in the united states district court for the northern...

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION THOMAS G. ONG for THOMAS G. ONG IRA and THOMAS G. ONG, individually and on behalf of all others similarly situated,

Plaintiffs, v. SEARS, ROEBUCK & CO., SEARS ROEBUCK ACCEPTANCE CORP., ALAN LACY, PAUL J. LISKA, GLENN R. RICHTER, KEVIN T. KELEGHAN, K.R. VISHWANATH, KEITH E. TROST, GEORGE F. SLOOK, LARRY R. RAYMOND, THOMAS E. BERGMANN, CREDIT SUISSE FIRST BOSTON, GOLDMAN, SACHS & CO., MORGAN STANLEY, BEAR, STEARNS & CO., INC., LEHMAN BROTHERS and MERRILL LYNCH & CO., INC.

Defendants.

))))))))))))))))))))

CASE NO. 03 C 04142 THIRD AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS JURY TRIAL DEMANDED

Lead Plaintiffs Thomas G. Ong and Thomas G. Ong for Thomas G. Ong IRA and

Plaintiff State Universities Retirement System of Illinois (collectively, “Plaintiffs”) allege the

following based upon the investigation of Plaintiffs' counsel, which included a review of U.S.

Securities and Exchange Commission ("SEC") filings by Sears, Roebuck & Co. ("Sears") and

Sears Roebuck Acceptance Corp. ("SRAC"), as well as regulatory filings and reports, securities

analysts' reports and advisories about Sears and/or SRAC, press releases and other public

statements issued by Sears and/or SRAC, and media reports about Sears and/or SRAC. Plaintiffs

believe they will find substantial additional evidentiary support for the allegations set forth

herein after a reasonable opportunity for discovery.

Case 1:03-cv-04142 Document 95 Filed 10/28/2005 of 121

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NATURE OF THE ACTION

1. This is a class action for violations of the federal securities laws on behalf of

Plaintiffs and (a) all persons and entities who purchased or otherwise acquired securities issued

by SRAC ("SRAC Debt Securities") between October 24, 2001 and October 17, 2002, inclusive,

pursuant to a prospectus or traceable to a prospectus ("Issuer Class" and "Class Period,"

respectively); and (b) all persons and entities who, during the Class Period, purchased or

otherwise acquired publicly traded SRAC Debt Securities issued by SRAC before the start of the

Class Period ("Trader Class") and actively traded through the public markets and over national

securities exchanges including, inter alia, the New York Stock Exchange and NASDAQ Fixed

Income Pricing System. Plaintiffs allege violations of the Securities Act of 1933 (the "Securities

Act") on behalf of the Issuer Class, and violations of the Securities Exchange Act of 1934 (the

"Exchange Act") on behalf of the Trader Class.

2. During the Class Period, SRAC issued the following debt securities that were

purchased by members of the Issuer Class:

A. $600 million of 6.70% notes due April 15, 2012, offered pursuant to an

Indenture dated May 15, 1995 (the "Indenture"); a Registration Statement

and accompanying Prospectus, including documents incorporated therein,

dated September 3, 1998 (the "Registration Statement"); and a Prospectus

and Prospectus Supplement, both dated March 18, 2002, and filed with the

SEC on or about that date (the "3/18/02 Offering");

B. $1 billion of 7.0% notes due June 1, 2032 offered pursuant to the

Indenture, Registration Statement and a Prospectus and Prospectus


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Supplement dated May 21, 2002, and filed with the SEC on or about that

date (the "5/21/02 Offering"); and

C. $250 million of 7.0% notes due July 15, 2042 offered pursuant to the

Indenture and Registration Statement and a Prospectus and Prospectus

Supplement dated June 21, 2002, and filed with the SEC on or about that

date (the "6/21/02 Offering").

3. In addition, before the start of the Class Period, SRAC had issued billions of

dollars of SRAC Debt Securities. These securities remained outstanding during the entire Class

Period. Many were actively traded over national securities exchanges, such as the New York

Stock Exchange and NASDAQ Fixed Income Pricing System, and purchased by members of the

Trader Class. The SRAC Debt Securities issued before the start of the Class Period, and

available for purchase by members of the Trader Class during the Class Period, are set forth in

Exhibit A to this Complaint.

