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In re New Century

United States District Court for the Central District of California

December 3, 2008, Decided; December 3, 2008, Filed

Case No. CV 07-00931 DDP (JTLx)

Opinion

 [*1209]  ORDER DENYING DEFENDANTS' MOTIONS TO  [**8] DISMISS AND DENYING MOTION TO STRIKE

[Motions to Dismiss and Motion to Strike filed on June 2, 2008]

This is a securities class action that arises in the wake of the sub-prime mortgage lending crisis and the collapse of one of the industry's formerly largest sub-prime mortgage [*1210]  lenders, New Century Financial Corporation ("New Century"). Lead Plaintiff New York State Teachers Retirement System ("NYSTRS") brings this action on behalf of all persons and entities, other than Defendants, who purchased or acquired New Century common stock, New Century Series A Cumulative Redeemable Preferred Stock ("Series A Stock"), New Century Series B Cumulative Redeemable Preferred Stock ("Series B Stock"), and/or New Century call options, or who sold New Century put options, between May 5, 2005 and March 13, 2007 (the "Class Period"). (Compl. P 1.) Defendants are New Century officers ("Officer Defendants"), its directors ("Director Defendants"), its auditor KPMG ("KPMG"), and the underwriters of the stock offering ("Underwriter Defendants").

Sub-prime lending involves originating and purchasing loans for borrowers considered high-risk by traditional credit and underwriting standards. (Compl. P 2.) The recent  [**9] sub-prime mortgage lending crisis has caused many mortgage lending companies -- and the value of their stocks -- to collapse. New Century became one of the nation's largest mortgage finance companies by focusing on sub-prime lending. (Compl. P 2.) In 1996, when New Century was formed, it had $ 357 million in total loan originations and purchases. For the year-ended December 31, 2005, New Century reported $ 56.1 billion in total loan originations and purchases. (Compl. PP 55-60.) Sub-prime loans accounted for $ 32.8 billion, or 62.2% of total loans financed or sold. (Compl. P 65.)

In June 2005 and August 2006, New Century made offerings of the Series A stock and Series B stock respectively. On February 7, 2007, a day before 2006 fourth-quarter and year-end results were scheduled to be released, New Century issued a press release that disclosed a restatement of earnings for the previous three quarters of 2006. New Century stated that material weaknesses in internal controls over financial reporting caused the reporting errors. (Compl. P 457.) Upon this announcement, New Century stock plummeted by 36% the following day. (Id. at P 459) In the period subsequent to these and additional disclosures,  [**10] (Id. at PP 464, 468-476), New Century stock further declined. On March 14, 2007, New Century stock closed at $ 0.67 per share, a 97% decline from the over $ 30 per share prior to the disclosures. (Id. at P 9) The Series A and Series B stock likewise fell by 75% during this period. (Id. at PP 9, 478.)

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588 F. Supp. 2d 1206 *; 2008 U.S. Dist. LEXIS 101496 **

IN RE NEW CENTURY

Subsequent History: Motion granted by, in part In re New Century, 2009 U.S. Dist. LEXIS 133786 (C.D. Cal., July 8, 2009)

Costs and fees proceeding at, Motion granted by In re New Century, 2010 U.S. Dist. LEXIS 148444 (C.D. Cal., Nov. 15, 2010)

CORE TERMS

allegations, underwriting, scienter, audit, repurchase, loans, stock, disclosures, internal control, Plaintiffs', residual, violations, causation, strong inference, accounting, documents, valuation, earnings, misrepresentations, misstatements, false and misleading, Defendants', press release, particularity, registration statement, financial statement, reckless, sales, motion to dismiss, deliberately

Civil Procedure, Responses, Defenses, Demurrers & Objections, Motions to Dismiss, Pleadings, Complaints, Requirements for Complaint, Heightened Pleading Requirements, Fraud Claims, Motions to Dismiss, Failure to State Claim, Pleading & Practice, General Overview, Evidence, Judicial Notice, Legislative Facts, Securities Law, Regulators, US Securities & Exchange Commission, Motions to Strike, Postoffering & Secondary Distributions, Securities Exchange Act of 1934 Actions, Heightened Pleading Requirements, Implied Private Rights of Action, Deceptive & Manipulative Devices, Elements of Proof, Civil Liability Considerations, Securities Litigation Reform & Standards, Group Pleading Doctrine, Safe Harbor, Scienter, Relevant Factors, Accounting Irregularities, Insider Trading, Secondary Liability, Controlling Persons, Elements of Proof, Accountants & Auditors, Causation, Registration of Securities, False Registration Statements