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Bank One Securities Litigation 00-CV-00767-First Chicago NBD

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Bank One Securities Litigation 00-CV-00767-First Chicago NBD Case 1:00-cv-00767 Document 180 Filed 10/17/2002 Page 1 of 117 IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION In re BANK ONE SECURITIES ) Civil Action No. 00-CV-0767 LITIGATION Judge Wayne R. Andersen First Chicago Shareholder Claims ) Magistrate Judge Morton Denlow FILED OCT 1 7 2002 MICHAEL W. CLERK, u. S. DOB8INS DISTRICT CoURr FIRST CHICAGO NBD PLAINTIFFS' FIRST AMENDED CONSOLIDATED CLASS ACTION COMPLAINT „e'1;1 /o Case 1:00-cv-00767 Document 180 Filed 10/1 7/29Q2 Page 2 of 117 TABLE OF CONTENTS Pa e 1. NATURE OF THE ACTION .............................................. 1 H. JURISDICTION AND VENUE ............................................ 8 III. THE PARTIES .......................................................... 9 A. Lead Plaintiff ..................................................... 9 B. Defendants ....................................................... 9 IV. CLASS ACTION ALLEGATIONS ......................................... 13 V. NO STATUTORY SAFE I-IARBOR ........................................ 15 VI. SUBSTANTIVE ALLEGATIONS ......................................... 16 A. The Banc One/First Chicago Merger .................................. 16 B. The Registration Statement And Prospectus Were Materially Misleading And Omitted Material Facts, Trends And Risks Related To First USA's Operations, Earnings And Prospects For Continued Growth ..... 22 1. The Changing Credit Card Environment And Banc One's Acquisition Of First USA ....................... 22 2. First USA Quietly Changes Its Business Strategy In Response To The Changing Market .... ............... 23 3. The Change In Pricing Strategy Exacerbates An Undisclosed Attrition Problem And Breakdown in Customer Service At First USA ................................ 26 4. First USA's Elimination Of Grace Periods On Its Credit Card Accounts Compounds The Undisclosed Attrition And Customer Service Problems At First USA ............ 28 5. The Undisclosed "Portfolio Collapse" At First USA And Ensuing Class Action Lawsuits ................... 29 1 Case 1:00-cv-00767 Document 180 Filed 10/17/2002 Page 3 of 117 C. The Undisclosed Effort To Maintain The Appearance Of Earnings And Portfolio Growth At First USA Prior To The Merger ......... 31 1. The Pressure From Banc One To Earn More ...................... 31 2. First USA's Efforts To "Manage" The Returns On Its Credit Card Portfolio To Earn Additional Short Term Profits ........ 33 3. First USA Purportedly "Comes Clean" To Banc One About The True Extent Of The Problems At First USA ............. 39 4. The Instruction From Banc One To "Earn More" To Complete The Merger Regardless Of The Cost ................. 41 5. First USA's Reaction to Slowing Growth: The "Portfolio Acquisition Blitz" .............................. 44 6. First USA' s Aggressive Pursuit Of New Affinity Relationships To Bring In New Accounts ................. 45 D. Banc One ' s Inadequate Disclosure Of Accounting Practices At First USA That Materially Affected Banc One's Reported Results .......... 48 1. Banc One's Failure To Adequately Disclose That First USA Was Continuing To Capitalize And Defer Marketing Expenses Up To The Date Of The Merger .......... 49 2. Banc One ' s Failure To Adequately Disclose That First USA Was Capitalizing And Deferring Expenses Associated With Its Affinity Programs .......................... 51 3. Banc One's Failure to Adequately Disclose First USA's Securitization and Gain On Sale Accounting Practices .............. 53 E. The Flurry Of Merger Activity ....................................... 57 1. The Retention Of A New Auditor .............................. 57 2. The Efforts To Conform First USA's And First Card' s Divergent Accounting Policies ... ................... 58 a. The Internal Debate Over How To End First USA's Expense Capitalization Practices ............... 58 11 Case 1 :00-cv-00767 Document 180 Filed 10/17/22 Page 4 of 117 b. The Undisclosed Accounting Implications Of Not Changing First USA's Bankruptcy Notification Charge-Off Policy At the Time of the Merger ............... 63 3. The Individual Defendants ' Supposed "Due Diligence " Efforts ....... 64 F. The Failure To Address The Undisclosed Problems At First USA Leads To Increased Regulatory Scrutiny .................... 66 G. The New Bank One . ..............................................69 1. Arthur Andersen's Audit Of Bank One's Combined 1998 Results ..... 69 2. The Post-Merger Efforts To Try To Resolve Some Of The Undisclosed Problems And Negative Trends At First USA ....... 73 3. The Unresolved Problems At First USA Ultimately Threaten The Safety And Soundness Of The Bank ................. 