4. The essence of this action is that, as a wholly-owned subsidiary of Sears, and one

that depends almost entirely on Sears for its earnings, the market value and yield of SRAC Debt

Securities are directly related to Sears' finances, financial condition and present and future

operations. Throughout the Class Period, Sears manipulated its results with respect to Sears'

credit card operations in an effort to make those operations appear more stable and profitable

than they actually were. In manipulating these results, defendants within Sears knew that certain

public documents and statements issued or disseminated by Sears to the investing public during

the Class Period were materially false and misleading, and that those results would impact

directly on the value and yield of SRAC Debt Securities. Further, with respect to those

defendants involved in the issuance of SRAC Debt Securities during the Class Period, none of


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those defendants made a reasonable investigation or possessed reasonable grounds for the belief

that statements related to Sears' credit card operations, and contained in the registration statement

pursuant to which the securities were issued, were true and without omissions of any material

facts and were not misleading. As a result, members of both the Issuer Class and the Trader

Class were damaged.

JURISDICTION AND VENUE

5. The claims asserted in this Complaint arise under Sections 11, 12(a)(2) and 15 of

the Securities Act, 15 U.S.C. §§ 77k, 77l(2) and 77o, and Sections 10(b) and 20(a) of the

Exchange Act, 15 U.S.C. §78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the

SEC, 17 C.F.R. 240.10b-5.

6. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. §§ 1331 and 1337, Section 22 of the Securities Act, 15 U.S.C. § 77v, and Section 27 of

the Exchange Act, 15 U.S.C. § 78aa.

7. In connection with the acts alleged in this Complaint, Defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce including, but not limited

to, the mails, interstate telephone communications and the facilities of the national securities

markets.

8. Venue is proper in this District pursuant to Section 22 of the Securities Act,

Section 27 of the Exchange Act, and 28 U.S.C. § 1391(b). Many of the acts charged herein,

including the preparation and dissemination of materially false and misleading prospectuses and

information, occurred in substantial part in this District. Additionally, Sears' executive offices

and its principal place of business are within this District.


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PARTIES

9. Lead Plaintiff Thomas G. Ong, as set forth in the accompanying certification,

attached as Exhibit B, and incorporated by reference herein, purchased SRAC Debt Securities

during the Class Period at artificially inflated prices and has been damaged thereby.

10. Lead Plaintiff Thomas G. Ong for Thomas G. Ong IRA, as set forth in the

accompanying certification, attached as Exhibit C, and incorporated by reference herein,

purchased SRAC Debt Securities during the Class Period at artificially inflated prices and has

been damaged thereby.

11. Plaintiff State Universities Retirement System of Illinois, as set forth in the

accompanying Certification, attached hereto as Exhibit D, and incorporated by reference herein,

purchased SRAC Debt Securities during the Class Period at artificially inflated prices and has

been damaged thereby.

THE SEARS/SRAC DEFENDANTS

12. Defendant Sears Roebuck Acceptance Corporation is a wholly-owned subsidiary

of defendant Sears, Roebuck & Co. SRAC is organized under the laws of Delaware and

maintains executive offices at 3711 Kennett Pike, Greenville, Delaware. SRAC raises funds

through the issuance of various debt securities, including commercial paper, medium term notes

and other borrowings, i.e., Sears Debt Securities. SRAC uses the proceeds from these

borrowings to purchase short-term notes or receivable balances from Sears or its domestic credit

operations. SRAC's income is derived primarily from the earnings on its investment in these

notes and receivable balances.

13. Defendant Sears, Roebuck & Co. is organized under the laws of New York and

maintains its principal executive offices at 3333 Beverly Road, Hoffman Estates, Illinois. Sears


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is one of North America's largest retailers. Sears provides financing to its customers through

private label credit cards and installment plans. Sears owns all of the outstanding stock in

SRAC.

14. Defendant Alan Lacy ("Lacy") was Sears' Chief Executive Officer, President and

Chairman of the Board throughout the Class Period.

