Lipton v. McLean (World Acceptance Corporation) | VERIFIED SHAREHOLDER DERIVATIVE COMPLAINT

August 10, 2015 in STOP FORECLOSURE FRAUD

UNITED STATES DISTRICT COURT DISTRICT OF SOUTH CAROLINA

IRWIN J. LIPTON, Derivatively on Behalf of WORLD ACCEPTANCE CORPORATION, Plaintiff, v. A. ALEXANDER MCLEAN, III, JOHN L. CALMES, JR., KELLY M. MALSON, MARK C. ROLAND, JAMES R. GILREATH, CHARLES D. WAY, KEN R. BRAMLETT, JR., SCOTT J. VASSALLUZZO, and DARRELL E. WHITAKER, Defendants, -and- WORLD ACCEPTANCE CORPORATION, a South Carolina corporation, Nominal Defendant. JURY TRIAL DEMANDED

VERIFIED SHAREHOLDER DERIVATIVE COMPLAINT

I. NATURE AND SUMMARY OF THE ACTION 1. World Acceptance is a small-loan consumer finance business that specializes in sub- “subprime” lending. The Company offers short- and medium-term installment loans (i.e., ranging from four to 42 months), marketing those loans and related credit insurance and ancillary products and services in more than 1,200 branch offices in 14 states as well as Mexico. World Acceptance targets its products to customers with credit scores as low as 400 — well below the floor for “subprime” credit scores. In other words, the Company preys on consumers who have no other place to turn for financial help. While World Acceptance provides these consumers with financing, it comes at a steep price. The Company’s loans typically carry exorbitant interest rates which are set near or at the maximum allowable limit under applicable law. 2. During the Relevant Period, World Acceptance routinely boosted its effective interest rates through two devious, but extremely profitable practices. First, the Company’s customers were bilked into purchasing worthless credit insurance products that only benefitted the Company, but were paid for by the borrowers. 3. Second, the Company’s borrowers were locked into an endless cycle of debt by being constantly manipulated into refinancing their loans, even before they had paid back a significant portion of their outstanding balance. Such renewals comprised as much as 75% of the Company’s loan portfolio during the Relevant Period. Through this practice, the Individual Defendants were able to create the perception of significant loan growth, which as the Individual Defendants stated, was their “number-one priority.” However, as the Individual Defendants later revealed, they were improperly accounting for many of those renewals in violation of Generally Accepted Accounting Principles (“GAAP”). Indeed, while World Acceptance was accounting for small-dollar loan renewals as new loans, such renewals should actually have been accounted for as “modifications.” Through this accounting machination, the Individual Defendants improperly inflated their loan growth and loan volume to the market, which closely followed these key metrics in assessing World Acceptance stock. 4. The truth about the Individual Defendants’ illicit lending practices and improper accounting began to emerge on July 25, 2013. On that date, the Individual Defendants caused the Company to hold a conference call with analysts to discuss the Company’s first quarter 2014 financial results and recently filed amended fiscal 2013 Form 10-K, in which they admitted that there had been a “material weakness” in World Acceptance’s accounting treatment of small-dollar loan renewals. The Individual Defendants explained that such small-dollar renewals, which comprise between 15% and 25% of the Company’s entire loan renewal portfolio, were improperly being recorded as “renewals” instead of “modifications,” in violation of GAAP, and that remedial actions would be required. 5. However, the Individual Defendants downplayed numerous analyst inquiries, falsely reassuring investors that the “material weakness” would not “have a significant impact on the overall operations of the company” moving forward. As a result of its July 25, 2013 revelations, World Acceptance’s share price dipped 4.3%, causing millions in investor losses and in market capitalization loss to World Acceptance. This stock drop would have been even greater, however, but for the Individual Defendants’ misleading assurances. 6. The Individual Defendants could only hide the truth regarding their illicit practices for so long. Indeed, on March 13, 2014, additional information emerged when the Individual Defendants caused the Company to reveal to the market that World Acceptance was the subject of a federal investigation by the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) regarding potential “unlawful acts or practices in connection with the marketing, offering, or extension of credit in violation of” federal consumer financial laws such as the Consumer Financial Protection Act and the Truth in Lending Act. As a result of this revelation regarding the U.S. government’s investigation into the Company’s marketing and lending practices, World Acceptance’s stock price sank almost 20%, from a close of $97.32 on March 12, 2014 to a close of $78.25 on March 13, 2014, erasing millions more in market capitalization. However, as was the case previously, the Individual Defendants continued to downplay this additional negative news to the market thereby buoying World Acceptance’s stock price with false assurances as to the propriety of its marketing and lending practices. 7. Then, on April 29, 2014, the truth regarding World Acceptance’s illicit lending practices and accounting manipulation was finally and fully revealed as the Individual Defendants caused the Company to announce first quarter 2015 earnings. Indeed, on that day the Individual Defendants revealed that they had changed their corporate policy to no longer “encourage” small-dollar renewals. As a result of this correction, World Acceptance posted its lowest quarterly loan growth in at least nine years. Through this disclosure, the Individual Defendants implicitly acknowledged that through their prior practices, they had manipulated consumers who had barely repaid their loan balances into renewals to artificially boost World Acceptance’s loan growth and volume. 8. Moreover, the Individual Defendants’ announcement revealed that, contrary to their initial assurances, the previously disclosed “material weakness” had, in fact, materially impacted the Company’s operations in that, during the Relevant Period, reported loan volume and loan growth figures had been artificially inflated as a result of World Acceptance’s faulty accounting methods for small-dollar renewals. 9. The market’s reaction to this revelation was swift and severe as investors sent the Company’s stock price spiraling downward approximately another 10%, falling from a close of $80.50 on April 28, 2014 to a close of $72.60 on April 30, 2014, resulting in millions of dollars in additional market capitalization loss to the Company. All told, World Acceptance saw its market capitalization shrink by more than $250 million during the Relevant Period between January 30, 2013 and April 29, 2014. The Company’s stock price has continued its downward trajectory, closing at just $59.77 per share on July 14, 2015. 10. Of course, not everyone was harmed by the Individual Defendants’ actions. Specifically, during the Relevant Period, in just a 12 month period of time between February 1, 2013 and February 5, 2014, certain of the Individual Defendants sold 326,953 World Acceptance shares at inflated prices reaping almost $29 million in proceeds. These sales were made at the same time the Individual Defendants were causing the Company to repurchase millions of shares of its own stock at inflated prices. Specifically, between February 2013 and February 2014 — the same time period many of the Individual Defendants were unloading shares and reaping millions in proceeds, the Individual Defendants caused the Company to purchase more than 2,000,000 shares of its own stock for a total of $188,518,361 at inflated prices ranging from a weighted average of $77.53 per share to as high as $102.89 per share. 11. World Acceptance’s Board of Directors (the “Board”) has not commenced, and will not commence, litigation against the Individual Defendants named in this Complaint, let alone vigorously prosecute such claims, because, among other things, a majority of the members of the Board are directly interested in the personal financial benefits challenged herein that were not shared with World Acceptance shareholders, and/or face a substantial likelihood of liability to World Acceptance for breaching their fiduciary duties of loyalty and good faith by authorizing or failing to correct the false and misleading statements alleged herein, and/or lack independence. Accordingly, a pre-suit demand upon World Acceptance’s Board was and is a useless and futile act. Thus, Plaintiff rightfully brings this action to vindicate World Acceptance’s rights against its wayward fiduciaries and hold them responsible for the damages they have caused to World Acceptance. [...]