Shareholders in Minnesota and New York have filed suit against Olympic Financial Ltd., alleging that the company misled investors about the quality of its loans.
Olympic Financial Ltd. officially changed its name to Arcadia Financial Ltd. in April. Arcadia, based in Minneapolis, is a publicly traded, independent finance company.
Two federal lawsuits in Minnesota and one in New York allege that Arcadia misrepresented subprime loans as prime notes. The plaintiffs are North River Trading and Allan Farkas of New York; Stuart Taran of Minnesota; and Frank Dibella of Minnesota. The suits seek class-action status, and ask for unspecified damages.
Arcadia said the suits are without merit. Richard Greenawalt, president and CEO, said: 'The company's policy has always been and will continue to be complete and accurate disclosure. We fully intend to contest this suit, and expect to be successful.'
Arcadia buys, sells and services retail installment contracts for new and used automobiles through more than 7,700 dealers in 40 states.
The suits allege that the company, which already operated as Arcadia Financial Ltd. in about half the states in which it does business, violated federal securities laws with an inaccurate portrayal of its financial condition.
According to the complaints, the company's trouble started when it introduced its Classic loan program in October 1994, in addition to its so-called Premier loans. The company says in its 1996 annual report that Premier Program customers have 'stronger credit characteristics' than Classic borrowers.
The share of Classic loans in Arcadia's portfolio has grown rapidly. In 1995, 17 percent of the loans the company purchased were Classic loans, compared with 4 percent in 1994. In September 1996, Classic loans were 32 percent of total loan purchases, compared with 16 percent during the same period in 1995. Arcadia intended to make Classic loans 50 percent of total loan purchases by the end of 1996, court documents say.
Repossessions grew as a result of the Classic loan program, the suits say. Arcadia sold and financed the repossessed vehicles, insisting that the loans on repossessions met the same standards as the original loans.
But the company's reserves on repossession loans were higher than for other loans, the suits say.
STOCK PRICE RISES, FALLS
In August 1996, Arcadia announced that it had an interested prospective buyer. The announcement drove the stock price up 36 percent.
But the stock price began to drop after the company reported higher repossessions and net losses a month later. The price dropped $2 to close at $12.62 on Oct. 16, 1996, when Arcadia announced that its suitors had lost interest.
On Feb. 6, 1997, Moody's Investors Service reduced ratings on Arcadia's senior notes, and the stock dropped to a 20-month low of $11.75 per share. The rating service said the lower rating reflected Arcadia's shift toward subprime loans.
The shareholders contend that Arcadia failed to establish enough loss reserves to cover loan losses and that the company created a large, unmanageable surplus of repossessed automobiles.
The suit, filed in the U.S. District Court for the Eastern District of New York, alleges that 'the repossession and sales program was a scheme devised to improperly delay or avoid the accurate recording of losses and loan loss reserves.'
The Minnesota suits were filed in U.S. District Court in Minneapolis.