15. Defendant Glenn R. Richter ("Richter") has been Sears' Chief Financial Officer

since October 4, 2002. Prior to his appointment as CFO, Richter served as Senior Vice

President, Finance.

16. Defendant Paul J. Liska ("Liska") was Sears' CFO from the beginning of the Class

Period until October 4, 2002. Liska was a director of SRAC for all or part of the Class Period.

17. Defendant Kevin T. Keleghan ("Keleghan") was President of Sears' Credit and

Financial Products segment and an Executive Vice President from the start of the Class Period

until October 4, 2002, when he was forced to resign.

18. Defendant K.R. Vishwanath ("Vishwanath") was Sears' Vice President of Risk

Management from the start of the Class Period until October 16, 2002, when his employment

was terminated.

19. Defendant Keith E. Trost ("Trost") was the President and a director of SRAC

throughout the Class Period.

20. Defendant George F. Slook ("Slook") was the Vice President of Finance and a

director of SRAC throughout the Class Period.

21. Defendant Larry R. Raymond ("Raymond") was a director of SRAC throughout

the Class Period.


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22. Defendant Thomas E. Bergmann ("Bergmann") was Chief Accounting Officer

and Controller of Sears throughout the Class Period. Bergmann was also a director of SRAC,

beginning at least as early as July 8, 2002.

23. Defendants Lacy, Richter, Liska, Keleghan, Vishwanath, Trost, Slook, Raymond

and Bergmann are referred to collectively herein as the "Individual Defendants."

24. Defendants Lacy, Richter, Liska, Keleghan, Vishwanath and Bergmann are

referred to collectively herein as the "Sears Defendants."

25. Defendants Liska, Trost, Slook, Raymond and Bergmann are referred to

collectively herein as the "SRAC Defendants."

26. During the Class Period, each Individual Defendant, as a senior executive officer

or director of Sears and/or SRAC, was privy to confidential and proprietary information

concerning Sears, SRAC, their operations, finances, financial condition and present and future

business prospects. The Individual Defendants had access to material, adverse, non-public

information concerning Sears and SRAC, as discussed in detail below. Because of their

positions with Sears and SRAC, the Individual Defendants had access to non-public information

about their business, finances, products, markets and present and future business prospects

through their access to internal corporate documents, conversations and connections with other

corporate officers and employees, attendance at management and Board of Directors meetings

and committees, and through reports and other information provided to them in connection with

such meetings and committees. Because of their possession of such information, the Individual

Defendants knew or should have known that the adverse facts specified herein had not been

disclosed to, and were being concealed from, the investing public, and that materially and

affirmatively false and misleading statements as alleged herein were being made to the public.


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27. Each of the Individual Defendants is liable as a direct participant in the wrongs

complained of herein. In addition, Sears, by reason of its status as the sole shareholder of SRAC,

and the Individual Defendants, by reason of their status as senior executive officers and directors

of Sears and/or SRAC, were each a "controlling person" of SRAC within the meaning of Section

15 of the Securities Act and Section 20(a) of the Exchange Act, and had the power and influence

to cause SRAC to engage in the unlawful conduct complained of herein. Because of their

positions of control, both Sears and the Individual Defendants were able to and did, directly or

indirectly, control the conduct of SRAC's business.

28. The Individual Defendants, because of their positions within either Sears and/or

SRAC, controlled and/or possessed the authority to control the contents of Sears and SRAC

reports, public filings (including registration statements, prospectuses and supplements thereto),

press releases and presentations to securities analysts, which were disseminated to the investing

public. The Individual Defendants were provided with copies of the Sears and/or SRAC reports,

public filings (including prospectuses and supplements thereto) and press releases alleged herein

to be misleading, prior to or shortly after their issuance and had the ability and opportunity to

prevent their issuance or cause them to be corrected. Thus, each of the Individual Defendants

had the opportunity to commit the fraudulent acts alleged herein, and is liable for the

misrepresentations contained in those documents.

