Nuggets For New Century or Home123 Victims of Predatory Lending Fighting Foreclosure Etc.

1 BERNSTEIN LITOVJITZ BERGER
& GROSSMANN LLP

2 BLAIR A. NICHOLAS (Bar No. 178428) ORIGINAL
(blairn @blbLylaw.com)
3 MATTHEWP. SIBEN (Bar No. 223279)
(matthews @blbalaw.com)
4 12481 High Bluff Drive, Suite 300
San Diego, CA 92130
Tel: 08 793-0070
Fax: (858) 793-0323
6 -and-
SALVATORE J. GRAZIANO
7 (s2raziano @blbalaw.com)
HANNAH E. GREENWALD I z' -
8 (hannah @ blbglaw.com) l- ;rc
1285 Avenue of the Americas
9 New York, NY 10019
Tel: (212) 554-1400
10 Fax: (212) 554-1444
11 Lead Counsel for Lead Plaintiff New J.

York State Teachers' Retirement System
12
13 UNITED STATES DISTRICT COURT

14
CENTRAL DISTRICT OF CALIFORNIA
15
16
IN RE NEW CENTURY Case No. 2:07-cv-00931-DDP
(JTLx)
17 (Lead Case)
18
CONSOLIDATED CLASS
19 ACTION COMPLAINT
20
JURY TRIAL DEMANDED
21
77
a•
Judge: Hon. Dean D. Pregerson
23
24
25
26
i `
27
28
CONSOLIDATED CLASS ACTION COMPLAINT

Case No. 2:07-c v-0093 1-DDP (JTLx )
1 Lead Plaintiff, the New York State leachers' Retirement System, and
Plaintiffs Carl Larson and Charles Hooten (collectively "Plaintiffs") make the
3 following allegations upon information and belief based upon all of the facts set
4 forth herein which were obtained through an investigation made by and through
5 Plaintiffs' Lead Counsel. Lead Counsel's investigation has included, among other
6 things, a review of filings by Defendants with the United States Securities and
7 Exchange Commission ("SEC"). press releases and other public statements issued
8 by Defendants and the other sources set forth below. Plaintiffs believe that
9 substantial additional evidentiary support will exist for the allegations set forth
10 herein after a reasonable opportunity for discovery.
11 1. NATURE OF THE ACTION
12 i. Plaintiffs bring this federal securities class action on behalf of
13 themselves and all other persons and entities other than Defendants and their
14 affiliates as specified below, who purchased or acquired New Century Financial
15 Corporation ("New Century" or the "Company") common stock; New Century
16 9.125% Series A Cumulative Redeemable Preferred Stock ("Series A Preferred
17 Stock"); New Century 9.75% Series B Cumulative Redeemable Preferred Stock
18 ("Series B Preferred Stock"); and/or New Century call options and/or who sold
19 New Century put options (collectively "New Century securities") during the time
20 period between May 5, 2005 and March 13, 2007 (the "Class Period") and who.
21 upon disclosure of certain facts alleged herein, were injured thereby.
?? 2. New Century, until it filed for bankruptcy on or about April 2, 2007,
23 operated as one of the nation's largest mortgage finance companies. Since its
24 formation in 1996, the Company grew rapidly to become one of the country's
25 largest sub-prime lenders, reporting $56.1 billion of total mortgage originations
26 and purchases for the year-ended December 31, 2005, nearly ten times as much as
27 the Company had originated and purchased in 2001, and an increase of over $10
28
-I- CONSOLIDATED CLASS ACTION COMPLAINT

Case No. 2:07-cv-0093 I -DDP (JTLx)
1 billion of originations and purchases from the prior year-ended December 31,
2 2004.
3 3. As the real estate market softened and interest rates increased prior to
4 and during the Class Period, New Century kept pushing ever-increasing sub-prime
5 loan volume through its system by loosening the Company's underwriting
6 standards and introducing a growing percentage of high risk mortgage products,
7 including adjustable-rate, interest-only loans and "stated income" loans, where
8 even W-2 wage earners did not have to bother verifying their stated income.
9 4. In addition, as these circumstances led to increased first payment
10 default loans being pushed back to New Century from its mortgage loan purchasers
11 and delinquencies and defaults grew in number, New Century failed to account for
1^ these adverse facts and substantially increased risk in its publicly-reported
13 financial statements, in violation of Generally Accepted Accounting Principles
14
15 5. It was only at the end of the Class Period, and less than three months
16 after hiring a new Chief Financial Officer, that New Century announced the need
17 to restate its reported financial results for the first three quarters of 2006. A few
18 weeks later, the Company announced that an independent investigation concluded
19 that New Century would have to report a net loss for the quarter and year-ended
20 December 31, 2006, wiping over $270 million of the net income previously
21 reported by the Company for the first three quarters of 2006. Thereafter, the
22 Company reported that its independent investigation revealed that it was "more
23 likely than not" that there was also a "material overstatementof earnings in 2005
24 and that the Company's financial statements for the year-ended December 31, 2005
25 should no longer be relied upon. Ultimately, the Company never revealed the
26 actual magnitude of the required adjustments, citing to the constraints it faced as a
27 bankrupt company.
28
-2- CONSOLIDATED CLASS ACTION COMPLAINT

Case No. 2:07-cv-0093I-DDP (JTLx)
1 6. Before any of these adverse disclosures were made, as set forth below,
2 the Company's senior executive officers named as Defendants herein repeatedly
3 signed sworn certifications attesting to the fair presentation of New Century's
4 fmancial statements in accordance with GAAP and the adequacy of the Company's
5 internal controls which were materially misstated when made as they failed to
6 reveal New Century's (now admitted) violations of GAAP as well as (now
7 admitted) material weaknesses in the Company's internal controls.
8 7. Throughout the Class Period, New Century' s senior executive officers
9 also repeatedly stated that the credit quality of the Company's mortgages was
10 "strong," "very high" and "higher" or "better" that it had been in the Company's
11 past as the result of purportedly "strict," "improved" and "strong" underwriting
12 controls and guidelines and risk management discipline, when the true facts were
13 to the contrary. As revealed by the Company's increasingly adverse loan
14 performance as well as first-hand accounts obtained by Lead Counsel's
15 investigation from dozens of former New Century employees from across the
16 Company (set forth in detail below), New Century's underwriting standards were
17 not strengthened, but actually were reduced beginning in 2003, in order to continue
18 to drive record-breaking loan volume through the Company's origination system in
19 the face of severe competition, with quantity at the expense of quality.
20 8. The New Century officer Defendants' repeated statements regarding
21 the purported improvement of New Century's underwriting during, the Class Period
and the failure to present New Century's reported financial results and balance
23 sheets in accordance with GAAP resulted in a material deception of the investing
24 public. Unfortunately for unsuspecting investors, it was only a matter of time
?5 before the Company's extremely loose lending practices - - driven by aggressive
26 volume targets and financial incentives -- and accounting violations would be
27 revealed by substantially increased mortgage delinquencies and defaults and would
28 cause material losses for New Century investors.

Case No. ?:07-cv-0093 I -DDP (JTLx)
1 9. Indeed, when the true facts were revealed. including the need for a
1 financial restatement, the price of New Century securities declined precipitously,
3 causing substantial losses and damages to Plaintiffs and members of the Class.
4 The price of New Century common stock declined from over S30 per share to less
5 than Si per share , between February 7 and March 13, 2007 , as the true facts were
6 I revealed, a decline of approximately 97%. The price of New Century Series A and
7 B Preferred stock declined by over 75% during that same time period.
8 10. The disclosures also triggered an immediate ( and entirely foreseeable)
9 liquidity crisis for the Company, because of the Company's dependence upon
10 numerous short-term credit agreements to fund its mortgage business and
11 operations which required the Company to present its financial statements in
12 accordance with GAAP, causing New Century to file or bankruptcy on or about
13 April 2, 2007.
14 11. Before any of the adverse disclosures were made, however, individual
15 11 New Century officer Defendants Robert K. Cole, Brad A. Morrice, Edward F.
16 Gotschall and Patti M. Dodge -- who controlled New Century's financial reporting
17 and were the public spokespersons of the Company -- each took personal
18 advantage of the artificially inflated price for New Century securities by selling, in
19 the aggregate, over S50 million of their personally-held New Century common
20 stock during the Class Period and by receiving incentive bonuses and other
21 substantial compensation and income based on New Century's (mis)reported
?? financial performance.
23 12. Not surprisingly, these individuals now face a grand jury and criminal
24 investigation by the United States Attorney for the Central District of California as
25 well as an elevated, formal investigation by the SEC.
26 H. NON-FRAUD AND FRAUD CLAIMS
27 13. In this Complaint, Plaintiffs assert two different sets of claims. In the
28 first set of claims (Counts One through Eight), Plaintiffs assert strict liability and
^- CONSOLIDATED CLASS ACTION COMPLAINT

1 negligence claims based on the Securities Act of 1933 (the "Securities Act").
I These claims are asserted against those Defendants who are statutorily responsible
3 for material misstatements of facts and omissions in the prospectuses and
4 I registration statements pursuant to which New Century Series A and B Preferred
5 Stock were offered to the public in June 2005 and August 2006, respectively (the
6 1 "Offerings"). Plaintiffs specifically disclaim any allegations of fraud in connection
7 with these non-fraud claims.

8 14. In the second set of claims (Counts Nine through Ten). Plaintiffs
9 assert fraud-based claims under the Securities Exchange Act of 1934 (the
10 "Exchange Act") against those individual Defendants who are alleged to have
11 directly participated in a fraudulent scheme and made materially misleading
12 statements and omissions throughout the Class Period and who acted with
13 knowledge or deliberate reckless disregard of the true facts.
14 III. JURISDICTION AND VENUE
15 15. Certain non-fraud related claims asserted herein arise under Sections
16 11, 12(a)(2) and 15 of the Securities Act, 15 U.S.C. §§ 77k, 771(a)(2) and 77o.
17 Certain other claims asserted herein arise under Sections 10(b) and 20(a) of the
18 Exchange Act, 15 U.S.C. §§ 78j(b) and 78t( a), and the rules and regulations
19 promulgated thereunder, including SEC Rule lOb-5, 17 C.F.R. § 240.1Ob-5 ("Rule
20 10b-5").
21 16. This Court has jurisdiction over the subject matter of this action
1) 1) pursuant to Section 2 2 of the Securities Act, 15 U.S .C. § 77v, Section 27 of the
23 Exchange Act, 15 U.S.C. § 78aa, and 28 U.S.C. § 1331 . because this is a civil
24 action arising under the laws of the United States.
25 17. Venue is proper in this district pursuant to Section 22 of the Securities
26 11 Act, 15 U.S.C. § 77, Section 27 of the Exchange Act, 15 U.S.C. § 78aa, and 28
27 11 U.S.C. § 1391(b), (c) and (d). Many of the acts and transactions that constitute
28 violations of law complained of herein, including the dissemination to the public of

Case No. 2:07-cv-00931-DDP (JTLx )
1i untrue statements of material facts, occurred in this district. During the Class
I Period, New Century's headquarters were located at 18400 Von Karman, Irvine,
3 California and, in 2007, were relocated to 3 161 Michelson Drive, Irvine,
4 California.
5 18. In connection with the acts alleged in this Complaint, Defendants,
6 directly or indirectly, used the means and instrumentalities of interstate commerce,
7 including, but not limited to, the United States mails, interstate telephone
8 communications and the facilities of national securities exchanges.
9 IV. PARTIES
10 A. Plaintiffs
11 19. On June 26, 2007, the Honorable Dean D. Pregerson appointed the
12 New York State Teachers' Retirement System ("NYSTRS") to serve as Lead
13 Plaintiff in this consolidated class action. NYSTRS provides retirement, disability
14 and death benefits to eligible New York State public school teachers and
15 administrators. NYSTRS is one of the ten largest public retirement systems in the
16 nation, serving nearly 400,000 active members, retirees and beneficiaries. As set
17 forth in the previously-filed certification attached hereto as Exhibit A., NYSTRS
18 purchased New Century common stock during the Class Period and suffered
19 damages as the result of the conduct complained of herein.
- 20 20. Plaintiff Carl Larson, as set forth in the certification attached hereto as
21 Exhibit B, purchased New Century Series A and B Preferred Stock during the Class
Period issued pursuant and/or traceable to the Series A and Series B Preferred
23 Stock Registration Statement (as defined below) and suffered damages as the result
24 of the conduct complained of herein.
25 21. Plaintiff Charles Hooten, as set forth in the certification attached
26 hereto as Exhibit C, sold New Century put options during the Class Period and
?7 suffered damages as the result of the conduct complained of herein.
''8

1 B. Defendants
21 22. New Century is not named as a Defendant in this Complaint due to its
3 filing for bankruptcy protection under Chapter 11 of the Bankruptcy Code.
4 1. The New Century Officer Defendants
5 23. Defendant Robert K. Cole ("Cole''). one of the Company's co-
6 founders, served as Chairman of the Board of Directors of New Century from
7 1 December 1995 until December 31, 2006; as Chief Executive Officer of New
8 11 Century from December 1995 until June 30. 2006; and as a director of the
9 Company from November 1995 through the end of the Class Period. In addition,
10 Cole has substantial prior financial and industry experience. From February 1994
11 to March 1995, Cole was the President and Chief Operating Officer, Finance, of
12 Plaza Home Mortgage, a publicly-traded savings and loan holding company
13 specializing in the origination and servicing of residential mortgage loans. Cole
14 also served as a director of Option One Mortgage Corporation, a subsidiary of
15 Plaza Home Mortgage specializing in the origination, sale and servicing of non-
16 prime mortgage loans. Previously, Cole served as the President of operating
17 subsidiaries of NBD Bancorp and Public Storage, Inc. Cole received a Masters of
18 Business Administration degree from \Vayne State University.
19 24. Defendant Brad A. Morrice ("Morrice"), one of the Company's co-
20 founders, served as Vice Chairman of the Board of Directors of New Century from
21 December 1996 until his termination, after the end of the Class Period, on June 8,
11) ?007; as President and a director of the Company from 1995 until June 8, 2007; as
23 Chief Executive Officer from July 1, 2006 until June 8, 2007; as Chief Operating
24 Officer from January 2001 until July 2006; as General Counsel from December
25 1995 until December 1997; and as Secretary of the Company from December 1997
26 until May 1999. In addition, Morrice has substantial prior legal, financial and
27 11 industry experience. From February 1994 to March 1995, Morrice was the
28 President and Chief Operating Officer, Administration, of Plaza Home Mortgage,

Case No . 2:07-cv-0093 I -DDP (JTLx)
1 after serving as its Executive Vice President, Chief Administrative Officer since
February 1993. Morrice also served as General Counsel of Option One Mortgage
3 Corporation and, from August 1990 to January 1993, was a partner in a law firm
4 specializing in the legal representation of mortgage banking companies. Morrice
5 has a law degree from the University of California. Berkeley (Boalt Hall) and a
6 Masters of Business Administration degree from Stanford University.
7 25. Defendant Edward F. Gotschall ("Gotschall"), one of the Company's
8 co-founders. served as Vice Chairman, Finance. of the Board of Directors of New
9 Century from July 2004 until June 2006; as a director of the Company from
10 November 1995 through the end of the Class Period; as Chief Financial Officer of
11 the Company from August 1998 until July 2004; and as Chief Operating Officer,
12 Finance/Administration, from December 1995 until August 1998. Gotschall served
13 as a member of the Finance Committee of the Board of Directors from its inception
14 on January 9, 2006. The Finance Committee was responsible for reviewing, inter
15 alia , the Company's loan performance, including, the adequacy of its loan loss
16 reserves. In addition, Gotschall has substantial prior financial and industry
17 experience. From April 1994 to July 1995, Gotschall was the Executive Vice
18 President/Chief Financial Officer of Plaza Home Mortgage and a director of
19 Option One Mortgage Corporation. Gotschall co-founded Option One Mortgage
20 Corporation and, from December 1992 to April 1994, served as its Executive Vice
21 President/Chief Financial Officer. From January 1991 to July 1992, Gotschall was
the Executive Vice President/Chief Financial Officer of The Mortgage Network,
23 Inc., a retail mortgage banking company.
24 26. Defendant Patti M. Dodge ("Dodge") served as Executive Vice
25 President. Chief Financial Officer of New Century from July 20, 2004 until
?6 November 14, 2006; and as Executive Vice President, Investor Relations from
27 November 15, 2006 through the end of the Class Period. Prior to these positions,
?8 Dodge served as Senior Vice President and Chief Financial Officer of the

Case No. 2 :07-cv-00931-DDP (JTLx)
1 Company (February 2002 until July 2004); Senior Vice President and Controller
(February 1999 until February 2002) and Vice President and Controller (September
3 1996 until February 1999). Dodge also has substantial prior financial and industry
4 experience. From December 1990 to June 1995, Dodge was Senior Vice President
5 at Plaza Home Mortgage Corporation. From February 1989 to December 1990,
6 Dodge served as Vice President and Chief Financial Officer of University Savings
7 Bank and from October 1984 to February 1989, Dodge served as Controller of
8 Butterfield Savings. Dodge earned her Bachelor's degree in Business
9 Administration with an emphasis in accounting from the University of Southern
10 II California.
11 27. Defendants Cole, Morrice, Gotschall and Dodge are referred to herein
12 collectively as the "New Century Officer Defendants." As set forth below, the
13 materially misstated information conveyed in the Company' s press releases, SEC
14 filings and other public statements were the collective actions of these individuals.
15 These individuals were each involved in drafting, producing, reviewing and/or
16 disseminating the statements at issue in this case during his or her tenure with the
17 Company.
18 2 8. As officers and directors of a publicly-held company whose shares are
19 registered with the SEC pursuant to the Exchange Act, traded on the New York
20 Stock Exchange, and governed by the Federal securities laws, these individual
21 Defendants each had a duty to disseminate promptly, accurate information with
respect to the Company's business, operations, financial statements and internal
23 controls, and to correct any previously-issued statements that had become
24 materially misstated or untrue, so that the market price of the Company's publicly-
25 traded securities would be based upon accurate information. Defendants Cole,
26 Morrice, Gotschall and Dodge each violated these requirements and obligations
27 during the Class Period.
28

Case No . 2:07-cv - 0093 I -DDP (JTLx)
1 29. These four individuals, because of their positions of control and
I authority as senior executive officers and directors of New Century, were able to
3 and did control the content of the press releases. SEC filings and other public
4 statements issued by New Century during the Class Period. Each of these
5 I individuals, during his or her tenure with the Company. was provided with copies
6 of the statements at issue in this action before they were issued to the public and
7 had the ability to prevent their issuance or cause them to be corrected.
8 Accordingly, each of these individuals is responsible for the accuracy of the public
9 statements detailed herein.
10 2. The New Century Director Defendants
^' 11 30. Defendant Fredric J. Forster ("Forster-') served as a director of the
12 Company from July 1997 through the end of the Class Period. During the Class
13 Period, Forster served as the Company's Lead Independent Director, and was
14 appointed to serve as Non-Executive Chairman of the Board of Directors effective
15 January 1, 2007. Forster served as a member of the Audit Committee of the New
16 Century Board from 2000 through 1-005. Forster also served as a member of the
17 Compensation Committee from 1998 through ?007, serving as its Chairman from
18 2001 through 2005. Forster has extensive industry experience, spending nine years
19 at ITT Financial Corporation. including as President and Chief Executive Officer
20 of ITT Federal Bank. Forster was a principal of Financial Institutional Partners
21 11 from November 1996 until December 1998. Prior to that, he served as President
and Chief Operating Officer of H.F. Ahmanson & Co. and its subsidiary, Home
23 Savings of America. In addition, Forster spent nearly ten years as a director of the
24 Federal Home Loan Bank of San Francisco and as a director of and consultant to
25 LoanTrader, a private company that developed a website serving mortgage brokers
26 and lenders. Forster received his Masters Degree in Business Administration from
27 Harvard Business School and his Bachelor's degree in Physics from Princeton
28 University. As set forth below, Forster signed the registration statement pursuant to

1 which New Century Series A and B Preferred Stock were offered and sold to the
public during the Class Period.
3 31. Defendant Michael M. Sachs ("Sachs") served as a director of the
4 Company from November 1995 through the end of the Class Period and was one
5 I of the Company's founding shareholders. Sachs served as a member of the
6 Board's Audit Committee from 1998 through 2007, serving as its Chairman from
7 ?000 through 2006. Sachs also served as a member of the Compensation
8 Committee (1998 to 2007) and as a member of the Finance Committee (from its
9 inception on January 9, 2006 through the end of the Class Period). Sachs has
10 substantial legal, financial, accounting and business experience. Sachs is a
11 Certified Public Accountant and attorney. Since 1990, Sachs has served as
12 Chairman of the board of directors and Chief Executive Officer of Westrec
13 Financial, an operator of marinas and related businesses. As set forth below, Sachs
14 signed the registration statements pursuant to which New Century Series A and B
15 Preferred Stock were offered and sold to the public during the Class Period. Sachs
16 sold 140,000 shares of New Century common stock on or about February 8, 2007,
17 at an average price of $19.6-2 per share.
18 32. Defendant Harold A. Black (`Black-) served as a director of the
19 Company from June 2004 through the end of the Class Period. For the past twenty
20 years. Black has served as the James F. Smith, Jr. Professor of Financial
21 Institutions at the University of Tennessee, Knoxville. From 1987 to 1995, he was
Head of the Department of Finance, College of Business Administration of the
23 University of Tennessee. Black's industry experience includes, among other
24 things, serving as: (i) Deputy Director, Department of Economic Research and
25 Analysis, Office of the Comptroller of the Currency from 1976 to 1978; (ii) board
26 member of the National Credit Union Administration from 1979 to 1981: (iii)
27 director from 1990 to 1994, and Chairman in 1992, of the Nashville Branch of the
28 Federal Reserve Bank of Atlanta: (iv) public interest member of the Federal
i] CONSOLIDATED CLASS ACTION COME PLAINT

1 Deposit Insurance Corporation's Savings Association Insurance Fund Advisory
Committee from 1994 to 1998; and (v) director of H.F. Ahmanson & Co., the
3 parent company of Home Savings of America prior to its merger with Washington
4 Mutual Savings Bank, from 1995 to 1998. As set forth below, Black signed the
5 I registration statement pursuant to which New Century Series A and B Preferred
6 Stock were offered and sold to the public during the Class Period.
7 33. Defendant Donald E. Lange ("Lange") served as a director of the
8 Company from November 2002 through the end of the Class Period. Lange served
9 as a member of the Audit Committee of the Board of Directors from November
10 2002 to June 22, 2007. Lange also served on the Compensation Committee,
11 serving as its Chairman from October 26, 2005 to 2007. Lange has extensive
12 industry and financial experience. Since 1999, Lange has served as the President
13 and Chief Executive Officer of Pacific Financial Services, a mortgage banking and
14 specialty finance company. From March 2001 to February 2002, Lange served as
15 President and Chief Executive Officer of OptiFl, a private company specializing in
16 prepayment analytics. He also served as the President and Chief Executive Officer
17 of several specialty finance subsidiaries of Weyerhaeuser Company, including
18 Weyerhaeuser Financial Services and Weyerhaeuser Mortgage Company. In
19 addition, Lange served as a director of Mortgage Electronic Registration System
20 (1995 until 2002) and as a director of Pacific Gulf Properties (1998 until 2001).
21 Lange was the President of the Mortgage Bankers Association of America in 1999.
As set forth below, Defendant Lange signed the registration statement pursuant to
23 which New Century Series A and B Preferred Stock were offered and sold to the
24 public during the Class Period.
25 34. Defendant Terrence P. Sandvik ("Sandvil:") served as a director of the
26 Company from November 1995 until May 17, 2005. From 1999 through the end
27 of his tenure on the Board. Sandvik served as a member of the Compensation
28 Committee. Sandvik has substantial prior business experience, including serving

Case No. 2:07-cv-00931-DDP (JTLx)
1 as President of U.S. Bancorp Business Technology Center at U.S. Bancorp from
11990 to 1999. As set forth below, Defendant Sandvik signed the registration
3 statement pursuant to which New Century Series A Preferred Stock was offered
4 I and sold to the public during the Class Period.
35. Defendant Richard A. Zona ("Zona") served as a director of the
6 Company from June 2000 through the end of the Class Period. Zona served as a
7 member of the Audit Committee of the Board of Directors from 2000 to 2007 and
8 as a member of the Finance Committee of the Board of Directors from its inception
9 on January 9. 2006 to 2007. Zona has substantial industry and accounting
10 experience. Zona was a partner with the accounting firm of Ernst & Young LLP
11 from 1979 to 1989. Zona served as the Chief Financial Officer of U.S. Bancorp
12 from 1989 to 1996 and as Vice Chairman of U.S. Bancorp from 1996 to 2000.
13 Zona served as a director of sub-prime lender Olympic Financial Ltd. from 1995 to
14 1996 and of ING Bank Direct. Zona currently serves as a director of Piper Jaffray
15 Companies. As set forth below, Defendant Zona signed the registration statement
16 pursuant to which New Century Series A and B Preferred Stock were offered and
17 sold to the public during the Class Period.
r 18 36. Defendant Marilyn A. Alexander ("Alexander") served as a director of
19 the Company from May 18, 2005 until April 10, 2007. Alexander served as a
20 member of the Audit Committee of the Board of Directors from May 18, 2005 until
21 April 10, 2007. Alexander has more than twenty three years of finance, marketing
and strategic planning experience. She served as Senior Vice President and Chief
23 Financial Officer of the Disneyland resort in California and, prior to that, served as
24 Vice President of Financial Planning and Analysis for the Marriott Corporation.
25 Alexander holds a Masters of Business Administration degree from the Wharton
26 Graduate School of the University of Pennsylvania. As set forth below. Defendant
27 Alexander served as a director of the Company at the time New Century Series A
?8 and B Preferred Stock were offered and sold to the public.

1 37. Defendant William J. Popejoy ("Popejoy") served as a director of the
Company from 2002 until June 5, 2006. Popejoy served on the Board's
3 Compensation Committee from 2002 through 2005 . Popejoy also has extensive
4 industry and financial experience. Popejoy was the Managing Member of Pacific
5 Capital Investors (1999 to 2005) and the Chief Executive Officer and a director of
6 the California State Lottery (April 1997 to November 1998). He served as the
7 Chief Executive Officer of the County of Orange, Chairman and Chief Executive
8 Officer of Financial Corporation of America and its subsidiary, American Savings,
9 President and Chief Executive Officer of Financial Federation, Inc., the President
10 of Far West Savings, the President of First Charter Financial and its subsidiary,
11 American Savings & Loan Association, and the President and Chief Executive
12 Officer of T'ne Federal Home Loan Mortgage Corporation (Freddie Mac). in
13 addition, since 1996, Popejoy has served as a member of the board of trustees of
14 PIMCO Funds and PIMCO Commercial Mortgage Securities, Inc. As set forth
15 below, Defendant Popejoy signed the registration statement pursuant to which New
16 Century Series A Preferred Stock was offered and sold to the public during, the
17 Class Period.
18 38. Defendant David Einhorn ("Einhorn") served as a director of the
19 Company from March 31, 2006 until March 7, 2007. Einhorn is the President of
20 Greenlight Capital, Inc., a New York investment management firm managing over
21 $4 billion of assets founded in 1996. As set forth below, Defendant Einhorn was a
director at the time New Century Series B Preferred Stock was offered and sold to
23 the public during the Class Period
24 3. Defendant KPMG
?5 i 39. Defendant KPMG LLP ("KPMG") served as the Company's outside
26 auditor from 1995 until its resignation on April 27, 2007. KPMG provided audit,
27 audit-related., tax and other services to the Company prior to and throughout the
28 Class Period, which included the issuance of unqualified opinions on the
-14- CONSOLIDATED CLASS ACTION, COMPLAINT

1 Company's financial statements and management's assessment of internal controls
for the year ended December 31, 2005. KPMG consented to the incorporation by
3 reference in the registration statement for the Series B Preferred Stock Offering of
4 its unqualified opinions on the Company's financial statements and management's
5 assessment of internal controls for the year ended December 31, 2005. KPMG
6 maintains its national headquarters at 757 Third Avenue, New York, New York
7 10017.
8 4. The Underwriter Defendants
9 40. Defendant Bear, Steams & Co. Inc. ("Bear Steams") is an investment
10 bank and acted as one of the underwriters with respect to the public offerings of
11 New Century securities in June 2005 and August 2006. Bear Stearns' corporate
1? headquarters are located at 383 Madison Avenue, New York, New York 10179.
13 41. Defendant Deutsche Bank Securities Inc. ("Deutsche Bank") is an
14 11 investment bank and acted as one of the underwriters with respect to the public
15 offering of New Century securities in June 2005. Deutsche Bank's U.S.

16 headquarters are located at 60 Wall Street, New York, New York 10005.
17 42. Defendant Piper Jafray & Co. ("Piper Jaffray") is an investment bank
18 11 and acted as one of the underwriters with respect to the public offering of New
19 II Century securities in June 2005. Piper Jaffray's headquarters are located at 800
20 Nicollet Mall, Minneapolis, Minnesota 55402.
r 21 43. Defendant Stifel, Nicolaus & Company, Incorporated ("Stifel
Nicolaus") is an investment bank and acted as one of the underwriters with respect
23
to the public offerings of New Century securities in June 2005 and August 2006.
24 Stifel Nicolaus' headquarters are located at 501 N Broadway, St. Louis, Missouri
25 163 102.
26 44. Defendant IMP Securities LLC ("JMP Securities") is an investment
27 bank and acted as one of the underwriters with respect to the public offering of
28
-15- CONSOLIDATED CLASS ACTION COAMPLAThST

Case No. 2:07 -cv-009 3 I -DDP (JTLx)
1 New Century securities in June 2005. JMP Securities' headquarters are located at
I 600 Montgomery Street, San Francisco, California 94111.
-; 45. Defendant Roth Capital Partners, LLC ("Roth Capital") is an
4 investment bank and acted as one of the underwriters with respect to the public
5 offering of New Century securities in June 2005. Roth Capital's headquarters are
6 located at 24 Corporate Plaza Drive, Newport Beach, California 92660.
7 46. Defendant Morgan Stanley & Co. Incorporated ("Morgan Stanley") is
8 an investment bank and acted as one of the underwriters with respect to the public
9 offering, of New Century securities in August 2006. Morgan Stanley's
10 headquarters are located at 1585 Broadway, New York, New York 10036.
11 47. Defendant Jefferies & Company, Inc. (Jefferies & Co.) is an
12 investment bank and acted as one of the underwriters with respect to the public
13 offering of New Century securities in August 2006. Jefferies & Co.'s headquarters
14 are located at 520 Madison Avenue, New York, New York 10022.
15 V. CLASS ACTION ALLEGATIONS
16 48. Plaintiffs bring, this action on behalf of themselves and as a class
17 action pursuant to Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure
18 on behalf of a class (the "Class") consisting of all persons and entities who
19 purchased or otherwise acquired New Century common stock, New Century Series
20 A Preferred Stock, New Century Series B Preferred Stock and/or New Century call
21 options and/or who sold New Century put options during the Class Period, May 5,
?1) 2005 through March 13, 2007, either in the Offerings, pursuant to a registration
23 statement, or in the market, and, who, upon disclosure of certain facts alleged
24 herein, were injured thereby. Excluded from the Class are: (a) Defendants; (b)
members of the immediate families of the individual Defendants; (c) the
26 subsidiaries and affiliates of Defendants; (d) any person or entity who is a partner,
27 executive officer, director, or controlling person of New Century (including any of
28 its subsidiaries or affiliates) or of any other Defendant; (e) any entity in which any

1 Defendant has a controlling interest; (f) Defendants' liability insurance carriers,
I and any affiliates or subsidiaries thereof; and (g) the legal representatives, heirs,
3 I successors and assigns of any such excluded party.
4 49. The members of the Class are so numerous that joinder of all
5 I members is impracticable. As of March 1, 2006. New Century had 55,984,299
6 shares of common stock issued and outstanding; 4,500,000 shares of Series A
7 Preferred Stock issued and outstanding; 2,300,000 shares of Series B Preferred
8 Stock issued and outstanding; and substantial options trading. Throughout the
9 Class Period, New Century common stock and Series A and B Preferred Stock
10 were actively traded on the New York Stock Exchange and New Century options
11 were actively traded on the Chicago Board of Options Exchange. While the exact
12 number of Class members is unknown to Plaintiffs at this time, Plaintiffs believe
13 that Class members number in the thousands.
14 50. Plaintiffs' claims are typical of the claims of the members of the
15 Class. Plaintiffs* and the other members of the Class acquired New Century
16 securities in the Offerings, pursuant to a registration statement, purchased or sold
17 New Century securities in the market, and sustained damages as a result of
18 Defendants' conduct complained of herein.
19 51. Plaintiffs will fairly and adequately protect the interests of the
20 members of the Class and have retained counsel competent and experienced in
21 class and securities litigation. Plaintiffs have no interests that are adverse or
antagonistic to the Class.
23 52. A class action is superior to other available methods for the fair and
24 efficient adjudication of this controversy. Because the damages suffered by
25 individual members of the Class may be relatively small, the expense and burden
26 of individual litigation make it impracticable for Class members individually to
27 seek redress for the wrongful conduct alleged herein.
28

1 53. Common questions of law and fact exist as to all members of the
Class, and predominate over any questions affecting solely individual members of
3 the Class. Among the questions of law and fact common to the Class are:
4 a. whether the Federal securities laws were violated by Defendants'
5 conduct as alleged herein;
6 b. whether the registration statements and prospectuses for the
7 Company's Offerings contained material misstatements or omitted to state material
8 information;
9 c. whether the SEC filings, press releases and other public statements
10 disseminated to the investing public during the Class Period contained material
11 misstatements or omitted to state material information;
12 d. whether and to what extent the Company's financial statements failed
13 to comply with GAAP during the Class Period;
14 e. whether and to what extent Defendant KPMG's audits of the
15 Company's financial statements and management's assessments of internal
16 controls during the Class Period failed to be conducted in accordance with the
17 standards of the Public Company Accounting Oversight Board (the "PCAOB"`,;
18 f. whether and to what extent the market prices of New Century
19 common stock, Series A and B Preferred Shares and/or call options were
20 artificially inflated (and whether and to what extent the market prices of New
21 Century put options were artificially reduced) during the Class Period due to the
22 non-disclosures and/or misstatements complained of herein;
23 or. whether, with respect to Plaintiffs' claims under the Securities Act,
24 Defendants named in those claims can sustain their burden of establishing an
25 affirmative defense pursuant to the applicable statute;
26 h. whether, with respect to Plaintiffs' claims under the Exchange Act,
27 Defendants named in those claims acted with scienter;
28
_18- CONSOLIDATED CLASS ACTION COMPLAINT

Case No. 2:07-cv-009 3 I -DDP (JTLx)
1 i. whether, with respect to Plaintiffs' claims pursuant to Section 15 of
the Securities Act and Section 20(a) of the Exchange Act, Defendants Cole.
3 Morrice, Gotschall and Dodge were controlling persons of New Century;
4 j, whether reliance may be presumed pursuant to the fraud-on-the-
5 market doctrine; and
6 k. whether the members of the Class have sustained damages as a result
7 I of the conduct complained of herein. and if so, the proper measure of damages.
8 54. The names and addresses of those persons and entities who purchased
9 11 or sold New Century securities during the Class Period are available from the
10 Company's transfer agent(s) and/or from the underwriter Defendants. Notice may
11 be provided to such class members via first-class mail using, techniques and a form
12 of notice similar to those customarily used in securities class actions.
13 VI. FACTUAL ALLEGATIONS
PERTINENT TO CLAIMS FOR RELIEF
14
A. The Company ' s Formation And Rapid Growth
15
55. During the Class Period, New Century operated as a publicly-traded
16
Real Estate Investment Trust, or REIT, and, through its subsidiaries, operated as
,7
one of the nation's largest mortgage finance companies. According to the
18
Company's Form 10-K filed with the SEC on or about March 16, 2006 for the
19
year-ended December 31, 2005 (the "2005 Form 10-K"), New Century began
20
originating and purchasing mortgage loans in 1996, and began operating its
21
business as a REIT in the fourth quarter of 2004.1
1) 1)
56. During the Class Period, New Century originated and purchased
23
primarily first mortgage loans nationwide, focusing on the sub-prime market,
24
lending to individuals who did not satisfy the credit, documentation or other
25
26
1 As a REIT. New Century was generally not subject to federal corporate income tax on that
27 portion of its REIT taxable income that it distributed to its stockholders. To qualify as a REIT.
28 New Century was required to distribute to its stockholders at least 90% of its REIT taxable
income.

