated are insufficient to establish scienter. However, "where such allegations are coupled with evidence that the violations or irregularities were the result of the defendant's fraudulent intent to mislead investors they may be sufficient to state a claim." City of Philadelhia, 264 F.3d at 1260.⁴

4 See e.g., Retsky Family Limited Partnership v. Price waterhouse, LLP, 1998 WL 774678 (N.D. Ill. 1998) ("Deliberately ignoring 'red flags' such as those alleged here can constitute the sort of recklessness necessary to support § 10(b) liability. . . . This is not a case in which the plaintiff failed to allege facts supporting the inference that the accounting firm knew of the company's financial irregularities or the inference that the financial irregularities were sufficiently obvious that the accounting firm 'must have been aware of them.'"). AA also refers the Court to In re Cirrus Logic Securities Litigation, 946 F. Supp. 1446 (N.D. Cal. 1996). There, the court noted that "[e]ven at the pleading stage, the Ninth Circuit has held that plaintiffs must set forth facts explaining why the allegedly fraudulent accounting decision 'is not merely the difference between two permissible judgments,' because flexible accounting concepts do not always (or perhaps ever) yield a single correct figure.'" In re Cirrus at 457. Plaintiffs have met this requirement.

Plaintiffs have adequately pled violations of GAAS or GAAP in combination with a fraudulent intent to mislead. For example, plaintiffs allege that when AA requested the appropriate information to test the ECR model, and CFS refused to provide the necessary information, GAAS required AA to withdraw and "red flags" should have caused AA to question the ECR model. Plaintiffs assert that the agreed-upon procedures identified numerous exceptions for which AA accepted an explanation from CFS although AA had a responsibility to be alert to such transactions. Plaintiffs assert that AA should have been suspicious when monthly quotas were met only by large transfers of money at the end of each month. Plaintiffs assert that AA knew that the actual value of the Residual was zero but agreed to hide the value.

C. PLAINTIFFS' ALLEGATIONS SATISFY THE OTHER PLEADING REQUIREMENTS OF A § 10(b) CLAIM.

1. Plaintiffs Have Pled that the Misrepresentations Were "In Connection With" the Purchase or Sale of a Security.

Third parties such as lawyers, accountants, brokers, and credit agencies may commit fraud "in connection with" the purchase or sale of securities, even when those third parties are not themselves directly trading in the securities. See, e.g., Competitive Associates, Inc. v. Laventhol, Krekstein. Horwath and Horwath, 516 F.2d 811, 815 (2nd Cir. 1975). As Professor Hazen has noted, "[a]ny statement that is reasonably calculated to affect the investment decision of a reasonable investor will be held to satisfy the "in connection with' requirement." In Connection With, 16 Pepp. L. Rev, at 932 (quoting T. Hazen, The Law of Securities Regulation, § 13.6 at 470 (1985)). This is consistent with the Tenth Circuit's holdings on this topic. The Tenth Circuit has held that a representation made to influence a party's investment decision or to induce a party to purchase a security is a representation made "in connection with" the purchase of a security.⁵ See also Anixter v. Home-Stake Production Company, 77 F.3d 1215 (10th Cir. 1996) (auditor sued who prepared financial statements for company which were included in offering materials).

5 See united Intern. Holdings. Inc. v. wharf (Holdings) Ltd., 210 F.3d 1207, 1221 (10th Cir. 2000) (citing SEC v. Jakubowski, 150 F.3d 675, 679 (7th Cir. 1998) and Angelastro v. Prudential-Bache Secs., Inc., 764 F.2d 939. 943 (3d Cir. 1985)); and Arst v. Stifel. Nicolaus Co., Inc., 86 F.3d 973, 977 (10th Cir. 1996) (holding that if defendant's allegedly deceptive conduct could not have had an impact on the plaintiff's decision to sell his shares, defendant's conduct was not in connection with the sale of a security).

Plaintiffs allege that AA reviewed the PPMs issued by CFS, and the Audited Financials and the Unqualified Audit Report which were attached to the PPMs. Plaintiffs allege that Kevin Corbett received draft PPMs, and that he had the ability to make comments and changes to the offering materials. Plaintiffs assert that AA authorized CFS to include its Unqualified Audit Reports in the PPMs, knowing that investors would rely on them and the audited financial statements in deciding whether to purchase the SMART and GREAT securities. Plaintiffs allege that AA knew the importance of the ECR model to investors and that the audited financials indicated that AA's audit included an audit of the ECR model. The undersigned finds that plaintiffs have sufficiently alleged that the alleged misrepresentations and omissions in the audited financial statements and letters drafted by AA were made "in connection with" the purchase or sale of a security.

To support their argument that plaintiffs have failed to establish that the alleged fraudulent statements and omissions made by AA were made "in connection with" the sale of a security, AA relies on Farlow v. Peat. Marwick, Mitchell Co., 956 F.2d 982 (10th Cir. 1992). Farlow is similar to the current action in some respects. The outside accounting firm claimed that they audited only the financial statements for the company rather than the, in the case of Farlow, limited partnerships which issued the securities. Similarly, AA claims that they audited only CFS and not the trusts. In Farlow, the court found that the auditor was serving as the auditor for the company and not the limited partnerships. However, this finding is not the reason that the Tenth Circuit upheld the trial court's dismissal of the complaint. AA's conclusion that because it only audited CFS, it cannot be found to have made any misrepresentations in connection with the sale of a security is not a result dictated byFarlow. The court in Farlow noted numerous difficulties that the plaintiff had failed to overcome. The Tenth Circuit held that "the complaint fails to make any specific allegation that Peat Marwick participated in Powers' misrepresentations . . . ."⁶ Farlow, 962 F.2d at 985. The court in Farlow additionally noted that the plaintiffs had made no specific allegations regarding the financial statements, that the "misstatement" was an omission or failure to disclose assertion, and that no allegations were made that the outside auditor reviewed or approved any of the offering materials.

6 Basically, the only alleged misrepresentation of a financial statement was a financial statement that was sent after the investors had invested. The plaintiffs made no allegations of misrepresentations in materials sent prior to the investments. The Tenth Circuit noted that the plaintiffs claimed that the auditor certified the financial statements and that the auditor knew that the financial statements would be provided to investors. "However, in this respect the only particular partnership memorandum alleged to include Pepco financial statements was the memo for the Southroads Mall village partnership, which contained only the statement for December 31, 1981. Some newsletters (not identified) were sent to investors (not identified) after they had invested and the complaint alleges that a July 12, 1982, newsletter included a financial statement for year-end 1981. It is claimed that these newsletters "induced' future investments, but no specific facts are provided concerning what these future investments might have been, who made them, or what newsletters contained information concerning these investments. The complaint charges that Powers, with Peat Marwick's knowledge and consent, sent copies of financial reports to prospective investors; but, again, no facts are alleged indicating which financial statements were sent to whom or in what context." Farlow, 956 F.2d at 985. The Tenth Circuit noted that in the dismissal of the first complaint, plaintiffs had been orderee to specify which financial statements appeared in which offering materials and what was fraudulent about the statements. In the second amended complaint, the plaintiffs identified only one offering circular but did not allege any problem with the accompanying financial statements. In addition, the plaintiffs alleged problems only with financial statements which were sent to them after the investment. Id. Not surprisingly, the dismissal of the complaint was upheld by the Tenth Circuit. The plaintiffs failed to identify any misrepresentations which accompanied the sale of a security.

AA's argument is that it audited only CFS and not the trusts,⁷ and therefore AA's actions were not "in connection with the sale of a security" because the sales issued out of the trust. Even if Farlow supported this conclusion, AA's premise ignores other facts which plaintiffs allege. CFS existed to service the trusts. Investors would not purchase securities in the trusts without assurances that CFS had the ability to perform its collection functions for the trusts. Plaintiffs assert that the audited financials for CFS indicate that after collecting for the trusts and paying back any amounts owed, CFS would collect sufficient amounts for the benefit of CFS (i.e., the Residual). Plaintiffs assert that this served as an important assurance to potential investors that all investors would be paid in full. Plaintiffs assert that the representations by AA with regard to the audited financials were essential, and that AA knew that such representations were essential to the success of the securitizations. Plaintiffs make the same assertions with respect to the ECR model and AA's representations in the audited financials.

7 In its reply brief, AA acknowledges that it did audit one of the trusts. AA asserts, however, that no plaintiff has pled that AA audited the trusts. However, at least one plaintiff has pled that AA "audited at least one of the Trusts that sold notes to certain Plaintiffs . . . ."See No. 00-111, Doc. No, 12, ¶ 98.

AA argues that any alleged misrepresentation made by it occurred in November 1997 when it failed to disclose the reason for the write-down of the Residual. Consequently, AA argues that those plaintiffs who purchased a security prior to November 1997 cannot allege any AA misrepresentation in connection with the purchase of their securities. AA unreasonably limits plaintiffs' claims. Plaintiffs claim that the "1996 audited financial statement which was released in February 1997 contains false statements and incorrectly indicates the value of the Residual as being in the millions. Plaintiffs claim that when AA learned of the intended public stock offering, AA immediately insisted upon restating the audited financials. Plaintiffs claim that AA's insistence upon restating the 1996 financials was due to AA's knowledge that the original 1996 financials (issued February 1997) were incorrect. Although the 1996 restated financials were not issued until November 1997, Plaintiffs do allege material misrepresentations by AA prior to that date.

2. Plaintiffs have Adequately Pled Reliance.

Plaintiffs allege that in making their decision to purchase the SMART and GREAT securities at issue they, or their predecessors in interest whose claims they are asserting, relied on the truth of AA's representations in the audited financial statements. This allegation is sufficient to survive a motion to dismiss. Neither Fed.R. Clv. P. 9 nor the PSLRA impose any special pleading requirements with regard to § 10(b)'s reliance element.

With respect to some plaintiffs, AA asserts that the plaintiffs have not adequately pled reliance because several courts have held that reliance on an outdated financial statement is unreasonable. AA refers toCMNY Capital. L.P. v. Deloitte Touche, 821 F. Supp. 152 (S.D.N.Y. 1993) and In re ZZZZ Best Securities Litigation, 864 F. Supp. 960 (C.D. Cal. 1994). The undersigned finds that whether or not the plaintiffs reasonably relied on particular financial statements is an issue of fact which cannot be decided as a matter of law on a motion to dismiss.

In CMNY, the court "noted that reliance may have been unreasonable after the 1988 financial statement had aged," but concluded that the plaintiff had relied on the material for initial investments and that was reasonable. The court held that reliance on the financial statement was reasonable. CMNY, 821 F. Supp. at 160. The court did not specify any time frame for concluding that reliance was unreasonable.

In In re ZZZZ, the court discussed the CMNY case, noting that the court there has held that reliance on outdated financials was unreasonable. However, the court concluded that the plaintiffs had raised a disputed factual issue, and denied the movant's request for summary judgment.

The MPF plaintiffs⁸ allege that they purchased their securities on June 30, 1998. The MPF plaintiffs assert that they relied on the CFS Audited Financial Statements dated February 4, 1998, which included an audit of CFS and affiliated companies for December 31, 1997 and 1996. The audit report upon which plaintiffs claim reliance is the most recent audit report issued by AA and included in the PPM that was issued approximately five months before plaintiffs purchased. AA argues that reliance on any portion of the 1996 financials was misplaced. The 1998 audit report is an audit of the combined balance sheets for the years ended 1997 and 1996. Plaintiffs claim reliance on the 1998 audit report. The undersigned concludes that it cannot decide, as a matter of law, that plaintiffs should, in no way have relied on any information related to 1996.⁹

8 case No. 99-828 involves the MPF plaintiffs. The undersigned focuses on this complaint merely as an example. A review of the complaint indicates that each plaintiff claims reliance on the most recent financial statement. In some cases, early financial statements are additionally included. The 1996 financial statement, which was initially issued in February 1997 and reissued in November 1997, is noted by plaintiffs as demonstrating that AA had knowledge of the fraud.

9 Neither party provides much assistance on this issue, without any support, AA merely argues that reliance on a 1996 financial statement is obviously unreasonable. Plaintiffs note that they relied on the 1998 audit report, as though relying on an audit report issued in 1998 somehow validates the 1996 data. The court in In re ZZZZ noted numerous factors in its conclusion that whether or not the financial information was "aged' involved a disputed issue of fact. certainly, as a matter of law, reliance on a 1992 financial statement in connection with a purchase of a security in 2001 would be unreasonable. However, in the case before the court, the undersigned is unable to conclude that reliance upon a 1996 financial statement in a 1998 purchase is unreasonable. The undersigned additionally notes that plaintiffs have alleged that the issued and reissued financial statements in 1996 are also important because they indicate knowledge on the part of AA.

AA additionally argues that with respect to the plaintiffs who purchased SMART 98-1 or GREAT 98-A securities, none of the plaintiffs ever saw, relied upon, or received the February or November 1997 audit reports covering the 1996 and 1995 financial statements and therefore those plaintiffs cannot rely upon misrepresentations related to those audit reports. Some plaintiffs appear to agree. To the extent a plaintiff did not see or rely upon a prior audit report, misrepresentations in that audit report do not constitute a misrepresentation forming the basis of that plaintiff's claims. These plaintiffs assert reliance on the 1998 audit report for the 1997 and 1996 financial statements. These plaintiffs further assert that the earlier reports are not pled as a misrepresentation, but to support their position that AA had actual knowledge.

With regard to the American International Life Assurance Company of New York plaintiffs in No. 99-862, AA argues that the plaintiffs allege that the 1996 audit report was included only in the PPMs for the SMARTS, and that plaintiffs did not purchase in the SMARTS. AA asserts that plaintiffs, therefore, cannot allege that they relied on the 1996 audit report. These plaintiffs allege they were courted to purchase in the SMARTS and sent copies of the PPMs for a SMART securitization which included the 1996 audit report. These plaintiffs plead that in all of their investment decisions they received and relied on marketing documents from 1997 and 1998, which included the 1996 audit report.¹⁰ Based on the arguments of AA, the undersigned cannot conclude that plaintiffs have failed to plead reliance on the 1996 audit report. In addition, as discussed above, the undersigned cannot conclude as a matter of law that reliance on the 1996 audit report was unreasonable.

10 These allegations must be "pieced together" from plaintiffs' complaint. In their brief, plaintiffs note that ¶ 124 states that plaintiffs received the 1997 PPM which included the 1996 audited financial report; ¶ 198 states that plaintiffs made their investment decisions based on the offering documents which they received in 1997 and 1998.

3. Materiality:¹¹ AA Has Not Met the Requirements for Applicability of the "Bespeaks Caution" Doctrine.

11 AA discusses the "bespeaks caution" doctrine with respect to AA's argument that plaintiffs have not sufficiently pled reliance. The Tenth circuit treats the doctrine as a materiality element. See, e.g., Grossman, 120 F.3d at 1119. of course, if the statement was not material, plaintiffs probably could not have reasonably relied on it, which is, in part, AA's argument.

In AA's reply brief, AA presents a new argument that plaintiffs' arguments related to the Residual¹² booked on the 1996/1997 financial statements is "forward looking" and therefore subject to the judicially created "bespeaks caution doctrine." AA argues that its statements regarding the Residual constitute "forward-looking" statements which were accompanied by appropriate cautionary language. AA argues that because these future estimates were based on disclosed assumptions they are not actionable pursuant to the "bespeaks caution doctrine." AA refers the Court to Grossman v. Novell, Inc., 120 F.3d 1112, 1120 (10th Cir. 1997). Plaintiffs did not respond to this argument because AA presented it in their reply brief.

12 AA contends that what Plaintiffs refer to as a "residual" is not the residual, but is the Securitization Retained Interests."

The "bespeaks caution doctrine" is a judicially created doctrine.¹³ Generally, if a statement is "forward looking" and accompanied by sufficient cautionary language to disclose potential risks, a court can dismiss a securities fraud claim based on that statement:

13 The PSLRA has a safe harbor provision which applies to "forward-looking" statements. However, the PSLRA specifically excepts financial statements from the forward-looking" statements defense. See 15 U.S.C. § 78u-5(b)(2)(A). Because AA presented this argument in its reply brief, plaintiffs have not addressed AA's assertion, and no party has discussed whether the PSLRA replaces the previously judicially created "bespeaks caution" doctrine, courts addressing the issue have noted that the PSLRA was not intended to supplant the "bespeaks caution" doctrine. See, e.g., In re: Independent Energy Holdings Plc Securities Litigation, 154 F. Supp.2d 741, 754 (S.D.N.Y. 2001); In re Boeing Securities Litigation 40 F. Supp.2d 1160, 1170 n. 6 (W.D. wash. 1998) ("The Explanatory Statement of the Committee of Conference (the "Statement of Managers') provides that "[t]he Conference committee does not intend for the safe harbor to replace the judicial "bespeaks caution" doctrine or to foreclose further development of that doctrine by the courts.' Conf. Rep. at 46.").

Forward-looking representations are also considered immaterial when the defendant has provided the investing public with sufficiently specific risk disclosures or other cautionary statements concerning the subject matter of the statements at issue to nullify any potentially misleading effect. This doctrine, which is called the "bespeaks caution" doctrine, "provides a mechanism by which a court can rule as a matter of law (typically in a motion to dismiss for failure to state a cause of action or a motion for summary judgment) that defendants' forward-looking representations contained enough cautionary language or risk disclosure to protect the defendant against claims of securities fraud." However, not every risk disclosure will be sufficient to immunize statements relating to the disclosure; rather, "the cautionary statements must be substantive and tailored to the specific future projections, estimates or opinions . . . which the plaintiffs challenge." At bottom, the "bespeaks caution" doctrine stands for the "unremarkable proposition that statements must be analyzed in context when determining whether or not they are materially misleading."

Grossman, 120 F.3d at 1120 (citations omitted, emphasis added). Therefore, to meet the requirements of the "bespeaks caution" doctrine, AA must establish that the misstatements were (1) forward-looking, and (2) accompanied by the appropriate cautionary language. The undersigned finds that AA has failed to establish either of these elements as a matter of law.

First, the doctrine applies only to forward-looking statements. The court in Grossman held that statements involving present factual conditions or background factual assumptions would not be protected under the "bespeaks caution" doctrine.

By definition, the bespeaks caution doctrine applies only to affirmative, forward-looking statements. Because several of the allegedly misleading statements referred to then-present factual conditions, or implied background factual assumptions a reasonable investor would regard the speaker as believing to be true, the "bespeaks caution' doctrine would be of no assistance to defendants as to those statements.

Grossman, 120 F.3d at 1123. AA argues that statements about the Residual qualify as a forward-looking statements. The undersigned cannot agree. The Residual is based, in part, on the current collectable assets contained in the trusts and the evaluation, based on the ECR model as to what amount will be collected. At best, it includes both forward-looking and present factual conditions or implied factual background assumptions. Further, the Residual is an assessment of a present value that is recorded on the financial statements. Presumably, as collection data changed, the value of the Residual would fluctuate. In fact, this did occur, and the value attributed to the Residual was changed in the restated 1996 financials. Therefore, the amount reflected on the financial statement is actually a current assessment, rather than a forward-looking statement.

Second, the statement must be accompanied by appropriate cautionary statements which are specifically tailored to the forward-looking statement. AA refers to the notes accompanying the financial statements which indicate that the assumptions upon which the Residual is based contain a significant amount of uncertainty. The undersigned has reviewed the notes in conjunction with the statements which AA claims are forward-looking. The undersigned cannot find that, as a matter of law, the cautionary statements are sufficient.

4. Agreed-Upon Procedures

AA asserts that to meet the requirements for pleading fraud, plaintiffs must allege "what" misrepresentations were made, "to whom" the misrepresentations were made, "when" the misrepresentations were made and "how" the misrepresentations furthered the fraud. AA notes that plaintiffs refer to misrepresentations contained in agreed-upon procedures reports, but AA argues that plaintiffs do not allege the necessary facts in conjunction with these reports.

Many of the plaintiffs assert facts related to the agreed-upon procedures reports to support their allegation that AA knew about the fraud. For those plaintiffs who have not asserted the agreed-upon procedures report as a separate misrepresentation, AA's argument does not apply.

The AUSA plaintiffs in 00-111 have separately pled that the agreed-upon procedures reports were sent to the plaintiffs in connection with prior purchases of securities, and relied upon by the plaintiffs with regard to subsequent purchases of securities. These plaintiffs assert that they did rely upon the agreed-upon procedures reports. For example, the AEGON plaintiffs allege that they received the July 25, 1997 agreed-upon procedures reports related to the SMART 97-2, and would not have purchased SMART 97-4 securities without first reviewing and relying upon that report. Similarly, the BlackRock plaintiffs assert that they received agreed-upon procedures reports related to SMART 97-2, 97-3, and 97-4, and that absent receipt and reliance upon those reports they would not have purchases additional securities. The Hyperion Plaintiffs allege that they received agreed-upon procedures reports related to their SMART 97-2 and 97-4 purchases and would not have purchased any subsequent securities if those reports had not contained misrepresentations and omissions. Thus, the AUSA plaintiffs have alleged reliance on the agreed-upon procedures report, specifying the specific report received.

AA additionally, and generally, argues that plaintiffs must satisfy the "how" and "why" prong. AA claims plaintiffs do not assert how the purported misrepresentations furthered the alleged fraud. Plaintiffs allege that the agreed-upon procedures reports identified five audit exceptions, and stated the explanation of the audit exceptions as a record-keeping error. Plaintiffs allege that the exceptions actually identified that bulk sales were being made and were reported as "collections." Plaintiffs claim that this furthered the fraud by hiding that collections were inadequate. Plaintiffs identify these statements as false and asserts that AA knew the statements were false when made. Thus, the undersigned finds that plaintiffs have pled the basic requirements questioned by AA.

D. PLAINTIFFS HAVE PLED THEIR ALLEGATIONS WITH SUFFICIENTLY PARTICULARITY

AA alleges that plaintiffs have failed to plead fraud with the particularity required under Fed.R.Civ.P. 9(b) and the PSLRA.

1. Plaintiff's Have Adequately Substantiated Their "Information and Belief" Allegations.

AA argues that, pursuant to the PSLRA, all allegations based on "information and belief" must be supported by all facts upon which the belief is based. Plaintiffs refer to 15 U.S.C. § 78u-4(b)(1)(8). "Information and belief" pleading has been discussed above, and in connection with MBP. Generally, the PSLRA requires that a plaintiff "specify each statement alleged to have been misleading" and "the reason or reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1). When a plaintiff makes an allegation "upon information and belief" regarding these specific statements," the PSLRA further requires plaintiff to "state with particularity all facts on which that belief is formed." Id.

AA identifies six allegations by plaintiffs which AA claims are wrongly made upon "information and belief" and lack the appropriate additional factual information: first, that AA was CFS' outside auditor and conducted agreed-upon procedures to test CFS' collections; second, that Kevin Corbett of AA received draft PPMs and had the ability to make changes; third, that Mr. Vernick disclosed his concerns about CFS' business model to Mr. Corbett; fourth, that AA discovered asset sales during the course of the agreed-upon procedures work; fifth, that discrepancies exist between payor names and cash transaction history reports; and sixth, that AA failed to maintain an independent mental attitude while doing work for CFS. Plaintiffs deny that each of the statements was based solely on "information and belief," and argues that many of the statements were supported by the appropriate facts. Plaintiffs also argue that the complaints must be considered as a whole.

None of the alleged "information and belief" assertions referenced by AA address alleged misstatements by AA. Accordingly, the provisions of the PSLRA are not applicable. The majority of the allegations relate to AA's knowledge and should be evaluated along with the totality of the other allegations in the complaint.

2. Plaintiffs' Claims are Not Based Solely on Aider and Abettor Allegations.

AA argues that plaintiffs are alleging improper "aider and abettor" allegations. AA generally notes that plaintiffs' complaints contain language such as "participated in," "assisted," and "complicity in." AA additionally asserts that claims related to assisting" CFS in drafting footnotes to the CFS financial statements do not allege that AA was a primary violator. AA asserts that plaintiffs' complaints cannot survive dismissal under Central Bank of Denver, N.A. v. First Interstate Bank of Denver. N.A., 511 U.S. 164 (1994).

a. Plaintiffs' Allegations that AA "s Participation in the Drafting of the Audit Footnotes Constitutes a Primary Violation is Foreclosed by Central Bank .

Certain plaintiffs allege that AA assisted in drafting the footnotes in CFS' financial statements, and that the footnotes, therefore, became AA's representations and constitute a separate misstatement by AA. Plaintiffs refer the Court to two district court cases and a Ninth Circuit Court of Appeals case.

In the wake of Central Bank, federal courts split in their approach to determining when a secondary actor has committed a primary violation of § 10(b). Some courts, like the Ninth Circuit, have adopted a "significant role" or "substantial involvement" test. Applying this test, secondary actors are primarily liable for false or misleading statements made by others so long as the secondary actor had a significant role in the preparation of the false or misleading statement. See. e.g., In re Software Toolworks, 50 F.3d 615, 628 n. 3 (9th Cir. 1994) (accountant may be primarily liable based on its significant role in drafting and editing" a letter sent by the issuer to the SEC). Other Courts, including the Tenth Circuit, reject the "significant role" test and insist that, under Central Bank, primary liability may be imposed only when the secondary actor makes his own false or misleading statement that is communicated to investors See e.g., Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1226-27 (10th Cir. 1996). These courts hold that anything short of an actual statement by the secondary actor is merely aiding and abetting, and no matter how substantial that aid may be, it is not enough to trigger primary liability under § 10(b). See also Shapiro v. Cantor, 123 F.3d 717, 720 (2nd Cir. 1997). This Court is bound to follow the Tenth Circuit's formulation of Central Bank's holding announced in Anixter. See also MBP RR, Part I(A)(1).

The cases referenced by plaintiffs each rely upon a test that has been rejected by the Tenth Circuit. Plaintiffs cannot assert as a separate misrepresentation those portions of the CFS financial statement footnotes which plaintiffs claim AA participated in drafting. Under Central Bank, CFS' the financial statements are CFS' representations, not AA's, no matter how much AA may have participated in their preparation.

b. Plaintiffs Have Alleged Claims That are Not Premised on Aider and Abettor Allegations .

Plaintiffs' complaints do contain some of the aider and abettor language noted by AA. Because aider and abettor claims are not permitted pursuant to Central Bank, the Court must determine: (1) whether plaintiffs have alleged that AA is a primary violator, and (2) whether the referenced allegations by AA support any other elements of plaintiffs' claims.

The undersigned concludes that plaintiffs have sufficiently alleged that AA is a primary violator. Plaintiffs allege that AA prepared an audit report, that the audit report was false and misleading, that the audit report was included in the offering materials to plaintiffs, that AA knew potential investors would rely on the information prepared by AA, and that plaintiffs actually relied on the information. AA drafted the audit report and plaintiffs adequately allege that AA is a primary violator under § 10b(5). See Central Bank of Denver. N.A. v. First Interstate Bank of Denver. N.A., 511 U.S. 164 (1994); and Anixter v. Home-Stake Production Company, 77 F.3d 1215 (10th Cir. 1996).

The second inquiry is whether the allegations identified by AA as "aider and abettor" allegations have any other purpose in the complaints. AA notes that plaintiffs claim that AA had the ability to make changes in the offering materials and AA authorized CFS to include its audit reports in the PPMs. Plaintiffs argue that these allegations support plaintiffs' claims that AA's misrepresentations were made in connection with the purchase or sale of a security. AA also refers to allegations that AA "participated in" and "assisted in" drafting notes to the 1996 and 1997 audit notes as supporting an aider and abettor theory. Although the choice of language may support AA's premise, plaintiffs have alleged that AA is a primary violator. Plaintiffs assert as the alleged misrepresentation AA's audit report which plaintiffs represent as validating CFS' financial statements and audit notes. Plaintiffs assert that the audit report therefore "validates" all of the audit report notes, and therefore whether or not AA drafted any particular note or "aided" in the drafting of the note is not relevant because AA "ratified" the notes in its clean audit report. Finally, the undersigned notes that plaintiffs have alleged state law aider and abettor claims against AA, which would obviously require plaintiffs to allege that AA had aided and abetted.

3. Plaintiffs Do Not Plead Fraud by Hindsight.

AA argues that plaintiffs impermissibly plead fraud by hindsight. AA refers the Court to DiLeo v. Ernst Young, 901 F.2d 624 (7th Cir. 1990).

The story in this complaint is familiar in securities litigation. At one time the [company] bathes itself in a favorable light. Later the [company] discloses that things are less rosy. The plaintiff contends that the difference must be attributable to fraud. "Must be" is the critical phrase, for the complaint offers no information other than the differences between the two statements of the firm's condition. Because only a fraction of financial deterioration reflects fraud, plaintiffs may not proffer the different financial statements and rest. Investors must point to some facts suggesting that the difference is attributable to fraud.

DiLeo, 901 F.2d at 627. Fraud by hindsight occurs when a plaintiff asserts that the defendant must have known that the statements were fraudulent because of the information which is later known to all parties. Basically, plaintiffs are required to explain why the statement was untrue or misleading when the statement was made. Grossman, 120 F.3d at 1124.

The undersigned has reviewed plaintiffs complaints. Plaintiffs do not plead fraud by hindsight in the manner contemplated by the court inDiLeo. Plaintiffs allege that the statements made by AA in issuing a clean audit report were inaccurate at the time that the audit report was issued, and that AA knew that the statements were inaccurate. Plaintiffs have not relied upon fraud by hindsight to establish that the misstatements, when made, were untrue or misleading.

4. The "Group Pleading" Doctrine Is Not Applicable to the Claims Pled Against AA.

AA argues that plaintiffs inappropriately rely on the "group pleading" doctrine. Group pleading is discussed in detail in the Main RR, Part IV(D). Generally, group pleading is a relaxation of the requirement that a plaintiff must allege with particularity "who" made the misstatement. In this case, plaintiffs have specifically identified the misstatements attributed to AA. If the maker of the misstatement is specifically identified, plaintiffs are not relying upon the group pleading doctrine.

In its reply brief, AA seems to recognize the inapplicability of the group pleading doctrine, and instead asserts that plaintiffs improperly make "blanket references" to all defendants. AA asserts that defendants should not be lumped together, and that each defendant should be informed of the alleged nature of the claims against it. AA does not further develop this argument. The undersigned has reviewed the complaints and cannot recommend dismissal on the basis urged by AA.

Finally, plaintiffs in 99-828, 99-919 and 99-943 suggest that group pleading is appropriate. These plaintiffs generally note that group pleading survived the PSLRA and that AA assisted in drafting the PPM. However, as discussed in the Main RR, group pleading applies only to clearly cognizable corporate insiders with active operational involvement in the company. See Main RR, Part IV(D). Mere assertions that AA assisted in the drafting of the PPMs, had access to inside information, and created audited opinions which were attached to the PPMs, is insufficient to place AA in the group of corporate insiders with active operational involvement in CFS.

II. PLAINTIFFS' STATE LAW CLAIMS ARE NOT SUBJECT TO DISMISSAL.

AA argues only that because the federal claims will be dismissed, the Court lacks supplemental jurisdiction over the remaining state claims. Plaintiffs note that if dismissal is recommended, plaintiffs should be given a chance to replead. Plaintiffs additionally suggest that even if complaints against AA are dismissed, the Court should retain supplemental jurisdiction as long as any of the parties to the suit remain in the action. Because the undersigned recommends that plaintiffs' federal claims not be dismissed, the issues raised regarding whether or not the Court retains supplemental jurisdiction are moot.

RECOMMENDATION

For the reasons discussed above and in the Main RR, the undersigned recommends that Arthur Anderson's motions to dismiss plaintiffs' aiding and abetting fraud claims under Oklahoma law be GRANTED. See RR Exhibit C, p. 14.

For the reasons discussed above and in the Main RR, the undersigned recommends that Arthur Anderson's motions to dismiss be DENIED as to the following claims: (1) claims under § 10(b) of the 1934 Securities Act; (2) claims under § 408(a)(2)(A) of the Oklahoma Securities Act; (3) claims under § 408(b) of the Oklahoma Securities Act; (4) claims under the Blue Sky laws of California, Georgia, Illinois, Iowa and Massachusetts; (4) claims under Oklahoma law for fraud, deceit and constructive fraud; and (5) claims under Oklahoma law for negligent misrepresentation and malpractice.

REPORT AND RECOMMENDATION REGARDING THOSE CLAIMS PLED AGAINST MICHAEL C. TEMPLE TABLE OF CONTENTS

I. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF LIABILITY AGAINST MR. TEMPLE UNDER § 10(b) OF THE 1934 SECURITIES ACT 1

A. PLAINTIFFS ADEQUATELY ALLEGE THAT MR. TEMPLE MADE ACTIONABLE MISREPRESENTATIONS OR OMISSIONS 2

B. PLAINTIFFS ADEQUATELY ALLEGE THAT MR. TEMPLE MADE MISREPRESENTATIONS "IN CONNECTION WITH" THE PURCHASE OR SALE OF A SECURITY 3

C. PLAINTIFFS ADEQUATELY ALLEGE THAT MR. TEMPLE MADE MISREPRESENTATIONS AND OMISSIONS WITH SCIENTER 3

D. PLAINTIFFS ADEQUATELY ALLEGE THAT MR. TEMPLE MADE MISREPRESENTATIONS AND OMISSIONS ON WHICH THEY RELIED 6

E. PLAINTIFFS ADEQUATELY ALLEGE THAT MR. TEMPLE'S ALLEGED MISREPRESENTATIONS AND OMISSIONS CAUSED THEIR LOSS 7

II. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF CONTROL PERSON LIABILITY AGAINST MR. TEMPLE UNDER § 20(a) OF THE 1934 SECURITIES ACT 10

III. PLAINTIFFS STATE LAW CLAIMS ARE NOT SUBJECT TO DISMISSAL 12

RECOMMENDATION 12

ii

Michael Temple has moved to dismiss all claims pled against him by plaintiffs. See RR Exhibit A for a list of Mr. Temple's motions to dismiss, and RR Exhibit B for a list of the claims pled against him.

Plaintiffs allege that Mr. Temple served as CFS' Chief Financial Officer ("CFO") and that he was a member of CFS' Executive Committee. As CFS' CFO, plaintiffs allege that Mr. Temple was responsible for all aspects of CFS' accounting policy and for the compilation and reporting of CFS' financial information to rating agencies and potential investors. In particular, plaintiffs allege that Mr. Temple was responsible for CFS' financial reporting of collections, for CFS' Estimated Cash Recovery ("ECR") modeling, and for valuing the Residual. Plaintiffs further allege that Mr. Temple was responsible for preparing and verifying the accuracy of CFS' financial statements and that these statements were included, with Mr. Temple's knowledge, in the Private Placement Memoranda ("PPM") and due diligence materials used by CFS to sell the SMART and GREAT securities. Upon his resignation in 1998, plaintiffs allege that Mr. Temple received a $3.25 million severance package from CFS.

I. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF LIABILITY AGAINST MR. TEMPLE UNDER § 10(b) OF THE 1934 SECURITIES ACT.

The elements of a § 10(b) claim are as follows:

1. That Mr. Temple made an untrue statement of material fact, or failed to state a material fact;

2. That Mr. Temple's misrepresentation or omission occurred in connection with the purchase or sale of a security;

3. That Mr. Temple made the misrepresentation or omission with scienter (i.e., knowingly or recklessly); and

4. That plaintiffs relied on Mr. Temple's misrepresentation or omission, and sustained damages as a proximate result of Mr. Temple's misrepresentation or omission.

Anixter v. Home-Stake Product Co., 77 F.3d 1215, 1225 (10th Cir. 1996);United Int'l Holdings, Inc. v. The Wharf (Holdings) Ltd., 210 F.3d 1207, 1220 (10th Cir. 2000). To resolve Mr. Temple's motions to dismiss, the Court must determine for each

1

element outlined above whether plaintiffs have pled facts which would, if taken as true together with all reasonable inferences therefrom, permit a reasonable jury to find that the element has been established. Grossman v. Novell, Inc., 120 F.3d 1112, 1118 (10th Cir. 1997).

Plaintiffs allege that Mr. Temple is liable to them because the financial statements he prepared contained materially false and misleading statements about CFS' overhead costs, historical collections and about the Residual which CFS booked as a significant asset on its financial statements.¹ Mr. Temple responds that he is not liable to plaintiffs because even if he prepared false or misleading financial reports for CFS, plaintiffs have not alleged with sufficient particularity facts which establish a strong inference that he acted with scienter when he prepared CFS' financial reports. Mr. Temple also argues that plaintiffs have not sufficiently alleged that the false financial statements caused plaintiffs' alleged injury. The undersigned does not agree. From a review of the complaints, the undersigned finds that plaintiffs have pled facts sufficient to establish each element of their prima facie case under § 10(b).

1 See MBP RR, Part I(B)(2)(a)(ii) for a detailed discussion of ECR and the Residual.

A. PLAINTIFFS ADEQUATELY ALLEGE THAT MR. TEMPLE MADE ACTIONABLE MISREPRESENTATIONS OR OMISSIONS.

Plaintiffs allege that as CFS' CFO Mr. Temple prepared CFS' verified financial statements; performance reports on past securitizations; reports on collection rates in current securitizations; and base case and stress case collection models, showing that under either model CFS would collect more than enough from the receivables held by the trusts to pay back investors. According to plaintiffs, these reports were included in the PPMs and due diligence materials given to prospective investors, including plaintiffs. Plaintiffs allege that these reports contain false and misleading statements about CFS' historical collections performance, ECR models and the Residual. See, e.g., No. 99-829, Doc. No. 84, pp. 41-42. Plaintiffs also allege that the financial statements prepared by Mr. Temple fail to disclose the fact that the cost of CFS' collections operation exceeded the fees to which it was entitled under the Sales and Servicing Agreements. In other words, plaintiffs allege that CFS' financial statements were false because they failed to record the Sales and Servicing Agreements as a liability. Plaintiffs have, therefore, alleged that Mr. Temple made false or misleading statements for which he can be held responsible under Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 169 (1994), assuming the other elements

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of a § 10(b) claim are established. See MBP RR, Part I(A)(1); and Benediktson RR, Part II(A)(1)(a).²

B. PLAINTIFFS ADEQUATELY ALLEGE THAT MR. TEMPLE MADE MISREPRESENTATIONS "IN CONNECTION WITH" THE PURCHASE OR SALE OF A SECURITY.

2 Having found that plaintiffs adequately allege that Mr. Temple is directly responsible for alleged misstatements in CFS' financial reports, the undersigned need not determine whether, under the group pleading doctrine, Mr. Temple is presumed to also be responsible for similar misrepresentations in the PPMs or due diligence materials.

Any statement that is reasonably calculated to affect the investment decision of a reasonable investor will be held to satisfy § 10(b)'s "in connection with" requirement. The undersigned finds that the statements in CFS' financial reports were reasonably calculated to affect the investment decision of potential investors in the SMART and GREAT securities; and Mr. Temple does not argue otherwise. See United Intern. Holdings, Inc. v. Wharf (Holdings) Ltd., 210 F.3d 1207, 1221 (10th Cir. 2000) (citing SEC v. Jakubowski, 150 F.3d 675, 679 (7th Cir. 1998) andAngelastro v. Prudential-Bache Secs., Inc., 764 F.2d 939, 943 (3d Cir. 1985)); and Arst v. Stifel, Nicolaus Co., Inc., 86 F.3d 973, 977 (10th Cir. 1996).³

C. PLAINTIFFS ADEQUATELY ALLEGE THAT MR. TEMPLE MADE MISREPRESENTATIONS AND OMISSIONS WITH SCIENTER.

3 Mr. Temple does, however, make a standing argument. Mr. Temple argues that certain plaintiffs are not "purchasers" of a security within the meaning of § 10(b) because they obtained their securities on the secondary market by purchasing them from original purchasers. This argument is similar to the general non-assignability of § 10(b) claims made by several defendants, which the undersigned has rejected.See Main RR, Part I(C).

Plaintiffs must allege that Mr. Temple made the misrepresentations and omissions identified in Part I(A) with scienter. Pursuant to the PSLRA, the totality of plaintiffs' allegations must give rise to a "strong inference" that Mr. Temple made these misrepresentations and omissions with scienter; a reasonable inference of scienter is not sufficient. See Main RR, Part IV. To establish scienter in a § 10(b) claim, plaintiffs must allege either that Mr. Temple knew he was making false or misleading statements, or that Mr. Temple was reckless. To establish recklessness, plaintiffs must allege that it was an extreme departure from the standards of ordinary care for Mr. Temple to make the statements he did, and that this extreme departure from the standards of ordinary care created the risk that the investors would be misled, and that Mr. Temple knew of this risk or that the risk was so obvious that Mr. Temple must have been aware of it. Id. at Part IV(C)(1).

3

The complaints at issue must be read as a whole to determine whether plaintiffs' allegations give rise to a strong inference of Mr. Temple's scienter. While certain allegations read in isolation may not give rise to a strong inference of scienter, taking each of plaintiffs' complaints as a synergistic whole, the undersigned finds that the complaints raise a strong inference that Mr. Temple acted with scienter.

Plaintiffs allege that senior management at CFS, including Mr. Temple, received daily collections reports indicating that CFS' collections were falling behind in every securitization. Plaintiffs also allege that senior management, including Mr. Temple, received monthly sales spreadsheets, which showed asset sales, including sales to Dimat. Plaintiffs allege that Charles Welsh, Director of CFS Collections Department, had researched the Dimat transactions and determined that Dimat was buying worthless receivables from the trusts for top dollar, that the amount and timing of Dimat's purchases were suspicious because they occurred at the end of each month in the same amount as CFS collections shortfall for the month, and that the amount being paid by Dimat was very close to the amount of distributions being taken out of CFS by William Bartmann and Jay Jones. See Benediktson RR, Part II(C). Plaintiffs also allege that the fact that Dimat was a front for Mr. Bartmann and Mr. Jones was so widely rumored at CFS that even the front-line account officers making the phone calls to collect on the trusts' receivables were aware of it. Plaintiffs allege that Mr. Welsh discussed with Mr. Temple what he had discovered about Dimat. The undersigned finds, therefore, that plaintiffs have adequately alleged that Mr. Temple knew CFS was falling behind its collections targets, and that CFS was using bulk sales of the trusts' receivables to make up the difference between what it told investors it would collect from the credit card debtors and what it was actually collecting.

Plaintiffs allege that Mr. Temple, as CFS' CFO, was responsible for the restatement of CFS' 1996 financial statements. Plaintiffs allege, and the undersigned agrees, that it can be reasonably inferred that as CFO, Mr. Temple assisted Arthur Anderson in its audit of the 1996 financials, and that he was aware that CFS, through Gertrude Brady, refused to provide Arthur Anderson with ECR information about the non-performing receivables held by the trusts; information which Arthur Anderson had requested in order to audit the value of the Residual claimed by CFS. It is a reasonable inference that Ms. Brady's conduct, and CFS' refusal to provide information Arthur Anderson specifically requested to value the Residual, would have raised red flags in the mind of a reasonable CFO about the value which CFS was assigning to the Residual.

Mitchell Vernick joined CFS as its CFO and President in early 1997. Mr. Vernick was the first outsider to join the top ranks of CFS management. Plaintiffs allege that within months of being hired, Mr. Vernick began to question the validity of CFS' business model. These concerns eventually led Mr. Vernick to resign within four

4

months of being hired. Upon his resignation, Mr. Vernick wrote an unaddressed, hand-written letter, although it is not clear to whom he gave a copy of the letter. See RR Exhibit G. The primary reason for Mr. Vernick's resignation, as stated in the letter, was his concern that CFS's securitization model was not viable. Given these concerns, Mr. Vernick concluded that his professional integrity would no longer permit him to represent to investors that he thought they would be repaid in full. In particular, Mr. Vernick stated that he was certain that Base Case projections could not be met, and he was not even certain that Stress Case projections could be met.⁴

4 Base Case and Stress Case are ECR models used by the ratings agencies. Base Case used ECR values less optimistic than CFS' internal ECR values, and Stress Case used worst-case-scenario ECR values. If Base Case were met, there would be enough collections to pay off investors with some left over for CFS. If only Stress Case were met, there would only be enough collections to pay off investors with nothing left over for CFS.

Plaintiffs allege that Mr. Vernick shared the reasons for his resignation with Mr. Bartmann and that Mr. Bartmann called a meeting of CFS's senior management to discuss Mr. Vernick's concerns. Given that Mr. Vernick's concerns touched upon CFS' financial viability and that Mr. Vernick specifically refers in his letter to calculations performed by Mr. Temple, and given Mr. Temple's position as CFO, the undersigned agrees with plaintiffs that it is reasonable to infer that Mr. Vernick's concerns were communicated to Mr. Temple. Plaintiffs are also entitled to the reasonable inference that if the problems with CFS' business model were obvious to Mr. Vernick within months of his arrival at CFS, they were equally as obvious to CFS' CFO.

In his resignation letter, Mr. Vernick also stated that CFS' collections' overhead was so high that CFS could not continue to meet that overhead out of its servicing fees, and would have to continue to use cash from future securitizations to fund overhead; a practice which Mr. Vernick believed must stop immediately. During his discussion of this topic in his letter, Mr. Vernick referred to a "going out of business" analysis of CFS's servicing business which Mr. Temple had conducted. According to Mr. Vernick, Mr. Temple's analysis showed that CFS would have to make cuts in expenses in order to live within the cash flow from its servicing fees. Mr. Vernick believed, however, that cuts more dramatic than those projected by Mr. Temple's analysis would be needed if CFS was to live within the cash flow provided by its servicing fees. See RR Exhibit G. At the very least, these references by Mr. Vernick to Mr. Temple's "going out of business" analysis raise a strong inference that Mr. Temple was aware, though he may have disagreed with Mr. Vernick by how much, that CFS' overhead was exceeding the cash flow from its servicing fees.

Given the magnitude and volume of loan sales which plaintiffs allege to have occurred during 1996 and 1997, and given how central those loan sales were to the

5

continued viability of CFS, the undersigned agrees with plaintiffs that there is a reasonable inference that CFS' CFO would be aware of them.See, e.g., In re Aetna Inc. Securities Lit., 34 F. Supp.2d 935, 952-53 (E.D. Pa. 1999); and Danis v. USN Comm., Inc., 73 F. Supp.2d 923, 938-40 (N.D. Ill. 1999). CFS' business was the collection of money on bad credit card debt, and plaintiffs allege that one of the most significant sources of income for that business came from only two sources during a two year period: Cadle and Dimat. It is a reasonable inference that the CFO of any company would make it his business to know about the most significant sources of income for his company. That Mr. Temple would simply accept the collections numbers CFS' credit department posted for a month, without any questions, is not a reasonable inference, and would itself constitute an extreme departure from the standard of ordinary care for a CFO. The undersigned finds that the totality of plaintiffs' complaints sufficiently allege that, as CFS' CFO, Mr. Temple either refused to look at the obvious facts before him, or refused to investigate the doubtful accuracy of the figures before him. A reasonable jury could conclude that such conduct was reckless under the circumstances. See Rhem v. Eagle Finance Corp., 954 F. Supp. 1246, 1255-56 (N.D. Ill. 1997) (holding that an egregious refusal to see the obvious, or to investigate the doubtful, may give rise to an inference of recklessness); and Epstein v. Itron, Inc., 993 F. Supp. 1314, 1325-26 (E.D. Wash. 1998) (holding that facts critical to a company's core operations or important transactions are generally so apparent that their knowledge may be attributed to the company's senior management).

Plaintiffs need only establish a strong "inference" of fraud to survive a motion to dismiss their § 10(b) claims. At this stage of the litigation, and without any discovery, plaintiffs are not required to establish Mr. Temple's mental state by a preponderance of evidence. The undersigned finds that the allegations in plaintiffs' complaints, taken as a whole, are sufficient to raise a strong inference that Mr. Temple, as CFS' CFO, was aware that CFS' base case and stress case models (i.e., its ECR models) were not accurate predictors of the value of the trusts' receivables; that CFS' treatment of the Residual in its financial statements was misleading; and that given CFS' enormous overhead, its servicing agreements with the trusts were a liability rather than an asset.

D. PLAINTIFFS ADEQUATELY ALLEGE THAT MR. TEMPLE MADE MISREPRESENTATIONS AND OMISSIONS ON WHICH THEY RELIED.

Plaintiffs allege that in making their decision to purchase the SMART and GREAT securities at issue they, or their predecessors in interest whose claims they are asserting, relied on the accuracy of the information in the financial statements and reports prepared and verified by Mr. Temple. This allegation is sufficient to survive a motion to dismiss. Neither Fed.R.Civ.P. 9 nor the PSLRA impose any special

6

pleading requirements with regard to § 10(b)'s reliance element. To obtain a dismissal, Mr. Temple must demonstrate that plaintiffs will be unable to prove any set of facts upon which a reasonable jury could find that Mr. Temple's statements were a substantial factor in plaintiffs' investment decision; something Mr. Temple has not done. See Brady RR, Part I(D).

E. PLAINTIFFS ADEQUATELY ALLEGE THAT MR. TEMPLE'S ALLEGED MISREPRESENTATIONS AND OMISSIONS CAUSED THEIR LOSS.

Courts examining causation in § 10(b) cases have borrowed heavily from the common law torts of fraud and fraudulent misrepresentations. As with these common law torts, "but for" causation and "proximate" causation are required to recover under § 10(b); however, different terms are used. In the securities context, "but for" causation is referred to as "transaction causation" and proximate causation is referred to as "loss causation."⁵ TBG Inc. v. Bendis, 841 F. Supp. 1538, 1562 (D. Kan. 1993); AUSA Life Ins. Co. v. Ernst Young, 206 F.3d 202, 210-20 (2nd Cir. 2000).

5 See generally David S. Escoffery, A Winning Approach to Loss Causation Under Rule 10B-5 in Light of the Private Securities Litigation Reform Act of 1995. 68 Fordham L. Rev. 1781 (2000). In fact, plaintiffs' burden of proving loss causation in § 10(b) cases was codified by the PSLRA, which provides that "[i]n any private action arising under this title, the plaintiff shall have the burden of proving that the act or omission of the defendant alleged to violate this title caused the loss for which the plaintiff seeks to recover damages." 15 U.S.C. § 78u-4(b)(4).

To establish transaction causation, plaintiffs must establish that but for Mr. Temple's misstatements in CFS' financial statements and reports, they would not have purchased the SMART or GREAT securities at issue. See Edington v. R.G. Dickinson Co., No. 90-1274-C, 1992 WL 223822, at *11 n. 5 (D. Kan. Aug. 7, 1992). Plaintiffs have sufficiently alleged that had CFS' financial statements accurately revealed CFS' historical collections experience, its reliance on bulk sales of the trusts' assets, and the fact that its overhead exceeds its servicing fees, they would not have purchased the SMART and GREAT securities. The undersigned finds that these allegations sufficiently plead transaction causation.

The Tenth Circuit has not yet directly addressed loss causation in the § 10(b) context. Consequently, as the bankruptcy court in this district did in connection with CFS' bankruptcy proceedings,⁶ the undersigned takes his lead regarding loss causation from the Second Circuit's decision in Castellano v. Young Rubicam, Inc., 257 F.3d 171 (2nd Cir. 2001) and the Restatement (Second) of Torts § 548A (1976). Because the concept of loss causation is intended to encompass notions of proximate cause, it has been found to exist when the damages suffered by plaintiff are a foreseeable

6 See In re Commercial Financial Services, Inc., 268 B.R. 579, 605-06 (Bankr. N.D. Okla. 2001).

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consequence of the defendant's misrepresentations or omissions. Id. at 186. The loss causation inquiry requires an examination of how directly the subject of the misrepresentation or omission caused the loss, and whether the resulting loss was a foreseeable outcome of the misrepresentation or omission. Such an inquiry also necessarily requires an examination of any intervening causes which might have caused the loss and the lapse of time between the misrepresentation and the loss. Id. While the definition of loss causation is easy to recite, its application to particular facts is often challenging. However, with regard to the allegations against Mr. Temple, § 548A of the Restatement and the Second Circuit's decision in Castellano provide significant guidance.

In Castellano, the Second Circuit held that a plaintiff sufficiently alleges loss causation when the plaintiff alleges that the defendant's misrepresentation or omission causes "a disparity between the transaction price and the true "investment quality' of the securities at the time of the transaction." Castellano, 257 F.3d at 187 (citing Suez Equity Investors v. Toronto-Dominion Bank, 250 F.3d 87, 97-98 (2nd Cir. 2001)). If the plaintiff can allege that the defendant's misrepresentations or omissions led the plaintiff to incorrectly appraise the value of the security at issue, the plaintiff has adequately alleged loss causation.Id.

The Second Circuit's holding in Castellano is directly supported by the Restatement (Second) of Torts. The Restatement has a division dealing specifically with misrepresentations. In that division, § 548A defines when a misrepresentation will be found to be the "legal cause" (i.e., the phrase used by the Restatement for proximate cause) of a pecuniary loss. Specifically § 548A provides as follows:

A fraudulent misrepresentation is a legal cause of a pecuniary loss resulting from action or inaction in reliance upon it if, but only if, the loss might reasonably be expected to result from the reliance.

Restatement (Second) of Torts § 548A (1976). Comment b to § 548A elucidates the section as follows:

[O]ne who misrepresents the financial condition of a corporation in order to sell its stock will become liable to a purchaser who relies upon the misinformation for the loss that he sustains when the facts as to the finances of the corporation become generally known and as a result the value of the shares is depreciated on the market, because that is the obviously foreseeable result of the facts misrepresented. On the other hand, there is no liability

8

when the value of the stock goes down after the sale, not in any way because of the misrepresented financial condition, but as a result of some subsequent event that has no connection with or relation to its financial condition. There is, for example, no liability when the shares go down because of the sudden death of the corporation's leading officers. Although the misrepresentation has in fact caused the loss, since it has induced the purchase without which the loss would not have occurred, it is not a legal cause of the loss for which the maker is responsible.

Restatement (Second) of Torts § 548A cmt. b (1976).

The undersigned finds Castellano and comment b to § 548A of the Restatement particularly instructive given plaintiffs' allegations that Mr. Temple misrepresented CFS' financial condition in various ways. The undersigned finds, based on the allegations in plaintiffs' complaints, that a jury could conclude that it was reasonably foreseeable that the value of the SMART and GREAT securities would plummet when it became generally known that the trusts' assets were being sold to Cadle and Dimat in order to maintain the aura that CFS' collections were meeting or exceeding Base Case in all securitizations, and that CFS was living of the proceeds of each successive securitization to fund its collections operation rather than living off of its servicing fee. Plaintiffs' allegations certainly support the inference that because of Mr. Temple's alleged misrepresentations and omissions at the time they purchased the SMART and GREAT securities, plaintiffs valued the securities higher than they would have valued them had the alleged misrepresentations or omissions not infected CFS' financial statements. Plaintiffs allege that the value of the securities dropped immediately upon disclosure of the very misrepresentations which they allege Mr. Temple made, and Mr. Temple has not pointed to any external or unforeseen factors such as market crashes or the death of key corporate insiders which caused the alleged devaluation of plaintiffs' securities. Given the totality of plaintiffs' allegations, the undersigned finds that plaintiffs have adequately alleged loss causation. See In re CFS, 268 B.R. at 606 (where the bankruptcy court in this district reached the same conclusion based on similar allegations).

9

II. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF CONTROL PERSON LIABILITY AGAINST MR. TEMPLE UNDER § 20(a) OF THE 1934 SECURITIES ACT.

Section 20(a) of the 1934 Securities Act provides as follows:

Every person who, directly or indirectly, controls any person liable under any provision of this chapter [including § 10(b)] or of any rule or regulation thereunder [including SEC Rule 10b-5] shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

15 U.S.C. § 78t(a). Plaintiffs allege that Mr. Temple is jointly liable under this section with CFS for CFS' alleged violations of the 1934 Securities Act.

To state a prima fade case of control person liability under § 20(a), plaintiffs must establish (1) that CFS committed a primary violation of the securities laws, and (2) that Mr. Temple had "control" over CFS. Maher v. Durango Metals, Inc., 144 F.3d 1302, 1305 (10th Cir. 1998). Plaintiffs need not show that Mr. Temple actually or culpably participated in CFS' alleged primary violation. Rather, once the plaintiffs establish their prima fade case, the burden shifts to Mr. Temple to show lack of culpable participation or knowledge. Id. Whether Mr. Temple was a culpable participant in CFS' alleged fraud, which of course plaintiffs allege with their § 10(b) claims against him, is relevant to Mr. Temple's defense to plaintiffs' § 20(a) claims, but it is not relevant to plaintiffs' prima fade case.

Plaintiffs allege that CFS committed primary violations of § 10(b) of the 1934 Securities Act. The question is, therefore, whether plaintiffs have also adequately alleged that Mr. Temple had "control" over CFS. Mr. Temple argues that as a matter of law he did not have control over CFS because he was not an officer, director or shareholder of CFS. However, neither one's title nor the amount of stock one owns is determinative of the control issue.⁷ Rather, the focus is on the nature of the actual relationship between the defendant and the alleged primary violator.

7 "It is well known that actual control sometimes may be exerted through ownership of much less than a majority of the stock of a corporation . . . ." HR. Rep. No. 1383, 73d Cong. 2d Sess. 26 (1934) (1934 WL 1290).

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As the legislative history to § 20(a) indicates, "[i]t would be difficult if not impossible to enumerate or to anticipate the many ways in which actual control may be exerted." H.R. Rep. No. 1383, 73d Cong., 2d Sess. 26 (1934) (1934 WL 1290). Thus, when it enacted § 20(a) Congress expressly declined to define "control," wishing to keep the concept flexible. Heeding this intent, the Tenth Circuit has held that § 20(a) is a remedial statute which must be "construed liberally."Maher, 144 F.3d at 1305. Given that Congress intended for "control" to be defined flexibly by the courts, the determination of whether a particular individual is a control person is necessarily an intensely factual question, requiring scrutiny of the defendant's participation in the day-to-day affairs of the alleged primary violator. Factual questions of this nature are ordinarily not subject to resolution on a motion to dismiss. Id. at 1306. See, e.g., Stadia Oil Uranium Co. v. Wheelis, 251 F.2d 269, 275-76 (10th Cir. 1957) (upon competing factual inferences, fact of control is one for the trier of fact).