29. It is appropriate to treat the Individual Defendants as a group for pleading

purposes and to presume that the false, misleading and incomplete information conveyed in

Sears and SRAC public filings (including prospectuses and supplements thereto), press releases,

and other publications as alleged herein are the collective actions of the narrowly defined group


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of defendants identified above. Each of the Individual Defendants, by virtue of their high-level

positions within Sears and/or SRAC, directly participated in the management of SRAC, was

directly involved in the day-to-day operations of SRAC at the highest levels, and was privy to

confidential proprietary information concerning SRAC and its business, operations, growth,

financial statements, and financial condition, as alleged herein. The Individual Defendants were

involved in drafting, producing, reviewing and/or disseminating the false and misleading

statements and information alleged herein; knew or should have known that the false and

misleading statements were being issued regarding SRAC, and approved or ratified these

statements, in violation of the federal securities laws.

30. As officers and controlling persons of a publicly-held company whose securities

were, and are, registered with the SEC pursuant to the Exchange Act, and are traded on the New

York Stock Exchange ("NYSE"), and governed by the provisions of the federal securities laws,

the Individual Defendants each had a duty to disseminate promptly, accurate and truthful

information with respect to SRAC's financial condition and performance, growth, operations,

financial statements, business, markets, management, earnings and present and future business

prospects, and to correct any previously-issued statements that had become materially misleading

or untrue, so that the market price of SRAC Debt Securities would be based upon truthful and

accurate information. The Individual Defendants' misrepresentations and omissions during the

Class Period violated these specific requirements and obligations.

31. The Individual Defendants participated in the drafting, preparation, and/or

approval of the various public filings (including prospectuses and supplements thereto) and other

communications complained of herein and were aware of, or should have been aware of, the

misstatements and omissions, and their materially false and misleading nature. Because of their


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Board membership and/or executive and managerial positions with Sears and/or SRAC, each of

the Individual Defendants had access to the adverse undisclosed information about Sears' and

SRAC's business prospects and financial condition and performance as particularized herein and

knew or should have known that these adverse facts rendered the positive representations made

by or about Sears and/or SRAC's business issued or adopted by these companies materially false

and misleading.

32. Each of the defendants is liable as a participant in a fraudulent scheme and course

of business that operated as a fraud or deceit on purchasers of the SRAC Debt Securities by

disseminating materially false and misleading statements and/or concealing material adverse

facts. The scheme: (a) deceived the investing public regarding Sears' and SRAC's business,

operations, management and the intrinsic value of the SRAC Debt Securities; and (b) caused

Plaintiffs and other members of the Issuer and Trader Classes to purchase SRAC Debt Securities

at artificially inflated prices.

THE UNDERWRITER DEFENDANTS

33. Defendant Credit Suisse First Boston ("CSFB") was, at all relevant times herein, a

registered broker-dealer and member of the NASD. CSFB is an integrated financial services

institution that provides securities, investment management and credit services to corporations,

governments, financial institutions and individuals. CSFB was the joint book runner for the

3/18/02 Offering, i.e. a managing underwriter, and substantially participated in the wrongs

alleged herein. At all relevant times, CSFB had a duty to undertake an adequate due diligence

investigation and disseminate truthful and accurate information with respect to the 3/18/02

Offering.


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34. Defendant Goldman, Sachs & Co. ("Goldman Sachs") was, at all relevant times

herein, a registered broker-dealer and member of the NASD. Goldman Sachs is an integrated

financial services institution that provides securities, investment management and credit services

to corporations, governments, financial institutions and individuals. Goldman Sachs was a joint

book runner for the 3/18/02 Offering, i.e. the managing underwriter, and substantially

participated in the wrongs alleged herein. At all relevant times, Goldman Sachs had a duty to

undertake an adequate due diligence investigation and disseminate truthful and accurate

information with respect to the 3/18/02 Offering.

35. Defendant Morgan Stanley ("Morgan Stanley") was, at all relevant times herein, a

registered broker-dealer and member of the NASD. Morgan Stanley is an integrated financial

services institution that provides securities, investment management and credit services to

corporations, governments, financial institutions and individuals. Morgan Stanley was a joint

lead manager and the book runner, i.e. the managing underwriter, for the 05/21/02 Offering of

the SRAC Debt Securities and substantially participated in the wrongs alleged herein. At all

relevant times, Morgan Stanley had a duty to undertake an adequate due diligence investigation

and disseminate truthful and accurate information with respect to the 5/21/02 Offering.