Case No . 2:07-cv-00931 -DDP (JTLx)
1 I underwriting standards prescribed by conventional mortgage lenders and loan
buyers.
3 57. According to the Company's 2005 Form 10-K, New Century
4 originated and purchased mortgage loans through two divisions - its "Wholesale
5 Division" and its "Retail Division." In 2005, New Century's Wholesale Division
6 reportedly originated and purchased $49.2 billion in mortgage loans, or 87.7% of
7 the total mortgage loans originated and purchased by the Company and its Retail
8 Division reportedly originated $6.9 billion in mortgage loans, or 12.3% of the total.
9 58. During the Class Period, New Century's Wholesale Division
10 originated and purchased loans through a network of independent mortgage
11 brokers and correspondent lenders. According to the Company's 2005 Form 10-K:
12 "The Wholesale Division operates under the name New Century Mortgage
13 Corporation and originates mortgage loans through its FastQual Web site at
14 wwwnewcenturv.coin . where a broker can upload a loan request and receive a
15 response generally within 12 seconds." According to the 2005 Form 10-K, as of
16 December 31, 2005, New Century's Wholesale Division operated through 35
17 regional operating centers located in 18 states and had more than 47,000 approved
18 mortgage brokers to submit loan applications to the Company.
19 59. According to the 2005 Form 10-K, the Company's total 2005 loan
20 production volume was $56.1 billion, its "tenth consecutive record year of loan
21 production." Indeed, New Century's annual loan production grew rapidly from
1) 1) $357 million in 1996. to $56.1 billion in 2005. The Company's reported earnings
23 per share also grew rapidly from $0.13 in 1996, to $7.17 in 2005. In May 2006,
24 Defendant Morrice publicly reported that the Company's wholesale business
25 "ranked as the #1 non-prime wholesale lender and #4 wholesale lender in the
26 overall mortgage market in 2005."
27 60. On or about February 2. 2006. New Century presented the following
28 slide showing its dramatic growth over the previous 10 years:

Case No. 2:07-c v-00931-DDP (JTLx)
3
in Billions
4 $6C
1 $422
Sa0-
6 $Vo
7 $20 $14,i
$10 $3.2 $41 $4.2

8
1996 1997 1998 1999 2003 2001 2002 2003 2004 2005
9
10
11 B. Throughout The Class Period, New

Century Recognized Substantial Revenue
12 From Whole Loan Sales And Securitizations
13 61. During the Class Period, one of the primary components of New
14 Century's reported revenue was the recognition of "gain on sale" of its mortgage
15 loans through whole loan sales and securitizations structured as sales. Starting in
16 2003, New Century also structured securitizations as "financings" under GAAP.
17 These sales and securitizations were an essential component of New Century's
18 operations since they provided cash to repay substantial sums of money the
19 Company borrowed each quarter on a short-term basis to originate and purchase
20 mortgage loans and support its operating activities.
21 62. In a whole loan sale, New Century recognized and received a cash
gain upon the sale of a pool of mortgage loans to third parties.
23 63. In a securitization structured as a sale for financial reporting purposes,
24 New Century also recognized a gain on sale at the time it sold a pool of loans to a
25 trust that raised cash by selling certificates representing interests in a pool of loans.
26 In addition to the cash received at the time of the securitization, New Century
27 could receive cash flows over the life of the loans from the residual interests it
28 retained in the securitized pool of loans, if the specified over-collateralization
?l CONSOLIDATED CLASS ACTION COMPLAINT

1 requirements were met. Alternatively, the Company could sell its residual interests
through net interest margin securities, or NIMS, at the time of or shortly after a
3 securitization. A NIMS transaction allowed the Company to receive a substantial
4 portion of its residual interest as an additional cash gain at the time of the
5 securitization rather than over the actual life of the mortgage loans.
6 64. In securitizations structured as financings for financial reporting
7 purposes, New Century did not record gain on sale at the time of the transaction,
8 but recognized interest income as the payments on the underlying mortgages were
9 received. According to New Century's 2005 Form 10-K, because the Company's
10 credit facilities were short-term in nature and generally did not allow for its
11 mortgage loans to be financed for longer than 180 days, securitizations structured
12 as financings allowed the Company the most attractive means of financing its
13 mortgages over a longer term and retaining them on its balance sheet.
14 65. According to the Company's 2005 Form 10-K, in 2005, the Company
15 sold or financed a total of approximately $52.7 billion of loans through secondary
16 market transactions . According to the Company's Form 10-K, in 2005, New
17 Century sold approximately $32.8 billion of sub-prime loans through whole loan
18 sales, or 62.2% of total loans sold or financed; New Century sold approximately
19 $6.4 billion of loans through securitizations structured as sales, or 12.2% of total
20 loans sold or financed; and New Century financed approximately S 11 billion of
21 loans through securitizations structured as financings, or 20.8% of total loans sold
1) ? or financed. According to the Company's third quarter 2006 Form 10-Q, in the
23 first nine months of 2006, the Company sold or financed a total of approximately
24 $44.1 billion of loans through secondary market transactions. According to the
25 Company's Form 10-Q, in the first nine months of 2006, New Century sold
26 approximately $40.2 billion of loans through whole loan sales, or 91.3% of total
27 loans sold or financed; and New Century financed approximately $3.4 billion of
28

Case No. 2:07-cv-0093I-DDP (JTLx)
1 loans through securitizations structured as financings, or 7.7% of total loans sold or
financed.
3 C. -ew Century 's Financial Statements
Were 'MMaterially Misstated Throu ghout The
4 Class Period And At The Time Of The Offerings
5 66. Unfortunately for unsuspecting investors, the Company, in reporting
6 its financial results throughout the Class Period and at the time of the Offerings,
7 made numerous untrue statements of material fact and omitted to state material
8 facts necessary to make its reported financial results and other public statements
9 not misleading , including violations of GAAP in connection with its whole loan
10 sales and securitizations.
11 67. GAAP are those principles recognized by the accounting profession as
12 1 the conventions, rules and procedures necessary to define accepted accounting
13 practices at a particular time. The SEC has the statutory authority for the
14 promulgation of GAAP for public companies and has delegated that authority to
15 the Financial Accounting Standards Board (the "FASB"). SEC Regulation S-X (17
16 C.F.R. § 210.4-01(a)(1)) provides that financial statements filed with the SEC
17 which are not presented in accordance with GAAP will be presumed to be
18 misleading, despite footnotes or other disclosures.
19 68. Statement of Financial Accounting Standards No. 5, "Accounting for
20 Contingencies " ("SFAS 5") was issued in March 1975 by the FASB. The
21 principles described in SFAS 5 set forth the standards of financial accounting and
reporting for loss contingencies. Statement of Financial Accounting Standards No.
23 140, "Accounting for Transfers and Servicing of Financial Assets and
24 Extincruishments of Liabilities" ("SFAS 140") was issued in September 2000 by
25 the FASB. The principles described in SFAS 140 set forth "the standards for
26 accounting for securitizations and other transfers of financial assets and collateral."
27 As set forth below. New Century violated GAAP. SFAS 5 and SFAS 140, in a
28 number of ways.

Case No. 2:07-cv- 0093 I - DDP (JTLx)
1 1. NVhole Loan Sales - GAAP Violations
69. According to the Company's 2005 Form 10-K, New Century sold
3 whole loans on a non-recourse basis pursuant to purchase agreements in which it
4 gave `'customary representations and warranties" regarding its loan characteristics
5 I and origination process, including, for example. that the home borrower would
6 I make the first mortgage payment . New Century was required to repurchase or
7 substitute loans in the event of a breach of these representations and warranties.
8 70. As reported by the Company in the 2005 Form 10-K and required by
9 II GAAP, the Company established , at the time the sale was consummated, an
10 allowance for repurchase losses on whole loan sales, which is a reserve for
11 expenses that may be incurred by the Company due to the potential repurchase of
12 loans resulting from early payment defaults by the underlying home borrowers or
13 from alleged violations of representations and warranties in connection with the
14 sale of the loans (the "Allowance for Repurchase Losses"). As set forth by GAAP,
15 Emerging Issues Task Force 92-2. "Measuring Loss Accruals by Transferors for
16 Transfers of Receivables With Recourse," issued in September 1992 ("EITF 92"),
17 this reserve should include "all probable credit losses over the life" of the
18 transaction. When New Century repurchased loans, it was required by GAAP,
19 SFAS 140, to add the repurchased loans to its balance sheet as Mortgage Loans
20 Held for Sale at their estimated fair values (including any expected discount upon
21 disposition) and reduce its Allowance for Repurchase Losses reserve by the
amount that the repurchase prices exceeded the fair value.
23 71. According to the 2005 Form 10-K, the Company's Allowance for
24 Repurchase Losses covered all expenses due to the potential repurchase of loans or
25 indemnification of losses based on _alleged violations of representations and
26 warranties that are customary to the business. The Company represented that its
27 Allowance for Repurchase Losses reserve represented "the Company's estimate of
28 the total losses expected to occur" and was "considered to be adequate by
11 CONSOLIDATED CLASS ACTION COMPLAINT

Case No. 2:07 - cv-0093 1 -DDP (JTLx)
1 management based upon the Company's evaluation of the potential exposure
I related to the loan sale agreements over the period of repurchase risk ." (Emphasis
3 I added.) In fact, and contrary to the New Century Officer Defendants' public
4 I statements and representations throughout the Class Period and at the time of the
5 Offerings, New Century has now admitted that its Allowance for Repurchase
6 Losses reserve was materially understated at all relevant times.
7 72. On February 7, 2007, the Company admitted the need to restate New
8 Century's previously reported financial statements for the first three quarters of
9 2006 based on material violations of GAAP in setting New Century's Allowance
10 for Repurchase Losses reserve and related material weaknesses in internal controls.
11 The February 7, 2007 press release stated:
12 The Company establishes an allowance for repurchase losses on loans
13 sold, which is a reserve for expenses and losses that may be incurred
14 by the Company due to the potential repurchase of loans resulting
15 from early-payment defaults by the underlying borrowers or based on
16 alleged violations of representations and warranties in connection with
17 the sale of these loans. When the Company repurchases loans, it adds
18 the repurchased loans to its balance sheet as mortgage loans held for
19 sale at their estimated fair values, and reduces the repurchase reserve
?p by the amount the repurchase prices exceed the fair values. During
21 the second and third quarters of 2006, the Company's accounting
policies incorrectly applied Statement of Financial Accounting
23 Standards No. 140 - Accounting for Transfers and Servicing of
24 Financial Assets and Extinguishment of Liabilities. Specifically, the
25 ComDanv did not include the expected discount upon disposition of
26 loans when estimating its allowance for loan repurchase losses .
27
28

Case No. 2:07 - ev-00931 -DDP (.rrLx
1 In addition, the Company's methodology for estimating the volume of
repurchase claims to be included in the repurchase reserve calculation
3 did not properly consider in each of the first three quarters of 2006,
4 the growing volume of repurchase claims outstanding that resulted
J from the increased pace of repurchase requests that occurred in 2006.
6 compounded by the increasing length of time between the whole loan
7 sales and the receipt and processing of the repurchase request.
8
9 In light of the pending restatements, the Company's previously filed

10 condensed consolidated financial statements for the quarters ended
11 March 31. June 30 and September 30, 2006 and all earnings-related
12 press releases for those periods should no longer be relied upon .
13
14 The Company also expects that the errors leading, to these

15 restatements constitute material weaknesses in its internal control over
16 financial reporting for the year ended December 31, 2006 .
17
18 While the Company is still determining the magnitude of these

19 adjustments to its fourth quarter 2006 results, the Company expects
20 the combined impact of the foregoing to result in a net loss for that
21 period . [Emphasis added.]
73. On May 24. 2007, New Century filed a Form 8 -K which admitted to
23 further "errors" and a "more likely than not" material overstatement in the
24 Company's previously-issued 2005 financial statements with respect to, inter alia ,
25 "both the accounting and reporting of loan repurchase losses:"
26 On February 7, 2007, New Century Financial Corporation (the
27 "Company") filed a Form 8-K with the Securities and Exchange
28 Commission (the "SEC") reporting that the Company's Board of

Case No . 2:07-cvr- 00931 -DDP (JTLx)
1 Directors had concluded that the Company's previously filed interim
financial statements for the quarters ended March 31, 2006, June 30.
3 2006. and September 30, 2006 (collectively, the "Interim Financial
4 Statements"), should be restated to correct errors the Company
discovered in its accounting and financial reporting of loan repurchase
6 losses . In connection with the restatement process, the Audit
7 Committee of the Company's Board of Directors, on the advice of its
8 independent counsel, initiated an independent investigation into the
9 issues giving rise to the Company's need to restate the Interim
10 Financial Statements, and as previously reported, subsequently
11 expanded the investigation to include issues pertaining to the
12 Company's valuation of certain residual interests in securitizations in
13 2006 and prior periods (the "Internal Investigation"). In addition to its
14 independent counsel, the Audit Committee also retained forensic
15 accountants and other professionals (collectively, the "Investigative
16 Team'") to assist it in connection with the Internal Investigation.
17
18 Based on recent communications with members of the Investigative

19 Team, the Audit Committee has determined that there were errors in
20 the Companypreviously filed annual financial statements for its
21 fiscal year ended December 31, 2005 (the "200 5 Financial
Statements") with respect to both the accounting and reporting of loan
23 repurchase losses and the Company's valuation of certain residual
24 interests in securitizations. The Company's ability to further
25 investigate these matters is constrained as the Company is currently in
26 liquidation proceedings under chapter 11 of the Bankruptcy Code.
27 However, based upon the work performed by the Investigative Team.
28 the Audit Committee and management believe that it is more likely

1 than not that these errors in the a2areaate resulted in a material
overstatement of pretax earnings in the 2005 Financial Statements.
3 Accordingly, on May 23. 2007. the Company 's Board of Directors
4 concluded, based upon the recommendation of the Audit Committee,
5 that the 2005 Financial Statements should no longer be relied upon .
6 [Emphasis added.]
7 74. According to a former New Century senior financial manager
8 employed by the Company from September 2004 until February 2007 ("CW 1"),
9 prior to the restatement New Century had delayed payment of loan repurchase
10 claims in an effort to cause its previously reported 2005 and 2006 financial results
11 to appear better than they actually were. According to the former senior financial
12 I I manager, he was specifically tasked to review the Company's repurchase claims
13 backlog during July and August of 2006, and concluded that the Company had
14 delayed payment of repurchases, causing a massive backlog of claims, hundreds of
15 millions of dollars worth which were 18-24 months old. According, to the former
16 employee, New Century's transaction managers, who were primarily responsible
17 for investigating the validity of repurchase requests, would analyze and
is recommend repurchasing valid claims in a timely fashion, but the Company simply
19 never funded the majority of the valid claims. According, to the former employee.
20 New Century Senior Vice President of capital markets Karl S. Weiss (responsible
21 for managing secondary market operations and reporting to Kevin M. Cloyd) had
commented during a meeting in the summer of 2006 that New Century had delayed
23 payment of repurchase claims to make its 2005 year-end reported financial results
24 look better than they actually were and the Company was waiting to fund its
25 repurchase claims when it had better cash flow. According to the former
26 employee, the result of this delay caused a "snowball" effect to a point where the
27 Company could not catch up. According to the former employee, repurchase
2 8 claims which were not funded did not appear on the Company's financial

Case No. 2:07 -cv-0093 I -DDP (JTLx)
1 I statements and the Company's data was "so unkempt" that it took a while to
compile it from several different sources and combine it in order to obtain a true
3 picture of what was going on.
4 75. According to a former New Century Vice President. Assistant
5 Controller, who was employed by the Company from September 2004 to July 2007
6 1 ("CW 2"), New Century' s Capital Markets division failed to provide the
7 Company ' s Controller 's office with sufficient repurchase claims information in
8 order for that division of the Company to properly set New Century's Allowance
9 for Repurchase Losses reserve. According to the former Assistant Controller,
10 II however, the repurchase claims backlog information was shared between Kevin M.
11 Cloyd , Executive Vice President of New Century and President of New Century's
12 secondary marketing division , NC Capital Corporation ( a wholly-owned subsidiary
13 responsible for the Company ' s capital market activities ), and Defendant Dodge and
14 the Company ' s other senior executive officers . According to the former Vice
15 President , Assistant Controller. Cloyd kept Dodge up to date with repurchase claim
16 information.
17 76. According to a former New Century Vice President, Corporate
18 Finance, employed by the Company from 2002 until April 2007, who reported
19 directly to Defendant Dodge or, at times, Dodge's direct reports, and who
20 specifically worked on a special internal New Century project examining how
21 investor "kickbacks" and repurchase claims were handled ("CW 3"), prior to the
restatement New Century was ``sitting on repurchase requests- hoping to ride out
23 the market. According to the former employee, the Company failed to have good
24 internal reporting of repurchase information prior to 2006, and New Century was
25 not "an easy place" to examine repurchase information.
26 77. An internal, non-public New Century document entitled "Inventory
27 Management September 2006" obtained through Lead Counsel's investigation with
28 handwritten notes from Defendant Dodge to Kevin Cloyd demonstrates the

1 following pattern of growing outstanding loan repurchase claims as compared to
funded repurchases during the first eight months of 2006 and a portion of
3 September 2006 (in dollars):
4
5 Beginning Claims Ending

2006 Balances Received Re p urchases Refuted/Removed Outstandin g
6 Jan 120.800.483 99.970.165 14.784.592 19.048.681 186,937,375
Feb 186.937.375 89.884.364 20,696.974 80.000 256,044,765
7 tar 256.044.765 78.598.606 29.189.176 46.036.822 259,417,373
Apr 259.417.373 33.528.709 55.993.512 ^ 16.078.072 220,874,498
8 May 220.874.498 149,184.807 133,229.453 33.257.62_0 '_03,572,231
Jun 203.572 231 47,998.054 60,825.108 13.832.593 176,912,5 84
9
Jul 176,912.584 64,187.707 47.496.937 3,044.646 190,5 8,708
10 Au g 190.558.708 173.473.845 46.921.772 4,154.300 312,956,481
Se p 312.956.481 69,847,846 174.400 148.292 382,481.635
11 Total 382,481,635 806,674.103 409,311.92 5 135.681.026
12
78. The same page of the document reports that 61 % of the Company's
13
outstanding repurchase claims had been received prior to July 3 1, 2005 .
14
79. Another internal, non-public New Century document obtained through
15
Lead Counsel's investigation covering thirteen months of repurchase claims data
16
from January 2006 through January 2007, demonstrates the following pattern of
17
growing outstanding 2006 loan repurchase claims as compared to funded
18
repurchases during 2006 (in dollars):
19
20
21
1) 1)
23
24
25
26
27
28

1 Rolling
13 Beginning Claims Refuted/ Ending
2 Months Balances Received Repurchases Re-Priced Remove Outstanding
Jan 75,270,123 345,499 10.351.000 64,573,624
3 Feb 64,573,624 92.820,763 16.406.884 17,000,350 123,987,153
Mar 123,987,153 82,617,193 28.420,664 46,034.119 132,149 563
4 Apr 132,149.563 42 295.804 48.424.178 1 1.544,350 114.476,840
May 114,476,840 151.237,862 121,737,906 24,056,966 119.919.740
Jun 119.919.740 60.210,366 53.002 238 12.231.761 114.896,108
6 Jul 114.896.108 81,037 574 46.427.065 2,467.800 147,038.818
Aug 147,038,818 194.795.931 46,748.567 6.702.500 288,383,682
7 Sep 288,383,682 168.384451 58.163.032 2.917,839 395.687,461
Oct 395,687,461 190,042,233 61,082.036 13.694,009 510.9 3,649
8 Nov 510,953.649 60.254,283 51.100.059 50.739.034 42,916,988 426,451.851
Dec 426,451.851 109,812.818 62,183,446 87,139.340 36,648.227 350.293.6 5 6
9 Jan 350,293.656 214,829.368 83.312.716 18,706.001 59,846,941 403,25 7.366
Total 1,523,608,969 677,354,379 1-56,5 84.375 286.412.849
10
11
80. The above, internal New Century repurchase claims and backlog data
12
which was not publicly reported during the Class Period demonstrates a growing
13
backlog of outstanding repurchase claims. While the failure of the Company to
14
repurchase approved claims on a timely basis had the short-term effect of
15
improving its publicly reported cash flow, under GAAP, the Company was required
16
(but admittedly failed) to account for this growing volume of repurchase claims
17
outstanding in setting its Allowance for Repurchase Losses reserve.
18
81. In addition, in accordance with GAAP, SFAS 140, the Company was
19
required to consider the impact of its growing repurchase claims backlog in
20
estimating the expected discounted resale value (if any) of the repurchased loans.
21
The Company failed to include the expected discount upon disposition of loans
when estimating its Allowance for Repurchase Losses reserve, despite its growing
23
repurchase claims backlog as well as the fact that its discounted loan sales both in
24
total volume and discount severity were increasing dramatically. For example, the
25
Company reported in its 2006 third quarter 10-Q:
26
During the three and nine months ended September 30, 2006, we sold
27
$409.9 million and $916.3 million, respectively, in mortgage loans at
28
a discount to their outstanding principal balance. Included in
1 discounted loan sales for the three and nine months ended September
30, 1006 is approximately $152.1 million and $447.4 million,
3 respectively, of second lien mortgage loans that were sold at a slight
4 discount. There were no discounted second lien sales for the same
5 period in 2005. The remaining $257.7 million and $468.9 million of
6 discounted loan sales loans for the three and nine months ended
7 September 30, 2006, respectively, consisted of repurchased loans,
8 loans with documentation defects or loans that whole loan buyers
9 rejected because of certain characteristics. For the three and nine
10 months ended September 20, 1-005, discounted loan sales totaled
11 $32.1 million and $178.5 million, respectively. As a percentage of
12 secondary market transactions, when adjusting for the second lien
13 transaction, discounted sales increased from 0.2% for the three
14 months ended September 30, 2005 to 1.6% for the three months ended
15 September 30. 1-006. The severity of the discount increased from
16 3.5% for the three months ended September 30. 2005 to 12.9% for the
17 three months ended September 30, 2006. As a percentage of
18 secondary market transactions, when adjusting for the second lien
19 transaction, discounted sales increased from 0.5% for the nine months
20 ended September 30, 2005 to 1.1% for the nine months ended
21 September 30, 2006. The severity of the discount increased from
3.9% for the nine months ended September 30, 2005 to 8.7% for the
23 nine months ended September 30, 2006 due to a less favorable
24 secondary market for these types of loans as well as the mix of loans
25 sold as discounted sales . [Emphasis added.]
26 82. According to a former New Century Vice President, Assistant
28 (CW 2), contrary to GAAP, the Company did not include in its Allowance for
- 32- CONSOLIDATED CLASS ACTION COMPLAINT

1 Repurchase Losses reserve an estimated discount upon disposition necessary to
2 report loans repurchased in the second and third quarters of 2006 at fair market
3 value.
4 83. As admitted by the Company in its February 7, 2007 press release and
5 May 24, 2007 Form 8-K, New Century. in violation of GAAP. SFAS 140, New
6 Century failed to account for both its growing backlog of outstanding repurchase
7 claims, as well as the expected discount upon disposition of the repurchased loans,
8 in setting its Allowance for Repurchase Losses reserve in 2005 and 2006. These
9 were violations of GAP that had a material effect on the Company's financial
10 statements.
11 84. Throughout the Class Period, New Century also never publicly
disclosed the magnitude of its repurchase claims or its growing repurchase claims
13 backlog. In fact, New Century did not report any data regarding repurchases until
14 after the end of the second quarter of 2006, when it apparently reported only the
15 portion of actual funded loan repurchases that were resold at a discount during the
16 2006 second quarter, as opposed to total repurchase claims received, validated or
17 funded. In the Form 10-Q filed for the quarter ended June 30, 2006. New Century
18 reported as follows:
19 The table below illustrates the composition of discounted loan sales
20 for each of the periods indicated (dollars in thousands):
21
Three Months Ended June 30 1
2006 2005
Princi pal Discount Princi pal Discount
23
Repurchases From $45,911 (27.6)x% $48,038 (9.4)%
24 Whole Loan
Investors I I
. T
25
85. This disclosure came after Defendant Dodge publicly stated that the
26
Company was experiencing only a "modest" rise in repurchase requests in the
27
2006 second quarter as a result of early payment defaults. However, internal New
28

Case No . 2:07-cv- 0093 I -DDP (JTLx)
1 Century repurchase claims and backlog data which was not publicly reported
during the Class Period demonstrates that New Century actually received a total of
3 $253,744,032 repurchase claims during the quarter ended June 30, 2006, and New
4 Century actually paid $223,164,322 of repurchases during the quarter. as compared
5 to the $45.911,000 of repurchases reported in the 2006 second quarter Form 10-Q.
6 The repurchase claims received by the Company during the quarter ended June 30,
7 ?006 were more than five times larger than the subset of repurchase data reported
8 by the Company.
9 86. Similarly, the above , non-public New Century repurchase claims data
10 obtained through Lead Counsel ' s investigation demonstrates that the Company
11 received a total of $444,218, 156 of repurchase claims during the quarter ended
12 September 30, 2006 , whereas the Company's Form 10-Q for that quarter reported
13 only that the Company paid $150 ,974,000 of repurchase claims from whole loan
14 investors during the quarter. This presentation was misleading as funded
15 repurchases in the 2006 third quarter were less than half of the total repurchase
16 claims received during the quarter and less than half the total repurchase claims
17 backlog as of the end of the quarter. The Company's publicly reported repurchases
18 for the nine months ended September 30, 2006, were also less than half of the total
19 repurchase claims received but not disclosed by New Century during that same
20 time period . Moreover, in disclosing actual repurchases from whole loan investors
21 during the third quarter ended September 30, 2006 (but not the growing claims
22 backlog ), Defendant Morrice stated "our third quarter repurchases were actually
23 down compared to the second quarter" without disclosing these additional material
24 facts.
25 87. The internal New Century repurchase claims and backlog data set
26 forth in paragraph 79 above also demonstrate "re-pricing" activity beginning in
27 November 2006, in an apparent effort to lower repurchase claims in the 2006
28
rt CONSOLIDATED CLASS ACTION COMPLAINT

Case No. 2:07 -cv-0093 I -DDP (JTLX )
1 I fourth quarter. As a result of the bankruptcy, the Company's 2006 fourth quarter
I results were never publicly reported.
3 88. At all times throughout the Class Period and at the time of the
4 Offerings, the Company's Allowance for Repurchase Losses reserve was materially
5 understated. For example, as of the end of 2005. the Company had an unreported
6 repurchase claims backlog of over S120,000,000 and reported an Allowance for
7 Repurchase Losses reserve of only $7,000,000, which the Company represented
8 was adequate to cover "total losses" incurred due to the potential repurchases of
9 loans or indemnification of losses. As of September 30, 2006, the Company had an
10 unreported repurchase claims backlog of nearly 5400.000,000 and reported an
11 Allowance for Repurchase Losses reserve of only $13,900,000. which the
12 Company again represented was adequate to cover total losses incurred due to the
13 potential repurchase of loans resulting from early payment defaults or
14 indemnification of losses based on claimed violations of representations and
15 warranties.
16 89. A review of the Company's actually funded repurchases on a year-to-
17 year "vintage" loan basis (which were not publicly reported other than in
18 connection with discounted loan sales data in the 2006 second quarter and in the
19 2006 third quarter). also demonstrates a significant pattern of increasing
20 repurchases. According, to an internal, non-public New Century data obtained
21 through Lead Counsel's investigation, the Company funded a total of S255,420,289
repurchases of 2004 vintage loans, representing 0.61 % of total originations; and
23 $419,667,368 of repurchases of 2005 vintage loans, representing 0.77% of total
24 originations. According, to the internal data, the Company funded a total of
25 $414,948,357 of repurchases of 2006 vintage loans as of early 2007, representing
26 0.76% of total originations, only a few months into the 2007 year. The Company
27 was required by GAAP to consider its increasing repurchases and growing backlog
28

Case No . 2:07-cv-0093 I -DDP (JTLX)
1 of repurchase claims in setting its Allowance for Repurchase Losses reserve, but
failed to do so.
3 90. Only at and after the end of the Class Period did the Company
4 disclose the need to restate its previously issued financial statements based on
5 I material violations of GAAP in setting New Century's Allowance for Repurchase
6 Losses reserve. In that regard, the Company finally admitted that: (1) it failed to
7 account for (a) the expected discount upon disposition of its repurchased loans; and
8 (b) its growing backlog of repurchase claims outstanding when stating its
9 Allowance for Repurchase Losses reserve in 2005 and 2006; and (2) that its
10 previously reported 2005 and 2006 financial statements should no longer be relied
11 upon.
12 91. The Company's February 7, 2007 restatement announcement came
13 11 less than three months after newly hired Tajvinder S. Bindra replaced Defendant
14 Dodge as Chief Financial Officer of the Company, effective November 15, 2006.
15 According to a former New Century Senior Vice President of Financial Planning
16 who reported directly to Bindra and was employed by the Company from February
17 2007 until July 2007 ("CV 4"), Bindra told the former employee that he was the
18 one who revealed the Company's accounting errors and that he observed that New
19 Century's reserves were way too low as soon as he came on board. This is
20 consistent with a July 11, 2007 filing in the bankruptcy court by Heller Ehrman
21 LLP which states at page 11 that it acted as special counsel to the independent
subcommittee of New Century's Audit Committee and that "The initial focus for
23 the Investigators was an analysis of [New Century's] accounting for its repurchase
24 reserve , an issue that had first been flagged by New Century's] new Chief
25 Financial Officer and that had become the basis for [New Century's] February 7,
26 2007 announcement that it would be restating certain financial results." (Emphasis
27 added.)
28

Case No. 2:07 -cv-009 3 I -DDP (JTLx)
1 2. Securitizations Structured As Sales - GAP Violations
92. In addition to admitting the need to restate its financial statements to
3 I correct material `'errors" in reporting its Allowance for Repurchase Losses reserve,
4 on and after February 7. 2007. New Century further admitted to material `'errors"
5 in its previously filed 22005 and 2006 financial statements in connection with the
6 Company's valuation of residual interests in securitizations structured as sales.
7 93. In a securitization structured as a sale for financial reporting purposes,
8 New Century recognized a gain on sale at the time it sold a pool of loans. New
9 Century also recorded on its balance sheet at the closing of a securitization
10 structured as a sale a valuation of the residual interests ('`Residual Interests") it
11 retained in the securitized pool of loans.
12 94. New Century represented that it valued and accounted for its Residual
13 II Interests in accordance with GAAP, SFAS 140. In this regard, according to New
14 Century's 2005 Form 10-K, the Company purportedly reviewed the underlying
15 assumptions it used to value Residual Interests on a quarterly basis and adjusted
16 the carrying value of the Residual Interests based on actual experience and industry
17 experience. In valuing the Residual Interests, New Century, on a quarterly basis,
18 purportedly estimated, inter alia, delinquencies, defaults and default loss severity
19 as they affected the amount and timing of estimated cash flows. According to the
20 1005 Form 10-K, New Century purportedly based its estimates on historical loss
21 data for the loans, the specific characteristics of the loans, and the general
economic environment. According to New Century's 2005 Form 10-K and other
23 SEC filings during the Class Period. as a result of these reported quarterly
24 evaluations and consistent with GAAP. New Century reported its Residual Interests
25 at "fair value" throughout the Class Period. New Century's Residual Interests were
26 reported at $234,930,000 as of December 31, 2005 and at $223,680,000 as of
27 September 30. 2006.
28

1 95. In fact, as now admitted, at all times during the Class Period and at the
time of the Offerings, New Century's reported Residual Interests were materially
3 overstated as the Company failed to account for decreasing loan quality and
4 underwriting and increasing delinquencies, defaults and default loss severity
5 throughout 2005 and 2006.
6 96. It was only in connection with the Company's February 7, 2007 and
7 May 24, 2007 disclosures, that the Company revealed that there were material
8 `'errors" in the Company's previous financial statements with respect to the
9 Company's valuation of these Residual Interests. Additional information regarding
10 the Company's decreasing loan quality and underwriting and increasing
11 delinquencies and defaults throughout 2005 and 2006 is set forth in detail in
12 paragraphs 106-47 below.
13 3. Securitizations Structured As Financings - GAAP Violations
14 97. According to New Century's 2005 Form 10-K, Mortgage Loans Held
15 for Investment represent loans securitized through transactions structured as
16 financings, or pending securitization through transactions that were expected to be
17 structured as financings. According to the 2005 Form 10-K, Mortgage Loans Held
18 for Investment were stated at amortized cost, including the outstanding principal
19 balance, less an allowance for loan losses, plus net deferred origination costs.
20 According to the 2005 Form 10-K, New Century purportedly established an
21 allowance for loan losses ("Allowance for Loan Losses") reserve based on its
1) 1) estimate of losses inherent and probable as of the balance sheet date and charged
23 off uncollectible loans at the time they were liquidated.
24 98. Throughout the Class Period, New Century represented that in
25 accordance with GAAP, it evaluated the adequacy of its Allowance for Loan
26 Losses each quarter, giving consideration to factors such as the current
27 performance of the loans, credit characteristics of the portfolio, the value of the
28 underlying collateral and the general economic environment. In addition, the

Case No. 2:07-cv- 00931 -DDP (JTLx)
1 Company repeatedly represented throughout the Class Period that delinquency
rates purportedly were "trending better than previously anticipated;" "well within
3 the Company's expectations:" "better than the Company's expectations;"
4 "significantly lower than anticipated;" and "significantly lower than historical
5 experience." Moreover, as reported delinquencies increased in the second and
6 third quarters of 2006, senior New Century officers reiterated that they were
7 "comfortable with our current loan loss reserve levels;" that they "appropriately
8 reserved for expected losses;" and that the Company "adequately reserved for the
9 expected higher level of loan losses" with an Allowance for Loan Losses reserve
10 that purportedly was "very fairly and adequately stated."
11 99. However, a review of the Company's Allowance for Loan Losses
12 reserve during the Class Period and at the time of the Offerings demonstrates that
13 the Company's Allowance for Loan Losses reserve was actually decreasing
14 throughout the Class Period as a percentage of Mortgage Loans Held for
15 Investment ("MLI") that were 60 days or more delinquent (dollars in thousands):
16
17 Loan Loss LLA as a % 111LI 60+ % of XILI LLA as a %

Q uarter •fLI Allowance of MLI Delin q uent 60+ Del. of 60+ Del.
18 3Q'06 14.222.560 191,561 1.35% 817,800 5.7 5 c 23.42%
2Q '06 16.115.525 209. 889 1.30 % 710,300 4.41% 29.55%
19 1 Q '06 16.312.684 209.804 1.29% 735.300 4.51% 28.53%
4Q '05 16.341,996 198,131 1.21% 666.800 4.08% 29.71 %
20 2.59%
3Q'05 18.508,072 177,759 0.96% 479,200 37.09%
2 Q '05 18,628,555 145.565 0.78% 319.500 1.72% 45.56%
21
l '05 15.953.698 117.495 0.74% 211.100 1.32% 55.66%
4Q '04 13.285,551 90.227 [ 0.68% 179,200 1.35 7r 50.35%
3 Q '04 10.975.111 84.656 0.77% 75.900 0.69% 111.54%
23 2 Q '04 9.207,779 61,307 0.67% 78.500 0.85% 78.10%
I Q '04 6.044,873 45.596 0.75 0 48.600 0.80% 93.82%
24
25
100. The above data demonstrates that while New Century publicly
26 reported an increasing Allowance for Loan Losses reserve from the first quarter of
27 ?004 through the third quarter of 2006, the percentage of Mortgage Loans Held for
28 Investment by the Company that were 60 days or more delinquent increased

Case No. 2:07 - cv-0093 1-DDP (JTLx)
1 dramatically throughout 2005 and the first three quarters of 2006. Significantly,
the Company's Allowance for Loan Losses reserve as a percentage of Mortgage
3 Loans Held for Investment by the Company that were 60 days or more delinquent
4 steadily decreased throughout 2005 and the first three quarters of 2006.
5 101. Contrary to New Century's representations throughout the Class
6 Period and at the time of the Offerings, the Company's Allowance for Loan Losses
7 reserve was materially understated at all relevant times throughout the Class
8 Period, including at year end 2005. As delinquencies increased, the Company, in
9 violation of GAAP, failed to increase its Allowance for Loan Losses reserve
10 sufficiently. In fact, as demonstrated by the above data, the Company actually
11 reduced its Allowance for Loan Losses reserve in the 2006 third quarter in the face
12 of a material increase in loan delinquencies.
13 102. As reported by analyst Zach Gast of The Center for Financial
14 Research and Analysis (the "CFRA'*), New Century. at first, did not disclose the
15 fact that it had actually reduced its Allowance for Loan Losses reserve in the
16 quarter-ended September 30, 2006 and, instead, changed its public reporting in that
17 quarter. As observed by Gast, for the first time, New Century publicly reported its
18 Allowance for Loan Losses reserve in the 2006 third quarter on a combined basis
19 with an allowance for Real Estate Owned (properties that New Century acquired as
20 the result of foreclosures) masking the decline in its Allowance for Loan Losses
21 reserve:
1) 1) NEW's presentation of its loan loss allowance changed at 9/30/06,
23 and does not appear to properly reflect reserve levels or loan losses.
24 After adjusting for valuation allowances on [Real Estate Owned], it
25 appears that reserves actually declined by 8.7% during the quarter .. .
26
27 NEW significantly changed its presentation of the allowance for loan

28 losses, combining it with the allowance on Real Estate Owned.