Determining whether one is a control person within the meaning of § 20(a) is a question of fact which depends upon the totality of the circumstances. The Tenth Circuit has interpreted "control" as only requiring "some indirect means of discipline or influence [over the primary violator] short of actual direction . . . ." Maher, 144 F.3d at 1305 (quoting from Richardson v. MacArthur, 451 F.2d 35, 41-42 (10th Cir. 1971)). The SEC defines control as "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise." 17 C.F.R. § 230.405. A plaintiff must, therefore, allege facts which establish that the control person actually participated in the general operations of the primary violator and that the control person had the power to control the specific transaction underlying the securities violation alleged to have been committed by the primary violator. Maher, 144 F.3d at 1305, n. 8;Wenneman v. Brown, 49 F. Supp.2d 1283, 1290 (D. Ut. 1999). "Control may be exerted in other ways than by vote, stock ownership being only one aspect of control. A person may be in control even though he does not own a majority of the voting stock, and such control may rest with more than one person at the same time or from time to time." United States v. Corr, 543 F.2d 1042, 1050 (2nd Cir. 1976) (internal citations omitted).

As Chief Financial Officer for CFS, plaintiffs allege that Mr. Temple set CFS' accounting policy. Plaintiffs also allege that Mr. Temple determined the content of CFS' financial statements and reports. Plaintiffs further allege that Mr. Temple served on CFS' Executive Committee. At the pleading stage, these allegations give rise to the reasonable inference that Mr. Temple participated in CFS' general operations as CFO and through his membership on CFS' Executive committee. Plaintiffs also allege that Mr. Temple received a salary and a $3.25 million severance package which are commensurate with someone performing a managerial function. Thus, as a whole,

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plaintiffs allege that Mr. Temple actually participated in the operations of CFS and possessed the power to control the activities (i.e., the omissions in CFS' financial statements) upon which CFS' primary violations are predicated. Based on these allegations, the undersigned finds that plaintiffs have alleged facts from which it could reasonably be inferred by a trier of fact that Mr. Temple was a control person within the meaning of § 20(a). Dismissal of plaintiffs' § 20(a) claims is, therefore, not appropriate.

III. PLAINTIFFS STATE LAW CLAIMS ARE NOT SUBJECT TO DISMISSAL.

In addition to the federal securities law claims pled against Mr. Temple, plaintiffs also allege the following state law claims against Mr. Temple: claims under § § 408(a) and (b) of the Oklahoma Securities Act; claims under § § 25401 and 25501 of the California Corporation Code; common law fraud, deceit, conspiracy and negligence claims under Oklahoma law.

Mr. Temple does not address the merits of any of the state law claims directly. Rather, Mr. Temple argues that to the extent any of plaintiffs' state law claims are based on fraud, they should be dismissed for the same reasons he argues that plaintiffs' § 10(b) claims under the 1934 Securities Act should be dismissed. To the extent that any of plaintiffs' state law claims do not require a showing of fraud, Mr. Temple argues, based on his assumption that all of plaintiffs' federal claims will be dismissed, that the Court should exercise its discretion and decline to exercise supplemental jurisdiction over these state claims under 28 U.S.C. § 1367. The undersigned has, however, not recommended the dismissal of plaintiffs' § 10(b) and § 20(a) claims. Mr. Temple's arguments do not, therefore, apply, and plaintiffs' state law claims are not subject to dismissal.

RECOMMENDATION

For the reasons discussed above and in the Part III of the Main RR, the undersigned recommends that Mr. Temple's motions to dismiss be GRANTED as to the following claims: (1) claims under § 12(a)(2) of the 1933 Securities Act; and (2) claims under § 15 of the 1933 Securities Act.

For the reasons discussed above and in the Main RR, the undersigned recommends that Mr. Temple's motions to dismiss be DENIED as to the following claims: (1) claims under § 10(b) of the 1934 Securities Act; (2) claims under § 20(a)

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of the 1934 Securities Act; (3) claims under § § 25401 and 25501 of the California Corporation Code; (4) claims under § 408(a)(2)(A) of the Oklahoma Securities Act; (5) claims under § 408(b) of the Oklahoma Securities Act; (6) claims under Oklahoma law for fraud, deceit and constructive fraud; (7) claims under Oklahoma law for conspiracy to commit fraud; and (8) claims under Oklahoma law for negligent misrepresentation.

13 REPORT AND RECOMMENDATION REGARDING THOSE CLAIMS PLED AGAINST GERTRUDE BRADY TABLE OF CONTENTS

I. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF LIABILITY AGAINST MS. BRADY UNDER § 10(b) OF THE 1934 SECURITIES ACT 3

A. PLAINTIFFS ADEQUATELY ALLEGE THAT Ms. BRADY MADE ACTIONABLE MISREPRESENTATIONS OR OMISSIONS 3

1. Plaintiffs Allege Ms. Brady Made Actionable Misstatements 4

2. Plaintiffs Allege Ms. Brady Made Actionable Omissions 4

3. Under the Group Pleading Doctrine, Ms. Brady Is Presumed to Have Made the Misstatement Allegedly Contained in the Transaction Documents at Issue 6

4. Summary of the Misrepresentations Allegedly Made by Ms. Brady 7

B. PLAINTIFFS ADEQUATELY ALLEGE THAT Ms. BRADY MADE MISREPRESENTATIONS "IN CONNECTION WITH" THE PURCHASE OR SALE OF A SECURITY 8

C. PLAINTIFFS ADEQUATELY ALLEGE THAT MS. BRADY MADE MISREPRESENTATIONS AND OMISSIONS WITH SCIENTER 9

D. PLAINTIFFS ADEQUATELY ALLEGE THAT MS. BRADY MADE MISREPRESENTATIONS AND OMISSIONS ON WHICH THEY RELIED 10

II. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF CONTROL PERSON LIABILITY AGAINST MS. BRADY UNDER § 20(a) OF THE 1934 SECURITIES ACT 13

III. PLAINTIFFS' STATE LAW CLAIMS ARE NOT SUBJECT TO DISMISSAL 16

RECOMMENDATION 16

ii

Gertrude Brady has moved to dismiss all claims pied against her by plaintiffs. See RR Exhibit A for a list of Ms. Brady's motions to dismiss, and RR Exhibit B for a list of the claims pled against her.

Plaintiffs allege that Ms. Brady was Director of Investor Relations for CFS, and a member of CFS' Executive and Strategic Planning Committees. Plaintiffs further allege that Ms. Brady received a million dollars each year in salary and bonuses from CFS. Ms. Brady points out that plaintiffs merely allege that the was a member of the Executive and Strategic Planning Committees, without alleging in any detail the responsibilities of these Committees. While this may be true, plaintiffs are entitled at the pleading stage to all reasonable inferences which flow from Ms. Brady's membership on such Committees, together with her title as Director and her high salary. One such reasonable inference is that Ms. Brady was an important member of CFS' management team.

Ms. Brady alleges in her brief that in fact her membership on the Executive and Strategic Planning Committees and her Director title were honorifics bestowed by William Bartmann as CFS' "Czar." No. 99-824, Doc. No. 58, p. 6. These are, however, not the allegations in the complaints and such extra-complaint allegations cannot be considered on a motion to dismiss. Nevertheless, Ms. Brady's allegations at most create a question of fact, and at the pleading stage plaintiffs are entitled to the inference that Ms. Brady was more than a titular member of CFS' management team.

Plaintiffs allege that as Director of Investor Relations Ms. Brady was the direct liaison between CFS and potential investors, and that the regularly communicated with potential investors in face-to-face meetings and over the telephone. According to plaintiffs, Ms. Brady handled all investor requests for information, was responsible for supervising the preparation of investor reports to respond to specific inquiries, and generally controlled CFS' responses to investors' inquiries about CFS and the securitization transactions.

Plaintiffs allege that Ms. Brady actively participated in the marketing to potential investors of the SMART and GREAT securities. In particular, plaintiffs allege that Ms. Brady attended sales meetings and due diligence sessions at which the specifically (a) represented that CFS had consistently met or exceeded Base Case projections; and (b) touted CFS' debt collection abilities, ECR modeling and historical performance. Plaintiffs also allege that Ms. Brady gave interviews with the press about CFS' performance and then reproduced and distributed these interviews to potential investors as part of CFS' marketing campaign.

Plaintiffs allege that after the 1996 securitizations closed, CFS almost immediately began falling behind on its monthly collections targets. At that point,

1

plaintiffs allege that it became clear to CFS' management that CFS would not be able to achieve its monthly collection targets based solely on its ability to collect from the credit card debtors. To make up for this collections shortfall, plaintiffs allege that through the first nine months of 1997 CFS sold large amounts of the CFS-related trusts' best performing loans to an unaffiliated company named Cadle, Inc. ("Cadle") and reported these sales as if they were collections from the credit card debtors. Plaintiffs allege that it was William Bartmann and Ms. Brady who coordinated these sales in an effort to bridge the gap in cash flow caused by CFS' inadequate collections.

Once Cadle refused to purchase any additional receivables from the CFS-related trusts, plaintiffs allege that William Bartmann and Jay Jones established Dimat Corporation to purchase worthless credit card receivables at top dollar from the trusts (i.e., receivables with a $0 or negligible ECR). To fund Dimat's purchases, plaintiffs allege that Mr. Bartmann and Mr. Jones began taking large distributions from CFS. Plaintiffs allege that these distributions were secretly passed to a company wholly-owned by Mr. Jones, Calamity Jones Entertainment, Inc. Calamity Jones then loaned the money to Dimat. Within days of receiving the loan proceeds from Calamity Jones, Dimat would receive purchase and servicing agreements from CFS with all of the information on those documents completed by CFS. Dimat would then use the money wired from Calamity Jones to purchase receivables from the CFS-related trusts. Plaintiffs allege that over the course of 13 months, Mr. Bartmann and Mr. Jones funneled approximately $63 million to Dimat in this fashion.

Plaintiffs allege that Ms. Brady, along with William Bartmann, designed and implemented the Dimat scheme. According to plaintiffs, Ms. Brady supervised the Dimat sales. In particular, plaintiffs allege that the performed calculations near the end of each month to determine CFS' collections shortfall and the amount that Dimat would need to pay for the worthless receivables it was to purchase from the trusts. According to plaintiffs, Ms. Brady would then coordinate the Dimat sales with Bruce Hadden. Mr. Hadden was CFS' Director of Business Development, and he would actually pull together packages of receivables from the trusts for sale to Dimat. According to plaintiffs, Ms. Brady also communicated with James Sill, the president of Dimat, and told him what the bid price for that month's package of receivables would be. According to plaintiffs, Ms. Brady also directed that the receivables bought by Dimat be mingled with the other receivables remaining in the trusts and that they not be maintained as a separate collections account.

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I. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF LIABILITY AGAINST MS. BRADY UNDER § 10(b) OF THE 1934 SECURITIES ACT.

The elements of a § 10(b) claim are as follows:

1. That Ms. Brady made an untrue statement of material fact, or failed to state a material fact;

2. That Ms. Brady's misrepresentation or omission occurred in connection with the purchase or sale of a security;

3. That Ms. Brady made the misrepresentation or omission with scienter (i.e., knowingly or recklessly); and

4. That plaintiffs relied on Ms. Brady's misrepresentation or omission, and sustained damages as a proximate result of Ms. Brady's misrepresentation or omission.

Anixter v. Home-Stake Product Co., 77 F.3d 1215, 1225 (10th Cir. 1996);United Int'l Holdings, Inc. v. The Wharf (Holdings) Ltd., 210 F.3d 1207, 1220 (10th Cir. 2000). To resolve Ms. Brady's motions to dismiss, the Court must determine for each element outlined above whether plaintiffs have pied facts which would, if taken as true together with all reasonable inferences therefrom, permit a reasonable jury to find that the element has been established. Grossman v. Novell, Inc., 120 F.3d 1112, 1118 (10th Cir. 1997). From a review of the complaints, the undersigned finds that plaintiffs have pled facts sufficient to establish each element of their prima fade case under § 10(b).

A. PLAINTIFFS ADEQUATELY ALLEGE THAT Ms. BRADY MADE ACTIONABLE MISREPRESENTATIONS OR OMISSIONS.

Fed.R.Civ.P. 9(b) and 15 U.S.C. § 78u-4(b)(1) require that a complaint stating a § 10(b) claim specify each statement alleged to be false or misleading and the reasons why the statements are false or misleading. See Main RR, Part IV(B). Plaintiffs allege that there are material misrepresentations in the Private Placement Memorandum ("PPM") and due diligence materials, which include copies of monthly and quarterly collection performance reports, distributed to investors. Plaintiffs also allege that certain false and misleading verbal statements were made to investors at

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sales and due diligence meetings. Ms. Brady argues, however, that the is responsible for none of these alleged misstatements because none of them are attributable to her personally. Ms. Brady argues that the was merely a conduit through which the misstatements of others passed to the investors, and that the made no actionable misrepresentations or omissions of her own. The undersigned finds, however, that Ms. Brady's characterization of her role at CFS is not consistent with the role alleged in plaintiffs' complaints, and it is plaintiffs' allegations which must control at this stage of the proceedings.

1. Plaintiffs Allege Ms. Brady Made Actionable Misstatements.

Plaintiffs allege that Ms. Brady supervised the preparation and signed monthly and quarterly reports showing CFS' collection performance. Plaintiffs also allege that these reports were included, with Ms. Brady's knowledge, in the due diligence materials given to prospective investors. The reports were included to demonstrate that CFS was meeting, and had met in all of the securitizations, its collections targets. Plaintiffs also allege that at various meetings with potential investors, Ms. Brady "touted" (i.e., made representations about) CFS' historical debt collecting performance, ECR model and the Residual. These representations qualify as statements for which Ms. Brady can be held directly liable under Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 169 (1994), assuming the other elements of a § 10(b) claim are established. See MBP RR, Part I(A)(1); and Benediktson RR, Part II(A)(1)(a).

2. Plaintiffs Allege Ms. Brady Made Actionable Omissions.

Plaintiffs argue that Ms. Brady was much more than a conduit through which information made its way from CFS to potential investors. Plaintiffs allege that in fact Ms. Brady controlled what CFS information would be revealed to investors and what information would not. In other words, plaintiffs allege that Ms. Brady acted more like a sieve than a conduit; a sieve through which CFS' raw internal information was refined for presentation to the investors. That Ms. Brady was actually shaping the message investors received is confirmed by her million dollar salary and her title as Director of Investor Relations. It is a reasonable inference that Ms. Brady would not have been given a Director title and paid handsomely if the were not performing a significant managerial function like shaping CFS' message to potential investors.

Plaintiffs allege that Ms. Brady was much more than a "fanny-patter," as the argues in her brief. Plaintiffs allege that in the Spring of 1996 William Bartmann decided that he wanted the Residual to be booked as an asset on CFS' audited financial statements for 1996. Arthur Anderson would, therefore, be required to audit the Residual's value. To do so, Mr. Bartmann and Arthur Anderson agreed that CFS

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would provide Arthur Anderson with various pieces of information, including the ECR amount assigned to the trusts' non-performing receivables (i.e., receivables which had not been converted to a payment schedule). However, once Arthur Anderson began conducting the audit, Ms. Brady refused to provide Arthur Anderson with the ECR information regarding the trusts' non-performing receivables. Despite his earlier agreement, plaintiffs allege that Mr. Bartmann backed Ms. Brady's decision, and told Arthur Anderson that CFS would not produce ECR information for the trusts' non-performing receivables. These allegations if true, which must presumed at this stage, establish that, consistent with her title and salary, Ms. Brady exercised considerable control over what information CFS would reveal and what information it would not reveal to outsiders.

Plaintiffs' complaints allege that as Director of Investor Relations Ms. Brady was the person at CFS who controlled what information CFS' revealed to outsiders. While occupying this position at CFS, Ms. Brady had a duty under the securities laws to insure that what CFS revealed to investors would not be so incomplete as to be materially misleading. As the sieve, Ms. Brady had an obligation to ensure that CFS did not speak in half-truths while concealing material information. By allowing information to be communicated to investors which the knew, based on other information in her possession, to be false or misleading, the engaged in an "act, practice, or course of business which operate[d] . . . as a fraud or deceit" upon potential investors; the employed a "scheme or artifice to defraud" potential investors; and the omitted to state material facts necessary in order to make the CFS statements the revealed to potential investors not misleading. See 17 C.F.R. § 240. 10b-5 (SEC Rule 10b-5). The undersigned finds that such conduct is actionable under § 10(b), assuming the other elements of a § 10(b) claim are established.¹

1 See generally, MBP RR, Part I(B)(2)(a)(i)(b); SEC v. Washington county Util. Dist., 676 F.2d 218, 223-24 (6th Cir. 1982); SEC v. Washington County Util. Dist., No. CIV-2-77-15, 1982 WL 1381, at *13 (E.D. Tenn. Dec. 2, 1982); First Virginia Bankshares v. Benson, 559 F.2d 1307, 1314 (5th Cir. 1977); Discovery Zone Sec. Litig., 943 F. Supp. 924, 940 (N.D. Ill. 1996); Zuckerman v. Foxmeyer Health Corp., 4 F. Supp.2d 618, 625 (N.D. Tex. 1998); Kline v. First Western Gov't Sec., Inc., 24 F.3d 480, 488 (3rd Cir. 1994); and Ackerman v. Schwartz, 947 F.2d 841, 846-48 (9th Cir. 1991) (all supporting a duty to disclose materially adverse information for those in Ms. Brady's position).

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3. Under the Group Pleading Doctrine, Ms. Brady Is Presumed to Have Made the Misstatement Allegedly Contained in the Transaction Documents at Issue.

The group pleading doctrine allows a plaintiff to rely on a presumption that statements in prospectuses, registration statements, annual reports, press releases, or other group-published information, are the collective work of those individuals with direct involvement in the everyday business of the company. See Benediktson RR, Part II(A)(1)(b). "Identifying the individual sources of statements is unnecessary when the fraud allegations arise from misstatements or omissions in group-published documents . . . which presumably involve collective actions of corporate directors or officers." Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1254 (10th Cir. 1997). The group pleading presumption only applies with respect to clearly cognizable corporate insiders with active operational involvement in the company. In re GlenFed, Inc. Securities Litigation, 60 F.3d 591, 593 (9th Cir. 1995); In re: Stratosphere Sec. Litig., 1 F. Supp.2d 1096, 1108 (D. Nev. 1998). See generally Main RR, Part IV(D).

The allegations in plaintiffs complaints give rise to the reasonable inference that the PPMs, due diligence materials, Contribution and Sale Agreements and the Sale and Servicing Agreements at issue in this case are documents in which CFS's senior managers had substantial input. These are the types of documents which typically are the product of collective decision-making by a company's officers and directors. The undersigned finds, therefore, that plaintiffs have sufficiently alleged that the transaction documents at issue are the type of group-published documents to which the group pleading doctrine's presumption applies. See Adler v. Berg Harmon Associates, 816 F. Supp. 919, 927-28 (S.D.N.Y. 1993) (applying the group pleading doctrine to a PPM).

Plaintiffs allege that Ms. Brady was given the title of Director of Investor Relations and paid a million dollar salary. Plaintiffs also allege that the served on CFS' Executive and Strategic Planning Committees. Plaintiffs further allege that Ms. Brady was substantially involved in the entire securitization marketing process, and that the supervised the preparation of reports which were ultimately included within the due diligence materials provided to potential investors. Plaintiffs also allege that it was Ms. Brady who made decisions about what information was disclosed to investors, rating agencies, and Arthur Anderson. According to plaintiffs, Ms. Brady also had operational involvement with the Cadle sales, and that the helped design and implement and ultimately supervised the Dimat sales. The undersigned finds that the totality of the allegations in plaintiffs' complaints are sufficient to raise the reasonable inference that Ms. Brady was a CFS insider with active operational involvement in CFS' day-to-day activities. The undersigned certainly cannot say that plaintiffs will be unable to prove

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any set of facts under which it could be found that the group pleading presumption applies to Ms. Brady. The undersigned finds, therefore, that at this stage of the litigation plaintiffs are entitled to a presumption that the alleged misrepresentations in the PPMs and other transaction documents at issue were made by Ms. Brady and those other CFS managers with direct operational involvement in CFS's securitization business.

4. Summary of the Misrepresentations Allegedly Made by Ms. Brady

Plaintiffs allege that Ms. Brady's misrepresentations or omissions made the following representations false for the same reasons that the representations in MBP's Negative Assurance Letters are false. See MBP RR, Part I(B)(2)(a)(ii).

1. The Sale and Servicing Agreements falsely stated that the ECR represented CFS' good faith best estimate of the amount to be collected on each loan.

2. Certain PPMs misleadingly failed to disclose that the Residual had been marked down to zero.

3. Statements in the due diligence materials provided to investors regarding CFS' historical collection performance were false or misleading.

4. Verbal statements made to investors at sales and due diligence meetings about CFS' historical collections performance, ECR model and Residual were false or misleading.

There is a full discussion of CFS' ECR model and CFS' use of the Residual in the Report and Recommendation regarding those claims pled against MBP. See MBP RR, Part I(B)(2)(a)(ii). The undersigned directs the Court to that Report for a detailed discussion of ECR and the Residual. By way of summary, however, plaintiffs allege that representations about the ECR and Residual are false because after CFS closed its first all-credit-card-debt securitization in 1996, CFS almost immediately began falling behind its collection targets. As a response to this collection target miss, plaintiffs allege that CFS began to sell performing loans to Cadle and report those sales as if they were collections from the credit card debtors. When Cadle refused to purchase additional loans, plaintiffs allege that CFS insiders, Mr. Jones and Mr. Bartmann, created Dimat Corporation as a way of funneling money from new securitizations into older securitizations. That is, CFS began selling worthless loans to Dimat, and these loans were paid for with funds from Mr. Bartmann and Mr. Jones, which they received because they continued to close new securitizations. As it did

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with the sales to Cadle, CFS reported the sales to Dimat as if they were collections from the credit card debtors. Id. Plaintiffs allege that these activities made the core representations underpinning the transaction documents misleading.

Plaintiffs allege that the core representations underpinning each securitization were that the trusts would hold credit card receivables which backed the investors' notes, and that CFS, with its excellent abilities as a loan collector, would collect on those receivables from the credit card debtors. Plaintiffs allege that these core representations were misleading absent disclosures about the volume and purpose of CFS' loan sales. Absent disclosures about the volume and purpose of the loan sales, investors were mislead into believing that CFS would collect on the receivables from the credit card debtors using its revolutionary collections techniques, not by selling them. Absent disclosures regarding CFS reliance on loan sales to consistently meet collections targets, plaintiffs allege that the statements attributable to Ms. Brady about the ECR and the Residual were misleading because the fact that CFS had to make loan sales demonstrated that the ECR model did not work and that the Residual was potentially worthless. See MBP RR, Part I(B)(2)(a)(ii).

The undersigned finds that plaintiffs have adequately alleged that Ms. Brady made actionable misrepresentations or omissions. Whether plaintiffs have adequately alleged that Ms. Brady made these alleged misrepresentations with scienter is discussed below.

B. PLAINTIFFS ADEQUATELY ALLEGE THAT Ms. BRADY MADE MISREPRESENTATIONS "IN CONNECTION WITH" THE PURCHASE OR SALE OF A SECURITY.

Plaintiffs must allege that Ms. Brady's alleged misrepresentations and omissions occurred "in connection with the purchase or sale of any security." 15 U.S.C. § 78j (b). Any statement that is reasonably calculated to affect the investment decision of a reasonable investor will be held to satisfy the "in connection with" requirement. A representation made to influence a party's investment decision or to induce a party to purchase a security is a representation made "in connection with" the purchase of a security. United Intern. Holdings, Inc. v. Wharf (Holdings) Ltd., 210 F.3d 1207, 1221 (10th Cir. 2000) (citing SEC v. Jakubowski, 150 F.3d 675, 679 (7th Cir. 1998) andAngelastro v. Prudential-Bache Secs., Inc., 764 F.2d 939, 943 (3d Cir. 1985)); and Arst v. Stifel, Nicolaus Co., Inc., 86 F.3d 973, 977 (10th Cir. 1996) (holding that if defendant's allegedly deceptive conduct could not have had an impact on the plaintiff's decision to sell his shares, defendant's conduct was not in connection with the sale of a security). The statements discussed in the previous section were clearly made to induce investors to purchase SMART and GREAT notes being offered by CFS and its affiliates, and Ms. Brady does not argue otherwise. The undersigned finds,

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therefore, that plaintiffs have sufficiently alleged that Ms. Brady's alleged misrepresentations and omissions occurred in connection with the sale of a security.

C. PLAINTIFFS ADEQUATELY ALLEGE THAT MS. BRADY MADE MISREPRESENTATIONS AND OMISSIONS WITH SCIENTER.

Plaintiffs must allege that Ms. Brady made the misrepresentations and omissions identified in Part I(A) with scienter. Pursuant to the PSLRA, the totality of plaintiffs' allegations must give rise to a "strong inference" that Ms. Brady made these misrepresentations and omissions with scienter; a reasonable inference of scienter is not sufficient. See Main RR, Part IV. To establish scienter in a § 10(b) claim, plaintiffs must allege either that Ms. Brady knew the was making false or misleading statements, or that Ms. Brady was reckless. To establish recklessness, plaintiffs must allege that it was an extreme departure from the standards of ordinary care for Ms. Brady to make the statements the did, and that this extreme departure from the standards of ordinary care created the risk that the investors would be misled, and that Ms. Brady knew of this risk or that the risk was so obvious that Ms. Brady must have been aware of it. Id. at Part IV(C)(1).

The complaints at issue must be read as a whole to determine whether plaintiffs' allegations give rise to a strong inference of Ms. Brady's scienter. While certain allegations read in isolation may not give rise to a strong inference of scienter, taking each of plaintiffs' complaints as a synergistic whole, the undersigned finds that the complaints raise a strong inference that Ms. Brady acted with scienter.

Plaintiffs allege that within months of the first 1996 securitization, it was apparent to Ms. Brady and other senior managers at CFS that CFS was not able to meet its collections targets by collecting directly from the credit card debtors. In an October 1997 email from Charles Welsh, the head of CFS' collections department, to Holly Jones, Ms. Brady's assistant, Mr. Welsh states that Ms. Brady's figures indicate that every securitization was showing a continual reduction in cash flow. This allegation, if true, establishes that Ms. Brady herself was aware that CFS' collections from the credit card debtors were lagging, while at the same time Ms. Brady was allegedly touting CFS' collections performance by representing to investors that CFS' collections were not only on target, but above target.

Plaintiffs allege that Ms. Brady calculated CFS' collections shortfall for each month. According to plaintiffs, Ms. Brady helped devise and ultimately supervised the sales of receivables from the trusts to Cadle and then Dimat to make up for this monthly collections shortfall. These allegations, if true, establish that Ms. Brady knew that CFS was missing its collections targets each month and was using loan sales to make up the difference between what CFS told investors it would collect from the

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credit card debtors and what CFS was actually collecting from the debtors.² These allegations establish a strong inference that Ms. Brady knew that the core representations underpinning the transaction documents were misleading.

2 Ms. Brady's argument that the could not know of the fraud allegedly being conducted by CFS because Jay Jones was "cooking" the books is a factual argument which cannot be resolved on a motion to dismiss. In any event, the undersigned finds that Ms. Brady's argument is not persuasive. The only "cooking" which plaintiffs allege is that Mr. Jones surreptitiously modified CFS computer records to make non-performing loans look as though they were in fact performing. Even if Ms. Brady were unaware of Mr. Jones' tampering, as the argues, his tampering would not have prevented Ms. Brady from apprehending the fact that CFS was selling large amounts of the trusts' receivables to meet collections each month.

As discussed above, plaintiffs allege that in 1996 William Bartmann wanted the Residual booked as an asset on CFS' audited financial statements. Plaintiffs allege that Ms. Brady refused to give Arthur Anderson information about the ECR assigned to the trusts' non-performing receivables; information which Arthur Anderson had earlier stated was necessary for it to determine whether the Residual had value. The undersigned finds that these allegations, if true, give rise to a strong inference that Ms. Brady knew that the Residual could not be booked as an asset if Arthur Anderson were permitted to see ECR information regarding non-performing receivables.

While this is not a complete catalog of plaintiffs' allegations relating to Ms. Brady's scienter,³ the undersigned finds that the totality of the allegations in plaintiffs' complaints give rise to a strong inference that Ms. Brady acted recklessly when the made, or permitted CFS to make, representations about CFS' historical collections performance, ECR models and Residual, without disclosing CFS' continual reliance on sales of the trusts' receivables. The undersigned finds that, at a minimum, a reasonable jury could conclude that Ms. Brady's failure to disclose CFS reliance on asset sales was an extreme departure from the standards of ordinary care which created a risk that potential investors would be mislead, and that Ms. Brady was aware of this risk. The undersigned finds, therefore, that plaintiffs' complaints sufficiently allege a strong inference of scienter with regard to Ms. Brady.

3 See, e.g., No. 99-889, Doc. No. 53, pp. 16-20.

D. PLAINTIFFS ADEQUATELY ALLEGE THAT Ms. BRADY MADE MISREPRESENTATIONS AND OMISSIONS ON WHICH THEY RELIED.

Plaintiffs allege that in making their decision to purchase the SMART and GREAT securities at issue they, or their predecessors in interest whose claims they are asserting, relied on the accuracy of the information they received from Ms. Brady. This allegation is sufficient to survive a motion to dismiss. Neither Fed.R.Civ.P. 9 nor the PSLRA impose any special pleading requirements with regard to § 10(b)'s

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reliance element. To obtain a dismissal, Ms. Brady must demonstrate that plaintiffs will be unable to prove any set of facts upon which a reasonable jury could find that her alleged misstatements were a substantial factor in plaintiffs' investment decision; something Ms. Brady has not done.

Ms. Brady argues that the Court should dismiss plaintiffs' § 10(b) claims because as a matter of law plaintiffs, in making their investment decisions, could not have reasonably relied on anything Ms. Brady said or did because they relied on the fact that the ratings agencies had given the SMART and GREAT securities an "A" rating, and on the reputations of Arthur Anderson; Mayer, Brown and Platt; and Chase Securities. In reality, however, Ms. Brady's argument is an attack on the truthfulness of plaintiffs' allegation that they relied on Ms. Brady; a factual attack not permitted at the motion to dismiss stage. Plaintiffs allege they relied on Ms. Brady to provide them with accurate, non-misleading information about CFS and Ms. Brady argues that plaintiffs relied on everyone else and not her. The trier of fact will have to determine the truth.

Ms. Brady also argues that plaintiffs' reliance is precluded as a matter of law because the transaction documents inform plaintiffs that sales of the trusts' receivables may occur, and because the PPMs contain a disclaimer stating that investors may not rely on any representations outside of the PPMs themselves. The undersigned does not agree. As discussed in the MBP RR, it is not clear from a reading of the PPMs as a whole that the sale of performing loans by CFS was ever contemplated. Even if such sales were contemplated, the PPMs do not clearly disclose CFS' right to sell the trusts' assets on a monthly basis to meet collection targets. See MBP RR, Part I(B)(2)(a)(ii)(a).

The undersigned has found that pursuant to the group pleading doctrine, plaintiffs allegations give rise to a presumption, which can be rebutted at trial by Ms. Brady, that the is responsible for the misstatements which plaintiffs allege are in the PPMs themselves. Ms. Brady's argument regarding plaintiffs' inability to rely on any representations outside of the PPMs necessarily do not apply to misrepresentations which plaintiffs allege are in the PPMs. Plaintiffs have, therefore, at least stated a § 10(b) claim against Ms. Brady with regard to the PPMs.

In Affiliated Ute, the United States Supreme Court held that the trier of fact in a § 10(b) case may presume reliance where the defendant fails to disclose material information. Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54 (1972). Thus, in an omissions case, positive proof of the investor's reliance on the omitted facts is not required to recover under § 10(b). All that is necessary is that the omitted fact be material. Often, however, a plaintiff alleges a mixture of misrepresentations and omissions. In these "mixed" cases, theAffiliated Ute

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presumption of reliance will apply only if the alleged omissions predominate over issues involving defendant's affirmative misrepresentations. See Joseph v. Wiles, 223 F.3d 1155, 1162 (10th Cir. 2000); Grubb v. FDIC, 868 F.2d 1151, 1163 (10th Cir. 1989); Hoxworth v. Blinder, Robinson Co., Inc., 903 F.2d 186, 202 (3rd Cir. 1990); andSharp v. Coopers Lybrand, 649 F.2d 175, 188 (3rd Cir. 1981). At this stage of the litigation, plaintiffs' case against Ms. Brady appears to be primarily based on her failure to disclose CFS' extraordinary reliance on loan sales to Cadle and Dimat to meet its collection targets. The undersigned finds, therefore, that it is likely that plaintiffs will be entitled to invoke the Affiliated Ute presumption of reliance. Dismissal based solely on the lack of reliance is, therefore, not appropriate.

Justifiable reliance is determined from an examination of all relevant factors to a transaction. Reliance is not justifiable if the plaintiff's conduct is comparable to that of the defendant's culpable conduct. A plaintiff may not justifiably rely on information when its falsity is palpable from a plain reading of the transaction documents. That is, a plaintiff's reliance must be reckless before it will be found to be unjustifiable. Zobrist v. Coal-X, Inc., 708 F.2d 1511, 1516 (10th Cir. 1983); Grubb v. Federal Deposit Ins. Corp., 868 F.2d 1151, 1163 (10th Cir. 1989); Foremost Guar. Corp. v. Mentor Sav. Bank, 910 F.2d 118, 124-27 (4th Cir. 1990). Thus, when representations outside of the transaction documents are palpably false based on disclosures or representations in the transaction documents, reliance on representations made outside of the transaction documents may not be justified (i.e., reliance would be reckless). Ms. Brady has not demonstrated that any misrepresentation alleged to exist outside of the PPMs is clearly revealed by disclosures in the PPMs to be so palpably false as to make plaintiffs' reliance on the alleged misrepresentation reckless. Ms. Brady has, therefore, failed to demonstrate that plaintiffs' reliance is not justified as a matter of law.

The undersigned also agrees with plaintiffs' reading of the Tenth Circuit's dicta in Zobrist. A defendant cannot, consistent with the securities laws, disclaim responsibility for all misrepresentations made outside of a PPM simply by placing a warning in the PPM that investors may not rely on representations not contained in the PPM. Zobrist, 708 F.2d at 1518; Brown v. E.F. Hutton Group, Inc., 991 F.2d 1020, 1032 n. 4 (2nd Cir. 1993). A disclosure such as that relied on by Ms. Brady does not give her, as CFS' Director of Investor Relations, a license to lie directly and repeatedly to investors and then argue "King's X" based on a warning in the PPM that the is not to be relied on. At most, the disclosure in the PPM creates a factual issue regarding the reasonableness of plaintiffs' reliance on Ms. Brady, which cannot be resolved on a motion to dismiss.

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II. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF CONTROL PERSON LIABILITY AGAINST MS. BRADY UNDER § 20(a) OF THE 1934 SECURITIES ACT.

Section 20(a) of the 1934 Securities Act provides as follows:

Every person who, directly or indirectly, controls any person liable under any provision of this chapter [including § 10(b)] or of any rule or regulation thereunder [including SEC Rule 10b-5] shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

15 U.S.C. § 78t(a). Plaintiffs allege that Ms. Brady is jointly liable under this section with CFS for CFS' alleged violations of the 1934 Securities Act.

To state a prima facie case of control person liability under § 20(a), plaintiffs must establish (1) that CFS committed a primary violation of the securities laws, and (2) that Ms. Brady had "control" over CFS. Maher v. Durango Metals, Inc., 144 F.3d 1302, 1305 (10th Cir. 1998). Plaintiffs need not show that Ms. Brady actually or culpably participated in CFS' alleged primary violation. Rather, once the plaintiffs establish their prima fade case, the burden shifts to Ms. Brady to show lack of culpable participation or knowledge. Id. Whether Ms. Brady was a culpable participant in CFS' alleged fraud, which of course plaintiffs allege with their § 10(b) claims against her, is relevant to Ms. Brady's defense to plaintiffs' § 20(a) claims, but it is not relevant to plaintiffs' prima fade case.

Plaintiffs allege that CFS committed primary violations of § 10(b) of the 1934 Securities Act. The question is, therefore, whether plaintiffs have also adequately alleged that Ms. Brady had "control" over CFS. Ms. Brady argues that as a matter of law the did not have control over CFS because CFS was controlled lock, stock and barrel by Bill Bartmann, Kathryn Bartmann, and Jay Jones, the founders and 80% shareholders of CFS. However, neither one's title nor the amount of stock one owns

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is determinative of the control issue.⁴ Rather, the focus is on the nature of the actual relationship between the defendant and the alleged primary violator.

4 "It is well known that actual control sometimes may be exerted through ownership of much less than a majority of the stock of a corporation . . . ." HR. Rep. No. 1383, 73d Cong., 2d Sess. 26 (1934) (1934 WL 1290). Thus, Ms. Brady's argument that the court should look to the transaction documents, which define control as 80% ownership of CFS's stock, is not persuasive.

As the legislative history to § 20(a) indicates, "[i]t would be difficult if not impossible to enumerate or to anticipate the many ways in which actual control may be exerted." H.R. Rep. No. 1383, 73d Cong., 2d Sess. 26 (1934) (1934 WL 1290). Thus, when it enacted § 20(a) Congress expressly declined to define "control," wishing to keep the concept flexible. Heeding this intent, the Tenth Circuit has held that § 20(a) is a remedial statute which must be "construed liberally."Maher, 144 F.3d at 1305. Given that Congress intended for "control" to be defined flexibly by the courts, the determination of whether a particular individual is a control person is necessarily an intensely factual question, requiring scrutiny of the defendant's participation in the day-to-day affairs of the alleged primary violator. Factual questions of this nature are ordinarily not subject to resolution on a motion to dismiss. Id. at 1306.

A good example of the type of allegations which are subject to resolution on a motion to dismiss is presented by Maher. In Maher the defendant (i.e., the alleged control person) had an option to acquire a seat on the board of directors, and a controlling interest in, the primary violator. The Tenth Circuit dismissed the plaintiff's § 20(a) claim holding that the plaintiffs's allegations regarding the defendant's inchoate right to acquire control over the primary violator were insufficient to establish that the defendant had actual control over the primary violator. Maher, 144 F.3d at 1305-06. Plaintiffs' allegations in this case are not at all like those in Maher. Rather, plaintiffs allege that given her title, compensation, and her control over the content of the information outsiders, including investors, received Ms. Brady is a control person of CFS. Ms. Brady argues that the is not a control person because the Bartmanns and Mr. Jones were the actual control persons of CFS. This is generally the type of factual dispute which cannot be resolved on a motion to dismiss where there is no factual record. See, e.g., Stadia Oil Uranium Co. v. Wheelis, 251 F.2d 269, 275-76 (10th Cir. 1957) (upon competing factual inferences, fact of control is one for the trier of fact).

Determining whether one is a control person within the meaning of § 20(a) is a question of fact which depends upon the totality of the circumstances. The Tenth Circuit has interpreted "control" as only requiring "some indirect means of discipline or influence [over the primary violator] short of actual direction . . . ." Maher, 144

14

F.3d at 1305 (quoting from Richardson v. MacArthur, 451 F.2d 35, 41-42 (10th Cir. 1971)). The SEC defines control as "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise." 17 C.F.R. § 230.405. A plaintiff must, therefore, allege facts which establish that the control person actually participated in the general operations of the primary violator and that the control person had the power to control the specific transaction underlying the securities violation alleged to have been committed by the primary violator. Maher, 144 F.3d at 1305, n. 8;Wenneman v. Brown, 49 F. Supp.2d 1283, 1290 (D. Ut. 1999).⁵ "Control may be exerted in other ways than by vote, stock ownership being only one aspect of control. A person may be in control even though he does not own a majority of the voting stock, and such control may rest with more than one person at the same time or from time to time." United States v. Corr, 543 F.2d 1042, 1050 (2nd Cir. 1976) (internal citations omitted).

5 The undersigned recognizes that the Tenth Circuit has left unresolved the issue of whether it is sufficient to merely allege that the control person had the power to control the general affairs of the primary violator, or whether a § 20(a) plaintiff must also allege that the control person in fact exercised that power, Maher, 144 F.3d at 1305, n. 8. In this case, however, plaintiffs allege that Ms. Brady had the power and that the in fact exercised the power to control CFS' affairs. The court need not, therefore, decide whether an allegation that the merely possessed the power, without exercising it, would be sufficient to state a § 20(a) claim.

As Director of Investor Relations, plaintiffs allege that Ms. Brady controlled what CFS information was revealed to outsiders, including what information would be revealed to potential investors, the rating agencies and Arthur Anderson, CFS outside auditor. Plaintiffs allege that Ms. Brady calculated CFS' monthly collections shortfall and supervised loan sales to Cadle and Dimat to cover this shortfall. Plaintiffs also allege that Ms. Brady supervised the preparation of and signed collection performance reports which were included in due diligence materials given to potential investors. Plaintiffs further allege that Ms. Brady served on CFS' Executive and Strategic Planning Committees. Ms. Brady argues that these allegations should be discounted because plaintiffs do not allege when these committees met or what was discussed at these meetings, if anything. While that may be true, Ms. Brady's membership on these committees at least entitles plaintiffs, at the pleading stage, to the reasonable inference that the participated in CFS' general operations through her membership on these committees. Plaintiffs also allege that Ms. Brady received a salary commensurate with someone performing a managerial function. Thus, as a whole, plaintiffs allege that Ms. Brady actually participated in the operations of CFS and possessed the power to control the activities (i.e., the omissions) upon which CFS' primary violations are predicated. Based on these allegations, the undersigned finds that plaintiffs have alleged facts from which it could reasonably be inferred by a trier

16

of fact that Ms. Brady was a control person within the meaning of § 20(a). Dismissal of plaintiffs' § 20(a) claims is, therefore, not appropriate.

III. PLAINTIFFS' STATE LAW CLAIMS ARE NOT SUBJECT TO DISMISSAL.

In addition to the federal securities law claims pled against Ms. Brady, plaintiffs also allege the following state law claims against Ms. Brady: claims under § § 408(a) and (b) of the Oklahoma Securities Act; claims under §§ 25401 and 25501 of the California Corporation Code; common law fraud, deceit, conspiracy and negligence under Oklahoma law.

Ms. Brady does not address the merits of any of the state law claims directly. Rather, Ms. Brady argues that to the extent any of plaintiffs' state law claims are based on fraud, they should be dismissed for the same reasons the argues that plaintiffs' § 10(b) claims under the 1934 Securities Act should be dismissed. To the extent that any of plaintiffs' state law claims do not require a showing of fraud, Ms. Brady argues, based on her assumption that all of plaintiffs' federal claims will be dismissed, that the Court should exercise its discretion and decline to exercise supplemental jurisdiction over these state claims under 28 U.S.C. § 1367. The undersigned has, however, not recommended the dismissal of plaintiffs' § 10(b) and § 20(a) claims. Ms. Brady's arguments do not, therefore, apply, and plaintiffs' state law claims are not subject to dismissal.

RECOMMENDATION

For the reasons discussed above and in the Part III of the Main RR, the undersigned recommends that Ms. Brady's motions to dismiss be GRANTED as to the following claims: (1) claims under § 12(a)(2) of the 1933 Securities Act; and (2) claims under § 15 of the 1933 Securities Act.

For the reasons discussed above and in the Main RR, the undersigned recommends that Ms. Brady's motions to dismiss be DENIED as to the following claims: (1) claims under § 10(b) of the 1934 Securities Act; (2) claims under § 20(a) of the 1934 Securities Act; (3) claims under § § 25401 and 25501 of the California Corporation Code; (4) claims under § 408(a)(2)(A) of the Oklahoma Securities Act; (5) claims under § 408(b) of the Oklahoma Securities Act; (6) claims under Oklahoma law for fraud, deceit and constructive fraud; (7) claims under Oklahoma law for conspiracy to commit fraud; and (8) claims under Oklahoma law for negligent misrepresentation.

16 REPORT AND RECOMMENDATION REGARDING THOSE CLAIMS PLED AGAINST BRUCE HADDEN TABLE OF CONTENTS

I. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF LIABILITY AGAINST MR. HADDEN UNDER § 408(b) OF THE OKLAHOMA SECURITIES ACT 3

III. PLAINTIFFS HAVE NOT SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF CIVIL CONSPIRACY AGAINST MR. HADDEN 9

RECOMMENDATION 10

ii

Bruce Hadden has moved to dismiss all claims pled against him by plaintiffs. See RR Exhibit A for a list of Mr. Hadden's motions to dismiss, and RR Exhibit B for a list of the claims pied against him.

The purported business of CFS was to purchase charged-off credit card receivables from financial institutions, package those receivables into a securitization, and sell interests to investors in the securitization based on representations that CFS would collect more on the charged-off debt than the investors had paid for their securities. Plaintiffs allege that it was Mr. Hadden, as CFS' Director of Business Development, who determined which charged-off receivables to purchase from the banks and how those receivables should be packaged into a securitization. Plaintiffs allege that Mr. Hadden was responsible for searching out, identifying and performing due diligence on pools of charged-off credit card debt to determine which receivables CFS should purchase. Thus, according to plaintiffs, Mr. Hadden analyzed and purchased the very assets which fueled CFS's whole enterprise.

Plaintiffs allege that almost from the inception of the first all-credit-card-debt securitization closed by CFS, it was clear to CFS that CFS would not be able to achieve its monthly collection targets based solely on its ability to collect from the credit card debtors. Plaintiffs allege that to make up the difference each month between what CFS was actually collecting from the credit card debtors and what CFS had promised the investors it would collect each month, CFS began selling large amounts of the trusts' best performing receivables to an unaffiliated company named Cadle, Inc. ("Cadle"). According to plaintiffs, CFS added the proceeds of these sales to the amount it had collected from the credit card debtors and reported the total as meeting its monthly collections targets.

Plaintiffs allege that Mr. Hadden was the person at CFS responsible for determining which receivables to sell to Cadle. Specifically, plaintiffs allege that Mr. Hadden assembled and marketed packages of receivables for sale out of the pool of receivables backing the investors' securities. Plaintiffs also allege that Mr. Hadden knew that the Private Placement Memorandum ("PPM"), pursuant to which the investors purchased their securities, placed a limit on the amount of receivables that could be sold out of the pool of receivables backing the investors' securities. Consequently, plaintiffs allege that Mr. Hadden closely monitored the value of the debts being sold. Plaintiffs also allege that given his position at CFS, and the precisely-timed nature of these sales transactions at the end of each month, Mr. Hadden knew that the sales to Cadle were being made to cover CFS' collection shortfall each month.

Plaintiffs allege that by September 1997 Cadle refused to purchase any additional receivables from the trusts, and that by this time CFS was approaching the

1

limits placed on such sales in the PPMs. Plaintiffs allege that CFS' management, including Mr. Hadden, were acutely aware that if collection targets were missed, no further securitizations could be closed; and that if no further securitizations were closed, the cash needed to run CFS's expensive operations would dry up and CFS would collapse as a going concern. To prevent this collapse, plaintiffs allege that William Bartmann and Jay Jones concocted a scheme to funnel investor money from new securitizations into old securitizations by using a shell company named Dimat Corporation.

Plaintiffs allege that Dimat was established to purchase worthless credit card receivables at top dollar from CFS (i.e., receivables with a $0 or negligible ECR). To fund Dimat's purchases, plaintiffs allege that Mr. Bartmann and Mr. Jones began taking large distributions from CFS. Plaintiffs allege that these distributions were secretly passed to a company wholly-owned by Mr. Jones, Calamity Jones Entertainment, Inc. Calamity Jones then loaned money to Dimat, which Dimat would use to purchase receivables from CFS. Plaintiffs allege that over the course of 13 months, Mr. Bartmann and Mr. Jones funneled approximately $63 million to Dimat in this fashion.

As with the sales to Cadle, plaintiffs allege that Mr. Hadden was responsible for selecting the receivables to be sold to Dimat. Now, however, plaintiffs allege that in order to keep from busting the limits set by the PPMs, Mr. Hadden had to analyze the receivables being sold to Dimat to ensure that they had no real value. Plaintiffs allege that Mr. Hadden knew that Dimat never conducted any due diligence in connection with the loans he was preparing for sale to Dimat. Plaintiffs allege, therefore, that Mr. Hadden knew that Dimat was paying millions of dollars for virtually worthless receivables. Plaintiffs also allege that, due to conversations Mr. Hadden had with Charles Welsh, CFS' head of collections, Dimat never inquired about the status of collections on its receivables, and that CFS was barely collecting anything on Dimat's account. Being an expert in the field of buying and selling credit card receivables, plaintiffs allege that Mr. Hadden knew that Dimat was not a normal player in the industry, and knew that Dimat's behavior defied any rational, economic sense.

Plaintiffs allege that Mr. Hadden attended certain investor meetings at which investors were told that CFS was enjoying spectacular collections success and was meeting and surpassing all of its collections targets. In light of his alleged knowledge of CFS' monthly collections shortfalls and CFS' asset sales to Cadle and Dimat, plaintiffs allege that Mr. Hadden knew these statements to investors were at best misleading.

Mr. Hadden's motions require the Court to determine whether these allegations sufficiently allege that Mr. Hadden conspired to defraud plaintiffs, and whether, under

3

the Oklahoma Securities Act, Mr. Hadden's conduct "materially aided" CFS in the sale of the SMART and GREAT securities to plaintiffs. For the reasons discussed below, the undersigned finds that plaintiffs' allegations are not sufficient to state a claim for civil conspiracy, but are sufficient to state a claim for liability under § 408(b) of the Oklahoma Securities Act.

I. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF LIABILITY AGAINST MR. HADDEN UNDER § 408(b) OF THE OKLAHOMA SECURITIES ACT.

Section 408(b) of the Oklahoma Securities Act provides as follows:

Every person who materially participates or aids in a sale made by any person liable under [§ 408(a)(2)] . . . shall also be liable jointly and severally with and to the same extent as the person so liable, unless the person who so participates [or] aids . . ., sustains the burden of proof that he did not know, and could not have known, of the existence of the facts by reason of which liability is alleged to exist.

71 Okla. Stat. § 408[ 71-408](b).

From the statutory language quoted above, the Oklahoma Supreme Court has identified the following elements of a prima fade case under § 408(b) of the Oklahoma Securities Act: (1) that some person committed a primary violation of § 408(a) of the Oklahoma Securities Act, and (2) that the defendant materially participated or aided in the sale of securities by the primary violator of § 408(a). Sullivan Engine Works, 910 P.2d 1052, 1055-58; Nikkel v. Stifel, Nicolaus Co., Inc., 542 P.2d 1305, 1309 (Okla. 1975). Plaintiffs satisfy the first element of their § 408(b) claims by alleging that CFS violated § 408(a)(2) of the Oklahoma Securities Act by selling securities to plaintiffs by means of material misrepresentations, and Mr. Hadden does not argue otherwise.¹

1 Mr. Hadden does argue a variant of Mayer, Brown and Platt's and Caroline Benediktson's lack of standing argument. Mr. Hadden argues that certain plaintiffs do not have standing because they do not qualify as purchasers under § 408(a)(2) because their investment advisors purchased the securities, not these plaintiffs. The undersigned rejects this argument for the reasons stated in the Main RR at Part II.

Mr. Hadden argues that plaintiffs cannot establish that he materially aided CFS within the meaning of § 408(b). The parties' arguments center around how broadly or narrowly § 408(b) should be read. Mr. Hadden argues that plaintiffs must allege

4

that he was directly involved in the sale of securities by CFS to plaintiffs, and plaintiffs argue that they need only show that he was involved in CFS' violation of § 408(a)(2), and that "but for" his conduct the securities sales which caused their harm would not have occurred.

The Oklahoma Supreme Court has not given detailed guidance on how § 408(b) is to be interpreted and applied. In the absence of an authoritative decision from the state's highest court, this Court's task is to predict how the state's highest court would rule. In doing so, the Court must follow any intermediate state court decision unless other authority demonstrates that the state supreme court would decide otherwise. The policies underlying the applicable legal doctrines, the doctrinal trends indicated by these policies, and the decisions of other courts may also inform the Court's analysis. Daitom, Inc. v. Pennwalt Corp., 741 F.2d 1569, 1574-75 (10th Cir. 1984).

Based on the plain language of § 408(b), the undersigned does not agree with Mr. Hadden that plaintiffs must demonstrate his direct involvement with, or presence at, the sales of securities to plaintiffs. Section 408(b) makes one who is not himself the seller of a security liable for an unlawful sale if he "materially participate or aids" in the sale. "Participate" and "aids" are separate concepts, not synonyms. A person may participate without aiding or aid without participating. Prince v. Brydon, 764 P.2d 1370, 1372 (Or. 1988) (interpreting a statute substantially similar to § 408(b)). Plaintiffs can, therefore, survive a motion to dismiss by demonstrating that Mr. Hadden materially aided CFS in an unlawful sale of securities, without having to demonstrate that Mr. Hadden actually participated in, or was present at, the unlawful sale. Adamson v. Lang, 389 P.2d 39, 41 (Or. 1964) ( en banc); Black Co. v. Nova-Tech, Inc., 333 F. Supp. 468, (D. Or. 1971) (a person may aid in an illegal securities transaction without having communicated with the purchaser).

Plaintiffs argue that they should only be required to show that Mr. Hadden aided CFS in its "violations" of § 408(a) or the "transactions" which violated § 408(a). These are, however, not the words used in § 408(b) which speaks solely of participating or aiding in a "sale" that violates § 408(a). See South Western Oklahoma Dev. Auth. v. Sullivan Engine Works, Inc., 910 P.2d 1052, 1057-58 (Okla. 1996) (defendant must materially aid in the "sale"). Nevertheless, in this case the relevant violation" or "transaction" under § 408(a) is the sale of a security by means of a material misstatement. Connecticut Nat. Bank v. Giacomi, 699 A.2d 101, 121 (Conn. 1997) (interpreting a statute substantially similar to § 408(b)). Thus, plaintiffs must demonstrate that Mr. Hadden materially aided CFS in the unlawful sale of a security.

The undersigned also finds that whether one's assistance in the sale of a security is "material" does not depend on one's knowledge of the facts that make the

4

sale unlawful. Prince, 764 P.2d at 1372. As the plain language of § 408(b) demonstrates, knowledge is relevant only in the form of an affirmative defense. That is, § 408(b) permits a non-selling defendant who materially aids an unlawful sale of securities to avoid liability by demonstrating that he "did not know, and could not have known, of the existence of the facts by reason of which [the primary violator's] liability is alleged to exist." 71 Okla. Stat. § 408[ 71-408](b). It is also important to note the narrowness of § 408(b)'s affirmative defense. It is not enough for Mr. Hadden to demonstrate that he did not know that CFS's securities sales were unlawful. Mr. Hadden must demonstrate that he did not know of the "existence of the facts" upon which CFS' alleged liability for selling those securities is predicated.Prince, 764 P.2d at 1372. The undersigned agrees that § 408(b) smacks of strict liability and places a substantial burden on non-sellers who materially aid an unlawful sale of securities to exonerate themselves from liability by showing a lack of knowledge. This legislative choice wasp however, deliberate² and it must be respected by this Court.Id.

2 Section 408(b) of the Oklahoma Securities Act is based on § 410(b) of the Uniform Securities Act of 1956. The Uniform Act imposes liability on employees, broker-dealers or agents of the seller who materially aid in the seller's unlawful sale of securities. When Oklahoma adopted the Uniform Act in 1959, Oklahoma significantly broadened Uniform Act § 410(b) by imposing liability on "every person" who materially aids in a seller's unlawful sale of securities. This section has remained unchanged since its adoption in 1959. See 1959 Okla. Laws, p. 345, § 408.

The penultimate question presented by Mr. Hadden's motion is, therefore, what constitutes "material" aid for purposes of § 408(b). Mr. Hadden interprets "material" to mean aid which substantially, directly and proximately caused CFS to make an unlawful sale of securities which damaged plaintiffs. However, no court in Oklahoma, or in any state construing a statute substantially similar to § 408(b). has construed "materially" as narrowly as Mr. Hadden would have the Court construe it.

Borrowing from § 10(b) concepts, some courts directly considering a statute like § 408(b) have defined "material" aid as aid which has a natural tendency to influence, or is capable of influencing, an investor's decision to purchase the securities at issue. Connecticut Nat. Bank v. Giacomi, 699 A.2d 101, 121-22 (Conn. 1997); Foster v. Jesup Lamont Securities Co., 482 So.2d 1201, 1207 (Ala. 1986). Other courts addressing a statute like § 408(b) have adopted a "but for" test for distinguishing material from immaterial aid. These courts hold that if the illegal sale would not have occurred "but for" the defendant's aid, the defendant's aid is material. Black Co. v. Nova-Tech, 333 F. Supp. 468, 472 (D. Or. 1971); Adamson v. Lang, 389 P.2d 39, 41 (Or. 1964) ( en banc); Fakhrdai v. Mason, 696 P.2d 1164, 1167 (Or.App. 1985).

The undersigned finds that the appropriate test for determining whether aid is material asks both whether the alleged conduct was a "but for" cause of the illegal

5

sale, and whether the alleged conduct had a natural tendency to influence, or was capable of influencing, the investor's purchase decision. This two-pronged test is actually supported by the facts of the cases cited in the previous paragraph. In those cases focusing on the ability of the alleged conduct to influence the investor's purchase decision, the conduct was also a "but for" cause of the illegal sales transaction, and in those cases focusing on the cause-in-fact nature of the alleged conduct, the alleged conduct also had the tendency to influence the investor's purchase decision. A test which combines both inquiries is necessary to prevent statutes like § 408(b) from sweeping too broadly. If just a "but for" test is used, a secretary who types the stock purchase agreement would be liable under § 408(b), subject of course to her affirmative defense, because but for her conduct the stock sale could not have been completed. The secretary would not, however, be liable under § 408(b), and put to the task of showing her lack of knowledge, if the investor were also required to establish that the secretary's conduct had a tendency to influence the purchase decision because the fact that a secretary typed the purchase agreement does not influence the decision to buy the stock one way or the other. The test which the undersigned proposes is also consistent with the sparse Oklahoma authority regarding § 408(b). See Cook v. Westinghouse, No. 70,081 (Okla.App. Oct. 16, 1990)) (attached as Exhibit 19 to Doc. No. 109 in 00-104).

In Cook, Pepco acted as general partner to various limited partnerships. Pepco wanted to sell interests in these limited partnerships. To accomplish this goal, Pepco approached Westinghouse Credit about providing financing for investments in the limited partnerships. Before financing the first loan, Westinghouse conducted an audit which raised the concern that the interests Pepco was selling might be securities which needed to be registered under the Oklahoma Securities Act. Westinghouse asked for an opinion letter from Pepco's outside counsel certifying Pepco's compliance with applicable securities laws. When Pepco's outside counsel refused to issue the letter, Pepco's in-house counsel did. Westinghouse accepted the in-house counsel's opinion and issued the financing. The Oklahoma Department of Securities eventually issued a cease and desist order against Pepco, and ordered Pepco to make a recission offer to all investors. The investors then sued Westinghouse under § 408(b). The trial court granted summary judgment for the investors against Westinghouse, finding that Westinghouse had materially participated or aided in the sale of unregistered securities by Pepco.