36. Defendant Bear, Stearns & Co., Inc. ("Bear Stearns") was, at all relevant times

herein, a registered broker-dealer and member of the NASD. Bear Stearns is an integrated


to corporations, governments, financial institutions and individuals. Bear Stearns was the joint

lead manager for the 5/21/02 Offering and substantially participated in the wrongs alleged

herein. At all relevant times, Bear Stearns had a duty to undertake adequate due diligence


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investigation and disseminate truthful and accurate information with respect to the 5/21/02

Offering.

37. Defendant Lehman Brothers ("Lehman") was, at all relevant times herein, a

registered broker-dealer and member of the NASD. Lehman is an integrated financial services

institution that provides securities, investment management and credit services to corporations,

governments, financial institutions and individuals. Lehman was the joint lead manager for the

5/21/02 Offering and substantially participated in the wrongs alleged herein. At all relevant

times, Lehman had a duty to undertake an adequate due diligence investigation and disseminate

truthful and accurate information with respect to the 5/21/02 Offering.

38. Defendant Merrill Lynch & Co., Inc. ("Merrill Lynch") was, at all relevant times

herein, a registered broker-dealer and member of the NASD. Merrill Lynch is an integrated


to corporations, governments, financial institutions and individuals. Merrill Lynch was the book

runner for the offering of the 6/21/02 Offering, i.e. the managing underwriter, and substantially

participated in the wrongs alleged herein. At all relevant times, Merrill Lynch had a duty to

undertake an adequate due diligence investigation and disseminate truthful and accurate

information with respect to the 6/21/02 Offering.

39. Defendants CSFB, Goldman Sachs, Morgan Stanley, Bear Stearns, Lehman and

Merrill Lynch are referred to collectively herein as the "Underwriter Defendants."

PLAINTIFFS' CLASS ACTION ALLEGATIONS

40. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of themselves and two classes: (a) the Issuer Class, which


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consists of all persons and entities who purchased or otherwise acquired SRAC Debt Securities

between October 24, 2001 and October 17, 2002, inclusive, pursuant to a prospectus or traceable

to a prospectus; and (b) the Trader Class, which consists of all persons and entities who, during

the Class Period, purchased or otherwise acquired SRAC Debt Securities that were actively

traded through the public markets and over national securities exchanges including, inter alia,

the NYSE.

41. Excluded from the Classes are all Defendants, the officers and directors of both

Sears and SRAC at all relevant times, subsidiaries and affiliates of the corporate defendants,

members of their immediate families and their legal representatives, heirs, successors or assigns

and any entity in which Defendants have or had a controlling interest.

42. The members of the Issuer Class and the Trader Class are each so numerous that

joinder of all members of either class is impracticable. Pursuant to registration statements,

prospectuses and prospectus supplements, there were millions of SRAC Debt Securities issued

and/or traded during the Class Period. SRAC Debt Securities were actively traded through the

public markets and over national securities exchanges including, inter alia, the NYSE. While

the exact number of members of either Class is unknown to Plaintiffs at this time, and can only

be ascertained through appropriate discovery, Plaintiffs believe that there are hundreds or

thousands of members in each of the proposed Classes. Record owners and other members of

both Classes may be identified from records maintained by Sears, SRAC or their transfer agent

and may be notified of the pendency of this action by mail, using the form of notice similar to

that customarily used in securities class actions.


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43. Plaintiffs' claims are typical of the claims of the members of both the Trader Class

and the Issuer Class as all members of both Classes are similarly affected by Defendants'

wrongful conduct in violation of federal law that is complained of herein.

44. Plaintiffs will fairly and adequately protect the interests of the members of both

Classes and have retained counsel competent and experienced in class and securities litigation.