Case No. 2: 07-cv-009 3 I -DDP (JTLx )
1
The Company's reported allowance for loan losses, which for the first
3 time included valuation allowances on [Real Estate Owned], makes
4 reserves appear to have increased, when they in fact declined by 8.7%.
5 After Zach Gast raised this fact with the Company and issued his report, the
6 Company confirmed his calculations and corrected its presentation in the Form 10-
7 Q for the quarter ended September 30, 2006 without any explanation for the
8 change from the prior presentation.
9 103. In his report, analyst Zach Gast also questioned the credit quality of
10 New Century's more recent loans (but did not have access to internal underwriting
11 guidelines and practices to confirm his beliefs):
12 Credit quality on more recently originated loans appears to have
13 weakened substantially for NEW.
14
15 Newer originations appear to be deteriorating more quickly that prior

16 years, suggesting that underwriting may need to be tightened or that
17 secondary market prices will suffer.
18 104. SEC Staff Accounting Bulletin No. 102, "Selected Loan Loss
19 Allowance Methodology and Documentation Issues" (-SAB 102"), provides
20 further guidance for setting loan loss reserves. SAB 102 states: "It is critical that
21 loan loss allowance methodologies incorporate management's current judgments
about the credit quality of the loan portfolio through a disciplined and consistently
23 applied process ... consider all known relevant internal and external factors that
24 may affect loan collectiblity ... [and] be based on current and reliable data ...."
25 SAB 102 provides: "Factors that should he considered in developing loss
26 measurements include . . . levels of and trends in delinquencies and impaired loans
27 ... [and] effects of any changes in risk selection and underwriting standards, and
28 other changes in lending policies. procedures, and practices ... .

1 105. At all times during the Class Period and at the time of the Offerings,
New Century's Allowance for Loan Losses reserve failed to comply with these
3 SEC requirements and was materially understated in violation of GAAP. As set
4 forth below, the Company admitted that it needed to increase its Allowance for
Loan Losses reserve on March 2, 2007, in connection with its independent
6 investigation. At all times during the Class Period, the Company's Allowance for
7 Loan Losses reserve failed to sufficiently take into account the adverse
8 performance of New Century's loans; the decreased underwriting standards for
9 those loans; the higher Loan-to-Value characteristics of those loans; and the
10 unfavorable real estate and interest rate environment. Rather than increase the
11 Company's Allowance for Loan Losses reserve in a manner sufficient to account
12 for these adverse facts and circumstances, New Century allowed its Allowance for
13 Loan Losses reserve to steadily decrease when compared to Mortgage Loans Held
14 for Investment that were 60 days or more delinquent. Additional information
15 regarding the Company's decreasing loan quality and underwriting and increasing
16 delinquencies and defaults throughout 2005 and 2006 is set forth in detail in
17 paragraphs 106-47 below.
18 D. New Century' s Underwriting Quality Declined , Rather
Than Improved As Defendants -Repeatedly Stated During
19 The Class Period And At The Time Of The Offerings
20 106. While the New Century Officer Defendants stated repeatedly, during,
21 the Class Period and at the time of the Offerings, that the credit quality of the
Company's mortgages was "strong," "excellent," "very high" and "higher" or
23 "better" than it had been in the Company's past as the result of purportedly "strict;"
24 "improved;" and "strong" underwriting controls and guidelines and risk
25 management discipline , the data set forth in paragraph 99 above demonstrates that
26 the percentage of New Century ' s Mortgage Loans Held for Investment which were
27 60+ days delinquent grew steadily from the first quarter of 2005 through the third
28 quarter of 2006.

1 107. The same trend appears from a review of Mortgage Loans Held for
Sale (loans that the Company was either planning to sell through whole loan sales
3 or not yet categorized) (dollars in thousands):
-rA
5 Mortgage Loans Held % of MLS 60+

Q uarter for Sale ("MLS") MLS 60+ Delin q uent Delin q uent
6 3Q'06 8.945.134 235.000 2.63%
2Q' 06 9,303.086 173,300 1.86%
7 I Q'06 6,352.645 99,3300 1.56%
4Q'05 7.825.175 80,200 1.02%
8 3Q'05 8,570.862 58.600 0.68%
2Q'05 5,989,211 31.300 0.52%
9
1 Q'05 3.874.414 29,600 0.76%
10 4Q'04 3,922.865 23,400 0.60%
11
108. Additional, internal and non-public New Century access database
12
loan-level default data covering New Century early payment defaults, over the
13
time period from 2004 through 2007, obtained by Lead Counsel's investigation,
14
demonstrates that early payment default rates increased year-over-year for
15
mortgages purchased or originated from ?004 through 2006.
16
109. The New Century Officer Defendants' repeated public statements
17
during the Class Period and at the time of the Offerings that the Company had
18
improved its loan performance by implementing "stricter" or "improved"
19
underwriting standards were materially untrue and misleading when made. As set
20
forth herein, the Company's lower delinquency rates for 2003 and 2004 vintage
21
loans were not the result of stricter underwriting standards, but rising home prices
which, through loan servicing or otherwise, permitted borrowers who fell behind
23
on mortgage payments to refinance their homes and "cash out" equity to
24
temporarily catch up with their debt payments. As interest rates increased and
25
home prices stopped rising (and decreased in some regions), New Century's
26
borrowers quickly fell behind on mortgage payments.
27
110. The following charts demonstrate the increasing interest rates and
28
softening of the real estate market prior to and during the Class Period:
Interest rates (January 2004-September 2007):
6%
. a.i w
Mayes Sep OS Ian-06 May-06 5e0-06 1 - -r Mey-07 Sep-09

J-04 May-01 Sea04 Jan-0S
Date
Housing prices (December 1996-December 2006):
25%
j 20%
e 15%
10%
a 5%
0%
•10%
oc dti SF Fi S^-jz- ^,c

C C O C C` a- C° C-
Dau
... .ruwea-myno.eeta+h-o ...e...m US C......t....^. ew.1.l..J w.nm.. i.n..•nw.xe

Case No. 2:07 - cv-0093 I -DDP I JTLx )
1 111. Contrary to Defendants' repeated statements, underwriting standards
were not increased, but actually reduced prior to and throughout the Class Period.
Rather than increase the Company's credit and underwriting standards in the face
4 I of rising interest rates and a softening of the real estate market, New Century
5 actually made repeated exceptions to and reduced its underwriting guidelines and
6 offered higher risk products to continue to reach record mortgage volume in the
7 face of severe industry competition. Moreover, New Century's account executives
8 and employees were highly motivated to close as many loans as possible given that
9 sales and/or loan volume were key components of the variable part of their
10 compensation. These facts are confirmed not only by the Company's increased
11 default rates set forth above but by first-hand accounts from dozens of former New
12 Century employees from all levels of the Company with direct knowledge as set
13 forth herein. As recently observed by United States Secretary of the Treasury
14 Henry Paulson on September 122, 2007, the problems with sub-prime mortgages
15 have arisen not because of weakness in the economy generally, but because of bad
16 lending practices: "If a market turbulence is precipitated by economic weakness or
17 by the credit quality of the corporate sector, its one thing, but we have, again,
18 strong economies, we have a healthy corporate sector, we have a healthy financial
19 sector, major financial institutions, so the problems we're experiencing right now
20 are coming from bad lending practices . And during extended periods of benign
21 markets, excesses creep in. We've had some bad lending practices ." (Emphasis
added). Bad lending practices at New Century are revealed by numerous former
23 employees with first-hand knowledge.
24 112. According to a former New Century Vice President, Corporate
25 Finance employed by the Company from 2002 until April 2007 (CW 3), New
26 Century began originating loans with "risky increased LTVs [loan to values]" and
27 began to lower credit standards starting in 2003. In addition, according to the
28 former Vice President, Corporate Finance, at that time, the Company also changed

Case No. ?: 07-cv -009 ]-DDP (JTLx)
1 its practice with respect to stated income loans. Although the Company had
? always had the program, it was originally used primarily with self-employed
3 borrowers. According to the former Vice President, Corporate Finance, starting in
4 2004-2005, the Company began allowing riskier stated income loans for W-2 wage
5 I earners, who should have been able to verify their stated income, but did not.
6 113. According to a former New Century fraud investigator and senior loan
7 underwriter employed by the Company from January 1999 until April 2007 and
8 who examined numerous New Century mortgage loans (-CW 5"). New Century's
9 problems began when it "started to abandon prudent underwriting guidelines" at
10 the end of 2003 in order to "push more loans through" the system. According to
11 the former employee, New Century, in effect, "stopped underwriting and adopted
12 an approach that the Company would be "okay if [it] could out run 'its'
13 delinquency rate" which eventually caught up with the Company.
14 114. According to a former New Century regional operations manager in
15 Scottsdale, Arizona employed by the Company from August 2003 until December
16 2006 ("CW 6"), starting in the second half of 2003, there was a concerted effort at
17 the Company to make as many loans as they could. According to the former
18 employee, problem loans included stated income loans, and problem loans
19 increased because the Company was "willing to accept them."
20 115. According to a former New Century regional unit manager and
21 employed by the Company from 1.002 until April 2007 and responsible for auditing
and overseeing the work of New Century underwriters and account executives
23 ("CW 7"), New Century "did loosen up guidelines" and began doing more 100%
24 financing or 80/20 loans and more stated income loans. According to the former
25 employee, "exceptions were widespread" and "there was always someone to sign
26 off on any loan."
27 116. According to a former New Century regional Vice President, Region
28 20. employed by the Company from 1999 until May 1007 ("CW 8"). the mindset

1 of New Century's operations division was that it did not matter if a loan was a
good loan or a had loan, as long as New Century could sell the loan, it was a good
3 loan. According to the former Vice President, New Century almost could not turn
4 down a loan for most of 2005 and the first half of 2006. According to the former
5 Vice President, New Century booked "ugly" loans and there was significant
6 pressure to continue approving loans, it was about "volume, volume, volume .. .
7 pretty reckless volume."
8 117. According to a former New Century Senior Vice President employed
9 by the Company from July 2005 until April 2006 in Irvine, California ("CW 9"),
10 there was no way other than through reduced underwriting standards that New
11 Century could meet its increasing year-over-year sales projections. According to
12 the former Senior Vice President, New Century would just about approve any loan
13 under New Century's "weak- underwriting standards and employees were
14 financially incentivized to increase loan volume.
15 118. According to a former New Century account manager employed by
16 the Company from May 2006 until January 2007 in Atlanta, Georgia ("CW 10"),
17 there was constant pressure at New Century to get loans closed and many loans
18 had exceptions, mostly loan-to-value exceptions.
19 119. According to a former New Century underwriter and risk manager
20 employed by the Company from December 2001 until April 2007 ("CW 11 "), New
21 Century became more and more lenient over the years with its underwriting
standards until the fall of 2006, when standards finally began to tighten up.
23 According to the former employee, until that time, exceptions were prevalent and it
24 was "more about quantity than quality" with the attitude being "get the volume on;
25 get the volume on." According to the former employee, New Century "got a little
26 crazy" with high loan to values and 80/20 loans as well as with exceptions or
27 overrides.
28

Case No. 2:07 - cv-0093 I -DDP (JTLx)
1 120. According to a former New Century account executive employed by
the Company from January 2005 until August 2006 in Bloomington, Minnesota
("CW 12"), New Century employee compensation was always related to loan
4 production and, because of the pressure of sales quotas which got "rougher" in
5 2006, employees "wanted every single loan in" and account executives were
6 I constantly "looking for ways to make it work."
7 121. According to a former New Century senior training development
8 manager employed by the Company from March 2003 until March 2006
9 responsible for training current employees and new hires in underwriting,
10 mortgage processes , fair lending practices and compliance ("CW 13"), New
11 Century's managers were constantly being pushed hard by corporate officers to
12 produce more loan volume.
13 122. According to a former New Century regional sales manager employed
14 by the Company from 2004 through March 2006 ("CW 14"), New Century was
15 driven by volume goals and it was well known within the Company that as much
16 as 30% of all loan files contained misstated income levels or employment
17 inform ation because of pressure to close loans. According to the former employee,
18 New Century employees were motivated to increase loan volume because they
19 were compensated on volume, with half or more of their salary based on a
20 percentage of total monthly volume.
21 123. According to a former New Century underwriter employed by the
Company from July 2004 until November 2006 in Folsom, California ("CW 15"),
23 his operations manager was compensated based on production and had an incentive
24 to get as many loans through the system as possible. According to the former
25 employee, his operations manager was "loose" with underwriting guidelines and
26 did whatever it took to get loans closed before the end of a quarter. According to
27 the former employee, his region was driven hard to meet sales goals and the quality
28

1 of the loans being issued was "unbelievable" and "just junk" and it was difficult to
be an underwriter at New Century because "they didn't let you do your job."
3 124. According to a former New Century underwriting unit manager
4 employed by the Company from 1998 through October 2006 ('`CW 16"),
5 underwriting standards were loosened in order to increase sales volume.
6 According to the former employee, exceptions to New Century's underwriting
7 standards were "the norm" and he was told by his Divisional Vice President,
8 branch managers and loan offices that he needed to make loans "work.." At one
9 meeting in the late spring of 2006, the former employee and other underwriters
10 were told by their operations manager that the underwriters had to do what was
11 necessary to increase volume.
12 125. According to a former New Century regional operations manager
13 employed by the Company from 1996 until May ?007 and who directly supervised
14 sales and underwriting ("CU 17"), New Century operated with "loose"
15 underwriting standards for the past couple of years, beginning in 2003, especially
16 with 100% finance and stated income loans. According to the former employee,
17 there was "always someone to siEn^ off on a loan no matter how bad it was" and
18 there was "heavy pressure" to close loans, especially at month-end.
19 126. According to a former New Century senior loan funder employed by
20 the Company from May 2004 until January 2007 in Bloomington, Minnesota
21 ("CW 18"), New Century was underwriting lower quality loans in order to "get the
volume up." According to the former employee, loan quality "definitely went
23 down" in 2006 and underwriters had to "dive deeply" into loan files to find
24 ^ justification for approval.
25 127. According to a former New Century wholesale mortgage processor
26 employed by the Company from 2001 until August 2006 ("CW 19"), New Century
27 never wanted to decline a loan and, in order to approve more loans and increase
28 volume, was willing to make numerous exceptions to its underwriting guidelines,
z9 CONSOLIDATED CLASS ACTION COMPLAINT

Case No. 2 : 07-cv-00931 -DDP (JTLx'
1 including credit score exceptions, prior credit history exceptions and rate
I exceptions. According to the former employee, exceptions were frequent.

3 128. According to a former New Century production risk manager
4 employed by the Company from April 2002 until April 2007 in 'Woodland Hills,
5 California who performed quality control audits on approximately fifteen funded
6 loans daily and, after February 2 007, on loans claimed for repurchases ("CW 20"),
7 New Century ' s loans over the past few years were vetting "riskier and riskier,"
8 especially with 100% financing, or 80/20 loans introduced over the past two or
9 three years combined with stated income applications . According to the former
10 employee, underwriters were told not to deny loans and, if they were denied,
11 applications would simply be re-worked and signed off by operations managers.
12 According to the former employee, volume mattered and over time it "became a
13 numbers game ." According to the former employee, the most "questionable loans"
14 were those with exceptions required to be signed off on by management and those
15 were about half of the total volume of loans she generally reviewed.
16 129. According to a former New Century Vice President, Operations
17 employed by the Company from February 2003 until October 2006 in Santa Ana,
18 California ("CW 21 "), New Century loosened its underwriting standards in order to
19 gain volume in 2005 and 2006 and that was the only way that the Company could
20 have increased its volume. According to the former employee, a large percentage
21 of New Century's mortgage defaults were from stated income loans. According to
,Y? the former employee, New Century had an internal system for detailing how loans
23 were performing and Kevin Cloyd, who reported directly to Brad Morrice,
24 received a monthly report detailing the number of loans with first, second and third
25 payment defaults as well as an analysis of the defaulted loans.
27 Company from May 2005 to March 2006 in Itasca, Illinois and, previously, from
28 2000 until 2003 in Cincinnati, Ohio ("CW 22''), as an underwriter for New
-50- CONSOLIDATED CLASS ACTION COIVFPLAINT

Case No. 2:07-cv-0093 1 -DDP (J TLx )
1 Century, he could not recall the last loan that he looked at that did not have an
exception; he handled close to 200 loans a month: and nearly every loan had an
3 exception such as debt ratio exceptions or loan-to-value exceptions. According to
4 the former employee , "the guidelines were thrown against a wall" and underwriters
5 were instructed to "dig deep" in order to make loans work and all decisions were
6 volume driven. According to the former employee. appraisals even if turned down,
7 were often accepted later as branch or regional sales manager -gave them hell" for
8 rejecting appraisals. According to the former employee. he was told by his
9 superiors that New Century was a volume based company and that New Century
10 needed to increase its volume to outrun "shrinkages" in the secondary market.
11 According to the former employee, underwriting standards were not increased
from his prior tenure in 2000-03, but reduced and "the sales force ran the show"
13 which was not the case during his first term with the Company. According to the
14 former employee, the Company offered 80/20 100% financing loans in 2005,
15 including stated income loans which were not offered in earlier years. According
16 to the former employee, had underwriting standards been tightened in 2005,
17 volume would have gone down.
18 131. According to a former New Century account manager employed by
19 the Company from November 2004 until September 2006 in Englewood, Colorado
20 ("CW 23"), New Century was very "loose" with its underwriting rules, waiving
21 many conditions and she was personally told by her operations manager and her
1) 1? sales manager on a number of occasions to just sign off on loans because they
23 needed to make their volume numbers.
24 132. According to a former underwriter for New Century employed by the
25 Company from November 2005 until January 2007 in Hawaii ("CW 24"), her
26 operations manager would waive off conditions just to push loans through the
27 system.
28

1 133. According to a former New Century underwriter and risk manager
employed by the Company from March 2001 until April 2007 (`'CW 25"),
3 underwriting at the Company became more lax in 2005 and 2006. According to
4 the former employee. loans that would not have been approved in 2004 were
5 approved in 2005 and 2006. According to the former employee, the Company
6 began making numerous exceptions to guidelines in 2004 and 2005 and the
7 Company began offering riskier programs such as adjustable rate mortgages and
8 stated income loans with 100% financing. According to the former employee,
9 adjustable rate loans became a problem as the housing market was softening and
10 borrowers who got in trouble could not refinance their loans.
11 134. According to a former New Century senior account manager
12 employed by the Company from December 2004 until September 2006 ("CW 26"),
13 New Century abandoned its guidelines, made exceptions to its underwriting
14 guidelines and allowed loans to be made that should not have been made, typically
15 for wholesale brokers who provided the Company with a large volume of business.
16 According to the former employee, account managers were overruled on a daily
17 basis and it was those exceptions that were the problem.
19 Company from September 2003 until March 2006 ("CW 27"), New Century did
20 not tighten its guidelines from 2003 until 2006, and "would approve just about
21 anybody for anything. " According to the former employee , one out of every three
11) loans that he underwrote had an exception and management would always find a
23 way to push loans through.
24 136. According to a former New Century Vice President, Regional
25 Manager, Region 21, employed by the Company from October 1999 until March
26 2007 ('CW 28"), starting in 2003 and 2004, the Company was making more
27 exceptions to bring in more loan volume and that continued through 2006.
28 According to the former Vice President. numbers increased volume-wise from

Case No. 2:07- cat-009 3 I -DDP (JTLx)
1 ?003 to 2006, and that was accomplished through aggressive underwriting.
According to the former Vice President. exceptions occurred frequently. with
roughly half of the loans having exceptions, and New Century would sometimes
change its guidelines to make repeated exceptions fit within its guidelines.
5 137. According to a former New Century Vice President and Regional

6 Manager, Region 12, employed by the Company from September 1996 until May
7 2007 and who received reports on all of his regions first payment defaults ("CW
8 29"), New Century made very low quality and extremely risky loans, even for a
9 sub-prime lender, noting that "If you had a heartbeat, we would give you a loan."
11 Company from January 1999 until May 2007 who was responsible for
12 underwriting an average of ten to fifteen loans per day ("CW 30"), New Century's
13 underwriting guidelines were "loose" in 2006 with "risky" loans, especially stated
14 income loans with "ridiculous" stated incomes and had New Century not loosened
15 its guidelines, "business would have been lost."
16 139. According to a former New Century Loan Counselor - Default Loan
17 Specialist employed by the Company from June 2005 until August 2006 ("CW
18 31"), there were so many bad loans at New Century because the Company was
19 'just pushing loans through" the system and he would often investigate early loan
20 defaults and find out that a borrower's stated income was not correct.
21 140. According to a former New Century Assistant Manager for High Risk
employed by the Company from September 2004 until September 2006 and whose
23 job involved reviewing high risk loans (loans at risk of default) and recommending
24 mitigation strategies ("CW 32"), he saw "month by month increase in high risk
25 assets" starting after the first quarter of 2006 and the factors that led to high
26 defaults at New Century included: (1) adjustable-rate mortgages that had reset to
27 higher monthly payment rates; (2) property appraisals that were improperly
28

Case No. 2:07-cv -0093 I -DDP (JTLx)
1 I inflated; (3) stated income loans: and (4) 80/20 loans enabling borrowers to finance
100% of purchase price, with 80/20 loans especially problematic for New Century.
3 141. On May 7, 2007, the front page of The Washington Post reported:
4 "Pressure at Mortgage Firm Led to Mass Approval of Bad Loans." The
5 Washington Post reported:
6 "[Y]ou didn't want to turn away a loan because all hell would break
7 loose," [former New Century employee Maggie Hardiman] recounted
8 in interviews. When she did, her bosses often overruled her and found
9 another appraiser to sign off on it.
10
11 Hardiman's account is one of several from former employees of New

12 Century that shed fresh light on an unfolding disaster in the mortgage
13 industry, one that could cost as many as 2 million American families
14 their homes and threatens to spill over into the broader economy.
15
16 New Century has become the premier example of a group of

17 companies that grew rapidly during the housing boom, selling
18 working-class Americans with questionable credit huge numbers of
19 "subprime" loans with "teaser" rates that typically rose after the first
20 two years. This business transformed the once-tiny New Century into
21 a lending powerhouse that was held up as a model of the mortgage
11) industry's success.
23
24 But now, with home values failing and adjustable loan rates rising,
25 record numbers of homeowners are failing to make their payments.
26 And a detailed inquiry into the situation at New Century and other
27 subprime lenders suggests that in the feeding frenzy for housing loans,
28 basic quality controls were ignored in the mortgage business. while

Case No . 2: 07-cv-0093 I -DDP (JTLx)
1 the bit Wall Street investment banks that backed these firms looked
the other way .
3
4 New Century, which filed for bankruptcy protection last month, has
J admitted that it underreported the number of bad loans it made in its
6 financial reports for the first three quarter of 2006. Hardiman and
7 other former employees of New Century interviewed said there was
8 intense pressure from bosses to approve loans, even those with
9 obviously inflated housing appraisals or exaggerated homeowner
10 incomes.
11
12 Hardiman said she was fired for refusing to approve weak loans.
13 Others said they left because they were pressured to pump loans
14 through the system . A few were interviewed while they were worked
15 at New Century but then lost their jobs after the firm filed for
16 bankruptcy.
17
18 Although there were variations in their descriptions of the atmosphere

19 in their offices, most said they were pushed to approve questionable
20 loans. Several of the employees interviewed said they faced
?1 "unofficial quotas" of loans that had to be approved each day.
77 X * `*
23 A veteran appraiser who worked in Pearl River, N.Y., said he joined

24 New Century because he heard the pay was good. That turned out to
25 be true, but he quickly discovered that the place was a pressure
26 cooker. He said he often was encouraged "to make loans work."
X
27
28

1 Hardiman, the former New Century appraiser. said she was not
surprised by the Company's downfall. Few at the Company seemed
3 to be thinking long-term when she was there. The message she heard
4 constantly from headquarters. which was broadcast at work
conferences and in e-mails. was to approve more loans .
6
7 "We were constantly told. 'If you look the other way and let an
8 additional three to four loans in a day that would mean millions more
9 in revenue for New Century over the course of the week ," Hardiman
10 said. She added that it seemed "no one, from the top levels down to
11 the lower levels of the office. didn't want those loans to Qo through."
12 [Emphasis added.]
13 142. Similarly, on April 19, 2007, The Orange County Register reported:
14
[S]ome New Century employees said the Company was under
15
pressure to relax standards to compete in an industry where customers
16
could easily shop for a better deal. Amanda Milano, a former senior
17
loan processor who worked at New Century for four years, said it was
18
once a very solid company and that she felt like it was part of her
19
family, but that she witnessed a deterioration in its guidelines last
20
year .
21
77
Some former emplovees said New Century started making more

23
exceptions to its -,uidelines in 2006. as the housing industry slowed
24
down . Karen Waheed, an underwriter with the Home 123 retail unit
25
of New Century, said some loan applicants called themselves
26
landscapers or "tree surgeons" and reported dubious incomes of
27
S 10.000 to $1 5 .000 a month.
28

I Waheed, who was laid off April 2 after three years with the Company,
said exceptions were also made that allowed elderly borrowers on
3 fixed incomes to get adjustable-rate loans that would eventually
4 become unaffordable.
5
6 "It tot to a Doint where I literally aot sick to my stomach," she said.
7 "Every day I Qot home and would think to myself, I helped set
8 someone up for failure ." [Emphasis added.]
9 143. According to a former New Century Vice President Division
10 Operations Manager. Division 6. employed by the Company from 2000 until May
11 2007 and who received regular monthly reports on early payment defaults ("CW
12 33"), New Century finally tightened its underwriting guidelines and eliminated
13 certain loan programs in the fall of ?006, including eliminating 80/20 loans, raising
14 FICO scores and requiring additional asset information for stated income loans, but
15 these changes took place too late.
16 144. Indeed, New Century admitted only at the end of the Class Period that
17 first payment defaults increased with the increased risk characteristics of its loans
18 as a result of "layering" of risk characteristics. for example, a combination of
19 borrower and collateral characteristics that included a first-time buyer with stated
20 income, and a high loan to value ratio. Only when it was too late and just months
21 before it filed for bankruptcy, New Century announced that it was introducing
?1) "Additional Lending Best Practices" which included:
23 Tightening underwriting guidelines for its adjustable-rate mortgage
24 programs for at-risk borrowers:
25
26 Offering existing adjustable-rate mortgage (ARM) and interest-only

27 customers who qualify the option of refinancing into a low fee 30-
28 year or 40-year fixed-rate mortgage:

1
2 Implementing plain language disclosures that go beyond legal
3 requirements in explaining terms such as prepayment charges,
4 interest-only features, adjustable-payment features. escrows for
5 insurance and taxes and other key features of a loan;
6
Enhancing its processes for confirming the income information
7
provided on stated income loans; and
8
9
Introducing a new front-end confirmation early in the loan process to
10
assist applicants in better understanding the terms of their loan.
I1
145. Prior to these changes, a significant number of New Century mortgage
i%
loans originated in 2005 and 2006 were adjustable rate mortgage loans. Because
13
of increases in interest rates since those mortgage loans were made, New Century's
14
home borrowers faced large payment increases once the initial two or three-year
15
fixed "teaser" rate period ended. That was even more of a problem for interest-
16
only borrowers who also faced higher monthly payments upon the expiration of the
17
interest-only payment period, two to three years from origination, as they would,
18
for the first time, also have to cover the fully-amortizing mortgage loan amount,
19
not just interest. In 2005, New Century originated $16.6 billion of adjustable rate,
20
interest-only loans, more than twice as much as it had originated in 2004.
21
146. Prior to the above-described changes and during the Class Period,
under New Century's "Stated Income Documentation" loan program, a morttrage
2
applicant could be qualified based upon monthly income as stated on the mortgage
24
loan application. For the year-ended December 31. 2005. Stated Income
25
Documentation loans totaled $24.2 billion, almost half of the total mortgage loans
26
originated and purchased by the Company in 2005.
27
147. The volume-driven. exception-ridden, loose underwriting standards
?g
employed by the Company throughout the Class Period, revealed by the first-hand
1 accounts of numerous former employees, and confirmed by New Century's sharply
I increasing default and delinquency rates created a recipe for disaster given the
3 significant number of high risk mortgage products offered by the Company
4 including adjustable rate. interest-only, high loan-to-value and stated income loans.
5 II At the same time, the New Century Officer Defendants' repeated public statements
6 J about purportedly "improved" and "stricter" underwriting were materially

7 II misstated when made. Each of these statements is set forth below.
8 E. New Century' s Material

Misstatements Regarding Its Internal Controls
9
148. Throughout the Class Period and at the time of the Offerings, New
10
Century Officer Defendants Cole, Morrice, Gotschall and Dodge each repeatedly
11
certified the design, operation and effectiveness of New Century's internal
12
controls. Each of these statements was materially misstated and misleading when
13
made.
14
149. As set forth by the above accounts from numerous former New
15
Century employees with first-hand knowledge, New Century repeatedly made
16
exceptions to its underwriting guidelines in order to originate larger mortgage
17
volume. In addition, as set forth above, the Company delayed payment of loan
18
repurchase claims from its whole loan purchasers in an effort to cause its
19
previously reported 2005 and 2006 financial results to appear better than they
20
actually were, yet failed to provide that information to those individuals within the
21
Company's Controller's office responsible for setting the Company's Allowance
for Repurchase Losses reserve. These practices evidence material deficiencies in
23
the Company' s internal controls and had the effect of distorting the Company's
24
reporting of financial results and performance data at all times throughout the
25
Class Period.
26
150. Contrary to Defendants' repeated certifications, the Company
27
acknowledged that it expected to conclude that the material errors leading to the
28
restatement disclosed on February 7. 2007 "constitute[d] material weaknesses in its
Case No. 2:07-cv-0093 I -DDP (JTLx )
1 internal control over financial reporting for the year ended December 31, 2006."
1 As set forth here and consistent with the Company's subsequent May 24, 2007
3 disclosures, material weaknesses existed in the Company's internal controls not
'
just as acknowledged (on February 7. 1-007) for the first three quarters of 2006. but
5 throughout the Class Period.
6 F. New Century 's Misstatements And
Omissions Durin g The Class Period And
7 At The Time Of the Offerings Were Material
8 151. The misstatements and omissions set forth herein were material. In
9 fact. by announcing the need to restate its financial statements, the Company
10 admitted the materiality of the "errors" contained therein. The Company's failure
11 to maintain effective internal controls, its failure to report its 2005 and 2006
12 financial statements in accordance with GAAP and its expected net losses resulting
13 from the required restatements and related financial adjustments also triggered
14 foreseeable and grave consequences for the Company given its highly leveraged
15 balance sheet.
16 152. At all relevant times, New Century needed to borrow substantial sums
17 of money each quarter to originate and purchase mortgage loans and to support its
18 operating activities. The Company entered into credit arrangements to finance its
19 mortgage loans until it aggregated one or more pools of loans for sale or
20 securitization. During the Class Period, New Century maintained credit facilities
21 with, inter alia , Bank of America N.A., Barclays Bank PLC, Citigroup Global
1) 1) Markets Realty Corp., Credit Suisse First Boston Mortgage Capital LLC, Morgan
23 Stanley Mortgage Capital Inc ., UBS Real Estate Securities Inc.. Goldman Sachs
24 Mortgage Company. Guaranty Bank and State Street Global Markets LLC. The
25 Company used these facilities to finance the funding of its loan originations and
26 purchases pending sale or securitization . Importantly. all of the Company' s credit
27 facilities contained certain customary covenants , which, among other provisions,
28 required the Company to deliver timely financial statements prepared in

Case No. 3:07-cv -00931-DDP (JTLx)
1 I accordance with GAAP to its lenders. In addition , 11 of the Company's 16
financing arrangements required it to report at least $1 of net income for any

3 I rolling two-quarter period, a requirement the Company did not expect to meet as a
T result of the restatements and other adjustments disclosed at the end of the Class
5 Period.
6 153. As a result of these circumstances, after the Company's February 7,
7 2007 disclosures, substantial doubt existed as to the Company's ability to continue
8 as a going concern and, after the Company was unsuccessful in its discussions with
9 its lenders and other third parties regarding a possible refinancing or other
10 alternatives to obtain additional liquidity, the Company was forced to cease
11 accepting new loan applications from prospective borrowers and to file for
12 Bankruptcy protection after its lenders declared the Company in default.
13 154. All of the losses suffered by New Century investors following the
14 Company's February 7, 2007 disclosures through the end of the Class Period were
15 entirely foreseeable and -- as demonstrated by the Company's unsuccessful efforts
16 -- unavoidable consequences of the materially misstated and misleading statements
17 complained of herein.
18 G. Defendant KPMG's Violation Of Auditing Standards
19 155. Public investors, creditors and others rely on independent, registered
20 public accounting firms to audit financial statements and assess internal controls
?1 when deciding whether to invest in or do business with a public company.
156. The PCAOB, established by the Sarbanes -Oxley Act of 2002, is
23 responsible for the development of auditing and related professional practice
24 standards that are required to be followed by registered public accounting firms.
25 On April. 16, 2003. the PCAOB adopted as its interim standards Generally
26 Accepted Auditing Standards ("GRAS ") as described by the American Institute of
27 Certified Public Accountants Auditing Standards Board's Statement of Auditing
28 Standards No. 95, Generally Accepted Auditing Standards, and related
-61- CONSOLIDATED CLASS ACTION CoT%1PL. vT

1 interpretations in existence on that date . Accordingly, an auditor ' s reference to
I "the standards of the Public Company Accounting Oversight Board (United
3 States )" includes a reference to GAAS in existence as of April 16, 2003. For
4 simplicity, all reference to GAAS hereinafter includes the standards of the
5 II PCAOB.
6 157. During the Class Period. KPMG issued an unqualified opinion on the
7 Company's financial statements for the year-ended December 31, 2005, as well as
8 an unqualified opinion regarding New Century management's assessment of
9 internal controls as of December 31, 2005. KPMG also completed reviews of New
10 Century's interim unaudited financial statements for the quarters ended March 31,
11 2006, June 30, 2006 and September 30, 2006.
12 158. KPMG consented to the incorporation by reference in the registration
13 11 statement for the Series B Preferred Stock Offering of its unqualified opinion on
14 the Company's financial statements for the year ended December 31, 2005, and its
15 opinion regarding New Century management's assessment of internal controls over
16 financial reporting as of December 31, 2005.
17 159. In both of its opinions, KPMG stated that it performed its audits and
18 II evaluations in accordance with the standards of the PCAOB. Each of these
19 statements was materially misstated when made and at the time of the Series B
20 Preferred Stock Offering as KPMG's audits failed to comply with the standards of
21 the PCAOB.
160. There are ten GAAS provisions, which are divided into three types of
23 standards: (1) general standards, which provide guidelines for auditor staffing and
24 maintaining independence from the client; (2) standards of fieldwork. which
25 provide guidelines for audit planning. collecting evidential verification for audit
26 findings, and the proper evaluation of internal controls; and (3) standards of
27 reporting, which are primarily concerned with ensuring that a company's financial
28 statements are presented in accordance with GAAP.
-62- CONSOLIDATED CLASS ACTION CO-MPL.4dNTT