76 171. The Truth Begins To Emerge Only Ten Months AfterThe Merger .......... 78 1. Bank One Concludes That The Problems At First USA Are Beyond Easy Repair And Contracts To Take Out $320 Million Of Additional Insurance Coverage To Mitigate Defendants' Exposure .... 79 2. Bank One's August 24, 1999 Announcement Attributes The Earnings Revision "Entirely" To Problems At First USA ........ 80 3. The October 19, 1999 Resignation Of Richard Vague And Appointment of William Boardman As CEO of First USA .......... 84 4. The November 10, 1999 Announcement , Revising Earnings Projections For A Second Time Due To Problems At First USA . ..... 85 5. Arthur Andersen's December 1999 Reassignment Of The Bank One Engagement To "Maximum Risk" ............... 87 6. The December 21, 1999 Resignation Of Bank One's CEO, John McCoy ................................ 88 7. The January 11, 2000 Announcement And Revision of First USA's Business Plans ................................... 89 iii Case 1:00-cv-00767 Document 180 Filed 10/17/2002 Page 5 of 117 Bank One's Restructuring Of First USA's Balance Sheet In 1999 And Early 2000 Confirms That The Financial Statements Incorporated Into The Registration Statement Were Materially False And Misleading ...... 91 1. Bank One's Special $725 Million Fourth Quarter 1999 Charge ....... 91 2. The SEC's Challenge Of Bank One's Special Charge ............... 92 3. Bank One's Additional $1.91 Billion Charge In 2000 ............... 94 J. Conclusion And Summary .......................................... 95 K. Defendants Violated SEC Reporting Rules ............................. 97 L. Defendants Violated Basic Tenets Of GAAP .......................... 100 M. Defendants Violated OCC Regulations ............................... 102 VII. INCORPORATION OF PRIOR ALLEGATIONS ............................ 103 COUNT I: Against Bank One for Violations of Section 11 of the Securities Act .......................... 103 COUNT 11: Against the Individual Defendants for Violations of Section 11 of the Securities Act ....................... 105 COUNT III: Against Bank One for Violations of Section 12(a)(2) of the Securities Act ................................ 106 COUNT IV: Against The Individual Defendants Under Section 15 of the Securities Act ............................... 108 COUNT V: Against All Defendants for Violations of Section 14(a) of the Exchange Act and Rule 14a-9 Promulgated Thereunder ..................................... 109 COUNT VI: Against the Individual Defendants Under Section 20 of the Exchange Act ............................... 110 PRAYER FOR RELIEF ....................................................... 110 JURY DEMAND ............................................................ III Iv Case 1 : 00-cv-00767 Document 180 Filed 10/17/2002 Page 6 of 117 FIRST CHICAGO NBD PLAINTIFFS' FIRST AMENDED CONSOLIDATED CLASS ACTION COMPLAINT Lead Plaintiff for the former First Chicago NBD ("First Chicago") shareholders, on behalf of itself and all other persons similarly situated, brings this class action complaint, upon personal knowledge as to itself, and upon information and belief as to other matters obtained through the ongoing investigation by counsel ofthe following: (a) the Registration Statement dated July 31, 1998 (the "Registration Statement") issued in connection with the October 2, 1998 merger of First Chicago into Bank One Corporation (the "Merger"); (b) the Joint Proxy Statement/Prospectus included within the Registration Statement (the "Prospectus"); (c) financial statements and other documents incorporated by reference into the Registration Statement; (d) materials obtained through ongoing discovery in this action; and (e) other public filings, documents and press releases of Bank One Corporation ("Bank One" or the "Company") and its predecessor, Banc One Corporation ("Banc One").' Lead Plaintiff, by and through its attorneys, complains against Defendants, as follows: 1. NATURE OF THE ACTION 7. Lead Plaintiff brings this class action on behalf of itselfand the class (defined below), who, in exchange for their shares of First Chicago common stock, purchased shares of Bank One common stock in connection with the Merger and pursuant to the Registration Statement and Prospectus. In connection with the Merger, First Chicago stockholders received 1.62 shares of Bank One common stock in exchange for each share of First Chicago common stock. 8. The Merger between Banc One and First Chicago was first announced to the public on April 10, 1998. At that time, and throughout the period leading up to the completion of the ' Where appropriate , the terms " Bank One" and the "Company " include Banc One, Bank One and First USA Bank, N.A. Case 1:00-cv-00767 Document 180 Filed 10/17/2002 Page 7 of 117 Merger on October 2, 1998, one of the represented strengths of Banc One's operations and business was the purportedly
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