6

On appeal the Oklahoma Court of Appeals, in an unpublished,³ held that a bank that provides

3 under Oklahoma law, an unpublished opinion by the Court of Appeals has no precedential value. See 20 Okla. Stat. § 30.5[ 20-30.5].

normal banking functions, such as lending, may not be held liable for their client's activities. However, this immunity does not continue when the financial institution departs from the normal money-lending function and actively participates in the affairs of the issuer or in the sales of the securities themselves.

No. 00-104. No. 109, Exhibit 19, p. 4. The court then went on to reverse the trial court's grant of summary judgment, holding as follows:

While Westinghouse did work in alternative ways to provide financing or refinancing to the limited partnerships, there exists a question of fact to be determined. Under the evidence reasonable minds could differ as to whether [Westinghouse's] activities extend beyond the normal banking function.

Id.

In Cook, Westinghouse's conduct as a lender was a "but for" cause of the illegal sales because "but for" Westinghouse's financing and refinancing, the sales could not have occurred. A lender who merely provides necessary financing should not, however, be held to answer under § 408(b). However, when the scope of a lender's conduct deviates from a normal banking function and extends to active participation in the affairs of the stock seller, the lender's conduct then becomes capable of influencing an investor's purchase decision. This is what the appellate court in Cook recognized when it held that normal money-lending conduct is not "material" aid for purposes of § 408(b), but that money-lending coupled with participation in the stock seller's affairs might be "material" aid. Consequently, the court remanded the Cook case so the jury could determine whether the bank's conduct amount to "material" aid under the circumstances.

The undersigned finds that plaintiffs have sufficiently alleged that Mr. Hadden materially aided CFS's alleged illegal sale of securities. Plaintiffs have alleged that Mr. Hadden was directly involved in putting together the very sales which permitted CFS

7

to create and maintain the false impression that it was consistently meeting its promised collections targets. Without this false impression, CFS would not have been able to sell any further SMART or GREAT securities. The undersigned finds, therefore, that plaintiffs have sufficiently alleged that Mr. Hadden's role, especially in the Dimat transactions, was essential for CFS to continue selling securities despite the fact that it was not collecting at levels promised to earlier investors. The undersigned also finds that plaintiffs have sufficiently alleged that Mr. Hadden's conduct had the tendency, and in fact did, influence their decision whether to purchase SMART and GREAT securities from CFS. Plaintiffs purchased securities from CFS primarily because they believed, based on collections numbers which were falsely inflated as a direct result of the sales Mr. Hadden helped to arrange with Cadle and Dimat, that CFS was a phenomenally successful collector of charged-off credit card debt. According to plaintiffs, Mr. Hadden, through his attendance at investor meetings, was also minimally involved in the marketing of the SMART and GREAT securities. The undersigned finds that these allegations are sufficient to put Mr. Hadden to the task of demonstrating under § 408(b) that he had no knowledge of the facts which constituted the fraud allegedly being carried out by CFS. The undersigned cannot find that plaintiffs will be unable to prove any set of facts which demonstrate that Mr. Hadden in fact materially aided CFS in its allegedly unlawful sales of securities.

The undersigned's conclusion is further supported by the Oregon Supreme Court's decision in Adamson v. Lang. In Adamson, a stock seller issued stock pursuant to an escrow agreement which required a certain number of shares be sold and a certain amount of money be deposited in the escrow account before any of the stock sales would be complete. The seller ran out of prospects and needed to raise an additional $16,000.00 to close the escrow. To make up this difference, the seller entered into a series of transactions with a third party lender to borrow the money himself and purchase the remaining securities. The lender knew that he was going to be repaid in part immediately out of the escrow proceeds once the escrow closed. Under these facts, the Oregon Supreme Court held that the lender materially aided the seller under an Oregon statute substantially similar to § 408(b). Adamson, 389 P.2d at 41-42. The undersigned finds that Mr. Hadden's conduct in this case is similar enough to that of the defendant in Adamson that this case ought to proceed, as did Adamson, past the pleading stage. Consequently, the undersigned recommends that Mr. Hadden's motions to dismiss plaintiffs' claims under § 408(b) of the Oklahoma Securities Act be DENIED.

8

III. PLAINTIFFS HAVE NOT SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF CIVIL CONSPIRACY AGAINST MR. HADDEN.

Civil conspiracy doctrine is used to enlarge the pool of potential defendants from whom a plaintiff may recover for an underlying tort by making each conspirator liable for all of the acts of his co-conspirators. A civil conspiracy consists of an agreement between two or more persons to do an unlawful act, or to do a lawful act by unlawful means. Unlike its criminal counterpart, however, the agreement does not itself create liability. There must be an agreement, coupled with an intent to commit a fraudulent act which results in injury to the plaintiff. The gravamen of a civil conspiracy claim is the underlying independent tort which harms the plaintiff. Thus, if the underlying tort has not been adequately pled, the conspiracy claim will fail. Gaylord Entertainment Co. v. Thompson, 958 P.2d 128, 148 (Okla. 1998); Brock v. Thompson, 948 P.2d 279, 294 n. 66 67 (Okla. 1998); Wright v. Cies, 648 P.2d 51, 53 n. 2 (Okla.App. 1982); North Texas Production Credit Ass'n v. McCurtain County Nat. Bank, 222 F.3d 800, 815 (10th Cir. 2000);Dill v. City of Edmond, Okl., 155 F.3d 1193, 1208 (10th Cir. 1998).

The existence of an agreement necessary to establish a civil conspiracy claim may be inferred from all relevant facts and circumstances. The question is whether the circumstances, considered as a whole, show that the parties united to accomplish a fraudulent scheme. When the alleged conspiracy is a conspiracy to defraud, such as a conspiracy to violate the securities laws, the elements of the conspiracy must be pled with the particularity required by Fed.R.Civ.P. 9(b). Eastwood v. National Bank of Commerce, 673 F. Supp. 1068, 1082 (W.D. Okla. 1987) (citing several cases). Disconnected circumstances, any of which, or all of which, are just as consistent with lawful purposes as with unlawful purposes, are insufficient to establish a conspiracy. Shadid v. Monsour, 746 P.2d 685, 688-89 (Okla.App. 1987); North Texas Production, 222 F.3d at 815 (citingDill v. Rader, 583 P.2d 496 (Okla. 1978)); Dill, 155 F.3d at 1208.

The undersigned finds that plaintiffs have alleged, with detail that satisfies Rule 9(b), the particulars of the underlying securities fraud which CFS allegedly perpetrated on plaintiffs. The undersigned finds, however, that plaintiffs have not sufficiently alleged a meeting of the minds between Mr. Sill and another person to defraud plaintiffs.

Plaintiffs' allegations regarding Mr. Hadden's involvement in a conspiracy are merely conclusory. Plaintiffs have not pled an agreement with any specificity. More particularly, with whom exactly did Mr. Hadden have a meeting of the minds? Presumably, plaintiffs believe that Mr. Hadden conspired with other CFS officers and employees. Generally, however, officers and employees of the same company do not

10

provide the plurality of actors necessary for a conspiracy. Because only one economic entity is involved, intracorporate conduct does not implicate the plurality of actors required to create a conspiracy. There is "no conspiracy if the conspiratorial conduct challenged is essentially a single act by a single corporation acting exclusively through its own directors, officers, and employees, each acting within the scope of his employment."⁴ Because plaintiffs have failed to allege facts from which it could be found that Mr. Hadden's alleged conduct was not part of a single corporate act by CFS, the undersigned recommends that Mr. Hadden's motion to dismiss plaintiffs' civil conspiracy claims be GRANTED.

4 Hermann v. Moore, 576 F.2d 453, 459 (2d Cir. 1978). See also Cooperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 769 (1984) (no conspiracy to violate § 1 of the Sherman Act where actors were all part of same firm); Zelinger v. Uvalde Rock Asphalt Co., 316 F.2d 47, 52 (10th Cir. 1963); Nelson Radio Supply Co. v. Motorola, Inc., 200 F.2d 911, 914 (5th Cir. 1952); John Deere Co. v. Metzler, 201 N.E.2d 478, 486 (Ill.App. 1964) (holding that a civil conspiracy cannot exist between a corporation and its agents or employees since the acts of an agent are considered to be the acts of the principal).

RECOMMENDATION

For the reasons discussed above and in the Main RR, the undersigned recommends that Mr. Hadden's motions to dismiss plaintiffs' claims under § 408(b) of the Oklahoma Securities Act be DENIED, and that his motions to dismiss plaintiffs' civil conspiracy claims be GRANTED.

10 REPORT AND RECOMMENDATION REGARDING THOSE CLAIMS PLED AGAINST JAMES SILL TABLE OF CONTENTS

I. MR. SILL'S MOTIONS TO DISMISS ARE ACTUALLY MOTIONS FOR JUDGMENT ON THE PLEADINGS, WHICH THE COURT WILL TREAT AS MOTIONS TO DISMISS 2

II. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF LIABILITY AGAINST MR. SILL UNDER § 408(b) OF THE OKLAHOMA SECURITIES ACT 3

III. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF CIVIL CONSPIRACY AGAINST MR. SILL 9

RECOMMENDATION 10

ii

James Sill has moved to dismiss all claims pled against him by plaintiffs. See RR Exhibit A for a list of Mr. Sill's motions to dismiss, and RR Exhibit B for a list of the claims pled against him.

Plaintiffs allege that by September 1997 it became clear to CFS' management that CFS would be unable to meet the collections targets it had promised investors. Plaintiffs also allege that by this time CFS was unable to make arms-length sales of the trusts' receivables to third parties because there were no purchasers willing to buy, and because CFS was approaching the limits placed on asset sales in the Private Placement Memoranda. Plaintiffs further allege that CFS' management was acutely aware that if collection targets were missed, no further securitizations could be closed; and that if no further securitizations were closed, the cash needed to run CFS's expensive operations would dry up and CFS would collapse as a going concern. To pi event this collapse, plaintiffs allege that William Bartmann and Jay Jones concocted a scheme to funnel investor money from new securitizations into old securitizations by using a shell company named Dimat Corporation.

Mr. Sill is a lawyer, and prior to Mr. Jones' involvement with CFS, plaintiffs allege that Mr. Sill served as Mr. Jones' lawyer. In September 1997, Mr. Jones approached Mr. Sill and asked Mr. Sill to incorporate a company named Dimat. Mr. Jones told Mr. Sill that the company would be used to purchase credit card receivables from CFS-related trusts. Mr. Sill agreed, and he incorporated Dimat Corporation in September 1997. At all times relevant to plaintiffs' complaints, Mr. Sill was the incorporator, owner, president and sole employee of Dimat.

Plaintiffs allege that Dimat was established to purchase worthless credit card receivables at top dollar from the CFS-related trusts (i.e., receivables with a $0 or negligible ECR). To fund Dimat's purchases, plaintiffs allege that Mr. Bartmann and Mr. Jones began taking large distributions from CFS. Plaintiffs allege that these distributions were secretly passed to a company wholly-owned by Mr. Jones, Calamity Jones Entertainment, Inc. Calamity Jones then loaned the money to Dimat, which Mr. Sill received by wire transfer as Dimat's president. Within days of receiving the loan proceeds from Calamity Jones, Mr. Sill would receive purchase and servicing agreements from CFS with all of the information on those documents completed by CFS. Mr. Sill would sign these agreements as Dimat's president and use the money wired from Calamity Jones to purchase receivables from the CFS-related trusts. Plaintiffs allege that over the course of 13 months, Mr. Bartmann and Mr. Jones funneled approximately $63 million to Dimat in this fashion.

Plaintiffs allege that as a condition to its purchase of receivables from the trusts, Dimat required that CFS remain as the servicer of the loans. The servicing agreements with Dimat gave CFS sole discretion to settle any debtor's account, and there was no

1

requirement that CFS report on its collections efforts to Dimat. The servicing agreements with Dimat did not require CFS to collect a certain amount each month but simply required CFS to use its "best efforts." Plaintiffs allege that in fact CFS was collecting at a rate of less than 1% on the loans, and that at no time did Mr. Sill ever visit CFS or inquire about CFS' dismal collections rate on Dimat's assets. According to plaintiffs, this was true despite the fact that Dimat engaged in no other business other than the purchase and holding of receivables from the CFS-related trusts.

Plaintiffs allege that from information contained in the purchase agreements he executed, Mr. Sill knew that the receivables Dimat was purchasing were worthless and that Dimat was paying top dollar for these worthless receivables. Based on his correspondence with CFS employees, plaintiffs allege that Mr. Sill also knew that Dimat's purchases from CFS occurred at the end of each month on an urgent basis, and that the amount Dimat was to pay often abruptly changed just before the transaction was to close (i.e., CFS was adjusting the purchase price so it would precisely match its collections shortfall for the month).

Mr. Sill's motions require the Court to determine whether these allegations sufficiently allege that Mr. Sill conspired with Mr. Jones to defraud plaintiffs, and whether, under the Oklahoma Securities Act, Mr. Sill's conduct "materially aided" CFS in the sale of the SMART and GREAT securities to plaintiffs. For the reasons discussed below, the undersigned finds that plaintiffs' allegations are sufficient to state a claim for civil conspiracy, and to state a claim for liability under § 408(b) of the Oklahoma Securities Act.

I. MR. SILL'S MOTIONS TO DISMISS ARE ACTUALLY MOTIONS FOR JUDGMENT ON THE PLEADINGS, WHICH THE COURT WILL TREAT AS MOTIONS TO DISMISS.

Mr. Sill has filed what he styles a motion to dismiss, pursuant to Fed.R.Civ.P. 12(b)(6), for failure to state a claim upon which relief can be granted. However, Mr. Sill answered the plaintiffs' complaints prior to filing his motion to dismiss. Mr. Sill is, therefore, precluded by Rule 12(b) from filing a motion to dismiss, which requires that such a motion be filed "before pleading."

Mr. Sill's motions can, however, be treated by the Court as a Rule 12(c) motion for judgment on the pleadings. Rule 12(h)(2) specifically provides that the defense of failure to state a claim upon which relief can be granted may be raised on a motion for judgment on the pleadings so long as the defense was actually raised in the answer. Mr. Sill did raise as an affirmative defense in his answer the defense of failure to state a claim. See, e.g., No. 99-829, Doc. No. 148, ¶ 36. Mr. Sill may therefore raise this defense in a motion for judgment on the pleadings so long as the motion is filed

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"within such time as not to delay the trial." Fed.R.Civ.P. 12(c) and 12(h)(2). No trial has been set in this case. A Rule 12(c) motion is, therefore, timely.

When the defense of failure to state a claim is properly raised in a Rule 12(c) motion for judgment on the pleadings, the Court should apply the same standards for granting the relief it would have employed had the motion been brought under Rule 12(b)(6). 5A Wright Miller, Federal Practice and Procedure: Civil 2nd § 1367, pp. 515-16 (1990); Schy Susquehanna Corp., 419 F.2d 1112, 1115 (7th Cir. 1970); MM Fuel Co. v. United States, No. 90-1136-K, 1991 WL 12875, at *1 (D. Kan. Jan. 29, 1991). The undersigned will, therefore, treat Mr. Sill's motions as Rule 12(c) motions for judgment on the pleadings. Because Mr. Sill's motions for judgment on the pleadings are based on the defense of failure to state a claim, the undersigned will apply the familiar standard announced in Conley v. Gibson, 355 U.S. 41, 45-46 (1957) to decide Mr. Sill's motions.

II. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF LIABILITY AGAINST MR. SILL UNDER § 408(b) OF THE OKLAHOMA SECURITIES ACT.

Section 408(b) of the Oklahoma Securities Act provides as follows:

Every person who materially participates or aids in a sale . . . made by any person liable under [§ 408(a)(2)] . . . shall also be liable jointly and severally with and to the same extent as the person so liable, unless the person who so participates [or] aids . . ., sustains the burden of proof that he did not know, and could not have known, of the existence of the facts by reason of which liability is alleged to exist.

71 Okla. Stat. § 408[ 71-408](b).

From the statutory language quoted above, the Oklahoma Supreme Court has identified the following elements of a prima fade case under § 408(b) of the Oklahoma Securities Act: (1) that some person committed a primary violation of § 408(a) of the Oklahoma Securities Act, and (2) that the defendant materially participated or aided in the sale of securities by the primary violator of § 408(a). Sullivan Engine Works, 910 P.2d 1052, 1055-58; Nikkel v. Stifel, Nicolaus Co., Inc., 542 P.2d 1305, 1309 (Okla. 1975). Plaintiffs satisfy the first element of their § 408(b) claims by alleging that CFS violated § 408(a)(2) of the Oklahoma Securities Act by selling securities to

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plaintiffs by means of material misrepresentations, and Mr. Sill does not argue otherwise.¹

1 Mr. Sill does argue a variant of Mayer, Brown and Platt's and Caroline Benediktson's lack of standing argument. Mr. Sill argues that certain plaintiffs do not have standing because they do not qualify as purchasers under § 408(a)(2) because their investment advisors purchased the securities, not these plaintiffs. The undersigned rejects this argument for the reasons stated in the Main RR at Part II.

Mr. Sill argues that plaintiffs cannot allege that, through his conduct with Dimat, he materially aided CFS within the meaning of § 408(b). The parties' arguments center around how broadly or narrowly § 408(b) should be read. Mr. Sill argues that plaintiffs must allege that he was directly involved in the sale of securities by CFS to plaintiffs, and plaintiffs argue that they need only show that he was involved in CFS' violation of § 408(a)(2). Mr. Sill also argues that plaintiffs must demonstrate that their harm is the direct, proximate result of his alleged aid to CFS. Plaintiffs argue that they need only demonstrate that "but for" Mr. Sill's conduct the securities sales which caused their harm would not have occurred.

The Oklahoma Supreme Court has not given detailed guidance on how § 408(b) is to be interpreted and applied. In the absence of an authoritative decision from the state's highest court, this Court's task is to predict how the state's highest court would rule. In doing so, the Court must follow any intermediate state court decision unless other authority demonstrates that the state supreme court would decide otherwise. The policies underlying the applicable legal doctrines, the doctrinal trends indicated by these policies, and the decisions of other courts may also inform the Court's analysis. Daitom, Inc. v. Pennwalt Corp., 741 F.2d 1569, 1574-75 (10th Cir. 1984).

Based on the plain language of § 408(b), the undersigned does not agree with Mr. Sill that plaintiffs must demonstrate his direct involvement with, or presence at, the sales of securities to plaintiffs. Section 408(b) makes one who is not himself the seller of a security liable for an unlawful sale if he "materially participate or aids" in the sale. "Participate" and "aids" are separate concepts, not synonyms. A person may participate without aiding or aid without participating. Prince v. Brydon, 764 P.2d 1370, 1372 (Or. 1988) (interpreting a statute substantially similar to § 408(b)). Plaintiffs can, therefore, survive a motion to dismiss by demonstrating that Mr. Sill materially aided CFS in an unlawful sale of securities, without having to demonstrate that Mr. Sill actually participated in, or was present at, the unlawful sale. Adamson v. Lang, 389 P.2d 39, 41 (Or. 1964) ( en banc); Black Co. v. Nova-Tech, Inc., 333 F. Supp. 468, (D. Or. 1971) (a person may aid in an illegal securities transaction without having communicated with the purchaser).

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Plaintiffs argue that they should only be required to show that Mr. Sill aided CFS in its "violations" of § 408(a) or the "transactions" which violated § 408(a). These are, however, not the words used in § 408(b) which speaks solely of participating or aiding in a "sale" that violates § 408(a). See South Western Oklahoma Dev. Auth. v. Sullivan Engine Works, Inc., 910 P.2d 1052, 1057-58 (Okla. 1996) (defendant must materially aid in the "sale"). Nevertheless, in this case the relevant "violation" or "transaction" under § 408(a) is the sale of a security by means of a material misstatement. Connecticut Nat. Bank v. Giacomi, 699 A.2d 101, 121 (Conn. 1997) (interpreting a statute substantially similar to § 408(b)). Thus, plaintiffs must still demonstrate that Mr. Sill materially aided CFS in the unlawful sale of a security.

The undersigned also agrees with plaintiffs that whether one's assistance in the sale of a security is "material" does not depend on one's knowledge of the facts that make the sale unlawful. Prince, 764 P.2d at 1372. As the plain language of § 408(b) demonstrates, knowledge is relevant only in the form of an affirmative defense. That is, § 408(b) permits a non-selling defendant who materially aids an unlawful sale of securities to avoid liability by demonstrating that he "did not know, and could not have known, of the existence of the facts by reason of which [the primary violator's] liability is alleged to exist." 71 Okla. Stat. § 408[ 71-408](b). It is also important to note the narrowness of § 408(b)'s affirmative defense. It is not enough for Mr. Sill to demonstrate that he did not know that CFS's securities sales were unlawful. Mr. Sill must demonstrate that he did not know of the "existence of the facts" upon which CFS' alleged liability for selling those securities is predicated. Prince, 764 P.2d at 1372. The undersigned agrees that § 408(b) smacks of strict liability and places a substantial burden on non-sellers who materially aid an unlawful sale of securities to exonerate themselves from liability by showing a lack of knowledge. This legislative choice was, however, deliberate² and it must be respected by this Court. Id.

2 Section 408(b) of the Oklahoma Securities Act is based on § 410(b) of the Uniform Securities Act of 1956. The Uniform Act imposes liability on employees, broker-dealers or agents of the seller who materially aid in the seller's unlawful sale of securities, when Oklahoma adopted the uniform Act in 1959, Oklahoma significantly broadened Uniform Act § 410(b) by imposing liability on "every person" who materially aids in a seller's unlawful sale of securities. This section has remained unchanged since its adoption in 1959. See 1959 Okla. Laws, p. 345, § 408.

The penultimate question presented by Mr. Sill's motion is, therefore, what constitutes "material" aid for purposes of § 408(b). Mr. Sill interprets "material" to mean aid which substantially, directly and proximately caused CFS to make an unlawful sale of securities which damaged plaintiffs. However, no court in Oklahoma, or in any state construing a statute substantially similar to § 408(b), has construed "materially" as narrowly as Mr. Sill would have the Court construe it.

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Borrowing from § 10(b) concepts, some courts directly considering a statute like § 408(b) have defined "material" aid as aid which has a natural tendency to influence, or is capable of influencing, an investor's decision to purchase the securities at issue. Connecticut Nat. Bank v. Giacomi, 699 A.2d 101, 121-22 (Conn. 1997); Foster v. Jesup Lamont Securities Co., 482 So.2d 1201, 1207 (Ala. 1986). Other courts addressing a statute like § 408(b) have adopted a "but for" test for distinguishing material from immaterial aid. These courts hold that if the illegal sale wold not have occurred "but for" the defendant's aid, the defendant's aid is material. Black Co. v. Nova-Tech, 333 F. Supp. 468, 472 (D. Or. 1971); Adamson v. Lang, 389 P.2d 39, 41 (Or. 1964) ( en banc); Fakhrdai v. Mason, 696 P.2d 1164, 1167 (Or.App. 1985).

The undersigned finds that the appropriate test for determining whether aid is material asks both whether the alleged conduct was a "but for" cause of the illegal sale, and whether the alleged conduct had a natural tendency to influence, or was capable of influencing, the investor's purchase decision. This two-pronged test is actually supported by the facts of the cases cited in the previous paragraph. In those cases focusing on the ability of the alleged conduct to influence the investor's purchase decision, the conduct was also a "but for" cause of the illegal sales transaction, and in those cases focusing on the cause-in-fact nature of the alleged conduct, the alleged conduct also had the tendency to influence the investor's purchase decision. A test which combines both inquiries is necessary to prevent statutes like § 408(b) from sweeping too broadly. If just a "but for" test is used, a secretary who types the stock purchase agreement would be liable under § 408(b), subject of course to her affirmative defense, because but for her conduct the stock sale could not have been completed. The secretary would not, however, be liable under § 408(b). and put to the task of showing her lack of knowledge, if the investor were also required to establish that the secretary's conduct had a tendency to influence the purchase decision because the fact that a secretary typed the purchase agreement does not influence the decision to buy the stock one way or the other. The test which the undersigned proposes is also consistent with the sparse Oklahoma authority regarding § 408(b). See Cook v. Westinghouse, No. 70,081 (Okla.App. Oct. 16, 1990)) (attached as Exhibit 19 to Doc. No. 109 in 00-104).

In Cook, Pepco acted as general partner to various limited partnerships. Pepco wanted to sell interests in these limited partnerships. To accomplish this goal, Pepco approached Westinghouse Credit about providing financing for investments in the limited partnerships. Before financing the first loan, Westinghouse conducted an audit which raised the concern that the interests Pepco was selling might be securities which needed to be registered under the Oklahoma Securities Act. Westinghouse asked for an opinion letter from Pepco's outside counsel certifying Pepco's compliance with applicable securities laws. When Pepco's outside counsel refused to issue the letter, Pepco's in-house counsel did. Westinghouse accepted the in-house counsel's

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opinion and issued the financing. The Oklahoma Department of Securities eventually issued a cease and desist order against Pepco, and ordered Pepco to make a recission offer to all investors. The investors then sued Westinghouse under § 408(b). The trial court granted summary judgment for the investors against Westinghouse, finding that Westinghouse had materially participated or aided in the sale of unregistered securities by Pepco.

On appeal the Oklahoma Court of Appeals, in an unpublished opinion,³ held that a bank that provides

3 Under Oklahoma law, an unpublished opinion by the court of Appeals has no precedential value. See 20 Okla. Stat. § 30.5[ 20-30.5].

normal banking functions, such as lending, may not be held liable for their client's activities. However, this immunity does not continue when the financial institution departs from the normal money-lending function and actively participates in the affairs of the issuer or in the sales of the securities themselves.

No. 00-104, No. 109, Exhibit 19, p. 4. The court then went on to reverse the trial court's grant of summary judgment, holding as follows:

While Westinghouse did work in alternative ways to provide financing or refinancing to the limited partnerships, there exists a question of fact to be determined. Under the evidence reasonable minds could differ as to whether [Westinghouse's] activities extend beyond the normal banking function.

Id.

In Cook, Westinghouse's conduct as a lender was a "but for" cause of the illegal sales because "but for" Westinghouse's financing and refinancing, the sales could not have occurred. A lender who merely provides necessary financing should not, however, be held to answer under § 408(b). However, when the scope of a lender's conduct deviates from a normal banking function and extends to active participation in the affairs of the stock seller, the lender's conduct then becomes capable of influencing an investor's purchase decision. This is what the appellate court in Cook recognized when it held that normal money-lending conduct is not "material" aid for purposes of § 408(b), but that money-lending coupled with participation in the stock

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seller's affairs might be "material" aid. Consequently, the court remanded the Cook case so the jury could determine whether the bank's conduct amount to "material" aid under the circumstances.

The undersigned finds that plaintiffs have sufficiently alleged that Mr. Sill materially aided CFS's alleged illegal sale of securities. Plaintiffs have alleged that Mr. Sill allowed himself to be used by CFS to create the false impression that CFS was consistently meeting its promised collections targets. Without this false impression, CFS would not have been able to sell any further SMART or GREAT securities. The undersigned finds, therefore, that plaintiffs have sufficiently alleged that Dimat, and Mr. Sill's role at Dimat, was essential for CFS to sell securities after September 1997. The undersigned also finds that plaintiffs have sufficiently alleged that Mr. Sill's conduct had the tendency, and in fact did, influence their decision whether to purchase SMART and GREAT securities from CFS. Plaintiffs purchased securities from CFS primarily because they believed, based on collections numbers which were falsely inflated as a direct result of Dimat's purchases, that CFS was a phenomenally successful collector of charged-off credit card debt. The undersigned finds that these allegations are sufficient to put Mr. Sill to the task of demonstrating under § 408(b) that he had no knowledge of the facts which constituted the fraud allegedly being carried out by CFS.

The undersigned's conclusion is further supported by the Oregon Supreme Court's decision in Adamson v. Lang. In Adamson, a stock seller issued stock pursuant to an escrow agreement which required a certain number of shares be sold and a certain amount of money be deposited in the escrow account before any of the stock sales would be complete. The seller ran out of prospects and needed to raise an additional $16,000.00 to close the escrow. To make up this difference, the seller entered into a series of transactions with a third party lender to borrow the money himself and purchase the remaining securities. The lender knew that he was going to be repaid in part immediately out of the escrow proceeds once the escrow closed. Under these facts, the Oregon Supreme Court held that the lender materially aided the seller under an Oregon statute substantially similar to § 408(b). Adamson, 389 P.2d at 41-42. The undersigned finds that Mr. Sill's conduct in this case is similar enough to that of the defendant in Adamson that this case ought to proceed, as did Adamson, past the pleading stage. Consequently, the undersigned recommends that Mr. Sill's motions to dismiss plaintiffs' claims under § 408(b) of the Oklahoma Securities Act be DENIED.

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III. PLAINTIFFS HAVE SUFFICIENTLY ALLEGED A PRIMA FACIE CASE OF CIVIL CONSPIRACY AGAINST MR. SILL.

Civil conspiracy doctrine is used to enlarge the pool of potential defendants from whom a plaintiff may recover for an underlying tort by making each conspirator liable for all of the acts of his co-conspirators. A civil conspiracy consists of an agreement between two or more persons to do an unlawful act, or to do a lawful act by unlawful means. Unlike its criminal counterpart, however, the agreement does not itself create liability. There must be an agreement, coupled with an intent to commit a fraudulent act which results in injury to the plaintiff. The gravamen of a civil conspiracy claim is the underlying independent tort which harms the plaintiff. Thus, if the underlying tort has not been adequately pled, the conspiracy claim will fail. Gaylord Entertainment Co. v. Thompson, 958 P.2d 128, 148 (Okla. 1998); Brock v. Thompson, 948 P.2d 279, 294 n. 66 67 (Okla. 1998); Wright v. Cies, 648 P.2d 51, 53 n. 2 (Okla.App. 1982); North Texas Production Credit Ass'n v. McCurtain County Nat. Bank, 222 F.3d 800, 815 (10th Cir. 2000);Dill v. City of Edmond, Okl., 155 F.3d 1193, 1208 (10th Cir. 1998).

The existence of an agreement necessary to establish a civil conspiracy claim may be inferred from all relevant facts and circumstances. The question is whether the circumstances, considered as a whole, show that the parties united to accomplish a fraudulent scheme. When the alleged conspiracy is a conspiracy to defraud, such as a conspiracy to violate the securities laws, the elements of the conspiracy must be pied with the particularity required by Fed.R.Civ.P. 9(b). Eastwood v. National Bank of Commerce, 673 F. Supp. 1068, 1082 (W.D. Okla. 1987) (citing several cases). Disconnected circumstances, any of which, or all of which, are just as consistent with lawful purposes as with unlawful purposes, are insufficient to establish a conspiracy. Shadid v. Monsour, 746 P.2d 685, 688-89 (Okla.App. 1987); North Texas Production, 222 F.3d at 815 (citingDill v. Rader, 583 P.2d 496 (Okla. 1978)); Dill, 155 F.3d at 1208.

Containing only a page and a half of analysis relating to the conspiracy claims pled against Ms. Sill, plaintiffs' response briefs are of little help in resolving Mr. Sill's motions to dismiss. See No. 99-862, Doc. No. 261, pp. 14-15. The undersigned finds, however, that plaintiffs have alleged, with detail that satisfies Rule 9(b), the particulars of the underlying securities fraud which CFS and Mr. Jones allegedly perpetrated on plaintiffs. The undersigned also finds that plaintiffs have pled sufficient facts from which it could reasonably be inferred by a jury that Mr. Sill cast his lot with Mr. Jones in a scheme that had no economic purpose other than to permit CFS to defraud plaintiffs. While Mr. Sill may not have been aware of the mechanics of the fraud being perpetrated by CFS, it can be inferred from plaintiffs' allegations regarding the particulars of the transactions he closed with CFS and the trusts that he was

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aware of his involvement in a fraudulent scheme to shuttle money from Mr. Jones to CFS. These type of allegations are at least sufficient to survive a motion to dismiss. See Deere Co. v. Zahm, 837 F. Supp. 346, 350 (D. Kan. 1993) (holding that a complaint which alleges the manner in which a conspiracy to defraud is to be carried out and the role of the defendant in that conspiracy is sufficient to withstand a motion to dismiss). Consequently, the undersigned recommends that Mr. Sill's motions to dismiss plaintiffs' civil conspiracy claims be DENIED.

The MPF plaintiffs in 99-829 request leave to amend to allege a civil conspiracy claim against Mr. Sill. See Doc. No. 255, p. 16. A one-sentence request, such as this, is not, however, a proper motion for leave to amend. Calderon v. Kansas Dept. of Social and Rehabilitation Services, 181 F.3d 1180, 1185-87 (10th Cir. 1999). Consequently, the undersigned declines to addresses MPF's request in this Report and Recommendation.

RECOMMENDATION

For the reasons discussed above and in the Main RR, the undersigned recommends that Mr. Sill's motions to dismiss plaintiffs' aiding and abetting fraud claims under Oklahoma law be GRANTED. See RR Exhibit C, p. 14.

For the reasons discussed above and in the Main RR, the undersigned recommends that Mr. Sill's motions to dismiss plaintiffs' claims under § 408(b) of the Oklahoma Securities Act and plaintiffs' civil conspiracy claims be DENIED.

10 RR EXHIBIT "A" LIST OF PENDING MOTIONS TO DISMISS PLAINTIFFS' COMPLAINTS CFS-RELATED SECURITIES FRAUD LITIGATION PENDING MOTIONS TO DISMISS PLAINTIFFS' COMPLAINTS Sorted by: Defendant Filing/Case Number CASE NUMBER FIRST NAMED PLAINTIFF DOCKET DEFENDANT FILING 1999-CV-828 Bank Hapoalim 122 Arthur Anderson 1999-CV-829 MPF Limited 82 Arthur Anderson 1999-CV-862 American Int'l Life 91 Arthur Anderson 1999-CV-863 Abbey Nat'l 71 Arthur Anderson 1999-CV-864 Cerberus Partners 91 Arthur Anderson 1999-CV-919 Pioneer Ins. 93 Arthur Anderson 1999-CV-943 Bristol Fund 65 Arthur Anderson 2000-CV-104 Bank Austria 62 Arthur Anderson 2000-CV-110 AAA Investment 16 Arthur Anderson 2000-CV-111 AUSA 18 Arthur Anderson 1999-CV-829 MPF Limited 214 Caroline Benediktson 1999-CV-862 American Int'l Life 47 Caroline Benediktson 1999-CV-863 Abbey Nat'l 51 Caroline Benediktson 1999-CV-864 Cerberus Partners 55 Caroline Benediktson 2000-CV-104 Bank Austria 74 Caroline Benediktson 2000-CV-837*** Pioneer Insurance 16 Caroline Benediktson 2000-CV-838*** Bristol Fund 19 Caroline Benediktson 2000-CV-839*** Bank Hapoalim 19 Caroline Benediktson 2000-CV-847 Peoples Benefit 37 Caroline Benediktson 1999-CV-825 AUSA 56 Gertrude Brady 1999-CV-825 AUSA 57 Gertrude Brady 1999-CV-828 Bank Hapoalim 50 Gertrude Brady 1999-CV-829 MPF Limited 40 Gertrude Brady 1999-CV-862 American Int'l Life 44 Gertrude Brady 1999-CV-862 American Int'l Life 56 Gertrude Brady 1999-CV-863 Abbey Nat'l 47 Gertrude Brady 1999-CV-864 Cerberus Partners 48 Gertrude Brady 1999-CV-864 Cerberus Partners 49 Gertrude Brady RR Exhibit A Page 1 of 3 CASE NUMBER FIRST NAMED PLAINTIFF DOCKET# DEFENDANT FILING 1999-CV-873 Bank Austria 40 Gertrude Brady 1999-CV-873 Bank Austria 41 Gertrude Brady 1999-CV-874 AAA Investment 32 Gertrude Brady 1999-CV-874 AAA Investment 33 Gertrude Brady 1999-CV-889 Liberty Mutual Ins. 30 Gertrude Brady 1999-CV-889 Liberty Mutual Ins. 31 Gertrude Brady 1999-CV-919 Pioneer Insurance 29 Gertrude Brady 1999-CV-943 Bristol Fund 24 Gertrude Brady 1999-CV-829 MPF Limited 191 Bruce Hadden 1999-CV-862 American Int'l Life 45 Bruce Hadden 1999-CV-863 Abbey Nat'l 49 Bruce Hadden 1999-CV-864 Cerberus Partners 53 Bruce Hadden 2000-CV-104*** Bank Austria 110 Bruce Hadden 1999-CV-829 MPF Limited 182 Mayer Brown Platt 1999-CV-862 American Int'l Life 89 Mayer Brown Platt 1999-CV-863 Abbey Nat'l 70 Mayer Brown Platt 1999-CV-864 Cerberus Partners 87 Mayer Brown Platt 1999-CV-864 Cerberus Partners 89 Mayer Brown Platt 2000-CV-104*** Bank Austria 108 Mayer Brown Platt 2000-CV-837*** Pioneer Insurance 21 Mayer Brown Platt 2000-CV-838*** Bristol Fund 24 Mayer Brown Platt 2000-CV-839*** Bank Hapoalim 23 Mayer Brown Platt 2000-CV-847*** Peoples Benefit 20 Mayer Brown Platt 1999-CV-829 MPF Limited 210 James Sill 1999-CV-862 American Int'l Life 250 James Sill 1999-CV-863 Abbey Nat'l 192 James Sill 1999-CV-864 Cerberus Partners 245 James Sill 1999-CV-873 Bank Austria 128 James Sill 1999-CV-825 AUSA 54 Mike Temple 1899-CV-828 Bank Hapoalim 52 Mike Temple 1999-CV-829 MPF Limited 54 Mike Temple RR Exhibit A Page 2 of 3 CASE NUMBER FIRST NAMED PLAINTIFF DOCKET# DEFENDANT FILING 1999-CV-862 American Int'l Life 42 Mike Temple 1999-CV-863 Abbey Nat'l 38 Mike Temple 1999-CV-864 Cerberus Partners 51 Mike Temple 1999-CV-873 Bank Austria 43 Mike Temple 1999-CV-874 AAA Investment 30 Mike Temple 1999-CV-889 Liberty Mutual Ins. 33 Mike Temple 1999-CV-919 Pioneer Insurance 31 Mike Temple 1999-CV-943 Bristol Fund 26 Mike Temple *** Denotes motions riled after the close of oral argument on November 3, 2000.

RR Exhibit A Page 3 of 3

DESCRIPTION OF THE CLAIMS BEING ASSERTED AGAINST THE MOVING DEFENDANTS IN THE CFS-RELATED SECURITIES FRAUD CASES

MOVING DEFENDANTS

Federal Securities Claims

See 78jSee 15 U.S.C. § 771See 77oSee 15 U.S.C. § 78t CAUSE OF ACTION AA BENEDIK- BRADY HADDEN MBP SILL TEMPLE TSON § 10(b) of the 1934 99-828 99-829 99-825 99-829 99-825 Act and SEC Rule 10b-5. 99-829 99-862 99-828 99-862 99-828 15 U.S.C. § 98-862 99-863 99-829 99-863 99-829 § (b); and 17 99-863 99-864 99-862 99-864 99- 862 C.F.R. § 240.10b-5. 99-864 00-104 99-863 00-104 99-863 99-919 00-837 99-864 00-837 99-864 99-943 00-838 99-873 00-838 99-873 00-104 00-839 99-874 00-839 99-874 00-110 00-847 99-889 00-847 99-889 00-111 99-919 99-919 99-943 99-943 § 12(a)(2) of the 99-862 99-862 1933 Act. 99-863 99-863 (a)(2). 99-864 99-864 § 15 of the 1933 Act. 99-862 99-862 99-862 15 U.S.C. § 99-863 99-863 99-863 § . 99-864 99-864 99-864 00-104 § 20(a) of the 99-829 99-825 99-825 1934 Act. 99-862 99-828 99-828 (a) 99-863 99-829 99-829 99-864 99-862 99-862 00-104 99-863 99-863 00-837 99-864 99-864 00-838 99-873 99-873 00-839 99-874 99-874 00-847 99-889 99-889 99-919 99-919 99-943 99-943 RR Exhibit B Page 1 of 4

State Securities Claims (Blue Sky Laws)

See See 10-5-14 MOVING DEFENDANTS CAUSE OF ACTION AA BENEDIK BRADY HADDEN MBP SILL TEMPLE -TSON § 408(a)(2)(A) of the 99-829 99-825 99-829 99-825 99-828 Oklahoma 99-829 99-862 99-828 00-837 99-828 Securities Act. 71 99-919 99-863 99-829 00-838 99-829 Okla. Stat. 99-943 99-864 99-862 00-839 99-862 § 408(a)(2)(A). 00-104 99-863 99-863 00-837 99-864 99-864 00-838 99-873 99-873 00-839 99-874 99-874 99-889 99-889 99-919 99-919 99-943 99-943 § 408(b) of the 99-828 99-829 99-825 99-829 99-829 99-829 99-825 Oklahoma 99-829 99-862 99-828 99-862 99-862 99-862 99-828 Securities Act. 71 99-862 99-863 99-829 99-863 99-863 99-863 99-829 Okla. Stat. § 408(b). 99-863 99-864 99-862 99-864 99-864 99-864 99-862 99-864 00-104 99-863 00-104 00-104 99-873 99-863 99-919 00-837 99-864 00-837 99-864 99-943 00-838 99-873 00-838 99-873 00-104 00-839 99-874 00-839 99-874 00-110 00-847 99-889 00-847 99-889 00-111 99-919 99-919 99-943 99-943 §§ 25401 and 25501 99-828 99-828 99-828 of the California Corporation Code §§ 10-5-12 and 00-111 00-847 Georgia Securities Act of 1973 (ING) §§ 2 and 10a 00-111 Illinois Consumer Fraud and Deceptive Business Practice Act, 815 ILCS 505\2 505\10a (Stein Roe) §§ 502.401 and 00-111 00-847 502.503 Iowa Uniform Securities Act (AEGON and AmerUS) §§ 2 and 11, Ch. 93A 00-111 00-847 Massachusetts General Laws (The Liberty Companies) § 1-501 Pennsylvania 00-847 Securities Act of 1972 (Miller Anderson and Morgan Stanley) RR Exhibit B Page 2 of 4

Common Law Fraud and Negligence Claims (Oklahoma)

See MOVING DEFENDANTS CAUSE OF ACTION AA BENEDIK BRADY MADDEN MBP SILL TEMPLE -TSON Common law fraud 99-828 99-829 99-825 99-829 99-825 and deceit. 99-829 99-862 99-828 99-862 99-828 See 76 Okla. Stat. 99-862 99-863 99-829 99-863 99-829 § 2. 99-863 99-864 99-862 99-864 99-862 99-864 99-874 99-863 00-104 99-863 98-919 00-104 99-864 00-837 99-864 99-943 00-837 99-873 00-838 99-873 00-104 00-838 99-889 00-839 99-874 00-110 00-839 99-919 00-847 99-889 00-111 00-847 99-943 99-919 99-943 Aiding and abetting fraud. 99-829 99-829 99-829 99-873 Conspiracy to commit 99-862 99-862 99-862 00-837 99-862 99-862 fraud. 99-863 99-863 99-863 00-838 99-863 99-863 99-864 99-864 99-864 00-839 99-864 99-864 00-104 00-104 00-837 00-838 00-839 Constructive fraud. 15 99-828 99-829 99-828 99-829 99-828 99-829 99-862 99-829 00-837 99-829 OkLa. Stat. § 99-919 99-863 99-862 00-838 99-862 99-943 99-864 99-863 00-839 99-863 00-104 99-864 99-864 00-837 99-873 99-873 00-838 99-919 99-919 00-839 99-943 99-943 Negligence, including 99-828 99-829 99-825 99-829 99-828 negligent 99-829 99-862 99-828 99-862 99-829 misrepresentation and 99-862 99-863 99-829 99-863 99-862 malpractice. 99-863 99-864 99-862 99-864 99-863 99-864 00-104 99-863 00-104 99-864 99-919 00-837 99-864 00-837 99-873 99-943 00-838 99-873 00-838 99-919 00-104 00-839 99-874 00-839 99-943 00-110 00-847 99-889 00-847 00-111 99-919 99-943 RR Exhibit B Page 3 of 4

The claims identified above are asserted in the following complaints:

Case Date Filed Docket Number Original/Amended Number 99-CV-825 09/30/1999 1 Original 99-CV-828 03/15/2000 44 Second Amended 99-CV-829 06/19/2000 111 Third Amended 99-CV-862 01/31/2000 23 Amended 99-CV-863 01/31/2000 22 Amended 99-CV-864 01/31/2000 22 Amended 99-CV-873 10/15/1999 1 Original 99-CV-874 10/15/1999 1 Original 99-CV-889 10/19/2000 1 Original 99-CV-919 03/15/2000 28 Second Amended 99-CV-943 02/09/2000 16 Amended 00-CV-104 10/02/2000 59 Second Amended 00-CV-110 02/07/2000 1 Original 00-CV-111 03/09/2000 12 Amended 00-CV-837 02/16/2001 8 Amended 00-CV-838 02/16/2001 8 Amended 00-CV-839 02/16/2001 15 Second Amended 00-CV-847 12/29/2000 25 Amended RR Exhibit B Page 4 of 4

RR EXHIBIT "C"

SUMMARY OF THE ELEMENTS OF PLAINTIFFS' CLAIMS

CFS-RELATED SECURITIES FRAUD LITIGATION

SUMMARY OF PLAINTIFFS' CLAIMS

TABLE OF CONTENTS

THE FEDERAL SECURITIES CLAIMS 3 § 10(b) OF THE SECURITIES EXCHANGE ACT OF 1934 3 Section 10(b) 3 Rule 10b-5 3 Elements 4 § 12(a)(2) OF THE SECURITIES ACT OF 1933 4 Elements 5 Buyer's Reliance and Seller's Scienter Not Required 5 CONTROL PERSON LIABILITY, § 15 OF THE SECURITIES ACT OF 1933 AND § 20(A) OF THE SECURITIES EXCHANGE ACT OF 1934 6 § 15 of the 1933 Act 6 Control Defined 6 § 20(a) of the 1934 Act 6 Elements 7 THE STATE SECURITIES CLAIMS (Blue Sky Laws) 8 OKLAHOMA SECURITIES ACT 8 Section 101 8 Corollary to § 10(b) of the 1934 Act 8 Section 408(a)(2)(A) 8 Corollary to § 12(a)(2) of the 1933 Act 9 Uniform Act 9 Elements 9 Buyer's Reliance and Seller's Scienter Not Required 10 RR Exhibit C Page 1 Section 408(b) 10 Corollary to § 15 of the 1933 Act and § 20(a) of the 1934 Act 10 Uniform Act 11 Elements 11 Buyer's Reliance and Seller's Scienter Not Required 11 Section 501 11 OTHER STATE BLUE SKY LAWS 11 COMMON LAW FRAUD AND NEGLIGENCE 13 COMMON LAW FRAUD/DECEIT 13 Elements 15 AIDING AND ABETTING FRAUD 14 CONSPIRACY TO COMMIT FRAUD 14 Elements 15 CONSTRUCTIVE FRAUD 15 Elements 16 NEGLIGENCE 16 Negligent Misrepresentation 16 Elements 16 Professional Malpractice 17 Elements 17 RR Exhibit C Page 2

THE FEDERAL SECURITIES CLAIMS

I. § 10(b) OF THE SECURITIES EXCHANGE ACT OF 1934

A. Section 10(b) of the 1934 Act provides as follows:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange —

To use or employ, in connection with the purchase or sale of any security . . ., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j(b) (hereinafter "§ 10(b) of the 1934 Act").

B. Rule 10b-5 — Pursuant to the authority vested in it by § 10(b) of the 1934 Act, the Securities and Exchange Commission ("SEC") has promulgated Rule 10b-5. which provides as follows:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

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(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5 (hereinafter "SEC Rule 10b-5").

C. Elements¹ — plaintiffs must plead and prove the following elements to recover under § 10(b) of the 1934 Act and SEC Rule 10b-5:

1. That the defendant made an untrue statement of material fact, or failed to state a material fact;

2. That the conduct occurred in connection with the purchase or sale of a security;

3. That the defendant made the statement or omission with scienter (i.e., knowingly or recklessly); and

4. That the plaintiff relied on the misrepresentation or omission, and sustained damages as a proximate result of the misrepresentation or omission.

Anixter v. Home-Stake Product Co., 77 F.3d 1215, 1225 (10th Cir. 1996); United Int'l Holdings, Inc. v. The Wharf (Holdings) Ltd., 210 F.3d 1207, 1220 (10th Cir. 2000).

1 Neither § 10(b) nor Rule 10b-5 provide an express civil remedy for their violation. Nevertheless, the United States Supreme Court has held that there is an implied private right of action under Rule 10b-5.See Superintendent of Ins. v. Bankers Life Gas, Co., 404 U.S. 6, 13 n. 9 (1971); and Affiliated Ute Citizens v. United States, 406 U.S. 128, 150-54 (1972).

II. § 12(a)(2) OF THE SECURITIES ACT OF 1933

A. § 12(a)(2) of the 1933 Act provides as follows:

Any person who —

offers or sells a security . . . by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral

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communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission,

shall be liable, subject to subsection (b) of this section, to the person purchasing such security from him

15 U.S.C. § 771(a) (hereinafter "§ 12(a)(2) of the 1933 Act").

B. Elements — plaintiffs must plead and prove the following elements to recover under § 12(a)(2) of the 1933 Act:

1. That the plaintiff purchased a security;

2. That defendant sold the security to plaintiff, or actively solicited plaintiff's purchase of the security to serve his own financial interests or the financial interests of the security's owner;

3. That a prospectus was used to sell the security to plaintiff;

4. That the prospectus, or defendant's oral communication related to the prospectus, contained an untrue statement of a material fact, or omitted to state a material fact necessary in order to make the prospectus or oral communication not misleading; and

5. That the plaintiff was not aware of the untruth or omission at the time he purchased the security.

Gustafson v. Alloyed Co., Inc., 513 U.S. 561, 567-68 (1995); Pinter v. Dahl, 486 U.S. 622 (1988); Joseph v. Wiles, 223 F.3d 1155, 1161 (10th Cir. 2000); MidAmerica Fed. Sav. and Loan Ass'n v. Shearson/American Exp., Inc., 886 F.2d 1249, 1255-57 (10th Cir. 1989).

C. Buyer's Reliance and Seller's Scienter Not Required — Unlike a § 10(b) claim, § 12(a)(2) does not require the plaintiff to allege or prove reliance or the defendant's scienter. Rather, § 12(a)(2) gives the defendant an

RR Exhibit C Page 5

affirmative defense pursuant to which the defendant must prove that he did not know, and could not have known in the exercise of reasonable care, that the prospectus or oral communication was false or misleading. Wertheim Co. v. Codding Embryological Sciences, Inc., 620 F.2d 764, 767 (10th Cir. 1980); Gilbert v. Nixon, 429 F.2d 348, 357 (10th Cir. 1970); Woodward v. Wright, 266 F.2d 108, 116 (10th Cir. 1959).

III. CONTROL PERSON LIABILITY, § 15 OF THE SECURITIES ACT OF 1933 AND § 20(a) OF THE SECURITIES EXCHANGE ACT OF 1934

A. § 15 of the 1933 Act provides as follows:

Every person who . . . controls any person liable under sections [11 or 12 of the 1933 Act], shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.

15 U.S.C. § 77o.

Control Defined for purpose of § 15 of the 1933 Act, the SEC has defined "control" as

[T]he possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.

17 C.F.R. § 230.405.

§ 20(a) of the 1934 Act provides as follows:

Every person who, directly or indirectly, controls any person liable under any provision of this chapter [e.g., § 10(b) of the 1934 Act] or of any rule or regulation thereunder [e.g., SEC Rule 10b-5] shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless

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the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

15 U.S.C. § 78t(a).

Although worded differently, the control person provisions of § 15 and § 20(a) are to be interpreted the same. Maher v. Durango Metals. Inc., 144 F.3d 1302, 1305 n. 7 (10th Cir. 1998).

B. Elements — plaintiffs must plead and prove the following elements to recover under either § 15 of the 1933 Act or § 20(a) of the 1934 Act:

1. That some person committed a primary violation of the securities laws (e.g., a violation of § 10(b) of the 1934 Act or § 12(a)(2) of the 1933 Act); and

2. That the defendant had control over the primary violator.

Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994). There is no requirement that plaintiff prove that the defendant actually or culpably participated in the primary violation — control is sufficient to attach liability. The defendant does, however, have an affirmative defense pursuant to which he must prove lack of culpable participation or knowledge. Maher v. Durango Metals. Inc., 144 F.3d 1302, 1304-1305 (10th Cir. 1998).

RR Exhibit C Page 7

THE STATE SECURITIES CLAIMS (Blue Sky Laws)

IV. OKLAHOMA SECURITIES ACT — the following provisions of the Oklahoma Securities Act were adopted from the American Law Institute's 1956 Uniform Securities Act, as amended in 1958. The Uniform Securities Act has been adopted by 33 other states, Puerto Rico and the District of Columbia. See Uniform Securities Act, 7B U.L.A. § 101, Reference. The Uniform Act was substantially revised in 1985, and amended again in 1988.

A. Section 101 of the Oklahoma Securities Act provides as follows:

It is unlawful for any person, in connection with the offer, sale, or purchase of any security, directly or indirectly

(1) to employ any device, scheme, or artifice to defraud,

(2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misreading,

(3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

Corollary to § 10(b) of the 1934 Act — Section 101 is the Oklahoma corollary to § 10(b) of the 1934 federal Act and SEC Rule 10b-5. See Frederic Dorwart and David W. Holden, An Overview of the Oklahoma Securities Act, 25 Okla. L. Rev. 184, 185-86 (1972) (hereinafter An Overview). The Oklahoma Securities Act does not, however, provide a private cause of action for violations of § 101. Civil liability may only be imposed as provided in § 408 of the Oklahoma Securities Act. 71 Okla. Stat. § 408[ 71-408](k).

B. Section 408(a)(2)(A) of the Oklahoma Securities Act provides as follows:

Any person who:

offers or sells or purchases a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements

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made, in the light of the circumstances under which they are made, not misleading (the other party not knowing of the untruth or omission), and who does not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the untruth or omission, is liable:

in the case of an offer or sale of a security, to the person buying the security from him, who may sue either at law or in equity.

71 Okla. Stat. § 408[ 71-408](a)(2)(A).

1. Corollary to § 12(a)(2) of the 1933 Act — Section 408(a)(2)(A) of the Oklahoma Securities Act is the Oklahoma corollary to § 12(a)(2) of the 1933 federal Act. South Western Oklahoma Development Authority v. Sullivan Engine Works, 910 P.2d 1052, 1058-59 (Okla. 1996); MidAmerica Fed. Sav. and Loan Ass'n v. Shearson/American Exp., Inc., 886 F.2d 1249, 1255 n. 3 (10th Cir. 1989). One major difference exists, however. Section 408(a)(2)(A), unlike § 12(a)(2), does not require the untruth or omission be in a "prospectus or oral communication." Liability under § 408(a)(2)(A) will attach to any material untruth or omission regardless of its means of transmission.

2. Uniform Act — Section 408(a)(2)(A) is virtually identical to § 410(a)(2) of the 1956 Uniform Securities Act, as amended in 1958. The only difference being that Oklahoma has added liability for purchasers as well as offerers and sellers of securities. "The draftsmen of the Uniform Securities Act hoped 'for an interchangeability of federal and state judicial precedence in this very important area.'" An Overview, 25 Okla. L. Rev, at 187 (quoting Draftsmen's Commentary to § 410(a) of the Uniform Securities Act). See also 71 Okla. Stat. § 501[ 71-501] (requiring uniform interpretation of § 408 with the federal securities laws).

3. Elements — plaintiffs must plead and prove the following elements to recover under § 408(a)(2)(A) of the Oklahoma Securities Act:

a. That the plaintiff purchased a security from the defendant;

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b. That the defendant made an untrue statement of material fact or omitted to state a material fact necessary to make the statements made not misleading; and

c. That the plaintiff was not aware of the untruth or omission at the time he purchased the security from defendant.

Sullivan Engine Works, 910 P.2d at 1056 n. 1; MidAmerica, 886 F.2d at 1249.

4. Buyer's Reliance and Seller's Scienter Not Required — Unlike a § 10(b) claim, but like a § 12(a)(2) claim, § 408(a)(2)(A) does not require the plaintiff to allege or prove reliance or the defendant's scienter. Like § 12(a)(2), § 408(a)(2)(A) gives the defendant an affirmative defense pursuant to which the defendant must prove that he did not know, and could not have known in the exercise of reasonable care, that his statements were false or misleading. See Buford White Lumbar Co. Profit Sharing Plan Trust v. Octagon Properties, Ltd., 740 F. Supp. 1553, 1569 n. 7 (W.D. Okla. 1989).

C. Section 408(b) of the Oklahoma Securities Act provides as follows:

Every person who materially participates or aids in a sale or purchase made by any person liable under [§ 408(a)(2)]. or who directly or indirectly controls any person so liable, shall also be liable jointly and severally with and to the same extent as the person so liable, unless the person who so participates, aids or controls, sustains the burden of proof that he did not know, and could not have known, of the existence of the facts by reason of which liability is alleged to exist.

71 Okla. Stat. § 408[ 71-408](b).

1. Corollary to § 15 of the 1933 Act and § 20(a) of the 1934 Act — Section 408(b) of the Oklahoma Securities Act is the Oklahoma corollary to § 15 of the 1933 federal Act and § 20(a) of the 1934 federal Act. One major difference exists, however. Section 408(b), unlike § § 15 and 20(a), imposes liability for those that "materially participate or aid" in a securities sale made by a primary violator, as well as imposing liability on those who control a primary violator who sells a security. See South Western

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Oklahoma Development Authority v. Sullivan Engine Works, 910 P.2d 1052, 1058-59 (Okla. 1996); Wilson v. Al McCord Inc., 858 F.2d 1469, 1474 (10th Cir. 1988).

2. Uniform Act — Section 408(b) is substantially similar to § 410(b) of the 1956 Uniform Securities Act, as amended in 1958. See 71 Okla. Stat. § 501[ 71-501].

3. Elements — in the context of this case, plaintiffs must plead and prove the following elements to recover under § 408(b) of the Oklahoma Securities Act:

a. That some person committed a primary violation of § 408(a) (e.g., § 408(a)(2)(A)); and

b. That the defendant either (i) materially participated or aided in the sale of securities by the primary violator, or (ii) had control over the primary violator.