Case No . 2:07-ev- 0093 I -DDP (JTLx)
1 161. GAAS General Standard No. 3 states that: "Due professional care is to
be exercised in the performance of the audit and the preparation of the report."
3 GAAS Standards of Field Work No. 1 states that: "The work is to be adequately
4 planned and assistants , if any, are to be properly supervised ." GAAS Standards of
5 Field Work No. 2 states: "A sufficient understanding of the internal control
6 structure is to be obtained to plan the audit and to determine the nature , timing and
7 extent of tests to be performed ." GAAS Standards of Field Work No. 3 states:
8 "Sufficient competent evidential matter is to be obtained through inspection,
9 observation , inquiries , and confirmations to afford a reasonable basis for an
10 opinion regarding the financial statements under audit ." GAAS Standards of
11 Reporting No. 1 states : "The report shall state whether the financial statements are
12 presented in accordance with generally accepted accounting principles (GAAP)."
13 At all relevant times, KPMG violated all of these GAAS provisions.
14 162. In order to effectively audit New Century's compliance with GAAP
15 and the adequacy of the Company's internal controls, KPMG was required to, but
16 did not, follow these GAAS standards in evaluating New Century's underwriting
17 standards and practices, reserving methodology and accounting for Residual
18 Interests in securitizations structured as sales.
19 163. KPMG failed to comply with the standards of the PCAOB in auditing
20 New Century's Allowance for Repurchase Losses reserve and related internal
21 controls.
164. As set forth in paragraphs 69-91 above, New Century, in violation of
23 GAAP, failed to account for its growing repurchase claims backlog in setting its
24 Allowance for Repurchase Losses reserve and the Company's Allowance for
25 Repurchase Losses reserve was materially understated throughout the Class Period,
26 including as of December 31. 2005. As set forth in paragraph 73 above, on May
27 24. 2007, New Century publicly reported that its Audit Committee determined that
28 there were "errors" in the Company's previously-filed financial statements for the

1 year- ended December 31, 2005, with respect to the accounting and reporting of
loan repurchase losses and that it is "more likely than not " that there was a material
3 overstatement of pretax earnings in the 2005 financial statements. As set forth in
4 paragraph 72 above, New Century also publicly reported that errors leading to its
5 restatement constituted material weakness in internal control.
6 165. As set forth in paragraph 74 above, according to a former New
7 Century senior financial manager employed by the Company from September 2004
8 until February 2007 (CW 1), New Century delayed payment of loan repurchase
9 claims, causing its previously reported year-end 2005 financial results to appear
10 better than they actually were as well as creating a massive backlog of claims,
11 hundreds of millions of dollars worth which were 18-24 months old. According to
12 the former employee, the Company's data was "so unkempt" that it took a while to
13 compile it from several different sources and combine it in order to obtain a true
14 picture of what was going on. As set forth in paragraph 76 above, according to a
15 former New Century Vice President, Corporate Finance employed by the Company
16 from 2002 until April 2007 (CW 3), New Century was "sitting on repurchase
17 requests," hoping to ride out the market. As set forth in paragraph 77 above,
18 according to internal Company documents obtained through Lead Counsel's
19 investigation, New Century had a backlog of outstanding repurchase claims in
20 excess of $120,000,000 as of year-end December 31, 2005, and that grew to over
21 $256,000,000 by the time KPMG's year-end 2005 audit was completed. According
to the same documents as set forth in paragraph 78 above, 61% of the Company's
23 outstanding claims had been received prior to July 31, 2005.
24 166. Given the nature of New Century's business and the massive volume
25 of loans sold with repurchase obligations, nearly $40 billion in 2005 alone, it was
26 incumbent upon KPMG to exercise due professional care in performing its audit;
27 to adequately plan its audit; to obtain a sufficient understanding of New Century's
28 internal controls: and to obtain sufficient competent evidential matter in auditing

1 New Century's Allowance for Loan Repurchases reserve. KPMG failed to conduct
2 its audit in compliance with all of these GAAS provisions. Had KPMG performed
3 its audit consistent with GAAS, it would have uncovered New Century's growing
4 I repurchase claims backlog; related poor internal controls; and materially deficient
5 Allowance for Loan Repurchases reserve. Indeed, as set forth above, the
6 Company's materially deficient reserves were revealed within three months after
7 the Company hired a new Chief Financial Officer who observed that the reserves
8 were understated shortly after he joined the Company.
9 167. According to a former New Century Vice President, Assistant
11 (CW 2), KPMG was provided access to New Century's financial data and
12 specifically reviewed New Century's Allowance for Repurchase Losses reserve
13 during each quarter and at year-end. Nonetheless, KPMG, in connection with its
14 audit of the year-ended December 31, 2005 financial statements failed to raise any
15 issue with regard to the Company's growing repurchase claims backlog, related
16 poor internal controls or materially deficient reserve. According to the former Vice
17 President, Assistant Controller, the first time KPMG raised any issue with the
18 Company's failure to include an estimated discount upon disposition of repurchase
19 loans was when KPMG concurring audit partner Mark McCauley -- and not
20 KPMG audit partner John Donovan or the KPMG senior manager working on the
21 audit -- specifically noted that an expected discount upon disposition was required
in accordance with GAAP, SFAS 140. paragraph 55, at the time a restatement
23 already was being discussed in January 2007.
24 168. KPMG also failed to comply with the standards of the PCAOB in
25 auditing New Century's reporting of Residual Interests in securitizations structured
26 as sales and New Century's Allowance for Loan Losses reserve for Mortgage
27 Loans Held for Investment through securitizations structured as financings.
28

1 169. As set forth in paragraph 73 above. on May 24. 2007. New Century
2 publicly reported that its Audit Committee determined that there were "errors" in
3 the Company's previously-filed financial statements for the year-ended December
4 31. 2005 with respect to the Company's valuation of Residual Interests and that it
5
1 is "more likely than not" that there was a material overstatement of pretax earnings
6 in the 2005 financial statements . As set forth in paragraphs 97-105 above, the
7 Company's Allowance for Loan Losses reserve was materially understated at all
8 relevant times throughout the Class Period, including at year-end 2005.
9 170. Given the size of New Century's Residual Interests, reported at
10 $234.930,000 at December 31, 2005, and the growing portfolio of Mortgage Loans
11 Held for Investment on New Century's balance sheet, with an additional $11
12 billion added in 2005 alone, it was incumbent upon KPMG to exercise due
13 professional care in performing its audit; to adequately plan its audit-, to obtain a
14 sufficient understanding of New Century's internal controls; and to obtain
15 sufficient competent evidential matter in auditing New Century's Residual Interests
16 and Allowance for Loan Losses reserve. KPMG failed to conduct its audit in
17 compliance with all of these GAAS provisions.
18 171. At all times during the Class Period and at the time of KPMG's 2005
19 audit, New Century's reported Residual Interests were materially overstated as the
20 Company failed to account for decreasing underwriting and loan quality and
21 increasing delinquencies, defaults and default loss severity throughout 2005.
11) Similarly, in setting its Allowance for Loan Losses reserve during the Class Period,
23 the Company failed to account for decreasing underwriting and loan quality and
24 increasing delinquencies, defaults and default loss severity.
25 172. Information regarding the Company's decreasing underwriting and
26 loan quality and increasing delinquencies, defaults and default loss severity
27 throughout 2005 and at the time of KP IG's audit was available to KPMG and,
28 according to public statements by Defendant Dodge during the Class Period,
-66- CONSOLIDATED CLASS ACTION CO'WLAINT

1 KP.N7G purportedly spent significant time reviewing the Company's data in its
2 2005 audit.
3 173. Indeed, a review of the Company's Allowance for Loan Losses at the
4 time of KPM'IG's 2005 audit demonstrates that the Company's Allowance for Loan
5 Losses was actually decreasing throughout the Class Period as a percentage of
6 Mortgage Loans Held for Investment (NILI) that were 60 days or more delinquent
7 (dollars in thousands):
8
9 Loan Loss LLA as a % MILI 60+ % of MLI LL A as a %

Q uarter MLI Allowance of MLI Delin q uent 60+ Del. of 60+ Del.
10 1 '06 16,312,684 209,804 1.29% 735,300 4.51% 28.53%
4Q -05 16.341.996 198.131 1.21% 666,800 4.08% 29.71%
11 3Q-05 18,508.072 177.759 0.96% 479,200 2.59% 37.09%
2Q'05 18.628.555 145,565 0.78% 319,500 1.72% 45.56 %
12 15,953,698 117.495 0.74% 211,100 1.32% 55.66%
1Q-05
4Q '04 13,285,551 90,227 0.68% 179.200 1.35% 50.35%
13
3Q'04 10,975.111 84.656 0.77% 75.900 0.69% 111.54%
14 2 Q '04 9.207.779 61,307 0.67% 78.500 0.85% 78.10%
I Q04 6.044.873 45,596 0.75% 48,600 0.80% 93.82%
15
16 The same trend of increasing delinquencies appears from a review of Mortgage

17 Loans Held for Sale which were 60 plus days delinquent (dollars in thousands):
18
19 Mortgage Loans Held % of MLS 60+

Q uarter for Sale (MLS) MLS 60+ Delin q uent Delin q uent
20 1 Q -06 6.352,645 99.300 1.56%
4Q'05 7,825,175 80.200 1.02%
21 3Q'05 8,570.862 58.600 0.68%
2Q '05 5.989.211 31,300 0.52%
22
1 Q '05 3,874.414 29.600 0.76%
23 4Q'04 3.922.865 23.400 0.60%
24 174. In violation of GAAS, KPMG failed to exercise due professional care

25 in reviewing this data - - all of which was available to it -- and to obtain sufficient
26 competent evidential matter in auditing New Century' s Residual Interests and
27 Allowance for Loan Losses reserve. Had KPMG performed its audit consistent
28

1 with GAAS. it would have uncovered New Century's materially overstated
2 Residual Interests and materially deficient Allowance for Loan Losses reserve.
3 175. In auditing the Company's internal controls, KPMG also failed to
4 I comply with GAAS, to exercise due professional care in performing its audit; to
5 adequately plan its audit ; to obtain a sufficient understanding of New Century's
6 internal controls; and to obtain sufficient competent evidential matter regarding
7 New Century's adherence to internal controls, given KPI\4G's failure to uncover
8 the Company's repeated lack of compliance and numerous exceptions to the
9 Company's underwriting guidelines throughout the Class Period and at the time of
10 KPMG's audit to boost its loan volume, as set forth above from first-hand accounts
11 of numerous former New Century employees. KPMG was required by GAAS, but
12 failed to test on a sufficient basis whether New Century's mortgage loans were in
13 compliance with its underwriting standards as part of its audit planning, assessment
14 and testing of internal controls. As set forth above, this lack of compliance with
15 and numerous exceptions to underwritinglt^ guidelines was one of the major reasons
16 why New Century's loans were experiencing increasing delinquencies, defaults
17 and default loss severity throughout 2005 and at the time of KPMG's audit and
18 causing significantly higher repurchase claims to the Company from its whole loan
19 purchasers.
20 VII. THE OFFERING REGISTRATION STATEMENT
AND PROSPECTUSES CONTAINED UNTRUE
21 STATEMENTS OF MATERIAL FACT
11) A. The Series A Preferred Stock Offering
23 176. In June 2005, New Century sold approximately 4,500,000 shares of
24 119.125% Series A Cumulative Redeemable Preferred Stock. including
?5 approximately 300,000 shares sold to cover over-allotments, to the investing public
26 raising net proceeds of approximately $109 million. Defendants Bear Stearns,
27 Deutsche Bank, Piper Jaffray, Stifel Nicolaus, JMP Securities and Roth Capital
28 acted as underwriters for the offering.
-68- CONSOLIDATED CLASS ACTION COMPLALVT

1 177. The Series A Preferred Stock was offered and sold pursuant to a shelf
and May
I registration statement on Form S-3 and prospectus. dated April 26. 2005
3 6, 2005, signed by Defendants Morrice, Dodge. Cole, Gotschall, Black, Forster,
Y Lange. Popejoy, Sachs. Sandvik and Zona; a prospectus supplement filed on June
5 13, 2005, and a prospectus supplement, dated June 15, 2005 (the "Series A
6 Preferred Stock Prospectus") which were filed with the SEC (collectively, the
7 "Series A Preferred Stock Registration Statement").
8 178. The Series A Preferred Stock Registration Statement expressly
9 11 incorporated the following documents by reference : New Century' s Form 8-K,
10 filed on or about May 5, 2005, and Form 10-Q for the quarter ended March 31,
11 2005. The Series A Preferred Stock Registration statement also presented selected
12 11 balance sheet and statements of income data purporting to reflect the Company's
13 financial performance and assets and liabilities for, inter alia . the three months
14 ended March 31, 2005. As set forth herein, the Series A Preferred Stock
15 Registration Statement and the Forms 8-K and 10-Q incorporated therein by
16 reference pursuant to which Plaintiff Carl Larson and other members of the Class
17 were induced to purchase New Century Series A Preferred Stock contained untrue
18 statements of material facts and omitted to state material facts required therein or
19 necessary to make the statements contained therein not misleading.
?0 179. New Century's Form 8-K filed on or about May 5, 2005. attached as
21 an exhibit the Company's May 5, ?005 press release reporting financial results for
the quarter ended March 31, 2005. In the press release, the Company reported net
23 earnings for the first quarter of $84.8 million, or $1.48 per share. The press release
24 contained income statement and balance sheet data purporting, to reflect the
25 Company's financial performance and assets and liabilities for the three months
26 ended March 31, 2005 in accordance with GAAP. The press release stated:
27 Delinquencies and losses in the company's mortgage loan portfolio
28 continue to significantly outperform securitizations executed prior to

Case No. 2:07-cv -00931-DDP (JTLx )
1 2003 due primarily to higher credit quality , the strength of our
2 servicing platform and improved underwriting controls and appraisal
3 review process. Delinquency rates and cumulative loss experience for
4 the portfolio are trending better than previously anticipated.
5 [Emphasis added.]
6 180. New Century's Form 10-Q for the quarter ended March 31, 2005 was
7 filed with the SEC on or about May 10, 2005. The first quarter 2005 Form 10-Q
8 contained consolidated balance sheets and consolidated statements of earnings
9 purporting to reflect the Company's financial performance and assets and liabilities
10 for the three months ended March 31, 2005 in accordance with GAAP. The Form
11 10-Q stated:
12 The ComDanv has prepared the accompanying unaudited condensed
13 consolidated financial statements in accordance with accounting
14 principles generally accepted in the United States of America for
15 interim financial information and with the instructions to Form 10-0
16 and Rule 10-01 of Regulation S-X . Accordingly, they do not include
17 all of the information and footnotes required by generally accepted
18 accounting principles for complete financial statements. In the
19 opinion of management. all adjustments (consisting of normal
20 recurring accruals) considered necessary for a fair presentation have
21 been included . [Emphasis added.]
181. The first quarter 2005 Form 10-Q provided the following information
23 regarding New Century's internal controls and procedures:
24 As of March 31, 2005, the end of our first quarter, our management,
?5 including our Chief Executive Officer, Vice Chairman - Finance,
26 Chief Financial Officer and President and Chief Operating Officer,
27 has evaluated the effectiveness of our disclosure controls and
?8 procedures, as such term is defined in Rule 13a-15(e) promulgated
'0 CONSOLIDATED CLASS ACTION COMPLAINT

Case No. 2:07-cv-00931 -DDP (JTLx)
1 under the Securities Exchange Act of 1934 . as amended. Based on
2 that evaluation, our Chief Executive Officer. Vice Chairman -
3 Finance, Chief Financial Officer and President and Chief Operating
4 Officer concluded, as of March 31. 2005, that our disclosure controls
5 and procedures were effective to ensure that information required to
6 be disclosed by us in reports that we file or submit under the
7 Securities Exchange Act of 1934 is recorded. processed. summarized
8 and reported within the time periods specified in the Securities and
9 Exchange Commission rules and forms . There was no change in our
10 internal control over financial reporting during the quarter ended
11 March 31, 2005 that materially affected, or is reasonably likely to
12 materially affect, our internal control over financial reporting.
14 182. Accompanying the first quarter 2005 Form 10-Q as exhibits were
15 certifications signed by Defendants Cole, Dodge, Gotschall and Morrice which
16 stated:
17 1. I have reviewed this quarterly report on Form 10-Q of New
18 Century Financial Corporation:
19 2. Based on my knowledge, this report does not contain any
20 untrue statement of a material fact or omit to state a material fact
21 necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
23 to the period covered by this report;
24 3. Based on my knowledge, the financial statements, and other
25 financial -information included in this report, fairly present in all
26 material respects the financial condition. results of operations and
?7 cash flows of the registrant as of, and for, the periods presented in this
28 report;
-71- CON SOLIDATED CLASS ACTION COMPLAINT

Case No. 2:07-cv -(K)93 I -DDP (JTLx)
1 4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
3 (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
4 internal control over financial reporting (as defined in Exchange Act
5 Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
6 a) Designed such disclosure controls and procedures, or caused
7 such disclosure controls and procedures to be designed under our
8 supervision, to ensure that material information relating to the
9 registrant, including its consolidated subsidiaries, is made known to us
10 by others within those entities, particularly during the period in which
11 this quarterly report is being prepared;
12 b) Designed such internal control over financial reporting. or
13 caused such internal control over financial reporting to be designed
14 under our supervision, to provide reasonable assurance regarding the
15 reliability of financial reporting and the preparation of financial
16 statements for external purposes in accordance with generally
17 accepted accounting principles ;
18 c) Evaluated the effectiveness of the registrant's disclosure
19 controls and procedures and presented in this report our conclusions
20 about the effectiveness of the disclosure controls and procedures, as of
21 the end of the period covered by this report based on such evaluation ;
and
23 d) Disclosed in this report any change in the registrant's
24 internal control over financial reporting that occurred during the
25 registrant's most recent fiscal quarter (the registrant's fourth fiscal
26 quarter in the case of an annual report) that has materially affected, or
27 is reasonably likely to materially affect, the registrant's internal
28 control over financial reporting; and

1 5. The registrant's other certifying officers and I have disclosed.
based on our most recent evaluation of internal control over financial
3 reporting, to the registrant's auditors and the audit committee of the
4 registrant's board of directors (or persons performing the equivalent
5 functions):
6 a) all significant deficiencies and material weaknesses in the
7 design or operation of internal control over financial reporting which
8 are reasonably likely to adversely affect the registrant's ability to
9 record, process. summarize and report financial information: and
10 b) any fraud, whether or not material, that involves
11 management or other employees who have a significant role in the
registrant's internal control over financial reporting.
13
14 In connection with the Quarterly Report of New Century Financial

15 Corporation (the "Company") on Form 10-Q for the period ended
16 March 31, 2005 as filed with the Securities and Exchange
17 Commission on the date hereof (the "Report"), I ... certify. pursuant
18 to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-
19 Oxley Act of 2002, that, to my knowledge:
20 (1) The Report fully complies with the requirements of section
21 13(a) or 15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
23 all material respects, the financial condition and results of operations
24 of the Company . [Emphasis added.]
25 183. As set forth in paragraphs 55-175 above, the above - referenced
26 statements from New Century's Forms 8-K and 10-Q for the first quarter ended
27 1\-larch 31, 2005 incorporated by reference into the Series A Preferred Stock
28 Registration Statement were materially misstated and omitted to state material facts

required therein or necessary to make the statements contained therein not
misleading, at the time of the offering,. At the time of the Series A Preferred Stock
3 Offering, and contrary to the above-referenced statements. New Century's financial
Y statements for the first quarter ended March 31, 2005 were not presented in
5 accordance with GAAP, the Company's internal controls suffered from material
6 weaknesses and New Century did not improve its underwriting controls as set forth
7 in paragraphs 55-175 above. As the adverse disclosures were made and the true
8 facts revealed after the offering was completed, the price of New Century Series A
9 Preferred Stock declined by over 75%.
10 B. The Series B Preferred Stock 2006 Offering
11 184. In August 2006, New Century sold approximately 2,300,000 shares of
12 9.75% Series B Cumulative Preferred Stock, including approximately 300,000
13 shares sold to cover over-allotments, to the investing public raising net proceeds of
14 approximately $55.6 million. Defendants Bear Steams, Morgan Stanley, Stifel
15 Nicolaus and Jefferies & Co. acted as underwriters for the offering.
16 185. The Series B Preferred Stock was offered and sold pursuant to a shelf
17 registration statement on Form S-3 and prospectus, dated April 26, 2005 and May
18 6, 2005, signed by Defendants Morrice, Dodge, Cole, Gotschall, Black, Forster,
19 Lange, Sachs and Zona, a prospectus supplement dated August 14, 2006, and a
20 prospectus supplement, dated August 15, 2006 (the ."Series B Preferred Stock
21 Prospectus") which were filed with the SEC (collectively, the "Series B Preferred
Stock Registration Statement").
23 186. The Series B Preferred Stock Registration Statement expressly
24 incorporated the following documents by reference: New Century's Form 10-K for
25 the year-ended December 31, 2005; and New Century's Forms 10-Q for the
26 quarters ended March 31, 2006 and June 30, 2006. The Series B Preferred Stock
-2.7 Registration Statement also presented selected balance sheet and statements of
28 income data purporting to reflect the Company's financial performance and assets

Case No. 2 : 07-cv-0093 I -DDP (JTLx)
1 and liabilities for, inter alia , the year ended December 31, 2005 and the six months
2 ended June 30, 2006. As set forth herein, the Series B Preferred Stock Registration
3 Statement and Series B Preferred Stock Prospectus and the documents incorporated
4 therein by reference pursuant to which plaintiff Carl Larson and other members of
5 the Class were induced to purchase New Century Series B Preferred Stock
6 contained untrue statements of material facts and omitted to state material facts
7 required therein or necessary to make the statements contained therein not
8 misleading.
9 187. New Century's Form 10-K for the year ended December 31, 2005 was
10 1 filed with the SEC on or about March 16, 2006. The 2005 Form 10-K contained
11 consolidated balance sheets and consolidated statements of earnings purporting to

12 reflect the Company's financial performance and assets and 'liabilities for the three
13 months and year ended December 31, 2005 in accordance with GAAP. The 2005
14 Form 10-K also stated the following regarding New Century's underwriting
15 standards:
16 Our loan origination standards and procedures are designed to
17 produce high quality loans . These standards and procedures
1s encompass underwriter qualifications and authority levels, appraisal
19 review requirements, fraud prevention, funds disbursement controls,
20 training of our employees and ongoing review of our employees'
21 work. We help to ensure that our origination standards are met by
employing accomplished and season managers. underwriters and
23 processors and through the extensive use of technology . We also have
24 a comprehensive training program for the continuing development of
25 both our existing staff and new hires. In addition. we employ
26 proprietary underwriting systems in our loan origination process that
27 improve the consistency of underwriting standards, assess collateral
28
?5 CONSOLIDATED CLASS ACTION COA7PLMNT

1 adequacy and help to prevent fraud, while at the same time increasing
'- productivity . [Emphasis added.]

3 188. The 2005 Form 10-K provided the following information regarding
4 New Century' s internal controls and procedures:
5 As of December 31, 2005, the end of our fourth quarter, our
6 management, including our Chief Executive Officer, Vice Chairman-
8 Officer, has evaluated the effectiveness of our disclosure controls and
9 procedures, as such term is defined in Rule 13a-15(e) promulgated
10 under the Securities Exchange Act of 1934, as amended. Based on
11 that evaluation, our Chief Executive Officer. Vice Chairman-Finance.
12 Chief Financial Officer and President and Chief Operating Officer
13 concluded, as of December 31. 2005, that our disclosure controls and
14 procedures were effective to ensure that information required to be
15 disclosed by us in reports that we file or submit under the Securities
16 Exchange Act of 1934 is recorded, processed, summarized and
17 reported within the time periods specified in the Securities and
18 Exchange Commission rules and forms .
19
20 There have not been any changes in our internal control over financial
21 reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the quarter to which this report
23 relates that have materially affected, or are likely to materially affect,
24 our internal control over financial reporting. [Emphasis added.]
25 189. Accompanying the 2005 Form 10-K as exhibits were certifications
26 signed by Defendants Cole, Dodge, Morrice and Gotschall in the form set forth in
27 paragraph 182 above.
28

I 190. The 2005 Form 10-K contained a "Report of Independent Registered
Public Accounting Firm" from Defendant KPMG dated March 15, 2006 which
3 stated:
4 We have audited the accompanying consolidated balance sheets of
5 New Century Financial Corporation and subsidiaries as of
6 December 31, 2005 and 2004, and the related consolidated statements
7 of income, comprehensive income, changes in stockholders' equity,
8 and cash flows for each of the years in the three-year period ended
9 December 31, 2005. These consolidated financial statements are the
10 responsibility of the Company's management. Our responsibility is to
11 express an opinion on these consolidated financial statements based
12 on our audits.
13
14 We conducted our audits in accordance with the standards of the

15 Public Company Accounting Oversight Board (United States) . Those
16 standards require that we plan and perform the audit to obtain
17 reasonable assurance about whether the financial statements are free
18 of material misstatement. An audit includes examining, on a test
19 basis, evidence supporting the amounts and disclosures in the
20 financial statements. An audit also includes assessing the accounting
21 principles used and significant estimates made by management, as
22 well as evaluating the overall financial statement presentation. We
23 believe that our audits provide a reasonable basis for our opinion .
24
25 In our opinion, the consolidated financial statements referred to above

26 present fairly, 'in all material respects, the financial position of New
27 Century Financial Corporation and subsidiaries as of December 31.
28 2005 and 2004, and the results of their operations and their cash flows
-77- CONSOLIDATED CLASS ACTION COINPLALNT

1 for each of the years in the three-year period ended December 31,
2005. in conformity with U.S. generally accepted accounting
3 principles .
-rA
5 We also have audited, in accordance with the standards of the Public

6 Company Accounting Oversight B oard (United States) , the
7 effectiveness of the Company's internal control over financial
8 reporting as of December 31, 2005, based on criteria established in
9 Internal Control - Integrated Framework issued by the Committee of
10 Sponsoring Organizations of the Treadway Commission (COSO), and
11 our report dated March 15, 2006 expressed an unqualified opinion on
12 management's assessment of. and the effective operation of. internal
13 control over financial reporting . [Emphasis added.]
14 191. The 2005 Form 10-K also contained a "Report of Independent
15 Registered Public Accounting Firm" on internal controls from Defendant KPMG
16 dated March 15, 2006 which stated:
17 We have audited management ' s assessment, included in the
18 accompanying Management 's Report on Internal Control Over
19 Financial Reporting, that New Century Financial Corporation and
20 subsidiaries maintained effective internal control over financial
21 reporting as of December 31, 2005, based on criteria established in
22 Internal Control - Integrated Framework issued by the Committee of
23 Sponsoring Organizations of the Treadway Commission (COSO).
24 The Company's management is responsible for maintaining effective
25 internal control over financial reporting and for its assessment of the
26 effectiveness of internal control over financial reporting. Our
27 responsibility is to express an opinion on management's assessment
28

1 and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
3
4 We conducted our audit in accordance with the standards of the Public

5 Company Accounting Oversight Board (United States) . Those
6 standards require that we plan and perform the audit to obtain
7 reasonable assurance about whether effective internal control over
8 financial reporting was maintained in all material respects. Our audit
9 included obtaining an understanding of internal control over financial
10 reporting, evaluating management's assessment, testing and
11 evaluating the design and operating effectiveness of internal control,
12 and performing such other procedures as we considered necessary in
13 the circumstances. We believe that our audit provides a reasonable
14 basis for our opinion .
15
16 A company's internal control over financial reporting is a process

17 designed to provide reasonable assurance regarding the reliability of
18 financial reporting and the preparation of financial statements for
19 external purposes in accordance with generally accepted accounting
20 principles. A company's internal control over financial reporting
21 includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
23 reflect the transactions and dispositions of the assets of the company;
24 (2) provide reasonable assurance that transactions are recorded as
?5 necessary to permit preparation of financial statements in accordance
26 with generally accepted accounting principles, and that receipts and
27 expenditures of the company are being made only in accordance with
28 authorizations of management and directors of the company; and

1 (3) provide reasonable assurance regarding prevention or timely
2 detection of unauthorized acquisition, use, or disposition of the
3 company's assets that could have a material effect on the financial
4 statements.
5
6 Because of its inherent limitations, internal control over financial

7 reporting may not prevent or detect misstatements. Also, projections
8 of any evaluation of effectiveness to future periods are subject to the
9 risk that controls may become inadequate because of changes in
10 conditions, or that the degree of compliance with the policies or
11 procedures may deteriorate.
12
13 In our opinion, management's assessment that New Century Financial

14 Corporation and subsidiaries maintained effective internal control
15 over financial reporting as of December 31, 2005. is fairly stated, in
16 all material respects. based on the COSO criteria. Also, in our
17 opinion. New Century Financial Corporation and subsidiaries
18 maintained, in all material respects. effective internal control over
19 financial reporting as of December 31. 2005. based on the COSO
20 criteria .
21
22 New Century Financial Corporation acquired certain assets and

23 assumed certain liabilities of RBC Mortgage Company during 2005,
24 and management excluded from its assessment of the effectiveness of
New Century Financial Corporation's internal control over financial
26 reporting as of December 31, 2005, RBC Mortgage Company's
27 internal control over financial reporting associated with total assets of
28 $1.2 billion and total revenues of $59.6 million included in the

1 (consolidated) financial statements of New Century Financial
Corporation and subsidiaries as of and for the year ended

3 December 31. 2005. Our audit of internal control over financial
4 reporting, of New Century Financial Corporation also excluded an
5 evaluation of the internal control over financial reporting of RBC

6 Mortgage Company.
7
8 We also have audited, in accordance with the stan dards of the Public
9 Company Accounting Oversight Board (United States), the
10 consolidated balance sheets of New Century Financial Corporation
11 and subsidiaries as of December 31. 2005 and 2004, and the related
12 consolidated statements of income, comprehensive income, changes
13 in stockholders' equity, and cash flows for each of the years in the
1'T three-year period ended December 31. 2005. and our report dated
15 March 15. 2006 expressed an unqualified opinion on those
16 consolidated financial statements . [Emphasis added.]
17 192. KPMG gave its consent to the incorporation by reference of its
18 unqualified audit opinion on New Century's 2005 financial statements and its
19 opinion regarding management's assessment of internal controls in the registration
20 statement for the Series B Preferred Stock Offering.
21 193. New Century's Form 10-Q for the quarter ended March 31, 2006 was
1) 1) filed with the SEC on or about May 10, 2006. The first quarter 2006 Form 10-Q
23 contained consolidated balance sheets and consolidated statements of earnings
25 for the three months ended March 31, 2006 in accordance with GAAP. The Form
26 10-Q stated:
27 The Company has prep ared the accompanying unaudited condensed

interim financial information and with the instructions to Form 10-Q
6 opinion of management, all adjustments (consisting of normal
9 194. The first quarter 2006 Form 10-Q provided the following information
12 including our Chief Executive Officer, Chief Financial Officer and
13 President and Chief Operating Officer, has evaluated the effectiveness
14 of our disclosure controls and procedures, as such term is defined in
15 Rule 13a-15(e) promulgated under the Securities Exchange Act of
16 1934, as amended. Based on that evaluation, our Chief Executive
17 Officer. Chief Financial Officer and President and Chief Operating
18 Officer concluded, as of March 31, 2006, that our disclosure controls
21 Securities Exchange Act of 1934 is recorded, processed. summarized
1) 1) and reported within the time periods specified in the Securities and
?3 Exchange Commission rules and forms . There was no change in our
?5 March 31, 2006 that materially affected, or is reasonably likely to
28
-8_- CONSOLIDATED CLASS ACTION COMPLAI NT

2 certifications signed by Defendants Cole, Dodge and Morrice in the form set forth
3 in paragraph 182 above.
4 196. New Century's Form 10-Q for the quarter ended June 30, 2006 was
5 filed with the SEC on or about August 9, 2006. The second quarter 2006 Form 10-
6 Q contained consolidated balance sheets and consolidated statements of earnings
8 for the three months ended June 30, 2006 in accordance with GAAP. The Form
9 10-Q stated:
10 The ComDanv has prepared the accomi anvina unaudited condensed
14 and Rule 10-01 of Regulation S-X. Accordingly, the statements do
15 not include all of the information and footnotes required by generally
16 accepted accounting principles for complete financial statements. In
17 the opinion of management, all adjustments (consisting of normal
20 197. The second quarter 2006 Form 10-Q provided the following
21 information regarding New Century's internal controls and procedures:
As of June 30, 2006, the end of our second quarter, our management,
23 including our Chief Executive Officer. Chief Financial Officer and
of our disclosure controls and procedures, as such term is defined in
27 1934, as amended. Based on that evaluation, our Chief Executive
28 Officer, Chief Financial Officer and President and Chief Operating

1 Officer concluded, as of June 30, 2006, that our disclosure controls
and procedures were effective to ensure that information required to
and reported within the time periods specified in the Securities and
7 internal control over financial reporting during the quarter ended June
8 30, 2006 that materially affected, or is reasonably likely to materially
9 affect, our internal control over financial reporting. [Emphasis
10 added.]
11 198. Accompanying the second quarter 2006 Form 10-Q as exhibits were
12 1 certifications signed by Defendants Cole, Dodge and Morrice in the form set forth
13 in paragraph 182 above

14 199. As set forth in paragraphs 55-175 above, the above-referenced
15 statements from New Century's Forms 10-K and 10-Q for the year-ended
16 December 31, 2005 and the three months-ended March 31, 2006 and June 30, 2006
17 incorporated by reference into the Series B Preferred Stock Registration Statement
18 were materially misstated and omitted to state material facts required therein or
19 necessary to make the statements contained therein not misleading, at the time of
20 the offering. At the time of the Series B Preferred Stock Offering, and contrary to
21 the above-referenced statements, New Century's financial statements for the year-
) 1) ended December 31, 2005 and the quarters-ended March 31 and June 30, 2006
23 were not presented in accordance with GAAP, the Company ' s internal controls
24 suffered from material weaknesses, the Company ' s underwriting standards were
25 not designed to produce high quality loans as stated and KPMG's audits of New
26 Century's financial statements and internal controls were not performed in
27 accordance with GAAS as set forth in paragraphs 55-175 above. As the adverse
?8

Case No . 2:07-cvv- 0093 I -DDP (JTLx)
1 disclosures were made and the true facts revealed after the offering was completed.
the price of New Century Series B Preferred Stock declined by over 75%.
3 VIII. CLAIMS FOR RELIEF UNDER THE SECURITIES ACT
4 COUNT ONE
For Violations Of Section 11 Of The Securities Act, On Behalf Of Purchasers
Of New Century Series A Preferred Stock, Against New Century Officer
6 Defendants Cole, Morrice , Gotschall And Dod ge; New Century Director
Defendants : Forster, Sachs, Black, Lange, Sanvik, Zona, Alexander And
7 Popejoy; And Underwriter Defendants : Bear Stearns , Deutsche Bank, Piper
Jaffray, Stifel Nicolaus , JN P Securities , And Roth Capital
8
9 200. Plaintiffs repeat and reallege each and every allegation above as if
10 fully set forth herein. For the purposes of this claim, Plaintiffs assert only strict
11 liability and negligence claims and expressly disclaim any claim of fraud or
12 intentional misconduct.
13 201. This claim is brought pursuant to Section 11 of the Securities Act
14 against New Century Officer Defendants Cole, Morrice, Gotschall and Dodge;
15 New Century Director Defendants: Forster, Sachs, Black, Lange, Sandvik, Zona,
16 Alexander and Popejoy; and underwriter Defendants: Bear Steams, Deutsche
17 Bank, Piper Jaffray, Stifel Nicolaus, JMP Securities and Roth Capital.
18 202. This claim is brought on behalf of Plaintiff Carl Larson and other
19 members of the Class who, during the Class Period, purchased or otherwise
20 acquired New Century Series A Preferred Stock issued pursuant and/or traceable to
21 the Series A Preferred Stock Registration Statement and were damaged by acts
alleged herein.
23 203. New Century issued the Series A Preferred Stock pursuant to the
24 Series A Preferred Stock Registration Statement.
25 204. Defendants Cole, Morrice, Gotschall, Dodge, Forster, Sachs, Black,
26 Lange, Sandvik, Zona and Popejoy each signed the Series A Preferred Stock
27 Registration
Reg istration Statement.
2 8
S^ CONSOLIDATED CLASS ACTION COI L .INT

1 205. As set forth above , at the time the Series A Preferred Stock
Registration Statement and the prospectus supplements were filed, Defendants
3 Cole. Morrice, Gotschall, Forster, Sachs, Black, Lange, Zona, Alexander and
4 Popejoy were each directors of New Century.
5 .206. Defendants Bear Stearns, Deutsche Bank, Piper Jaffray, Stifel
6 Nicolaus, JMP Securities and Roth Capital acted as underwriters for the Series A
7 Preferred Stock Offering.
8 207. The Series A Preferred Stock Registration Statement contained untrue
9 statements of material fact, including the financial statements of New Century. In
10 addition, the Series A Preferred Stock Registration Statement omitted to state
11 material facts required to be stated therein or necessary to make the statements
12 therein not misleading, including New Century's violations of GAAP. The facts
13 misstated and omitted would have been material to a reasonable person reviewing
14 the Series A Preferred Stock Registration Statement.
15 208. Defendants named in this Count owed to Plaintiff and the Class the
16 duty to make a reasonable and diligent investigation of the statements contained in
17 the Series A Preferred Stock Registration Statement, to ensure that the statements
18 contained or incorporated by reference therein were true and that there was no
19 omission to state a material fact required to be stated in order to make the
?0 statements contained therein not misleading.
21 209. Defendants did not make a reasonable investigation of the statements
1) 1) contained and incorporated by reference in the Series A Preferred Stock
23 Registration Statement and did not possess reasonable grounds for believing that
24 the Series A Preferred Stock Registration Statement did not contain an untrue
25 statement of material fact or omit to state a material fact required to be stated
26 therein or necessary to make the statements therein not misleading.
27 210. The underwriter Defendants did not conduct a reasonable
28 investigation of the statements contained in and incorporated by reference in the
-66- CONSOLIDATED CLASS ACTION COIV L_AINT

1 Series A Preferred Stock Registration Statement and did not possess reasonable
2 grounds for believing that the statements contained therein were true and not
3 materially misstated. In particular, the underwriter Defendants did not conduct a
4 reasonable investigation into the accuracy of the statements regarding the
5 Company's reported financial performance and internal controls, including New
6 Century's purportedly improved underwriting controls. The underwriter
7 Defendants could not simply rely on the work of New Century's auditors because
8 the investing public relies on the underwriters to obtain and verify relevant
9 information and then make sure that important facts are accurately disclosed.
10 Thus, the underwriter Defendants must conduct their own, independent and
11 reasonable investigation into the accuracy of the Company's financial statements
12 and assessments of internal controls which they were negligent in failing to do
13 sufficiently in connection with the Offering.
14 2 11. Similarly, the Company director Defendants were negligent in failing
15 to conduct a reasonable investigation of the statements contained in the Series A
v
16 Registration Statement regarding the Company's financial performance and

17 internal controls and did not possess reasonable grounds for believing that the
18 statements contained therein were true and not materially misstated. The
19 Company's directors, through its Audit Committee, failed to conduct their own
20 independent and reasonable investigation into the Company's financial reporting
21 and internal controls until March 2007, well after the offering was completed.
212. Plaintiff and members of the Class purchased New Century Series A
Preferred Stock issued in, or traceable to, the Series A Preferred Stock Registration
?4 Statement and were damaged thereby.
25 U. Plaintiff and the Class did not know, nor in the exercise of reasonable
26 diligence could they have known, of the untrue statements of material fact or
27 omissions of material facts in the Series A Preferred Stock Registration Statement
28 when they purchased or acquired the shares.

