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In Re: First Union Corporation Securities Litigation 99-CV-00237

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In Re: First Union Corporation Securities Litigation 99-CV-00237 cHP\RL0TTE '4. Ff iOOü' UNITED STATES DISTRICT COURT 0STRCT COURT WESTERN DISTRICT OF NORTH CAROLINAj. S. CHARLOTTE DIVISION 'N. 01ST. OF N. C. 3 :99CV237-MCK IN RE: THE FIRST UNION CORP. SECURITIES LITIGATION CONSOLIDATED AND AMENDED CLASS ACTION COMPLAINT Plaintiffs, by and through their attorneys, allege the following based upon, among other things, the investigation of their attorneys, which included: (a) review and analysis of public filings made by First Union Corporation ("First Union" or the "Company'), with the Securities and Exchange Commission (the "SEC"); (b) interviews with former employees of First Union; (c) review and analysis of securities analysts' reports concerning First Union; (d) review and analysis of First Union press releases and reports and articles about First Union and/or the individual defendants in the financial and general press; (e) review and analysis of other publicly available information about First Union; (0 review and analysis of First Union financial statements and reports; and (g) consultation with certified public accountants. Plaintiffs believe that further substantial evidentiary support for the allegations will be uncovered after a reasonable opportunity for discovery. Many additional detailed facts supporting the allegations contained herein are known only to defendants or are within their exclusive possession and control. Case 3:99-cv-00237-CH Document 47 Filed 02/22/00 Page 1 of 64 NATURE OF THE CASE 1. This is a class action on behalf of purchasers of the common stock of First Union, a nationwide banking and financial services provider, between August 14, 1998, and May 24, 1999, inclusive (the "Class Period"). Plaintiffs' claims arise under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and SEC Rule lOb-5. 2. During the Class Period, the individual defendants made statements, and caused First Union to make statements in public filings and press releases, trumpeting the success of the Company's massive acquisition program, in particular the $20 billion acquisition of CoreStates Financial Corporation ("CoreStates") and over $2 billion acquisition of The Money Store, Inc. ("The Money Store"). According to these defendants - who were the top officers and managers of the Company - First Union had successfully implemented the "integration" of the acquired businesses and operations of CoreStates and The Money Store into First Union's existing operations, resulting in substantial operating savings and increased efficiencies that were and would continue to result in increased earnings and profitability. 3. In fact, as defendants knew or recklessly disregarded, the acquisition program was a debacle. First Union was experiencing severe and costly problems in virtually every area of its day-to-day business operations in connection with integrating and consolidating its acquisitions, including the loss of hundreds of thousands of customers. These undisclosed problems included: credit card discrepancies, computer crashes, incorrect billing statements, failure to complete corporate customers' payrolls, losing checks, wiring currency transfers in incorrect amounts, losing information about customer accounts, assigning incorrect numbers to customer accounts, and depriving customers access to their accounts electronically. Case 3:99-cv-00237-CH Document 47 Filed 02/22/00 Page 2 of 64 4. These integration problems were more than simply a headache for First Union. According to an August 16, 1999, article in The Morning Call, First Union lost 400,000, or 20%, of CoreStates' 2 million customers due to service-related issues resulting from the merger. Similarly, the costs resulting from these integration and conversion problems had a material adverse effect on the Company's profitability. Defendants' also engaged in accounting manipulations to inflate reported pretax earnings in violation of generally accepted accounting principles ("GAAP"). In particular, defendants failed to properly adjust on First Union's 1998 financial statements the value of certain securitized interests in portfolios of siibprirne home equity loans originating from The Money Store. As a result, 1998 pretax earnings were overstated by at least $79 million. 6. In order to inflate and maintain the market price of First Union's common stock, the defendants not only failed to disclose the major logistic and financial obstacles First Union was encountering in integrating its acquisitions and the material impact of those obstacles on its bottom line earnings and profitability, but also falsely represented that the acquisitions were, and would continue to add to First Union's earnings and profitability. Among other fraudulently misleading representations, defendants: (a) repeatedly misrepresented the progress and success of the integration of the acquired companies; (b) publicly touted a 1999 earnings per share ("EPS") estimate of $4.00, without having any reasonable basis; (c) falsely represented First Union's acquisition of The Money Store as "immediately accretive to earnings"; Case 3:99-cv-00237-CH Document 47 Filed 02/22/00 Page 3 of 64 (d) boasted of First Union's strong customer retention rates while the Company was, in fact, losing customers in droves; and (e) touted cost cutting programs such as the "Future Bank" initiative as successful means to streamline operations and enhance profits and earnings, while at the same time knowing that the Company's massive layoffs, combined with the severe problems integrating its multi-billion dollar acquisitions were creating chaotic, not improved or streamlined, customer services and operations. 7. Despite defendants' repeated representations to the contrary, the Company's merger with CoreStates, in particular, was ridden with significant and material obstacles. For example: (a) The Company was experiencing major problems integrating the CoreStates' computer systems into First Union's systems, because, as one former senior executive in the Company's Commercial Card division stated, "the Company wanted to complete what should have been a two-year job in six months." After First Union signed the merger agreement with CoreStates, it quickly discovered that the two computer systems were not compatible, and that a system conversion was not going to work. In April of 1998, First Union learned that the treasury management systems were also incompatible. (b) The integration of CoreStates' data into the First Union computer system led to a multitude of repeated errors in customer accounts. From August to September of 1998, overdraft processing was substantially delayed because of failures of the First Union computer system caused by the integration process and failures of the automated check sorting system. Case 3:99-cv-00237-CH Document 47 Filed 02/22/00 Page 4 of 64 (c) Resources were being wasted because of the chaotic conditions surrounding the integration with CoreStates. For example, the Company incurred thousands of dollars a month in unnecessary losses as a result of active computer network access jacks that were not being used despite paying monthly fees for each activated jack. (d) A frequent computer error alienating customers involved double- billing customers who used debit cards for payment. A former First Union overdraft processor experienced the problem firsthand when he purchased a suit with his debit card on his employee account and discovered he was billed twice for the clothing. He was informed that First Union was experiencing "computer errors." (e) For at least six months after the merger, First Union took an extra two to three days to credit deposits that customers made to their checking accounts. If a check was deposited in a non-First Union ATM machine, First Union would automatically debit the customer account for the ATM fee, but not credit the account for the check that had been deposited, leading to numerous customer complaints. (f) When customers complained about the frequency of improperly bounced checks and overdraft fees, First Union employees were told to tell customers that First Union was 'having computer system problems." After First Union eliminated CoreStates' customer service department as part of its "cost-cutting" initiatives, CoreStates' overdraft processors took on customer service duties, including handling customer calls and complaints, which they were not equipped to handle. (g) As a result of First Union's sale of certain CoreStates branches and customer accounts to Sovereign Bank, numerous former customers had problems with balances Case 3:99-cv-00237-CH Document 47 Filed 02/22/00 Page 5 of 64 that were transferred over from CoreStates to Sovereign. Even though the accounts were sold, customers' checks were still coming to First Union rather than Sovereign. For two or three months after the merger, temporary employees were brought into First Union's overdraft department to sort through First Union's incoming checks by hand to determine if any Sovereign customer checks were in the group. Every time this happened, check processing for First Union customers was substantially delayed. (h) The e-commerce area system conversion, which covers cash management, cash management account reconcilement, control disbursement and the lock box system, was also adversely impacted from the merger. Between October, 1998 and June, 1999. First Union lost "batches" of work, customers did not receive credit for lock box deposits, and First Union lost payments. According to a former executive in the Company's corporate banking
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