Sullivan Engine Works, 910 P.2d 1052, 1055-58; Nikkel v. Stifel, Nicolaus Co., Inc., 542 P.2d 1305, 1309 (Okla. 1975).

4. Buyer's Reliance and Seller's Scienter Not Required — § 408(b) does not require the plaintiff to allege or prove reliance or the defendant's scienter. However, § 408(b) does give the defendant an affirmative defense pursuant to which the defendant must prove that he did not know, and could not have known in the exercise of reasonable care, of the facts that formed the basis for the primary violator's liability. See Buford White Lumbar Co. Profit Sharing Plan Trust v. Octagon Properties, Ltd., 740 F. Supp. 1553, 1569 n. 7 (W.D. Okla. 1989).

D. Section 501 of the Oklahoma Securities Act provides as follows:

This [Oklahoma Securities Act] shall be so construed as to effectuate its general purpose to make uniform the law of those states which enact it and to coordinate the interpretation and administration of this act with the related federal regulation.

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71 Okla. Stat. § 501[ 71-501]. Thus, the Court should interpret § 408 of the Oklahoma Securities Act in light of the relevant portions of the 1933 and 1934 federal securities acts, and in light of the interpretations given to similar provisions by jurisdictions also adopting the Uniform Securities Act.

V. OTHER STATE BLUE SKY LAWS — plaintiffs have also asserted claims under the Blue Sky Laws of California, Georgia, Illinois, Iowa, Massachusetts and Pennsylvania. The statutory provisions in these states are substantially similar to the federal and Oklahoma securities laws discussed above. The undersigned will not, therefore, cite all of the relevant provisions of these states' statutes. If a particular statute becomes relevant during the discussion of a particular defendant's argument or motion, the relevant language of the particular statute will then be recited.

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COMMON LAW FRAUD AND NEGLIGENCE CLAIMS (OKLAHOMA)

VI. COMMON LAW FRAUD/DECEIT — the basic elements of common law fraud and deceit are identical under Oklahoma law. See, e.g., 15 Okla. Stat. § 58[ 15-58]; 76 Okla. Stat. § 3[ 76-3]; OUJI 2d, Chapter 18 (providing identical jury instructions under Oklahoma law for fraud and deceit).² See also Cooper v. Parker-Hughey, 894

2 Oklahoma's deceit statutes provide as follows:

One who willfully deceives another, with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers.

76 Okla. Stat. § 2[ 76-2].

A deceit, within the meaning of [76 Okla. Stat. § 2[ 76-2]], is either:

1. The suggestion, as a fact, of that which is not true by one who does not believe it to be true.

2. The assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true.

3. The suppression of a fact by one who is bound to disclose it, or who gives information of other facts which are likely to mislead for want of communication of that fact; or,

4. A promise, made without any intention of performing.
76 Okla. Stat. § 3[ 76-3].
In connection with the execution of contracts, Oklahoma defines actual fraud as follows:

Actual fraud . . . consists in any of the following acts, committed by a party to the contract, or with his connivance, with intent to deceive another party thereto, or to induce him to enter into the contract:

1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true.

2. The positive assertion in a manner not warranted by the information of the person making it, of that which is not true, though he believe it to be true.

3. The suppression of that which is true, by one having knowledge or belief of the fact.

4. A promise made without any intention of performing it; or,
5. Any other act fitted to deceive.
15 Okla. Stat. 58.

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P.2d 1096, 1100 (Okla. 1995); and Nutt v. Carson, 340 P.2d 260, 263 (Okla. 1959) (both recognizing the tort of fraud and deceit as synonymous).

A. Elements — plaintiffs must plead and prove the following elements to recover under the tort of fraud:

1. That the defendant made a material representation;

2. That the representation was false;

3. That defendant made the representation when he knew the representation was false, or made the representation as a positive assertion recklessly, without any knowledge of its truth;

4. That defendant made the representation with the intention that it should be acted upon by plaintiff;

5. That plaintiff acted in reliance on the representation; and

6. That plaintiff suffered injury as a result of the representation.

OUJI 2d 18.1; Whitson v. Oklahoma Farmers Union Mut. Ins. Co., 889 P.2d 285, 287 (Okla. 1995); McCain v. Combined Communications Corp., 975 P.2d 865, 867 (Okla. 1988).

VII. AIDING AND ABETTING FRAUD — the undersigned agrees with the Western District of Oklahoma and finds no authority in Oklahoma for recognizing a common law claim for aiding and abetting fraud. See Eastwood v. National Bank of Commerce, 673 F. Supp. 1068, 1081 (W.D. Okla. 1987). The undersigned recommends, therefore, that the common law aiding and abetting claims in 99-CV-829(MPF) and 99-CV-873 (Bank Austria) be dismissed, pursuant to Fed.R.Civ.P. 12(b)(6), for failure to state a claim upon which relief can be granted.

VIII. CONSPIRACY TO COMMIT FRAUD — A civil conspiracy consists of a combination of two or more persons to do an unlawful act, or to do a lawful act by unlawful means. Unlike its criminal counterpart, civil conspiracy itself does not create liability. To be liable the conspirators must pursue an independently unlawful purpose or use an independently unlawful means. There can be no civil conspiracy where the act complained of, and the means employed, are lawful. A conspiracy between two or more persons to injure another is not enough; an

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underlying unlawful act is also necessary. In essence, a civil conspiracy claim enlarges the pool of potential defendants from whom a plaintiff may recover for an underlying tort.

A. Elements — plaintiffs must plead and prove the following elements to recover under the tort of civil conspiracy to commit fraud:

1. That there is an agreement, express or implied, between defendants;

2. To commit a fraud;

3. Which damaged plaintiff.

The conspirators' agreement may be established by direct or circumstantial evidence. However, unless there is direct evidence of an agreement, the conspirators' agreement must be established by clear and convincing evidence. Brook v. Thompson, 948 P.2d 279, 294 (Okla. 1997); Shadid v. Monsour, 746 P.2d 685, 689 (Okla.App. 1987); Dill v. Rader, 583 P.2d 496 (Okla. 1978); Wright v. Cies, 648 P.2d 51, 52-53 n. 2 (Okla.App. 1982).

IX. CONSTRUCTIVE FRAUD — "Fraud, a generic term with multiple meanings is divided into actual fraud and constructive fraud. Actual fraud is the intentional misrepresentation or concealment of a material fact which substantially affects another person. Constructive fraud, a breach of either a legal or equitable duty, does not necessarily involve any moral guilt, intent to deceive, or actual dishonesty of purpose. It may be defined as any breach of a duty which, regardless of the actor's intent, gains an advantage for the actor by misleading another to his prejudice." Patel v. OMH Medical Center, Inc., 987 P.2d 1185, 1199 (Okla. 1999) (footnotes omitted).³ A constructive fraud does not require an intent to deceive, and liability for constructive fraud may be based on negligent or even innocent misrepresentation. Nevertheless, a constructive fraud must be based on the breach of some legal or equitable duty owed to the plaintiff. For instance, where one has a duty to speak, but remains silent, he may be guilty of constructive fraud, even if he had no intent to mislead. Thus, even an innocent misrepresentation may constitute constructive fraud where there is an underlying right to be correctly informed of the facts. Constructive

3 In its law of contracts, Oklahoma has statutorily defined constructive fraud as "any breach of duty which, without an actually fraudulent intent, gains an advantage to the person in fault, or anyone claiming under him, by misleading another to his prejudice, or to the prejudice of anyone claiming under him" 15 Okla. Stat. § 59[ 15-59].

RR Exhibit C Page 15

fraud has the same legal consequence as actual fraud. Patel, 987 P.2d at 1199.

A. Elements — plaintiffs must plead and prove the following elements to recover under the tort of constructive fraud:

1. That the defendant owed plaintiff a duty of full disclosure. This duty could be part of a general fiduciary duty owed by the defendant to the plaintiff. This duty could also arise, even though it might not exist in the first instance, once a defendant voluntarily chooses to speak to plaintiff about a particular subject matter;

2. That the defendant misstated a fact or failed to disclose a fact to plaintiff;

3. That the defendant's misstatement or omission was material;

4. That plaintiff relied on defendant's material misstatement or omission; and

5. That plaintiff suffered damages as a result of defendant's material misstatement or omission.

MSA Tubular Products, Inc. v. First Bank and Trust Company, 869 F.2d 1422, 1424-25 (10th Cir. 1989); Faulkenberry v. Kansas City Southern Ry. Co., 602 P.2d 203, 206 n. 6 (Okla. 1979); Silver v. Slusher, 770 P.2d 878, 882 n. 11 (Okla. 1988); Uptegraft v. Dome Petroleum Corp., 764 P.2d 1350 (Okla. 1988); Gentry v. American Motorist Ins. Co., 867 P.2d 468 (Okla. 1994); Buford White Lumber Co. v. Octagon Properties, Ltd., 740 F. Supp. 1553 (W.D. Okla. 1989). Roberts Ranch Co. v. Exxon Corp., 43 F. Supp.2d 1252, 1259 (W.D. Okla. 1997).

X. NEGLIGENCE

A. Negligent Misrepresentation

1. Elements — plaintiffs must plead and prove the following elements to recover under the tort of negligent misrepresentation:

a. That defendant owed a duty of care to plaintiff;

b. That defendant made a misrepresentation to plaintiff;

RR Exhibit C Page 16

c. That defendant was negligent (i.e., failed to exercise ordinary care) in making the misrepresentation;

d. That plaintiff reasonably relied to his detriment on the misrepresentation and

e. That plaintiff suffered damages as a proximate result of defendant's misrepresentation.

Ragland v. Shattuck Nat'l Bank, 36 F.3d 983, 991 (10th Cir. 1994).

B. Professional Malpractice

1. Elements — plaintiffs must plead and prove the following elements to recover under the tort of negligent misrepresentation:

a. That defendant owed plaintiff a duty as a professional;

b. That defendant breached its duty to plaintiff by failing to exercise the ability, skill and care customarily exercised by those in the same profession under similar circumstances;

c. That defendant suffered damages as a proximate result of defendant's breach of professional duty.

Whitehead v. Rainey, Ross, Rice Binns, 997 P.2d 177 (Okla.App. 1999); Buford White Lumber Co. Profit Sharing and Sav. Plan Trust v. Octagon Properties, Ltd., 740 F. Supp. 1553, 1570 (W.D. Okla. 1989).

RR Exhibit C Page 17

RR EXHIBIT "D"

RR EXHIBIT "E"

TABLE OF CONTENTS

Page

SUMMARY 1

RISK FACTORS 12

THE ISSUER AND GTD 19

THE TRUSTEE 20

THE LOANS 21

CERTAIN LOAN CHARACTERISTICS 25

WEIGHTED AVERAGE LIFE OF THE NOTES 32

USE OF PROCEEDS 32

THE WAREHOUSE FACILITY 32

THE SELLER AND THE SERVICER 32

THE BACKUP SERVICER 33

THE INTEREST RATE CAP PROVIDER 33

DESCRIPTION OF THE NOTES 33

CERTAIN INFORMATION REGARDING THE NOTES 40

DESCRIPTION OF THE SALE AND SERVICING AGREEMENT 44

CERTAIN LEGAL ASPECTS OF THE LOANS 56

CERTAIN FEDERAL INCOME TAX CONSEQUENCES 58

CERTAIN STATE TAX CONSEQUENCES 59

ERISA CONSIDERATIONS 60

PLAN OF DISTRIBUTION 61

LEGAL OPINIONS 62

INDEX OF TERMS TERMS 63

vii

EXHIBIT A — Form of Representation Letter A-1

EXHIBIT B — Global Clearance, Settlement and Tax Documentation Procedures B-1

EXHIBIT C — Audited Financial Statements of Commercial Financial Services, Inc. C-1

EXHIBIT D — Cash Flow Model D-1

EXHIBIT E — Notional Amount Schedule E-1

viii SUMMARY

This summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Private Placement Memorandum. Certain capitalized terms used in the Summary are defined elsewhere in this Private Placement Memorandum. Class A-1 Notes Class A-2 Notes Notes Indenture Seller" Issuer GTD CFS Servicer Trustee Backup Servicer" Placement Agent Interest Rate Cap Provider Closing Date Cutoff Date Expected Final Distribution Date Final Distribution Date

Securities Offered $88,000,000 aggregate principal amount of 7.85% Fixed Rate Class A-1 Asset Backed Notes, Series 1997-4 (the "") and $88,000,000 aggregate principal amount of Floating Rate Class A-2 Asset Backed Notes, Series 1997-4 (the "" and together with the Class A-1 Notes. the "" pursuant to an Indenture (the "") dated as of August 6, 1997, between Issuer and Trustee. Seller Commercial Financial Services, Inc., an Oklahoma corporation (the ") See "The Seller and the Servicer." Issuer CF/SPC SMART, Inc., a bankruptcy-remote, special purpose Oklahoma corporation (the ""). After giving effect to the transactions contemplated to occur on the Closing Date, the Issuer will be a wholly-owned subsidiary of CF/SPC GTD, Inc. See "The Issuer". GTD, Inc. CF/SPC GTD. Inc. a bankruptcy-remote, special purpose Oklahoma corporation and wholly-owned subsidiary of the Seller ("") Servicer Commercial Financial Services, Inc. ("" or, in its capacity as the servicer, the ""). See "The Seller and the Servicer." Trustee Bankers Trust Company (in its capacity as the trustee, the ""). See "Description of the Notes — The Trustee." Backup Servicer Bankers Trust Company (in its capacity as the backup servicer, the " See "The Backup Servicer." Placement Agent Chase Securities Inc. (in its capacity as placement agent, the " "). Interest Rate Cap Provider The Chase Manhattan Bank (in its capacity as interest rate cap provider, the ""). See "The Interest Rate Cap Provider." Closing Date On or about August 6, 1997 (the""). Cutoff Date June 30, 1997 (the ""). The Loans that comprise the pool were fixed as of the Cutoff Date. Expected Final Distribution Date September 17, 2001 (the "") Final Distribution Date February 15, 2005 (the "")

1

Description of the Notes The Issuer will issue the Class A-1 Notes in an aggregate principal amount of $88,000,000 and the Class A-2 Notes in an aggregate principal amount of $88,000,000. The aggregate principal amount of the Class A-1 Notes outstanding at any tune will be called the "Class A-1 Note Balance" and the aggregate principal amount of the Class A-2 Notes outstanding at attune will be called the "Class A-2 Note Balance" and the Class A-1 Note Balance and Class A-2 Note Balance together, the "Note Balance." For purposes of voting Notes held by the Seller, the Issuer or any affiliate thereof will not be included as part of the Note Balance. The Notes will be issued in minimum denominations of $100,000 and generally in integral multiples of $1,000 in excess thereof. The property of the Issuer pledged under the Indenture will include of the Loans and all monies received thereunder after the Cutoff Date. (ii) the other assets related to the Loans and books and records, if any. related to the Loans. (iii) the Owned Accounts and a security interest in the Reserve Account and all funds on deposit therein. (iv) rights under the Sale and Servicing Agreement. (v) rights under the Interest Rate Cap, and (vi) all proceeds of the foregoing. On the Closing Date, all of the Issuer's rights and benefits with respect to the foregoing properties will be pledged by the Issuer to the Trustee for the benefit of the Noteholders pursuant to the Indenture. See "Description of the Notes — The Indenture." Registration of the Notes The Notes will initially be represented by one or more notes registered in the name of Cede Co. ("Cede") as nominee of the Depository Trust Company ("DTC"). No person acquiring a beneficial ownership interest in the Notes, a "Note Owner") will be entitled to receive a Definitive Note, except under the limited circumstances described under "Certain Information Regarding the Notes — Definitive Notes" Unless and until the Notes are issued in definitive form, all references herein to distributions, notices, reports and statements and to actions by and effects upon the related Noteholders will refer to the same actions and effects with respect to DTC or Cede, as the case mat be, for the benefit of the related Note Owners in accordance with DTC procedures. See "Certain Information Regarding the Notes — Book Entry Registration. The Loans The loans will consist of a pool of receivables (together with any replacement therefor, the "Loan") due from obligors that arose connection with credit card transactions entered into by or on behalf of such obligors (including the right to receive all pavements under such receivables after the Cutoff Date, which receivables have previously become defaulted and have been purchased by the Seller, the Warehouse Buyer or another analyze of the Seller from specified Sellers. On the Closing Date, the Seller will sell or contribute, as applicable, its Loans, together with the Loans acquired by the Seller from the Warehouse Buyer and the Seller's other affiliates. to the Issuer, pursuant to a Sale and Servicing Agreement (the "Sale and Servicing Agreement") dated at of August 6, 1997, among the Issuer, CFS, as Seller and Servicer, the Backup Servicer and the Trustee. As of the Cutoff Date, the ECR of the Loans is approximately $319,319,742. A portion of the Loans have been securities in two previous transactions sponsored by CFS; as of the Cutoff Date, such Loans included Non-Performing Loans, the ECR of which was approximately $37,401,204 (which represents approximately 12.54% of the ECR of all Non-Performing Loans) and Performing Loans, the Payoff Balance of which was approximately $31,020,511 (which represents approximately 84.40% of the

2

ECR Payoff Balance Payoff Balance of all Performing Loans) Such Loans were acquired by CFS or one of its affiliates in connection with the redemption of securities issued in that securitization transaction. See "The Loans' and "Certain Loan Characteristics." ECR The estimate of the Servicer as of any date of the total of all cash to be recovered from the Loans (not including future interest accruals on Loans) assuming that no Loan that is a Non-Performing Loan on such date will become a Converted Loan ("ECR"). See "The Loans." ECR Payoff Balance As of any date for any Loan, the ECR as of the Cutoff Date of such Loan minus the amount of all payments received with respect to such Loan on or prior to such date (""). See "The Loans." Performing Loan Any Loan for which the obligor and the Servicer have reached agreement as to a repayment schedule desired to retire the obligation by monthly payments made by the obligor ("Performing Loan"). See "The Loans." The obligor of a Performing Loan may not have made any payments to the Servicer on such Loan. The Servicer may, from time to time, in accordance with the Credit and Collection Policy, modify the terms of a Performing Loan. As of the Cutoff Date, the Payoff Balance of the Performing Loans was approximately $36,756,075. Performing Loan Any Loan for which there is a payoff balance and (x) for which, as of the Cutoff Date the obligor and the Servicer have not reached agreement on a repayment schedule desired to retire the obligation by monthly payments made by the obligor or (y) becomes a defaulted loan after the Cutoff Date and is classified — a Non-Performing Loan in accordance with the Credit and Collection Policy ("Non-Performing Loan"). Non-Performing Loan A Performing Loan or Converted Loan becomes defaulted under the Credit and Collection Policy in most cases when a payment representing at least 94% of any agreed and approved installment payment is not in which by the obligor for 180 days from the date still payment is due under the payment plan established by the Servicer and such obligor. In situations where such a 94% payment has been mule within such 180-day period or negotiations with an obliger for the resolution of such a delinquency are pending on the 150th day since payment, the Credit and Collection Policy may, under certain circumstances. permit' the deferral of the classification of a loan as a Non-Performing Loan for another 180 days. See "The Loans." As of the Cutoff Date, the ECR of the Non-Performing Loans was approximately $295,147,530 Converted Loan Any Loan designated as a Non-Performing Loan as of the Cutoff Date, which, subsequent to the Cutoff Date, becomes a Performing Loan ("Converted Loan"). See "The Loans." Interest Rates The Class A-1 Notes will accrue interest at 7.85% per annum (the "Class A-1 Interest Rate") and the Class A-2 Notes will accrue interest at a rate of 1.50% per annum above LIBOR detained on the related LIBOR Determination Date (the "Class A-2 Interest Rate" and, each tithe Class A-1 Interest Rate and the Class A-2 Interest Rate, an "interest Rate").

3

Business Day Monthly Period Liquidation Proceeds Distribution and Payments of interest and principal on the Notes will be made monthly on the Determination Dates 15th day of each month, or, if any such day is not a Business Day, on the next succeeding Business Day (each, a "Distribution Date"), commencing August 15, 1997. Payments will be made to holders of record of the Notes (the "Noteholders") as of the related Determination Date. A "" is a day other than a Saturday. a Sunday or a day on which banking institutions or trust companies in the cities of New York, New York or Tulsa, Oklahoma are authorized by law, regulation or executive order to be closed. A "" with respect to a Distribution Date will be the calendar month immediately preceding the month in which such Distribution Date occurs and with respect to a Determination Date will be the calendar month ending on such Distribution Date (such calendar month being referred to is the "related" Monthly Period with respect to such Distribution Date or Determination Date). The "Determination Date" with respect to any Monthly Period will be the last calendar day in such Monthly Period. Total Available Amount With respect to a Distribution Date, the suns of the following amounts with respect to the related Monthly Period (the "Total Available Amount"): (i) all collections on the Loans (other than Non-Performing Loans) received during such Monthly Period, (ii) Liquidation Proceeds received during such Monthly Period, (iii) the Warranty Payment or the Administrative Purchase Payment for each Loan that was reassigned to the Seller or purchased by the Servicer during such Monthly Period, (iv) all earnings on the Reserve Account during such Monthly Period and (v) all other immediately available funds on deposit in the Collection Account (with respect to the related Monthly Period) immediately prior to such Distribution Date. "" means the aggregate amount received with respect to a Non-Performing Loan in any manner with respect to the liquidation of such Loan or other property acquired by the Issuer with respect to such Loan and all proceeds thereof, other than monies in the Owned Accounts or the Reserve Account. Interest Each Class A-1 Note represents the right to receive interest at the Class A-1 Interest Rate. Interest on the Class A-1 Notes (the "Class A-1 Monthly Interest") will be paid on each Distribution Date to the holders of the Class A-1 Notes of record on the related Determination Date. to the extent of amounts on deposit and available therefor an the Note Distribution Account. With respect to each Distribution Date (other than the initial Distribution Date) interest on the Class A-1 Notes will accrue front and including the preceding Distribution Date to but excluding such Distribution Date, in an amount equal to the product of (a) the Class A-1 Interest Rate, multiplied by (b) 1/12. multiplied by (c) the Class A-1 Note Balance as of the preceding Distribution Date (after giving effect to any distributions of principal on such preceding Distribution Date). The Class A-1 Monthly Interest payable on the first Distribution Date will accrue on the Class A-1 Note Balance as of the Closing Date at the Class A-1 Rate from and including the Closing Date and will be $172,700.00

4

Each Class A-2 Note represents the right to receive interest at the Class A-2 Interest Rate determined on the related LIBOR Determination Date, interest on the Class A-2 Notes (the "Class A-2 Monthly Interest") will be paid on each Distribution Date to the holders of the Class A-2 Notes of record on the related Determination Date, to the extent of amounts on deposit and available therefor in the Note Distribution Account. With respect to each Distribution Date (other than the initial Distribution Date) Class A-2 Monthly Interest will accrue from and including the preceding Distribution Date to but excluding such Distribution Date (each such period, a "Class A-2 Interest Accrual Period") in an amount equal to the product of(a) the Class A-2 Interest Rate, multiplied by (b) a fraction, the numerator of which is the actual number of days in the related Class A-2 Interest Accrual Period and the denominator of which is 360, multiplied by (c) the Class A-2 Note Balance as of the preceding Distribution Date (after giving effect to any distributions of principal on such preceding Distribution Date). The Class A-2 Monthly Interest payable on the first Distribution Date will accrue on the Class A-2 Note Balance as of the Closing Date at the Class A-2 Interest Rate from and including the Closing Date and will be $156,860.00. "LIBOR Determination Date" means August 4, 1997 with respect to the first Distribution Date, and the second London business day prior to the commencement of the second and each subsequent Class A-2 Interest Accrual Period. The failure to pay the Noteholders' Interest Distributable Amount in full on any Distribution Date due to the insufficiency of amounts on deposit in the Note Distribution Account which are distributable as Interest on the Notes will not constitute a Servicer Default under the Sale and Servicing Agreement or an Event of Default under the Indenture. See "Risk Factors." Payments under the Interest Rate Cap will not be available to pay interest or principal on the Class A-1 Notes. To the extent that the Class A-1 Interest Rate exceeds 8.43% (the "Cap Rate"), the Class A-2 Noteholders will be entitled to receive, and must rely solely on, a payment wider the Interest Rate Cap for the portion of Class A-2 Monthly Interest which is attributable to the portion of the Class A-2 Interest Rate in excess of the Cap Rate. Payments under the Interest Rate Cap will be bind upon the amortizing notional amount schedule set forth in Exhibit B hereto (the "National Amount Schedule"). The National Amount Schedule may from time to time be reduced (i) to the extent the national amount exceeds the Class A-2 Note Balance or (ii) upon receipt of confirmation from each Rating Agency that such reduction will not result in the downgrade, withdrawal or suspension of the then-current rating of the Class A-2 Notes. There can be no assurance that the notional amount of the Interest Rate Cap from time to time will equal or exceed the Class A-2 Note Balance. In the event the notional amount of the Interest Rate Cap is less than the Class A-2 Note Balance at a time when the Class A-2 Interest Rate is greater than the Cap Rate, a shortfall an Class A-2 Monthly Interest would occur. The Reserve Account will not be used to cover any shortfall an amounts available to pay Class A-2 Monthly Interest due to the insufficiency of, or failure to receive, any payment under the Interest Rate Cap. See "Description of the Notes — Interest on the Notes" mid "Description of the Sale and Servicing Agreement" The failure of the Interest Rate Cap Provider to make such payments or for such payments to be sufficient to pay interest on the Class A-2 Notes in excess of the Cap Rate will not constitute a Servicer Default under the Sale and Servicing Agreement or an Event of Default under the Indenture. Recourse for failure of the Interest Rate Cap Provider in make

5

required payments under the Interest Rate Cap is limited solely to the Interest Rate Cap Provider as provided in the Interest Rate Cap and not to the Issuer or the Indenture Property. See "Risk Factors — Interest Rate Cap Risk." Principal Principal of the Notes will be paid monthly on each Distribution Date to the extent of the Total Available Amount remaining after payments of the Administrative Distributions and the Noteholders' Interest Distributable Amount ("Available Principal"). Principal will be paid to the Noteholders until the Note Balance has been reduced to zero. Available Principal will be allocated to the Class A-1 Notes and the Class A-2 Notes based on the Class A-1 Percentage and the Class A-2 Percentage, respectively. "Class A-1 Percentage" means, with respect to any Business Day, the percentage equivalent of a fraction, the numerator of which is the Class A-1 Note Balance and the denominator of which is the Note Balance, in each case as of the end of the preceding Business Day. "Class A-2 Percentage" means, with respect to any Business Day, the percentage equivalent of a fraction, the numerator of which is the Class A-2 Note Balance and the denominator of which is the Note Balance, in each case as of the end of the preceding Business Day. See "Description of the Notes — Principal" and "Description of the Sale and Servicing Agreement' Optional Redemption The Notes may be redeemed, subject to certain provisions in the Sale and Servicing Agreement in whole, but not in part. on any Distribution Date on which the Note Balance (after taking in to account all other distributions to be made on such Distribution Date) is 10% or less of the initial Note Balance and the Seller exercises its option to purchase the Indenture Property (other than the Owned Accounts, the Interest Rate Cap and the Reserve Account) at a redemption price which is not less than the greatest of (a) the aggregate ECR Payoff Balances of all such Loans, (b) the Note Balance and all accrued but unpaid interest on the Notes as of the Distribution Date related to the Monthly Period in which such deposit occurs, and (c) the fair market value of all such Loans. See "Description of the Notes" Event of Default; Upon the occurrence of an Event of Default under the Indenture, the Notes Mandatory Redemption may, at the direction of the Noteholders of the requisite percentage of the Note Balance, be accelerated and subject to immediate payment at par, plus accrued and unpaid interest thereon at the applicable Interest Rate. See "Description of the Transaction Documents — The Indenture — Events of Default; Rights Upon Event of Default." Servicer Defaults Upon the occurrence of a Servicer Default, (a) the Noteholders of at least 75% of the Note Balance may terminate all of the rights and obligations of the Servicer under the Sale and Servicing Agreement and (b) 100% of the Noteholders may direct the Trustee to sell the Loans. See "Description of the Sale and Servicing Agreement" and "The Indenture." Purchases of Certain The Seller will be obligated to accept reassignment of any Loan if the interest Loans of the Issuer or the Trustee in the Loans is materially and adversely affected by a breach of any representation or warranty made by the Seller with respect to the Loan and such breach has not been cured following discovery of such breach by the Seller or following notice of such breach received by the Seller

6

subject to certain cure periods. In addition, the Servicer will be obligated to purchase any Loan materially and adversely affected by a breach by the Servicer of certain of its servicing obligations, subject to certain cure periods. See "Description of the Sale and Servicing Agreement — Representations and Warranties as to the Loans Reserve Account An account (the "Reserve Account") will be established with an initial deposit (the "Reserve Account Initial Deposit") by CF/SPC GTD, Inc. ("GTD"), a limited-purpose, bankruptcy-remote wholly-owned subsidiary of CFS. on the Closing Date of cash or eligible investments having a value of $5,405,000 as of the Closing Date. The Reserve Account will be established by GTD and will be pledged to the Issuer by GTD and then to the Trustee for the benefit of the Noteholders by the Issuer. Funds will be withdrawn front the Reserve Account on each Distribution Date. first, in an amount of up to $125,000 to pay any expenses and costs of the Trustee in connection with the appointment of a successor Servicer and the transfer relating thereto and, second, to be deposited in the Note Distribution Account for distribution to the Noteholders to the extent that the sum of the Total Available Amount resuming after Administrative Distribution for such Distribution Date is less than the Noteholders' Interest Distributable Amount for such Distribution Date. On the Final Distribution Date, any amounts remaining on deposit in the Reserve Account will be transferred to the Note Distribution Account to the extent necessary to repay the Note Balance. See "Description of the Sale and Servicing Agreement — Reserve Account Transfers and Deposits by the Interest Rate Cap Providers." Unless an event of Default or a Servicer Default has occurred and is continuing. amounts in the Reserve Account on any Distribution Date (after giving effect to all distributions to be made on such Distribution Date) in excess of the Reserve Account Specified Balance for such Distribution Date will be released to GTD. The "Reserve Account Specified Balance" with respect to any Distribution Date will be equal to the greater of (a) $475,000 and (b) 8.0% of the Note Balance as of such Distribution Date (after giving effect to all distributions on such date) plus $125,000. On each Distribution Date, a deposit (the "Required Reserve Account Deposit") will be made in an amount necessary to increase the balance of the Reserve Account to $350,000 to the extent, if any, of the Total Available Amount remaining after required payments are made on such Distribution Date to the Trustee, the Servicer and the Backup Servicer. All amounts remaining no deposit in the Reserve Account following payment of the Note Balance plus accrued but unpaid interest on the Notes as of such date and all Administrative Distributions will be released front the lien of the Indenture. Collection Account An account will be established in the name of the Trustee (the "Collection Account") for the benefit of the Noteholders. Each obligor on a Loan will be instructed by the Servicer to remit all payments in respect of such Loan directly to the Lock-Box Account maintained with the Lock-Box Bank. The Servicer will agree to deliver to the Lock-Box Bank for deposit unto the Lock-Box Account all payments from obligors that are received and identified directly by the Servicer relating to the Loans (other than Loans reassigned to the Seller or

7

assigned to the Servicer and paid for by the appropriate person) and all Liquidation Proceeds within one Business Day after receipt thereof by the Servicer. The Lock-Box Bank will remit to the Collection Account on a daily basis all collections received in the Lock-Box Account with respect to the Loans in immediately available funds. Pursuant to the Sale and Servicing Agreement, the paying agent thereunder (the "Paying Agent") will, on each Distribution Date, make the following distributions from the Collection Account in the following order of priority (i) to the Servicer, to the extent of the Total Available Amount, an amount equal to the aggregate amount of all amounts owed to obligors on account of payments received in excess of amounts due with respect to the Loans of such obligors as identified in the Monthly Statement. (ii) to the Trustee, to the extent of the Total Available Amount (as such amount has been reduced by the distributions described in (i) above), the sum of (x) an amount equal to the Trustee Fee and any unpaid Trustee Fees from prior Monthly Periods, plus (y) an amount equal to all other reasonable expenses of the Trustee including, to the extent not reimbursed through the Reserve Account, the expenses and costs associated with the appointment of a successor Servicer and the transition relating thereto (which expenses and costs, including any amount reimbursed through the Reserve Account, shall not exceed $125,000) reimbursable by the Issuer as provided in the Sale and Servicing Agreement; (iii) to the Backup Servicer, to the extent of the Total Available Amount (as such amount has been reduced by the distributions described in (i) and (ii) above), an amount equal to the Backup Servicing Fee and any unpaid Backup Servicing Fees from prior Monthly Periods; (iv) to the Servicer, to the extent of the Total Available Amount (as such amount has been reduced by the distributions described in(i) through (iii) above), an amount equal to the Servicing Fee and any unpaid Servicing Fees from prior Monthly Periods; (v) to the Servicer, to the extent of the Total Available Amount (as such amount baa been reduced by the distributions described in (i) through (iv) above), an amount equal to any engagement fees payable on such Distribution Date to the independent certified public accounting firm performing the agreed upon procedures pursuant to the Sale and Servicing Agreement; (vi) to the Paying Agent, for deposit in the Reserve Account to the extent of the Total Available Amount (as such amount has been reduced by the distributions described in (i) through (v) above), in amount equal to the Required Reserve Account Deposit for such Distribution Date; and (vii) to the Note Distribution Account (to the extent necessary to pay the Noteholders' Interest Distributable Amount and reduce the

8

Note Balance to zero) for distribution to Noteholders (as such amount has been reduced by the distributions described in (i) through (vi) above) The distributions described in (i) through (vi) above referred to herein as the "Administrative Distributions" See "Description of the Notes" and "Description of the Sale and Servicing Agreement" Pursuant to the Sale and Servicing Agreement on each Distribution Date, the Paying Agent will distribute all amounts from the Note Distribution Account (after giving effect to the deposits, if any, to be made on such Distribution Date from the Collection Account and the Reserve Account) in the following order of priority: (i) to the extent of the Noteholders' Interest Distributable Amount, to the holders of the Class A-1 Notes and Class A-2 Notes, on a pro rats basis, the Class A-1 Interest Distributable Amount and the Class A-2 Interest Distributable Amount, respectively, for such Distribution Date; (ii) to the extent of the Cap Deposit Amount, first, to the holders of the Class A-2 Notes, on a pro rata basis, the Class A-2 Additional Interest Distributable Amount for such Distribution Date and second, to GTD; and (iii) to the holders of the Class A-1 Notes, on a pro rata basis, the Class A-1 Percentage of the Available Principal for such Distribution Date and to the holders of the Class A-1 Notes, on a pro rats basis, the Class A-2 Percentage of the Available Principal for such Distribution Date in reduction of principal until each of the Class A-1 Note Balance and Class A-2 Note Balance has been reduced to zero, See "Description of the Notes" and "Description of the Sale and Servicing Agreement — Distributions from the Note Distribution Account." Lock-Box Bank Liberty Bank Trust Company of Tulsa, N.A. (the "Lock-Box Bank"). Servicing Fee The Servicer will receive a fee on each Distribution Date (the "Servicing Fee") for servicing the Loans, in an amount equal to the product of (i)(a) for all Distribution Dates through and including July 15, 1999, 25%, (b) for all Distribution Dates after July 15, 1999 through and including July 17, 2000, 20%, or (c) fee all Distribution Dates after July 17, 2000, 15%, multiplied by (ii) the aggregate amount of Collections received by the Servicer during the related Monthly Period. See "Description of the Sale and Servicing Agreement — Servicing Compensation," Servicing The Servicer will be responsible for servicing and managing the Loans and Other Assets. See "Description of the Sale and Servicing Agreement" and "The Seller and the Servicer." Backup Servicer If a Servicer Default occurs and the Noteholders of at least 75% of the Note Balance exercise their right to terminate all of the rights and obligations of the

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Servicer under the Sale and Servicing Agreement or if CFS resigns as Servicer (after a determination that the performance of its servicing duties are no longer permissible under applicable law), the Backup Servicer has agreed to serve as successor Servicer pursuant to the Sale and Servicing Agreement. When acting as Servicer, the Backup Servicer will receive the Servicing Fee in lieu of the Backup Servicing Fee. See "The Backup Servicer" and "Description of the Sale and Servicing Agreement — Certain Matters Regarding the Servicer." Certain Legal Aspects of the Loans; Purchase Obligations See "Risk Factors — Certain Legal Aspects." ERISA Considerations Subject to the considerations discussed under "ERISA Considerations" herein, the Notes are eligible for purchase by employee benefit plans. See "ERISA Considerations." Tax Status In the opinion of Mayer, Brown Platt ("Federal Tax Court"), for federal income tax purposes, the Notes will be characterized as debt. In the opinion of Crowe Dunlevy, the same characterization will apply for Oklahoma tax purposes. Each Noteholder, by the acceptance of a Note, will agree to treat the Notes as indebtedness for federal income and Oklahoma tax purposes. See "Certain Federal Income Tax Consequences" and "Certain State Tax Consequences. Rating of the Notes It is a condition of issuance that the Notes be rated at least "A" or its equivalent by each of Standard Poor's Ratings Services, a division of the McGraw-Hill Companies, Inc. ("SP"), Fitch Investors Services, L.P. ("Fitch") and Duff Phelps Credit Rating Co. ("DCR" and, together with SP and Fitch, the "Rating Agencies"). The ratings of the Class A-2 Notes are based, in part, on the rating of the Interest Rate Cap Provider. There can be no assurance that a rating will not be lowered or withdrawn by a Rating Agency if circumstances so warrant. See "Risk Factors — Ratings of the Notes." Investors Suitability and Restrictions on Transfer The Notes are being offered in a private placement to "qualified institutional buyers" (as defined in Rule 144A under the Securities Act) (a "QIB"), to institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3), (7) or (8) under the Securities Act and herein "Accredited Investors") and outside the United States to persons other than "U.S. Persons" as defined in Regulation S under the Securities Act (Regulation S). In addition, the initial offering of the Notes is only being made to "qualified purchasers" ("Qualified Purchasers") as such term is defined in Section 2(a)(51) of the Investment Company Act of 1940, as amended (the "Investment Company Act"). The offering of the Notes will be made in reliance upon an exemption from Regulation S under the Securities Act of 1933, as amended (the "Securities Act") and certain state securities laws. The Notes may be reoffered and sold only to Qualified Purchasers and in a transaction registered under the Securities Act and the securities laws of applicable states, or exempt front registration pursuant to Rule 144A under the Securities Act ("Rule 144A") or Regulation S or pursuant to another exemption available under the Securities Act and applicable state securities laws. None of the Servicer, the Issuer, GTD), the

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Backup Servicer, CFS. the Trustee or any other person is obligated or intends to register the Notes under the Securities Act or any state securities laws. See "Risk Factors — Restrictions on Transfer" and "Description of The Notes — Transfer Restrictions."

11 RISK FACTORS

CERTAIN LEGAL ASPECTS INSOLVENCY-RELATED RISKS

Risk or Insolvency, Conservatorship or Receivership of a Specified Seller

If a Specified Seller becomes insolvent or is in an unsound condition, or under certain other circumstances the applicable banking regulators may appoint a conservator or receiver or such Specified Seller. In most instances, the conservator or receiver would be the Federal Deposit Insurance Corporation (the "FDIC"). Notwithstanding the intent of the Specified Seller and the Warehouse Buyer or CFS. as the case may be, that acquired Loans from the Specified Seller under the applicable agreement (each a "Specified Seller Agreement") that the transfer of Loans by such Specified Seller constitute a sale and the form of such Specified Seller Agreement, the FDIC (or another receiver or conservator I might take the position that such transfer constituted a grant of a security interest.

In the event that the FDIC were to assert that the transfer of Loans by a Specified Seller that is subject to the Federal Deposit Insurance Act, as amended (the " FDIA"), constituted a grant of a security interest rather than a sale, the FDIA sets forth certain powers that the FDIC, in its capacity as conservator or receiver for a Specified Seller, could exercise. Positions taken by the FDIC do not suggest that the FDIC, if appointed as conservator or receiver for a Specified Seller, would interfere with the timely transfer to the Issuer of payments collected on the Loans or interfere with the timely liquidation of Loans, provided that certain conditions, as described below, bad been satisfied. To the extent that such Specified Seller has granted a security interest in the Loans to the Warehouse Buyer or CFS, as the case may be, and that interest was validly perfected before the appointment of the FDIC as conservator or receiver and before such Specified Seller's insolvency, was not taken in contemplation of the insolvency of such Specified Seller, and was not taken with the intent to hinder, delay or defraud such Specified Seller or the creditors of such Specified Seller, such security interest should not be subject to avoidance if the Specified Seller Agreement and related documents are approved by such Specified Seller and are continuously maintained records of such Specified Seller (as required by the FDIA) and the transactions represent bona fide and arm's length transactions undertaken or adequate consideration in the ordinary course of business and the secured party is neither an insider nor an affiliate of such Specified Seller. If the foregoing conditions are satisfied and transfers of the Loans constitute neither voidable preferences nor fraudulent conveyances, payments to the Issuer with respect to the Loans should not be subject to recovery by the FDIC, as conservator or receiver of such Specified Seller. The foregoing conclusion is based upon policy statements of the FDIC and opinions of a former general counsel of the FDIC. No assurance can be given, however, that all such conditions have been satisfied with respect to any Specified Seller and the Loans sold by such Specified Seller. If such conditions were not satisfied or the FDIC, as conservator or receiver for a Specified Seller, were to assert a position contrary to the policy statements, or were to require the Warehouse Buyer, the Seller, the Issuer or the Trustee to establish its right to those payments by submitting to end completing the administrative claims procedure established under the FDIA, or the conservator or receiver were to request a stay of proceedings with respect to such Specified Seller as provided under the FDIA, delays in payments on the Notes and possible reductions in the amount of those payments could occur. See "Certain Legal Aspects of the Loans — Transfers of the Loans."

Notwithstanding the foregoing the FDIA provides that the FDIC may repudiate contracts determined by it to be burdensome. If the FDIC were to repudiate a Specified Seller Agreement, the claims (and any security interest securing such claims) of the affected parry thereof would be limited to actual, direct compensatory damages and any security interest securing such claims would be enforceable only to the extent of such damages. The FDIA does not define the term actual direct compensatory damages". but requires such damages to be determined as of the date of the appointment of the conservator or receiver. On April 10, 1990, the Resolution Trust Corporation (the RTC), formerly a sister agency of the FDIC that no longer exists, adopted a statement of policy (the "RTC Policy Statement") with respect to the payment of interest on direct collateralized borrowings of savings associations. The RTC Policy Statement stares that interest on such borrowings will be payable at the contract rate up to the date of the redemption or payment by the conservator, receiver, or the trustee of an amount equal to the principal owed plus the contract rate of interest up to the date of such payment or redemption, plus any expense of liquidation if provided foe in the contract to the extent secured by the collateral. However, in a case involving zero-coupon bonds directly issued by a savings association which were repudiated by the RTC, a federal district court in the Southern District of New York held, in 1993, that the RTC was obligated to pay holders the fair market value of repudiated bonds as of the date of repudiation. The FDIC

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itself has not adopted a policy statement on payment of interest on collateralized borrowings of banks, however, the FDIC, in its 1993 policy statement regarding security interests, indicated that in the case of repudiation of a secured obligation by the FDIC, as conservator or receiver, the liability for such repudiation is Limited to actual direct compensatory damages, as provided in the FDIA, determined as of the date of appointment.

The FDIC, as conservator or receiver, would also have the tights and powers conferred under applicable state or Federal law (including laws regarding bank insolvencies and applicable laws regarding preferences or fraudulent conveyances). In addition, the appointment of a receiver or conservator could result in administrative expenses of the receiver or conservator having priority over the interest of the Issuer in the Loans. In addition, if the FDIC were appointed as conservator or receiver of a Specified Seller, certain administrative expenses of the conservator, receiver or banking authorities may have priority ova' the Warehouse Buyer's, the Seller's, the Issuer's or the Trustees interest in the Loans.

Risk of No "True Sale" by the Seller

The Sale and Servicing Agreement under which the Seller will transfer Loans to the Issuer, treats such transfer as a sale (and not a pledge for security) of such Loans. Notwithstanding the foregoing, if the Seller were to become a debtor in a bankruptcy case and a creditor or Trustee in such a bankruptcy or the Seller itself were to take the position that the transfer of Loans by it to the issuer should instead be treated as a pledge of the Loans to secure a borrowing of the Seller, then delays in payments of collections of the Loans could occur or (should the court rule in favor of any such trustee, debtor or creditor) reductions in the amount of such payments could result if the transfer of the Loans by the Seller is treated as a pledge instead of a sale, a tax or government lien on the property of the Seller arising before the transfer of the Loans by Seller may have priority over the interest of the Seller, the Issuer or the Trustee in the Loans. If the conveyance of the Loans by the Seller is treated as a sale, the Loans would not be part of the bankruptcy estate of the Seller and would nor be available to the creditors of the Seller.

In Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948 (10th Cir. 1993), cert. denied 114 S.Ct. 554 (1993), the United States Court of Appeals for the 10th Circuit suggested that even where a transfer of accounts from a seller to a buyer constitutes a "true sale," the accounts would nevertheless constitute property of the seller's bankruptcy estate in a bankruptcy of the seller. Since each of the Seller and the Issuer is located in the State of Oklahoma (which is part of the 10th Circuit), it is reasonably possible that if either the Seller or the Issuer became a voluntary or involuntary debtor in a bankruptcy proceeding, such proceeding could take place in the 10th Circuit if the Seller were to become subject to a bankruptcy proceeding and a court were to follow the Octagon court's reasoning and find the Loans to be "accounts" or "chattel papa" as defined in the Uniform Commercial Code (the "UCC"), the Noteholders might experience delays in payment or possibly losses on their investment in the Notes. The Oklahoma Legislature enacted a statute (S.B. 1034) which repudiates the Octagon rationale. S.B. 1034 amended the Oklahoma UCC, effective retroactively to February 1, 1996, by adding a new subsection 9.102(4), which provides that Article 9 of the Oklahoma UCC does not prevent a transfer of ownership of accounts or chattel paper and does not govern the determination of whether a particular transfer of accounts or chattel papa' constitute a sale or transfer for security purposes. This legislation, however, is legally binding only on a count interpreting the law of the State of Oklahoma. In addition, the Permanent Editorial Board of the UCC has issued an official commentary (PEB Commentary No. 14) which characterizes the Octagon courts interpretation of Article 9 of the UCC as erroneous. Such commentary states that nothing in Article 9 is intended to prevent the transfer of ownership of accounts or chattel paper. However, such commentary is not legally binding on any court.

Risk of Insolvency of GTD or the Issuer

GTD will warrant in the Sale and Servicing Agreement that the pledge of the Reserve Account and assignment of its rights under the Interest Cap are a valid part of security interest in or assignment of. as applicable, all its right, title and interest in such property to the Issuer. The Issuer will warrant in the Indenture that the pledge of the Loans by the Issuer is a valid part of security interest in all right, title and interest of the Issuer in the Loans. Each of GTD and Issuer will also warrant that, to the extent such putt of a security interest or assignment by it can be perfected by filing a UCC-1 financing statement, all actions necessary in any jurisdiction to perfect on a first priority basis, the interest of the Issuer or the Trustee, as applicable have been taken, if GTD or the Issuer were to become a debtor in a bankruptcy case, delays in payments from the Reserve Account or pursuant to the Interest Rate Cap, in the case of GTD, or of collections of the Loans, in the case of the Issuer, could occur or reductions in the amount of such payments could result.

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In addition, a tax or government lien on the property of GTD or the Issuer arising before the pant of a security interest or assignment by it may have priority over the Issuer or the Trustee

Risk of Substantive Consolidation

Each of GTD and the Issuer has taken steps in structuring the transactions described herein that are intended to ensure that the voluntary or involuntary application for relief by the Seller under the United States Bankruptcy Code or similar state insolvency laws (collectively, " Insolvency Laws") will not result in consolidation of the assets and liabilities of GTD or the Issuer with those of the Seller. These steps include the creation of each of GTD and the Issuer as a separate, bankruptcy-remote, special-purpose corporation under articles of incorporation containing certain limitations (including restrictions on the nature of its respective business and a restriction on its ability to commence a voluntary case or proceeding under any Insolvency Law without the prior affirmative vote of its independent director). However, there can be no assurance that the activities of the Issuer would not result in a court's concluding that the assets and liabilities of GTD or the Issuer should be consolidated with those of the Seller in a proceeding under any insolvency Law See "The Issuer".

Obligor Insolvency-Related Risks

Numerous statutory provisions, including Insolvency Laws, may interfere with or affect the ability of a creditor to collect payments due under a contract or to enforce a deficiency judgment against an obligor. For example, a bankruptcy court may reduce the monthly payments of an obligor due under a contract or change the rate of interest and time of repayment of the indebtedness. In the event that the Indenture Property were insufficient to cover any losses resulting from such actions by a bankruptcy court, such actions could result in delays in payments on the Notes and possible reductions in the amount of those payments

Other Issues under Insolvency Laws

If the Servicer were to become a debtor in a bankruptcy case and no Servicer Default other than the insolvency of the Servicer exists, the bankruptcy court may have the power to prevent either the Trustee or the Noteholder from effecting a transfer of servicing to a successor Servicer.

FAIR DEBT COLLECTION PRACTICES ACT

The operations of the Servicer are subject to extensive regulation by the federal Fair Debt Collection Practices Act (" FDCPA") and similar state statutes which restrict the methods which may be used by third-party collection agencies to collect consider debt. In addition, many states and certain municipalities require collection agencies to be licensed with the appropriate regulatory body before operating in such jurisdictions. The Servicer believes that it operates in substantial compliance with the FDCPA and comparable state statutes and that it maintains licenses in all jurisdictions in which its operations require it to be licensed. There can be no assurance, however, that additional federal or state legislation will not be enacted that would further restrict the methods used in collecting accounts or require additional regulatory compliance. If the Servicer was found not to be in compliance with applicable laws, it could be subject to statutory penalties and could be required to make modifications in its practices which might negatively influence the effectiveness of its collection operations and could result in delays in payments on the Notes and possible reductions in the amount of those payments. See "Certain Legal Aspects of the Loans — Consumer Protection Laws."

REQUIRED REGISTRATIONS AND LICENSES

CFS believes that it has complied with or received appropriate waivers from compliance with the applicable requirements of each jurisdiction in which obligors on the Loans reside regarding licensing to collect loans, obtaining authority to transact business within the jurisdiction and other requirements applicable to its operations within those jurisdictions. Some states also impose additional licensing requirements upon the holders of consumer loans. Failure to comply with such licensing requirements generally results in a prohibition upon the collection of interest at a rate. In excess of the usury ceiling in effect in the applicable jurisdiction. Because the Credit and Collection Policy of the Servicer requires that the rate of interest on all Loans be reduced to a rate within the usury limits "f the applicable jurisdiction, the Servicer believes that any failure of the Issuer or the Seller or any of its affiliates to comply with licensing requirements imposed upon holders of Loans would not materially and adversely affect Collections on the

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Loans. Failure to comply with state licensing requirements. however, could result in the imposition of penalties on the Servicer, the Seller or the Issuer. Such consequences could result in delays in payments on the Notes and possible reductions in the amount of those payments.

CONSUMER PROTECTION LAWS

Federal and state consumer protection laws impose requirements upon creditors in connection with consumer loans. Under certain of these laws, an assignee of such a lean (such as the Issuer) may be liable to the obligor for any violation by the applicable lender or may be subject to defenses that could be asserted by the obligor against the applicable lender. Application of such laws could render a Loan unenforceable, cause the Issuer to be unable to collect any payoff balance on the Loan or insult in liability to the Issuer. Such consequences could result in delays in payments on the Notes and possible reductions in the amount of those payments. The Seller will be obligated under certain circumstances to accept reassignment of Loans that fail to comply with such requirements. See "Certain Legal Aspects of the Loans — Consumer Protection Laws."

LIMITED RELIANCE ON THE SELLER, GTD, THE ISSUER AND THE SERVICER

None of the Seller, the Servicer, GTD or their affiliates (other than the Issuer") is generally obligated to make any payments an respect of the Notes or the Loans. The Notes will not be guaranteed by, or represent an interest in or obligation either recourse or nonrecourse of, the Seller, the Servicer, GTD or any person other than the Issuer said recourse against the issuer for the Notes is limited solely to the Indenture Property,

However, in connection with the sale or contribution of the Loans by the Seller to the Issuer, the Seller will make representations and warranties with respect to the characteristics of such Loans and, in certain circumstances, the Seller will be required to accept reassignment of Loans from the Issuer with respect to which such representations and warranties have been breached. The rights of the Issuer wider the Sale and Servicing Agreement to require the Seller to accept reassignment of Loans will be assigned by the Issuer to the Trustee pursuant to the Indenture and may be enforced directly by the Trustee on behalf of the Noteholders. In addition, under certain circumstances, the Servicer may be required to purchase Loans in connection with the breach of certain covenants by the Servicer. See "Description of the Sale and Servicing Agreement"

If collections on any Loan were reduced as a result of any matter giving rise to a reassignment obligation on the part of the Seller or a purchase obligation of the Servicer, and the Seller or the Servicer failed for any reason to perform in accordance with that obligation, than delays in payments on the Notes and possible reductions in the amount of those payments could occur. See "Description of the Sale and Servicing Agreement"

THE SERVICER, CREDIT AND COLLECTION POLICIES AND BACKUP SERVICING

CERTAIN MATTERS CONCERNING CFS SERVICER

For the period from January 1, 1996 through May 1, 1997, the Servicer has experienced a significant rate of growth. The total assets serviced by the Servicer during such period has increased from approximately $1 billion to 57 billion in book value. The total number of employees employed by the Servicer has increased from 267 to 2,046 during that period, while the number of employees engaged directly in servicing the loan assets has increased from 191 to 1,633

In order to sustain this growth and continue to perform at the levels at which the Servicer has performed in the past, the Servicer must be able to hire, train and manage an increased staff particularly of collection personnel. Approximately eighteen months ago, the Servicer implemented an intensive and comprehensive training program for all new employees. For Account Officers, the employees who speak directly with the obligors, this training process is seven weeks and includes classroom training for approximately half the course and "laboratory" training making calls and negotiating settlements with obligors an a closely controlled process for the second half. The Servicer's computer systems were designed and have been implemented to be able to add over 10,000 users, to significantly expand the database and to add significant and extensive options. The continued ability of the Servicer to perform its duties with respect to the loan pools, particularly if rates of growth consistent with recent experience to continue, will be dependent upon the ability of the Servicer to recruit, tram and manage a staff of personnel consistent with the amount of assets being serviced. No assurance can be given as to the ability of the Servicer to so meet its future personnel requirements

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At the request of the Chairman of the Board of CFS, effective May 30, 1997. Mitchell F. Vernick resigned from his position as Chief Executive Officer of CFS which be had held since January 13, 1997. Both the Chairman of the Board of CFS and Mr. Vernick considered his resignation appropriate in light of their different perspectives and opinions relating to a variety of issues concerning the business of CFS. including, among other miners, the management of the collection process, its capital matter strategy and the value of the assets serviced by it

CFS currently intends to issue its senior notes (the " Senior Notes") in the principal amount of approximately $125,000,000. The Senior Notes will represent the general unsecured unsubordinated indebtedness of CFS and will rank part passu with its other unsecured obligations. The Senior Notes will bear interest at a rate based upon the London interbank offered rate, be non-amortizing mid will mature five years from the date of issuance. The indenture under which the Senior Notes will be issued will contain financial covenants that will, among other things, impose minimum net worth requirements and limit the amount of indebtedness of CFS and its affiliates. The proceeds of sale of the Senior Notes will be used for general corporate purposes.

CREDIT AND COLLECTION POLICIES

Potential investors should be aware that under the Credit and Collection Policy, the Servicer has a great deal of discretion to allocate personnel and other resources to (or away from) the collection activities for a specific pool (such as the Loans) and to take other actions that may affect collections on the Loans. Actions of the Servicer may affect the classification of a Loan as a "Performing Loan", "Non-Performing Loan" or "Converted Loan" pursuant to the Credit and Collection Policy. Classification as a Performing Loan means that the Servicer and the obligor have reached agreement on a repayment schedule. In connection with reaching such agreement, the Servicer may agree to a substantial discount from the Payoff Balance of the loan. Further, the classification of a loan as a Performing Loan does not mean that as of any time payments actually have been made or are current with respect to such loan. The Credit and Collection Policy does not prevent a Performing Loan from being rescheduled by the Servicer and the obligor subsequent to their initial agreement but prior to the rime any payment has been made on such obligation. However, any notification of a payment plan for a Performing Loan requires that the account officer proposing the modification submit the modification and justification therefore to an approval manager. Within twenty-tots' hours, the approval manager will follow the same procedure for approving or disapproving a modification as for the initial approval of a payment plan. A Performing Loan for which a payment representing at least 94% of any agreed and approved installment payment is not made for 180 days from the date such payment is due under the agreed approved payment plan will be transferred from the Performing Loan classification to the Non-Performing Loan classification. In situations where such a 94% payment has been made within such 180-day period or negotiations for the resolution of such a delinquency are pending on the 180th day since payment, the Credit and Collection Policy may, under certain circumstances, permit the deferral of the classification of a loan as a Non-Performing Loan for another 180 days.

PERFORMANCE OF A BACKUP SERVICER

The servicing of nonperforming Loans requires special skill and diligence. Eta Servicer Default should occur. Noteholders of at least 75% of the Note Balance have the right to terminate all of the rights and obligations of the Servicer under the Sale and Servicing Agreement. In addition the Servicer may resign from its rights and obligations as Servicer under the Sale and Servicing Agreement upon determination that the performance of such duties is no lunger permissible under applicable law as evidenced by an opinion of counsel. CFS resigns or is terminated as Servicer. the rights and obligations of the Servicer under the Sale and Servicing Agreement will be assumed by the Backup Servicer or another successor Servicer. CFS believes that its collection performance reflects its significant experience and expertise in the servicing of nonperforming loans as well as specialized technology and experienced staff and management. There may, however, be few or no successor Servicers capable of achieving comparable collection performance. Although Bankers Trust Company has agreed to act as Servicer upon the resignation or termination of CFS as Servicer, there can be no assurance that collections with respect to the Loans will not be adversely affected by any change in the Servicer. Moreover, if CFS were to cease acting as the Servicer, delays in processing payments on the Loans and information in respect thereof could occur and result in delays or decreases in payments to the Noteholders. See "The Seller and the Servicer," "The Backup Servicer" and "The Loans — Servicing and Collection."