Case No. 2:07-c v-0093 I -DDP (JTLx)
1 214. By reason of the foregoing, Defendants are liable to Plaintiff and
2 members of the Class for violations of Section 11 of the Securities Act.
COUNT TWO
4 For Violations Of Section 15 Of The Securities Act, On Behalf Of Purchasers
Of New Century^ Series A Preferred Stock, Against New Century Officer
5 Defendants Cole, Morrice , Gotschall And Dodge For Control Person Liability
Based On Section 11 Violations by New Century
6
215. Plaintiffs repeat and reallege each and every allegation above as if
7
fully set forth herein. For the purposes of this claim, Plaintiffs assert only strict
8
liability and negligence claims and expressly disclaim any claim of fraud or
9
intentional misconduct.
10
216. This claim is brought pursuant to Section 15 of the Securities Act
11
against Defendants Cole, Morrice, Gotschall and Dodge, on behalf of Plaintiff Carl
12
Larson, and other members of the Class who purchased or acquired New Century
13
Series A Preferred Stock issued pursuant and/or traceable to the Series A Preferred
14
Stock Registration Statement and were damaged by acts alleged herein.
15
217. Although not named as a defendant herein because of its bankruptcy
16
filing, New Century violated Section 11 of the Securities Act by issuing the Series
17
A Preferred Stock Registration Statement which included untrue statements of
18
material fact and omitted to state material facts required to be stated therein or
19
necessary in order to make the statements therein not misleading. The facts
20
misstated and omitted would have been material to a reasonable person reviewing
21
the New Century Series A Preferred Stock Registration Statement.
218. Defendants Cole, Morrice, Gotschall and Dodge were controlling
23
persons of New Century when the Series A Preferred Stock Registration Statement
24
was filed and became effective, due to their senior executive positions therewith;
25
their direct involvement in its day-to-day operations, including its financial
26
reporting and accounting functions; and their signatures on and participation in the
27
preparation and dissemination of the registration statement.
28

1 219. By virtue of the foregoing, Defendants Cole, Morrice. Gotschall and
Dodge each had the power to influence and control, and did influence and control.
3 directly or indirectly, the decision making of New Century, including the content of
4 its financial statements and of the Series A Preferred Stock Registration Statement.
5 ?20. Defendants Cole, Morrice, Gotschall and Dodge acted negligently and
6 without reasonable care regarding the accuracy of the information contained and
7 incorporated by reference in the Series A Preferred Stock Registration Statement
8 and lacked reasonable grounds to believe that such information was accurate and
9 complete in all material respects.
10 221. Plaintiff and members of the Class purchased New Century Series A
11 Preferred Stock issued in, or traceable to, the Series A Preferred Stock Registration
12 Statement and were damaged thereby.
13 222. Plaintiff and the Class did not know, nor in the exercise of reasonable
15 omissions of material facts in the Series A Preferred Stock Registration Statement
17 223. By reason of the foregoing, Defendants Cole, Morrice, Gotschall and
18 Dodge are liable to Plaintiff and members of the Class for violations of Section 15
19 of the Securities Act.
20 COUNT THREE
21 For Violations Of Section 12(a)(2) Of The Securities Act, On Behalf Of
Purchasers Of New Century Series A Preferred Stock, Against Underwriter
22 Defendants : Bear Stearns , Deutsche Bank, Piper Jaffray, Stifel Nicolaus, JMP
Securities , And Roth Capital
23
24
25
26
27
28
-89- CONSOLIDATED CLASS ACTION COINN1PLAINT

1 ?15. This claim is brought pursuant to Section 12(a)(2) of the Securities
, Act against underwriter Defendants : Bear Stearns . Deutsche Bank, Piper Jaffray,
3 Stifel Nicolaus, JMP Securities and Roth Capital.
4 226. This claim is brought on behalf of Plaintiff Carl Larson and other
5
I members of the Class who, during the Class Period, purchased or otherwise
6 acquired New Century Series A Preferred Stock issued pursuant to the Series A
7 Preferred Stock Prospectus and were damaged by acts alleged herein.
8 227. The Company solicited the purchase of New Century Series A
9 11 Preferred Stock by the use of means or instruments of transportation or
10 communication in interstate commerce or of the mails and by means of the Series
11 A Preferred Stock Prospectus. Underwriter Defendants Bear Stearns, Deutsche
12 Bank, Piper Jaffray, Stifel Nicolaus. JMP Securities and Roth Capital committed to
13 and purchased the Series A Preferred Stock from New Century and sold the shares
14 to Plaintiff and members of the Class by means of the Series A Preferred Stock
15 Prospectus. Underwriter Defendants Bear Stearns, Deutsche Bank, Piper Jaffray,
16 Stifel Nicolaus, Jh1P Securities and Roth Capital were responsible for the contents
17 and dissemination of the Series A Preferred Stock Prospectus.
18 228. As alleged herein, the Series A Preferred Stock Prospectus contained
19 untrue statements of material fact, including the financial statements of New
20 Century. In addition, the Series A Preferred Stock Prospectus omitted to state
therein not misleading, including New Century's violations of GAAP. The facts
24 the Series A Preferred Stock Prospectus.
25 229. Defendants named in this Count owed to Plaintiff and members of the
26 Class the duty to make a reasonable and diligent investigation of the statements
27 contained in the Series A Preferred Stock Prospectus, to ensure that the statements
28 contained or incorporated by reference therein were true and that there was no
-90- CONSOLIDATED CLASS ACTION COI.WLALNT

1 I omission to state a material fact required to be stated in order to make the
2 statements contained therein not misleading.
3 230. Defendants did not make a reasonable investigation of the statements
4 contained and incorporated by reference in the Series A Preferred Stock Prospectus
5 I and did not possess reasonable grounds for believing that the Series A Preferred
6 Stock Prospectus did not contain an untrue statement of material fact or omit to
7 state a material fact required to be stated therein or necessary to make the
8 statements therein not misleading.
10 Preferred Stock and were damaged thereby.
13 omissions of material facts in the Series A Preferred Stock Prospectus when they
14 purchased or acquired the shares.
16 members of the Class for violations of Section 12(a)(2) of the Securities Act.
17 Plaintiff and Class members hereby tender their shares to Defendants and seek
18 rescission of their purchases to the extent they continue to own such securities.
19 COUNT FOUR
Of New Century Series A Preferred Stock, Against Defendants Cole, Morrice,
21 Gotschall And Dodge For Control Person Liability Based On Section 12(a)(2)
Violations By New Century
23
24
25
26
27
against Defendants Cole, Morrice, Gotschall and Dodge, on behalf of Plaintiff Carl
28
Larson and other members of the Class who purchased or acquired New Century
Case No. 2:07 -cv-0093 1-DDP (JTLx)
1 Series A Preferred Stock issued pursuant to the Series A Preferred Stock Prospectus
2 and were damaged by acts alleged herein.
3 236. Although not named as a defendant herein because of its bankruptcy
4 filing , New Century violated Section 12 (a)(2) of the Securities Act by soliciting
5 Plaintiff's and Class members' purchases of New Century Series A Preferred Stock
6 by means of the Series A Preferred Stock Prospectus which included untrue
7 statements of material fact and omitted to state material facts required to be stated
8 therein or necessary in order to make the statements therein not misleading. The
9 facts misstated and omitted would have been material to a reasonable person
10 reviewing the New Century Series A Preferred Stock Prospectus.
11 237. Defendants Cole, Morrice, Gotschall and Dodae were controlling
12 persons of New Century when the Series A Preferred Stock Prospectus was filed
13 and became effective, due to their senior executive positions therewith; their direct
14 involvement in its day-to-day operations, including its financial reporting and
15 accounting functions; and their participation in the preparation and dissemination
16 of the prospectus. Defendants Cole, Morrice, Gotschall and Dodge participated in
17 road shows to solicit Class members' purchases of New Century Series A Preferred
18 Stock by means of the Series A Preferred Stock Prospectus. Defendants Cole,
19 Morrice, Gotschall and Dodge were responsible for the contents and dissemination
20 of the Series A Preferred Stock Prospectus.
21 238. By virtue of the foregoing, Defendants Cole. Morrice, Gotschall and
Dodge each had the power to influence and control, and did influence and control,
24 its financial statements and of the Series A Preferred Stock Prospectus.
25 239. Defendants Cole. Morrice. Gotschall and Dodge acted negligently and
27 incorporated by reference in the Series A Preferred Stock Prospectus and lacked
28

1 reasonable grounds to believe that such information was accurate and complete in
2 all material respects.
5 241. Plaintiff and the Class did not know. nor in the exercise of reasonable
7 omissions of material facts in the Series A Preferred Stock Prospectus when they
9 242. By reason of the foregoing, Defendants Cole, Morrice. Gotschall and
10 Dodge are liable to Plaintiff and members of the Class for violations of Section 15
11 of the Securities Act. Plaintiff and Class members hereby tender their shares to
12 11 Defendants and seek rescission of their purchases to the extent they continue to
13 own such securities.

14 COUNT FIVE
Of New Century Series B Preferred Stock, Against New Century Officer
16 Defendants Cole, Morrice . Gotschall And Dodge ; New Century Director
Defendants Forster, Sachs, Black, Lange, Zona , Alexander And Einhorn;
17 Defendant KPMG ; And Underwriter Defendants : Bear Stearns , Morgan
Stanley, Stifel Nicolaus, And Jefferies & Co.
18
19
20
21
1) 1?
23
against New Century Officer Defendants Cole, Morrice, Gotschall and Dodge;
24
New Century Director Defendants: Forster, Sachs, Black. Lange, Zona, Alexander
25
and Einhorn: Defendant KPMG: and underwriter Defendants: Bear Stearns.
26
Morgan Stanley, Stifel Nicolaus and Jefferies & Co.
?7
245. This claim is brought on behalf of Plaintiff Carl Larson and other
28
members of the Class who, during the Class Period, purchased or otherwise
1 I acquired New Century Series B Preferred Stock issued pursuant and/or traceable to
2
I the Series B PrefelTed Stock Registration Statement and were damaged by acts
3 ^ alleged herein.
4 246. New Century issued Series B Preferred Stock pursuant to the Series B
5 Preferred Stock Registration Statement.
6 247. Defendants Cole, Morrice, Gotschall, Dodge. Forster, Sachs, Black,
7 Lange and Zona each signed the Series B Preferred Stock Registration Statement.
8 ?48. At the time the Series B Preferred Stock Registration Statement and
9 prospectus supplements were filed, Defendants Cole, Morrice. Gotschall, Forster.
10 Sachs, Black, Lange Zona, Alexander and Einhorn were each directors of New
11 Century.
12 249. Defendant KPMG was the auditor of New Century throughout the
13 Class Period and consented to being named in the Series B Preferred Stock
14 Registration Statement as a party who certified the audited financial statements
15 contained or incorporated by reference therein. KPMG's audit report incorrectly
16 stated that KPMG's audits were performed in accordance with GAAS and that the
17 Company's financial statements were fairly presented in accordance with GAAP.
18 2--30. Defendants Bear Stearns. Morgan Stanley. Stifel Nicolaus an d
19 Jefferies & Co. acted as underwriters for the Series B Preferred Stock Offering.
20 251. As set forth above, the Series B Preferred Stock Registration
21 Statement contained untrue statements of material fact, including the financial
statements of New Century. In addition, the Series B Preferred Stock Registration
23 Statement omitted to state material facts required to be stated therein or necessary
24 to make the statements therein not misleading, including New Century's violations
25 of GAAP. The facts misstated and omitted would have been material to a
26 reasonable person reviewing the Series B Preferred Stock Registration Statement.

1 the Series B Preferred Stock Registration Statement, to ensure that the statements
contained or incorporated by reference therein were true and that there was no
3 omission to state a material fact required to be stated in order to make the
4 statements contained therein not misleading.
253. Defendants did not make a reasonable investigation of the statements
6 contained and incorporated by reference in the Series B Preferred Stock
7 Registration Statement, and did not possess reasonable grounds for believing that
8 the Series B Preferred Stock Registration Statement did not contain an untrue
9 statement of material fact or omit to state a material fact required to be stated
10 therein or necessary to make the statements therein not misleading.
11 154. The underwriter Defendants did not conduct a reasonable
12 investigation of the statements contained in and incorporated by reference in the
13 Series B Preferred Stock Registration Statement and did not possess reasonable
14 grounds for believing that the statements contained therein were true and not
15 materially misstated. In particular, the underwriter Defendants did not conduct a
16 reasonable investigation into the accuracy of the statements regarding the
17 Company's reported financial performance, internal controls and underwriting
18 standards. The underwriter Defendants could not simply rely on the work of New
19 Century's auditors because the investing public relies on the underwriters to obtain
20 and verify relevant information and then make sure that important facts are
21 accurately disclosed. Thus, the underwriter Defendants must conduct their own,
independent and reasonable investigation into the accuracy of the Company's
23 financial statements and assessments of internal controls which they were
24 negligent in failing to do sufficiently in connection with the offering.
25 255. Similarly, the Company director Defendants, were negligent in failing
26 to conduct a reasonable investigation of the statements contained in the Series B
27 Preferred Stock Registration Statement regarding the Company's financial
28 performance, internal controls and underwriting standards and did not possess
95- CONSOLIDATED CLASS ACTION COMPLAINT

1 reasonable grounds for believing that the statements contained therein were true
and not materially misstated. The Company's directors, through its Audit
3 Committee. failed to conduct their own independent and reasonable investigation
4 into the Company's financial reporting and internal controls until March ?007, well
5 after the Offering was completed.
6 256. Defendant KPMG, who consented to the inclusion of its opinions in
7 the August 2006 Series B Preferred Stock Offering Registration Statement,
8 negligently failed to perform its audits of New Century in a reasonable manner; as
9 set forth above did not comply with the standards of the PCAOB; and, thus, its
10 audit did not constitute a reasonable investigation of whether the Company's
11 financial statements were presented in compliance with GAAP and management's
12 assessment of internal controls was properly and accurately presented.
13 257. Plaintiff and members of the Class purchased New Century Series B
14 Preferred Stock issued in, or traceable to, the Series B Preferred Stock Registration
18 omissions of material facts in the Series B Preferred Stock Registration Statement
21 II members of the Class for violations of Section 11 of the Securities Act.
COUNT SIX
23
For Violations Of Section 15 Of The Securities Act, On Behalf Of Purchasers
24 Of New Century Series B Preferred Stock, Against Defendants Cole. Morrice.
Gotschall And Dodge For Control Person Liability Based On Section 11
27 fully set forth herein. For the purposes of this claim, Plaintiffs assert only strict
28

Case No. 2:07-cv-0093 I-DDP (JTLx)
3 261. This claim is brought pursuant to Section 15 of the Securities Act
4 I against Defendants Cole, Morrice, Gotschall and Dodge, on behalf of Plaintiff Carl
5 Larson and other members of the Class who purchased or acquired New Century
6 Series B Preferred Stock issued pursuant and/or traceable to the Series B Preferred
7 Stock Registration Statement and were damaged by acts alleged herein.
8 262. Although not named as a defendant herein because of its bankruptcy
9 1 filing. New Century violated Section 11 of the Securities Act by issuing the Series
10 B Preferred Stock Registration Statement which included untrue statements of

11 material fact and omitted to state material facts required to be stated therein or
12 necessary in order to make the statements therein not misleading. The facts
14 the New Century Series B Preferred Stock Registration Statement.
15 263. Defendants Cole, Morrice. Gotschall and Dodge were controlling
16 persons of New Century when the Series B Preferred Stock Registration Statement
17 was filed and became effective, due to their senior executive positions therewith;
18 their direct involvement in its day-to-day operations, including its financial
19 reporting and accounting functions: and their signatures on and participation in the
20 preparation and dissemination of the registration statement.
21 264. By virtue of the foregoing, Defendants Cole. Morrice, Gotschall and
1) 1) Dodge each had the power to influence and control, and did influence and control,
24 its financial statements and of the Series B Preferred Stock Registration Statement.
25 265. Defendants Cole. Morrice. Gotschall and Dodge acted negligently and
27 incorporated by reference in the Series B Preferred Stock Registration Statement
28

I and lacked reasonable grounds to believe that such information was accurate and
1) complete in all material respects.
3 ?66. Plaintiff and members of the Class purchased New Century Series B
4 Preferred Stock issued in, or traceable to, the Series B Preferred Stock Registration
7 diligence could they have known. of the untrue statements of material fact or
8 omissions of material facts in the Series B Preferred Stock Registration Statement
10 268. By reason of the foregoing, Defendants Cole. Morrice, Gotschall and
11 1 Dodge are liable to Plaintiff and members of the Class for violations of Section 15
12 of the Securities Act.

13 COUNT SEVEN
14 For Violations Of Section 12(a)(2) Of The Securities Act, On Behalf Of
Purchasers Of New Centur , Series Preferred Stock, Against Underwriter
15 Defendants: Bear Stearns, Morgan Stanley, Stifel Nicolaus and Jefferies & Co.
17 11 fully set forth herein . For the purposes of this claim, Plaintiffs assert only strict
20 270. This claim is brought pursuant to Section 12(a)(2) of the Securities
21 Act against underwriter Defendants: Bear Steams, Morgan Stanley, Stifel Nicolaus
1) 1) and Jefferies & Co.
23 ?71. This claim is brought on behalf of Plaintiff Carl Larson and members
24 of the Class who, during the Class Period, purchased or, otherwise acquired New
25 Century Series B Preferred Stock issued pursuant to the Series B Preferred Stock
26 Prospectus and were damaged by acts alleged herein.
?7 272. The Company solicited the purchase of New Century Series B
28 Preferred Stock by the use of means or instruments of transportation or

Case No. 2: 0 7-cv-0093 1 -DDP (JTLx)
1 communication in interstate commerce or of the mails and by means of the Series
B Preferred Stock Prospectus. Underwriter defendants Bear Steams, Morgan
Stanley, Stifel Nicolaus and Jefferies & Co. committed to and purchased the Series
4 B Preferred Stock from New Century and sold the shares to Plaintiff and members
5 of the Class by means of the Series B Preferred Stock Prospectus. Underwriter
6 Defendants Bear Steams, Morgan Stanley, Stifel Nicolaus and Jefferies & Co. were
7 responsible for the content and dissemination of the Series B Preferred Stock
8 Prospectus.
9 273. As alleged herein, the Series B Preferred Stock Prospectus contained
10 untrue statements of material fact, including the financial statements of New
11 Century. In addition, the Series B Preferred Stock Prospectus omitted to state
13 therein not misleading, including New Century's violations of GAAP. The facts
14 misstated and on-utted would have been material to a reasonable person reviewing
15 the Series B Preferred Stock Prospectus.
18 the Series B Preferred Stock Prospectus, to ensure that the statements contained or
19 incorporated by reference therein were true and that there was no omission to state
20 a material fact required to be stated in order to make the statements contained
21 therein not misleading.
11) 275. Defendants did not make a reasonable investigation of the statements
23 contained and incorporated by reference in the Series B Preferred Stock Prospectus
24 and did not possess reasonable grounds for believing that the Series B Preferred
?5 Stock Prospectus did not contain an untrue statement of material fact or omit to
26 state a material fact required to be stated therein or necessary to make the
27 statements therein not misleading.
28

1 276. Plaintiff and members of the Class purchased New Century Series B
277. Plaintiff and the Class did not know, nor in the exercise of reasonable
5 I omissions of material facts in the Series B Preferred Stock Prospectus when they

8 members of the Class for violations of Section 12(a)(2) of the Securities Act.
9 Plaintiff and Class members hereby tender their shares to Defendants and seek
10 rescission of their purchases to the extent they continue to own such securities.
11 COUNT EIGHT
12 For Violations Of Section 15 Of The Securities Act, On Behalf OfPurchasers
Of New Century Series B Preferred Stock, Against Defendants Cole, Morrice,
13 Gotschall And Dodge For Control Person Liability Based On Section 12(a)(2)
14
15
16
17
18
19
against Defendants Cole, Morrice. Gotschall and Dodge, on behalf of Plaintiff Carl
20
Larson, and other members of the Class who purchased or acquired New Century
21
Series B Preferred Stock issued pursuant to the Series B Preferred Stock
Prospectus and were damaged by acts alleged herein.
24
filing, New Century violated Section 12(a)(2) of the Securities Act by soliciting
25
Plaintiff's and Class members' purchases of New Century Series B Preferred Stock
26
by means of the Series B Preferred Stock Prospectus which included untrue
27
statements of material fact and omitted to state material facts required to be stated
28
therein or necessary in order to make the statements therein not misleading. The
1 facts misstated and omitted would have been material to a reasonable person
reviewing the New Century Series B Preferred Stock Prospectus.
3 282. Defendants Cole, Morrice, Gotschall and Dodge were controlling
4 persons of New Century when the Series B Preferred Stock Prospectus was filed
5 I and became effective, due to their senior executive positions therewith; their direct
6 involvement in its day-to-day operations, including its financial reporting and

7 accounting functions; and their participation in the p: eparation and dissemination
8 of the prospectus. Defendants Cole, Morrice. Gotschall and Dodge participated in
9 road shows to solicit Class members' purchases of New Century Series B Preferred
10 Stock by means of the Series B Preferred Stock Prospectus. Defendants Cole,
11 Morrice, Gotschall and Dodge were responsible for the content and dissemination
12 of the prospectus.
13 283. By virtue of the foregoing, Defendants Cole, Morrice, Gotschall and
14 Dodge each had the power to influence and control, and did influence and control,
16 its financial statements and of the Series B Preferred Stock Prospectus.
17 284. Defendants Cale, Morrice , Gotschal] and Dodge acted ne g ligently and
19 incorporated by reference in the Series B Preferred Stock Prospectus and lacked
20 reasonable grounds to believe that such information was accurate and complete in
21 all material respects.
285. Plaintiff and members of the Class purchased New Century Series B
24 286. Plaintiff and Class members did not know, nor in the exercise of
?5 reasonable diligence could they have known. of the untrue statements of material
26 fact or omissions of material facts in the Series B Preferred Stock Prospectus when
27 they purchased or acquired the shares.
28
101 CONSOLIDATED CLASS ACTION CON,11"LALNT

Case No . 2: 07-cv-0093 I -DDP (JTLx)
1 287. By reason of the foregoing, Defendants Cole. Morrice, Gotschall and
Dodge are liable to Plaintiff and members of the Class for violations of Section 15
3 of the Securities Act. Plaintiff and Class members hereby tender their shares to
4 Defendants and seek rescission of their purchases to the extent they continue to
5 own such securities.
6 IX. FACTUAL ALLEGATIONS PERTINTNIT TO
CLALMS FOR RELIEF UNDER THE EXCHANGE ACT
7
288. Plaintiffs repeat and reallege each of the allegations set forth above
8
(except for those alleging negligence ) as if fully set forth herein.
9
1.89. Plaintiffs, on behalf of themselves and the Class, bring claims set forth
10
below against Defendants Cole, Morrice, Gotschall and Dodge for violations of the
11
Exchange Act for materially false and misleading statements and omissions made
12
throughout the Class Period during their tenures at the Company. As alleged
13
herein , these Defendants acted with scienter, acting intentionally or with a
14
deliberate reckless disregard of the true facts , in making or participating in the
15
making of these misstatements and omissions during the Class Period.
16
X. THE NEW CENTURY OFFICER DEFENDANTS
17 MADE MATERIALLY FALSE AND MISLEADING
STATEMENTS DURING THE CLASS PERIOD
18
2290. On May 5, 2005, the first day of the Class Period, the New Century
19
Officer Defendants issued a press release reporting the Company's earnings results
20
for the first quarter ended March 31, 2005. The Company reported net earnings for
21
the first quarter of S84.8 million, or $1.48 per share. The press release contained
income statement and balance sheet data purporting to reflect the Company's
23
financial performance and assets and liabilities for the three months ended March
24
31. 2005 in accordance with GAAP. The press release stated:
25
Delinquencies and losses in the company`s mortgage loan portfolio
26
continue to significantly outperform securitizations executed prior to
27
2003 due primarily to higher credit quality , the strength of our
28
servicing platform and improved underwriting controls and appraisal
Case No. 2_07-car-0093 I -DDP (JTLx)
1 review process. Delinquency rates and cumulative loss experience for
the portfolio are trending better than previously anticipated.
3 [Emphasis added.]
4 The press release also contained the following quoted statement from Defendant
Cole: Our first quarter 2005 results provide a solid foundation to deliver record
financial results for fiscal 2005 despite a competitive marketplace and rising
interest rate environment. We are very pleased that our first quarter REIT taxable
income fully covers the first quarter dividend and confirms the strength of our REIT
9 portfolio."
10 291. On May 5, 2005. the New Century Officer Defendants also held a
11 11 conference call with analysts and investors. During the call, Defendants Cole and
12 Dodge reviewed the Company's reported financial results for the quarter ended
13 March 31, 2005. During the conference call, Defendant Cole described New
14 Century' s purported areas of "primary emphasis " as: "cost savings initiatives:
15 continued maintenance of our strong credit quality, which is 1lprovinQ out in
16 portfolio performance ; and our loan servicing practices, which are keeping balance
17 loans with low delinquencies and low losses . Those three areas - cost, credit, and
18 servicing - are control business functions that we think are very core to the
19 contributors of long-term profitability, portfolio performance and dividend growth.
20 And we can control those areas, and I think you'll see from first quarter into April
21 [2005] how we are doing on those three matters." (Emphasis added.) Defendant
Cole further stated: "Earnings were higher [than] expected due to portfolio losses
23 [that] continued to be lower than expected. As we have been mentioning in prior
24 calls, the delinquency and the loss performance in both our REIT and our taxable
25 sub-portfolios just continues to be better than anticipated." During the conference
26 call, Defendant Dodge presented a slide (made available over the Internet)
27 purporting to demonstrate lower 60+ day delinquency rates for New Century's
?S 2003 and 2004 loans and stated: "Note the dramatically lower delinquency rates

Case No. 2: 07-cv-00931 -DDP (JTLx)
1 for the 2003 and 2004 vintages, which are vintages that are on our balance sheet.
This performance reflects a number of factors. including the credit quality of the
loans , the impact of servicing the loans on our own platform, and the economic and
4 interest rate environment." (Emphasis added.) When he was asked during a
5 question-and-answer session of the conference call regarding credit performance
6 during the quarter.. Defendant Cole again stated:
7 We thought it was quite good measured by the delinquency and the
8 losses. And that's a result of a strategy adopted a number of years ago
9 to move much higher up the FICO scale. So the loans originated '03
10 and `04 that are on our balance sheet, either in the REIT or in the
11 taxable sub, just have characteristics that perform better . [Emphasis
12 added.]
13 292. On or about May 10, 2005, the New Century Officer Defendants filed
14 the Company's Form 10-Q for the quarter ended March 31, 2005. The first quarter
15 1 1 2005 Form 10-Q contained consolidated balance sheets and consolidated
16 statements of earnings purporting to reflect the Company's financial performance
17 and assets and liabilities for the three months ended March. 31, 2005 in accordance
18 with GAAP. The Form 10-Q stated:
19 The ComDanv has prepared the accompanvincr unaudited condensed
interim financial information and with the instructions to Form 10-0
-104- CONSOLIDATED CLASS ACTION COMPLALNT

1 The first quarter 2005 Form 10-Q was signed by Defendants Cole, Dodge,
2 Gotschall and Morrice.
6 'including our Chief Executive Officer, Vice Chairman - Finance,
9 procedures. as such terns is defined in Rule 13a-15(e) promulgated
11 that evaluation, our Chief Executive Officer, Vice Chairman -
13 Officer concluded, as of March 31, 2005, that our disclosure controls
16 Securities Exchange Act of 1934 is recorded, processed, summarized
[Emphasis added.]
24 certifications signed by Defendants Cole, Dodge, Gotschall and Morrice which
?5 stated:
26 1. I have reviewed this quarterly report on Form 10-Q of New
27 Century Financial Corporation:
28
105- CONSOLIDATED CLASS ACTION CONIPLALNT

1 ?. Based on my knowledge. this report does not contain any
untrue statement of a material fact or omit to state a material fact
3 necessary to make the statements made, in light of the circumstances
4 under which such statements were made, not misleading with respect
5 to the period covered by this report;
6 3. Based on my knowledge, the financial statements, and other
7 financial information included in this report, fairly present in all
8 material respects the financial condition, results of operations and
9 cash flows of the registrant as of, and for, the periods presented in this
10 report:
11 4. The registrant's other certifying officers and I are responsible
12 for establishing and maintaining disclosure controls and procedures
13 (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
14 internal control over financial reporting (as defined in Exchange Act
15 Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
16 a) Designed such disclosure controls and procedures, or caused
17 such disclosure controls and procedures to be designed under our
18 supervision, to ensure that material information relating to the
19 registrant, including its consolidated subsidiaries, is made known to us
20 by others within those entities, particularly during the period in which
21 this quarterly report is being prepared:
b) Designed such internal control over financial reporting, or
23 caused such internal control over financial reporting to be designed
24 under our supervision, to provide reasonable assurance regarding the
25 reliability of financial reporting and the preparation of financial
26 statements for external purposes in accordance with generally
27 accepted accounting principles-
28

1 c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
4 the end of the period covered by this report based on such evaluation;
5 and
6 d) Disclosed in this report any change in the registrant's
7 internal control over financial reporting that occurred during the
8 registrant's most recent fiscal quarter (the registrant's fourth fiscal
9 quarter in the case of an annual report) that has materially affected, or
10 is reasonably likely to materially affect, the registrant's internal
11 control over financial reporting; and
12 5. The registrant's other certifying officers and 1 have disclosed,
13 based on our most recent evaluation of internal control over financial
14 reporting, to the registrant's auditors and the audit committee of the
15 registrant's board of directors (or persons performing the equivalent
16 functions):
17 a) all significant deficiencies and material weaknesses in the
18 design or operation of internal control over financial reporting which
19 are reasonably likely to adversely affect the registrant's ability to
20 record, process, summarize and report financial information; and
21 b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
23 registrant's internal control over financial reporting.
?4 x
In connection with the Quarterly Report of New Century Financial

26 Corporation (the "Company") on Form 10-Q for the period ended
27 March 31. 2005 as filed with the Securities and Exchange
28 Commission on the date hereof (the "Report"), I .., . certify, pursuant

1 to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-
Oxley Act of 2002, that, to my knowledge:
3 (1) The Report fully complies with the requirements of
4 section 13(a) or 15 (d) of the Securities Exchange Act of 1934: and
5 (2) The information contained in the Report fairly presents.
6 in all material respects, the financial condition and results of
7 operations of the Company. [Emphasis added.]
9 statements from the New Century Officer Defendants' press release. conference
10 1 call and Form 10-Q for the first quarter ended March 31, 2005 were materially
11 misstated and omitted to state material facts required therein or necessary to make
12 the statements contained therein not misleading , at all times throughout the Class
13 Period. Contrary to the above -referenced statements , New Century' s financial
14 statements for the first quarter ended March 31, 2005 were not presented in
15 accordance with GAAP, the Company ' s internal controls suffered from material
16 weaknesses and New Century did not improve its underwriting controls as set forth
17 in paragraphs 55-175 above.
18 296. On August 4, 2005, the New Century Officer Defendants issued a
19 press release reporting the Company's earnings results for the second quarter ended
20 June 30, 2005. The Company reported net earnings for the second quarter of 595.1
21 million, or S1.65 per share. The press release contained income statement and
balance sheet data purporting to reflect the Company's financial performance and
23 assets and liabilities for the three months and six months ended June 30. 2005 in
24 accordance with GAAP. The press release stated:
25 The REIT portfolio average balance for the second quarter of 2005
26 was $14.3 billion and pre-tax income from this portfolio was 579.2
27 million, or $1.38 per share on a GAAP basis, which reflects a
28 considerable increase compared with first quarter 2005 pre-tax income
_108- CONSOLIDATED CLASS ACTION COMPLAINT