45. Common questions of law and fact exist as to all members of both the Issuer

Class and the Trader Class, and such questions predominate over any questions solely affecting

individual members of that Class. Among the questions of law and fact common to the Issuer

Class are:

(a) whether the federal securities laws were violated by Defendants' acts as

alleged herein;

(b) whether statements made by the Sears Defendants to the investing public

during the Class Period misrepresented material facts about the business

and operations of Sears and/or SRAC;

(c) to what extent the members of the Issuer Class and Trader Class have

sustained damages and the proper measure of damages;

(d) whether the SRAC Defendants and the Underwriter Defendants undertook

a reasonable investigation or possessed reasonable grounds for the belief

that statements set forth in the Registration Statement pursuant to which

the SRAC Debt Securities were issued, were true and without omissions of

any material facts and were not misleading; and


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(e) whether the market price of SRAC Debt Securities was artificially inflated

during the Class Period owing to the non-disclosures and/or material

misrepresentations complained of here.

46. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of both the Issuer Class and the

Trader Class to redress the wrongs done to them individually. There will be no difficulty in the

management of this action as a class action.

SUBSTANTIVE ALLEGATIONS

The Market Looks to Sears When Judging the Investment Prospects for SRAC and SRAC Debt Securities

47. Sears is one of North America's largest general retailers. Sears Roebuck

Acceptance Corp. is a wholly-owned finance subsidiary of Sears. Sears owns all outstanding

stock in SRAC and has done so since the latter's incorporation in 1956. Several of Sears' senior

officers -- defendants Richter and Bergmann -- were members of SRAC's Board of Directors

during the Class Period.

48. SRAC's principal business is the purchasing of Sears short-term notes and account

receivable balances of Sears domestic credit operations. SRAC finances the purchases of Sears'

notes and account receivables through the issuance and sale of SRAC Debt Securities to the

general public.

49. SRAC operates as an independent entity with its own board of directors, its own

public filings with the SEC and its own independently issued securities. Nevertheless, operating


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income is generated primarily from the earnings on its investment in Sears' short-term notes and

account receivables. Moreover, the amount of SRAC's earnings is determined by Sears, which

during the Class Period calculated the interest rate on its notes so that SRAC maintained an

earnings-to-fixed-charges ratio of at least 1.25. (The Indenture, dated May 15, 1995, relating to

SRAC Debt Securities, requires SRAC to maintain a ratio of earnings to fixed charges of not less

than 1.10 for any fiscal quarter.) As a result, the yield on SRAC's investment in Sears notes is

directly related to SRAC's borrowing costs, i.e., the yield under which SRAC can issue and sell

its Debt Securities. It is therefore in Sears' best financial interest to keep SRAC's borrowing

costs as low as possible; the less SRAC must pay purchasers of its Debt Securities, the less Sears

must pay to borrow from SRAC.

50. In light of the inter-relationship between SRAC, Sears and the earnings of both

companies, industry analysts and the rest of the market looked to the finances, financial

condition and present and future operations of Sears when assessing the investment prospects for

SRAC Debt Securities. When industry analysts viewed Sears favorably, SRAC was treated

accordingly. For example:

• On March 10, 1999, when Duff & Phelps Rating Agency reaffirmed its current

ratings on SRAC long-term debt and commercial paper, it did so based on the

announcement by SRAC's parent, Sears, that it intended to complete a $1.5 billion

share repurchase program by December 31, 2001;

• On May 14, 2002, when the rating service agency Standard & Poor's reaffirmed

its "A-" rating on both Sears and SRAC debt, it did so as a result of Sears'

announcement that it intended to acquire the direct-mail retailer, Land's End, Inc.


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In support of its decision, Standard & Poor's relied entirely on how the Land's End

transaction affected Sears' finances, financial condition and present and future

business prospects;

• Finally, immediately after the close of the Class Period, after Sears had

announced that two high-level employees had left and that Sears would be taking

an additional $222 million to its reserves for bad accounts, Standard & Poor's

placed SRAC on "CreditWatch" with negative implications, citing concerns over

the health of Sears' credit business, while the rating agency Fitch also placed

SRAC's senior unsecured debt on "rating watch negative," citing Sears'

difficulties with its credit operations.