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CERTAIN OTHER MATTERS

The Servicing Agreements utilized in the previous six securitization transactions sponsored by the Servicer contain certain default events (" Default Events") and, with respect to the four most recent transactions, data delivery events (" Data Delivery Events") that relate to certain scheduled reductions in principal amount of the related securities. In the view of the Servicer, the language of such provisions did not comport with the intent of the parties. Because the performance of the securities may not comply with the provisions of such documents as drafted, the Servicer has circulated proposed amendments to such documents and requested that such documents be amended in accordance with the related amendment provisions. To date the Servicing Agreements with respect to two of the six outstanding securitization transactions sponsored by the Servicer have been so amended, while such amendments with respect to the remaining four such actions have not yet been approved. At the current time no Default Event or Data Delivery Event has occurred with respect to any of the transactions that have not been amended. There can be no assurance that amendments will ultimately be approved with respect to such remaining transactions and thus a Default Event and/or Data Delivery Event potentially may occur with respect to one or more of such transactions under such provisions if such an event were to occur it may adversely affect the securities involved and/or the Servicer. The Sale and Servicing Agreement for the Notes contains the provision at issue as modified to reflect the intent of the Servicer.

RECOURSE LIMITED TO INDENTURE PROPERTY

Recourse for the Notes is limited to the Indenture Property. Consequently, the Noteholders must rely for repayment of the Notes upon payments on the Loans and, if and to the extent available, upon the other Indenture Property, including amounts on deposit in the Reserve Account. Similarly, although finds in the Reserve Account will be available to cover shortfalls on any Distribution Date in distributions of interest on the Notes (but, with respect to the Class A-2 Notes, only up to the Cap Rate) and principal of the Notes on the Final Distribution Date, the fluids to be deposited in the Reserve Account are limited in amount. If the Reserve Account is exhausted, the Issuer will depend solely on collections on the Loans (and, with respect to the Class A-2 Monthly Interest, amounts received under the Interest Rate Cap) to make payments on the Notes, and the Noteholders will bear the risk of delinquency and loss with respect to the Loans. Accordingly, there can be no assurance that the Notes will ultimately be paid in full. Moreover, there can be no assurance that the future collection experience of the Servicer with respect to the Loans will be comparable the Servicer's historical experience with respect to other portfolios of loans serviced by the Servicer. Any amounts released from the Reserve Account to GTD will not be available to the Noteholders. See "The Loans" and "Description of the Sale and Servicing Agreements."

INTEREST RATE CAP RISK

To the extent the Class A-2 Interest Rate exceeds the Cap Rate, the holders of the Class A-2 Notes must rely solely on payments under the Interest Rate Cap in accordance with the Notional Amount Schedule. The Notional Amount Schedule may front time to time be reduced (i) to the extent the notional amount exceeds the Class A-2 Note Balance or (ii) upon receipt of confirmation front each Rating Agency that such reduction will not result in the downgrade, withdrawal or suspension of the then-currant rating of the Class A-2 Notes. There can be no assurance that payments will be received front the Interest Rate Cap Provider under the Interest Rate Cap or that such payments will be sufficient to pay all interest due on the Class A-2 Notes in excess of the Cap Rate. The failure of the Interest Rate Cap Provider to make such payments or for such payments to be sufficient to pay interest on the Class A-2 Notes in excess of the Cap Rate will not constitute a Servicer Default under the Sale and Servicing Agreement or an Event of Default under the Indenture Recourse for failure of the Interest Rate Cap Provider to make required payments under the Interest Rate Cap is limited solely to the Interest Rate Cap Provider as provided in the Interest Rate Cap and not to the Issuer or the Indenture Property. See "Description of the Notes — Interest on the Notes"

CERTAIN RISKS CONCERNING THE LOANS

LOANS CONSIST OF DEFAULTED CREDIT CARD RECEIVABLES' NO ASSURANCE OF PAYMENT

The Loans are receivables due from obligors that arose in connection with credit card transactions entered into by or on behalf of such obligors, which receivables have previously become defaulted. As of the Cutoff Date, the Payoff Balance of Performing Loans was approximately $36,756,075 and the ECR of Non-Performing Loans was approximately $298,147,530. A portion of the Loans have been securitized in two previous transactions sponsored by

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CFS, as of the Cutoff Date, such Loans included Non-Performing Loans, the ECR of which was approximately $37,401,204 (which represents approximately 12.54% of the ECR of all Non-Performing Loans) the Performing Loans. the Payoff Balance of which was approximately $31,020,511 (which represents approximately 84.40% of the Payoff Balance of all Performing Loans). Such Loans were acquired by CFS or one of its affiliates in connection with the redemption of securities issued in that transaction. No assurance can be given that Collections on the Loans will equal or exceed the ECR assigned by the Servicer to the Loans or be sufficient for Noteholders to recover their initial investment. Neither CFS nor any of its affiliates has any obligation to purchase or otherwise redeem the Notes. See "The Loans — Underwritting Standards for Acquired Loan portfolios" and "Certain Loan Pool Characteristics."

The Servicer has six existing securitization transactions in which portfolios of charged off credit card receivables constituted all or a portion of the assets securitized. To date, however, the final distribution date has not occurred with respect to the securities issued snider any of those transactions. Accordingly, no assurance can be given that the Collections on the Loans will be sufficient for Noteholders to recover their initial investments.

The failure of the Issuer to make timely payments of interest on the Notes does not constitute an Event of Default. Such failure, or the occurrence of certain other events, may lead to a downgrade of the ratings of the Notes by the Rating Agencies to as low as "D" or its equivalent. Accordingly, it is possible that Noteholders may experience shortfalls in the payment of interest on the Notes and have the rating of the Notes to downgraded, but have no rights or remedies with respect to the Indenture Property unless an Event of Default or Servicer Default has occurred.

DIFFICULTY OF PREDICTING PAYMENT PURCHASE AND SUBSTITUTION

Since the rate of payment of principal on the Notes depends on the ability of the Servicer to convert Non-Performing Loans to Performing Loans the rate of payment of the payoff balance of the Loans and the Servicer's ability to accurately predict and collect the payoff balance of the Loans, final payment of the Notes could occur significantly earlier or later than the Expected Final Distribution Date. Payment patterns on nonperforming loans are generally more difficult to predict than payment patterns on amortizing loans and performing loans. In addition, under the Specified Seller Agreements, the Seller or the Warehouse Buyer, as the case may be, for a limited time has the right to cause the applicable Specified Seller to repurchase Loans or substitute new loans for Loans that do not meet certain criteria, including Loans for which the obligor, as of the dare the Loans were sold by a Specified Seller, is deceased or the subject of a bankruptcy proceeding, in the case of any such repurchase, the repurchase price paid by the Specified Seller for such Loans to or for the benefit of the Issuer for subsequent distribution to the Noteholders is equal to the price originally paid (which price may be significantly less than the corresponding portion of the amount received through the securitization of such Loans) by the Seller or the Warehouse Buyer under the applicable Specified Seller Agreement in some cases, the repurchase price is reduced to reflect the amount of any collections received on the loans being repurchased. The exercise of such a right, or the repurchase or substitution of Loans by the Seller in connection with the breach of certain representations and warranties made with respect to the Loans, could shorten the weighted average life of the Notes or could result in a shortfall in the repayment of the Note Balance. Historically less than 5% of all loans purchased by CFS and its affiliates have been subject to such a repurchase or substitution. Although it is expected that final payment of the Notes will occur by the Expected Final Distribution Date, if sufficient foods are not available, final payment of the Notes could occur later than such daze or anal payment in the Notes may not occur in full at all. If the rate of payment of the Loans is more rapid than expected, final payment of the Notes could occur earlier than the Final Expected Distribution Date. See "Weighted Average Life of the Notes."

GEOGRAPHIC LOCATIONS

Economic conditions in states where obligors reside may affect the delinquency and loan loss experience with respect to the Loans. The geographic concentrations of obligors and certain related information are set forth in "Certain Loan Characteristics" As a result of such geographic concentrations of obligors, economic conditions in such states may have a disproportionate impact on the delinquency and loan loss experience with respect to the Loans. In particular, an economic downturn in one or more of such states could adversely affect the performance of the pool of Loans as a whole (even if national economic conditions remain unchanged or improve) as obligors in such stale or stales experience the effects of such a downturn and face greater difficulty in making payments on the Loans. See "The Loans."

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ORIGINATOR CONCENTRATIONS

The Loans were acquired from the Specified Sellers set forth in "The Loans — General." The ECR and Payoff Balance of the Loans acquired from each Specified Seller is set forth in "Certain Loan Characteristics." Under certain circumstances, the insolvency of a Specified Seller could result in delays in or reductions of the amount of payments oil the Loans sold by such Specified Seller which would further result in delays in payments of the Notes and possible reductions in the amount of such payments. See "Risk Factors — Certain Legal Aspects — Insolvency Related Risks."

CERTAIN RISKS CONCERNING THE NOTES

RATINGS OF THE NOTES

It is a condition to the issuance of the Notes that the Notes be rated at least "A" or its equivalent by each Rating Agency. The ratings of the Class A-2 Notes are based, in part, on the rating of the Interest Rate Cap Provider A rating is not a recommendation to purchase, hole or sell the Notes, in as much as such rating does not comment as to market price or suitability for a particular investor. The ratings of the Notes address the likelihood of the timely payment of interest on each Distribution Date and the intimate return of principal by the Final Distribution Date. There can be no assurance that a rating will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a Rating Agency if in judgment circumstances in the future to warrant

RESTRICTIONS ON TRANSFER: LIMITED LIQUIDITY

The Notes have not been, and will not be registered under the Securities Act, or qualified under arty state or foreign securities Laws, and may not be reoffered or sold except to a Qualified Purchaser in a transaction exempt from registration under the Securities Act pursuant to Rule 144A or Regulation S or under another exemption from registration. Each prospective transferee will also be required to make the representations as to its status as a Qualified Purchaser and as a QIB or person to whom the offer of the Notes was not made in the United States and certain other matters as set forth in the form of a Representation Letter attached as Exhibit A to this Memorandum. There is currently no secondary market for the Notes. As a result of such restrictions on transfer, it is doubtful that a meaningful secondary market for the Notes will develop or, ifs secondary market does develop with respect to the Notes, that it will provide the related Noteholders with liquidity of investment or that it will continue for the Life of such Notes. See "Description of the Notes — Transfer Restrictions".

BOOK ENTRY REGISTRATION

Each class of Notes will be initially represented by one or more notes registered in the name of Cede, or any other nominee (Cede, or such other nominee, " DTC's Nominee") for DTC, and will not be registered in the names of the beneficial owners of the Notes (" Note Owners") or their nominees unless Definitive Notes are issued. As a result, unless and until Definitive Notes are issued, such Note Owners' will not be recognized by the Issuer or the Trustee as "Noteholders" fiance, until Definitive Notes are issued, such Note Owners will only be able to exercise the rights of Noteholders indirectly through DTC, Cedel or Euroclear and their participating organizations. See "Certain Information Regarding the Notes — Book-Entry Registration" and "— Definitive Securities."

THE ISSUER AND GTD

The Issuer is a bankruptcy-remote, special-purpose corporation formed under the laws of the State of Oklahoma for the limited purpose of (i) acquiring and holding and, through the Servicer, managing pools of loans, including the Loans, and other assets and proceeds therefrom; (ii) issuing, selling, transferring or exchanging notes secured by such pools of loans, including the Notes; and (iii) engaging in those activities that are necessary, suitable or convenient to accomplish the foregoing or are incidental thereto or connected therewith, including entering into, and performing its obligations under, the Basic Documents to which it a party. The "Basic Documents" means the Notes, the Sale and Servicing Agreement, the Indenture, the Placement Agent Agreement, the Lock-Box Agreement and the other documents

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delivered in connection therewith. The Issuer from time to nine may issue additional series of notes secured by pools loans and other assets (other than the Loans and Other Assets) and may amend its articles of incorporation. Under the indenture, the Issuer will covenant not to issue additional series of notes or amend its articles of incorporated unless the Issuer has received written confirmation from each Rating Agency that such action will not result in a downgrading withdrawal or suspension of the then-current rating of the Notes.

To secure the Notes, the Issuer has granted, pursuant to the indenture, a security Interest or lien in certain collateral (collectively, the " Indenture Property") consisting of all of the Issuer's right, title and interest in (in) the Loans and all monies received thereunder alter the Cutoff Date, (ii) the other assets related to the Loans and books and records, if any, related to the Loans; (iii) the Owned Accounts and a security interest in the Reserve Account and all funds on deposit therein, (iv) the Sale and Servicing Agreement: (v) rights under the Interest Rate Cap, and (vi) all proceeds of the foregoing.

GTD is a bankruptcy-remote, special-purpose corporation formed under the laws of Oklahoma for the limited purpose of (i) entering into the Interest Rate Cap, (ii) establishing the Reserve Account, (iii) holding capital stock in the Issuer and (iv) engaging in those activities that are necessary, suitable or convenient to accomplish the foregoing or are incidental thereto or connected therewith, including entering into, and performing its obligations under, the Basic Documents to which it is a party. Pursuant to the Sale and Servicing Agreement, GTD will grant a security interest in the Reserve Account and assign all its rights under the Interest Rate Cap to the Issuer which, in turn will pledge such property, together with other Indenture Property, to the Trustee for the benefit of the Noteholders,

The Seller, the Issuer and GTD are under common ownership and control. After giving effect to the transactions contemplated to occur on the Closing Date, the Issuer will be a wholly-owned subsidiary of GTD, which in turn will be a wholly-owned subsidiary of the Seller. The principal executive offices of each of GTD and the Issuer are located at 2448 E. 81st Street, Suite 5510, Tulsa, Oklahoma 74137-4248 and its telephone number is (918) 488-9140.

THE TRUSTEE

Bankers Trust Company, a banking corporation organized under the laws of the State of New York, is engaged in banking and related activities. The principal executive offices of Bankers Trust Company are located at Four Albany Street, New York, New York 10006.

The Trustee will receive a fee (the " Trustee Fee") each month for services rendered during the preceding Monthly Period, which will be, with respect to each Distribution Date an amount generally equal to the greater of (a) $2,841 and (b) the product of (i) the quotient of 0.05% divided by twelve, multiplied by (ii) the Note Balance as of the first day of such month. Bankers Trust Company, as Trustee and Backup Servicer, will also receive an up-front fee of $100,000. With respect in any Monthly Period in which the Trustee does not serve as Trustee for such whole Monthly Period, the Trustee Fee will be pro rated.

20 THE LOANS

GENERAL

The Loans were purchased by the Seller, the Warehouse Buyer or another affiliate of the Seller, from the following financial institutions (collectively, the " Specified Sellers") in the ordinary course of business:

MBNA America Bank, N.A. First USA Bank Household Bank (S.B.), N.A. The Bank of New York (Delaware) Household Bank (Nevada), N.A. Community First Bankshares Chase Manhattan Bank USA, National First North American National Bank Association First Union National Bank of Georgia Wells Fargo Bank (Arizona), N.A. Advanta National Bank USA GE Capital Consumer Card Corporation Advanta National Bank Norwest Bank Iowa, N.A. Nationsbank of Delaware, N.A. Other (identity of one institution subject to Greenwood Trust Company confidentiality agreement) PNC National Bank The Loans were originated in the ordinary course of business by either the Specified Sellers or another bank or financial institution from which the Specified Seller acquired the Loans.

The Loans consist of a pool of receivables due torn obligors that arose in connection with credit card transactions entered into by or on behalf of such obligors. The obligor on each Loan had defaulted upon its payment obligation prior to the sale of that Loan to the Seller or an affiliate of the Seller, as the case may be. Collections have been attempted on souse of the credit card Loans by other Specified Seller or other originating entity and up to three or more different third party agencies prior to being acquired by the Seller or an affiliate. The price paid by the Seller or an affiliate for the Loans is dependent. in part, on the number of third parry agencies which have attempted to collect each Loan prior to the purchase of such receivable. Generally, the fewer the number of third party agencies which have attempted to collect the credit card receivable, the higher the price the Seller or an affiliate has paid for the receivable. See "Certain Loan Characteristic — Composition of the Loans as of the Cutoff Date by Asset Type." The unpaid balance of a Loan may include finance charges, late fees, return check charges, over limit fees and other related costs and charges.

With respect to documentation related to the Loans, the Seller and its affiliates have only received data downloaded from the computer system of the applicable Specified Seller. Generally, no documents evidencing the indebtedness (such as an application signed by the obliger on the Loan) are provided by the Specified Seller either because such documents do not exist or are not available.

The Seller will warrant to the Issuer in the Sale and Servicing Agreement that to the Seller's actual knowledge. each as of the Closing Date (i) each Loan represents the genuine, real, valid and binding payment obligation of the obligor thereon. enforceable by the holder thereof in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization. statute of limitations or similar laws affecting the enforcement of creditors' rights in general and by equity, regardless of whether such enforceability as considered in a proceeding in equity or at law and except to the extent the inforceability of such Loan (when taken together with the unenforceability of any other Louis) would nor have a material adverse effect on the ability of the Issuer or the Trustee to enforce any material portion of the Loans against the obligors thereof, and (ii) there is no litigation, proceeding or governmental investigation pending, or any order, injunction or decree outstanding, existing or relating to any Loan that could have a Material Adverse Effect. Breach of such warranties may trigger the Seller's repurchase obligation. See "Description of the Sale and Servicing Agreement — Repurchase Obligations."

Notwithstanding such warranties, an obliger on a Loan may have defenses to a claim under the Loan, such as expiration of the applicable statute of limitations, bankruptcy or death of the obligor or release or settlement by the

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originating entity, the Specified Seller or a court. In addition, a Loan may not be enforceable, may be subject to enforcement or collection restrictions, may have little or no value or liquidity, may be the subject of fraud or pending litigation or may be subject to contingency fees of the Specified Seller's collection agency or a collection attorney. The information provided to the Seller or its affiliates by the Specified Sellers regarding the Loans and the obligors (including addresses and telephone numbers) may be incomplete or inaccurate, making it difficult to locate the obligor. Furthermore, Specified Sellers may be permitted to repurchase a Loan under certain circumstances such as the cross-collateralization of the loan with another loan held by the Specified Seller, loan participation by more than one bank and the existence or threat of litigation involving the Loan to which the Specified Seller is, or is threatened to be made, a party. As a result of these and other limitations, the Servicer may be unable to collect any of the unpaid balance of Loan.

UNDERWRITING STANDARDS FOR ACQUIRED LOAN PORTFOLIOS

GENERAL

The Servicer has developed a proprietary computer grading model for credit card receivables. The model sorts the credit card receivables based upon an algorithm developed by the Servicer and assigns a score to each based on factors that the Servicer has determined are relevant to its ability to collect such receivables. The credit card grading model sorts and scores receivables based upon a variety of criteria such as whether the obligor is deceased or bankrupt, the applicability of statute of limitation defenses, whether the obligor has made a recant payment on the receivable, the time elapsed since the receivable was originated, the size of the outstanding balance on the receivable and the availability of selected information concerning the identity and location of the obligor. Prior to bidding on the portfolio, the credit card receivables therein are scored under the credit card grading model. The Servicer's preliminary bid price for a credit card receivable is a function of the score assigned to that receivable. Final adjustments to the preliminary bid price may be made by the Servicer based on such factors as its evaluation of the origination practices and underwriting standards of the Specified Seller or other originating entity or other information supplied to the Servicer or the Seller by the Specified Seller or other originating entity. The ECR of Non-Performing Loans in each purchased portfolio is reassessed under the model on a daily basis. The Servicer's collection efforts are prioritized among Non-Performing Loans according to its daily ECR assessment.

ESTIMATED CASH RECOVERY

Consistent with industry practice and based upon the credit card grading model and other factors indicated in "— General" above, the purchase price paid by the Seller, the Warehouse Buyer or another affiliate of the Seller for nonperforming assets such as the Loans is substantially less than the gross amount of collections the Servicer expects in receive with respect to such assets. The Servicer evaluates each receivable and assigns an ECR. for each receivable. See "Underwriting Standards for Acquired Loan Portfolios." The ECR assigned by the Servicer to the Loans is a function of the Servicer's evaluation of the Loans under its credit card grinding model and also reflects numerous other considerations. Such considerations include the Servicer's personnel and systems, its underwriting standards and Credit and Collection Policy and its historical collection experience with respect to nonperforming assess. See "The Loans — Servicing and collection" Accordingly, ECR for the Loans reflects the Servicer's estimate of the amount of cash it expects to recover frosts the Loans (not including future interest accruals on the Loans) based on the Servicers own capabilities. As such, the ECR assigned by the Servicer to the Loans may be greater than similar estimates of collectibility that would be assigned to the Loans by other servicer, of nonperforming assess. As a result, to the extent that the initial Note Balance is a function of the ECR on the Loans, the gross proceeds from the issuance of Notes by the Issuer may exceed the proceeds that would be raised in a transaction sponsored by other nonperforming loan servicer and will exceed the aggregate purchase price paid to Specified Sellers by the Seller, the Warehouse Buyer or another affiliate of the Seller for the Loans.

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SERVICING AND COLLECTION

The Servicer on behalf of the Warehouse Buyer, the Seller or one of its affiliates has reviewed and valued the Loans before purchase from a Specified Seller utilizing its proprietary Credit card grading model and has serviced and agreed to continue to service the Loans in accordance with the terms of the Sale and Servicing Agreement. See "Description of the Sale and Servicing Agreement." The Servicer believes that it is in substantial compliance with all applicable state requirements to collect loans in the fifty states or has received "written waivers of such requirements. The Servicer currently services approximately 20 million loans wider the terms of six other securization transactions involving affiliates of the Servicer. Approximately 98% of such loans by number of loans is represented by charged off credit card balances. Upon the purchase of the Loans by the Seller, the Servicer entered relevant data regarding each Loan into its proprietary software systems. Using the Servicer's software systems and automated telephonic dialers, the Servicer's staff of over one thousand account officer contacts, and arranges for the payment of each Loan with, the applicable obligors. The Servicer provides each account officer with seven weeks of training, including three and a half weeks of classroom training covering company policies and procedures with respect to collections, negotiation skills, FDCPA issues and a variety of other topics relevant to the collection process. In addition to classroom training, each account officer has received three and a half weeks of laboratory" training in which the account officer has been part of a group of trainees closely supervised and monitored by an experienced collection manager who assists the trainees in implementing the skills they have learned in the classroom on a portfolio of accounts. The Servicer has extensive policies, procedures and systems in place for management of the collection process as set forth in its Credit and Collection Policy.

CREDIT AND COLLECTION POLICY

The Servicer has established and documented formalized credit and collection policies (the " Credit and Collection Policy") which govern the actions of its collection management and staff. The Credit and Collection Policy sets forth among other things management's collection philosophy, procedures for loan recoveries, criteria for making settlements or arrangements for payouts over time, assignment of collection responsibility for loans to various sections of the collection department. and procedures for litigation and determining the location of obligors. The Credit and Collection Policy is included in the curriculum for new hires. is periodically reviewed with collection personnel and is available to collection personnel on an on-line basis. See "Description of the Sale and Servicing Agreement — Servicing Procedures."

The general philosophy of the Servicer with respect to collection negotiation is to attain the highest return in the least amount of time, as dictated by the obligor's circumstances. The Servicer's preference is to obtain an immediate lump sum payment of all amounts due. Generally, given the nature of the Loans as charged off credit card receivables, the request for an immediate lump sum payment is not satisfied. The Servicer next discusses the ability of the obligor to make a lump sum payment at a discounted amount or to make payments over time on the full amount due or on a discounted basis. With respect to any obligor, the Servicer generally implements the payment plan that maximizes the expected present value of collections from that obligor

Under the Credit and Collection Policy, all resolutions of a loan negotiated with an obliger are submitted by the negotiating account officer to an approval manager. The approval manager approves or rejects the offer and makes a counteroffer if' the amount of the loan and the proposed resolution is within the approval manager's delegation of authority. If the proposal is outside the approval manager's authority, the approval manager submits the proposal to the appropriate level of authority as provided in the Credit and Collection Policy. All agreements for the payment of the loan on installments are reviewed with the obligor as least every six months to increase the amount of the payments and reduce the amount of time required to repay the loan.

Potential Investors should be aware that wider the Credit and Collection Policy the Servicer has a great deal of discretion that affects the classification of loans and that the terms "Performing Loan", "Non-Performing Loan" and "Converted Loan" have specific meanings that are affected by actions taken by the Servicer pursuant to the Credit and Collection Policy. In particular, classification as a Performing Loan means that the Servicer and the obligor have reached agreement on a repayment schedule. In connection with reaching such agreement, the Servicer may agree to a substantial

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discount from the Payoff Balance of the loan. Further, the classification of loan as a Performing Loan does not mean that as of any tone payments actually have been made or are current with respect to such loan. The Credit and Collection Policy does not prevent a Performing Loan from being rescheduled by the Servicer and the obliger subsequent in their initial agreement but prior to the time any payment has been made on sucks obligation. However, any modification of a payment plan for a Performing Loan requires that the account officer proposing the modification submit the modification and justification thereof to an approval manager. Within twenty-four hours, the approval manager will follow the same procedure for approving or disapproving a modification as for the initial approval of a payment plan. A Performing Loan for which a payment representing at least 94% of any agreed and approved installment payment is not made for 180 days from the date such payment is due wider the agreed and approved payment plan is transferred from the Performing Loan classification to the Non-Performing Loan classification. In situations where such a 94% payment has been made within such 180-day period or negotiations for the resolution of such a delinquency are pending on the 180th day since payment, the Credit and Collection Policy may, wider certain circumstances permit the deferral of the classification of a loan as a Non-Performing Loan for another 180 days.

Under the Sale and Servicing Agreement, the Servicer may offer to sell a Loan to any third party if the Servicer determines that such a sale is consistent with the Servicing Standards and in the best economic interests of the Issuer and the Holders. The Servicer may not, however, sell any Loan to the Trustee or an affiliate or to itself or any of its affiliates. In addition, except for my Loan sold on an individual basis to accomplish a settlements thereof the Sale and Servicing Agreement prohibits the sale of any Loans sinless the cash purchase price to be received by the Servicer is at least equal to 75% of the aggregate ECR Payoff Balances for such Loans. Prior to the Final Scheduled Distribution Date, the Servicer may not sell Loans having ECR Payoff Balances in excess of $5,000,000 in the aggregate. The proceeds of any sale of Loans by the Servicer will be deposited in the Collection Account.

SYSTEMS AND FACILITIES

The Servicer employs proprietary collection software, as well as various commercial software products. The Servicer utilizes Intel-based application servers, digital AlphaServers for database servers and Intel-based workstations for client interfaces to form a three tier client/server architecture. The Servicer's Information Systems group consists of over 50 employees, including fifteen programmers/analysts and six network administrators. The Servicer proprietary software systems include a credit card grading model and a system which allows each account officer on-line access to data regarding a particular loan and the ability to enter certain new information regarding the account into the system, as well as to record the efforts of the account officer in collecting the account. The systems also allow for on-line approval of settlements by management and on-line verification of agreed upon payments over time by Servicer's verification unit. The Servicer leases office space in Tulsa and Oklahoma City, Oklahoma and has contractual rights to additional space in both locations to accommodate additional personnel. The Servicer utilizes both electronic (utilizing databases acquired from third parties) and manual skip trace procedures.

FEES AND EXPENSES

The Servicer will receive a Servicing Fee on each Distribution Date in an amount equal to a specified percentage of the aggregate amount of Collections received by the Servicer during the related Monthly Period. See "Description of the Sale and Servicing Agreements" No additional fees or expenses related directly to the Loans will be paid to the Servicer. Certain expenses, such as the fees for outside accountants to provide certain agreed upon procedures on an annual basis, are paid on each distribution Date from the Total Available Amount. See "Description of the Sale and Servicing Agreement — Distributions."

THE BACKUP SERVICER

The Backup Servicer will receive a diskette each month from the Servicer containing certain information regarding each Loan, including collection information and status of the Loan (open or resolved). The Backup Servicer will be required to review and analyze the data for discrepancies, to report any discrepancies to the Trustee and the Servicer, and in attempt to reconcile any discrepancies with the Servicer. In the event of the inability of the Servicer

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and Backup Servicer to reconcile and discrepancy, a firm of independent certified public accountants will audit the Monthly Statement and reconcile the discrepancy. See "Description of the Notes — Reports to Noteholders."

Pursuant to the Sale and Servicing Agreement, the Backup Servicer has agreed to serve as successor Servicer if a Servicer Default occurs and the Noteholders of at least 75% of the Note Balance exercise their right to terminate all of the rights and obligations of the Servicer under the Sale and Servicing Agreement or if CFS resigns as Servicer (after a determination that the performance of its servicing duties are no longer permissible under applicable law). There can be no assurance, however, that Collections on the Loans would not be adversely affected by the replacement of the Servicer with the Backup Servicer. The Backup Servicer will receive a fee for acting as Backup Servicer, but when acting as Servicer, will receive the Servicing Fee in lieu of the Backup Servicing Fee. See "The Backup Servicer" and "Description of the Sale and Servicing Agreement — Servicing Compensation.

CERTAIN WAN CHARACTERISTICS

GENERAL

The Loans are comprised of credit card receivables which were in default prior to being sold to the Seller, the Warehouse Buyer or another affiliate of the Seller, as the case may be. The Loans were purchased by the Seller, the Warehouse Buyer or another affiliate of the Seller after review and valuation of the Loans by the Servicer in accordance with its underwriting standards as described above. As of the Cutoff Date, the Payoff Balance of all Performing Loans was approximately $36,756,075 and the ECR of all Non-Performing Loans was approximately $298,147,530. From the time a Loan is acquired from a Specified Seller, it accrues interest at a rate equal to the usury limitation rate in effect in the applicable jurisdiction or the rate agreed to by the Servicer and the applicable obligor. The ECR assigned to each Loan at the time such Loan was originally acquired by the Seller or an affiliate (the " First ECR") for all the Loans, as of the Cutoff Date, was approximately $302,341,242. A portion of the Loans have been securitized in a previous transaction sponsored by CFS. Such loans were acquired by CFS or one of its affiliates in connection with the redemption of securities issued in that transaction. See "Previously Securitized Loans" below.

The following table shows the composition as of the Cutoff Date of the pool of Loans by the number of collection agencies which attempted to collect each such Loan prior to the acquisition of such Loans by the Seller, the Warehouse Buyer or other affiliate of the Seller.

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The following table shows the composition as of the Cutoff Date of the pool of Loans by range on Payoff Balance

26

The following table shows the composition of the pool of Loans as of the date of acquisition by the Seller or an affiliate from the Specified Sellers by the number of days since the applicable Specified Seller charged off such Loan.

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The following table indicates the percentage of the Payoff Balance as of the Cutoff Date of the pool of Loans which were acquired from each Specified Seller

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The following table shows the composition of the pool of Loans by retailing address of the related obligors as reflected in the records of the Servicer as of the Cutoff Date

Distribution by Geographic Location of Obligor as of the Cutoff Date

State Number Payoff Balance Payoff ECR ECR as a of Loans Balance % of Total as a % of Total

California 55,834 $239,584,678 16.17% $50,869,366 Texas 46,015 $161,063,958 10.87% $35,691,692 New York 35,083 $132,972,680 8.97% $30,122,264 Florida 43,699 $154,603,515 10.43% $31,560,207 Pennsylvania 19,513 $61,416,419 4.14% $13,809,051 New Jersey 14,465 $154,136,818 3.65% $12,115,668 Illinois 14,236 $45,558,508 3.07% $9,461,586 Massachusetts 14,019 $146,868,296 3.16% $9,815,557 Ohio 16,537 $147,393,843 3.20% $9,825,161 Other 168,478 $538,310,002 36.33% $116,049,190 Total 427,879 $1,481,908,718 100.00% $319,319,742

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PREVIOUSLY SECURITIZED LOANS

A portfolio of the Loans with an ECR of $56,304,907 (which is approximately 17.63% of the ECR of all Loans) is of the Cutoff Date (of which approximately 33.57% were Performing Loans and approximately; 66.43% were Non-Performing Loans), have been sectioned in two previous transactions sponsored by CFS. As of the Cutoff Date. In payments have been received on approximately 37% of Payoff Balance of previously securitized Performing Loans, however only approximately 10.57% of such non-paying Loans had a payment due prior to the Cutoff Date. The weighted average rate of interest borne on the previously securitized Loans was approximately 6.53% as of the Cutoff Date and the weighted average maturity of such Performing Loans was approximately 55 months. The ECR of most of the previously securitized Loans has increased from the First ECR due to the determination of additional information regarding an obligor (for example, the obligor's location) and/or the accrual of interest with respect to such Loans. The previously securitized Loans were acquired by the Seller or an affiliate in the period between June of 1995 and January of 1996.

The following table shows the composition as of the Cutoff Date of the pool of previously securitized Performing Loans by aging of payments on a contractual basis. A Performing Loan becomes defaulted under the Credit and Collection Policy in most cases when a payment representing at least 94% of any agreed and approved installment payment is not made by the obligor for 180 days from the date such payment is due under the payment plan established by the Servicer and such obligor. In situations where such a 94% payment has been made within such 180-day period or negotiations with an obligor for the resolution of such a delinquency are pending on the 180th day since payment, the Credit and Collection Policy may, under certain circumstances, permit the deferral of the classification of a loan as a Non-Performing Loan for another 180 days.

The following table shows the composition of the pool of previously securitized Non-Performing Loans as of the date of acquisition by the Seller or an affiliate from Specified Sellers by the number of days since the applicable specified Seller charged off such Non-Performing Loans Each of the Non-Performing Loans referred to in the following table was acquired by the Seller or an affiliate in the period between June of 1995 and January of 1996.

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31 WEIGHTED AVERAGE LIFE OF THE NOTES

Since the rate of payment of principal on the Notes depends on the ability of the Servicer to convert Non-Performing Loans to Performing Loans, the rate of payment of the payoff balance of the Loans and the Servicer liability to accurately predict and collect the payoff balance of the Loans, final payment of the Notes could occur significantly earlier or later than the Expected Final Distribution Date. The rate of payment of payoff balances collected on nonperforming loans is difficult to predict and may be influenced by a variety of economic, social and other factors, including the skill and experience of the collector. If CFS were to cease acting as the Servicer, delays in processing payments on the Loans and information in respect thereof could occur and result in delays in payments to the Noteholders. Moreover, the rate of payment of payoff balances on the Loans may be adversely affected by the replacement of CFS with a less experienced or skilled servicer. As a result, final payment of the Notes could occur significantly earlier or later than the Expected Final Distribution Date. Any reinvestment risks resulting from a faster or slower incidence of payment of Loans will be borne exclusively by the Noteholders.

USE OF PROCEEDS

The net proceeds from the sale of the Notes offered hereby will be paid to the Seller for the Loans and Other Assets. The Seller will use such net proceeds (a) to make a capital contribution to GTD to enable GTD to purchase the Interest Rate Cap and to make the Reserve Account Initial Deposit and (b) to repay approximately $76,300,000 of the outstanding indebtedness owed to The Chase Manhattan Bank (" CMB") as lender under the Warehouse Facility, relating to borrowings under which were used b' the Warehouse Buyer to finance its acquisition of the Loans and otherwise for general corporate purposes.

THE WAREHOUSE FACILITY

The Warehouse Buyer has financed its purchases of Loans from Specified Sellers under a revolving credit facility (the " Warehouse Facility") with CMB as lender. Under the Warehouse Facility, CMB has committed to make up to $100,000,000 in revolving loans to the Warehouse Buyer to acquire certain financial assets such as charged off credit card receivables. CFS has agreed to service the financial assets acquired by the Warehouse Buyer

THE SELLER AND THE SERVICER

Commercial Financial Services, Inc., the Seller and the Servicer, was incorporated in the State of Oklahoma on August 27, 1986. Its principal executive offices are located as 2448 E. 81st Street, Suite 5500, Tulsa, Oklahoma 74137-4248. The audited combined financial statements of CFS and its affiliates and the related auditors report are attached hereto as Exhibit C.

CFS specializes in due diligence review, valuation and servicing of non-performing consumer loans solely on behalf of itself and affiliated entities which purchase such loans and on behalf of trusts which purchase the loans from one of CFS affiliates as part of a securitization transaction.

In January 1997, CFS received a "Strong" ranking as a loan collector by Standard Poor's a division of the McGraw-Hill Companies, Inc. CFS has also been designated as an "Approved Servicer" for securitization of charged off credit card receivables by Duff Phelps Credit Rating Co. in a Special Report dated February 1997. See "The Loans — Servicing and Collection.

None of the Seller, the Servicer nor any of their respective affiliates have issued any debt or Securities (other than any securities issued in a securitization transaction) that have been rated by any rating agency.

33 THE BACKUP SERVICER

Bankers Trust Company, a banking corporation organized under the laws of the State of New York, is engaged in banking and related activities. The principal executive Offices of Bankers Trust Company are located at Four Albany Street, New York, New York 10006. The terms of the Sale and Servicing Agreement permit the Backup Servicer to engage subservicers for the serving of the Loans provided that the Backup Servicer remains primarily responsible for such servicing

The Backup Servicer will receive a fee (the "Backup Servicing Fee") each month for services rendered during the preceding Monthly Period, which will be, with respect to each Distribution Date an amount generally equal to the greater of (a) 53.409 and (b) the product of (i) the quotient of 0.06% divided by twelve, multiplied by (is) the Note Balance as of the first day of such month, Bankers Trust Company, as Trustee and Backup Servicer, will also receive an upfront fee of $100,000. With respect Monthly Period in which the Backup Servicer for such whole Monthly Period. The Backup Servicing Fee will be pro rated, if the Backup Servicer is acting as the Servicer, the Backup Servicer will receive the Servicing Fee in lieu of the Backup Servicing Fee.

THE INTEREST RATE CAP PROVIDER

The Interest Rate Cap Provider will be The Chase Manhattan Bank.

DESCRIPTION OF THE NOTES

GENERAL

The Issuer will issue the Class A-1 Notes with an aggregate initial principal balance of $88,000,000 and the Class A-2 Notes with an aggregate initial principal balance of $88,000,000. The Class A-1 Notes and the Class A-2 Notes will bear interest as provided below in "interest on the Notes" and will share collections distributable in respect of principal on a part paw basis in proportion to the Class A-1 Percentage or Class A-2 Percentage, as applicable. The Notes will be issued pursuant to the Indenture and will be secured by the Indenture Properly pledged to the Trustee pursuant the Indenture. The Notes will be privately offered and issued to Noteholders in book-entry form except under the limited circumstances described below. The following summary describes the material terms of the Notes and the Indenture, but does not purport to be a complete description of the Notes or the Indenture and is subject to, and qualified in its entirety by reference to all the provisions of the Notes and the Indenture.

The Notes will generally be available for purchase in minimum denominations of $100,000 and integral multiples of $1,000 in excess thereof Notes will initially be issued in book entry form only. As to the Notes issued in book-entry form, the Seller baa been informed by DTC that DTC's nominee will be Cede. Accordingly, such nominee is expected to be the holder of record of the Notes. Unless and until Definitive Notes are issued in replacement for book-entry Notes under the limited circumstances described herein, no Note Owner will be entitled to receive a physical note representing a Note. See "Certain Information Regarding the Notes — Definitive Notes." As to the Notes issued in book-entry form, all references herein to actions by Noteholders refer to actions taken by DTC upon instructions from its participating organizations (" Participating Organizations") and all references herein to distributions to Noteholders refer to distributions to DTC or its nominee, as the registered holder of the Notes, for distribution to Noteholders in accordance with DTC's proceedings with respect thereto. See "Certain Information Regarding the Notes — Book-Entry Registration" and "— Definitive Notes."

Notes acquired by QIBs or Accredited Investors will be represented by book-entry certificates (the " U.S. Global Note") "in registered form, without coupons, deposited on the date of, issuance of such Notes with the Trustee on behalf of DTC, and registered in the name of a nominee of DTC. The U.S. Global Notes will be subject to certain restrictions on transfer set forth herein.

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Notes offered pursuant to Regulation S under the Securities Act will be represented initially by temporary book-entry certificates (the " Temporary Regulation S Note") to be deposited on the date of issuance of such Notes with the Trustee on behalf of DTC, and registered in the name of a nominee of DTC for the benefit of Euroclear and Cedel, which will be exchanged upon the later of (a) 40 days after the later of (i) the Closing Date and (ii) the commencement of the offering of such Notes and (b) the date on which the requisite certifications of ownership by other than a "U.S. Person" as defined in Rule 902 of Regulation S are due to and provided to the Trustee as described under "— Transfer Restrictions" below (the later of clauses (i) and (ii) is referred to herein as the "Exchange Date") for permanent, book-entry certificates in respect of such Notes (the "Unrestricted Regulations S Notes," and, together with the Temporary Regulation S Notes. the "Registration S Book-Entry Notes"). The Registration S Book-Entry Notes will be issued in registered form without interest coupons and deposited with the Trustee on behalf of DTC, and registered in the name of a nominee of DTC at Euroclear and Cedel on behalf of Participating Organization, which have rights in respect of such Notes credited to their accuracies accounts with Euroclear or Cedel from time to time.

Investors may hold their interest in U.S. Global Notes directly through DTC if they are Participating Organizations or indirectly through organizations that are Participating organizations. Note Owners may hold their interests in the Regulation S book-entry Notes directly through Euroclear or Cedel, if they are participants in Euroclear or Cedel, or indirectly through organizations that are Participating Organization. Beginning on the Exchange Date (but not earlier)' Note Owners my subject to certain conditions, also hold such interests through organizations other than Euroclear or Cedel that are Participating Organization, Euroclear and Cedel will hold interests in the Unrestricted Regulation S Notes on behalf of their Participating Organizations through their respective depositories, which depositories in turn will hold such interest in the Unrestricted Regulation S Notes in customers' securities accounts in the depositories' names on the books of DTC.

INTEREST ON THE NOTES

The Class A-1 Notes will bear interest at the Class A-1 Interest Rate, which will be distributed on each Distribution Date to the holders of the Class A-1 Notes of record on the preceding Determination Date, to the extent of amounts on deposit and available therefor in the Note Distribution Account. With respect to each Distribution Date (other than the initial Distribution Date) interest on the Class A-1 Notes will accrue from and including the preceding Distribution Date to but excluding such Distribution Date, in an amount equal to the product of (a) the Class A-1 Interest Rate, multiplied by (b) 1/12, multiplied by (c) the Class A-1 Note Balance as of the preceding Distribution Date (after giving effect to any distributions of principal on such preceding Distribution Date). The Class A-1 Monthly Interest payable on the first Distribution Date will accrue on the Class A-1 Note Balance as of the Closing Date at the Class A-1 Rate from and including the Closing Date and will be $172,700.00.

The Class A-2 Notes will bear interest at the Class A-2 Interest Rate determined on the related LIBOR Determination Date. Class A-2 Monthly Interest will be distributed on each Distribution Date to the holders of the Class A-2 Notes of record on the preceding Determination Date, to the extent of amounts on deposit and available therefor in the Note Distribution Account. With respect to each Distribution Date (other than the initial Distribution Date Class A-2 Monthly Interest will accrue (a the related Class A-2 Interest Accrual Period, in an amount equal to the product of (a) the Class A-2 Interest Rate, multiplied by (b) a fraction, the number of which is the actual number of days in the related Class A-2 Interest Accrual Period and the denominator of which is 360, multiplied by (c) the Class A-2 Note Balance as of the preceding Distribution Date (after giving effect to any distributions of principal on such preceding Distribution Date). The Class A-2 Monthly Interest payable on the first Distribution Date will scenic on the Class A-2 Note Balance as of the Closing Date at the Class A-2 Interest Rate from and including the Closing Date and will be $156,860.00

The failure to pay the Noteholders' Interest Distributable Amount in full on an) Distribution Date due to the insufficiency of amounts on the deposit Note Distribution Account which are distributable as interest on the Notes will not constitute a Servicer Default under the Sale and Servicing Agreement or an Event of Default under the Indenture.

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Payments under the Interest Rate Cap will not be available to pay interest or principal on the Class A-1 Notes. To the extent that the Class A-2 Interest Rate exceeds the Cap Rate, the Class A-2 Noteholder will be entitled to receive, and must rely solely on a payment under the Interest rate Cap for the portion of Class A-2 Monthly Interest which is attributable to the portion of the Class A-2 Note Rate in excess of the Cap Rate. Payments under the interest Rate Cap will be based upon the Notional Amount Schedule. The Notional Amount Schedule may from time to time be reduced it to the extent the notional amount exceeds the Class A-2 Note Balance at (ii) upon receipt of confirmation from each Rating Agency that such reduction will not result in the downgrade, withdrawal c: suspension of the then current rating of the Class A-2 Notes. There can be no assurance that the notional amount of the Interest Rate Cap from time to time will equal or exceed the Class A-2 Note Balance. Accordingly, a shortfall in Class A-2 Monthly Interest could occur The Reserve Account will not be used to cover any shortfall in amounts available to pay Class A-2 Monthly interest due to the insufficiency of, or failure to receive, any payment under the Interest Rate Cap.

PRINCIPAL OF THE NOTES

Principal of the Notes will be paid on each Distribution Date to the extent of "Available Principal" which consists of the Total Available Amount remaining after payments of the Administrative Distributions and payments of accrued but unpaid interest on the Notes as of such date (other than interest which is unpaid on the Class A-2 Notes due to the insufficiency of, or failure to receive, any payment under the Interest Rate Cap). Available Principal will be paid to the Noteholders until the Class A-1 Note Balance and the Class A-2 Note Balance are reduced to zero and will be allocated, on a pro rats basis, to the Class A-1 Notes and the Class A-2 Notes based on the Class A-1 Percentage and the Class A-2 Percentage, respectively. See "Description of the Sale and Servicing Agreement.

OPTIONAL REDEMPTION

On any Distribution Date as of which the Note Balance (after taking into account all other distributions to be made on such Distribution Date) is 10% or less of initial Note Balance of the Notes, the Seller will have the option to purchase all, but not less than all, of the Indenture Property (other than the Owned Accounts, the Interest Rate Cap and the Reserve Account and all investments held in such accounts and my proceeds therefrom). To exercise such option, the Seller will deposit in the Note Distribution Account Amount is equal to the greatest of (a) the aggregate ECR Payoff Balances of all such Loans, (b) the sum of the Note Balance and all accrued but unpaid interest on the Notes as of the Distribution Date related to the Monthly Period in which such deposit occurs, and (c) the fast market value of all such Loans. Thereupon, the Seller will succeed so all interests in and to the Indenture Property described above. Any written determination at to the fair market value of the Loans made by the Seller and the Issuer and submitted to the Trustee will be deemed to conclusively establish such fair market value.

Amounts deposited into the Note Distribution Account upon the exercise by the Seller of such purchase option will be distributed in redemption of the Notes in the order of priority described in "Description of the Sale and Servicing Agreement — Distributions from Note Distribution Account."

REPORTS TO NOTEHOLDERS

On each Distribution Date, the Servicer will send to each Noteholder a report (the " Monthly Statement") setting forth, among other things, the Collection. Account balance, the Note Balance, the amount of accrued but unpaid interest on the Notes, the Reserve Account balance, the Required Reserve Account Deposit, the Trustee fees, the Backup Servicing Fee, the engagement fees for accountants and the Servicing Fee with respect to such Distribution Date.

TRANSFER RESTRICTIONS

No transfer of a Note will be made unless (i) the registration requirements of the Securities Act and any applicable State securities laws are complied with, (ii) such transfer is made to a person that has delivered to the Issuer and Trustee a representation letter in the form of Exhibit A hereto and whom the transferor reasonably believes seller due inquiry is a QIB that is purchasing such Note for its own account or the account of a QIB to whom notice is given that the transfer is being made in reliance on Rule 144A under the Securities Act and neither such person nor such others is

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a broker-dealer with less than $25 million in "Securities as such term is defined under Rule 144, and, as such, such person or others are a Qualified Purchaser, (iii) such transfer is made to certain non-U.S. Persons outside the United States in accordance with Rule 904 of Regulation S or (iv) such transfer is made pursuant to an exemption from registration requirements under the Securities Act other than Rule 144A or Regulation S and the registration requirements of applicable State securities laws. None of the Servicer, the Issuer, the Backup Servicer, the Seller, the Trustee or an' other person is obligated or intends to register the Notes under the Securities Act or any state securities law. The Issuer will make available, at any time upon request, to any Noteholder in connection with any sale of a Note and to my prospective transferee, the information specified in Rule 144A(d)(4) of the Securities Act.

If a transfer is to be made in reliance upon clause (iii) or (iv) above, (x) the Trustee shall require that both the prospective transferor and the prospective transferee certify to the trustee and the Seller in writing the facts surrounding such transfer, which certification shall be in form and substance reasonably satisfactory to the Trustee and the Seller and (v) if the reasonable discretion of the Trustee, such certification does not clearly establish a basis for such exemption, the Trustee shall require a written opinion of counsel (which shall be as the expense of the prospective transferee or the prospective transferor, but may be rendered by salaried counsel of the prospective transferor or the prospective transferee or any affiliate thereof) reasonably satisfactory to the Seller and the Trustee to the effect that such transfer will not violate the Securities Act.

The Note Purchase Agreement will contain representations and warranties and the representation letter to be delivered by each prospective transferee will require contain an acknowledgment that the Issuer is not registered as an investment company under the Investment Company Act, but the Issuer is excepted from registration as such by virtue of Section 3(c)(7) of the Investment Company Act, which in general excludes from the definition of an investment company any tastier, the outstanding securities of which are owned exclusively by persons who, at the time of acquisition of such securities, are Qualified Purchasers and which is not melting and does not at that tone propose to make a public offering of such securities. In the Note Purchase Agreement or the representation letter, as the case may be, each Note Owner will agree that it will not transfer any Notes if, in the reasonable judgment of the Issuer, such transfer would cause the Notes to be owned by a person that is not a Qualified Purchaser and will agree further that any purported transfer of Notes will be void if after having effect to such transfer, the Notes would be owned by a person who as not a Qualified Purchaser. In addition, in the Note Purchase Agreement and each representation letter, each Note Owner will represent that it and any party for whom it is acting as agent or trustee are not entities that we relying on exemptions from registration under the Investment Company Act under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act and certain other representations concerning the status of such Note Owner intended to ensure that the Issuer is not required to register as an "investment company under the Investment Company Act.

In addition, no transfer of a Note will be made unless the prospective transferee has certified that at least one of the following statements is an accurate representation as to the source of hinds to be used by it to pay the purchase price of the Note or as to its acquisition of the Note, as applicable, (i) if it is an insurance company, either (1) the source is a separate account that is maintained solely so connection with such prospective transferee's fixed contractual obligations under which the amounts payable, or credited, so any "employee benefit plan" as defined in Section 3(3) of ERISA or "plan" as defined in Section 4975 of the Code (a " Benefit Plan") and to any participant or beneficiary of such Benefit Plan (including any annuitant) are not affected in any manner by the investment performance of the separate account: or (2) the source is an "insurance company general account" within the meaning of Department of Labor Prohibited Transactions Class Exemption 95-60 (" PTE-60") and the amount of reserves and liabilities for the contracts(s) held by or on behalf of each Benefit Plan which has an interest in such prospective transferee's general account as a contract holder, together with the amount of reserves and liabilities for the general account contracts held by or on behalf of any such other Benefit Plan maintained by the same employer (or an affiliate thereof) or by the same employee organization, does not exceed and, so long as such Note is held by such insurance company general account, will not exceed (unless no portion of such excess results from an increase in the assets allocated to such insurance company general account by such a Benefit Plan, not including the reinvestment of such insurance company general account s earnings ma assess allocated to such insurance company general account by such a Benefit Plan), 10% of the total reserves and liabilities of such prospective transferee's general account plus surplus as determined pursuant to the provisions of Section 1(a) of PTE 95-60: or (3) its acquisition of the Note will not give rise to a non-exempt prohibited transaction

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under Section 406(a) of ERISA or Section 4975 of the Code, or (ii), the source does not include assess of am Benefit Plan.

CERTAIN TRANSFERS BY NOTE OWNERS

Prior to any exchange of an interest in a Temporary Regulation S Note for a corresponding interest in a U.S. Global Note or Unrestricted Regulation S Note, a Participating Organization appearing in the records of Euroclear or Cedel as entitled to a portion of the principal amount of such Temporary Regulation S Note must provide to Euroclear or Cedel a written certification in the form attached to the Indenture, (an " Owner Regulation S Certification") that the beneficial owner of the interest is the Notes is not a U.S. person, and Euroclear or Cedel will provide to the Trustee a certification in the form attached to the Indenture (a " Clearing Agency Certification"). For purposes of the Owner Regulation S Certification, "U.S. person" means (a) any individual resident in the United States, (b) any partnership or corporation organized or incorporated under the laws of the United States, (c) any estate of which an executor or administrator is a U.S. person (other than an estate governed by foreign law and of which an executor or administrator is a non-U.S. person who has sole or shared investment discretion with respect to its assets), (d) any trust of which any trustee is a U.S. person (other than a trust of which a trustee is a non-U.S. person who has sole or shared investment discretion with respect to its assess and no beneficiary of the trust (and no settler if the trust is revocable) is a U.S. person), (e) any agency or branch of a foreign entity located in the United States, (f) any non-discretionary or similar account (other than an estate or miss) held by a dealer or outer fiduciary for the benefit or account of a U.S. person, (g) any discretionary or sheller account (other' than an estate or trust) held by a dealer or other fiduciary organized, incorporated or (if sit individual) resident in the United States (other than such an account held for the benefit or account of a non-U.S. person) and (h) any partnership or corporation organized or incorporated under the laws of a foreign jurisdiction and formed by a U.S. person principally for the purpose of investing in securities not registered under the Securities Act (unless it is organized or incorporated, and owned, be accredited investors within the meaning of Rule 501(a) under the Securities Act who are not natural persona, estates or trusts); provided, however, that the term "U.S. person" shall not include (i) a branch or agency of a U.S. person that is located and operating outside the United States for valid business purposes as a locally regulated branch or agency engaged in the banking or insurance business, (ii) am employee benefit plan established and administered in accordance with the law, customary practices and documentation of a foreign county and (iii) the international organizations set forth in Section 902(o)(7) of Regulation S and any other similar international organizations, and their agencies, affiliates and pension plans.

A holder of a beneficial interest in a Temporary Regulation S Note may receive payments with respect to the Temporary Regulation S Note only alter deliver by such holder to Euroclear or Cedel, as the case may be of an Owner Regulation S Certification and upon delivery by Euroclear or Cedel, as the case may be to the Trustee of a Clearing Agency Certification. The delivery by such holder of a beneficial interest in a Regulation S Temporary Book-Entry Certificate of such certification shall constitute an irrevocable instruction by such holder to Euroclear or Cedel, as the case may be, to exchange such holder's beneficial interest with respect to a Temporary Regulation S Note for a beneficial interest in the Unrestricted Regulation S Note idler the Exchange Date. No payments will be paid to any holder of a beneficial interest in the Temporary Regulation S Note until the foregoing Owner Regulation S Certification has been provided to Euroclear or Cedel, as the case may be, by such holder and no payments shall be paid to Euroclear or Cedel with respect to such bolder's interest in a Temporary Regulation S Note unless Euroclear or Cedel, as the case may be, has provided a Clearing Agency Certification to the Trustee with respect to such interest

A beneficial interest in the Unrestricted Regulation S Note may be transferred to a person who takes delivery, in the form of an interest in the U.S. Global Note upon receipt by the Trustee of a written certification from the transferor in the form attached to the Indenture so the effect that such transfer is being made in accordance with Rule 144A and upon delivers of appropriate instructions to either of Euroclear or Cedel, as applicable. Beneficial interests in a U.S. Global Note may be transferred to a person who takes delivery an the form of an interest an a Temporary Regulation S Note or Unrestricted Regulation S Note, whether before, on or after the Exchange Date, only upon receipt by the Trustee of a written certification from the transferor in the form attached to the Indenture so the effect that such transfer is being made in accordance with Regulation S and upon delivery u(appropriate instructions to either of Euroclear or Cedel, as applicable. Any beneficial interest in any of the foregoing Book-Entry Certificates that is transferred to a person who takes delivery in the form of an interest in the other such Book-Entry Certificate will, upon transfer cease to be an

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interest in such Book-Entry Certificate and become an interest in the other such Book-Entry Certificate and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to beneficial interests in such other Book-Entry Certificate for as long as it remains such an interest.

In addition, no beneficial owner of an interest in a DTC Certificate will be able to transfer that interest except in accordance with DTC's applicable procedures and, if applicable, those of Euroclear and CEDEL

THE INDENTURE

Bankers Trust Company is the Trustee under the Indenture. The Trustee, in its individual capacity or otherwise, may hold Notes in its own name or as pledgee. For the purpose of meeting the legal requirements of certain jurisdictions, the Servicer and the Trustee may appoint co-trustees or separate trustees of all or any part of the mist estate and confer upon such party such powers, duties, obligations, rights and trusts as the Trustee seems necessary or desirable. In the event of such appointment, all rights, powers, duties, and obligations conferred or imposed upon the Trustee by the Indenture shall be conferred or imposed upon the Trustee and such separate trustee or co-trustee jointly, or, in any jurisdiction in which the Trustee shall be incompetent or unqualified to perform certain acts, singly upon such separate trustee or co-trustee who shall exercise and perform such rights, powers, ditties, and obligations solely at the direction of the Trustee.

The Trustee may resign as any time, in which event the Issuer will be obligated to appoint a successor trustee with the consent of the Noteholders of a majority of the Note Balance. The Issuer or the Noteholders of at least 75% of the Note Balance may also remove the Trustee if, among other reasons, the Trustee ceases to be eligible to continue as such under the Indenture, becomes legally unable to act, or becomes insolvent. In such circumstances, the Issuer will be obligated to appoint a successor trustee with the consent of the Noteholders of a majority of the Note Balance. Any resignation or removal of the Trustee and appointment of a successor Trustee will not become effective until acceptance of the appointment by the successor trustee.

The Sale and Servicing Agreement will provide that the Trustee's fees will be paid in accordance with the payment priorities set forth therein. The Indenture will further provide that the Trustee will be entitled to indemnification by the Servicer for and will be held harmless against, any loss, liability, fee, disbursement, or expense incurred by the Trustee not resulting from the Trustee's own willful misfeasance, bad faith, or negligence (other than by reason of a breach of any of its representations or warranties set forth in the Indenture). The Indenture will further provide that the Servicer will indemnify the Trustee for certain taxes that may be asserted in connection with the transaction.