Case No. 2:07 -cv-00931 -DDP (JTLx)
1 of $64.6 million, or $1.13 per share. This increase resulted primarily
from a larger portfolio balance in the second quarter, as well as the
3 continued excellent credit performance of the portfolio .
4 The company's portfolio of mortgage loans held at its TRS totaled
5 $3.2 billion at June 30, 2005. The average balance of this portfolio
6 for the second quarter of 2005 was $3.3 billion, which resulted in net
7 interest income of S 20.6 million.
8 The combination of the REIT and TRS mortgage loan portfolios
9 resulted in a total mortgage portfolio balance of $18.5 billion at June
10 30, 2005. Delinquencies and losses in the company's REIT and TRS
11 mortgage loan portfolios continue to perform well within the
12 company's expectations . [Emphasis added.]
13 11 The press release also contained the following quoted statement from Defendant
14 Cole: "In today's challenging environment, we are very pleased to report a strong
15 second quarter 2005 delivering EPS of $1.65, an 11.5 percent increase compared
16 with $1.48 for the first quarter of this year. Our strong results reflect the earnings
17 power of our REIT portfolio and our ability to significantly reduce our loan
18 acquisition costs. We are pleased that the losses in our REIT portfolio are lower
19 than expected."
20 297. On August 4, 2005, the New Century Officer Defendants also held a
21 conference call with analysts and investors. During the call, Defendants Cole and
Dodge reviewed the Company's reported financial results for the quarter ended
23 June 30, 2005. During the conference call, Defendant Cole stated: "On a very
24 positive note, our REIT portfolio continues to perform better than expected
25 measured by delinquencies and losses. We're very proud of the strict underwriting
26 guidelines, the risk management discipline that we have ." (Emphasis added.)
27 Defendant Cole further stated:
-8

1 So what are we focusing on? Well, first and foremost, we're a Real
Estate Investment Trust, we'll continue to grow the loan portfolio as
3 Patti described in her comments, and we'll continue to maintain strict
4 underwriting and risk management disciplines . I think you can see
5 from the portfolio that we've created at the REIT, plus the
6 performance of the taxable REIT subsidiary, which does back more
7 than a year-and-a-half to two years, that there is a very high quality
8 source of loans that go into the REIT portfolio . We've maintained
9 that we've tried to be equal in what we sell in the cash market and
10 what we put in the portfolio, and I think from loss assumptions
11 delivered to date, or actual losses, we're delivering on that
12 commitment. [Emphasis added.]
13 298. On or about August 9, 2005, the New Century Officer Defendants
14 filed the Company's Form 10-Q for the quarter ended June 30. 2005. The second
15 quarter 2005 Form 10-Q contained consolidated balance sheets and consolidated
16 statements of earnings purporting to reflect the Company' s financial performance
17 and assets and liabilities for the three months ended June 30, 2005 in accordance
19 The Company has DreDared the accomnanvina unaudited condensed
interim financial information and with the instructions to Form 10-0
been included. [Emphasis added.]
-1 10- CONSOLIDATED CLASS ACTION COMPLAINT

1 The second quarter 2005 Form 10-Q was signed by Defendants Cole. Dodge,
3 1-99. The second quarter 2005 Form 10-Q provided the following
4
information regarding New Century's internal controls and procedures:
5 As of June 30, 2005, the end of our second quarter, our management,
6 including our Chief Executive Officer, Vice Chairman - Finance,
11 that evaluation, our Chief Executive Officer, Vice Chairman -
13 Officer concluded, as of June 30. 2005, that our disclosure controls
17 and reported within the time periods specified ins the Securities and
added.]
?3
300. Accompanying the second quarter 2005 Form 10-Q as exhibits were
24 certifications signed by Defendants Cole, Dodge, Gotschall and Morrice in the
25 form set forth in Paragraph-294 above.
26 301. On September 6 and 7, 2005, New Century Officer Defendants
27 Gotschall and Dodge participated in an Investor Roundtable with analysts and
28 investors. During the meeting, Defendants Gotschall and Dodge reviewed the

Case No. 2:07-cv--0093 I -DDP (JTLx)
1 Company's reported financial results and business strategy. During the conference
call, Defendant Gotschall stated: "And while we know that investors are
3 concerned about residual assets. we do book them conservatively . We've been
4 through that before." (Emphasis added.) During the meeting, Gotschall also stated
5 that it was a "myth" that New Century focused on volume and not profits" and
6 that its loss reserves were inadequate given the "housing bubble." Gotschall stated
7 "you know, we get asked a lot, are you concerned about the housing bubble, and
8 the answer was of course we are. There's been so much talk about it. But more
9 11 than worrying about it is how do we mitigate? We mitigate it with as much
10 conservatism as we can ." (Emphasis added.) Gotschall added:
11 Please don't imply by anything that we say that the housing bubble
12 doesn't concern us; the rising interest rates don't concern us: that the
13 industry competition and the players in the market don't concern us.
14 But we have been through cycles before and we actually, especially
15 from the finance perspective, we get excited about this because this is
16 the time that we get to put better discipline into our business from
17 what exists during the really good times. [Emphasis added.]
19 statements from the New Century Officer Defendants' press release, conference
20 call and Form 10-Q for the second quarter ended June 30, 2005 and September 6
21 and 7, 2005 Investor Roundtable were materially misstated and omitted to state
material facts required therein or necessary to make the statements contained

23 therein not misleading, at all times throughout the Class Period. Contrary to the
24 above-referenced statements, New Century's financial statements for the second
25 quarter ended June 30, 2005 were not presented in accordance with GAAP, the
26 Company's internal controls suffered from material weaknesses and New Century
27 did not "maintain strict underwriting and risk management disciplines" or book its
28 Residual Interests '`conservatively'' as set forth in paragraphs 55-175 above.
-11 2- CONSOLIDATED CLASS ACTION CON4PL.AINT

1 303. On November 3, 2005, the New Century Officer Defendants issued a
2 press release reporting the Company's earnings results for the third quarter ended
3 September 30, 2005. The Company reported net earnings for the third quarter of
4 $120.1 million, or 52.04 per share. The press release contained income statement
5 and balance sheet data purporting to reflect the Company's financial performance
6 and assets and liabilities for the three months and nine months ended September
7 30, 2005 in accordance with GAAP. The press release stated:
8 The combined REIT and TRS mortgage loan portfolios totaled S 18.3
9 billion at September 30, 2005 and delinquencies and losses continue
10 to perform better than the compan.^pectations . [Emphasis
11 added.]
13 Cole: "In light of the challenging market environment we are quite pleased with
14 our financial results for the third quarter, which produced an after-tax return on
15 equity in excess of 20 percent . Our portfolio of mortgage loans provided greater
16 stability of earnings and revenues in this environment and was the primary
17 contributor to our third quarter earnings of $2.04 per share."
18 304. On November 3, 2005, the New Century Officer Defendants also held
19 a conference call with analysts and investors. During the call, Defendants Cole and
20 Morrice reviewed the Company's reported financial results for the quarter ended
21 September 30, 1-005. During the conference call, Defendant Morrice presented the
^'23 following slide (made available over the Internet) regarding the claimed "strong
loan performance" of New Century's loan portfolio:

24
?5
26
27
28

1
3 Cumulative Fool Loss {i%)
--^---- - Base Loss

cume
T
?.50
?.OCA
J
b%
6
7 0.50
8 0.00X
6 11 16 21 26 1 36
Seasoning (in months)
9
10
11 II Morrice described the slide as follows:
12 This slide illustrates a different approach to illustrating the strong loan

13 performance of our portfolio than we have shown you before, so let
14 me try to explain this graphic. The top line represents our modeled
15 losses. This model is based on the entire history of New Century's
16 loan loss experience, including to a very large extent the performance
17 of loans originated years ago with much lower FICO scores, and other
1s less favorable credit characteristics compared to recent production.
19 The bottom lines, which are somewhat hard to see in several cases
20 because they are so small, represent actual loss experienced to date on
21 our 2003. 2004 and 2005 vintage loans. [Emphasis added.]
During the question-and-answer portion of the conference call. Defendant Morrice
23 stated: " We have not seen any meaningful spike in first payment defaults.
24 certainly something we track carefully, but at this point that has not been our
25 experience ." (Emphasis added.) Defendant Dodge immediately followed by
26 agreeing with Morrice's statement, noting that first payment defaults were "vim
27 modest over the last 12 months ." (Emphasis added.)
28

1 305. On or about November 9, 2005, the New Century Officer Defendants
filed the Company's Form 10-Q for the quarter ended September 30. 2005. The
3 third quarter 2005 Form 10-Q contained consolidated balance sheets and
4 I consolidated statements of earnings purporting to reflect the Company's financial
5 performance and assets and liabilities for the three months ended September 30,
6 1 2005 in accordance with GAAP. The Form 10-Q stated:
7 The Company has prepared the accompanying unaudited condensed

11 and Rule 10-01 of Regulation S-X. Accordingly, they do not include
1% all of the information and footnotes required by generally accepted
13 accounting, principles for complete financial statements. In the
14 opinion of management. all adjustments (consisting of normal
15 recurrine accruals) considered necessary for a fair presentation have
16 been included. [Emphasis added.]
17 The third quarter 2005 Form 10-Q was signed by Defendants Cole , Dodge,
19 306. The third quarter 2005 Form 10-Q provided the following information
21 As of September 30, 2006, the end of our third quarter. our
management, including our Chief Executive Officer, Vice Chairman -
25 procedures , as such term is defined in Rule 13a- 15(e) promulgated
26 under the Securities Exchange Act of 1934, as amended . Based on
?7 that evaluation, our Chief Executive Officer. Vice Chairman -
28 Finance. Chief Financial Officer and President and Chief Operating
-1 15- CONSOLIDATED CLASS ACTION CON PLAINT

Case No. 2:07-ev-00931-DDP (JTLx)
1 Officer concluded, as of September 30. 2005, that our disclosure
2 controls and procedures were effective to ensure that information
3 required to be disclosed by us in reports that we file or submit under
4 the Securities Exchange Act of 1934 is recorded. processed.
5 summarized and reported within the time periods specified in the
6 Securities and Exchange Commission rules and forms . There was no
7 change in our internal control over financial reporting during the
8 quarter ended September 30, 2005 that materially affected, or is
9 reasonably likely to materially affect, our internal control over
10 financial reporting. [Emphasis added.]
11 307. Accompanying the third quarter 2005 Form 10-Q as exhibits were
12 I certifications signed by Defendants Cole, Dodge, Gotschall and Morrice in the
13 form set forth in paragraph 294 above.

16 call and Form 10-Q for the third quarter ended September 30, 2005 were materially
1s the statements contained therein not misleading, at all times throughout the Class
19 Period. Contrary to the above-referenced statements, New Century's financial
20 statements for the third quarter ended September 30, 2005 were not presented in
weaknesses and New Century's underwriting and loan quality was significantly
?3 worse than described as set forth in paragraphs 55-175 above.
24 309. On February 2, 2006, the New Century Officer Defendants issued a
?5 press release reporting the Company's earnings results for the fourth quarter and
26 year ended December 31, 2005. The Company reported net earnings for the fourth
27 quarter of $116.6 million., or $2.00 per share, and net earnings for the year ended
28 December 31, 2005 of $416.5 million, or $7.17 per share. The press release

Case No. 2:07-ev -0093 I -DDP (JTLx)
1 contained income statement and balance sheet data purporting to reflect the
Company ' s financial performance and assets and liabilities for the three months
3 and the year ended December 31. 2005 in accordance with GAAP. The press
4 release stated:
5 As of December 31. 2005, the allowance for losses on loans held for
6 investment was $170.3 million and $27.8 million for the REIT
7 portfolio and TRS portfolios, respectively, representing 1.23 percent
8 and 1.22 percent of the unpaid principal balance of the respective
9 portfolios. This compares with 0.93 percent and 1.20 percent of the
10 unpaid principal balance of the respective portfolios at September 30,
11 2005. Notwithstanding, the increase in loss allowances, portfolio
12 performance to date continues to exceed the company's forecasts.
13 The Company's 60+ day delinquency rates as of December 31, 2005
14 were 3.36 percent at the REIT and 4.10 percent at the TRS,
15 significantly lower than anticipated. Actual losses incurred for the
16 full- year 2005 were $23.3 million at the REIT and $9.0 million at the
17 TRS, also significantly lower than anticipated. It is important to note,
18 however, that as these portfolios mature, the company will continue to
19 build its allowances for loan losses based on its expectation of future
20 losses, which are influenced by overall economic and market
21 conditions.
The press release also contained the following quoted statement from Defendant
?3 Cole:
24 During a year of rising interest rates, intense competition and a
?5 challenging secondary market, we delivered record loan production.
26 reduced loan acquisition costs to a historic low. grew our REIT
27 portfolio of mortgage loans to $13.9 billion, and completed a strategic
28 acquisition that broadened our product offeririgs and marketing

1 channels. All of these accomplishments were achieved while
delivering four consecutive dividend increases.
3 310. On February 2, 2006, the New Century Officer Defendants also held a
4 conference call with analysts and investors. During the call, Defendants Cole.
5 Dodge and Morrice reviewed the Company's reported financial results for the
6 quarter and year ended December 31, 2005. During the call, Defendant Cole
7 stated:
8 [O]ur 60-plus-day delinquency rate was 3.36 at the REITs portfolio
9 and 4.10 at the TRS which are both significantly lower than
10 anticipated, indicating the good quality of loans and the great
11 performance of those assets . At year end, our allowances for losses
12 on loans held for investment was about $170 million in the REIT
13 portfolio and about S28 million in the TRS portfolio, representing
14 1.23 and 1.22, of the unpaid principal balance, of our respective
15 portfolios. [Emphasis added.]
16 During the call, Defendant Dodge referred to the following a slide (made available
17 over the Internet):
18
19
3.5%
3.0%
20 Z. ST.
20T.
i.$%
21 1.0%
2003 Vlnto e
O.Sx
ZppS o0e 2004 YlninOe
0.07L
77
6 it 16 36 31 36
'Doge loss cVrve Is 'ne o¢!IS Ô . avllain(y` !ne pmoeny'f atlowGnce ld loon 10-
24
25 Dodge described the slide as follows:

26 A strong housing market has certainly contributed to our performance
27 but we have also benefited from our strong credit and underwriting
28 standards and servicing platform. These factors are particularly

Case No. 2:07-cv-0093I -DDP (JTLx)
1 evident when we compare our performance to our peers, third party
comparisons of performance generally indicate that we outperform
3 our peer group. The black line on the chart represents our modeled
4 losses based on the entire history of our loan performance over ten
5 years. It includes performance over ten years. It includes
6 Derformance of loans originated nears no with much lower FICO
7 scores and other less favorable credit chara cteristics compared to
8 recent production . [Emphasis added.]
9 311. On or about March 16, 2006, the New Century Officer Defendants
10 filed the Company's Form 10-K for the quarter and year ended December 31,
11 ?005 . The 2005 Form 10-K contained consolidated balance sheets and
12 consolidated statements of earnings purporting to reflect the Company's financial
13 performance and assets and liabilities for the three months and year ended
14 December 31, 2005 in accordance with GAAP. The 2005 Form I 0-K also stated
15 the following regarding New Century's underwriting standards:
16 Our loan origination standards and procedures are designed to
17 produce high quality loans . These standards and procedures
18 encompass underwriter qualifications and authority levels, appraisal
19 review requirements, fraud prevention, funds disbursement controls,
20 training of our employees and ongoing review of our employees'
21 work. We help to ensure that our origination standards are met by
employing accomplished and season managers, underwriters and
23 processors and through the extensive use of technology. We also have
24 a comprehensive training program for the continuing development of
25 both our existing staff and new hires. In addition. we employ
26 proprietary underwriting systems in our loan origination process that
27 improve the consistency of underwriting standards, assess collateral
28

1 adequacy and help to prevent fraud. while at the same time increasing
I productivity . [Emphasis added.]
3 The 2005 Form 10-K was signed by, among others, New Century Officer
4 Defendants Cole, Dodge, Morrice and Gotschall.
5 312. The 2005 Form 10-K provided the following information regarding,
6 New Century' s internal controls and procedures:
7 As of December 31, 2005, the end of our fourth quarter, our
8 management, including our Chief Executive Officer, Vice Chairman-
9 Finance, Chief Financial Officer and President and Chief Operating,
13 that evaluation, our Chief Executive Officer. Vice Chairman-Finance,
14 Chief Financial Officer and President and Chief Operating Officer
15 concluded, as of December 31. 2005, that our disclosure controls and
16 procedures were effective to ensure that information required to be
17 disclosed by us in reports that we file or submit under the Securities
18 Exchange Act of 1934 is recorded, processed, summarized and
19 reported within the time periods specified in the Securities and
20 Exchange Commission rules and forms .
21
There have not been any changes in our internal control over financial
22
23
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
24
under the Exchange Act) during the quarter to which this report
25
relates that have materially affected, or are likely to materially affect,
26
our internal control over financial reporting. [Emphasis added.]
27
28
- 1-10 - CONSOLIDATED CLASS ACTION COMPLAINT

1 313. Accompanying the 2005 Form 10-K as exhibits were certifications
signed by Defendants Cole, Dodge, MorTice and Gotschall in the form set forth in
paragraph 294 above.
4 314. As set forth in paragraphs 55-175 above , the above -referenced
6 I call and Form 10-K for the fourth quarter and year ended December 31, 2005 were
7 materially misstated and omitted to state material facts required therein or

8 necessary to make the statements contained therein not misleading, at all times
9 throughout the Class Period. Contrary to the above-referenced statements, New
10 Century's financial statements for the fourth quarter and year ended December 31,
11 2005 were not presented in accordance with GAAP, the Company's internal
12 controls suffered from material weaknesses and New Century's underwriting and
13 loan quality was significantly worse than described as set forth in paragraphs 55-
14 175 above.
15 315. On May 4, 2006, the New Century Officer Defendants issued a press
16 release reporting, the Company's earnings results for the first quarter ended March
17 31, 2006. The Company reported net earnings for the first quarter of $103.7
1s million, or $1.79 per share. The press release contained income statement and
19 balance sheet data purporting to reflect the Company's financial performance and
20 assets and liabilities for the three months ended March 31, 2006 in accordance with
21 GAAP. The press release stated:
At March 31, 2006, the balance of the REIT mortgage loan portfolio
was $14.1 billion and the balance of the taxable REIT subsidiary
24 (TRS) mortgage loan portfolio was $2.1 billion. The allowance for
25 losses on loans held for investment was S 186.0 million and $23.8
26 million for the REIT and TRS portfolios, respectively, representing
27 1.32 percent and 1.14 percent of the unpaid principal balance of the
28 respective portfolios. This compares with 1.23 percent and 1.22

1 percent of the unpaid principal balance of the respective portfolios at
December 31, 2005. Delinquency rates as of March 31. 2006 and
3 actual losses to date in the company's REIT and TRS portfolios
4 continue to be significantly lower than historical experience. The
company's 60-plus day delinquency rates as of March 31, 2006 were
6 4.46 percent at the REIT and 4.78 percent at the TRS. While actual
7 losses to date have been significantly lower than the company's
8 expectations. the company continues to build its allowances for loan
9 losses based on various factors, which include seasoning of the
10 portfolios, as well as overall economic and market conditions.
[Emphasis added.]
13 Cole: "We achieved strong first quarter 2006 results highlighted by 21 percent
14 growth in EPS, a 17 percent increase in REIT taxable income, and 31 percent
15 growth in mortgage loan production compared with the same period last year."
16 316. On May 4, 2006, the New Century Officer Defendants also held a
17 I conference call with analysts and investors. During the call, Defendants Cole,
18 Dodge and Morrice reviewed the Company's reported financial results for the
19 quarter ended March 31, 2006. During the call, Defendant Cole stated: "Looking
20 at product performance and the REIT portfolio, the 60+ day delinquency rates at
21 quarter end which were 4.46 at the REIT and 4.78 at the TRS which are both
11 significantly lower than the company's historical experience." Defendant Dodge
23 further stated: "[T]he credit performance in both delinquencies and losses is better
24 than our historical experience and continues to exceed our expectations. This
25 performance can be attributed to faster prepayments that have occurred due to the
26 strength of the housing market as well as better credit quality and the success of
27 our servicing platform." (Emphasis added.) In response to a specific question
28 regarding "more activity on reps and warranties and putbacks [or repurchase
122 CONSOLIDATED CLASS ACTION COAIPL.ALNT

1 claims] from some of the whole loan buyers, Defendant Morrice stated: `'I guess in
terms of the putbacks, I think your antennae are correct. We see a modest rise in
3 the tightness of the buyers on that. I would not call it material at this point, but a
4 modest rise . Certainly something we want to stay on top of." (Emphasis added.)
5 317. On or about May 10, 2006. the New Century Officer Defendants filed
6 the Company's Form 10-Q for the quarter ended March 31, 2006. The first quarter
7 2006 Form 10-Q contained consolidated balance sheets and consolidated
9 and assets and liabilities for the three months ended March 31. 2006 in accordance
11 The Comnanv has nrenared the accomnanvin2 unaudited condensed
14 interim financial information and with the instructions to Form 10-Q
19 recurring accruals) considered necessary for a fair Dresentation have
21 The first quarter 2006 Form 10-Q was signed by Defendants Cole, Dodge and
II Morrice.
28 of our disclosure controls and procedures. as such teen is defined in
-Ill,- CONSOLIDATED CLASS ACTION COMPLAINT

Case No . 2:07-cv-0093 I -DDP (JTLx )
1934. as amended. Based on that evaluation, our Chief Executive
3 Officer. Chief Financial Officer and President and Chief Operating
4 Officer concluded, as of March 31. 2006, that our disclosure controls
7 Securities Exchange Act of 1934 is recorded, processed, summarized
15 certifications signed by Defendants Cole. Dodge and Morrice in the form set forth
17 3?0. As set forth in paragraphs 55-175 above, the above-referenced
18 statements from the New Century Officer Defendants' press release , conference
19 call and Form 10-Q for the first quarter ended March 31, 2006 were materially
21 the statements contained therein not misleading , at all times throughout the Class
?1) Period. Contrary to the above - referenced statements , New Century 's financial
23 statements for the first quarter ended March 31, 2006 were not presented in
25 weaknesses and New Century ' s underwriting and loan quality was significantly
26 worse than described as set forth in paragraphs 55-175 above . Moreover,'
27 Defendant Morrice's statement regarding a "modest" rise in repurchase claims was
28

Case No. 2:07- cv-0093 I -DDP (JTLx)
1 materially false and misleading when made for the reasons set forth in paragraphs
55-175 above.
3 321. On August 3, 2006, the New Century Officer Defendants issued a
4 press release reporting the Company's earnings results for the second quarter ended
5 June 30, 3006. The Company reported net income for the second quarter of $105.5
6 million, or S1.81 per share. The press release contained income statement and
7 balance sheet data purporting to reflect the Company's financial performance and
8 assets and liabilities for the three months and six months ended June 30, 2006 in
9 accordance with GAAP. The press release stated:
10 At June 30, 2006, the balance of the mortgage loan portfolio was
11 $16.0 billion. The allowance for losses on loans held for investment
12 was $209.9 million, representing 1.31 percent of the unpaid principal
13 balance of the portfolio. This compares with 0.79 percent of the
14 unpaid principal balance of the portfolio at June 30, 2005 and 1.30
15 percent of the portfolio at March 31, 2006. Delinquency rates as of
16 June 30, 2006 in the company's portfolio continue to be significantly
17 lower than historical experience . The company's 60-plus day
18 delinquency rate as of June 30, 22006 was 4.61 percent compared with
19 4.50 percent in the previous quarter. The company's 2005 and 2006
20 vintages are experiencing, more normalized delinquency trends than
21 the 2003 and 2004 vintages, which have performed exceptionally well
when compared with historical experience. "We are comfortable with
23 our current loan loss reserve levels, which take into consideration not
24 only normal portfolio seasoning but also our higher cumulative loss
25 expectations for the newer vintages ," said Patti M. Dodge, Executive
26 Vice President and Chief Financial Officer. [Emphasis added.]
28 Morrice: "Our second quarter results are evidence of the strength and stability of

1
I our franchise. We achieved the second highest quarterly loan production volume in
our history, while substantially improving our operating margin over the first
3 quarter in a challenging environment. As a result, our second quarter net earnings
4 were $105.5 million, or $1.81 per share, an 11 percent increase in net earnings
5 compared with the second quarter of 2005 ."
6 322. On August 3, 22006, the New Century Officer Defendants also held a
7 conference call with analysts and investors. During the call, Defendants Morrice
8 and Dodge reviewed the Company's reported financial results for the quarter ended
9 June 30, 2006. During the call, Defendant Morrice stated: "Although we are
10 seeing delinquencies and losses trending higher, credit performance remains strong
11 relative to our modeled assumptions, and we are comfortable with our current
12 reserve levels ." (Emphasis added.) Similarly, Dodge stated: "If you compare
13 them to historic, vintages for 2005 and 2006 performed still meaningfully better."
14 (Emphasis added.) A slide presented by the Company via the Internet during the
15 conference call entitled "Loan Seasoning and Credit Performance" further stated:
V
16 "We believe we are appropriately reserved for expected losses ." (Emphasis
17 added. ) During the call. Defendant Dodge responded to question regarding
18 repurchase claims and loans sold at a discount as follows:
19 Yes, I would tell you that while we are seeing that - a modest upward
20 in investor due diligence and loans that we are repurchasing as a result
21 of early payment defaults. Most of the reasons for the increase in the
1) 1) discounted sales is in terms of the second [trust deeds] And the first
23 [quarter] you might recall we did a securitization of those second
24 [trust deeds] because the whole loan market at that time was very
25 weak. The whole loan market for second [trust deeds] strengthened
26 pretty meaningfully in the second quarter. And we took the
27 opportunity to sell a pool of those loans for a price that was just barely
28 under par. I would tell you that most of the second [trust deeds] that
- i26- CONSOLIDATED CLASS ACTION COMPLAINT

Case No. 2:0 7 -cv-009 3 I -DDP (JTLx)
1 we originate are the 20% portion of what we call an 80/20 loan. And
2 we generally price the combined 80/20 loan to achieve our target
3 profit margin. So you shouldn't be concerned that if we carve out the
4 20% second [trust deedsl and sell that at a discount that that means
5 that we have a particular issue with those loans . We look at the
6 overall profitability of the combined loans. [Emphasis added.]
7 323. On or about August 9. 2006, the New Century Officer Defendants
8 filed the Company's Form 10-Q for the quarter ended June 30, 2006. The second
9 quarter 2006 Form 10-Q contained consolidated balance sheets and consolidated
11 11 and assets and liabilities for the three months ended June 30, 2006 in accordance

13 The Company has prepared the accompanying unaudited condensed
17 and Rule 10- 01 of Regulation S-X. Accordingly, they do not include
20 opinion of management , all adjustments (consisting of normal
1) 1) been included . [Emphasis added.]
23 The second quarter 2006 Form 10-Q was signed by Defendants Cole. Dodge and
24 II Morrice.
25 324. The second quarter 2006 Form 10-Q provided the following
26 information regarding New Century's internal controls and procedures:
27 As of June 30, 2006, the end of our second quarter, our management,

Case No . 2:07-cv-0093 I -DDP (JTLX )
1 President and Chief Operating Officer. has evaluated the effectiveness
of our disclosure controls and procedures. as such term is defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of
4 1934. as amended. Based on that evaluation, our Chief Executive
5 Officer Chief Financial Officer and President and Chief Operating
6 Officer concluded, as of June 30. 2006, that our disclosure controls
10 and resorted within the time periods specified in the Securities and
11 Exchange Commission rules and forms. There was no change in our
1511 added.]
16 325. Accompanying the second quarter 2006 Form 10-Q as exhibits were
is in paragraph 294 above.
19 326. As set forth in paragraphs 55-175 above, the above- referenced
21 call and Form 10-Q for the second quarter ended June 30, 2006 were materially
misstated and omitted to state material facts required therein or necessary to make
23 the statements contained therein not misleading, at all times throughout the Class
24 Period. Contrary to the above-referenced statements, New Century's financial
?5 statements for the second quarter ended June 30, 2006 were not presented in
27 weaknesses and New Century's underwriting and loan quality was significantly
28 worse than described as set forth in paragraphs 55-175 above. Moreover,

1 Defendants' statements regarding a "modest" rise in repurchase claims and
2 "appropriate" loan loss reserves were materially false and misleading when made
3 for the reasons set forth in paragraphs 55-175 above.
4 327. On September 8, 2006, the New Century Officer Defendants issued a
5 press release reporting August 2006 total. loan production of $5.8 billion. The
6 press release contained the following quoted statement from Defendant Morrice:
7 "We are also pleased with the aualitv of the loans we are oriainatin_2.... We
8 believe our strict underwriting guidelines, skilled risk management and servicing
9 teams and enhanced fraud detection tools have resulted in lower early payment
10 default and repurchase rates than many of our peers . While we have seen an
11 increase in early payment defaults from 2005 levels as a result of the macro-
12 economic environment, -the increase has been modest." (Emphasis added.)
13 328. On November 2, 2006, the New Century Officer Defendants issued a
14 press release reporting the Company's earnings results for the third quarter ended
15 September 30, 2006. The Company reported net income for the third quarter of
16 $66.6 million, or $1.12 per share. The press release contained income statement
17 and balance sheet data purporting to reflect the Company's financial performance
18 and assets and liabilities for the three months and nine months ended September
19 30, 2006 in accordance with GAAP The press release stated:
20 At September 30, 2006, the allowance for losses on mortgage loans
?1 held for investment and real estate owned was $239.4 million
22 compared with $236.5 million at June 30, 2006. These amounts
?3 represent 1.68 percent and 1.47 percent of the unpaid principal
24 balance of the mortgage loan portfolio, respectively. The company's
25
60-day-plus delinquency rate as of September 30, 2006 was 5.95
26 percent compared with 4.61 percent in the second quarter of 2006.
27 The higher delinqu ency rate in the third quarter was the result of
28 normal portfolio seasoning and hi(zher delinquencies in the 2005 and

1 2006 vintages compared with the 2003 an d 2004 vintages. The
company planed for these higher delinquency rates and believes it is
3 adequately reserved for the expected higher level of loan losses after
4 tivina consideration to the performance of its newer vintages .
5 [Emphasis added.]
7 Morrice: "Excluding the hedging-related accounting charges, our operating results
8 I were solid. As expected, we maintained loan production volume at a level
9 comparable to the previous quarter, achieved record low loan acquisition costs, and
10 improved portfolio interest spread before the impact of hedging during the third
11 quarter.''
12 329. On November 2, 2006, the New Century Officer Defendants also held
13 II a conference call with analysts and investors. During the call, Defendants Mon-ice
14 and Dodge reviewed the Company's reported financial results for the quarter ended
15 September 30, 2006. During the conference call, Defendant Morrice stated:
16 [W]e are aware of the heightened concern over first payment defaults
17 and loan repurchases. While these issues certainly do not represent a
18 highlight of the current environment, I do want to spend some time up
19 front discussing these important topics. In order to understand these
20 issues, I think it is useful to work back wards through the chain of
21 events. As most of you know, the most significant financial issue is
loan repurchases, which are at the end of the cycle, because it is
23 generally non-performing repurchase loans that are sold at the deepest
24 discounts. Quarterly repurchase numbers can be misleading. because
25 the timing of repurchase claims, and the completion of actual
26 repurchases. varies from quarter to quarter. Because of this variation,
27 our third quarter repurchases were actually down compared to the
28 second quarter. even though the year to date trend is higher . And we

Case No. 2:07 -cv-00931-DDP (JTLx)
1 expect higher level of repurchases in the fourth quarter, and probably
the first quarter of 2007. Most repurchases. in turn, are the result of
first, or early payment defaults, which we typically protect loan-
4 buyers against when selling whole loans. As reflected in slide six,
5 first payment defaults are up on a quarter-over-quarter basis, and are
6 nearly double the levels we experienced a year ago.
7
8 So what is driving the increase in first payment defaults? The answer

9 is that there are two main drivers. One is market conditions.
10 Specifically, interest rate increases over the last 12 to 18 months and
11 the decline in the housing market. Obviously there is not much we
i% can do about these macro-economic conditions.
13
14 The other component, however. is the layering of risk characteristics

15 in the loans. For example. a combination of borrower and collateral
16 characteristics that include a first-time home-buyer with stated
17 income, and a high loan to value ratio . The bad news is that as rates
18 have risen and the housing market has declined, the impact of this
19 layering of risks is translating into higher level of first-payment
20 defaults and repurchases.
21
22 I also want to emphasize that we believe that many of the credit-risk

management practices we employ, such as the FraudMark detection
24 tool, various appraisal scoring tools, our risk-management practices.
25 extensive analytics on broker and product performance. active credit
26 administration. and our strong servicing processes. have all helped to
?7 reduce the amount of first payment default and repurchase activity
28 that we are experiencing versus our peers . [Emphasis added.]
-13 I - CONSOLIDATED CLASS ACTION COMPLAINT

1 During the call, Defendant Dodge further stated:
3 Turning to the portfolio credit performance. we observed that the

4 delinquency rates in our portfolio are increasing as the portfolio
5 seasons. We have also observed the ?005 and 2006 vintages
6 experiencing delinquency ramp rates that are much more comparable
7 to what we experienced in our earlier years and certainly faster than
8 we experienced in 2003 and 2004. Not only had we anticipated this
9 would occur based on our expectation of a softening trend in the
10 housing market, our loan loss allowances are based on this
11 expectation.
12 T
13 I think I'd certainly point out that we believe that we have done, long
14 before even the third quarter, built in our allowance for loan loss that
15 our 2005 and 2006 vintages would perform much more comparable to
16 our earlier vintages. So I can't speak for our competitors but if others
17 were using more recent experience like 2003 and 2004 as the basis for
18 their 2005 and 2006 provisions for loan losses, they might find
19 themselves in the position you just described today. We've been
'0 planning for those higher levels of delinquencies and losses all along.
21
I'd point you to a table in the press release where we show the total
23 amount in the allowance for loan losses at the end of the quarter, and
24 its roughly $240 million at the end of Se tember . And to give you
25 some sense of how that positions us relative to what we're
26 experiencing in losses, you can look at the level of charge-offs and get
27 a sense that we have several years' worth of losses built up in the
28 current allowance for loan losses. So that ought to give you some

1 comfort that we believe that that loan loss allowance is very fairly and
adequately stated . [Emphasis added.]
3 A slide presented by the Company via the Internet during the conference call
4 entitled "Mortàge Loan Portfolio Summary" stated: "WWTe planned for these higher
5 delinquency rates and believe we are adequately reserved for the expected higher
6 1 level of loan losses after giving consideration to the performance of these newer
7 vintages ." (Emphasis added.)