DUTIES OF THE TRUSTEE

The Trustee makes no representations as to the validity or sufficiency of the indenture, the Notes (other than the authentication of the Notes), or any Loans or related documents, and is not accountable for the use or application by the Issuer of any funds paid to the Issuer in respect of the Notes or the Loans, or the investment of any monies received by the Servicer before such monies are deposited into the Collection Account. The Trustee has not independently verified the Loans. If no Event of Default under the Indenture has occurred and is continuing, the Trustee is required to perform only those duties specifically required of is under the certificates, reports, or other instruments required to be furnished to the Trustee wider the Indenture, an which case it is only required to determine whether such certificates, reports or other instruments conform to the requirements of the Indenture.

The obligations of the Trustee will terminate and the Trustee will release any property remaining subject to the lien of the Indenture on the date on which the Trustee shall have received payment and performance of all amounts and obligations which the Issuer may at any time owe to or on behalf of the Trustee for the benefit of the Noteholders under the indenture or the Notes.

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MODIFICATION OF INDENT

The Issuer and the Trustee may, with prior notice to the Rating Agencies but without consent of the Noteholders, enter into one or more supplemental indentures for an) of the following purposes. (i) to correct or amplify the description of any property subject to the lien of the Indenture, or to better assure, convey and confirm unto the Trustee any property subject or required to be subjected to the lien of the Indenture; (ii) to provide for the assumption of the Indenture obligations by a permitted successor to the Issuer, (iii) to add additional covenants for the benefit of the Noteholders, or to surrender any rights or powers confused upon the Issuer, (iv) to convey, transfer, assign, mortgage or pledge any property to or with the Trustee; (v) to cure any ambiguity or correct or supplement any provision in the Indenture or in any supplemental indenture', and (vi) to provide for the acceptance of the appointment of a successor Trustee or to add to or change any of the provisions of the Indenture or any supplemental indenture which may be inconsistent with any other provision of the Indenture as shall be necessary and permitted to facilitate the administration by more than one trustee.

The Issuer and the Trustee, with prior notice to the Rating Agencies and the consent of a the Noteholders of as least a majority of the Note Balance, may execute a supplemental indenture to add provisions to, change in any manner or eliminate any provisions of the Indenture, or modify in any manner the rights of the related Noteholders. However, without the consent of each Noteholder affected thereby, no supplemental indenture may: (i) change the Final Distribution Date or the due date of any installment of interest on any Note or reduce the principal amount thereof, the interest rate specified thereon or the redemption price with respect thereto or change any provisions of the Indenture relating to the application of collections on, or the proceeds of the sale of, the Loans to payment of principal of or interest on the Notes, or any place of payment where, or the coin or currency in which, any Note or any interest thereon is payable, (ii) impair the right to institute suit for the enforcement of certain provisions of the Indenture regarding payment, (iii) reduce the percentage of the Note Balance the consent of the Noteholders of which is required for any such supplemental indenture or for any waiver of compliance with certain provisions of the Indenture or of certain defaults thereunder and their consequences as provided for in the Indenture; (iv) modify or alter the provisions of the Indenture regarding the voting of Notes held by the Issuer or any of its affiliates, (v) reduce the percentage of the Note Balance the consent of the Noteholders of which is required to direct the Trustee to sell or liquidate the Loans if the proceeds of such sale would be insufficient to pay the principal amount and accrued but unpaid interest on the outstanding Notes, (vi) reduce the percentage of the Note Balance the consent of the Noteholders of which is required to amend the sections of the Indenture which specify the applicable percentage of the Note Balance necessary to amend the Indenture or certain other related agreements, (vii) modify any calculation of the amount of any payment of interest or principal due on any Note on any Distribution Date or (viii) permit the creation of any lien ranking prior to, or on a parity with, the lien of the Indenture with respect to any Indenture Property or, except as otherwise permitted or contemplated in the Indenture, terminate the lien of the Indenture on any such Indenture Property or deprive any Noteholders of the security afforded by the lien of the Indenture.

EVENTS OF DEFAULT: RIGHTS UPON EVENT OF DEFAULT

"Events of Default" under the Indenture will consist of (i) a default for five Business Days or more by the paying agent in forwarding to the Noteholders any amounts distributable as interest on the Notes; (ii) a default in the payments of principal of any Note when the same becomes due and payable on the Final Distribution Date: (iii) a default in the observance or performance in any material respect of any covenant or agreement of the Issuer made in the Indenture, or any representation or warranty made by the Issuer in the Indenture or in any certificate delivered pursuant thereto or in connection therewith having been incorrect as of the time made, and the continuation of any such default or the failure to cure such breach of a representation or warranty for a period of 30 days after knowledge thereof by the Issuer or there shall have been given to the limier by the Trustee or to the Issuer and the Trustee by the Noteholders of as least 25% of the Note Balance a written notice in accordance with the Indenture; or (iv) certain events of bankruptcy, insolvency, receivership or liquidation of the Issuer or GTD.

If an Event of Default should occur and be continuing with respect to the Notes the Trustee, upon request b the Noteholders of at least 75% of the Note Balance, shall declare the Note Balance to be immediately due and payable. If the Notes have been declared due and payable following an Event of Default with respect thereto the Trustee may

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institute proceedings to collect amounts due or foreclose on the Loans, exercise remedies as a secured party, sell the Loans or elect to have the Issuer maintain possession of such Loans and continue to apply collections on such Loans as if there had been no declaration of acceleration. The Trustee, however, will be prohibited from selling the Loans following an Event of Default unless (i) the Noteholders of the outstanding Notes consent to such sale, (ii) the proceeds of such sale are sufficient to pay in full the principal of and the accrued interest on such outstanding Notes as the date of such sale, or (iii) the Trustee determines that the proceeds of the Loans would not be sufficient on an ongoing basis to make all payments on the Notes as such payments would have become due if such obligations had not been declared due and payable, and the Trustee obtains the consent of the Noteholders of at least 75% of the Note Balance. Additionally, after the occurrence and during the continuance of a Servicer Default, the Trustee, at the direction of 100% of the Noteholders, may sell the Loans. Following a declaration upon an Event of Default that the Notes are immediately due and payable, the Noteholders will be entitled to ratable repayment of principal on the basis of their respective unpaid principal balances.

Subject to the provisions of the Indenture relating to the duties of the Trustee, if an Event of Default occurs and is continuing with respect to the Notes, the Trustee will be under no obligation to exercise any of the nights or powers under the Indenture at the request or direction of any of the Noteholders of such Notes, if the Trustee reasonably believes it will not be adequately indemnified against the coats, expenses and liabilities which might be incurred by is in complying with such request. Subject to the provisions for indemnification and certain limitations contained in the Indenture, the Noteholders of 75% of the Note Balance will have the right to direct the time, method and place of conducting any proceeding or my remedy available to the Trustee, and the Noteholders of at least a majority of the Note Balance may, in certain cases, waive may default with respect thereto, except a default in the payment of principal or interest or a default in respect of a covenant or provision of the Indenture that cannot be modified without the waiver or consent of all of the Noteholders.

No Noteholder will have the right to institute any proceeding with respect to the Indenture, unless (i) such Noteholder previously has given to the Trustee written notice of a continuing Event of Default, (ii) the Noteholders of as least 20% of the Note Balance have made written request of the Trustee to institute such proceeding in its own name as Trustee, (iii) such Noteholders have offered the Trustee reasonable indemnity, (iv) the Trustee has for 30 days failed to institute such proceeding, and (v) no direction inconsistent with such written request has been given to the Trustee during such 30-day period by the Noteholders of at least 75% of the Note Balance.

If an Event of Default occurs and as continuing and if it is known to the Trustee, the Trustee will mail to each Noteholder notice of the Event of Default within 30 days after is occurs.

NO PETITION

In addition, the Trustee and each Noteholder, by accepting a Note or an interest therein, will covenant that is will not at any time institute or join in any institution against the Issuer any bankruptcy, reorganization or other proceeding, under any federal or state bankruptcy or similar law.

CERTAIN INFORMATION REGARDING THE NOTES

BOOK-ENTRY REGISTRATION

The Notes, unless Definitive Notes are issued, shall be held through DTC (in the United States) or Cedel or Euroclear (in Europe) or indirectly through organizations that are participants in such systems. DTC's Nominee will hold the global Notes. Cedel and Euroclear will hold omnibus positions on behalf of the Cedel Participants and the Euroclear Participants, respectively, through customers' securities accounts in Cedel's and Euroclear's names on the books of their respective depositories (collectively, the "Depositaries") which in turn will hold such positions in customers' securities accounts an the Depositaries names on the books of DTC. For additional information regarding clearance and settlement procedures, see Exhibit B hereto.

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DTC is limited-purpose trust company organized under the New York Banking Law, a "banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation within the meaning of the New York Uniform Commercial Code, and a "clearing agency' registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities for Participating Organizations and facilitates the clearance and settlement among Participating Organizations of securities transactions, such as transfers and pledges, in deposited securities through electronic book-entry changes in Participating Organizations' accounts, thereby eliminating the need for physical movement of securities notes Participating Organizations include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Indirect access to the DTC system is also available no others such as securities brokers and dealers, bunks, and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly ("Indirect Participants"). The rules applicable to DTC and Participating Organizations are on file with the Securities and Exchange Commission.

Transfers between Participating Organizations will occur in accordance with DTC rules. Transfers between Cedel Participants and Euroclear Participants will occur in the ordinary way in accordance with their applicable rules and operating procedures.

Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and directly or indirectly through Cedel Participants or Euroclear Participants, on the other, will be effected in DTC in accordance with DTC rules on behalf of the relevant European international cleaning system by its Depositary; however, such cross-market transactions will require delivery of instructions to the relevant European international clearing system by the counterparty in such system in accordance with its rules and procedures and within its established deadlines (European time). The relevant European international clearing system will, if the transaction meets its settlement requirements, deliver instructions to its Depositary to take action to effect final settlement on its behalf by delivering or receiving securities in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Cedel Participants and Euroclear Participants may tics deliver instructions directly to the Depositaries.

Because of time-zone differences, credits of securities in Cedel or Euroclear as a result of a transaction with a DTC Participant will be made dicing the subsequent securities settlement processing, dated the business day following the DTC settlement date, and such credits or any transactions in such securities settled during such processing will be reported to the relevant Cedel Participant or Euroclear Participant on such business day. Cash received in Cedel or Euroclear as a result of sales of securities by or through a Cedel Participant or a Euroclear Participant to a DTC Participant will be received with value on the DTC settlement date but will be available in the relevant Cedel or Euroclear cash account only as of the business day following settlement in DTC.

Purchases of Notes sander the DTC system must be made by or through Participating Organization, which will receive a credit for the Notes on DTC's records. The ownership interest of each actual Note Owner is in turn to be recorded on the Participating Organization and Indirect Participants' records, Note Owners will not receive written confirmation from DTC of their purchase, but Note Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the DTC Participant or Indirect Participant through which the Note Owner entered into the transaction. Transfers of ownership interests in the Notes are to be accomplished by entries made on the books of Participating Organizations acting on behalf of Note Owners. Note Owners will not receive physical noses representing their ownership interest in Notes, except an the evens that use of the book-entry system for the Notes is discontinued. It is anticipated that the only "Noteholder" will be DTC's Nominee. Note Owners will not be recognized by each Trustee as Noteholders, as such term is used in each Indenture, and Note Owners will be permitted to exercise the rights of Noteholders only indirectly through DTC and Participating Organization.

To facilitate subsequent transfers, all Notes deposited by Participating Organizations with DTC are registered in the name of DTC's Nominee. The deposit of Notes with DTC and their registration an the name of DTC's Nominee effects no change in beneficial ownership. DTC has no knowledge of the actual Note Owners of the Notes. DTC's records reflect only the identity of the Participating Organizations to whose accounts such Notes are credited, which may

41

or may not be the Note Owners. The Participating Organizations will remain responsible for keeping account of their holdings on behalf of their customers

Conveyance of notices and other communications by DTC to Participating Organizations, by Participating Organizations to Indirect Participants, and by Participating Organizations and Indirect Participants to Note Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

Neither DTC nor DTC's Nominee will consent or vote with respect to Notes. Under its usual procedures. DTC mails an omnibus proxy to the issuer as soon as possible after the record date, which assigns DTC's Nominee's consenting or voting rights to those Participating Organizations to whose accounts the Notes are credited on the record date (identified is a listing attached thereto).

Principal and interest payments on the Notes will be made to DTC. DTC's practice is to credit Participants accounts on the applicable Distribution Date in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that at will not receive payment on such Distribution Date. Payments by Participating Organizations to Note Owners will be governed by standing instructions and customary practices, as is the case with the Notes held for the accounts of customers an bearer form or registered in "street name" and will be the responsibility of such DTC Participant and not of DTC, the Trustee, the Issuer, the Servicer or the Seller, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to DTC is the responsibility of the Trustee, disbursement of such payments to Participating Organizations shall be the responsibility of DTC, and disbursement of such payments to Note Owners shall be the responsibility of Participating Organizations and Indirect Participants. Under a book-entry format, the Noteholders may experience some delay in their receipt of payments, since such payments will be forwarded by the Trustee to DTC's Nominee. DTC will forward such payments to Participating Organizations which thereafter will forward them to Indirect Participants or Note Owners.

Because DTC can only act on behalf of Participating Organizations, who no m act on behalf of Indirect Participants and certain banks, the ability of a Noteholder to pledge Notes to persons or entities that do not participate in the DTC system, or otherwise take actions with respect to such Notes, may be limited due to the lack of a physical note for such Notes.

DTC has advised the Issuer that is will sake any action permitted to be taken by a Noteholder under the Indenture only at the direction of one or more Participating Organizations to whose accounts with DTC the applicable Notes are credited. DTC may sake conflicting actions with respect to other undivided interests to the extent that such actions are taken on behalf of Participants whose holdings include such undivided interests.

Cedel Bank, societe anonyme ("Cedel") is incorporated under the laws of Luxembourg as a professional depository. Cedel holds securities for its participating organizations ("Cedel Participants") and facilitates the clearance and settlement of securities transactions between Cedel Participants through electronic book-entry changes an accounts of Cedel Participants, thereby eliminating the need for physical movement of securities. Transactions may be settled in Cedel in any of 32 currencies, including United States dollars. Cedel provides to its Cedel Participants, among other "things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Cedel interfaces with domestic markets in several countries. As a professional depository, Cedel is subject to regulation by the Luxembourg Monetary Institute. Cedel Participants are recognized financial institutions. Around the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations and may include the underwriters of any series of noses issued by the Issuer. Indirect access to Cedel is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Cedel Participant, either directly or indirectly.

The Euroclear System was created in 1968 to hold securities for participants of the Euroclear System (Euroclear Participants) and to clear and settle transactions between Euroclear Participants through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical movement of securities and any risk from lack of simultaneous transfers of securities and cash. Transactions may now be settled in any of 32

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currencies, including United States dollars. The Euroclear System includes various other services, including securities lending and borrowing and interfaces with domestic markets in 25 countries generally similar to the arrangements :or cross-market transfers with DTC described above. The Euroclear System is operated by Morgan Guaranty Trust Company of New York. Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under contract with Euroclear Clearance System, Societe Cooperative, a Belgian cooperative corporation (the "Cooperative"). All operations are conducted by the Euroclear Operator, and all Euroclear securities clearance accounts and Euroclear casts accounts are accounts with the Euroclear Operator, not the Cooperative. The Cooperative Board establishes policy for the Euroclear System. Euroclear Participants include banks (including central banks), securities brokers and dealers and other professional financial intermediaries and may include the underwriters of any series of notes issued by the Issuer Indirect access to the Euroclear System is also available to other firms that maintain a custodial relationship with a Euroclear Participant, either directly or indirectly

The Euroclear Operator is the Belgian branch of a New York banking corporation which is a member bank of the Federal Reserve System. As such, it is regulated and examined by the Board of Governors of the Federal Reserve System and the New York State Banking Department, as well as the Belgian Banking Commission.

Securities clearance accounts and cash accounts with the Euroclear Operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System (collectively, the Terms and Conditions). The Terms and Conditions govern transfers of securities and cash within the Euroclear System, withdrawal of securities and cash from the Euroclear System, and receipts of payments with respect to securities in the Euroclear System. All securities in the Euroclear System are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. The Euroclear Operator acts wider the Terms and Conditions only on behalf of Euroclear Participants and has no record of or relationship with persons holding through Euroclear Participants.

Distributions with respect to the Notes held through Cedel or Euroclear will be credited to the cash accounts of Cedel Participants or Euroclear Participants in accordance with the relevant system's rules and procedures, to the extent received by its Depositary. Such distributions will be subject to tax reporting in accordance with relevant United States tax laws and regulations. See "Federal Income Tax Consequences." Cedel or the Euroclear Operator, as the case may be, will sake any other action permitted to be taken by a Noteholder under a related Agreement on behalf of a Cedel Participant or Euroclear Participant only an accordance with its relevant rules and procedures and subject to its Depositary's ability to effect such actions on its behalf through DTC.

Although DTC, Cedel and Euroclear have agreed to the foregoing procedures in order to facilitate transfers of the Notes among participants of DTC, Cedel and Euroclear, they are under no obligation to perform or continue to perform such procedures and such procedures may be discontinued at any time. Under such circumstances, in the event that a successor securities depository for DTC as not obtained. Definitive Notes are required to be printed and delivered. The Seller may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Definitive Notes will be delivered to Noteholders. See — Definitive Notes

The information in this section concerning DTC, Cedel, Euroclear and the book-entry system has been obtained from sources that the Issuer believes to be reliable, but the Issuer takes no responsibility for the accuracy thereof

NONE OF THE SELLER, THE SERVICER, THE ISSUER, THE TRUSTEE NOR THE PLACEMENT AGENT WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO ANY PARTICIPATING ORGANIZATIONS, CEDEL PARTICIPANTS OR EUROCLEAR PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH RESPECT TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, CEDEL, EUROCLEAR OR ANY PARTICIPANT, (2) THE PAYMENT BY DTC, CEDEL, EUROCLEAR OR; ANY PARTICIPANT OF ANY AMOUNT DUE TO ANY NOTE OWNER IN RESPECT OF THE PRINCIPAL BALANCE OF, OR INTEREST ON, THE NOTES, (3) THE DELIVERY BY ANY DTC PARTICIPANT, CEDEL PARTICIPANT OR EUROCLEAR PARTICIPANT OF ANY NOTICE TO ANY NOTE OWNER WHICH IS REQUIRED OR PERMITTED UNDER THE TERMS OF THE APPLICABLE AGREEMENTS TO BE GIVEN TO NOTEHOLDERS OR (4) ANY OTHER ACTION TAKEN BY DTC OR DTC'S NOMINEE AS THE NOTEHOLDER.

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DEFINITIVE SECURITIES

With respect to any Notes issued an book-entry form, such Notes will be issued fully registered, certificated form ("Definitive Notes") to the Noteholders or their nominees, rather than to DTC or its nominee, only if (i) the Seller advises the Trustee that DTC is no longer willing or able to discharge properly its responsibilities as depository with respect to such Notes and the Trustee is unable to locate a qualified successor, (ii) the Seller, at its option, advises the Trustee that it elects to terminate the book-entry system through DTC, or (iii) after the occurrence of an Event of Default. Noteholders representing at least a majority of the Note Balance advise the Trustee and DTC through Participating Organizations in writing that the continuation of a book-entry system through DTC (or a successor thereto) with respect to the Notes is no longer in the best interest of the holders of such Notes.

Upon the occurrence of any evens described in the immediately preceding paragraph, the Trustee will be required to notify all applicable Note Owners through participants of the availability of Definitive Notes. Upon surrender by DTC of the definitive noses representing the corresponding Notes and receipt of instructions for re-registration, the Trustee will reissue such Notes as Definitive Notes to such Noteholders.

DESCRIPTION OF THE SALE AND SERVICING AGREEMENT

The following summary describes the material terms of the Sale and Servicing Agreement. This summary does not purport to be complete and is subject to, and qualified in its entirety by reference to, all the provisions of the Sale and Servicing Agreement

SALE AND CONTRIBUTION OF LOANS

On the Closing Date, the Seller will sell or contribute to the Issuer pursuant to the terms of the Sale and Servicing Agreement and without recourse, except for breach of the representations and warranties of the Seller as to the Loans contained is the Sale and Servicing Agreement all right, title and interest of the Seller in (i) the Loans and all monies received thereunder after the Cutoff Date, (ii) other assets related to the Loans, and (iii) all proceeds of any of the foregoing. The property described in clauses (ii) and (iii) above referred to herein as the "Other Assets". The Seller will represent and warrant to the Issuer, among other things, that the Sale and Servicing Agreement constitutes a valid grant, transfer and assignment to the Issuer of all right, title and interest of the Seller an the Loans and Other Assets and that each Loan and Other Asset has been transferred to the Issuer free and clear of any adverse claim of saw person not holding through the Issuer

PLEDGE AND ASSIGNMENT OF RESERVE ACCOUNT AND INTEREST RATE CAP

On the Closing Date, GTD will fund the Reserve Account with the Reserve Account initial Deposit and purchase the Interest Rate Cap with funds contributed to GTD by the Seller. The Reserve Account and Interest Rate Cap will then be pledged and assigned by GTD to the Issuer and then by the Issuer to the Trustee for the benefit of the Noteholders

REPRESENTATIONS AND WARRANTIES AS TO THE LOANS

In the Sale and Servicing Agreement, the Seller will represent and warrant to the Issuer, as of the Closing Date, among other things that (1) the information set forth an the schedule of loans attached to the Sale and Servicing Agreement is true and correct in all material respects as of the Cutoff Date, each Loan was acquired by the Seller or the Warehouse Buyer, as the case may be from a Specified Seller, the Loans represent receivables due from obligors that arose in connection with credit card transactions entered into by or on behalf of such obligors; (2) the ECR information set forth an the schedule of loans attached to the Sale and Servicing Agreement contains the good faith best estimate of CFS as to the estimated recovery of the aggregate outstanding ECR Payoff Balance of the Loans as of the Cutoff Date; (3) to its actual knowledge, each Loan represents the genuine, legal, valid and binding payment obligation of the obligor thereon, enforceable by the holder thereof an accordance with its terms, except as enforceability may be limited by

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bankruptcy, unsolvency, reorganization, statute of limitations or similar laws affecting the enforcement of creditors rights in general and by equity, regardless of whether such enforceability is considered an a proceeding in equity or as law and except to the extent the unenforceability of such Loan (when taken together with the unenforceability of any other Loans would not have a material adverse effect or the ability of the Issuer or the Trustee to enforce any material portion of the Loans against the obligors thereof, (4) no transfer of any Loan b' is constitutes a fraudulent transfer or fraudulent conveyance under Insolvency Laws or commercial laws or as otherwise void or voidable or subject to subordination under similar laws or principles or for any other reason, (5) no Loan or Other Asset has been sold, transferred or assigned or pledged by it (except as contemplated by the Basic Documents), as the time of the conveyance of the Loans and Other Assets pursuant to the Sale and Servicing Agreement, it had good and marketable title thereto, free of any lien; the Issuer will have all of the right, title and interest of the Seller to and to the Louis and the Other Assets and the unpaid indebtedness evidenced thereby free of any lien (except as contemplated by the Basic Documents); (6) no Loan was originated in, or is subject to the laws of, any jurisdiction the laws of which would make the wander and assignment of such Loan unlawful; (7) all actions necessary in any jurisdiction to give the Issuer a first priority perfected ownership interest in the Loans have been made; no Loan, or constituent part thereof, constitutes a "negotiable instrument," "negotiable document of title" or "chattel paper" (as such terms are defined in the UCC); (8) the Seller has filed or caused to be filed, in respect of each such sale. UCC-I financing statements in all jurisdictions necessary to perfect a sale of "accounts" (as such terms are defined as the UCC) by such Specified Seller to the Seller or the Warehouse Buyer, as the case may be; (9) to its actual knowledge, no action or omission on the part of any Specified Seller would give rise to any right under the FDCPA on the part of any obligor to bring any action or claim that would result an a Material Adverse Effect; (10) each Loan was originated in the United States or one of its territories; (11) neither at nor any of its affiliates has advanced funds for the payment of any amount required by any Loan; (12) since the Cutoff Date, the terms of the Loans have not been impaired, waived, altered or modified in any respect, except in accordance with the Credit and Collection Policy; no obligor has been released, in whole or in part, except in accordance with the Credit and Collection Policy; (13) to its actual knowledge, the proceeds of each Loan have been folly disbursed and all costs, fees and expenses incurred in making, or closing or recording the Loans were paid or waived; there as no requirement on the part of the Issuer, or the Trustee to make future advances under any Loan, (14) to its actual knowledge with respect to each Performing Loan and Converted Loan, there is no material default, breach, violation or evens of acceleration existing under the related Loan and related documents as each way have been amended, restated, supplemented or otherwise modified in accordance with the Credit and Collection Policy, and no event which, with the passage of same or with notice and the expiration of any grace or cure period, would constitute a material default, breach, violation or evens of acceleration has occurred, and it has not waived any default, breach, violation or event of acceleration (except in accordance with the Credit and Collection Policy or which have been cured); and (15) to its actual knowledge, there is no litigation, proceeding or governmental investigation pending, or any order, injunction or decree outstanding, existing or relating to any Loan that could have a Material Adverse Effect "Material Adverse Effect" means a material adverse effect upon (i) the business, operations, properties, assess, condition (financial or otherwise) or prospects of the Seller, the Servicer or the Issuer, (ii) the ability of any person to perform its obligations or to enforce the obligations of other persons under the Basic Documents to which it is a party, or (iii) the Notes or the Noteholders. See "Description of the Sale and Servicing Agreement

REASSIGNMENT

The Seller will be obligated to accept reassignments of any Loan if the interest of the issuer or the Trustee in the Loans is materially and adversely affected by a breach at any representation or warranty made by the Seller with respect to the Loan and such breach has not been cured an all material respects within 30 days following discovery of such breach by the Seller or following notice of stub breach received by the Seller. The price to be paid by the Seller will be an amount equal to 55% of the ECR Payoff Balance of such Loan (the "Warranty Payment"). Upon reassignment and payment of the purchase price, the Seller will be entitled to receive any evidence of indebtedness and other documents relating to such Loan and all amounts received on account of such Loan after the date of such reassignment. The obligation of the Seller to accept reassignment of any Loan as to which a breach has occurred and as continuing, and the obligation of the Issuer to enforce the obligation of the Seller to accept reassignment of such Loan pursuant to the Sale and Servicing Agreement will, if such obligations are fulfilled, constitute the sole remedy against the Seller for such breach available to the Noteholders or the Trustee.

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SERVICING OF LOANS SERVICING PROCEDURES

The Servicer will service the Loans and administer the Other Assets with reasonable care, prudence, skill and diligence in accordance with (i) applicable law, (ii) the express terms of the Sale and Servicing Agreement, (iii) the procedures that the Servicer exercises with respect to all comparable loans and comparable properties that it services for itself and others, and (iv) the Credit and Collection Policy, with a view to maximizing the expected present value of the Loans but without regard to (A) any relationship that the Servicer or any subservicer, or any affiliate of the Servicer or any subservicer, may have with any obligor or any affiliate of any obligor, (B) the ownership of any Note by the Servicer or any subservicer or any affiliate of the Servicer or any subservicer, (C) the Servicer's, or any subservicer's obligations to incur servicing expenses with respect to the Loans; or (D) the Servicer's or any subservicer's or the Backup Servicer's right to receive compensation for its services under the Sale and Servicing Agreement or with respect to any particular transaction. The Servicer will not, without the prior written consent of the Noteholders of at least 75% of the Note Balance, and notice to the Rating Agencies, make any change to the Credit and Collection Policy (including changes in respect of extension of repayment terms, foreclosure procedures mid aging and write-off policies), if such change could reasonably be expected to have a Material Adverse Effect, provided that such consent will be deemed to have been granted unless notice to the contrary is received by the Servicer within fifteen Business Days after written notice of such change is received by the Trustee and each Noteholder.

Pursuant to the Sale and Servicing Agreement, the Servicer will have the right, at its own expense, to enter into subservicing agreements with subservicers for the servicing and administration of not more than in the aggregate 10% of the ECR Payoff Balance of the Loans at the time such agreement is entered into. Notwithstanding any subservicing arrangement, the Servicer will continue to be liable for all of its servicing obligations under the Sale and Servicing Agreement as if the Servicer alone were servicing and administering the Loans and Other Assets.

COLLECTIONS

The Servicer will deliver to the Lock-Box Bank for deposit in the Lock-Box Account all payments from obligors that are received by the Servicer relating to the Loans (other than Loans reassigned to the Seller or assigned to the Servicer and paid for by the appropriate person) and all Liquidation Proceeds within one Business Day after receipt thereof. The Lock-Box Bank will remit on a daily basis all collections received in the Lock-Box Account with respect to the Loans an immediately available funds to the Collection Account. "Collections" means with respect to any Loan or Other Assets, all funds which are received by the Servicer, the Issuer or the Seller in payment of any amounts owed an respect of such Loan or Other Asset, or applied to amounts owed in respect of sucks Loan or Other Asset (including, without limitation, Liquidation Proceeds).

SERVICING COMPENSATION

The Servicer will receive a Servicing Fee on each Distribution Date in an amount equal to the product of (i)(a) for all Distribution Dates through and including July 15, 1999, 25%, (b) for all Distribution Dates after July 15, 1999 through and including July 17, 2000, 20%, and (c) for all Distribution Dates after July 17, 2000, 15%, multiplied by (ii) the aggregate amount of Collections received by the Servicer during the related Monthly Period.

CERTAIN MATTERS REGARDING THE SERVICER

The Sale and Servicing Agreement will provide that the Servicer may not resign from its obligations and duties is Servicer thereunder, except upon determination that the Servicer's performance of such duties is no longer permissible under applicable law. Any such determination permitting the reassignment of the Servicer must be evidenced by an written opinion of counsel to such effect which is acceptable to the Trustee and is delivered to the Trustee, the Backup Servicer and each Noteholder. No such resignation will become effective until the Backup Servicer or a successor servicer shall have assumed the responsibilities and obligations of the Servicer under the Sale and Servicing Agreement. The Servicer

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may not assign any of its rights or duties under the Sale and Servicing Agreement without the written consent of the Noteholders of as least 75% of the Note Balance, the Trustee, the Backup Servicer and the Issuer.

The Sale and Servicing Agreement will further provide that neither the Servicer nor any of its directors or officers or employees or agents will be under any liability to the Issuer, the Trustee or any Noteholder for any action taken or for refraining from the taking of any action pursuant to the Sale and Servicing Agreement or for errors in judgment, provided, however, that neither the Servicer nor any such person will be protected against liability that would otherwise be imposed by reason of wilful misfeasance, bad faith or negligence in the performance of duties or by reason of reckless disregard of obligations and duties under the Sale and Servicing Agreement. The Servicer and any of its directors, officers or employees or agents may rely in good faith on the advice of counsel or on any document of an; kind prima facie properly executed and submitted by any person respecting any masters arising under the Sale and Servicing Agreement. In addition, the Sale and Servicing Agreement will provide that the Servicer will not be under any obligation to appear in, prosecute or defend any legal action that is not incidental to its duties to service the Loans and administer the Other Assets in accordance with the Sale and Servicing Agreement and that in its opinion may involve it in any expense or liability; provided, however, that the Servicer may in its discretion undertake any reasonable action that is may deem necessary or desirable in respect of the Sale and Servicing Agreement and the rights and duties of the parties to the Sale and Servicing Agreement and the interests of the Noteholders

Under the circumstances specified in the Sale and Servicing Agreement, any entity into which the Servicer may be merged or consolidated or any entity other than the Servicer resulting front any merger or consolidation to which the Servicer is a party, or any person that acquires all or substantially all of the assess of the Servicer, or any person succeeding to the business of the Servicer, which entity in each of the foregoing cases assumes the obligations of the Servicer, will be the successor of the Servicer under the Sale and Servicing Agreement

The Sale and Servicing Agreement (a) requires that CFS maintain a net worth calculated on a combined basis determined in accordance with generally accepted accounting principles of as least $100,000,000, (b) limits the amount of dividends and other distributions (other than amounts sufficient to pay shareholder taxes resulting from the operations of CFS and its affiliates) that CFS is permitted to make to its shareholders to 25% of its prior years cumulative net income on a combined basis (determined in accordance with generally accepted accounting principles and before taxes, if any) and (c) contains a covenant that requires CFS to maintain as of the end of any fiscal quilter beginning March 31, 1995, an aggregate amount of cash, cash equivalents, marketable securities and availability under working capital credit facilities averaging as least $10,000,000 as of the last Business Day of each of the immediately preceding six months.

SERVICER PURCHASE OBLIGATIONS

The Servicer or the Trustee will inform the other party promptly, in writing, upon the discovery (or in the case of the Trustee, receipt of written notice) of any breach by the Servicer of its obligations to administer and service the Loans pursuant to the Sale and Servicing Agreement; provided, however, that the failure to give such notice will not affect any obligation of the Servicer to purchase Loans as described herein. Unless the breach has been cured by the last day of the first Monthly Period following such discovery (or in the case of the Trustee, receipt of written notice), the Servicer will accept for assignment on such date any Loan materially and adversely affected by such breach. In consideration of the assignment of such Loan, the Servicer will transfer to the Trustee for deposit in the Collection Account immediately available funds in the amount of 55% of the ECR Payoff Balance of such Loan (the "Administrateive Purchase Payment"). The percentage of the ECR Payoff Balance used to compute the Administrative Purchase Payment represents the proportion that the initial Note Balance bears to ECR of the Loans as of the Cutoff Date, expressed as a percentage. The sole remedy of the Issuer, the Trustee or the Noteholders with respect to a breach of the Servicers obligations to administer and service the Loans pursuant to the Sale and Servicing Agreements will be to require the Servicer to accept assignment of Loans, provided however, that the Servicer will indemnify' the Trustee, the Issuer, the Backup Servicer and each Noteholder against all costs, expenses, losses, damages, classes and liabilities, including reasonable fees and expenses of counsel, that may be asserted against or incurred by any of them as a result of third party claims arising out of the events or facts giving rise to such breach, except in each case for the amount of any such claim arising from the negligence, bad faith or wilful misconduct of the Trustee, the Backup Servicer or such Noteholder.

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Upon deposit in the Collection Account of the Administrative Purchase Payment with respect to an assigned Loan, the Trustee will release from the lien of the Indenture and the Issuer will assign, without recourse, representation or warranty to the Servicer, all of the Issuer's right, title and interest in, to and under such Loan, all monies due thereon, proceeds from recourse against any obligor or guarantor on such Loan and any document relating thereto, such assignment being an assignment outright and not for security, and the Servicer will thereupon own such Loan, and all such security and documents, free of any further obligations to the Issuer, the Trustee or the Noteholders with respect thereto.

INDEMNIFICATION

The Sale and Servicing Agreement will provide that the Servicer will defend, indemnify and hold harmless each of the Trustee, the Backup Servicer, the Issuer and the Noteholders and each of their respective directors, officers, agents and employees from and against (i) any and all costs, expenses, losses, damages, claims and liabilities ("Indemnified Losses") arising out of or resulting front the use, ownership or operation by the Servicer or any affiliate thereof of any Loans or Other Assets, and (ii) any taxes that may at any time be asserted against any such person with respect to the transactions contemplated by the Sale and Servicing Agreement, including, without limitation, any sales, gross receipts, general corporation tangible personal property, privilege or license taxes (but not including any federal or other income taxes arising out of distributions on the Notes, or any fees or other compensation payable to any such person) and costs and expenses in defending against the same.

In addition, the Sale and Servicing Agreement will provide that the Servicer will defend, indemnify and hold harmless each of the Trustee, the Backup Servicer, the Noteholders and the Issuer and each of their respective directors, officers, agents and employees from and against (i) any and all Indemnified Losses to the extent that such Indemnified Losses arose out of or were imposed upon such person through the negligence, wilful misfeasance or bad faith of the Servicer in the performance of its duties under the Sale and Servicing Agreement or by reason of breach of its obligations and duties under the Sale and Servicing Agreement; and (ii) all Indemnified Losses arising out of or incurred in connection with the acceptance, administration or performance by, or action or inaction of the Trustee or the Backup Servicer, as applicable, of the trusts and duties contained in the Sale and Servicing Agreement and the other Basic Documents including the administration of the Indenture Property, except in each case to the extent that such Indemnified Losses; (A) are due to the wilful misfeasance, bad faith or negligence of the person indemnified, (B) to the extent otherwise payable to the Trustee, arise from the Trustee's breach of any of its representations or warranties set forth in the Indenture, (C) arise out of or are incurred in connection with the performance by the Trustee of the duties of the successor Servicer under the Sale and Servicing Agreement (D)(i) in the case of the Trustee, arise from actions taken by the Servicer as the request of the Trustee absent breach by the Servicer of any Basic Documents, wilful misconduct, bad faith or negligence and (ii) in the case of the Noteholders, arise from actions taken by the Servicer at the request of the Noteholders absent breach by the Servicer of any Basic Documents, wilful misconduct, bad faith or negligence, (E) are incurred by any Noteholder as a result of defaults or other losses with respect to Loans or Other Assets, or (F) represent any federal, state or local taxes (or any interest or penalties or additions with respect thereto) not otherwise indemnified.

In addition, the Servicer and any director, officer, employee or agent of the Servicer shall be indemnified by the Issuer and held harmless against any and all Indemnified Losses incurred in connection with any legal action relating to (i) the Sale and Servicing Agreement or the other Basic Documents, or related documents as of the Closing Date; provided, however, that no such indemnification shall be permitted under this clause with respect to any Indemnified Losses if and to the extent (a) the Servicer is obligated to provide indemnity to any person pursuant to the preceding paragraph for such Indemnified Losses, (b) such Indemnified Losses result from a breach by the Servicer of its obligations under any of the Basic Documents or a violation or alleged violation of applicable law, or (c) such Indemnified Losses are covered by any insurance policy maintained by and payable to the Servicer or one of its affiliates, and (ii) any action taken by the Servicer in accordance with the instruction delivered in writing to the Servicer by the Trustee pursuant to any provision of the Sale and Servicing Agreement, sinless tucks action arises out of the breach of in Basic Document by the Servicer or the negligence, wilful misfeasance, or bad faith of the Servicer.

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SERVICER TERMINATION

If a Servicer Default occurs and is continuing, Noteholders of at least 75% of the Note Balance, by unison notice to the Servicer and the Trustee, may terminate all of the rights and obligations of the Servicer wider the Sale and Servicing Agreement. On or alter the receipt by the Servicer of such written notice, all authority and power of the Servicer under the Sale and Servicing Agreement, whether with respect to the Notes or the Loans or otherwise, will pass to and be vested in the Backup Servicer or another successor Servicer appointed by Noteholders of at least 75% of the Note Balance, provided, however, that the Backup Servicer will not be liable for any acts, omissions or obligations of the Servicer prior to such succession or for any breach by the Servicer of any of its representations and warranties contained in the Sale and Servicing Agreement the Basic Documents or in any related document or agreement. The Trustee will not be deemed to have notice of a Servicer Default sinless the Trustee has received wince notice thereof. The Trustee and the successor Servicer will be authorized and empowered to execute and deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments, and to do or accomplish all other acts or things necessary or appropriate to effect the purposes of such notice of termination. The Servicer will cooperate with the Trustee and the successor Servicer in effecting the termination of the responsibilities and rights of the Servicer under the Sale and Servicing Agreement.

A " Servicer Default refers to any of the following events:

1. any failure by the Servicer to deliver to the Trustee for deposit in the Lock-Box Account or the Collection Account any required payment or to direct the Trustee or the Lock-Box Bank to make any required distributions therefrom, which failure continues unremedied for a period of three Business Days after written notice is received by the Servicer from the Trustee or any Noteholder or alter an executive officer of the Servicer otherwise has actual knowledge of such failure;

2. any failure on the part of the Issuer, GTD or the Servicer to duly observe or perform in any respect any other covenants or agreements of the Issuer, GTD or the Servicer set forth in the Sale and Servicing Agreement or any other Basic Document, which failure continues unremedied for a period of 30 days after the date on which written notice of such failure, requiring the same to be remedied, has been given to the Issuer, GTD or the Servicer, as applicable, by the Trustee, or to the Issuer, GTD or the Servicer, as applicable, and to the Trustee by Noteholders of at least 20% of the Note Balance as of the close of the preceding Distribution Date or after an executive officer of the Servicer otherwise has actual knowledge of such failure;

3. the entry of a decree or order by a court, agency or supervisory authority having jurisdiction in the premises for the appointment of a conservator, receiver or liquidator for the Issuer, GTD or the Servicer, to any insolvency, readjustment of debt, marshaling of assets and liabilities or similar proceedings, or for the winding up or liquidation of their respective affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days;

4. the consent by the Issuer, GTD or the Servicer to the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshaling of assets and liabilities, or similar proceedings of or relating to the Issuer, GTD or the Servicer or of or relating to substantially all of their respective property; or the Issuer; GTD or the Servicer admits in writing its inability to pay its debts generally as they become due, file a petition to sake advantage of any applicable insolvency or reorganization statute, make an assignment for the benefit of its creditors or voluntarily suspend payment of its obligations.

5. prior to the date on which the Note Balance is reduced to zero, the Servicer fasts to maintain a net worth calculated on a combined basis determined in accordance with generally accepted accounting principles of at least $100,000,000;

6. there occurs a Change in Control;

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7. from and after the ninth full month subsequent to the Cutoff Date, on the last day of any Monthly Period, the aggregate amount of Collections during such Monthly Period for all accounts in the aggregate that have been paid in full or settled to accordance with the Credit and Collection Policy from the period from the Cutoff Date to such day is less than 85% of the ECR initially assigned to the Loans and set forth as the "First ECR" in the schedule of loans attached to the Sale and Servicing Agreement.

8. on the last day of any month from and after the last day of the thirteenth month after the Cutoff Date:

(I) the quotient (expressed as a percentage) of (x) the Seasoned Noncomplying Loan Amount for Loans that as any time were Performing Loans, divided by (y) the Payoff Balance of all Performing Loans on such last day of any such month, exceeds the percentage with respect to Performing Loans on page 2 of Schedule I under the caption "Monthly Default Frequency — Performing Loans" in the model of expected results attached to the Sale and Servicing Agreement and set forth on Exhibit D hereto; or

(II) the quotient (expressed as a percentage) of (x) the Seasoned Noncomplying Loan Amount for Loans that at any time were Conversed Loans, divided by (y) the Payoff Balance of all Converted Loans on such last day of any such month, exceeds the percentage with respect to Conversed Loans on page 2 of Schedule I under the caption "Monthly Default Frequency — Converted Loans" in the model of expected results attached to the Sale and Servicing Agreement and set forth on Exhibit D hereto;

9. by December 31, 1997, June 30, 1992, December 31, 1998, June 30, 1999 and December, 1999, the Payoff Balance of Loans conversed to Performing Loans as of the date of conversion of such Loans from Loans identified as Non-Performing Loans on the schedule of loans attached to the Sale and Servicing Agreement as set forth on Exhibit D hereto since the Cutoff Date is less that 60%, 70%, 80%, 90% and 100%, respectively, of the Payoff Balance of Loans to be conversed as of such respective date as set forth in such schedule;

10. on the last day of any four consecutive months beginning on March 31, 1998, the cumulative amount of principal paid on the Notes by the end of each such month is less than 20% of the cumulative amount set forth for such month on pages 11, 12, 13 and 14 of Schedule I under the caption "Principal Payments" in the schedule of loans attached to the Sale and Servicing Agreements and set forth on Exhibit D hereto; and

11. any of the representations and warranties (i) made by the Issuer in the Indenture regarding its organization, powers, qualifications, business, authorization, compliance with and lack of conflict with law, enforceability of the Basic Documents, litigation, status, solvency, disclosure, grant of security or ownership interest in Loans and Other Assets free of liens (except for persons holding through the Issuer), place of business and offices and use of name; or (ii) made by GTD or the Servicer in the Sale and Servicing Agreement regarding its organization, powers, qualification, good standing, business, authorization, litigation, governmental regulation, solvency, disclosure or, in the case of the Servicer, confirmation of computer compatibility with Backup Servicer it incorrect or untrue and would cause a Material Adverse Effect

"Payoff Balance" means as of any date for any Loan, the total amount of an obligor's indebtedness for such Loan (including principal, together with any interest and late fees accrued). A "Change in Control" will be deemed to occur if Kathryn A. Bartmann, William R. Bartmann and Jay L. Jones collectively cease to own beneficially and of or indirectly, at least 80% of the capital stock of CFS or the Issuer. "Seasoned Noncomplying Loan means as of the last day of any month, the aggregate Payoff Balance of Noncomplying Loans on nick day that became Noncomplying Loans dining the twelfth month preceding such month and remained a Noncomplying Loan during the prior twelve months. A "Noncomplying Loan" is any Loan identified as a Performing Loan on the schedule of Loans attached to the Sale and Servicing Agreement, or a Loan which after the Cutoff Date becomes a Conversed Loan, which after the Cutoff Date is treated as defaulted under the Credit and Collection Policy. A Performing or Converted Loan for which a payment representing at least 94% of any agreed and approved installment payment is not made for 180 days from the date such payment is due under the speed and approved payment plan is transferred from the Performing or Converted Loan classification to the Non-Performing Loan classification. If such a 94% payment has been made within such 180-day period or negotiations with the obligor to cure a delinquency are pending, with the

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consent of the appropriate level of management authority, the reclassification of such a Loan to Non-Performing status can be deferred for another 180 days.

EVIDENCE OF COMPLIANCE

The Sale and Servicing Agreement provides that the Servicer will cause a firsts of nationally-recognized independent certified public accountants, who may also render other services to the Servicer or the Issuer, to deliver to the Servicer, Trustee, the Backup Servicer, each Rating Agency, and each Noteholder, on or before February 15 of each year, with respect to the period elapsed front the Cutoff Date through December 31, 1997, in the case of the initial period, and from January to December 31 for each subsequent year, a report (the "Accountants' Report") to the effect that such firm has performed the certain procedures with respect to the Servicer and the Loans. Such procedures will include testing of collections postings and deposits, testing of portfolio performance statistics and testing compliance with the Credit and Collection Policy and the accuracy of certain calculations. Each Accountants' Report shall also indicate that the firm is independent of the Issuer and the Servicer within the meaning of the Code of Professional Ethics of the American Institute of Certified Public Accountants.

The Sale and Servicing Agreement also provides that the Servicer will deliver to the Trustee, the Backup Servicer, and each Noteholder, on or before the fifteenth day of each month beginning August 15, 1997, an officer's certificate of the Servicer, dated as of the last day of the calendar month most recently ended, stating that (i) a review of the activities of the Servicer during the preceding Monthly Period and of its performance under the Sale and Servicing Agreement has been made under such officer's supervision, and (ii) to the best of such officer's knowledge, based on such review, no Servicer Default or event that with the passage of time or the giving of notice would constitute a Servicer Default has occurred, or, if there has been such a Servicer Default or event, specifying each such Servicer Default or event known to such officer and the nature and status thereof

WAIVER OF PAST DEFAULTS

Noteholders of at least 75% of the Note Balance on behalf of all Noteholders may waive an default (except for any default described wider the first paragraph of the definition of "Servicer Default" shove) by the Servicer in the performance of its obligations wider the Sale and Servicing Agreement and its consequences. Upon my such waiver of a past default, such default will cease to exist, and any Servicer Default arising therefrom will be deemed to have been remedied for ever's purpose of the Sale and Servicing Agreement and the other Basic Documents. No such waiver will extend to any subsequent or other default or impair any nibs consequent thereon.

AMENDMENT

The Sale and Servicing Agreement may be mended by the Seller, the Issuer, the Backup Servicer, the Servicer and the Trustee, with prior notice to the Rating Agencies but without consent of the Noteholders, for any of the following purposes: (i) to correct or amplify the description of any property sold or contributed to the Issuer, or to better assure, convey and confirm unto the Issuer such property; (ii) to provide for the assumption of the Sale and Servicing Agreement obligations by a permitted successor to the Seller, the Servicer, the Issuer or the Backup Servicer; (iii) to cure any ambiguity or correct or supplement any provision in the Sale and Servicing Agreement, (iv) to provide for the acceptance of the appointment of a successor Servicer; and (v) to add any provisions to, change in any manner, or eliminate any of the provisions of the Sale and Servicing Agreement or to modify in any manner the sights of Noteholders under such Sale and Servicing Agreement; provided that any action specified in this clause (v) shall not, as evidenced by an opinion of counsel, adversely affect in my material respect the interests of any Noteholder.

The Sale and Servicing Agreement may also be amended by the Seller, the Issuer, the Backup Servicer, the Servicer and the Trustee, with prior notice to the Rating Agencies and the consent of the Noteholders of at least a majority of the Note Balance, to add provisions to, change in any meaner or eliminate any provisions of, the Sale and Servicing Agreement, or modify in any miner the rights of the related Noteholders. However, without the consent of each Noteholder affected thereby, no such amendment may: (i) increase or reduce m any manner the amount of, or accelerate or delay the tinting of, Collections or distributions or payments required to be made for the benefit of

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Noteholders; or (ii) reduce the percentage of the Note Balance the consent of the Noteholders of which is required for any such amendment or for any waiver of compliance with certain provisions of the Sale and Servicing Agreements or of Servicer Defaults thereunder and their consequences as provided for in the Sale and Servicing Agreement.

ACCOUNTS

COLLECTION ACCOUNT/NOTE DISTRIBUTION ACCOUNT/LOCK-BOX ACCOUNT

There will be established and maintained with the Paying Agent (who will initially be the Trustee) for the benefit of the Noteholders, at the corporate trust department of the Paying Agent (or, in the case of the Lock-Box Account, as the Lock-Box Bank) in the name of the Trustee (i) the Collection Account, (ii) an account into which amounts released from the Collection Account and the Reserve Account for distribution to Noteholders will be deposited and from which all distributions to Noteholders will be made (the "Note Distribution Account") and (iii) an account into which the Servicer will notify each obligor to make all payments with respect to the Loans (the "Lock-Box Account" and together with the Collection Account and the Note Distribution Account, the "Owned Accounts").

RESERVE ACCOUNT

The Reserve Account will be established by GTD and maintained with the Paying Agent. On the Closing Date, GTD will make a deposit into the Reserve Account of cash or eligible investments having a value at least equal to the Reserve Account Initial Balance. The Reserve Account and any amounts therein will be pledged to the Issuer by GTD and then to the Trustee for the benefit of the Noteholders by the Issuer.

Funds will be withdrawn from the Reserve Account on each Distribution Date, first, in an amount of up to $125,000 to pay any expenses and costs of the Trustee in connection with the appointment of a successor Servicer and the transfer relating thereto and, second, to be deposited in the Note Distribution Account for distribution to the Noteholders to the extent that the Total Available Amount remaining after Administrative Distributions for such Distribution Date is less than the Noteholders' Interest Distributable Amount. On the Final Distribution Date, any amounts remaining on deposit in the Reserve Account will be transferred to the Note Distribution Account to the extent necessary to repay the Note Balance. See "Description of the Sale and Servicing Agreement — Reserve Account Transfers and Deposits by the Interest Rate Cap Provider."

Unless an Event of Default or a Servicer Default has occurred and is continuing, amounts in the Reserve Account on any Distribution Date (after giving effect to all distributions to be made on such Distribution Date) in excess of the Reserve Account Specified Balance for such Distribution Date will be released to GTD.

On each Distribution Date, the Required Reserve Account Deposit will be made in an amount necessary to increase the balance of the Reserve Account to $350,000 from the Total Available Amount, if any, remaining after required payments made on such Distribution Date to the Trustee, the Servicer and the Backup Servicer

All amounts remaining on deposit in the Reserve Account following payment of the Note Balance plus accrued but unpaid interest on the Notes as of such date and all Administrative Distributions will be released from the lien of the Indenture.

ELIGIBLE DEPOSIT ACCOUNTS/ELIGIBLE INVESTMENTS

Each Owned Account and the Reserve Account will be an Eligible Deposit Account. An " Eligible Deposit Account means either (i) a segregated account with an Eligible Institution or (ii) a segregated trust account with the corporate trust department of a depository institution organized under the laws of the United States of America or any one of the states thereof or the District of Columbia (or any domestic branch of a foreign bank), having corporate trust powers and acting as trustee for funds deposited in such account, to long as (a) any of the long-tern unsecured debt of such depository institution has a credit rating from SP of as least "A" and, if rated by DCR, from DCR of at least "A" and, if rated by Fitch, from Fitch of as least "A" and (b) any of the short-term deposit obligations of such depository

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institution has a credit rating from SP of at least "A-1" and, if rated by DCR, from DCR of at least "D-1" and, if rated by Fitch, from Fitch of as least "F-1." An "Eligible Institution" means a depository institution organized under the laws as the United States of America or any one of the states thereof or the District of Columbia (or any domestic branch of a foreign bank), which as all times has a long-term unsecured debt rating from SP of at least "A" and, if rated by DCR, from DCR of at least "A" and, if rated by Fitch, from Fitch of as least "A" or a short-term deposit obligation rating from SP of as least "A-1" and, if rated by DCR, from DCR of as least "D-1" and, if rated by Fitch, from Fitch of at least "F-1"

Funds on deposit in the Owned Accounts will be invested in Eligible Investments bearing interest or sold as a discount and selected by the Servicer. The Trustee will direct the institution at which the Reserve Account is maintained (the "Securities Intermediary") to invest funds on deposit in the Reserve Account in Eligible Investments selected by the Servicer and confirmed in writing by the Servicer to the Trustee. All earnings on anoints held in any Owned Account will become part of such accounts and all earnings on amounts held in the Reserve Account will be distributed as part of the Total Available Amount.

"Eligible Investments" consist of book-entry securities, negotiable instruments or securities represented by instruments in bearer or registered form which (am the time made) evidence: (i) an security issued by the United States treasury or by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation Federal Home Loan Bank or Student Loan Marketing Association that is maintained in book-entry form on the records of a Federal Reserve Bank; (ii) commercial paper subject to the control of or cleared through DTC, which is (a) rated am least "A-1" by SP and, if rated by DCR "D-1" by DCR company (other than any obligor or affiliate thereof) and (c) in certificated form (including master notes held by DTC or one or more of its nominees or custodian banks); and (iii) investments in money market funds having the highest investment category from each of the Rating Agencies (provided that, for purposes of this definition, such investments may include money market funds sponsored by Bankers Trust Company, that have the required credit rating from the Rating Agencies); in each case, maturing (A) not later than the Business Day immediately preceding the Distribution Date on which such amounts will be distributed or (B) on such Distribution Date if such investment is in the institution with which the Note Distribution Account is then maintained. Notwithstanding the foregoing, no instrument or security will be an Eligible Investment if (i) such instrument or security evidences a right to receive only interest payments, or (ii) the right to receive principal and interest payments derived from the underlying investment provides a yield to maturity in excess of 120% of the yield to maturity at par of such underlying investment

DISTRIBUTIONS

DISTRIBUTIONS FROM COLLECTION ACCOUNT

The Lock-Box Bank will be required to remit on a daily basis collections received in the Lock-Box Account with respect to the Loans in immediately available funds to the Collection Account, in addition, the Servicer will be required to deliver to the Lock-Box Bank for deposit in the Lock-Box Account all payments by or on behalf of the obligors received by the Servicer with respect to the Loans (other than Loans reassigned to the Seller or the Issuer or assigned to the Servicer and paid for by the appropriate person) and all Liquidation Proceeds within one Business Day following receipt. On each Distribution Date, the Paying Agent (based upon the information contained in the Monthly Statement) will make the following distributions from the Collection Account in the following order of priority

(i) to the Servicer, to the extent of the Total Available Amount, an amount equal to the aggregate amount of all amounts owed to obligors on account of payments received in excess of amounts due with respect to the Loans of such obligers as identified in the Monthly Statement.

(ii) to the Trustee, to the extent of the Total Available Amount (as such amount has been reduced by the distribution described in (i) above), the sum of (x) an amount equal to the Trustee Fee and any unpaid Trustee Fees torn prior Monthly Periods, plus (y) an amount equal to all other reasonable expenses of the Trustee including, to the extent not reimbursed through the Reserve Account, the expenses and costs associated with the appointment of a successor Servicer and the transition relating thereto (which

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expenses and costs, including any amount reimbursed through the Reserve Account, will not exceed $125,000) reimbursable from the Indenture Property as provided in the Sale and Servicing Agreements.

(iii) to the Backup Servicer, to the extent of the Total Available Amount (as such amount has been reduced by the distributions described in (i) and (ii) above, an amount equal to the Backup Servicing Fee and any unpaid Backup Servicing Fees from prior Monthly Periods:

(iv) to the Servicer, to the extent of the Total Available Amount (as such amount has been reduced by the distributions described in (i) through (iii) above), an amount equal to the Servicing Fee and any unpaid Servicing Fees front prior Monthly Periods,

(v) to the Servicer, to the extent of the Total Available Amount (as such amount has been reduced b'-' the distributions described in (i) through (iv) above), an amount equal to any engagement fees payable on such Distribution Date to the independent certified public amounting firm performing the agreed upon procedures pursuant to the Sale and Servicing Agreement;

(vi) to the Paying Agent, for deposit in the Reserve Account to the extent of the Total Available Amount (as such amount has been reduced by the distributions described in (i) through (v) above), an amount equal to the Required Reserve Account Deposit for such Distribution Date: and

(vii) to the Note Distribution Account (to the extent necessary to pay the Noteholders' Interest Distributable Amount and reduce the Note Balance to zero) for distribution to Noteholders the Total Available Amount (as such amount has been reduced by the distributions described in (i) through (vi) above).

A "Delivery Date" means with respect to each Monthly Period, the seventh Business Day (but in no evens later than the eleventh calendar day) after the related Determination Date for such Monthly Period.

The following sets forth an example of the application of the foregoing to a hypothetical monthly payment.

July 1-July 31 Monthly Period. Collections on the Loans are received and deposited into the Collection Account. July 31 Determination Date. Payments on the Distribution Date will be made to Noteholders of record on this date. August 11 Delivery Date. Monthly Statement delivered to the Indenture Trustee and Paying Agent by the Servicer. August 15 Distribution Date. Paying Agent pays Administrative Distributions and distributes all amounts in the Note Distribution Account to Noteholders. Deposits into and withdrawals from the Reserve Account take place. Monthly Statement sent to each Noteholder by the Trustee. RESERVE ACCOUNT TRANSFERS AND DEPOSITS BY THE INTEREST RATE CAP PROVIDER

If on any Distribution Date the Noteholders' Interest Distributable Amount exceeds the portion of the Total Available Amount remaining after Administrative Distributions for such Distribution Date (an "Interest Shortfall"), the Paying Agent will transfer to the Note Distribution Account from the Reserve Account an amount equal to the lesser of the Interest Shortfall and the balance in the Reserve Account. On each Distribution Date, the Interest Rate Cap Provider will deposit in the Note Distribution Account, for the benefit of the Class A-2 Notes and GTD, any payments required under the Interest Rate Cap for such Distribution Date or made with respect to any reduction of the Interest Rate Cap the "Cap Deposit Amount").