8 330. On or about November 9, 2006, the New Century Officer Defendants
9 11 filed the Company's Form 10-Q for the quarter ended September 30. 2006. The
10 third quarter 2006 Form 10-Q contained consolidated balance sheets and
11 consolidated statements of earnings purporting to reflect the Company's financial
12 performance and assets and 'liabilities for the three months ended September 30,
13 2006 in accordance with GAAP. The Form 10-Q stated:
14 The Company has prepared the accommanvinn unaudited condensed
?o accounting principles for complete financial statements. In the
recurring accruals) considered necessary for a fair Dresentation have
23 been included. [Emphasis added.]
24 The third quarter 2006 Form 10-Q was signed by Defendants Cole, Dodge and
25 I Morrice.
26 331. The third quarter 2006 Form 10-Q provided the following information
28

1 As of September 30. 2006, the end of our third quarter, our
management, including our Chief Executive Officer, Chief Financial
3 Officer and President and Chief Operating Officer, has evaluated the
4 effectiveness of our disclosure controls and procedures, as such term
5 is defined in Rule 13a-15(e) promulgated under the Securities
6 Exchange Act of 1934, as amended. Based on that evaluation, our
7 Chief Executive Officer. Chief Financia l Officer and President and
8 Chief Operating Officer concluded, as of September 30.2006. that our
9 disclosure controls and procedures were effective to ensure that
10 information required to be disclosed by us in reports that we file or
11 submit under the Securities Exchange Act of 1934 is recorded,
12 processed, summarized and reported within the time periods specified
13 in the Securities and Exchange Commission rules and forms. There
14 was no change in our internal control over financial reporting during
15 the quarter ended September 30, 2006 that materially affected, or is
16 reasonably likely to materially affect, our internal control over
18 332. Accompanying the third quarter 2006 Form i0-Q as exhibits were
21 333. As set forth in paragraphs 55-175 above. the above -referenced
statements from the New Century Officer Defendants' September 8, 2006 press
23 release and press release, conference call and Form 10-Q for the third quarter
24 ended September 30, 2006 were materially misstated and omitted to state material
2j facts required therein or necessary to make the statements contained therein not
26 misleading, at all times throughout the Class Period. Contrary to the above-
27 referenced statements, New Century's financial statements for the third quarter
28 ended September 30, 2006 were not presented in accordance with GAAP, the

1 Company's internal controls suffered from material weaknesses and New
2 Century's underwriting and loan quality was significantly worse than described as
3 set forth in paragraphs 55-175 above. Moreover, Defendants' statements regarding
4 the adequacy of New Century's Allowance for Loan Losses reserve and the rate of
5 its repurchase claims were materially false and misleading when made for the
6 reasons set forth in paragraphs 55-175 above. Contrary to Defendants' November
7 '1006 press release and conference call statements, the Company's Allowance for
8 Loan Losses reserve was not increased from the prior quarter, but, in fact, reduced.
9 A. New Century's February 7,
2007 And Subsequent Disclosures
10
334. On February 7, 2007, after the close of trading and just one day before
11
the Company was scheduled to report 2006 fourth quarter and year-end results,
12
New Century issued a press release announcing that it would restate its reported
13
financial results for the quarters ended March 31, June 30 and September 30, 2006.
14
The press release stated:
15
The Company establishes an allowance for repurchase losses on loans
16
sold, which is a reserve for expenses and losses that may be incurred
17
by the Company due to the potential repurchase of loans resulting
18
from early-payment defaults by the underlying borrowers or based on
19
alleged violations of representations and warranties in connection with
20
the sale of these loans. When the Company repurchases loans, it adds
21
the repurchased loans to its balance sheet as mortgage loans held for
sale at their estimated fair values, and reduces the repurchase reserve
23
by the amount the repurchase prices exceed the fair values. During
24
the second and third quarters of 2006, the Company's accounting
25
policies incorrectly applied Statement of Financial Accounting
26
Standards No. 140 - Accounting for Transfers and Servicing of
27
Financial Assets and Extinguishment of Liabilities. Specifically. the
28

1 Company did not include the expected discount upon disposition of
loans when estimating its allowance for loan repurchase losses .
3
4 In addition, the Company's methodology for estimating the volume of

5 repurchase claims to be included in the repurchase reserve calculation
6 did not DroDerly consider, in each of the first three quarters of 2006
7 the growing volume of repurchase claims outstanding that resulted
8 from the increased pace of repurchase requests that occurred in 2006.
9 compounded by the increasing length of time between the whole loan
10 sales and the receipt and processing of the repurchase request .
X X *
11
12 Although the Company's full review of the legal, accounting and tax
13 impact of the restatements is ongoing, at this time the Company
14 expects that, once restated, its net earnings for each of the first three
15 quarters of 2006 will be reduced.
16
17 In light of the pending restatements. the Compan'spreviously filed

18 condensed consolidated financial statements for the quarters ended
19 March 31, June 30 and September 30. 2006 and all earnings-related
20 Dress releases for those Deriods should no longer be relied upon. The
21 Company expects to file amended Quarterly Reports on Form 10-Q
for the quarters ended March 31, June 30 and September 30, 2006 as
23 soon as practicable, with a goal to file by March 1, 2007. The
24 Company also expects that the errors leading to these restatements
25 constitute material weaknesses in its internal control over financial
26 reporting for the year ended December 31, 2006 .
27
28

1 The Company's fourth quarter and full-year, 2006 earnings
announcement, originally scheduled for February 8, 2007, has been
postponed to an undetermined future date, which will follow the
4 Company's filing of its amended Quarterly Reports on Form 10-Q for
5 the quarters ended March 31, June 30 and September 30, 2006.
6 The increasing industry trend of early-payment defaults and,
7 consequently, loan repurchases intensified in the fourth quarter of
8 2006. The Company continued to observe this increased trend in its
9 early-payment default experience in the fourth quarter, and the
10 volume of repurchased loans and repurchase claims remains high.
11 In addition, the Company currently expects to record a fair value
12 adjustment to its residual interests to reflect revised prepayment, loss
13 and discount rate assumptions with respect to the loans underlying
14 these residual interests, based on indicative market data. While the
15 Company is still determining the magnitude of these adjustments to its
16 fourth quarter 2006 results, the Company expects the combined
17 impact of the foregoing to result in a net loss for that period.
19 The Company's press release sought to minimize the market reaction to these
20 disclosures by stating: "Importantly, the foregoing adjustments are generally non-
21 cash in nature. Moreover, the company had cash and liquidity in excess of $350
'7 I million at December 31, 2006." With regard to internal controls, the press release
23 further stated: "[T]he Company has taken significant steps to remediate these
24 weaknesses and anticipates remediating them as soon! as practicable." The
25 Company's cash and liquidity disclosure, however, conveniently failed to disclose
26 the effect of the January 31, 2007 dividend payment on cash and liquidity.
27 335. Also on February 7, 2007, after the close of trading, Defendant
28 Morrice held a listen-only conference call with analysts and investors to review the

Case No. 2:07-cv-0093 l -DDP (JTLx)
1 Company's press release. During the call, Defendant Morrice read the Company's
2 February 7, 2007 press release and added only the following additional statement:
3 Let me conclude by saying that I certainly understand your interest in
4 learning more about these events and their ramifications, and I ask for
5 your patience in allowing us to continue our review so that we can
6 finalize the restatements and file our Form 10-K as soon as possible.
7 `'While we are unable to comment further about the restatements and
8 our 2006 results at this time, please know that we are working
9 diligently to complete the review and will be back to you with more
10 complete information as soon as we can. Thank you for your
11 understanding and support.
12 336. In response to the Company's disclosures, the price of New Century
13 common stock closed on February 8, 2007, the next trading day, at $19.24 per
14 share, a decline of $10.92 per share, or approximately 36%, from the closing price
15 of $30.16 per share on February 7, 2007, on extraordinary trading volume.
16 Similarly, the price of New Century Series A and B Preferred Stock declined by
17 approximately 10% on heavy trading.
18 337. The Company's February 7, 2007 announcements came less than three
19 months after newly hired Tajvinder S. Bindra replaced Defendant Dodge as Chief
20 Financial Officer, effective November 15, 2006. and just over one month after
21 Defendant Cole retired as Chairman of the Board of !the Company, effective
11) December 31, 2006.
23 338. On February 8, 2007, Roth Capital issued an analyst report
24 suspending its coverage of New Century noting that:
25 Our previous set of estimates and valuation relied.) to a large degree,
26 on previously published and filed financial statements . ... Because
I
27 New Century's published financial statements nog longer appear to
28 reflect a fair representation of the Company's results of operations (its

1 earnings power) and financial condition as of the end of the periods
reported, we can no longer rely on stated book value - or, for that
3 matter, any other balance reported as of 9/30/06 - as a starting point
4 for our own calculations of the fair value of the Company's residual
5 assets.
6
7 Similarly, we do not believe we can use current or estimated

8 production levels in arriving at an estimate of the Company's
9 mortgage banking (origination) platform . Not knowing what portion
10 of New Century's production is coming back to it in the form of
11 repurchases, we cannot make a stab at the value of the Company's
12 origination platform []. Because the skill, the value added in
13 originating (or manufacturing) a loan is not the dollar volume of loans
14 produced, but, rather, in the dollar volume of loans'ithat have a market
15 value in excess of the costs incurred (resources expended) to originate
16 those loans.
17 * *
18 When interest rates are in free fall and home values are skyrocketing.
19 the market value of just about every loan - even if it is delinquent - is
20 rising because the value of the underlying collateral is increasing and
21 the ability of all parties to the transaction to make themselves whole is
improving. Any entity can originate a loan in that environment and
23 make money. There are no early payment defaults in this
24 environment. No repurchase requests. Why would a whole loan
25 buyer or investor put back a loan to the originator when that loan is
26 increasing in market value every day?
27
28

1 The true value, in our opinion, is in the volume of loans an
organization can produce at a profit ....
3
4 The upshot of the foregoing is that we have no reasonable basis on

which to calculate estimates of GAAP earnings, taxable income,
6 dividends or fair value. Until the Company can provide restated
7 operating results and statements of financial condition for 2006
8 interim periods and 4`h quarter operating results and a December 31.
9 2006 balance sheet - as well as 2007 guidance - in which we feel
10 confident, we cannot arrive at what we deem' to be reasonable
11 estimates of performance or value . [Emphasis added.]
12 339. Piper Jaffray issued a report on February 8, 2007 noting: "We believe
13 that relaxed underwriting standards have been the main driver for the large number
14 of loan repurchases." Friedman, Billings, Ramsey & Co.!, Inc. also issued a report
15 on February 8, 2007 noting: "Liquidity Is The Big Question Now. As a result of
16 the restatements, higher repurchases, and anticipated'I net losses, we believe
17 warehouse lines could be at risk of being pulled."
18 340. On March 1, 2007, after the close of trading, New Century issued a
19 press release announcing that it expected to file a Form 12b-25 Notification of Late
20 Filing with the SEC with respect to its Form 10-K for the year-ended December
21 31, 2006. The price of New Century common stock closed on Friday, March 2,
2007, the next trading day after New Century's disclosure, at $14.65 per share, a.
23 decline of $1.20 per share, or approximately 7.6%, from the closing price of
24 $15.85 per share on March 1, 2007, on extraordinary trading volume.
25 341. On Friday, March 2, 2007, after the close of trading, New Century
26 filed with the SEC a Form 12b-25 Notification of Late Filing. The Form 12b-25
27 stated:
28

Case No. 2:07- ev-0093 I -DDP (JTLx)
1 As previously announced, the Company will restate its consolidated
2 financial results for the quarters ended March 31, June 30 and
September 30. 2006 to correct errors the Company discovered in its
4 accounting and financial reporting of loan repurchase losses.
5
6 ith the restatement Drocess. the Audit Committee of

7 's Board of Directors (the "Audit Committee"). advised
8 by its independent counsel who is assisted by forensic accountants,
9 has initiated its own independent investigation into the issues giving
10 rise to the Company's need to restate its 2006 interim financial
11 statements, as well as issues pertaining to the Company's valuation of
12 residual interests in securitizations in 2006 and prior periods. The
13 Audit Committee will expand the scope of its investigation as may be
14 necessary to cover other matters that are develope4 in the course of its
15 investigation or otherwise come to its attention. The 2006 Form 10-K
16 will be filed after this investigation is complete.
17
is In addition, the Company is determining the amount of the adjustment

19 to the estimated fair value of its residual interests in securitizations to
20 reflect revised prepayment, cumulative loss and discount rate
21 assumptions with respect to the mortgage loans underlying these
1? 1) assets. The Company is revising the assumptions, to reflect relevant
23 data such as recent loss experience, changing market conditions and
24 updated expectations regarding higher credit losses and faster
?5 prepayment speeds.
26
27 In accordance with Section 404 of the Sarbanes-Oxley Act of 2002,

28 the Company' s management is assessing the effectiveness of its

1 internal control over financial reporting as of December 31. 2006, and
2 expects to conclude that there were material weaknesses in the
3 internal control over financial reporting as of December 31, 2006.
4 After management completes its assessment. the Company will
5 include the assessment in the 2006 Form 10-K. The assessment will
6 discuss the material weaknesses that management identifies and the
7 actions that have been and will be taken to remediate these material
8 weaknesses.
9
10 Estimated Effect of Restatement - Although a full review is ongoing,

11 the Company currently expects that the modifications to the allowance
12 for 'loan repurchase 'losses will result in restated net income for the
13 first three quarters of 2006 that is significantly lower than previously
14 reported in the Company's 2006 interim financial statements .
15
16 Estimated Fourth Quarter and Full-Year Results - Although the

17 Company's mortgage loan origination volume increased in 2006 when
18 compared to 2005, the Company's results of operations for the quarter
19 and year ended December 31. 2006 will reflect declines in earnings
20 and profitability when compared to the same periods in 2005. The
21 currentl
11) fourth quarter and the full year ended December 3 21006 .
23
These negative trends in results compared to 2005 are attributable
24
primarily to:
25
26
Lower Net Gain on Sale - The Company' s net ':gain on sale of its
27
mortgage loans declined over the course of 2006 due primarily to
28
(i) increased exposure to repurchased loans from whole loan buyers.
Case No . 2:07-cv-0093I -DDP (JTLx)
1 (ii) increases in the percent of loans rejected by whole loan investors
during their due diligence review prior to purchase and (iii) increasing
3 severity of loss upon disposition of repurchased and other loans in
4 discounted loan sales.
5
6 Reduction in Carrying Value of Residual Assets - The Company

7 expects to record an adjustment to the estimated fair value of its
8 residual interests in securitizations to reflect revised prepayment,
9 cumulative loss and discount rate assumptions with respect to the
10 mortgage loans underlying these residual interests.
11
12 Reduction in Carrying Value of Mortgage Loans Held for Sale - The

13 Company expects to record a lower-of-cost-or-market valuation
14 allowance reflecting the Company's current estimate of the fair value
15 of its inventory of mortgage loans held for sale, which is lower than
16 the Company's cost basis in those loans. This fair value estimate
17 reflects changes in market conditions.
18
19 Allowance for Losses on Loans Held for Investment - The Company

20 expects to record an increase in its allowance for losses on its
21 portfolio of loans held for investment reflecting relevant data such as
22 recent loss experience, changing market conditions and updated
23 expectations regarding higher credit losses and faster prepayment
24 speeds .
25
26 The Company currently relies on its 15 short-term repurchase

27 agreements and aggregation credit facilities and an asset-backed
28 commercial paper facility that collectively provide'the Company with

1 an aggregate of approximately $13.0 billion of committed and $4.4
billion of uncommitted borrowing capacity to fund mortgage loan
3 originations and purchases pending the pooling and sale of such
4 mortgage loans.
5
6 These financing arrangements generally require ithe Company to

7 deliver timely financial statements prepared in: accordance with
8 generally accepted accounting principles to its lenders. Because of the
9 previously announced restatement. the Company obtained written
10 waivers from its various lenders with respect to compliance with this
11 delivery requirement through March 15, 2007. If, as may occur, the
Company does not file its restated financial statements for the quarters
13 ended March 31, June 30 and September 30, 2006 and the 2006 Form
14 10-K on or before March 15, 2007, the Company will seek to obtain
15 additional written waivers from its various lenders with respect to this
16 delivery requirement.
17
18 In addition, 11 of the Company's 16 financing arrangements require it

19 to report at least $1 of net income for any rolling two-quarter period.
20 The Company expects that it will not meet this requirement for the
21 two-quarter period ended December 31, 2006. As a result, the
Company is seeking to obtain waivers with respect to this covenant.
23
={_
24
In addition , where applicable , the Company is seeking amendments to
25
its financing arrangements to modify this rolling two-quarter net
26
income covenant for the remainder of 2007. Although there can be no
27
assurance that the Company will receive these amendments and
28

Case No. 2:07 - cv-00931 -DDP (JTLx)
11 waivers from all of its lenders, the Company is in active dialogue with
these lenders and has made progress in this regard.
4 In the event the Company is unable to obtain satisfactory amendments

5 to and/or waivers of the covenants in its financing arrangements from
6 a sufficient number of its lenders, or obtain alternative funding
7 sources, KPMG has informed the Audit Committee that its report on
8 the Company's financial statements will include an explanatory
9 paragraph indicating that substantial doubt exists as to the Company's
10 ability to continue as a going concern .
11
12
13 The staff of the SEC has requested a meeting with the Company to
14 discuss the events leading up to the announcement of the restatements
15 and the Company intends to comply with the SEC's request .
16
17 On February 22, 2007, the Company receiv ed a letter dated

18 February 21, 2007 from the NYSE Regulation Inc indicating that its
19 Market Trading Analysis Department is reviewing, transactions in the
20 Company's securities prior to the February 7. 2007 announcement of
21 the restatement process and that the Company expected a loss in the
1) 1) fourth quarter of 2006 . In that regard, the letter requested certain
23 information from the Company, which the Company has agreed to
24 provide.
25
26 On February 28. 2007. the Company received a letter from the United
27 States Attorney's Office for the Central District of California (the
28 U.S. Attorney's Office") indicating that it was conducting a criminal

1 inauirv under the federal securities laws in connection with trading in
2 the Company's securities, as well as accounting erirors regarding the
3 Company's allowance for repurchase losses . The U.S. Attorney's
4 Office is requesting voluntary assistance by the Company, which the
5 Company has agreed to provide. [Emphasis added.]
6 342. On Saturday, March 3. 2007, The New York Times highlighted the
7 Company's disclosures that Federal prosecutors and securities regulators were
8 1 investigating stock sales and accounting errors at New Century. The New York
9 Times reported:
10 It is unclear what stock sales investigators are looking at. but data
11 from securities filings compiled by Thompson Financial show that
12 two of the Company's top executives sold sizable blocks of shares in
13 the second half of last year. Robert K. Cole, a former chairman and a
14 founder of the Company. sold stock worth $6.7 million in the third
15 and fourth quarters after not selling significant numbers of shares for
16 the previous three quarters. And Edward F. Gotschall, another
17 founder and vice chairman, sold shares worth $14.7 million after not
18 selling significant numbers of shares for the previous six months.
20 343. On March 5. 2007, The New York Times reported that "New
21 Century's disclosure of the federal investigations on Friday [March 2. 2007] was
the most serious in a string of shocks to have rocked the industry in the last three
23
11 months. " The New York Times further reported on the personal wealth and stock
24 sales of New Century's senior executives:
25 The three founders of New Century . . . together made more than

26 $40.5 million in profits from selling shares in the Company from 2004
27 to 2006, according to an analysis by Thompson Financial. They
?8 collected millions of dollars more in dividends, salaries bonuses and

1 perks. . . . In a series of sales from August to November [2006]. two
2 of the Company's founders sold shares for an average price of about
3 S40 a share, for a total profit of $21.4 million. .', .. The founders'
4 stock also rose in the social circles of southern California. the
5 epicenter of the boom in subprime. . . . Robert K. Cole, 60. a co-
6 founder who retired as chairman and chief executive last year, lives in
7 a 6,100 square foot oceanfront home in Laguna Beach that is valued at
8 tens of millions of dollars .... Edward F. Gotschall, 52, another co-
9 founder who is vice chairman of the board. donated $3 million for an
10 expanded trauma center at Mission Hospital that will be named for
11 him and his wife Susan.
12 The New York Times quoted former executive Kal Elsayed who spent nine years at
13 New Century before leaving to start his own mortgage firm in 2005 as stating:
14 "'We made so much money you couldn't believe it. And you didn't have to do
15 anything. You just had to show up." The New York Times further reported:
16 [A]bout 13.8 percent of the loans in a group of mortgages New
17 Century sold to investors in April [2006] were behind in payments or
18 in foreclosure by January [2006]. By comparison„ only 6 percent of
19 loans in a pool sold to investors in March 2005 had met that same fate
20 by January 2006. Investors and regulators fear that problems will
21 only worsen as so many borrowers have fallen behind so quickly,
22 especially at a time when the overall economy is healthy. The
23 )henomenon suggests that lending standards were si
24 weakened last year and that lenders were not as watchful for
25 fraudulent transactions . [Emphasis added.]
26 344. The price of New Century common stock closed on Monday. March
27 5. 2007, the next trading day after New Century's March 2, 2007 disclosures and
28 the news reports which followed, at S4. 5 6 per share, a delcline of $10.09 per share.
-147- CONSOLIDATED CLASS ACTION CONWL. T

or approximately 69%, from the closing price of S14.65 per share on March 2,
I 2007, on extraordinary trading volume. Similarly, the price of New Century Series
3 A and B Preferred Stock declined by approximately 55% and 58%, respectively, on
4 heavy trading.
5 345. On March 8, 2007, New Century filed with the SEC a Form SC
6 13D/A which disclosed: "In a letter sent by David Einhorn to the Board of
7 Directors of New Century on March 7. 2007, Mr. Einhorn resigned as a director of
8 New Century effective as of 7:00 p.m. EST on March 7, 2007."
9 346. In response to the Company's disclosure, the price of New Century
10 common stock closed on March 8, 2007, at $3.87 per share, a decline of $1.29 per
11 share, or approximately 25%, from the closing price of $5.16 per share on March
12 7, 2007, on extraordinary trading volume. Similarly, the price of New Century
13 Series A and B Preferred Stock declined by approximately 9% and 5%,
14 respectively, on heavy trading. The New York Times reported that the price of
15 New Century shares fell as "Einhorn's departure might mean that the Company's
16 troubles were intensifying."
18 press release announcing that as a result of "its current constrained funding
19 capacity," New Century had elected to cease accepting loan applications from
20 prospective borrowers "effective immediately" while the Company sought to
21 obtain additional funding capacity. The press release further reported that New
Century was in discussions with lenders and other third parties regarding
23 refinancing or other alternatives to obtain additional liquidity, but that no assurance
24 could be given that any of the discussions would be successful.
26 common stock closed on March 9, 2007, at $3.21 per share, a decline of $0.66 per
27 share, or approximately 17%, from the closing price of $3.87 per share on March
28 8. 2007, on extraordinary trading volume.

Case No. 2:07-cvv-009 3 I -DDP (JTLx)
1 349. On March 12, 2007. before the start of trading, New Century filed
with the SEC a Form 8-K which stated:
As previously disclosed, the Company has been in discussions with its
4 lenders in an effort to obtain waivers for certain of the obligations of
5 the Company and its subsidiaries under these financing arrangements.
6 As described below, the Company has received notices from certain
7 of its lenders asserting that the Company and/or its subsidiaries have
8 violated their respective obligations under certain of these financing
9 arrangements and that such violations amount to ! events of default.
10 Certain of these lenders have further advised the Company that they
11 are accelerating the Company's obligation to repurchase all
12 outstanding mortgage loans financed under the applicable agreements .
14 The Form 8-K disclosed that among the lenders who advised the Company that it
15 was in default and/or accelerated the Company's obligation to repurchase
16 outstanding mortgage loans were: Bank of America ," N.A.; Citigroup Global
17 Markets Realty Corp.; Credit Suisse First Boston Mortgage Capital LLC; Goldman
18 Sachs Mortgage Company; and Morgan Stanley Mortgage Capital Inc. The Form
19 8-K further disclosed:
20 All of the Company's financing arrangements with its lenders contain
21 cross default and cross acceleration provisions. Accordingly. each of
the Company's lenders that have not yet delivered notices of default
23 or acceleration to the Company will be permitted to do so under the
24 terms of their applicable financing arrangement with the Company. If
25 each of the Company's lenders were to accelerate the obligations of
26 the Company and its subsidiaries to repurchase all outstanding
?7 mortgage loans financed under all of the Company's outstanding
28 financing arrangements, the aggregate repayment' obligations would

1 be approximately $8.4 billion. Further, under the respective financing
arrangements. each of the Company's lenders have, the right to cease
providing financing to the Company and its subsidiaries during the
4 pendency of an event of default. As of March 9', 2007. all of the
5 ComDanv's lenders under its short-term repurch ase agreements and
6 aggregation credit facilities had discontinued their financing with the
7 Company or had notified the Company of their intent to do so .
8
9 The Company and its subsidiaries do not have sufficient liquidity to

10 satisfy their outstanding repurchase obligations under the Company's
11 existing financing arrangements . The Company is continuing its
12 discussions with its lenders and other third parties regarding
13 refinancing and other alternatives to obtain adequate liquidity. No
14 assurance can be given that any of these discussions will be
15 successful. If the Company and its subsidiaries are not able to satisfy
16 their repurchase obligations, one or more of the Company's lenders
17 may seek to liquidate the mortgage loans or other assets financed
18 under the applicable financing arrangement with the Company. If this
19 were to occur and if such liquidation was for an amount less than the
20 contractual amount at which the Company and its subsidiaries have
21 agreed to repurchase such mortgage loans from the applicable lender,
then the lender may seek to recover this deficiency from the Company
23 and its subsidiaries. The Company and its subsidiaries may not have
24 sufficient resources to satisfy any such deficiency.
25 *
26 As previously announced, on March 2, 2007, the Company filed a

27 Form 12b-25 with the Securities and Exchange Commission in which
28 it reported that it had not yet filed its Annual Report on Form 10-K for

1 its fiscal year ended December 31, 2006 (the "2006 Form 10-K"). In
2 the Form 12b-25, the Company reported that it would not be able to
3 complete its 2006 Form 10-K until (i) the Audit Committee of its
4 Board of Directors completes its previously announced internal
5 investigation into the issues Giving rise to the Company's need to
6 restate its 2006 interim financial statements, as well as issues
7 pertaining to the Company's valuation of residual interests in
8 securitizations in 2006 and prior periods, and (ii) the Company
9 provides its independent registered public accounting firm, KPMG
10 LLP. with the information that it needs in order to complete its audit
11 of the Company's financial statements and internal control over
12 financial reporting.
13
14 The Company continues to work diligently to finalize its financial

15 statements for the year ended December 31, 2006, but does not expect
16 to finalize its financial statements, or to file its 2006 Form 10-K. prior
17 to March 16, 2007 (the fifteenth calendar day following the prescribed
18 due date for the 2006 Form 10-K). If the Company does not file its
19 2006 Form 10-K with the SEC on or before March 16, 2007, the
20 Company will be in violation of Section 203.01 ((Annual Financial
21 Statement Requirement) of the New York Stock Exchange's (the
22 "NYSE") Listed Company Manual and will be subject to the
23 procedures specified in Section 802.01E (SEC Annual Report Timely
24 Filing Criteria) of the NYSE Listed Company 1\1anual. [Emphasis
25 added.]
27 common stock closed on March 12. 2007, at $1.66 per share, a decline of $1.55 per
28
1^ 1 CONSOLIDATED CLASS ACTION COMPLAINT

1 share, or approximately 48%. from the closing price of S3. 21 per share on March
9, 2007, the prior trading day, on extraordinary trading volume.
3 351. On March 13, 2007. before the start of trading. New Century filed
4 with the SEC a Form 8-K which disclosed additional lenders who advised the
5 Company that it was in default and/or accelerated the Company's obligation to
6 repurchase outstanding mortgage loans. These lenders included: Barclays Bank
7 PLC; Guaranty Bank; State Street Global Markets. LLC; and UBS Real Estate
8 Securities Inc. The Form 8-K further disclosed:
9 On February 28. 2007. the Company received a letter from the United
10 States Attorney's Office for the Central District of California (the
11 "U.S. Attorney's Office") indicating that it was conducting a criminal
12 inquiry under the federal securities laws in connection with trading in
13 the Company's securities, as well as accounting errors regarding the
14 Company's allowance for repurchase losses. The Company has
15 subseauentlv received a grand iurv subpoena reauestin2 production of
16 certain documents. The Company intends to cooperate with the
17 requests of the U.S. Attorney's Office .
18
19 On March 12, 2007, the Company received a letter from the staff of
20 the Pacific Regional Office of the Securities Exchange Commission
V V
21 stating that the staff was conducting a preliminary investigation
involving the Company and requesting production of certain

23 documents. The staff of the SEC had also previously requested a
24 meeting with the Company to discuss the events' leading up to the
?5 Company's previous announcement of the need to testate certain of its
26 historical financial statements. The Company intends to cooperate
27 with the requests of the SEC. [Emphasis added.]
28
- 152- CONSOLIDATED CLASS ACTION COMPLAINT

Case No . 2:07-car - 00931-DDP (JTLx)
2
I common stock closed on March 13. 2007, the last day of the Class Period. at $0.85
3 per share, a decline of $0.82 per share, or approximately 49%. from the closing
4 price of $1.67 per share on March 12. 2007, on extraordinary trading volume.
6 press release announcing that the New York Stock Exchange had determined that
7 its common stock Preferred A and Preferred B stock were no longer suitable for
8 continued listing on the NYSE and would he suspended; immediately. The press
9 release reported that the NYSE made its decision based upon the Company's recent
10 filings with the SEC and the uncertainty of its current liquidity position.
B. Post -Class Period Disclosures
12 354. On March 14, 2007, New Century filed with the SEC a Form 8-K
13 II which disclosed:
14 On March 13, 2007, the Company and certain of its subsidiaries

15 received cease and desist orders from regulators in the States of
16 Massachusetts, New Hampshire , New Jersey and New York. The
17 cease and desist orders contain allegations that certain of the
18 Company's subsidiaries have engaged in violations of applicable state
19 law, including, among others, failure to fund mortgage loans after a
20 mortgage closing, failure to meet certain financial requirements,
21 including net worth and available liquidity, and failure to timely
notify the state regulators of defaults and terminations under certain of
23 its financing arrangements.
24
The cease and desist orders seek to restrain the subsidiaries from
25
taking certain actions, including, among others, enàging in further
26
violations of state law, taking new applications for mortgage loans in
27
the relevant jurisdiction, and paying dividends or bonuses to officers,
28
directors or shareholders of the applicable subsidiaries. The cease and
1 desist orders also seek to cause the subsidiaries to affirmatively take
certain actions, including the creation of escrow accounts to hold fees
3 relating to pending mortgage applications, the transfer to other lenders
4 of the outstanding mortgage applications and unfunded mortgage
5 loans held by the subsidiaries, and the provision of regular
6 information to the state regulators regarding the subsidiaries' activities
7 in the applicable state, including the status of all outstanding mortgage
8 applications and unfunded mortgage loans in that state. Certain of the
9 cease and desist orders also require one or more of the subsidiaries to
10 show cause why their license should not be' revoked or why
11 administrative penalties should not be assessed.
12 355. On March 14, 2007, the price of New Century common stock closed
13 at just $0.67 per share, a new low closing price.
14 356. On April 2, 2007, New Century issued a press release announcing that
15 the Company had filed a voluntary petition for relief under Chapter 11 of the U.S.
16 Bankruptcy Code. In connection with the Chapter 11 filing, the Company
17 disclosed that it would reduce its workforce by approximately 3,200 employees
18 effective inunediately. Thousands more were fired in the months which followed.
19 357. On May 3, 2007, New Century filed with the SEC a Form 8-K which
20 disclosed that KPMG had notified the Chairman of New Century's Audit
21 Committee by letter dated April 27, 2007 that KPMG had resigned as New
Century's outside auditor. The Form 8-K disclosed:
23 On February 7, 2007, the Company filed a Form 8-K with the
24 Securities and Exchange Commission (the "SEC") reporting that the
?5 Company's Board of Directors had concluded that the Company's
26 previously filed interim financial statements for the quarters ended
27 March 31, 2006, June 30, 2006, and September 30,! 2006 (collectively,
28 the "Interim Financial Statements"), should be 'restated to correct

Case No. 2:07-cv-00931 -DDP (.TTLx )
1 errors the Company discovered in its accounting and financial
reporting of loan repurchase losses. In connection with the
3 restatement process, the Audit Committee of the Company's Board of
4 Directors, on the advice of its independent counsel. initiated its own
5 independent investigation into the issues giving rise to the Company's
6 need to restate the Interim Financial Statements, and subsequently
7 expanded the investigation, at the request of KPMG, to include issues
8 pertaining to the Company's valuation of residual interests in
9 securitizations in 2006 and prior periods (the "Internal Investigation").
10 The Audit Committee retained independent counsel, forensic
11 accountants and other professionals to assist it in connection with the
12 Internal Investigation.
13
14 Subsequent to the Company's discovery of the accounting errors and

15 initiation of the Internal Investigation, KPMG communicated to the
16 Company that as a result of the Internal Investigation KPMG would
17 likely need to reassess its audit plan. and perform additional audit
18 procedures. in order to obtain sufficient evidence concerning any
19 conclusions reached by the investigating team . KPMG also
20 communicated to the Company that (i) the pending regulatory
21 investigations into the matters under investigation in connection with
the Internal Investigation or (ii) the pendency of the Internal

?3 Investigation itself, could also impact KPMG's ability to conclude on
24 the financial statement implications of the matters under investigation,
25 including whether or not KPMG would be able to continue to rely on
26 representations from management. As of April 27, 2007, the date of
27 KPMG's resignation, the Internal Investigation was ongoing and
28 accordingly the Company had not received 'from KPMG its
-1»- CONSOLIDATED CLASS ACTION COMPLAINT

Case No. 2:07 -cv-0093 (-DDP (JTLx)
1 determination on these matters. The Company has! also been advised
I by KPMG that it expects that the evaluation of the impact of this
3 matter on the Company's internal control over financial reporting and
4 disclosure controls and procedures for the applicable periods could
5 constitute a material weakness in the Company's internal control over
7 358. On May 11, 2007, New Century filed a Form NT 10-Q with the SEC
8 which stated:
9 As previously disclosed, on April 2, 2007, the Company and certain of
10 its subsidiaries filed voluntary petitions for reorganization under
11 Chapter 11 of Title 11 of the United States Code in the United States
12 Bankruptcy Court for the District of Delaware (Case No. 07-10416).
13 Since that time, the Company has been immersed in bankruptcy-
14 related matters. The Company has not yet been able to file its Annual
15 Report on Form 10-K for the year ended December 31, 2006. Further,
16 the Company has experienced the resignation of its independent
17 accounting firm, KPMG LLP. Due to the resignation, as well as the
18 additional time required to complete its financial statements to be
19 included in its periodic reports as a result of, among other things, the
?o complexities of bankruptcy accounting, the process of impairment
21 testing and estimating the fair value of impaired assets, the
determination of the tax provision together with the evaluation of tax
23 deferred assets and the possible need for valuation allowances, the
24 Company will not be able to file the Form 10-Q in a timely manner
?5 without unreasonable effort or expense. For further information
26 regarding these and other factors affecting the Company's ability to
27 timely file the Form 10-Q, please see the Company's Form 12b-25
28 filed with the Securities and Exchange Commission (the "SEC") on
- l 56- CONSOLIDATED CLASS ACTION COMPLAINT

Case No. 2:07-cv-009 , I -DDP (JTLx)
1 March 2, 2007. The Company anticipates that it will not be able to
complete its financial statements and file the Form 10-Q by May 15,
3 2007 and the Company is uncertain as to whether or not it will ever be
4 able to file its financial statements.
5 359. On May 24, 2007, New Century filed a Form 8-K which disclosed:
6 On February 7, 2007, New Century Financial Corporation (the
7 "Company") filed a Form 8-K with the Securities and Exchange
8 Commission (the "SEC") reporting that the Company's Board of
9 Directors had concluded that the Company's previously filed interim
10 financial statements for the quarters ended March 31, 2006, June 30,
11 2006, and September 30, 2006 (collectively, the "Interim Financial
12 Statements"), should be restated to correct errors the Company
13 discovered in its accounting and financial reporting of loan repurchase
14 losses. In connection with the restatement process, the Audit
15 Committee of the Company's Board of Directors, on the advice of its
16 independent counsel , initiated an independent investigation into the
17 issues Living rise to the Company's need to restate the Interim
18 Financial Statements, and as previously reported, subsequently
19 expanded the investigation to include is sues pertaining to the
20 Company's valuation of certain residual interests in securitizations in
21 2006 and prior periods (the "Internal Investigation"). In addition to its
?? independent counsel, the Audit Committee also retained forensic
23 accountants and other professionals (collectively,, the "Investigative
24 Team") to assist it in connection with the Internal Investigation.
25
26 Based on recent communications with members of the Investigative

27 Team, the Audit Committee has determined that there were errors in
28 the Company's previously filed annual financial I statements for its
l J7- CONSOLIDATED CLASS ACTION COMPLAINT

1 fiscal year ended December 31. 2005 (the "2005 Financial
Statements") with respect to both the accounting and reporting of loan
3 repurchase losses and the Company's valuation of certain residual
4 interests in securitizations. The Company's ability to further
5 iiate these matters is constrained as the Company is currently i
6 liquidation proceedings under chapter 11 of the Bankruptcy Code.
7 However, based upon the work performed by the Investigative Team,
8 the Audit Committee and management believe that it is more likely
9 than not that these errors in the aaaregate resulted in a material
10 overstatement of pretax earnings in the 2005 Financial Statements.
11 Accordingly. on May 23. 2007, the Company's Board of Directors
12 concluded, based upon the recommendation of the Audit Committee,
13 that the 2005 Financial Statements should no longer be relied upon .
14
15 As the Company is currently in liquidation proceedings under chapter

16 11 of the Bankruptcy Code, the Company does not expect to complete
17 a restatement of either the 2005 Financial Statements or the Interim
18 Financial Statements. [Emphasis added.]
19 11 XI. THE NEW CENTURY OFFICER
DEFENDANTS ACTED WITH SCIENTER
20
360. At all relevant times, Defendants Cole, Morrice, Gotschall and Dodge
21
acted with scienter, in making materially false and misleading statements
throughout the Class Period. Each of these officer Defendants had actual
23
knowledge that the statements made by them were false, and misleading, or acted
24
with deliberate reckless disregard for the truth or falsity of those statements. These
25
Defendants' intent to deceive or deliberate reckless disregard for the truth is
26
demonstrated by substantial circumstantial evidence supporting a strong inference
27
of scienter.
28

1 361. Among other facts, each of these Defendants repeatedly signed the
Company's filings with the SEC which described (correctly) the controlling GAAP
3 requirements for setting Allowance for Repurchase Losses! and Allowance for Loan
4 Losses reserves as well as measuring Residual Interests at fair value. The
5 Company's SEC filings stated that New Century had established accounting
6 policies that governed the application of GAAP in the preparation of its financial
7 statements and labeled its accounting policies for setting,, inter alia , Allowance for
8 Repurchase Losses, Allowance for Loan Losses and Residual Interests as "Critical
9 Accounting Policies." At the same time, these Defendants repeatedly failed to
10 follow these same GAAP requirements and the Company's own Critical
11 Accounting Policies. Moreover, each of these individuals has substantial
12 educational, financial and industry experience, including the application of these
13 very same GAAP requirements.
14 362. For example, as set forth in paragraph 71 above, New Century's 2005
15 Form 10-K stated that the Company's Allowance for Repurchase Losses reserve
16 represented "the Company's estimate of the total losses expected to occur" and was
17 "considered to be adequate by management based upon the Company's evaluation
18 of the potential exposure related to the loan sale agreements over the period of
19 repurchase risk." (Emphasis added.) Yet, as set forth above and subsequently
20 admitted by the Company, the Company's Allowance, for Repurchase Losses
21 reserve in 2005 and 2006 failed to account for the growing volume of repurchase
1) 1) claims outstanding and, in 2006 , failed to include anv expected discount upon
23 disposition of loans to reflect fair value . This is despite GAAP, SFAS 140,
24 paragraph 55, which unambiguously provides that New 'Century was required to
25 record repurchased loans at "fair value on the date" of the repurchase as if New
26 Century "purchased the assets and assumed the liabilities on that date."
27 363. Similarly, with regard to the Company's valuation of Residual
28 Interests, New Century's 2005 Form 10-K stated that the Company purportedly

Case No. 2:07-cv-0093 I -DDP (JTLX)
1 reviewed its underlying assumptions on a quarterly basis and adjusted the carrying
2 value of the Residual Interests based on actual experience and industry experience.
3 Yet, only on May 24, 2007, after the Company's bankruptcy, was it revealed that
4 the Company, through its independent investigation, had found "errors" in the
5 Company's previously filed annual financial statements for its fiscal year-ended
6 December 31, 2005 with respect to the valuation of Residual Interests, "errors" that
7 were "more likely than not" in the aggregate to have resulted in a material
8 overstatement of pre-tax earnings in 2005.
9 364. In addition, as set forth above, Defendant Morrice admitted publicly
10 on November 3, 2005, that first payment defaults were "certainly something we
11 track carefully." According to a former New Century Vice President, Corporate
12 Finance employed by the Company from 2002 until April 2007 (CW 3), and a
13 former New Century Vice President, Operations employed by the Company from
14 February 2003 until October 2006 (CW 21), this was true,' as Morrice received on a
15 monthly basis, detailed information on delinquencies and early payment defaults.
16 Defendants Morrice, Cole, Gotschall and Dodge also made numerous public
17 statements purporting to describe or explain in detail the Company's loan
18 performance and delinquencies throughout the Class Period. Nonetheless, these
19 officer Defendants failed to properly account for the Company's reserves and
20 Residual Interests throughout
C the Class Period.
21 365. These Defendants each signed SEC filings! and/or made numerous
public statements regarding the adequacy of the Company's Allowance for Loan
23 Losses reserve despite the fact that the reserve was materially deficient and
24 actually declined over time as a percentage of 60+ day delinquent loans. In fact, as
25 pointed out by analyst Zach Gast of the Center for Financial Research, Defendants.
26 for the first time , deceptively combined the Company's Allowance For Loan
27 Losses reserve with another unrelated reserve in reporting earnings for the third
28 quarter-ended September 30, 2006, in order to make the reserve appear higher

Case No. 2:0 7 -cv-0093 I -DDP (JTLx)
1 I when, in fact, it had been reduced. As set forth above, Defendants quickly
reversed course after Zach Gast's questioning and disclosed that the Company's
3 Allowance of Loan Losses reserve was, in fact, reduced in the 2006 third quarter
4 Form 10-Q (without explaining the reason for the prior change in the Company's
5 presentation).
6 366. Additional evidence of these Defendants' scienter arises from the
7 intentional delay of funding, repurchase claims in an effort to cause the Company's
8 previously-filed 2005 and 2006 financial results to appear better than they actually
9 were. According to a former New Century senior financial manager employed by
10 the Company from September 2004 until February 2007 (CW 1). prior to the
11 restatement New Century had delayed payment of loan repurchase claims in an
12 effort to cause its previously reported 2005 and 2006 financial results to appear
13 better than they actually were. According to a former New Century Vice President,
14 Corporate Finance employed by the Company from 2002 until April 2007 (CW 3),
15 prior to the restatement New Century was "sitting on repurchase requests" and
16 "trying to game the system" hoping to ride out the market. This is further
17 confirmed by internal documents presented to Chief Financial Officer Dodge
18 showing the massive and growing backlog of repurchase claims which led to the
19 eventual restatement. Demonstrating these Defendants' scienter, at the very same
?0 11 time repurchase claims were growing dramatically, Defendants Morrice and Dodge
21 misleadingly described them as "modest" on two separate occasions and the

?? Company's SEC filings deceptivel y reported only a portion of them to investors
23 and Defendant Morrice claiming that repurchases were "actually down" in the
24 2006 third quarter, never publicly disclosing New Century's very material and
25 growing repurchase claims backlog.
26 367. Further evidencing Defendants Cole's, Morrice's, Dodce's and
27 Gotschall's scienter. the Company's February 7, 2007 restatement announcement
28 came less than three months after newly-hired Tajvinder S. Bindra, replaced
-161- CONSOLIDATED CLASS ACTION COMPLALNTT

1 Defendant Dodge as Chief Financial Officer, effective November 15. 2006. As set
forth in paragraph 91 above, Bindra was one of the persons who helped reveal the
3 Company's accounting misstatements and observed New I Century's reserves were
4 way too low as soon as he joined the Company and obtained access to its books
5 and records.
6 368. At the start of the Class Period, these Defendants also publicly
7 described New Century's underwriting as a "very core" control business function
8 and. thereafter, the New Century Officer Defendants repeatedly described the
9 credit quality of the Company's mortgages as "strong," "excellent," "very high"
10 and "higher" or "better" than it had been in the Company's past as the result of
11 purportedly "strict:" "improved;" and "strong" underwriting controls and
12 guidelines and risk management discipline. All the while, as set forth in detail in
13 paragraphs 106-47 above, New Century's underwriting guidelines were actually
14 declining and the Company introduced higher risk products to continue to reach
15 record loan volume. These Defendants were intentionally misstating the facts or
16 acting in a deliberately reckless manner in making their repeated statements
17 regarding purportedly improved underwriting in light of what was actually
18 occurring at the Company which, at the very least, provided no basis for these
19 Defendants' repeated statements and was completely the opposite of these
20 Defendants' repeated Class Period statements and descriptions. Each of these
21 Defendants was well aware of the competitive market New Century faced (they
described it as "severe" in the Company's 2005 Form 10-K) as well as the fact that
23 the Company could not continue to increase its mortgage origination volume
24 without reducing its underwriting guidelines. Yet, they repeatedly claimed the
25 contrary to New Century's investors during the Class Period.
26 369. Similarly, as set forth above, these Defendants repeatedly signed
27 sworn certifications attesting to the Company's compliance with GAAP and the
28 adequacy of New Century's internal controls in each and' every quarter during the
-162- CONSOLIDATED CLASS ACTION COItI'LA1NT

1 Class Period. The facts set forth herein, as well as the Company's own admissions
on February 7, 2007 and May 24, 2007, reveal the falsity of these repeated
3 certifications. These Defendants acted intentionally or in a deliberately reckless
4 manner in repeatedly issuing sworn certifications attesting to the Company's
5 compliance with GAAP, when New Century's financial results were not presented
6 in accordance with GAAP, and the adequacy of the Company's internal controls,
7 when New Century suffered from material weaknesses in its internal controls.
8 370. Each of these Defendants was also highly motivated to pump up the
9 Company's mortgage origination volume at the expense of underwriting standards
10 and to understate reserves and overstate Residual Interests throughout the Class
11 Period. As New Century increased its loan production volume to record levels,
12 understated its reserves and overstated its Residual Interests, the Company
13 declared increasing dividends throughout the Class Period. During the Class
14 Period, the Company declared the following dividends:
15
16 First Quarter 2005 51.55 per share paid April 29. 2005
Second Q uarter 2005 $1.60 per share paid Jul y 29, 2005
17 Third Quarter 2005 $1.65 per share paid October 31.2005
Fourth Quarter 2005 $1.70 per share id Janua ry 30, 2006
18 First Q uarter 2006 $1.75 per share paid A pril 28, 2006
Second Quarter 2006 S1.80 per share pa id July 31, 2006
19
Third Quarter 2006 $1.85 per share paid October 31. 2006
Fourth Quarter 2006 $1.90 per share pa id January 31, 2007
20
21
Defendants Cole, Morrice and Gotschall were each direct and significant
22
beneficiaries of these increasing dividend payments. ^ In the aggregate, they
23
personally received over $50 million of dividend payments during the Class
24
Period. Defendant Dodge also received, in the aggregate. over 500,000 of
25
dividend payments during the Class Period.
26
371. In addition, according to the Company's Schedule 14A Proxy
27
Statement filed with the SEC on or about April 4. 2006. under employment
28
agreements that existed throughout the Class Period, Defendants Cole. Morrice and
16-3- CONSOLIDATED CLASS ACTION COMPLAINT
1 Gotschall were each entitled to receive a percentage of New Century's pre-tax net
income under a special bonus formula based upon the ratio of New Century's pre-
3 tax net income to its average stockholder's equity. measured over a six-month and
4 12-month period as follows:
5 6-Month Performance from January 1 - June 30 :
6
Ratio of Pre-Tax Net Income
7 To Total Stockholders' Equity Amount of Bonus
8
9
Less than 9% 0
10 Between 9-14% 1.125% of pre- tax net income in excess of

11
9% but not in excess of 14% of Total
Stockholders' Equity
12
13
Between 14-19% The amount above plus 0.75% of pre-tax net
income in excess of 14% but not in excess
14 of 19% of Total Stockholders' Equity
15
More than 19% The amounts above plus 0.60% of pre-tax
16 net income in excess of 19% of Total
17 Stockholders' Equity
18 12-Month Performance from January 1 - December 31 :

19
Ratio of Pre-Tax Net Income
20 To Total Stockholders' Equity Amount of Bonus
21
Less than 18% 0
23 Between 18-28% 1.125 % of pre-tax net income in excess of

18% but not in excess of ?8% of Total
24
25
Between 28-38% The amount above 'plus 0.75% of pre-tax net
26 income in excess of 28% but not in excess
27 of 38% of Total Stockholders' Equity
28
-I6+- CONSOLIDATED CLASS ACTION COMPLAINT

1 More than 38% The amounts above plus 0.60% of pre-tax
2 net income in excess of 38% of Total
3
-t
Based on the above formula, Defendants Cole, Morrice and Gotschall were each
I paid $1,070,235 in cash bonuses in 2005. By comparison, their salary in that same
6 1 year was 5569.250.

7
372 . As reported by Financial Week on May 7, 2007, this "old-style" bonus
8
formula "gave a strong incentive for managers to inflate earnings and when
combined with the latitude in making, judgments on securitization transactions" set
9
10
up a situation that could have led to financial reporting problems. According to the
11
report by Financial Week, the incentives were as follows:
12
The incentives to executives on pay-for-results bonus plans, however,
13
are the same: originate lots of loans. The more loans made and
14
securitized, the more income can be recognized in the financial
15
statements. Secondly, keep hoping, for the best when it comes to the
16
quality of the loans. Increasing loan loss provisions when the credit
17
quality of the pool of loans deteriorates results in lower income - and
18
smaller bonuses .
19
20
Its on this front that New Century executives may have pushed the
21
accounting envelope, said Zach Gast, an analyst with the Center for
Financial Research and Analysis. "Even if a company doesn't
23
overstate income through gain-on-sale assumptions. if it doesn't make
24 an adequate provision for loan losses, it overstates the value of the
25
residual interests of securities it holds [and thereby incomel ."
26
27
New Century Financial appears to have used accounting gimmickry to
28
reduce the provisions it should have been taking, according to Mr.

Case No. 2:07-cv-0093I -DDP (JTLx)
1 Gast. He said the Company changed the presentation of its loan loss
data in the third quarter of last year and masked the deteriorating
quality of the portfolio.
4
"Their actual loan loss provision declined from $209 million in the
5
second quarter to $192 million in the third quarter as loan
6
delinquencies were rising rapidly," Mr. Gast explained.
7
8
The Company also failed to book a contingent liability for the
9
possibility that it would have to repurchase bad loans from the banks
10
to that sold the loans to investors. The volume of such loans thrown
11
back at New Century this year eventually sent it into bankruptcy.
12
* x
13
New Century didn't even book losses after the Company began
14
repurchasing bad loans last year. "In that regard they were different
15
from the other lenders," he said.
16
1',
Whv? Writing down the loans would have reduced income - and
18
executive bonuses . [Emphasis added.]
19
373. During the Class Period, Defendants Cole, Morrice. Gotschall and
20
Dodge also each took advantage of the artificial inflation in the price of New
21
Century common stock by selling, in the aggregate, over one million shares of their
?1)
personally held New Century common stock for aggregate proceeds of over $53
23
million as follows:
24
?5
26
27
28

1 DEFENDANT DATE SHARES PRICE ($I PROCEEDS ($)
Cole 5/9/2005 250.000.00 46.55 11.637.500.00
2 Dodee 6/6/2005 6.878.00 51.81 356.349.18
Gotschall 6/8/2005 100.000.00 51.93 5,193,000.00
3 Dodge 6/30/2005 4.782.00 5 L255 2-45,077.50
Mon-ice 7/1/2005 60.500.00 51.65 3.124,825.00
4 7/5/2005 64,500.00 51.33 3,310,785.00
Nlorrice
Gotschal1 9/8/2005 32,800.00 42.75 1.402,200.00
5
Gotschall 9/9/2005 42,200.00 42.23 1.782.106.00
6 Dodge 7/18/2006 13,889.00 46.00 638.894.00
Cole 8/7/2006 100,000.00 46.60 4,660,000.00
7 Gotschall 8/15/2006 100,000.00 41.69 4,169.000.00
Gotschall 9/1/2006 20,000.00 37.97 759,400.00
8 Gotschall 9/5/2006 80,000.00 38.36 3.068.800.00
Cole 9/15/2006 25,000.00 41.43 1,035,750.00
9 Gotschall 10/2/2006 100.000.00 38.98 3,898.000.00
Cole 10/6/2006 25,000.00 40.32 1,008,000.00
10
Gotschall 11/20/2006 65,300.00 36.99 2.415.447.00
11 Gotschall 11/21/2006 136.145.00 36.62 4.985.629.90
Total 1?26,994 553,690,763.8
12
13 374. On May 10, 2005, after the start of the Class Period, the Company
14 issued a press release announcing that Defendant Cole's stock sales were made
15 pursuant to a lOb5-1 sales plan. That plan - commenced only during the time of
16 the material misstatements complained of herein - cannot negate Defendant Cole's
17 substantial motive and opportunity to profit from selling his person. lly-held New
18 Century common stock during the Class Period. To the contrary, as noted by the
19 SEC's Director of Enforcement in a speech on March 8, 2007:
20 In 2000, the SEC enacted Rule l Ob5-1 in order to clarify the law
21 about when executives who may come into possession of inside
information can legally trade. Rule l Ob5-1 allows corporate
23 executives to make a plan, at a time when they are not in possession
24 of inside information, to make prearranged trades at specified prices
25 or dates in the future. The idea was to give executives "a safe harbor"
26 to proceed with these prearranged trades without facing charges of
27 insider trading. The Rule was intended to give executives regular
28 opportunities to liquidate their stock holdings-to pay their kids'

1 college tuition, for example-without risk of inadvertently facing an
2 insider trading inquiry. However, recent academic studies suggest that
3 the Rule is being abused. The academic data shows that executives
4 who trade within a l Ob5-1 plan outperform their peers who trade
5 outside of such a plan by nearly 6%; it ought to be the case that plan
6 participants should be no more successful on average than those who
7 trade outside a plan. The difference seems to be that executives with
8 plans sell more frequently and more strategically ahead of
9 announcements of had news. This raises the possibility that plans are
10 being abused in various ways to facilitate trading based on inside
11 information. We're looking at this-hard. We want to make sure that
12 people are not doing here what they were doing with stock options. If
13 executives are in fact trading on inside information and using a plan
14 for cover, they should expect the "safe harbor" to provide no defense .
16 XII. LOSS CAUSATION
17 375. Throughout the Class Period , the price of New Century common
18 stock. Preferred A and Preferred B shares and call options were artificially inflated
19 (and the price of New Century put options were artificially reduced) as a direct
20 result of Defendants' materially false and misleading statements and omissions.
21 '*Alen the true facts became known by the market and investors and the
materialization of the risks that had been fraudulently concealed by Defendants
2 occurred, the price of New Century common stock and Series A and B Preferred
24 Stock declined precipitously as the artificial inflation was removed from the price
?5 of these securities, causing substantial damage to Plaintiffs and members of the
26 Class. Specific dates of adverse disclosures and corresponding declines in the
27 price of New Century securities are set forth above.
28

1 376. M oreover, the adverse consequences of the New Century Officer
Defendants' end of Class Period disclosures and the adverse impact of those
3 circumstances on the Company's business going forward. were entirely foreseeable
4 to Defendants at all relevant times. Defendants' conduct, as alleged herein,
5 proximately caused foreseeable losses and damages to Plaintiffs and members of
6 the Class.
7 377. As set forth above, the Company' s failure to maintain effective
8 internal controls; its failure to report its 2005 and 2006 financial statements in
9 accordance with GAAP; and its expected net losses resulting from the required
10 restatements and related financial adjustments not only were material , but they also
11 triggered foreseeable and grave consequences for the Company given its highly
12 leveraged balance sheet.
13 378. At all relevant times . New Century needed to borrow substantial sums
14 of money each quarter to originate and purchase mortgage loans and support its
15 operating activities. The Company entered into credit arrangements to finance its
16 mortgage loans until it aggregated one or more pools of loans for sale or
17 securitization . During the Class Period , New Century maintained credit facilities
18 with , inter alia, Bank of America N.A., Barclays Bank PLC . Citigroup Global
19 Markets Realty Corp ., Credit Suisse First Boston Mortgage Capital LLC, Morgan
20 Stanley Mortgage Capital Inc., UBS Real Estate Securities Inc., Goldman Sachs
21 Mortgage Company, Guaranty Bank and State Street Global Markets LLC. The
,1) Company used these facilities to finance the actual funding of its loan originations
23 and purchases and to aggregate pools of mortgage loans pending sale or
24 securitization. Importantly, all of the Company's credit facilities contained certain
25 customary covenants, which, among other provisions, required the Company to
26 deliver timely financial statements prepared in accordance with GAAP to its
27 lenders. In addition, 11 of the Company's 16 financing arrangements required it to
28 report at least $1 of net income for any rolling two-quarter period, a requirement
-I69- CONSOLIDATED CLASS ACTION COMPLAINT

1 the Company did not expect to meet as a result of the restatements and other
2 adjustments disclosed at the end of the Class Period.
3 379. As a result of these circumstances, after the Company's February 7,
4 1 2007 disclosures, substantial doubt existed as to the Company's ability to continue
5 as a going concern and, after the Company was unsuccessful in its discussions with
6 its lenders and other third parties regarding a possible refinancing or other
7 alternatives to obtain additional liquidity, the Company was forced to cease
8 accepting new loan applications from prospective borrowers and to file for
9 Bankruptcy protection after its lenders declared the Company in default.
10 380. Further demonstrating that New Century's demise was entirely
11 foreseeable, Defendant Morrice identified -- approximately one year before the
12 Company's April 2007 bankruptcy filing, at the Company's May 10, 2006 annual
13 shareholder meeting -- running out of capital liquidity as the very reason why
14 mortgage companies go out of business (while claiming New Century was
15 financially sound):
16 Morrice: The history of the mortgage business generally suggests
17 that companies that run into big trouble and in some cases go out of
18 business don't do that because they run out of customers. They do it
19 because they run out of money and, again, this is a very, very good
20 business in the long run but you have to be there to enjoy that long
21 run. And so maintaining our capital liquidity basis is an important
part of our strategy and an important part of our message to
23 stockholders that this is a financially strong company and while we're
?4 excited and optimistic about what both 2006 and beyond can bring,
25 we're also confident of doing that with safety and soundness and
26 stability. [Emphasis added.]
27 381. Similarly, the fact that the Company's end-of-Class-Period adverse
'8 disclosures triggered governmental investigations into the Company's Class Period

1 statements. reported financial results and insider selling was an entirely foreseeable
consequence of the acts complained of herein.
3 XIII. THE INAPPLICABILITY OF
THE STATUTORY SAFE HARBOR
4
382. The statutory safe harbor applicable to forward-looking statements
5
under certain circumstances does not apply to any of the false or misleading
6
statements pleaded in this Complaint. First, none of the statements complained of
7
herein was a forward-looking statement. Rather the statements complained of
8
herein were historical statements or statements of current facts and conditions at
9
the time the statements were made, including statements of reported financial
10
results and underwriting practices. Second, the statutory safe harbor does not
11
apply to statements included in financial statements which purport to have been
1?
prepared in accordance with GAAP.
13
383. To the extent any of the false or misleading statements alleged herein
14
can be construed as forward-looking statements, the statements were not
15
accompanied by any meaningful cautionary language identifying important facts
16
that could cause actual results to differ materially from those in the statements.
17
384. Alternatively, to the extent the statutory safe harbor otherwise would
1s
apply to any forward-looking statements pleaded herein. Defendants are liable for
19
those false and misleading forward-looking statements because at the time each of
20
those statements was made, the speakers knew the statement was false or
21
misleading, or the statement was authorized or approved by an executive officer of
New Century who knew that the statement was materially false or misleading
23
when made.
24
XIV. THE PRESUMPTION OF RELIANCE
25
385. The market for New Century common stock'. Series A and B Preferred
26
Stock and options was, at all relevant times, an efficient market that promptly
27
digested current information with respect to the Company from all publicly-
28

Case No. 2:07-cv-0093 (-DDP (JTLx)
1 available sources and reflected such information in the price of these New Century
securities.
3 386. New Century common shares and Series A and Series B Preferred
4 Stock were traded on the N ew York Stock Exchange , a highly efficient market.
5 New Century options were traded on the Chicago Board of Options Exchange, also
6 I a highly efficient market. The Company was consistently followed, before and
7 throughout the Class Period, by the media, which issued over 1,000 news stories
8 regarding the Company during the Class Period and by securities analysts who
9 published over 100 analyst reports regarding New Century during the Class Period.
10 The price of New Century securities reacted promptly to the dissemination of new
11 information regarding the Company, as set forth above. New Century securities
12 were actively traded throughout the Class Period, with substantial trading volume
13 and average weekly turnover and high institutional investor participation.
14 387. Accordingly, Plaintiffs and other members of the Class did rely and
15 are entitled to have relied upon the integrity of the market price for New Century
16 securities and to a presumption of reliance on Defendants' materially false and
17 misleading statements and omissions during the Class Period.
18 XV. CLALMS FOR RELIEF UNDER THE EXCHANGE ACT
19 COUNT NINE
20 For Violations of Section 10(b) of the Exchange Act, On Behalf of Plaintiffs,
Against New Century Officer Defendants Cole, Morrice, Gotschall and Dodge
21
388. Plaintiffs repeat and reallege each of the allegations set forth above as
if fully set forth herein, except Plaintiffs expressly disclaim any claim of strict
23
liability or negligence.
24
389. This claim is brought pursuant to Section 10(b) of the Exchange Act
25
and Rule lOb-5 promulgated thereunder, on behalf of Plaintiffs and members of the
26
Class against Defendants Cole, Morrice, Gotschall and Dodge.
27
390. As alleged herein, throughout the Class Period. these Defendants,
28
individually and in concert. directly and indirectly. by the use of the means or
1 instrumentalities of interstate commerce. the mails and/or the facilities of national
I securities exchanges, made untrue statements of material fact and/or omitted to

3 state material facts necessary to make their statements not misleading and carried
4 out a plan, scheme and course of conduct. in violation of Section 10(b) of the
5 Exchange Act and Rule I Ob-5 promulgated thereunder. These Defendants intended
6 Ito and did, as alleged herein: (i) deceive the investing public, including Plaintiffs
7 and other members of the Class; (ii) artificially inflate and maintain the price of
8 New Century common stock, Preferred A and B Stock and call options (and
9 artificially reduce the price of New Century put options); and (iii) cause Plaintiffs
10 and the members of the Class to purchase New Century securities at artificially
11 inflated prices or sell New Century put options at artificially reduced prices.
12 391. The New Century Officer Defendants were individually and
13 collectively responsible for making the false and misleading statements and
14 omissions alleged herein and having engaged in a plan, scheme and course of
15 conduct designed to deceive Plaintiffs and members of the Class, by virtue of
16 having prepared, approved, signed and/or disseminated documents which
17 contained untrue statements of material fact and/or omitted facts necessary to make
18 the statements therein not misleading.
19 392. As set forth above, these Defendants made their false and misleading
20 statements and omissions and engaged in the fraudulent activity described herein
?1 knowingly and intentionally, or in such a deliberately reckless manner as to
22 constitute willful deceit and fraud upon Plaintiffs and the other members of the
23 Class who purchased New Century common stock and/or Series A or B Preferred
24 Stock and/or sold New Century put options during the Class Period.
?5 393. In ignorance of the false and misleading nature of these Defendants'
26 statements and omissions, and relying directly or indirectly on those statements or
27 upon the integrity of the market price for New Century common stock, Series A
28 and B Preferred Stock or options. Plaintiffs and other members of the Class

1 purchased New Century securities at artificially inflated prices during the Class
Period and/or sold New Century put options at artificially reduced prices during
3 the Class Period. But for the fraud. Plaintiffs and members of the Class would not
4 have purchased New Century securities at artificially inflated prices or sold New
5 Century put options at artificially reduced prices. As set forth herein. when the
6 true facts were subsequently disclosed, the price of New Century common stock,
7 Series A and B Preferred Stock declined precipitously and Plaintiffs and members
8 of the Class were harmed and damaged as a direct and proximate result of their
9 purchases of New Century securities at artificially inflated prices and/or their sale
10 of New Century put options at artificially reduced prices and the subsequent
11 decline in the price of New Century common stock and Series A and B Preferred
12 Stock when the truth was disclosed.
14 Dodge are liable to Plaintiffs and the members of the Class for violations of
15 Section 10(b) of the Exchange Act and Rule lOb-5 promulgated thereunder.
16 COUNT TEN
17 For Violations of Section 20(a) of the Exchange Act, On Behalf of Plaintiffs,
Against New Century Officer Defendants Cole, Morrice, Gotschall and Dodge
18
395. Plaintiffs repeat and reallege each of the allegations set forth above as
19
if fully set forth herein, except Plaintiffs expressly disclaim any claim of strict
20
liability or negligence.
21
396. This claim is brought pursuant to Section 20(a) of the Exchange Act
22
against Defendants Cole, Morrice, Gotschall and Dodge, on behalf of Plaintiffs and
23
members of the Class.
24
25
filing. New Century violated Section 10(b) and Rule 10b-5 promulgated thereunder
26
by making false and misleading statements in connection with the purchase and
27
sale of securities and by participating in a fraudulent scheme and course of
28
business or conduct throughout the Class Period. This fraudulent conduct was
Case No. 2:07-cv - 00931-DDP (JTLx)
1 undertaken with scienter and the Company is charged with the knowledge and
scienter of Defendants Cole, Morrice, Gotschall and Dodge and others who knew
of or acted with deliberate reckless disregarded the falsity of the Company's
z statements and the fraudulent nature of its scheme during the Class Period.
5 398. Defendants Cole, Morrice, Gotschall and Dodge were controlling
6 persons of New Century during the Class Period, due to their senior executive
7 positions therewith; their direct involvement in its day-to-day operations, including
8 its financial reporting and accounting functions; and their signatures on and
9 participation in the preparation and dissemination of the Company's public filings.
10 399. By virtue of the foregoing, Defendants Cole, Morrice, Gotschall and
11 Dodge each had the power to influence and control, and did influence and control,
13 its financial statements and public statements.
14 400. As set forth above, these Defendants acted knowingly and
15 intentionally, or in such a deliberately reckless mamler as to constitute willful
16 deceit and fraud upon Plaintiffs and the other members of the Class who purchased
17 New Century securities during the Class Period.
18 401. In ignorance of the false and misleading nature of the Company's
19 statements and omissions, and relying directly or indirectly on those statements or
20 upon the integrity of the market price for New Century securities, Plaintiffs and
21 other members of the Class purchased New Century common stock, Series A and B
Preferred Stock or call options at artificially inflated prices during the Class Period
?3
and/or sold New Century put options at artificially reduced prices during the Class
?4 Period. But for the fraud, Plaintiffs and members of the Class would not have
25 purchased New Century securities at artificially inflated prices or sold New
26 Century put options at artificially reduced prices. As set forth herein, when the
27 true facts were subsequently disclosed, the price of New Century common stock
28 and Series A and B Preferred Stock declined precipitously and Plaintiffs and
-175- CONSOLIDATED CLASS ACTION COIv-IPLAINT

result
members of the Class were harmed and damaged as a direct and proximate
and/or
of their purchases of New Century securities at artificially inflated prices
their sale of New Century put options at artificially reduced prices and the
4 subsequent decline in the price of New Century common stock and Series A and B
5 Preferred Stock when the truth was disclosed.
7 Dodge are liable to Plaintiffs and the members of the Class for violations of
8 Section 20(a) of the Exchange Act.
9 XVI. JURY DEMAND
10 403. Plaintiffs, on behalf of themselves and the Class, hereby demand a
11 trial by jury.
XVII. PRAYER FOR RELIEF
13 WHEREFORE, Plaintiffs, on behalf of themselves and the Class, pray for
14 relief and judgment as follows:
15 A. Determining that this action is a proper class action and certifying
16 Lead Plaintiff, the New York State Teachers' Retirement System, and Plaintiffs
17 Carl Larson and Charles Hooten as class representatives under Rule 23 of the
18 Federal Rules of Civil Procedure:
19 B. Awarding compensatory damages in favor of Plaintiffs and the other
20 members of the Class against all Defendants for all damages sustained as a result
21 of Defendants' violations in an amount to be proven at trial, together with interest
thereon;
?3 C. Awarding rescission and/or rescissory damages in favor of Plaintiffs
24 and the members of the Class;
25 D. Awarding prejudgment interest and/or opportunity cost damages in
i
26 favor of Plaintiffs and the other members of the Class;
27 E. Awarding Plaintiffs and the Class the fees and expenses incurred in
the prosecution of this action, including attorneys' fees and expert fees; and

1 F. Granting such other and further relief as the Court may deem just and
2 proper.
3 Dated: September 14, 2007 BERNSTEIN LITOWITZ BERGER
& GROSSMANN LLP
4
5
BLAIR A. NICHOLAS
6
7 BLAIR A. NICHOLAS
MATTHEW P. SIREN
8
12481 High Bluff Drive , Suite 300
9 San Diego , CA 92130
10
Tel: (858) 793-0070
Fax: (858 ) 793-0323
11 -and-
12
SALVATORE J. GRAZIANO
HANNAH E. GREENWALD
13 1185 Avenue of the Americas
14 New York, NY 10019
Tel: (212) 554-1400
15 Fax: (212) 554-1444
16
Lead Counsel for The New York State
17 Teachers' Retirement System and the Class
18
MARVIN A. FRANK
19 Murray, Frank & Sailer LLP
20 275 Madison Avenue
New York, NY 10016
21 Tel: (212) 682-1818
1) 1) Fax: (212) 682-1892
Counsel for Plaintiff Carl Larson
23
24 JEFFREY C. ZWERLING
RICHARD A. SPEIRS
25 Zwerling. Schachter & Zwerling. LLP
26 41 Madison Avenue
New York. NY 10010
27 Tel: (212) 22-3-3900
28 Fax: (212) 371-5969
Counsel for Plaintiff Charles Hooten

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1 BERNSTEIN LITOVJITZ BERGER

& GROSSMANN LLP

11 Lead Counsel for Lead Plaintiff New J.

13 UNITED STATES DISTRICT COURT

CONSOLIDATED CLASS ACTION COMPLAINT

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7 with these non-fraud claims.

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i] CONSOLIDATED CLASS ACTION COME PLAINT

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15 offering of New Century securities in June 2005. Deutsche Bank's U.S.

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-16- CONSOLIDATED CLASS ACTION COMPLAINT

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_18- CONSOLIDATED CLASS ACTION COMPLAINT

-19- CONSOLIDATED CLASS ACTION COMPLAINT

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$10 $3.2 $41 $4.2

11 B. Throughout The Class Period, New

?l CONSOLIDATED CLASS ACTION COMPLAINT

-22- CONSOLIDATED CLASS ACTION COMPLAINT

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11 CONSOLIDATED CLASS ACTION COMPLAINT

CONSOLIDATED CLASS ACTION COMPLAINT

9 In light of the pending restatements, the Company's previously filed

14 The Company also expects that the errors leading, to these

18 While the Company is still determining the magnitude of these

-26- CONSOLIDATED CLASS ACTION COMPLAINT

18 Based on recent communications with members of the Investigative

-27- CONSOLIDATED CLASS ACTION COMPLAINT

28 CONSOLIDATED CLASS ACTION COMPLAINT

-29- CONSOLIDATED CLASS ACTION COMPLAINT

5 Beginning Claims Ending

-30- CONSOLIDATED CLASS ACTION COMPLAINT

- 32- CONSOLIDATED CLASS ACTION COMPLAINT

-33- CONSOLIDATED CLASS ACTION COMPLAINT

rt CONSOLIDATED CLASS ACTION COMPLAINT

-35- CONSOLIDATED CLASS ACTION COMPLAINT

-36- CONSOLIDATED CLASS ACTION COMPLAINT

37 CONSOLIDATED CLASS ACTION COMPLAINT

-38- CONSOLIDATED CLASS ACTION COMPLAINT

17 Loan Loss LLA as a % 111LI 60+ % of XILI LLA as a %

-39- CONSOLIDATED CLASS ACTION COMPLAINT

27 NEW significantly changed its presentation of the allowance for loan

-10- CONSOLIDATED CLASS ACTION COMPLAINT

15 Newer originations appear to be deteriorating more quickly that prior

-41- CONSOLIDATED CLASS ACTION COMPLAINT

-42- CONSOLIDATED CLASS ACTION COMPLAINT

5 Mortgage Loans Held % of MLS 60+

Mayes Sep OS Ian-06 May-06 5e0-06 1 - -r Mey-07 Sep-09

Housing prices (December 1996-December 2006):

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