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DISTRIBUTIONS FROM NOTE DISTRIBUTION ACCOUNT

On each Distribution Date, the Paying Agent will distribute all amounts from the Note Distribution Account user giving effect to the deposits, if any, to be made on such Distribution Date from the Collection Account and the Reserve Account) in the following order of priority

(a) to the extent of the Noteholders' Interest Distributable Amount to the holders of the Class A-1 Notes and Class A-1 Notes, on a pro rats basis, the Class A-1 Interest Distributable Amount and the Class A-1 Interest Distributable Amount, respectively, for such Distribution Date,

(b) to the extent of the Cap Deposit Amount, first, to the holders of the Class A-2 Notes, on a pro rata basis, the Class A-1 Additional Interest Distributable Amount for such Distribution Date and second, to GTD: and

(c) to the holders of the Class A-1 Notes, on a pro rats basis, the Class A-1 Percentage of the Available Principal for such Distribution Date and to the holders of the Class A-1 Notes, on a pro rats basis, the Class A-1 Percentage of the Available Principal for such Distribution Date in reduction of principal until each of the Class A-1 Note Balance and Class A-1 Note Balance has been reduced to zero.

"Class A-1 Interest Carryover Shortfall" means, for any Distribution Date, the excess of the Class A-1 Interest Distributable Amount for the preceding Distribution Date, over the amount in respect of interest on the Class A-1 Notes that was actually paid to holders of the Class A-1 Notes on the preceding Distribution Date, plus interest on the amount of interest due but not paid to the holders of the Class A-1 Notes on the preceding Distribution Date, to the extent permitted by law, in an amount equal to the product of (i) 1/12, multiplied by (ii) the Class A-1 Interest Rate, multiplied by (iii) the amount of such interest due but not paid in respect of the Class A-1 Notes.

"Class A-2 Interest Distributable Amount" means, for any Distribution Date, the sum of (a) the Class A-2 Monthly Interest, plus (b) the Class A-2 Interest Carryover Shortfall, in each case for such Distribution Date.

"Class A-2 Additional Interest Carryover Shortfall" means, for any Distribution Date, the excess of the Class A-2 Additional Interest Distributable Amount for the preceding Distribution Date, over the amount in respect of interest on the Class A-2 Notes that was actually paid to holders of the Class A-2 Notes on the preceding Distribution Date (other than the Class A-2 Interest Distributable Amount for such preceding Distribution Date), plus interest on the amount such interest due bits not paid to the holders of the Class A-2 Notes on the preceding Distribution Date, to the extent permitted by law, in an amount equal to the product of (i) a fraction, the numerator of which is equal to the actual number of days in the related Class A-2 Interest Accrual Period and the denominator of which is 360, multiplied by (ii) the Class A-2 Interest Rate multiplied by (iii) the amount of such interest due but not paid in respect of the Class A-2 Notes

"Class A-2 Additional Interest Distributable Amount" means, for any Distribution Date, the sum of (a) the Class A-2 Additional Monthly Interest, plus (b) the Class A-2 Additional Interest Carryover Shortfall, in each case for such Distribution Date.

"Class A-2 Additonal Monthly Interest" means, for any Distribution Date, the excess, if any, of (a) the Class A-2 Monthly Interest for such Distribution Date over (b) the Class A-2 Monthly Interest for such Distribution Date calculated as if the Class A-2 Interest Rate were the Cap Rate rather than the Class A-2 Interest Rate in effect for the related Class A-2 interest Accrual Period.

"Class A-2 Interest Carryover Shortfall" means, for any Distribution Date, the excess of the Class A-2 Interest Distributable Amount for the preceding Distribution Date on such preceding Distribution Date, over the amount in respect of interest on the Class A-2 Notes that was actually paid to holders of the Class A-2 Notes on the preceding Distribution Date (other then amounts received by the holders of the Class A-2 Notes with respect to the Class A-2 Additional Interest Distributable Amount), plus interest on the amount of interest due but not paid to the holders of the Class A-2 Notes on the preceding Distribution Date, to the extent permitted by law, in an amount equal to the product

55

of (i) a fraction, the numerator of which is the actual number of days in the related Class A-2 Interest Accrual Period and the denominator of which is 360, multiplied by (ii) the lesser of (a) the Class A-2 Interest Rate, and (b) the Cap Rate, multiplied by (iii) the amount of such interest due but not paid in respect of the Class A-2 Notes.

"Class A-2 Interest Distributable Amount" means, for any Distribution Date, the sum of (a) the excess of the Class A-2 Monthly Interest over the Class A-2 Additional Monthly Interest. plus (b) the Class A-2 Interest Carryover Shortfall, in each case for such Distribution Date.

Interest Rate Cap's means that certain agreement dated as of August 6, 1997 between GTD and the Interest Rate Cap Provider, obtained by GTD for the benefit of the Noteholders and naming the Trustee as the party entitled to receive payments made thereunder, pursuant to which the Interest Rate Cap Provider will be obligated to pay to the Trustee an amount equal to all interest accrual on the amortizing notional amount, set forth on Exhibit E hereto, in excess of the Cap Rate. Such notional amount may from time to time be reduced (i) to the extent the notional amount exceeds the Class A-2 Note Balance or (ii) upon receipt of confirmation from each Rating Agency that such reduction will not result in the downgrade, withdrawal or suspension of the then-current rating of the Class A-2 Notes.

"LIBOR" means with respect to a LIBOR Determination Date and a Class A-2 Interest Accrual Period, the raze for deposits in U.S. Dollars for a period of one month which appears on the Telerate Page 3750 Screen as of 11:00 a.m. London time on such LIBOR Determination Date (rounded upwards, if necessary, to the nearest 1/100,000 of 1%), provided, however, in the evens such rate is not provided. LIBOR means the rate determined in accordance with the following procedure: the Interest Rate Cap Provider will, on the LIBOR Determination Date, request the principal London officers of each of Chase Manhattan Bank, N.A. Bankers Trust Company, Citibank N.A. and Morgan Guaranty Trust Company of New York (or, if the London office of any such batik is unable to provide the Interest Rate Cap Provider with an offered quotation, the principal London office(s) of mob other bank(s) as may be selected by the Interest Rate Cap Provider) to provide the Interest Rate Cap Provider with its offered quotation for deposits in U.S. Dollars for a period of one month commencing on such LIBOR Determination Date, to prime banks, in the London interbank market as approximately 11:00 a.m. London time, on the LIBOR Determination Date and in a principal amount that is representative for a single transaction in U.S. Dollars in such market at such time. If at least two such quotations are provided, the rate for that LIBOR Determination Date will be the arithmetic mean of such quotations (rounded upwards, if necessary, to the nearest 1/100,000 of 1%), if fewer shin two quotations are provided, the rate for that LIBOR Determination Date will be the arithmetic mean of the rates quoted at approximately 11:00 a.m. New York City time on the LIBOR Determination Date by three mayor banks in New York selected by the Interest Rate Cap Provider for U.S. Dollar loans to leading European banks for a period of one month, in a principal amount that is representative for a single transaction in U.S. Dollars in such market at such time (rounded upwards, if necessary, to the nearest 1/100,000 of 1%); provided, however, that if the banks to selected by the Interest Rate Cap Provider are not quoting as mentioned in this sentence, the rate determined on such LIBOR Determination Date will continue to be LIBOR as then currently in effect on such LIBOR Determination Date.

"Noteholders' Interest Distributable Amount" means, for any Distribution Date, the sum of (a) the Class A-1 interest Distributable Amount and (b) the Class A-2 Interest Distributable Amount.

"Telerate Page 3750 Screen" means the display designated as "Page 3750" on the Telerate Service (or such other page as may replace Page 3750 on that service or such other service as may be nominated by British Bankers Association as the information vendor for the purpose of displaying British Bankers' Association Interest Settlement Rates for U.S. Dollar deposits).

CERTAIN LEGAL ASPECTS OF THE LOANS

TRANSFERS OF THE LOANS

Each Specified Seller has represented and warranted to the Seller or the Warehouse Buyer acquiring Loans from such Specified Seller that is transferred good and marketable title to the Loans free and clear of the lien of any third party.

56

The Seller, under the Sale and Servicing Agreement, represents and warrants that at the time of the conveyance thereunder is had good and marketable title to the Loans free of any lien and that the Issuer will have all of its right, title and interest in and to the Loans and the Other Assets and the unpaid indebtedness evidenced thereby.

To the extent the Loans constitute accounts, both the sale of such Loans and the transfer of such Loans as security for as obligation are governed by Article 9 of the UCC, and to the extent that Article 9 of the UCC is applicable, the tiling of appropriate financing statements is required to perfect the sale of such Loans by a Specified Seller to the Seller or the Warehouse Buyer and by the Seller to the Issuer. In the Sale and Servicing Agreement, the Seller will represent and warrant that it has filed financing statements in all appropriate jurisdictions necessary to perfect a sale of Loans that constitute accounts to the affiliate that purchased such Loans front each Specified Seller and that it has taken all actions necessary in any jurisdiction to give the Issuer a perfected ownership interest prior to the Seller or its creditors or transferees in all such Loans. In the Indenture, the Issuer will represent and warrant that it has taken all actions necessary in any jurisdiction to give the Trustee a first priority perfected security interest in such Loans.

To the extent the Loans constitute general intangibles and the transfer of such Loans is deemed to be a transfer as security for an obligation, the provisions of Article 9 of the UCC relating to the perfection of such transfer are applicable to the same extent as they are applicable to Loans constituting accounts. If the transfer of Loans is a sale, the provisions of Article 9 of the UCC are not applicable to Loans constituting general intangibles and issues relating to perfection of the transfer would be determined in accordance with other applicable law in the relevant jurisdiction. To perfect a sale of general intangibles under the laws of certain states, notice of the transfer must be provided to the applicable obligor. In the ordinary course of its business, use Servicer will provide notice to all obligors (other than those for which is does not have a mailing address or that have not expressed a willingness to make payments on the applicable Loan) that the Loans are held by the Issuer. Due to the lack of uniformity among the laws of the venous relevant states and the relatively small amount of legal precedent addressing the issue, no assurance can be provided that the notice provided by the Servicer to obligors satisfies all requirements for perfection of a sale of general intangibles sit each applicable jurisdiction

CONSUMER PROTECTION LAWS

Numerous federal and state consumer protection laws and related regulations impose substantial requirements upon lenders and services involved in consumer finance. Federal laws and regulations include the Truth in Lending Act, the Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit Repealing Act, the FDCPA, the Federal Reserve Board's Regulations B, Z and AA, and the Federal Trade Commission's "Credit Practices" Rule. State laws include various adoptions of the National Consumer Act and of the Uniform Consumer Credit Code, and usury and other consumer protection statutes. These statuses regulate, among other things, finance charge rates and other terms and conditions of credit card and other consumer credit transactions and require contract disclosures in addition to those required under federal law. Violation of these laws by a creditor may subject the creditor (and in some cases an assignee such as the Issuer) to statutory' penalties and also to defenses or counterclaims of the obligor in the event of enforcement action.

The operations of the Servicer in collecting and enforcing the Loans are subject to the FDCPA and comparable statutes in many states. Under the FDCPA, a third-party collection agency is restricted in the methods is uses to collect consumer debt. For example, third-party collection agency is limited in communicating with persons other than the consumer about the consumer's debt, may not telephone at inconvenient boats and must provide verification of the debt at the consumer's request. Requirements under state collection agency statutes vary, with most requiring compliance similar to that required under the FDCPA. In addition, many states and certain municipalities require collection agencies to be licensed with the appropriate authorities before collecting debts from debtors within those jurisdictions. It is the policy of the Servicer to comply with the provisions of the FDCPA, comparable state statuses and applicable licensing requirements. The Servicer baa established policies and procedures designed to reduce the likelihood of violations of the FDCPA and related state statutes, including extensive training and testing of account representatives and monitoring by supervisors of interactions between account representatives and debtors.

57 CERTAIN FEDERAL INCOME TAX CONSEQUENCES

GENERAL

Set forth below is a general discussion of certain of the anticipated material Federal income tax considerations relating to the purchase, ownership and disposition of the Notes by the Noteholders. The discussion is generally limited to those persons who are original owners of the Notes and who hold such Notes as capital assets under the Code. The discussion does not purport to address all aspects of Federal income taxation that may be relevant to the Noteholders in light of their particular circumstances, nor to certain types of the Noteholders subject to special treatment under the Federal income tax laws (for example, S corporations, banks, foreign investors, shrift institutions, financial institutions, small business investment companies and life insurance companies). The discussion is based upon present provisions of the Code, the regulations promulgated thereunder and judicial and administrative authorities, all of which are subject to change, which change may be retroactive. The patties do not intend to seek a ruling from the Internal Revenue Service (the "IRS") on any of the issues discussed below. Moreover, there can be no assurance that the IRS will not sake contrary positions. Taxpayers and preparers of tax retina (including those filed by any partnership or other issuer) should be aware that under applicable Treasury regulations a provider of advice on specific issues of law is not considered an income tax return preparer unless the advice is: (i) given with respect to events that have occurred at the time the advice is rendered and not with respect to the consequences of contemplated actions; and (ii) directly relevant to the determination of an entry on a tax return. Accordingly, taxpayers should consult their respective tax advisors and tax return preparers regarding the preparation of any stem on a tax return, even where the anticipated tax treatment has been discussed herein. PROSPECTIVE NOTEHOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH REGARD TO THE FEDERAL TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP OR DISPOSITION OF INTERESTS IN THE NOTES, AS WELL AS THE TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, FOREIGN COUNTRY OR OTHER TAXING JURISDICTION.

FEDERAL TAX CONSEQUENCES WITH RESPECT TO THE NOTES

Tax Characterization of the Notes. Federal Tax Counsel has advised the Issuer that based on the terms of the Notes, the Notes will be treated as debt for Federal income tax purposes. There is, however, no specific authority with respect to the characterization for Federal income tax purposes of securities having the same terms as the Notes. The remainder of this discussion assumes that the Notes will be treated as debt.

Interest Income on the Notes. The stated interest on the Notes will be taxable to a Noteholder as ordinary income when received or accrued in accordance with such Noteholders method of tax accounting. It is not anticipated that the Notes will be issued with "original issue discount" within the meaning of Section 1273 of the Code ("OID"). A person who purchases a Note at a discount that exceeds a statutorily defined de minimis amount will be subject to the "market discount" rules of the Code, and a person who purchases a Note at a premium will be subject to the premium amortization rules of the Code.

Sale or Other Disposition If a Noteholder sells a Note, such Noteholder will recognize gain or loss in an amount equal to the difference between the amount realized on the sale and such Noteholder's adjusted tax basis in the Note. The adjusted tax basis of a Note to a particular Noteholder will equal such Noteholder's cost for the Note, increased by any OID (if any), market discount and gain previously included by such Noteholder in income with respect to the Note and decreased by the amount of bond premium (if any) previously amortized and by the amount of principal payments previously received by such Noteholder with respect to such Note. Subject to the rules of the Code concerning market discount on the Notes, any such gain or loss generally will be capital gain or loss tithe Note was held as a capital asset Capital losses generally may be deducted only to the extent the Noteholder has capital gains for the taxable year, although under certain circumstances non-corporate Noteholders can deduct losses in excess of available capital gains

Foreign Noteholders If interest paid (or accrued) to a Noteholder who is a nonresident alien, foreign corporation or other non-United States person (a "foreign person") is not effectively connected with the conduct of a trade or business within the United States by the foreign person, the interest generally will be considered "portfolio interest" and generally will not be subject to United States Federal income tax and withholding tax, if the foreign person

58

(i) is not actually or constructively a "10 percent shareholder" of the Issuer or a "controlled foreign corporation" with respect to which the Issuer is a "related person" within the meaning of the Code and (ii) provides the person otherwise required to withhold U.S. tax with an appropriate statement, signed under penalties of perjury, certifying that the beneficial owner of the Note is a foreign person and providing the foreign persons name and address. If the information provided in the statement changes, the foreign person must to inform the person otherwise required to withhold U.S. tax within 30 days of such change. The statement generally muss be provided in the year a payment occurs (prior to such payment) or in either of the two preceding years, its Note is held through a securities clearing organization or certain other financial institutions, the organization or institution may provide a signed statement to the withholding agent. However, in that case, the signed statement must be accompanied by a Form W-8 or substitute form provided by the foreign person that owns the Note. If such interest is not portfolio interest, then it will be subject to United States Federal income and withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an applicable tax treat.

Any capital gain realized on the sale, redemption, retirement or other taxable disposition of a Note by a foreign person will be exempt born United States Federal income and withholding tax, provided that (i) the gain is not effectively connected with the conduct of a trade or business in the United States by the foreign person and (ii) in the case of an individual foreign person, the foreign individual is not present in the United States for 181 days or more in the taxable year or does not have a tax home in the United States.

If the interest, gain or income on a Note held by a foreign person is effectively connected with the conduct of a trade or business in the United States by the foreign person (although exempt from the withholding tax previously discussed if the Noteholder provides an appropriate statement), the Noteholder generally will be subject to United States Federal income tax on the interest, gain or income at regular Federal income tax rates. In addition, if the foreign person is a foreign corporation, it may be subject to a branch profits tax equal to 30%, of its "effectively connected earnings and profits" within the meaning of the Code for the taxable year, as adjusted for certain items, sinless is qualifies for a lower rate under an applicable tax treaty (as modified by the branch profits tax rules)

Proposed Treasury regulations, which would be effective with respect to payments made after December 31, 1997 if adopted in their current form, would provide alternative certification requirements and means for obtaining the exemption from federal income and withholding tax.

Information Reporting and Withholding. The Issuer will be required to report annually to the IRS, and to each Noteholder of record, the amount of interest paid on the Notes (and the amount of interest withheld for Federal income taxes, if any) for each calendar year, except as to exempt Noteholders (generally, Noteholders that are corporations, tax-exempt organizations, qualified pension and profit-sharing trusts and individual retirement accounts). For nonresident aliens who provide certification as to their stanza as nonresidents, interest paid will be reported on Form 1042-S. However, withholding will not apply as long as the certification is valid. Generally, certification muss be renewed every three calendar veers. Accordingly, each Noteholder (other than exempt Noteholders who are not subject to the reporting requirements) will be required to provide, under penalties of perjury, a certificate containing the Noteholder's name, address, correct Federal taxpayer identification number and a statement that the Noteholder is not subject to backup withholding. Should a nonexempt Noteholder fail to provide the required certification or recertify its foreign status, the issuer will be required to withhold 31% for U.S. residents or 30% for nonresident aliens of the amount otherwise payable to the Noteholder, and remit the withheld amount to the IRS as a credit against the Noteholders Federal income tax liability.

CERTAIN STATE TAX CONSEQUENCES

In addition to the federal income tax consequences described in "Certain Federal Income Tax Consequences above, potential investors should consider the state income tax consequences of the acquisition, ownership and disposition of the Notes. State income tax law may vary substantially from state to state, and this discussion does not purport to describe any aspect of the income tax laws of any state other than Oklahoma. Therefore, potential investors should consult their own tax advisors with respect to the various tax consequences of an investment in the Notes.

59

Assuming that the Notes are treated as indebtedness for federal income tax purposes (as discussed above under "Certain Federal Income Tax Consequences"), such treatment will also apply for Oklahoma income tax purposes Accordingly, Oklahoma state income tax law will treat the Notes as debt. Pursuant to this treatment, investors not otherwise subject to Oklahoma income tax will not become subject to tax solely because of their ownership of the Notes. However, investors already subject to income taxation in Oklahoma will be required to pay tax on the income generated from ownership of the Notes.

ERISA CONSIDERATIONS

Subject to the following discussion the Notes may be acquired by pension, profit-sharing or other employee benefit plans, as well as an individual retirement accounts and Keogh plan (each a "Benefit Plan"). Section 406 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and Section 4975 of the Code prohibit a Benefit Plan from engaging in certain transactions with persons that are "parties in interest" under ERISA or "disqualified persons" under the Code with respect to such Benefit Plan. A violation of these "prohibited transaction" rules may result in an excise tax or other penalties and liabilities under ERISA and the Code for such persons or the fiduciaries of the Benefit Plan. In addition, Title I of ERISA also requires fiduciaries of a Benefit Plan subject to ERISA to make investments that are prudent, diversified and in accordance with the governing plan documents.

Certain transactions involving the Issuer might be deemed to constitute prohibited transactions under ERISA and the Code with respect to a Benefit Plan that purchased Notes if assets of the law were deemed to be assets of the Benefit Plan. Under a regulation issued by the United States Department of Labor (the "Regulation"), the assess of the Issuer would be treated as plan assets of a Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan acquired an "equity interest" in the Issuer and none of the exceptions contained in the Regulation were applicable. An equity interest is defined under the Regulation as an interest other than an instrument which is treated as indebtedness under applicable local law and which has no substantial equity features. Although there is little guidance on the subject, the Seller believes that, at the nine of their issuance, the Notes should be treated as indebtedness of the Issuer without substantial equity features for purposes of the Regulation. This determination is based in part upon the traditional debt features of the Notes, including the reasonable expectation of purchasers of Notes that the Notes will be repaid when due, as well as the absence of conversion rights, warrants and other typical equity features. The debt treatment of the Notes for ERISA purposes could change if the Issuer incurred losses.

However, without regard to whether the Notes are treated as an equity interest for purposes of the Regulation, the acquisition or holding of Notes by or on behalf of a Benefit Plan could be considered to give rise to a prohibited transaction if the Issuer, the Seller, the Servicer, or the Trustee is or becomes a party in interest or a disqualified person with respect to such Benefit Plan. Certain exemptions from the prohibited transaction rules could be applicable to the purchase and holding of Notes by a Benefit Plan depending on the type and circumstances of the plan fiduciary making the decision to acquire such Notes. Included among these exemptions are: Prohibited Transaction Class Exemption ("PTCE") 96-23, regarding transactions effected by "in-house asses managers"; PTCE 95-60, regarding investments by insurance company general accounts, PTCE 91-38, regarding investments by bank collective investment funds; PTCE 90-1, regarding investments by insurance company pooled separate accounts; and PTCE 84-14, regarding transactions effected by "qualified professional asses managers." In connection with its acquisition of a Note, each purchaser will be required to represent that at least one of the following statements as an accurate representation as to the source of in an insurance company either (1) the source is a separate account that is maintained solely in connection with such prospective transferee's fixed contractual obligations under which the amounts payable, or credited, to any "employee benefit plan" as defined in Section 3(3) of ERISA or "plan" as defined in Section 4975 of the Code (a "Benefit Plan") and to any participant or beneficiary of such Benefit Plan (including any annuitant) are not affected in any manner by the investment performance of the separate account or (2) the source is an "insurance company general account" within the meaning of Department of Labor Prohibited Transaction Class Exemption 95-60 ("PTCE-60"), and the amount of reserves and liabilities for the contracts(s) held by or on behalf of each Benefit Plan which has an interest in such prospective transferee's general account as a contract holder, together with the amount of reserves and liabilities for the general account contracts held by or on behalf of any such other Benefit Plan maintained by the same employer (or an

60

affiliate thereof) or by the same employee organization, does not exceed and, so long as such Note is held by such insurance company general account, will not exceed (unless no portion of such excess results from an increase in the assets allocated to such insurance company general account by such a Benefit Plan, not including the reinvestment of such insurance company general account's earnings as assets allocated to such insurance company general account by such a Benefit Plan), 10% of the total reserves and liabilities of such prospective transferee's general account plus surplus as determined pursuant to the provisions of Section I(a) of PTE 95-60; or (3) its acquisition of the Note will not give rise to a non-exempt prohibited transaction under Section 406(a) of ERISA or Section 4975 of the Code; or (ii) the source does not include assess of any Benefit Plan.

Employee benefit plans that are governmental plans (as defined in Section 3 (32) of ERISA) and certain church plans (as defined in Section 3 (33) of ERISA) are not subject to ERISA requirements, however governmental plans may be subject to comparable stale law restrictions.

A plan fiduciary considering the purchase of Notes should consult its legal advisors regarding whether the assets of the Issuer would be considered plan assets, the possibility of exemptive relief from the prohibited transaction rules and other issues and their potential consequences.

PLAN OF DISTRIBUTION

Under the terms of a Placement Agent Agreement, dated August 6, 1997 (the " Placement Agreement"), the Notes are being offered by Issuer through the Placement Agent, which has agreed to use reasonable efforts to solicit offers from QIBs and front institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3), (7) or (8) under the Securities Act) to purchase the Notes. The offering of the Notes will be made in reliance upon an exemption from registration under the Securities Act and certain state securities laws. The Notes may be reoffered and sold only in a transaction registered under the Securities Act and the securities laws of applicable states, pursuant to Rule 144A under the Securities Act or pursuant to another exemption available wider the Securities Act and applicable state securities laws. None of the Servicer, the Issuer, the Backup Servicer, the Seller, the Trustee or any other person is obligated or intends to register the Notes under the Securities Act or any state securities laws.

The Placement Agent will receive a fee with respect to the Notes sold through the Placement Agent. The Issuer has the sole right to accept offers to purchase Notes and may reject any such offer in whole or in part. On the Closing Date, payment of the purchase price of the Notes will be required to be made in immediately available funds. The purchase price of the Notes will be 100% of the principal amount thereof.

Pursuant to the Placement Agent Agreement, the Seller and the tastier have agreed to indemnify the Placement Agent against and contribute toward certain liabilities under the Securities Act and to reimburse the Placement Agent for certain expenses.

Chase Securities Inc. is an affiliate of Chase Manhattan Bank USA, N.A. (" Chase USA"), which is one of the Specified Sellers, and of CMB, which is the lender wider the Warehouse Facility. See "The Loans" and "The Warehouse Facility." The Seller intends to use a substantial portion of the net proceeds of the offering of the Notes to repay outstanding indebtedness of the Warehouse Buyer under such facility. See "Use of Proceeds." In addition, Chase USA and CMB may engage from time to time in general banking and financial transactions with the Company.

The Placement Agent has represented and agreed that (a) it has not offered or sold, and will not offer or sell, Note to persons in the United Kingdom except to persona whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted, and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995, (b) it has complied with and will comply with all applicable provisions of the Financial Services Act of 1986 of Great Britain with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom and (c) it has only issued or passed on and will only issue or pass on in the United Kingdom any document in connection with the issue of the Notes to a person who is of a kind

61 GJX 16900

describe. Article 11(3) of the Financial Services Act of 1986, as amended. (Investment Advertisement) (Exceptions) Order 1996, as amended, or is a person to whom the document may otherwise lawfully be issued or passed on.

CHASE SECURITIES INC., A WHOLLY-OWNED SUBSIDIARY OF THE CHASE MANHATTAN CORPORATION IS A SEPARATE ENTITY FROM THE CHASE MANHATTAN BANK AND OTHER LENDING AFFILIATES. SECURITIES SOLD, OFFERED OR RECOMMENDED BY CSI ARE NOT DEPOSITS, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION UNLESS EXPRESSLY DISCLOSED OTHERWISE TO YOU, ARE NOT GUARANTEED BY AN AFFILIATED BANK OR OTHER LENDING AFFILIATE, AND ARE NOT OTHERWISE AN OBLIGATION OR RESPONSIBILITY OF ANY AFFILIATED BANK OR OTHER LENDING AFFILIATE

LEGAL OPINIONS

Certain legal matters relating to the Notes will be passed upon for the Seller, the Servicer and the Issuer by Mayer, Brown Platt and by Caroline B. Benediktson, General Counsel to the Servicer. Certain federal income tax and other matters will be passed upon for the Issuer by Mayer, Brown Platt. Certain matters under Oklahoma law and certain state tax matters will be passed upon for the Issuer by Crowe Dunlevy.

62 GJX 16901 INDEX OF TERMS

63 GJX 16902

64 GJX 16903

Accountants' Report 50 Accredited Investors 10 Administrative Distributions 9 Administrative Purchase Payment 47 Available Principal 6 Backup Servicer 1 Backup Servicing Fee 33 Bankruptcy Code 14 Basic Documents 19 Benefit Plan 36 Business Day 4 Cap Deposit Amount 54 Cap Rate 5 Cede 2 Cedel 42 Cedel Participants 42 CFS 1 Change in Control 50 Chase USA 61 Class A-1 Interest Carryover Shortfall 55 Class A-1 Interest Distributable Amount 55 Class A-1 Interest Rate 3 Class A-1 Monthly Interest 4 Class A-1 Note Balance 2 Class A-1 Notes 1 Class A-1 Percentage 6 Class A-2 Additional Interest Carryover Shortfall 55 Class A-2 Additional Interest Distributable Amount 55 Class A-2 Additional Monthly Interest 55 Class A-2 Interest Accrual Period 5 Class A-2 Interest Carryover Shortfall 55 Class A-2 Interest Distributable Amount 55 Class A-2 Interest Rate 3 Class A-2 Monthly Interest 5 Class A-2 Note Balance 2 Class A-2 Notes 1 Class A-2 Percentage 6 Clearing Agency Certification 37 Closing Date 1 CMB 32 Collection Account 7 Collections 46 Converted Loan 3 Cooperative 42 Credit and Collection Policy 23 Cutoff Date 1 Data Delivery Events 17 DCR 10 Default Events 17 Definitive Notes 43 Delivery Date 54 Depositaries 40 Determination Date 4 Distribution Date 4 DTC 2 DTC's Nominee 19 ECR 3 ECR Payoff Balance 3 Eligible Deposit Account 52 Eligible Institution 52 Eligible Investments 53 ERISA 60 Euroclear 42 Euroclear Operator 42 Euroclear Participants 42 Events of Default 39 Exchange Date 34 Expected Final Distribution Date 1 FDCPA 14 FDIA 12 FDIC 12 Federal Tax Counsel 10 Final Distribution Date 1 First ECR 25 Fitch 10 foreign person 58 GTD 1 Indemnified Losses 48 Indenture 1 Indenture Property 20 Indirect Participants 41 Insolvency Laws 14 Interest Rate 3 Interest Rate Cap 55 Interest Rate Cap Provider 1 Interest Shortfall 54 Investment Company Act 10 IRS 58 Issuer 1 LIBOR 56 LIBOR Determination Date 5 Liquidation Proceeds 4 Loans 2 Lock-Box Account 52 Lock-Box Bank 9 Material Adverse Effect 45 Monthly Period 4 Monthly Statement 35 Non-Performing Loan 3 Noncomplying Loan 50 Note Balance 2 Note Distribution Account 52 Note Owner 2 Note Owners 19 Noteholders 4 Noteholders Interest Distributable Amount 56 Notes 1 Notional Amount Schedule 5 OID 58 Other Assets 44 Owned Accounts 52 Owner Regulation S Certification 37 Participating Organization 33 Paying Agent 8 Payoff Balance 50 Performing Loan 3 Placement Agent 1 Placement Agent Agreement 60 PTCE 60 PTE-60 36 QIB 10 Qualified Purchasers 10 Rating Agencies 10 Regulation 60 Regulation S 10 Regulation S Book-Entry Note 34 Required Reserve Account Deposit 7 Reserve Account 7 Reserve Account Initial Deposit 7 Reserve Account Specified Balance 7 RTC 12 RTC Policy Statement 12 Rule 144A 10 SP 10 Sale and Servicing Agreement 2 Seasoned Noncomplying Loan Amount 50 Securities Act 10 Securities Intermediary 53 Seller 1 Senior Notes 16 Servicer 1 Servicer Default 49 Servicing Fee 9 Specified Seller Agreement 12 Specified Sellers 20 Telerate Page 3750 Screen 56 Temporary Regulation S Note 34 Terms and Conditions 43 Total Available Amount 4 Trustee 1 Trustee Fee 20 U.S. Global Note 33 UCC 13 Unrestricted Regulation S Notes 34 Warehouse Facility 32 Warranty Payment 45

65 GJX 16904 EXHIBIT A Form of Representation Letter

Ladies and Gentlemen:

In connection with our proposed purchase of a Note (the " Note"), secured under an Indenture dated as of August 6, 1997 (the "Indenture") between CF/SPC SMART, Inc., as issuer (the " Issuer") and Bankers Trust Company, as Trustee, acting thereunder not in its individual capacity but solely as trustee under the Indenture (the " Trustee"), we confirm that:

1. We understand that the Note has not been registered tastier the Securities Act of 1933, as amended (the " Securities Act"), and may not be sold except as permitted in the following two sentences. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that such Note may not be sold or transferred (including by pledge or hypothecation) unless (i) the registration requirements of the Securities Act and any applicable state securities or Blue Sky laws we complied with, (ii) such transfer is made to a Person that has delivered to the Issuer a representation letter in the form of this Representation Lester and who the transferor reasonably believes after due inquiry is a "Qualified Institutional Buyer" (a "QIB") as defined in Rule 144A under the Securities Act ("Rule 144A") acting for its own account (and not for the account of others) or as a fiduciary or agent for others (which others are QIBs) to whom notice is given that the transfer is being made in reliance on Rule 144A and neither such Person nor such others is a broker-dealer with less than $25 million in "securities" as defined under Rule 144, (iii) such transfer is made to certain non-U.S. Persons outside the United States in accordance with Rule 904 of Regulation S ("Regulation S") of the Securities Act, or (iv) such transfer is made pursuant to an exemption from the registration requirements under the Securities Act other than Rule 144A, Regulation S and applicable state securities or "Blue Sky" laws. If a transfer is to be made in reliance upon clause (iii) or (iv) above, (x) the Trustee shall require that both the prospective transferor and the prospective transferee certify to the Trustee and the Issuer in writing the facts surrounding such transfer, which certification shall be in form and substance reasonably satisfactory to the Trustee and the Issuer and (y) if, in the reasonable discretion of the Trustee, such certification does not clearly establish a basis for such exemption, the Trustee shall require a written opinion of counsel (which shall be at the expense of the prospective transferee or the prospective transferor, but may be rendered by saluted counsel of the prospective transferor or the prospective transferee or any affiliate thereof) reasonably satisfactory to the Issuer and the Trustee to the effect that such transfer will not violate the Securities Act. We will notify any purchaser of the Note from us of the above resale restrictions, if then applicable.

2. (a) We are either (i) a QIB and are acquiring the Note for our owe account (and not for the account of others) or as a fiduciary or agent for others (which others we QIBs) but, neither we nor such others is a broker-dealer with less than $25 million in "securities" as that term is defined under Rule 144 and, as such, is a "qualified purchaser" as that term is defined in Section 2(a)(51) of the Investment Company Act of 1940, as amended (the "Investment Company Act") pursuant to Rule 2a51-1(g) thereunder or (ii) a Person to whom the offer of the Notes was not made in the United States. We are familiar with Rule 144A or Regulation S, as applicable, and are aware that the seller of the Note and other parties intend to rely on the statements made herein and the exemption from the registration requirements of the Securities Act provided by Rule 144A or Regulation S, as applicable.

(b) At least one of the following statements is an accurate representation as to the source of funds to be used by us to pay the purchase price of the Note or as to the acquisition of the Note, as applicable

(i) if we are an insurance company, either

A-1 GJX 16905

(1) the source is a separate account that is maintained solely in connection with such prospective transferee's fixed contractual obligations under which the amounts payable, or credited, to any "employee benefit plan" as defined in Section 3(3) of ERISA or "plan" as defined in Section 4975 of the Code (a "Benefit Plan") and to any participant or beneficiary of such Benefit Plan (including any annuitant) are not affected in any mariner by the investment performance of the separate account: or

(2) the source is an "insurance company general account" within the meaning of Department of Labor Prohibited Transaction Class Exemption 95-60 ("PTE-60"), and the amount of reserves and liabilities for the contracts(s) held by or on behalf of each Benefit Plan which has an interest in such prospective transferee's general account as a contract bolder, together with the amount of reserves and liabilities for the general account contracts held by or on behalf of any such other Benefit Plan maintained by the same employer (or an affiliate thereof) or by the same employee organization, does no exceed and, so long as such Note is held by such insurance company general account, will not exceed (unless no portion of such excess results from an increase in the assets allocated to such insurance company general amount by such a Benefit Plan, not including the reinvestment of such insurance company general account's earnings as assets allocated to such insurance company general account by such a Benefit Plan), 10% of the total reserves and liabilities of such prospective transferee's general account plus surplus as determined pursuant to the provisions of Section 1(a) of PTE 95-60; or

(3) the acquisition of the Note will not give rise to a non-exempt prohibited transaction under Section 406(a) of ERISA or Section 4975 of the Code; or

(ii) the source does not include assets of any Benefit Plan.

(c) We understand that the Issuer is not registered as an investment company under the Investment Company Act, but the Issuer is excepted from registration as such by virtue of Section 3(c)(7) of the Investment Company Act, which in general excludes from the definition of an investment company any issuer, the outstanding securities of which are owned exclusively by Persons who, at the time of acquisition of such securities, are Qualified Purchasers and which is not making and does not at that time propose to make a public offering of such securities. In accordance with the transfer restrictions set forth in Section 2.9 of the Indenture, we agree that we will not transfer any Notes if, in the reasonable judgment of the Issuer, such transfer would cause the Notes to be owned by a Person that is not a Qualified Purchaser and agree further that any purported transfer of Notes will be void if, after giving effect to such transfer, the Notes would be owned by a Person who is not a Qualified Purchaser.

3. We and any party for whom we are acting as agent or trustee are not entities that are relying on exemptions from registration under the Investment Company Act under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act and are not natural persons or companies owned directly or indirectly by or for two or more natural persons who are related as siblings or spouse (including former spouses), or direct lineal descendants by birth or adoption, spouses of such persons, or a foundation, charitable organization or toast established by or for the benefit of such persons. We and any party for whom we are acting as agent or trustee were not formed, reformed or recapitalized for the specific purpose of investing in the Notes and are not partnerships, common trust funds, special trusts, pension funds or retirement plans or other entities, in which the partners, or participants, as the case may be, may designate the particular investments to be made or the allocation thereof. We agree that we and any party for whom we are acting as agent or trustee shall not hold such Notes for the benefit of stay other Person and shall be the sole beneficial owner thereof for all purposes and that we or such party shall not sell participation interests in the Notes or enter into any other arrangement pursuant to which any other Person shall be entitled to a beneficial interest in the distributions on the Notes. The value of the Notes purchased (together with the value of any other Notes or any other securities issued by the Issuer and owned by us or by the party for whom we are acting as agent or trustee) constitutes less than 40% of the value of our or such party's total assets

A-2 GJX 16906

4. You are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the manes covered hereby.

Very truly yours,

__________________________ (Name of Purchaser)

By: ______________________

Date: ____________________

A-3 GJX 16907 EXHIBIT B GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES

Except in certain limited circumstances, the globally offered Class A-1 Notes and Class A-2 Notes (the " Global Securities") will be available only in book-entry form. Investors in the Global Securities may hold such Global Securities through any of DTC, Cedel or Euroclear. The Global Securities will be tradeable as home market instruments in both the European and U.S. domestic markets. Initial settlement and all secondary trades will settle in same-day funds

Secondary market trading between investors holding Global Securities through Cedel and Euroclear will be conducted in the ordinary way in accordance with their normal rules and operating procedures and in accordance with conventional eurobond practice (i.e., seven calendar day settlement).

Secondary market trading between investors holding Global Securities through DTC will be conducted according to the rules and procedures applicable to U.S. corporate debt obligations,

Secondary cross-market trading between Cedel or Euroclear and Participating Organizations holding Notes will be effected on a delivery-against-payment basis through the respective Depositaries of Cedel and Euroclear (in such capacity) and as Participating Organizations.

Non-U.S. holders (as described below) of Global Securities will be subject to U.S. withholding taxes unless such holders meet certain requirements and deliver appropriate U.S. tax documents to the securities clearing organizations or their participants.

Initial Settlement

All Global Securities will be held in book-entry fonts by DTC in the name of Cede as nominee of DTC. Noteholders' interests in the Global Securities will be represented through financial institutions acting on their behalf as direct and indirect Participants in DTC. As a result, Cedel and Euroclear will hold positions on behalf of their participants through their respective Depositaries, which in turn will hold such positions in accounts as Participating Organizations.

Noteholders electing to hold their Global Securities through DTC will follow the settlement practices applicable to U.S. corporate debt obligations. Noteholder securities custody accounts will be credited with their holdings against payment in same-day funds on the settlement date.

Noteholders electing to hold their Global Securities through Cedel or Euroclear accounts will follow the settlement procedures applicable to conventional eurobonds, except that there will be no temporary global security and no "lock-up" or restricted period. Global Securities will be credited to the securities custody accounts on the settlement date against payment in same-day funds.

Secondary Market Trading

Since the purchaser determines the place of delivery, it is important to establish at the time of the trade where both the purchaser's and sellers accounts are located to inure that settlement can be made on the desired value date

Trading between Participating Organizations. Secondary market trading between Participating Organizations will be settled using the procedures applicable to U.S. corporate debt obligations in same-day funds.

B-1 GJX 16908

Trading between Cedel and or Euroclear Participants. Secondary market trading between Cedel Participants or Euroclear Participants will be settled using the procedures applicable to conventional eurobonds in same-day funds.

Trading between DTC seller and Cedel or Euroclear purchaser. When Global Securities are to be transferred from the account of a DTC Participant to the account of a Cedel Participant or a Euroclear Participant, the purchaser will send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at least one business day prior to settlement. Cedel or Euroclear will instruct the respective Depositary, as the case may be, to receive the Global Securities against payment. Payment will include interest accrued on the Global Securities from and including the last coupon payment date to and excluding the settlement date. Payment will then be made by the respective Depositary to the DTC Participants account against delivery of the Global Securities. After settlement has been completed, the Global Securities will be credited to the respective clearing system and by the clearing system, in accordance with its usual procedures, to the Cedel Participant's or Euroclear Participant account. The Global Securities credit will appear the next day (European time) and the cash debit will be back-valued to, and the interest on the Global Securities will accrue from, the value date (which would be the preceding day when Settlement occurred in New York). If Settlement is not completed on the intended value date (i.e. the trade fails), the Cedel or Euroclear cash debit will be valued instead as of the actual settlement date.

Cedel Participants and Euroclear Participants will need to make available to the respective clearing systems the funds necessary to process same-day funds settlement. The most direct means of doing so is to pre-position funds for settlement, either from cash on hand or existing lines of credit, as they would for any settlement occurring within Cedel or Euroclear. Under this approach, they may take on credit exposure to Cedel or Euroclear until the Global Securities are credited to their accounts one day later

As an alternative, if Cedel or Euroclear has extended a line of credit to them, Cedel Participants or Euroclear Participants can elect not to pre-position funds and allow that credit line to be drawn upon the finance settlement. Under this procedure, Cedel Participants or Euroclear Participants purchasing Global Securities would recur overdraft charges for one day, assuming they cleared the overdraft when the Global Securities were credited to their accounts. However, interest on the Global Securities would accrue from the value date. Therefore, in many cases the investment income on the Global Securities earned during that one-day period may substantially reduce or offset the amount of such overdraft charges, although this result will depend on each Cedel Participants or Euroclear Participant's particular cost of funds.

Since the settlement is taking place during New York business hours, Participating Organizations can employ their usual procedures for sending Global Securities no the respective Depositary for the benefit of Cedel Participants or Euroclear Participants. The sale proceeds will be available to the DTC seller on the settlement date. Thus, to the DTC Participant a cross-market transaction will settle no differently than a trade between two Participating Organizations.

Trading between Cedel or Euroclear seller and DTC purchaser. Due to time zone differences in their favor, Cedel Participants and Euroclear Participants may employ their customary procedures for transactions in which Global Securities are to be transferred by the respective clearing system, through the respective Depositary, to a DTC Participant. The seller will send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at least one business day prior to settlement in these cases, Cedel or Euroclear will instruct the respective Depositary, as appropriate, to deliver the Global Securities to the DTC Participant's account against payment. Payment will include interest accrued on the Global Securities from and including the last coupon payment date to and excluding the settlement date. The payment will then be reflected in the account of the Cedel Participant or Euroclear Participant the following day, and receipt of the cash proceeds in the Cedel Participant's or Euroclear Participant s account would be back-valued to the value date (which would be the preceding day, when settlement occurred in New York). Should the Cedel Participant or Euroclear Participant have a line of credit with its respective clearing system and elect to be in debit in anticipation of receipt of the sale proceeds in its account, the back-valuation will extinguish any overdraft charges incurred over that one-day period. If settlement is not completed on the intended value date (i.e., the trade fails, receipt of the cash proceeds in the Cedel Participant's or Euroclear Participants account would instead be valued as of the actual settlement date. Finally, day traders that use Cedel or Euroclear and that purchase Global Securities from Participating Organizations for delivery to Cedel Participants or Euroclear Participants should note that these trades would

B-2 GJX 16909

automatically fail on the sale side unless affirmative action were taken. At least three techniques should be readily available to eliminate this potential problem:

(a) borrowing through Cedel or Euroclear for one day (until the purchase side of the day trade is reflected in their Cedel or Euroclear accounts) in accordance with the clearing systems customary procedures;

(b) borrowing the Global Securities in the U.S. from a DTC Participant no later than one day prior to settlement, which would give the Global Securities sufficient time to be reflected in their Cedel or Euroclear account in order to settle the sale side of the trade; or

(c) staggering the value dates for the buy and sell sides of the trade so that the value date for the purchase front the DTC Participant is at least one day prior to the value date for the sale to the Cedel Participant or Euroclear Participant

Certain U.S. Federal Income Tax Documentation Requirements

A beneficial owner of Global Securities holding securities through Cedel or Euroclear (or through DTC if the holder has an address outside the U.S.) will be subject to the 30% U.S. withholding tax that generally applies to pants of interest (including original issue discount) on registered debt issued by U.S. Persons, unless (i) each clearing system, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business in the chain of intermediaries between such beneficial owner and the U.S. entity required to withhold tax complies with applicable certification requirements and (ii) such beneficial owner takes one of the following steps to obtain an exemption or tax rate:

Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Notes that are non-U.S. Persons can obtain a complete exemption torn the withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If the information shown on Form W-8 changes, a new Form W-8 must be filed within 30 days of such change.

Exemption for non-U.S. Persons with effectively connected income (Form 4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S. branch, for which the interest income is effectively connected with its conduct of a trade or business in the United States, can obtain an exemption from the withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in the United States).

Exemption or reduced rate for non-U.S. Persons resident in treaty countries (Form 1001). Non-U.S. Persons that we Note Owners rending in a country that baa a tax treaty with the United States em obtain an exemption or reduced tax rate (depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty provides only for a reduced rate, withholding tax will be imposed am that rate unless the filer alternatively files Form W-8. Form 1001 may be filed by the Noteowner or his agent.

Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete exemption from the withholding tax by filing Form W-9 (Request for Taxpayer Identification Number and Certification).

U.S. Federal Income Tax Reporting Procedure. The Note Owner of a Global Security or in the case of a Form 1001 or a Form 4224 filer, his agent, files by submitting the appropriate form to the person through whom it holds (the clearing agency, in the case of persons holding directly on the books of the clearing agency). Form W-8 and Form 1001 are effective for three calendar years and Form 4224 is effective for one calendar year

The term " U.S. Person" means (i) a citizen or resident of the United States, (ii) a corporation or partnership organized in or under the laws of the United States or any political subdivision thereof or (iii) an estate or mist the income of which is includable in gross income for United States tax purposes, regardless of its source. This summary does not deal with all aspects of U.S. Federal income tax withholding that may be relevant to foreign holders of the

B-3 GJX 16910

Global Securities. Investors are advised to consult their own tax advisers for specific tax advice concerning their holding and disposing of the Global Securities.

On April 15, 1996, proposed Treasury Regulations (the " 1996 Proposed Regulations") were issued which, if adopted in final form, could affect the United States taxation of non-U.S. holders. The 1996 Proposed Regulations are generally proposed to be effective for payments after December 31, 1997, subject in certain transition rules. It cannot be predicted at this time whether the 1996 Proposed Regulations will become effective as proposed or what, if any, modifications may be made to them. The 1996 Proposed Regulations would, if adopted, alter the rules under this heading in certain respects. Prospective investors are urged to consult their tax advisors with respect to the effect the 1996 Proposed Regulations may have if adopted.

B-4 GJX 16911 EXHIBIT C GJX 16912 AUDITED FINANCIAL STATEMENTS OF COMMERCIAL FINANCIAL SERVICES, INC. ARTHUR ANDERSEN LLP COMMERCIAL FINANCIAL SERVICES, INC. AND AFFILIATED COMPANIES COMBINED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS GJX 16913 ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors, Stockholders and Partners of Commercial Financial Services, Inc. and affiliated companies:

We have audited the accompanying combined balance sheets of the entities identified in Note 1 as of December 31, 1996 and 1995, and the related combined statements of income, stockholders' equity and cash flows of the entities identified in Note 1 for the years then ended. These financial statements are the responsibility of the entities' management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the entities identified in Note 1 as of December 31, 1996 and 1995, and the combined results of operations and cash flows of the entities identified in Note 1 for the years then ended in conformity with generally accepted accounting principles.

Tulsa, Oklahoma

February 22, 1997

GJX 16914 COMMERCIAL FINANCIAL SERVICES, INC. AND AFFILIATED COMPANIES COMBINED BALANCE SHEETS DECEMBER 31, 1996 AND 1995

1996 1995 ASSETS 4,937,133 1,416,003 275,134,630 46,098,926 LIABILITIES AND STOCKHOLDERS' EQUITY 6,322,070 681,476 106,100,303 3,454,902 (10,773,825) (95,888) 169,034,327 42,644,024 275,134,630 46,098,926

ASSETS: Cash and short-term investments $ 79,504,085 $ 26,952,190 Loan collection fees receivable 1,569,813 662,027 Other receivables 1,595,332 1,130,141 Unrecovered loan costs 87,085,798 5,374,769 Retained interest in loans sold 2,323,921 915,167 Securitization reserve accounts (restricted cash) 12,460,088 3,990,000 Loan securitization receivables, net 50,171,182 858,286 Property and equipment, net 35,487,278 4,800,343 Other assets Total assets LIABILITIES: Borrowings $ 95,072,500 $ 2,045,871 Accounts payable 4,705,733 727,555 Accrued liabilities Total liabilities STOCKHOLDERS' EQUITY: Common stock 114,305 107,659 Additional paid-in capital 1,050,579 1,349,569 Retained earnings 178,643,268 41,582,684 Less: advances to stockholders Total stockholders' equity Total liabilities and stockholders' equity The accompanying notes are an integral part of these financial statements. GJX 16915 COMMERCIAL FINANCIAL SERVICES, INC. AND AFFILIATED COMPANIES COMBINED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 1996 1995 (141,659,400) (85,474,196) 9,075,902 3,902,877 203,085,131 64,999,232 2,526,250 605,962 2,526,250 901,320 205,611,381 65,900,552 3,995,498 424,932 68,498,978 23,070,741 137,112,403 42,829,811 REVENUES: Loan revenues: Loan securitizations and collections $ 335,668,629 $ 146,570,551 Loan costs recovered 194,009,229 61,096,355 Loan collection servicing fees Total loan revenues Other revenues: Management and disposition fees — 295,358 Interest and other income Total other revenues Total revenues EXPENSES: Salaries and benefits 39,299,908 13,623,151 Operating expenses 21,903,878 4,463,920 Interest expense 3,299,694 4,558,738 Depreciaton and amortization Total expenses NET INCOME The accompanying notes are an integral part of these financial statements. GJX 16916 COMMERCIAL FINANCIAL SERVICES, INC. AND AFFILIATED COMPANIES COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995Stock Capital Earnings Stockholders Total - — (3,673,087) — (3,673,087) - — — (10,677,937) (10,677,937) $ 114,305 $ 1,050,579 $ 178,643,268 $ (10,773,825) $ 169,034,327 Additional Common Paid-in Retained Advances to BALANCE, December 31, 1994 $ 104,745 $ 1,061,837 $ 2,434,054 $ (376,482) $ 3,224,154 PROCEEDS FROM ISSUANCE OF COMMON STOCK 3,035 100 — — 3,135 REDEMPTION OF COMMON STOCK (121) (12,368) (8,094) — (20,583) NET INCOME — — 42,829,811 — 42,829,811 STOCKHOLDER TRANSACTIONS: Advances to stockholders, net — — — 280,594 280,594 Distributions BALANCE, December 31, 1995 107,659 1,049,569 41,582,684 (95,888) 42,644,024 PROCEEDS FROM ISSUANCE OF COMMON STOCK 7,064 1,010 — — 8,074 REDEMPTION OF COMMON STOCK (418) — (51,819) — (52,237) NET INCOME — — 137,112,403 — 137,112,403 STOCKHOLDER TRANSACTIONS: Advances to stockholders BALANCE, December 31, 1996 The accompanying notes ate an integral part of these financial statements. GJX 16917 COMMERCIAL FINANCIAL SERVICES, INC. AND AFFILIATED COMPANIES COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 1996 1995 (3,125,050) (5,253,443) 96,519,670 40,711,620 (34,682,433) (4,829,108) (126,272,304) 33,381,733 — (3,218,605) 82,304,529 (53,127,287) 26,952,190 5,986,124 $ 79,504,085 $ 26,952,190 CASH FLOWS FROM OPERATING ACTIVITIES: Loan securitizations and collections in excess of costs recovered $ 144,696,333 $ 60,238,069 Loan collection servicing fees 8,168,116 3,320,601 Management and disposition fees received — 404,993 Interest and other income received 2,296,079 605,962 Payments to employees and suppliers (55,515,808) (18,604,562) Interest and financing fees paid Net cash provided by operating activities CASH FLOWS PROM INVESTING ACTIVITIES: Loan costs recovered-securitizations and collections 141,659,400 85,474,196 Retained interest in loans sold, net of payments (1,408,754) (915,167) Increase in securitization reserve accounts (restricted cash) (8,470,088) (3,990,000) Purchases of loans (223,370,429) (42,358,188) Purchases of property and equipment Net cash (used in) provided by investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 8,074 3,135 Redemption of common stock (52,237) (20,583) Proceeds from borrowings 216,448,374 36,536,040 Repayments of borrowings (123,421,745) (86,253,386) Advances to stockholders (10,677,937) (173,888) Distributions to stockholders Net cash provided by (used in) financing activities INCREASE IN CASH 52,551,895 20,966,066 CASH, beginning of period CASH, end of period The accompanying notes are an integral part of these financial statements. GJX 16918 COMMERCIAL FINANCIAL SERVICES, INC. AND AFFILIATED COMPANIES COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (continued)1996 1995 5,640,594 (280,422) $ 96,519,670 $ 40,711,620 RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 137,112,403 $ 42,829,811 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,995,498 424,932 Net change in: Loan securitization receivables (49,312,986) (858,286) Loan collection fees receivable (907,786) (582,276) Other receivables (465,191) 92,505 Other assets (3,521,130) (767,049) Accounts payable 3,978,178 147,595 Accrued liabilities Net cash provided by operating activities The accompanying notes are an integral part of these financial statements. GJX 16919 COMMERCIAL FINANCIAL SERVICES, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995i 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Description of Business and the Reporting Entity

The combined financial statements include Commercial Financial Services, Inc. (CFS, an Oklahoma corporation), and the "Affiliates" as follows: Year of Legal Name Abbreviation Formation The "Affiliates" (including the "Limited Partnerships"):

Commercial Financial Services, Inc. CFS 1986 Commercial Financial/SPC Acquisitions, Inc. SPC 1993 CF/SPC 1994, Inc. 1994, Inc. 1994 Financial Collections, Inc. FCI 1995 CF/SPC 1995, Inc. 1995, Inc. 1995 CF/SPC NB, Inc. NB, Inc. 1995 CF/SPC GTC, Inc. GTC, Inc. 1996 CF/SPC 1996, Inc. 1996, Inc. 1996 CF/SPC POC, Inc. POC, Inc. 1996 CF/SPC DFD, Inc. (1) DFD, Inc. 1996 CF/SPC NBEH, Inc. NBEH, Inc. 1996 CF/SPC CIH, Inc. CIH, Inc. 1996 CF/SPC 1997, Inc. 1997, Inc. 1996 CF/SPC WTM, Inc. WTM, Inc. 1996 T.A.P.R. III Limited Partnership (formerly T.A.P.R. Limited Partnership) TAPR III 1995 T.A.P.R. II Limited Partnership TAPR II 1995 T.A.P.R. IV Limited Partnership TAPR IV 1996 T.A.P.R. V Limited Partnership TAPR V 1996 T.A.P.R. VI Limited Partnership (1) TAPR VI 1996 T.A.P.R. VII Limited Partnership TAPR VII 1996 T.A.P.R. VIII Limited Partnership TAPR VIII 1996 T.A.P.R. IX Limited Partnership TAPR IX 1996 (1) Entity merged/dissolved prior to December 31, 1996.

GJX 16920

Following is a table indicating the general and limited partners of the Limited Partnerships:Partnership General Partner Limited Partner(s)

TAPR II FCI 1995, Inc. TAPR III SPC CFS, 1994, Inc., NB, Inc. TAPR IV FCI 1996, Inc. TAPR V NBEH, Inc. DFD, Inc. TAPR VII WTM, Inc. CFS TAPR VIII CIH, Inc. CFS TAPR IX 1997, Inc. CFS In most instances, the Affiliates (including the Limited Partnerships) were formed to facilitate loan sale transactions (See Note 2) and have limited operational activities. CFS and the Affiliates are collectively referred to as the "Company", on a combined basis. All entities were incorporated or formed in the state of Oklahoma, with the exception of CF/SPC NBEH, which was incorporated in the state of Delaware.

The stockholders of CFS and the Affiliates (excluding the Limited Partnerships) are identical with identical percentages of ownership. Due to the common ownership and management, generally accepted accounting principles require that the financial statements of CFS be presented on a combined basis with the Affiliates. Accordingly, the accompanying financial statements present CFS and the Affiliates combined as one reporting entity. All significant inter-company transactions and balances have been eliminated in combination.

Certain provisions of the Certificates of Incorporation, Limited Partnership Agreements, loan documents or securitization transaction documents of the Affiliates with their lender or investors require that the Affiliates conduct their businesses in a manner so as to preserve their separate existence. Among other things, the Affiliates must maintain separate books, accounts and records. Although the accompanying combined financial statements present CFS and the Affiliates as a combined entity, as required by generally accepted accounting principles, CFS and the Affiliates are separate and distinct entities; assets of one of the corporations or partnerships are not available to satisfy obligations of the other entities.

The December 31, 1996 combined financial statements include CFS and all of the companies incorporated or formed prior to December 31, 1996. CFS was incorporated in August 1986 to purchase and collect distressed loan packages. Since incorporation, CFS' operations have evolved to include distressed asset acquisition and management services for the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, and other private sector financial service institutions. Beginning in 1996, the Company's primary line of business has been the acquisition and resolution of charged-off general issue credit card obligations, purchased on a direct basis from individual financial institutions. The majority of the loans purchased during 1995 and 1996 have subsequently been pooled and sold to several institutional investors through six securitization transactions, beginning in May 1995 (See Note 2).

GJX 16921

Loan Collections

Revenue from loan collections is recognized on a loan-by-loan basis utilizing the cost recovery method for loans purchased. Loan collections are initially recorded as a recovery of the cost basis of an individual loan. Once the entire cost basis of an individual loan has been recovered, all remaining collections are recorded as income. The cost basis of an individual loan is determined by a pro rata allocation of the total cost of a loan portfolio acquired, based on a loan's individual estimate of collectibility to the total estimated collectibility of the acquired portfolio. Such allocations of cost basis are finalized within one year of acquisition.

Loan Sales (Securitizations)

In 1995 and 1996, the Company purchased loans from various financial institutions or government agencies. Subsequent to purchase, the Company sold the majority of these loans through a series of securitization transactions. In each securitization transaction, the Company sold the loans, without recourse, to a trust formed as part of the securitization transaction. The trust in turn sold interests in the trust, in the form of certificates, to institutional investors. In all transactions, the Company retained a small interest in each trust (less than 1%), in the form of certificates. The certificate interest retained is reflected as retained interest in loans sold in the combined balance sheets. The sales price of the loans was, in each instance, the cash proceeds received from the certificates issued by the trust (net of transactional expenses) plus a deferred sales price to be paid after all certificateholders are repaid. The proceeds from the sale of loans is reflected as a component of loan securitizations and collections, net of transactional expenses, in the combined statements of income, and the carrying value of the loans sold is reflected in loan costs recovered in the combined statements of income (See Note 2).

In connection with each sale, cash reserve accounts were established to fund required payments to the certificateholders in the event of insufficient loan collections. These reserve accounts are reflected as securitization reserve account (restricted cash) in the combined balance sheets. These restricted cash balances are presented separately in the combined balance sheets, and are excluded from cash and cash equivalents.

Loan Securitization Receivables (Deferred Sales Price)

In order to provide additional credit enhancement to the certificateholders m each securitization transaction, a portion of the sales proceeds is withheld by the trust in the form of a deferred sales price. The deferred sales price as equal to all collections on the loans in excess of the full repayment of required certificate payments, trust related expenses, and servicing costs, and is reflected as a loan securitization receivable in the combined balance sheets. Payments on the loan securitization receivables will be made only to the extent that the actual collections exceed the required certificate payments, trust related expenses, and servicing costs. As the receivables are expected to be collected over a period of years (generally beginning four to five years after the sale) and bear no contractual interest, such receivables have been discounted at an appropriate interest rate, commensurate with the uncertainties inherent in the cash flows, to reflect the estimated present value of the receivables. Accretion of the discount will be recognized over the expected collection period of the receivables. In arriving at the estimated present value of the receivables, the Company uses internally developed estimates to determine the expected collections on loans sold to the trust. This estimation process relies on the Company's experience in the collection industry, and includes several assumptions relating to the collection of loans sold. These assumptions include the Company's ability to locate

GJX 16922

borrowers, negotiate acceptable lump sum pay-offs or extended payment terms, and the ability to resolve accounts based upon established terms. These assumptions contain an element of uncertainty. Changes in the assumptions could have an adverse effect on the estimate of loan collections and therefore the collectibility of the loan securitization receivable. The Company periodically evaluates the realizability of the receivables based upon, among other things, the actual collections to date on the loans sold. In the event of a reduction in the expected collections on the loans sold, the carrying amount of the receivable is adjusted through a charge to operations. No charges to operations to reduce the realizability of the receivables were made during 1995 or 1996.

Loan Servicing

Revenue is recognized from loan servicing agreements as loan collections are received, based upon the contractual percentages of cash collections on the loans. For the public and private sector contracts, disposition fee revenue is recognized in the period in which assets are sold, based on the Company's contractual percentages as defined in the respective agreements. As of December 31, 1996, CFS no longer provides asset disposition or management services for third parties. Substantially all loan servicing fees received during 1996 were the result of servicing agreements resulting from loan sales through securitization transactions (See Note 2).

Unrecovered Loan Costs

Unrecovered loan costs represent the cost of loans held for sale at December 31, 1996 and 1995. These loans are anticipated to be sold through subsequent securitization transactions. The unrecovered loan costs have been funded primarily with revolving warehouse borrowings as part of the Company's normal operating activities. Unrecovered loan costs are carried at the lower of aggregate cost or estimated market value. Substantially all unrecovered loan costs at December 31, 1996 and 1995 represent loans purchased within the last three months of the respective year. Management has estimated that the book value of unrecovered loan costs is representative of estimated fair value at December 31, 1996 and 1995.

Reserve for Losses on Uncollectible Loans

The reserve for losses on uncollectible loans is maintained at a level that, in management's judgment, based on conditions as of the balance sheet date, is adequate to provide for losses on individual loans for which management's estimate of future collections of those loans is less than their related unrecovered cost. Ultimate lasses may vary from the current estimates. These estimates are reviewed periodically, and as adjustments become necessary, they are reported in earnings in the period in which they become known. The Company has estimated that no reserve for losses on uncollectible loans was required at December 31, 1996 and 1995.

Cash and Cash Equivalents

Cash and cash equivalents represent cash on hand and short-term investments with maturities of less than 90 days. Short-term investments represent primarily money market accounts and bank certificates of deposit at December 31, 1996 and 1995.

GJX 16923

Property and Equipment

Depreciation as provided by both straight-line and accelerated methods over the useful lives of the related assets. Expenditures for repairs and maintenance are charged to expense as incurred, whereas major improvements are capitalized.

Income Taxes

CFS and the Affiliates (excluding the Limited Partnerships) have elected under the Internal Revenue Code to be treated as Subchapter S corporations whereby the stockholders report individually the taxable income of each affiliate. The Limited Partnerships are partnerships which pass any income or loss through to its partners. Accordingly, the accompanying combined financial statements contain no provision for income taxes.

Use of Estimates

The preparation of the combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements. Actual results could differ from these estimates.

Reclassifications

Certain reclassifications have been made to the 1995 financial statements in order to conform to the 1996 financial statement presentation.

2. SALE OF LOANS:

The following is a table which describes certain information about loans sold pursuant to securitization transactions during 1996 and 1995 (dollars in thousands):Securitization Name Amounts (1) Closing Date Loan Costs (net) (2) 52,500 27,539 556 132,000 79,179 858 84,300 50,616 18,994 280,420 141,698 49,313 $ 412,420 $ 220,877 $ 50,171

Loan Securitization Securitization Certificate Transaction Expenses and Receivable (000's) (000's) (000's) SMART 95-1 $ 79,500 May 31, 1995 $ 51,640 $ 302 SMART 95-2 December 22, 1995 Total 1995 SMART 96-1(3) $ 24,920 March 25, 1996 $ 9,144 $ 2,746 SMART 96-2 71,500 June 19, 1996 33,919 11,828 SMART 96-3 99,500 August 27, 1996 48,019 15,745 SMART 96-4 December 23, 1996 Total 1996 Total (1) Excludes retained interest in loans sold.

(2) Net of discounts.

(3) Total issuance $86.3 million, $61.4 million used to repay outstanding SMART 95-1 certificates.

GJX 16924

CFS is the servicing agent for the loans sold. CFS earns a servicing fee equal to 15% of the gross loan collections and is reimbursed for certain out-of-pocket expenses. Management estimates that the servicing fee to be received represents adequate compensation relative to the Company's cost to service the loans.

3. PROPERTY AND EQUIPMENT:

Major classifications of property and equipment at December 31, 1996 and 1995, having estimated useful lives ranging from five to eight years, are summarized as follows:1996 1995 2,040,386 387,973 (4,142,418) (820,779) $ 35,487,278 $ 4,800,343

Computer and other equipment $ 12,978,974 $ 1,151,120 Airplane and automobiles 22,317,025 4,075,094 Leasehold improvements 2,293,311 6,935 Furniture and fixtures 39,629,696 5,621,122 Less: accumulated depreciation Property and equipment, net The carrying basis for property and equipment is historical cost, net of accumulated depreciation.

4. BORROWINGS:

Borrowing at December 31, 1996 and 1995 consist of the following:1996 1995 20,472,500 - $ 95,072,500 $ 2,045,871

Revolving warehouse borrowings $ 74,600,000 $ 2,045,871 Term borrowings Total borrowings 1995

Outstanding borrowings at December 31, 1995 represent a $100 million revolving credit facility used to purchase loans. Collateral for the facility was provided through a pledge of the loans purchased. The credit agreement provided for maturity of the facility on December 6, 1996. The interest rate was adjusted on a monthly basis, based upon one month LIBOR plus 3.5%. Management estimates that the carrying value of amounts outstanding at December 31, 1995 represents estimated fair value.

1996

Outstanding revolving warehouse borrowings at December 31, 1996 represent outstanding advances on a $100 million facility with a national bank. The advances under the facility are used to purchase loans and are collateralized through a pledge of the loans purchased. The

GJX 16925

credit agreement has a scheduled maturity of December 16, 1997. The Company pays interest based upon the type of advance requested at the time of funding. Term funding of one, two or three month duration is available, with the interest rate indexed to the one, two or three month LIBOR rate, plus 1.5%. At December 31, 1996, the interest rate on the term borrowings under the facility was 7.125%. Overnight funding is available, and is generally priced at the current prune rate (8.25% at December 31, 1996). Management estimates that the carrying value of amounts outstanding at December 31, 1996 represents estimated fair value.

Outstanding term notes payable at December 31, 1996 represent a 10-year amortizing note to a national transportation financing company. The proceeds of the note were used to purchase an airplane for corporate use, which provides the collateral for the note. Required monthly payments on the note are $239,000 beginning February 1, 1997 and ending January 1, 2007 The interest rate in the note is fixed for a one-year period at 7.14%, with the interest rate to reset annually thereafter at the current one-year Treasury rate plus 1.75%. Management estimates that the carrying value of the borrowing at December 31, 1996 represents estimated fair value.

The credit agreements provide for a number of affirmative and negative covenants, including operating and financial covenants. As of December 31, 1996 and 1995, the Company was in compliance with all terms of the credit agreements.

In addition to the borrowings described above, the Company has available a $1 million line of credit with a national bank for loan purchases. The maturity of the facility is March 31, 1997. During 1996, no advances were made on this line of credit

Subsequent to December 31, 1996, the Company entered into a credit agreement with a national bank whereby the bank agreed to provide a $20 million credit facility for loan purchases and working capital needs (See Note 10).

5. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL:

A summary of common stock and additional paid-in capital for CFS and the Affiliates follows:December 31, 1995 Authorized Outstanding Common Stock Capital 500,000 101,017 1,010 - 2,611,111 725,669 $ 107,659 $ 1,049,569

GJX 16926

December 31, 1996 Authorized Outstanding Common Stock Capital 500,000 100,827 1,008 - 6,111,111 1,430,083 114,305 $ 1,050,579 Amount of Shares Issued Additional Shares and Amount of Paid-in CFS 111,111 101,417 $ 101,417 $ — SPC 500,000 219,367 2,194 853,232 1994, Inc. 500,000 101,434 1,014 196,327 FCI 500,000 101,417 1,014 10 1995, Inc. 500,000 101,017 1,010 — NB, Inc. Total Amount of Shares Issued Additional Shares and Amount of Paid-in CFS 111,111 101,017 $ 101,017 $ 1,010 SPC 500,000 218,449 2,184 853,232 1994, Inc. 500,000 101,017 1,010 196,327 FCI 500,000 101,017 1,010 10 1995, Inc. 500,000 101,017 1,010 — NB, Inc. 500,000 101,017 1,010 — GTC 500,000 101,017 1,010 — 1996, Inc. 500,000 101,017 1,010 — POC, Inc. 500,000 101,017 1,010 — NBEH, Inc. 500,000 101,017 1,010 — CIH, Inc. 500,000 100,527 1,008 — 1997, Inc. 500,000 100,827 1,008 — WTM, Inc. Total In accordance with existing stockholder agreements, the companies have the right of first refusal to redeem the stock held by employees if they terminate employment with the Company. The Company exercised its right with respect to one former employee in 1995 and one former employee in 1996. The Company also partially redeemed the stock of one current employee in 1995. Common stock was retired at par, and the redemption price in excess of par was charged against additional paid-in capital and retained earnings

6. COMMITMENTS AND CONTINGENCIES: Leases

The Company has leased office space and equipment under various cancelable and noncancelable operating leases through June 2010. Rent expense was approximately $1,391,000 and $902,000 for the years ended December 31, 1996 and 1995, respectively.

Future minimum rental payments under the various leases are approximately as follows:Amount 7,319,767 $ 21,689,072

1997 $ 2,635,726 1998 1,800,534 1999 1,938,911 2000 3,634,315 2001 4,359,819 Thereafter Total

GJX 16927

Legal

The Company is involved from time to time in various litigation matters including lawsuits that seek recovery of alleged damages from the owners of loans and from CFS in its capacity as servicing agent. In the opinion of management, based in part on the advice of legal counsel, the ultimate outcome of these lawsuits will not have a material adverse impact on the combined balance sheet or future combined results of operations.

Purchase Commitments

Beginning in 1996, the Company has entered into various long term forward supply contracts with loan sellers. In limited instances, the Company is contractually obligated to purchase loans under these agreements. Failure to purchase under these agreements could result in cancellation of the agreement or actual damages, which would not be anticipated to have a significant impact to the Company.

7. EMPLOYEE BENEFITS: Medical Insurance

The Company maintains a hospitalization and medical coverage program for its employees and dependents. Beginning in 1996, the medical plan is a self-insured plan and is provided at a nominal cost to employees. Claims under the program are paid by the Company, limited by an annual maximum of $25,000 per covered individual. The Company accrues for medical expenses on a monthly basis, based upon estimates determined in conjunction with the third party claims administrator. At December 31, 1996, the Company had accrued $313,000 for the payment of outstanding medical claims incurred during 1996, but not yet paid at year end.

Defined Contribution Plan and Other Benefits

The Company sponsors a 401(k) plan. The plan is eligible to all employees, subject to a mandatory waiting period. Under the plan, eligible employees may contribute up to 10% of their annual salary and bonus, if applicable. A variety of investment options are provided. The Company may elect to match employee contributions on a discretionary basis. The Company accrued $715,000 during 1996 to match employee contributions, which is anticipated to be paid in early 1997. No matching contributions were made during 1995.

Other benefits include Company provided day care facilities, dental, vision, and life insurance, a section 125 cafeteria benefits plan, paid vacation and personal leave, bonus programs and reimbursement of educational expenses.

8. NEW ACCOUNTING PRONOUNCEMENTS:

Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 125 (SFAS 125), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement provides accounting and reporting standards

GJX 16928

for transfers and servicing of financial assets and extinguishments of liabilities. Under this statement, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. The adoption of SFAS 125 requires prospective treatment for all sales of financial assets after January 1, 1997.

9. RELATED PARTY TRANSACTIONS:

From time to time, the Company will make advances to certain shareholders and employees. These advances are evidenced by signed promissory notes, are payable on demand, and require that interest be paid at least annually.

10. SUBSEQUENT EVENTS:

On January 21, 1997, the Company entered into a credit agreement with a national bank whereby the bank agreed to provide a $20 million credit facility for loan purchases and general corporate needs. The interest rate on the facility is LIBOR plus 1.75%, to fund loan purchases, and prime rate for funding for general corporate purposes. The maturity of the facility is January 21, 1998.

On February 7, 1997, pursuant to the SMART 1997-1 securitization transaction, the Company sold loans with a cost of approximately $40.2 million to the SMART 1997-1 trust, receiving cash proceeds of approximately $65 million. The transaction resulted in a recovery of approximately $40.2 million of unrecovered loan costs. In addition, a portion of the cash proceeds was used to reduce outstanding borrowings on the loans sold of approximately $35.6 million.

GJX 16929 EXHIBIT D CASH FLOW MODEL

EXHIBIT E NOTIONAL AMOUNT SCHEDULE

Start Date Maturity Date Currency Amount

GJX 16950

Start Date Maturity Date Currency Amount

GJX 16951

Start Date Maturity Date Currency Amount 6 August 1997 15 August 1997 USD 88,000,000.00 15 August 1997 15 September 1997 USD 88,000,000.00 15 September 1997 15 October 1997 USD 88,000,000.00 15 October 1997 17 November 1997 USD 88,000,000.00 17 November 1997 15 December 1997 USD 88,000,000.00 15 December 1997 15 January 1998 USD 88,000,000.00 15 January 1998 17 February 1998 USD 88,000,000.00 17 February 1998 16 March 1998 USD 88,000,000.00 16 March 1998 15 April 1998 USD 88,000,000.00 15 April 1998 15 May 1998 USD 88,000,000.00 15 May 1998 15 June 1998 USD 87,661,405.00 15 June 1998 15 July 1998 USD 67,318,223.00 15 July 1998 17 August 1998 USD 86,943,568.00 17 August 1998 15 September 1998 USD 86,562,938.00 15 September 1998 15 October 1998 USD 86,176,566.00 15 October 1998 16 November 1998 USD 85,784,573.00 15 November 1998 15 December 1998 USD 85,324,373.00 15 December 1998 15 January 1999 USD 84,844,945.00 15 January 1999 16 February 1999 USD 84,350,827.00 16 February 1999 15 March 1999 USD 83,842,226.00 15 March 1999 15 April 1999 USD 83,319,342.00 15 April 1999 17 May 1999 USD 82,752,369.00 17 May 1999 15 June 1999 USD 82,231,494.00 15 June 1999 15 July 1999 USD 81,666,900.00 15 July 1999 16 August 1999 USD 81,088,760.00 16 August 1999 15 September 1999 USD 80,497,242.00 15 September 1999 15 October 1999 USD 79,892,510.00 15 October 1999 15 November 1999 USD 79,274,719.00 15 November 1999 15 December 1999 USD 78,648,272.00 15 December 1999 18 January 2000 USD 78,004,842.00 18 January 2000 15 February 2000 USD 77,348,791.00 15 February 2000 15 March 2000 USD 76,680,254.00 15 March 2000 17 April 2000 USD 75,999,360.00 17 April 2000 15 May 2000 USD 75,306,234.00 15 May 2000 15 June 2000 USD 73,863,089.00 15 June 2000 17 July 2000 USD 72,421,043.00 17 July 2000 15 August 2000 USD 70,979,799.00 15 August 2000 15 September 2000 USD 69,541,515.00 15 September 2000 16 October 2000 USD 68,105,159.00 16 October 2000 15 November 2000 USD 66,673,099.00 15 November 2000 15 December 2000 USD 65,246,387.00 15 December 2000 16 January 2001 USD 63,817,179.00 16 January 2001 15 February 2001 USD 62,389,448.00 15 February 2001 15 March 2001 USD 60,962,874.00 15 March 2001 17 April 2001 USD 59,537,164.00 17 April 2001 15 May 2001 USD 58,112,031.00 15 May 2001 15 June 2001 USD 56,573,345.00 15 June 2001 16 July 2001 USD 55,034,507.00 16 July 2001 15 August 2001 USD 53,495,231.00 15 August 2001 17 September 2001 USD 51,955,233.00 17 September 2001 15 October 2001 USD 50,414,237.00 15 October 2001 15 November 2001 USD 48,871,973.00 15 November 2001 17 December 2001 USD 47,332,424.00 17 December 2001 15 January 2002 USD 45,786,860.00 15 January 2002 15 February 2002 USD 44,239,246.00 15 February 2002 15 March 2002 USD 42,689,332.00 15 March 2002 15 April 2002 USD 41,136,871.00 15 April 2002 15 May 2002 USD 39,581,623.00 15 May 2002 17 June 2002 USD 38,023,350.00 17 June 2002 15 July 2002 USD 36,461,520.00 15 July 2002 15 August 2002 USD 34,896,805.00 15 August 2002 18 September 2002 USD 33,328,081.00 16 September 2002 15 October 2002 USD 31,755,496.00 15 October 2002 15 November 2002 USD 30,179,117.00 15 November 2002 16 December 2002 USD 28,603,039.00 15 December 2002 15 January 2003 USD 27,018,585.00 15 January 2003 18 February 2003 USD 25,429,773.00 18 February 2003 17 March 2003 USD 23,836,407.00 17 March 2003 15 April 2003 USD 22,236,291.00 15 April 2003 15 May 2003 USD 20,635,232.00 15 May 2003 16 June 2003 USD 19,027,042.00 16 June 2003 15 July 2003 USD 17,413,535.00 15 July 2003 15 August 2003 USD 15,794,527.00 15 August 2003 15 September 2003 USD 14,169,838.00 15 September 2003 15 October 2003 USD 12,539,293.00

GJX 16952

No person has been authorized to give any information or to make any representations other than those contained in this Memorandum and, if given or made, such information or representations must not be relied upon. This Memorandum does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the securities offered hereby nor an offer of such securities to any person in any state or other jurisdiction in which such offer would be unlawful. The delivery of this Memorandum at any time does not imply that information herein is correct as of any time subsequent to its date.

TABLE OF CONTENTS

Summary 1 Risk Factors 12 The Issuer and GTD 19 The Trustee 20 The Loans 21 Certain Loan Characteristics 25 Weighted Average Life of the Notes 32 Use of Proceeds 32 The Warehouse Facility 32 The Seller and the Servicer 32 The Backup Servicer 33 The Interest Rate Cap Provider 33 Description of the Notes 33 Certain Information Regarding the Notes 40 Description of the Sale and Servicing Agreement 44 Certain Legal Aspects of the Loan 56 Certain Federal Income Tax Consequences 58 Certain State Tax Consequences 59 ERISA Considerations 60 Plan of Distribution 61 Legal Opinions 62 Index of Terms 63

Private Placement Memorandum $88,000,000 7.85% Fixed Rate Class A-1 Asset Backed Notes, Series 1997-4 $88,000,000 Floating Rate Class A-2 Asset Backed Notes, Series 1997-4 CF/SPC SMART, Inc. Issuer Commercial Financial Services, Inc. Seller and Servicer Chase Securities Inc. Placement Agent August 6, 1997 GJX 16954 RR EXHIBIT "F" MBP OPINION LETTER ISSUED IN CONNECTION WITH THE SMART 1997-4 TRANSACTION

JOYNER, Judge

MAYER, BROWN PLATT 1675 BROADWAY NEW YORK, NEW YORK 10019-5820

MAIN TELEPHONE 212-506-2500

MAIN FAX 212-262-1910

August 6, 1997

Persons listed on Schedule I

Re: Commercial Financial Services, Inc. and CF/SPC SMART, Inc.

Ladies and Gentlemen:

This letter is being provided to you by the undersigned, as special counsel to Commercial Financial Services, Inc. ("CFS"), CF/SPC GTD, Inc. ("GTD, Inc.") and CF/SPC SMART, Inc. ("SMART, Inc."), pursuant to Section 7 of the Private Placement Agency Agreement, dated August 6, 1997, (the "Placement Agreement") among Chase Securities, Inc., CFS and SMART, Inc. relating to the placement by you of the Notes described in the definitive final Private Placement Memorandum dated August 6, 1997 (the "Memorandum"). Capitalized terms not otherwise defined herein have the meanings assigned to them in Appendix A to the Sale and Servicing Agreement dated August 6, 1997 among CFS, as Servicer and Seller, SMART, Inc. as Issuer, and Bankers Trust Company, as Trustee and Backup Servicer and acknowledged and agreed to by CF/SPC GTD, Inc.

In connection with the delivery of this letter, we have examined and relied upon the Memorandum and executed copies of the Placement Agreement and the Basic Documents, and originals or copies, certified or otherwise identified to our satisfaction, of such certificates and other documents as we have deemed appropriate for the purposes of delivering this letter.

We are members of the bar of the State of New York and do not purport to be experts on or to express any opinion herein concerning any laws other than the laws of the State of New York and the federal laws of the United States of America. We express no opinion herein as to the laws of any other jurisdiction.

As indicated above, we have examined various documents and records and participated in conferences with your representatives and the representatives of CFS, GTD, Inc. and SMART, Inc., at which time the contents of the Memorandum and related matters were discussed, and, on behalf of CFS, GTD, Inc. and SMART, Inc., we have participated

51071897 97377220 M053-001022 CHICAGO BERLIN BRUSSELS HOUSTON LONDON LOS ANGELES NEW YORK WASHINGTON INDEPENDENT MEXICO CITY CORRESPONDENT: JAUREGUI, NAVARRETE, NADER Y ROJAS INDEPENDENT PARIS CORRESPONDENT: LAMBERT ARMENIADES

MAYER, BROWN PLATT

Persons listed on Schedule I August 6, 1997 Page 2

in the preparation of the Memorandum. We have also examined the opinions and the documents delivered at the closing. However, we are not passing upon and assume no responsibility for the accuracy, completeness or fairness of the statements contained in the Memorandum. Subject to the foregoing, we advise you that no facts have come to our attention which lead us to believe that as of its date, the Memorandum (other than the financial and statistical data included or not included therein, as to which we express no opinion) contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

Whenever in this letter, the existence or absence of facts is indicated to be based on our knowledge or awareness, we are referring to the actual knowledge of the Mayer, Brown Platt attorneys who have represented CFS, GTD, Inc. and SMART, Inc., in connection with the transactions contemplated by the Placement Agreement and the Basic Documents. Except as expressly set forth herein, we have not undertaken any independent investigation to determine the existence or absence of such facts and no inference as to our knowledge concerning such facts should be drawn from the fact that such representation has been undertaken by us.

This letter is limited to the specific issues addressed herein and is limited in all respects to laws and facts existing on the date hereof. By delivering this letter, we do not undertake to advise you with respect to any other matter or of any change in such laws or facts or in the interpretations of such laws which may occur after the date hereof.

We are furnishing this letter to you solely for your benefit. This letter is not to be used, circulated, quoted or otherwise referred to for any other purpose.

Very truly yours,

MAYER, BROWN PLATT

RFH/PAJ/CAH

51071897 97377220 M053-001023

MAYER, BROWN PLATT

SCHEDULE I

Chase Securities, Inc.

Advisors

Initial investors

51071897 97377220 M053-001024 RR EXHIBIT "G" MITCHELL VERNICK'S RESIGNATION LETTER

As each week that I have been at CFS has past [sic], I have grown increasingly concerned about the viability of our securitization model. In the first couple of months I assumed that I did not understand enough about the business to draw intelligent conclusions. After observing some of the organizational ineffectiveness in Credit, I hoped that re-engineering would explain the continued and growing miss from Base Case performance. However, as I have recently focused on the trends in every securitization and compared this to the increasing levels of performance required in the Base Cases, I am convinced no amount of improvement in productivity can offset this growing differential. Assuming there continues to be a market to sell performing loans to, part of this differential can be offset for a while, but it prematurely consumes cash flow that will create a larger deficit later in the life of the securitization. While I believe there is a way to improve total collections from the track they are on today through a combination of re-engineering, better management, and more favorably timed asset sales in relation to market conditions, I do not believe this can come close to Base Case projections, either in terms of monthly timing or collections in total. I am not certain if even the Stress Case can be made over the life of the securitization, as the collectability of assets two, three, and four years out is very unclear given the fall-off in new transactions even six months into securitizations.

Given my concerns about the performance of securitizations, I am no longer comfortable representing to investors that they are making a risk-reward decision that has a one-third performance cushion, or that I have a high confidence that they will be repaid in full. I realize that making such statements to investors would cause transactions to either not be rated or have the advance rate reduced to the point where no cash could be taken-out of the deal. If CFS cannot create cash by doing new deals, it will not be able to fund current overhead and will need to make drastic cuts in expenses in order to live within the cash flow from servicing fees. These cuts are likely to be even more severe than contemplated in Mike Temple's "going out of business" servicing analysis, since Mike's analysis assumed we collected the Base Case cash flows, and I believe the reality will be substantially lower, further lowering servicing fees.

If this were my company, I would immediately stop any new securitization transactions and fund overhead temporarily out of operating cash, cutting expenses where possible but still presuming the basic franchise value of CFS's operations. Simultaneously, I would put the company up for sale, looking for a buyer who could finance the business without securitizing assets (a very large player) and saw strategic value both in the collections business and the data base. I realize, however, you see the situation different than I do. You have stated that you believe that some combination of better management and possibly some connection with a company like "Global Finance" will bring performance levels back to Base Case. I respect your opinion, and you may be correct, but all my instincts lead me to the opposite conclusion.

Given my conclusion, I can no longer lead the company under its present operating model. Therefore, I believe I must resign immediately, as it is unfair to you and to investors to remain, given my views. Bill, this is not at all an issue of our relationship or how I have been treated — you and I have worked reasonably effectively for our first few months together, and I have been treated well by all at CFS. Rather, this is an issue of professional integrity — something I must do, unhappy as it is for me, to maintain my professional integrity. If by some remote chance I have incorrectly assumed your point of view on this matter, and you would be prepared to stop securitizing transactions, I would be prepared to stay and help in any way I could. Since I do not assume this is your point of view, I regrettably must resign. I thank you for all you have done for me and would be willing to discuss this at your earliest convenience.

RR EXHIBIT "H" SCHEDULE OF SECURITIZATIONS AND CASES INVOLVING CLAIMS FOR EACH SECURITIZATION CFS-RELATED SECURITIES FRAUD LITIGATION SCHEDULE OF SECURITIZATIONS

SECURITIZATION CLOSED DESCRIPTION CASES IN WHICH THERE ARE CLAIMS Exchanged for GREAT securities Exchanged for GREAT securities Exchanged for GREAT securities Exchanged for GREAT securities

SMART 95-1 05/31/95 Involved no credit card debt no claims SMART 95-2 12/22/95 Involved no credit card debt no claims SMART 96-1 03/25/96 Credit card debt and debt no claims from SMART 95-1 SMART 96-2 06/19/96 Exclusively credit card debt 99-825; 00-847; 00-111 SMART 96-3 08/27/96 Exclusively credit card debt; claims as holders of GREAT securities SMART 96-4 12/23/96 Exclusively credit card debt 99-825; 00-111 SMART 97-1 02/07/97 Exclusively credit card debt; claims as holders of GREAT securities SMART 97-2 03/06/97 Exclusively credit card debt 99-825; 99-864; 99-943; 00-111; 00-838; 00-847 SMART 97-3 04/10/97 Exclusively credit card debt 99-825; 99-864; 00-104; 00-111; 00-847 SMART 97-4 08/06/97 Exclusively credit card debt; claims as holders of GREAT securities SMART 97-5 09/29/97 Exclusively credit card debt 99-825; 99-863; 99-864; 99-873; 99-874; 99-919; 00-104; 00-110; 00-111; 00-837; 00-847 SMART 97-6 12/10/97 Exclusively credit card debt 99-825; 99-828; 99-862; 99-863; 99-864; 99-874; 99-889; 99-919; 00-104; 00-110; 00-111; 00-837; 00-839; 00-847 SMART 98-1 02/27/98 Exclusively credit card debt; claims as holders of GREAT securities GREAT 98-A 07/02/98 Exclusively credit card debt; 99-825; 99-829; 99-862; 99-863; 99-864; 99-873; 99-874; 99-943; 00-104; 00-110; 00-111; 00-838; 00-847 GREAT 98-B 09/30/98 Exclusively credit card debt 99-864 RR EXHIBIT "I" CFS' COMBINED BALANCE SHEETS FOR 1996 AND 1995 ARTHUR ANDERSEN LLP COMMERCIAL FINANCIAL SERVICES, INC. AND AFFILIATED COMPANIES COMBINED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors, Stockholders and Partners of Commercial Financial Services, Inc. and affiliated companies:

We have audited the accompanying combined balance sheets of the entities identified in Note 1 as of December 31, 1996 (as restated — see Note 1) and 1995, and the related combined statements of income, stockholders' equity and cash flows of the entities identified in Note 1 for the years ended December 31, 1996 (as restated — see Note 1) and December 31, 1995. These financial statements are the responsibility of the entities' management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the entities identified in Note 1 as of December 31, 1996 (as restated) and 1995, and the combined results of operations and cash flows of the entities identified in Note 1 for the years ended December 31, 1996 (as restated) and December 31, 1995 in conformity with generally accepted accounting principles.

Tulsa, Oklahoma

November 10, 1997

COMMERCIAL FINANCIAL SERVICES, INC. AND AFFILIATED COMPANIES COMBINED BALANCE SHEETS DECEMBER 31, 1996 AND 1995

1996 1995 ASSETS 4,937,133 1,416,003 $217,360,623 $ 46,098,926 LIABILITIES AND STOCKHOLDERS' EQUITY 6,322,070 681,476 $106,100,303 $ 3,454,902 (10,773,825) (95,888) 111,260,320 42,644,024 $217,360,623 $46,098,926

(As restated — see Note 1) ASSETS: Cash and short-term investments $ 79,504,085 $ 26,952,190 Loan collection fees receivable 1,569,813 662,027 Other receivables 1,595,332 1,130,141 Unrecovered loans 87,085,798 5,374,769 Securitization retained interests 7,181,184 5,763,453 Property and equipment, net 35,487,278 4,800,343 Other assets Total assets LIABILITIES: Borrowings $ 95,072,500 $ 2,045,871 Accounts payable 4,705,733 727,555 Accrued liabilities Total liabilities STOCKHOLDRS' EQUITY: Common stock 114,305 107,659 Additional paid-in capital 1,050,579 1,049,569 Retained earnings 120,869,261 41,582,684 Less: advances to stockholders Total stockholders' equity Total liabilities and stockholders' equity The accompanying notes are an integral part of these financial statements. COMMERCIAL FINANCIAL SERVICES, INC. AND AFFILIATED COMPANIES COMBINED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 1996 1995 (141,659,400) (85,474,196) 9,075,902 3,902,877 141,510,124 64,999,232 2,526,250 605,962 2,526,250 901,320 144,036,374 65,900,552 3,995,498 424,932 64,697,978 23,070,741 $ 79,338,396 $ 42,829,811 (As restated — see Note 1) REVENUES: Loan revenues — $ 274,093,622 $146,570,551 Loan securitizations and collections Loan costs recovered 132,434,222 61,096,355 Loan collection servicing fees Total loan revenues Other revenues — Management and disposition fees — 295,358 Interest and other income Total other revenues Total revenues EXPENSES: Salaries and benefits 39,299,908 13,623,151 Operating expenses 18,102,878 4,463,920 Interest expense 3,299,694 4,558,738 Depreciation and amortization Total expenses NET INCOME The accompanying notes are an integral part of these financial statements. COMMERCIAL FINANCIAL SERVICES, INC. AND AFFILIATED COMPANIES COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 Stock Capital Earnings Stockholders Total - - (3,673,087) - (3,673,087) - - - (10,677,937) (10,677,937) $ 114,305 $ 1,050,579 $120,869,261 $(10,773,825) $111,260,320 Additional Common Paid-in Retained Advances to BALANCE, December 31, 1994 $ 104,745 $ 1,061,837 $ 2,434,054 $ (376,482) $ 3,224,154 PROCEEDS FROM ISSUANCE OF COMMON STOCK 3,035 100 — — 3,135 REDEMPTION OF COMMON STOCK (121) (12,368) (8,094) — (20,583) NET INCOME — — 42,829,811 — 42,829,811 STOCKHOLDER TRANSACTIONS: Repayment by stockholders, net — — — 280,594 280,594 Distributions BALANCE, December 31, 1995 107,659 1,049,569 41,582,684 (95,888) 42,644,024 PROCEEDS FROM ISSUANCE OF COMMON STOCK 7,064 1,010 — — 8,074 REDEMPTION OF COMMON STOCK (418) — (51,819) — (52,237) NET INCOME (as restated — see Note 1) — — 79,338,396 — 79,338,396 STOCKHOLDER TRANSACTIONS Advances to stockholders BALANCE, December 31, 1996 The accompanying notes are an integral part of these financial statements. COMMERCIAL FINANCIAL SERVICES, INC. AND AFFILIATED COMPANIES COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 1996 1995 (3,125,050) (5,253,443) 4,929,799 78,922,461 (34,682,433) (4,829,108) (34,682,433) (4,829,108) - (3,673,087) 82,304,529 (53,127,287) 26,952,190 5,986,124 $ 79,504,085 $ 26,952,190 (As restated — see Note 1) CASH FLOWS FROM OPERATING ACTIVITIES: Loan securitizations and collections $ 274,093,622 $ 145,712,265 Securitization retained interests (1,417,731) (4,905,167) Purchases of loans (223,370,429) (42,258,188) Loan collection servicing fees 8,168,116 3,220,601 Management and disposition fees received — 404,993 Interest and other income received 2,296,079 605,962 Payments to employees and suppliers (51,714,808) (18,604,562) Interest and financing fees paid Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 8,074 3,135 Redemption of common stock (52,237) (20,583) Proceeds from borrowings 216,448,374 36,536,040 Repayments of borrowings (123,421,745) (86,253,386) (Advances to) payments by stockholders (10,677,937) 280,594 Distributions to stockholders Net cash provided by (used in) financing activities INCREASE IN CASH 52,551,895 20,966,066 CASH, beginning of period CASH, end of period The accompanying notes are an integral part of these financial statements. COMMERCIAL FINANCIAL SERVICES, INC. AND AFFILIATED COMPANIES COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (continued)1996 1995 5,640,594 (280,422) $ 4,929,799 $ 78,922,461 (As restated — see Note 1) RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 79,338,396 $ 42,829,811 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,995,498 424,932 Net change in: Loan collection fees receivable (907,786) (582,276) Other receivables (465,191) 92,505 Unrecovered loans (81,711,029) 43,116,008 Securitization retained interests (1,417,731) (5,763,453) Other assets (3,521,130) (767,049) Accounts payable 3,978,178 (147,595) Accrued liabilities Net cash provided by operating activities The accompanying notes are an integral part of these financial statements. COMMERCIAL FINANCIAL SERVICES, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Description of Business and the Reporting Entity

The combined financial statements include Commercial Financial Services, Inc. (CFS, an Oklahoma corporation), and the "Affiliates" as follows: Legal Name Abbreviation Formation The "Affiliates" (including the "Limited Partnerships"):

Year of Commercial Financial Services, Inc. CFS 1986 Commercial Financial/SPC Acquisitions, Inc. SPC 1993 CF/SPC 1994, Inc. 1994, Inc. 1994 Financial Collections, Inc. FCI 1995 CF/SPC 1995, Inc. 1995, Inc. 1995 CF/SPC NB, Inc. NB, Inc. 1995 CF/SPC GTC, Inc. GTC, Inc. 1996 CF/SPC 1996, Inc. 1996, Inc. 1996 CF/SPC POC, Inc. POC, Inc. 1996 CF/SPC DFD, Inc. (1) DFD, Inc. 1996 CF/SPC NBEH, Inc. NBEH, Inc. 1996 CF/SPC CIH, Inc. CIH, Inc. 1996 CF/SPC 1997, Inc. 1997, Inc. 1996 CF/SPC WTM, Inc. WTM, Inc. 1996 T.A.P.R. III Limited Partnership (formerly TAPR III 1995 T.A.P.R. Limited Partnership) T.A.P.R. II Limited Partnership TAPR II 1995 T.A.P.R. IV Limited Partnership TAPR IV 1996 T.A.P.R. V Limited Partnership TAPR V 1996 T.A.P.R. VI Limited Partnership (1) TAPR VI 1996 T.A.P.R. VII Limited Partnership TAPR VII 1996 T.A.P.R. VIII Limited Partnership TAPR VIII 1996 T.A.P.R. IX Limited Partnership TAPR IX 1996 (1) Entity merged/dissolved prior to December 31, 1996.

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Following is a table indicating the general and limited partners of the Limited Partnerships: Partnership General Partner Limited Partner(s)

TAPR II FCI 1995, Inc. TAPR III SPC CFS, 1994, Inc., NB, Inc. TAPR IV FCI 1996, Inc. TAPR V NBEH, Inc. DFD, Inc. TAPR VII WTM, Inc. CFS TAPR VIII CIH, Inc. CFS TAPR IX 1997, Inc. CFS In most instances, the Affiliates (including the Limited Partnerships) were formed to facilitate loan sale transactions (see Note 2) and have limited operational activities. CFS and the Affiliates are collectively referred to as the "Company", on a combined basis. All entities were incorporated or formed in the state of Oklahoma, with the exception of CF/SFC NBEH, which was incorporated in the state of Delaware.

The stockholders of CFS and the Affiliates (excluding the Limited Partnerships) are identical with identical percentages of ownership. Due to the common ownership and management, generally accepted accounting principles require that the financial statements of CFS be presented on a combined basis with the Affiliates. Accordingly. the accompanying financial statements present CFS and the Affiliates combined as one reporting entity. All significant inter-company transactions and balances have been eliminated in combination.

Certain provisions of the Certificates of Incorporation, Limited Partnership Agreements, loan documents or securitization transaction documents of the Affiliates with their lender or investors require that the Affiliates conduct their businesses in a manner so as to preserve their separate existence. Among other things, the Affiliates must maintain separate books, accounts and records. Although the accompanying combined financial statements present CFS and the Affiliates as a combined entity, as required by generally accepted accounting principles. CFS and the Affiliates are separate and distinct entities; assets of one of the corporations or partnerships are not available to satisfy obligations of the other entities.

The December 31, 1996 combined financial statements include CFS and all of the companies incorporated or formed prior to December 31, 1996. CFS was incorporated in August 1986 to purchase and collect distressed loan packages. Since incorporation. CFS operations have evolved to include distressed asset acquisition and management services for the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, and other private sector financial service institutions. Beginning in 1996, the Company's primary line of business has been the acquisition and resolution of charged-off general issue credit card obligations, purchased on a direct basis from individual financial institutions. The majority of the loans purchased during 1995 and 1996 have subsequently been pooled and sold to several institutional investors through six securitization transactions, beginning in May 1995. (see Note 2).

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Loan Collections

Revenue from loan collections is recognized on a loan-by-loan basis utilizing the cost recovery method for loans purchased. Loan collections are initially recorded as a recovery of the cost basis of an individual loan. Once the entire cost basis of an individual loan has been recovered, all remaining collections are recorded as income. The cost basis of an individual loan is determined by a pro rata allocation of the total cost of a loan portfolio acquired, based on a loan's individual estimate of collectibility to the total estimated collectibility of the acquired portfolio. Such allocations of cost basis are finalized within one year of acquisition.

Loan Sales (Securitizations)

In 1995 and 1996, the Company purchased loans from various financial institutions or government agencies. Subsequent to purchase, the Company sold the majority of these loans through a series of securitization transactions. In each securitization transaction, the Company sold the loans, without recourse, to a bust formed as part of the securitization transaction. The trust in turn sold interests in the trust, in the form of certificates, to institutional investors. In all transactions, the Company retained a small interest in each trust (less than 1%). in the form of certificates and a deferred sales price. In addition, the Company provides cash reserve accounts for the benefit of the certificateholders equal to approximately 3% of the total proceeds received from each securitization transaction. These retained interests are reflected as securitization retained interests in the combined balance sheets. The sales price of the loans was, in each instance, the cash proceeds received from the certificates issued by the trust plus a deferred sales price to be paid after all certificateholders are repaid. The sales proceeds from the sale of loans are reflected as a component of loan securitizations and collections in the combined statements of income, and the carrying value of the loans sold is reflected in loan costs recovered in the combined statements of income (see Note 2).

Deferred Sales Price

In order to provide credit enhancement to the certificateholders in each securitization transaction, a portion of the sales proceeds is withheld by the trust in the form of a deferred sales price. The deferred sales price is equal to all collections on the loans in excess of the full repayment of required certificate payments, trust related expenses and servicing costs. Payments on the deferred sales price will be made only to the extent that the actual collections exceed the required certificate payments, trust related expenses, and contractual servicing fees. In arriving at the estimated range of present value for each of the deferred sales prices, the Company utilizes various internally generated models and estimates to determine the range of expected collections and costs of collections on loans sold to the trust. This estimation process relies heavily on the Company's experience in the collection industry and includes several assumptions relating to the collection of loans sold. These assumptions include the Company's ability to locate borrowers, negotiate acceptable lump sum pay-offs or extended payment terms and the ability to resolve accounts based upon established terms. These assumptions contain a significant element of uncertainty.

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The cash flows related to the deferred sales price from each transaction are expected to be collected over a period of years (generally four to eight years after the sale). Each deferred sales price bears no contractual interest. Therefore, such deferred sales prices are discounted at an appropriate interest rate commensurate with the risk of the transaction to reflect the estimated fair value of the receivables. Accretion of the discount will be recognized over the expected collection period of the deferred sales price. Changes in the assumptions could have an adverse effect on the estimate of loan collections and therefore the collectibility of the deferred purchase prices.

Restatement of Securitization Retained Interests

During 1996, the Company recorded the deferred sales price related to the securitization transactions as described above. During 1997, the Company reevaluated its methodology for estimating the fair value used to record each deferred sales price. Such evaluation included discussions with third parties to determine an estimate of the fair value based upon a theoretical price at which each deferred sales price could be sold. The Company concluded that based upon the lack of a liquid secondary market and comparable securities, it is not able to determine a specific estimate of fair value for each deferred sales price without an actual sale of such deferred sales price. Such lack of information has caused the Company to conclude that the estimate of fair value used to record each deferred sales price, obtained from the range of fair values estimated through the use of its various models, was not appropriate. The Company believes that given the lack of a liquid secondary market or comparable securities and the wide range of potential fair value estimates, none being a better estimate of fair value than any other, the fair value estimated by the use of the low end of the range of fair values is the most appropriate estimate under the circumstances. Accordingly, the Company has restated the previous carrying amount of the total deferred sales price reflected as securitization retained interests on the December 31, 1996 balance sheet. Such restatement resulted in a reduction of the previous carrying amount of the deferred sales price by approximately $57,800,000 which correspondingly reduced total assets at December 31, 1996 and net income for the year ended December 31, 1996 by approximately $57,800,000.

Loan Servicing

Revenue is recognized from loan servicing agreements as loan collections are received, based upon the contractual percentages of cash collections on the loans. For the public and private sector contracts, disposition fee revenue is recognized in the period in which assets are sold, based on the Company's contractual percentages as defined in the respective agreements. As of December 31, 1996, CFS no longer provides asset disposition or management services for third parties. Substantially all loan servicing fees received during 1996 were the result of servicing agreements resulting from loan sales through securitization transactions (See Note 2).

Unrecovered Loans

Unrecovered loan costs represent the cost of loans held for sale at December 31, 1996 and 1995. These loans are anticipated to be sold through subsequent securitization transactions. The unrecovered loan costs have been funded primarily with revolving warehouse borrowings as part of the Company's normal operating activities. Unrecovered loan costs are carried at the

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lower of aggregate cost or estimated market value. Substantially all unrecovered loan costs at December 31, 1996 and 1995 represent loans purchased within the last three months of the respective year. Management has estimated that the carrying value of unrecovered loan costs is representative of estimated fair value at December 31, 1996 and 1995.

Reserve for Losses on Uncollectible Loans

The reserve for losses on uncollectible loans is maintained at a level that, in management's judgment, based on conditions as of the balance sheet date, is adequate to provide for losses on individual loans for which management's estimate of future collections of those loans is less than their related unrecovered cost. Ultimate losses may vary from the current estimates. These estimates are reviewed periodically, and as adjustments become necessary, they are reported in earnings in the period in which they become known. The Company has estimated that no reserve for losses on uncollectible loans was required at December 31, 1996 and 1995.

Cash and Cash Equivalents

Cash and cash equivalents represent cash on hand and short-term investments with maturities of less than 90 days. Short-term investments represent primarily money market accounts and bank certificates of deposit at December 31, 1996 and 1995.

Property and Equipment

Depreciation is provided by both straight-line and accelerated methods over the useful lives of the related assets. Expenditures for repairs and maintenance are charged to expense as incurred, whereas major improvements are capitalized.

Income Taxes

CFS and the Affiliates (excluding the Limited Partnerships) have elected under the Internal Revenue Code to be treated as Subchapter S corporations whereby the stockholders report individually the taxable income of each affiliate. The Limited Partnerships are partnerships which pass any income or loss through to its partners. Accordingly. the accompanying combined financial statements contain no provision for income taxes.

Use of Estimates

The preparation of the combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements. Actual results could differ from these estimates.

Reclassifications

Certain reclassifications have been made to the 1995 financial statements in order to conform to the 1996 financial statement presentation.

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2. SALE OF LOANS:

The following is a table which describes certain information about loans sold pursuant to securitization transactions during 1996 and 1995 (dollars in thousands):Name Proceeds Closing Date Loan Costs 53,00027,539 $ 133,000 $ 79,179 82,450 50,616 $ 273,410 $ 141,698 $ 406,410 $ 220,877

Securitization Securitization Gross Sales Transaction Expenses and SMART 95-1 $ 80,000 May 31, 1995 $ 51,640 SMART 95-2 December 22, 1995 Total 1995 SMART 96-1(1) $ 24,120 March 25, 1996 $ 9,144 SMART 96-2 69,840 June 19, 1996 33,919 SMART 96-3 97,000 August 27, 1996 48,019 SMART 96-4 December 23, 1996 Total 1996 Total (1) Total issuance 585.5 million (net of $0.8 million in cash reserves), $61.4 million used to repay outstanding SMART 95-1 certificates.

CFS is the servicing agent for the loans sold. CFS earns a servicing fee equal to 15% of the gross loan collections and is reimbursed for certain out-of-pocket expenses. Management estimates that the servicing fee to be received represents adequate compensation relative to the Company's estimate of costs to service the loans over the expected collection period.

3. PROPERTY AND EQUIPMENT:

Major classifications of property and equipment at December 31, 1996 and 1995, having estimated useful lives ranging from five to eight years, are summarized as follows:1996 1995 2,040,386 387,973 (4,142,418) (820,779) $ 35,487,278 $ 4,800,343

Computer and other equipment $ 12,978,974 $ 1,151,120 Airplane and automobiles 22,317,025 4,075,094 Leasehold improvements 2,293,311 6,935 Furniture and fixtures 39,629,696 5,621,122 Less: accumulated depreciation Property and equipment, net The carrying basis for property and equipment is historical cost, net of accumulated depreciation.

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4. BORROWINGS:

Borrowings at December 31, 1996 and 1995 consist of the following:1996 1995 20,472,500 - $ 95,072,500 $ 2,045,871

Revolving warehouse borrowings $ 74,600,000 $ 2,045,871 Term borrowings Total borrowings 1995

Outstanding borrowings at December 31, 1995 represent a $100 million revolving credit facility used to purchase loans. Collateral for the facility was provided through a pledge of the loans purchased. The credit agreement provided for maturity of the facility on December 6, 1996. The interest rate was adjusted on a monthly basis, based upon one month LIBOR plus 3.5%. Management estimates that the carrying value of amounts outstanding at December 31, 1995 represents estimated fair value.

1996

Outstanding revolving warehouse borrowings at December 31, 1996 represent outstanding advances on a $100 million facility with a national bank. The advances under the facility are used to purchase loans and are collateralized through a pledge of the loans purchased. The credit agreement has a scheduled maturity of December 16, 1997. The Company pays interest based upon the type of advance requested at the time of funding. Term funding of one, two or three month duration is available, with the interest rate indexed to the one, two or three month LIBOR rate, plus 2.5%. At December 31, 1996, the interest rate on the term borrowing under the facility was 7.125%. Overnight funding is available, and is generally priced at the current prime rate (8.25% at December 31, 1996). Management estimates that the carrying value of amounts outstanding at December 31, 1996 represents estimated fair value.

Outstanding term notes payable at December 31, 1996 represent a ten-year amortizing note to a national transportation financing company. The proceeds of the note were used to purchase an airplane for corporate use, which provides the collateral for the note. Required monthly payments on the note are $239,000 beginning February 1, 1997 and ending January 1, 2007. The interest rate on the note is fixed for a one-year period at 7.14%, with the interest rate to reset annually thereafter at the current one-year Treasury rate plus 1.75%. Management estimates that the carrying value of the borrowing at December 31, 1996 represents estimated fair value.

The credit agreements provide for a number of affirmative and negative covenants, including operating and financial covenants. As of December 31, 1996 and 1995, the Company was in compliance with all terms of the credit agreements.

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In addition to the borrowings described above, the Company has available a $1 million line of credit with a national bank for loan purchases. The maturity of the facility is March 31, 1997. During 1996, no advances were made on this line of credit.

Subsequent to December 31, 1996, the Company entered into several borrowing arrangements.

5. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL:

A summary of common stock and additional paid-in capital for CFS and the Affiliates follows:December 31, 1995 Authorized Outstanding Common Stock Capital 1,010 - $ 107,659 $1,049,569 December 31, 1996 Authorized Outstanding Common Stock Capital 1,008 - $ 114,305 $1,050,579

Amount of Shares Issued Additional Shares and Amount of Paid-in CFS 111,111 101,417 $ 101,417 $ — SPC 500,000 219,367 2,194 853,232 1994, Inc. 500,000 101,434 1,014 296,327 FCI 500,000 101,417 1,014 10 1995, Inc. 500,000 101,017 1,010 — NB, Inc. 500,000 101,017 Total Amount of Shares Issued Additional Shares and Amount of Paid-in CFS 111,111 101,017 $ 101,017 $ 1,010 SPC 500,000 218,449 2,184 853,232 1994, Inc. 500,000 101,017 1,010 196,327 FCI 500,000 101,017 1,010 10 1995, Inc. 500,000 101,017 1,010 — NB, Inc. 500,000 101,017 1,010 — GTC 500,000 101,017 1,010 — 1996, Inc. 500,000 101,017 1,010 — POC, Inc. 500,000 101,017 1,010 — NBEH, Inc. 500,000 101,017 1,010 — CIH, Inc. 500,000 101,827 1,008 — 1997, Inc. 500,000 101,827 1,008 — WTM, Inc. 500,000 101,827 Total In accordance with existing stockholder agreements, the companies have the right of first refusal to redeem the stock held by employees if they terminate employment with the Company. The Company exercised its right with respect to one former employee in 1995 and

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one former employee in 1996. The Company also partially redeemed the stock of one current employee in 1995. Common stock was retired at par, and the redemption price in excess of par was charged against additional paid-in capital and retained earnings.

6. COMMITMENTS AND CONTINGENCIES: Leases

The Company has leased office space and equipment under various cancelable and noncancelable operating leases through June 2010. Rent expense was approximately $1,391,000 and $902,000 for the years ended December 31, 1996 and 1995, respectively.

Future minimum rental payments under the various leases are approximately as follows:Amount 7,319,767 $21,689,072

1997 $ 2,635,726 1998 1,800,534 2999 1,938,911 2000 3,634,325 2001 4,359,819 Thereafter Total Legal

The Company is involved from time to time in various litigation matters including lawsuits that seek recovery of alleged damages from the owners of loans and from CFS in its capacity as servicing agent. In the opinion of management, based in part on the advice of legal counsel, the ultimate outcome of these lawsuits will not have a material adverse impact on the combined balance sheet or future combined results of operations.

Purchase Commitments

Beginning in 1996, the Company has entered into various tong-term forward supply contracts with loan sellers. In limited instances, the Company is contractually obligated to purchase loans under these agreements. Failure to purchase under these agreements could result in cancellation of the agreement or actual damages, which would not be anticipated to have a significant impact to the Company.

7. EMPLOYEE BENEFITS: Medical Insurance

The Company maintains a hospitalization and medical coverage program for its employees and dependents. Beginning in 1996, the medical plan is a self-insured plan and is provided at a

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nominal cost to employees. Claims under the program are paid by the Company, limited by an annual maximum of $25,000 per covered individual. The Company accrues for medical expenses on a monthly basis, based upon estimates determined in conjunction with the third party claims administrator. At December 31, 1996, the Company had accrued $313,000 for the payment of outstanding medical claims incurred during 1996, but not yet paid at year end.

Defined Contribution Plan

The Company sponsors a 401(k) plan. The plan is eligible to all employees, subject to a mandatory waiting period. Under the plan, eligible employees may contribute up to 10% of their annual salary and bonus, if applicable. A variety of investment options are provided. The Company may elect to match employee contributions on a discretionary basis. The Company accrued $715,000 during 1996 to match employee contributions. No matching contributions were made during 1995.

Other benefits include Company provided day care facilities, dental, vision, and life insurance, a section 125 cafeteria benefits plan, paid vacation and personal leave, bonus programs and reimbursement of educational expenses.

8. NEW ACCOUNTING PRONOUNCEMENTS:

Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 125 (SFAS 125), Accounting for Transfers and Servicing of Financial Assets and Extinguishinents of Liabilities. This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Under this statement, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. The adoption of SFAS 125 requires prospective treatment for all sales of financial assets after January 1, 1997.

The Financial Accounting Standards Board issued SFAS 129 —Disclosure of Information about Capital Structure and SFAS 130 —Reporting Comprehensive Income in 1997. While these new standards, effective beginning in 1998, impose additional disclosure requirements on the Company, the Company does not anticipate that they will have any impact on operating results or its financial condition.

9. RELATED PARTY TRANSACTIONS:

From time to time, the Company will make advances to certain shareholders and employees. These advances are evidenced by signed promissory notes, are payable on demand, and require that interest be paid at least annually.

10. SUBSEQUENT EVENTS:

On January 21, 1997, the Company entered into a credit agreement with a national bank whereby the bank agreed to provide a $20 million credit facility for loan purchases and general

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corporate needs. The interest rate on the facility is LIBOR plus 1.75%, to fund loan purchases, and prime rate for funding for general corporate purposes. The maturity of the facility is January 21, 1998.

Borrowing Arrangements

In January, the Company entered into a credit agreement with a national bank whereby the bank agreed to provide a $20 million credit facility for loan purchases and working capital needs. The facility matures in January 1998.

In July, the Company entered into a $100 million warehouse facility with a life insurance company to fund loan purchases. The facility matures in April 1998.

On October 3, 1997, the Company issued $79,000,000 of 8.98% Senior Notes due October 1, 2002 and $62,000,000 of 8.96% Senior Notes due October 1, 2003. Principal is due on the 8.98% Senior Notes at maturity. The Company is required to remit annual principal payments of $15,500,000 on the 8.96% Senior Notes beginning October 1, 2000. The Senior Notes are unsecured. The net proceeds from the issuance of the Senior Notes will be used for general corporate purposes.

Each of the subsequent borrowing arrangements described above include a number of affirmative and negative covenants, including operating and financial covenants.