51. Similarly, that there was a direct relation between Sears and securities issued by

not only Sears, but SRAC as well, was readily apparent through the way the market price of

securities for both companies immediately reacted to news related to Sears' finances, financial

condition and current and future operations. For example, on October 17, 2002, after Sears had

announced that that Sears would increase its allowance for bad credit card debt by $222 million,

and that both Keleghan and Vishwanath had withheld information from Sears' management and

had been fired, the price of Sears' common stock plummeted $10.80 per share -- or

approximately 32% -- to close at $23.15, on trading volume of 36 million shares -- 12 times

greater than Sears' daily trading average of 2.9 million shares during the Class Period.

52. This same information also had a severe and immediate effect on the price of

SRAC Debt Securities that were being traded over the national markets such as the NYSE and

NASDAQ Fixed Income Pricing System. For example, SRAC Debt Securities that had been


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issued and sold by SRAC as part of the 6/21/02 Offering fell 8.6%, from an October 16, 2002

close of $24.05 per share to an October 17, 2002 close of $21.99 per share.

53. Not only SRAC credit ratings, but also the interest rate under which SRAC Debt

Securities were offered to the investing public, were directly and immediately related to Sears'

finances, financial condition and present and future business prospects.

54. For example, shortly before the end of the Class Period, SRAC announced its

intention to offer approximately $800 million of three-year SRAC Debt Securities at an interest

rate that would be 13 to 14 basis points ("bps") above the one-month London Interbank Offered

Rate ("Libor"), approximately 3.47%. However, after Sears' October 17, 2002 announcement, as

discussed above, the interest rate on these SRAC Debt Securities rose dramatically, from 13 bps

above Libor to 38 bps above Libor. Wall Street analysts attributed this sudden and dramatic

increase in interest rates to the recent adverse disclosures not by SRAC, but by its parent, Sears:

Sears Roebuck Acceptance Corp., the latest issuer to feel a backlash with recent financial disclosures, was set to price an $840 million three-year floater Friday via Deutsche Bank Securities and Morgan Stanley. The triple-As were talked in the mid to high 30 basis point area, a far cry from the recent 13 basis points over Libor, Sears saw with its most recent three-year print in September. 55. In the end, the three-year SRAC Debt Securities were priced at 38 points above

Libor. Thus, as a direct result of the downward change in Sears' financial condition and future,

SRAC suffered as well. The cost for SRAC to borrow $814 million had increased by millions of

dollars.

56. It was therefore reasonable for investors to believe that the ratings and yields on

SRAC Debt Securities would correlate with the price of Sears' common stock, and in direct and

immediate response to information disclosed to the market as it related to Sears' finances,


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financial condition, and present and future operations. The reasonableness of that belief is

furthered supported by the absence of any "risk factor" in Offering Materials for the 3/18/02,

5/21/02 or 6/21/02 Offerings to alert potential investors that the future performance, ratings and

yields for SRAC Debt Securities would be independent of Sears' financial performance and any

positive or adverse information regarding Sears that might be disseminated to the market.

57. Unlike other debt instruments, the intertwining of the finances and operations of

SRAC and Sears cause the SRAC Debt Securities to take on the status of a direct investment

with Sears itself.

58. With respect to SRAC Debt Securities issued during the Class Period, such

securities were sold to the investing public under a Registration Statement, prospectuses and

prospectus supplements that contained false and misleading statements that misled Class

members as to the true finances, financial condition and present and future operations of both

SRAC and Sears. Further, as a result of the false and misleading nature of the Registration

Statement, prospectuses and prospectus supplements, Defendants were able to set yields on

SRAC Debt Securities that did not adequately reflect the true risk which attended an investment

in such debt securities.

59. With respect to SRAC Debt Securities issued before the Class Period, and which

were actively traded through the public markets and over national securities exchanges

including, inter alia, the NYSE and NASDAQ Fixed Income Pricing System, during the Class

Period, Defendants, with the exception of the Underwriting Defendants set forth below: (a) used

devices, schemes, and artifices to defraud; (b) made untrue statements of material fact and/or

omitted to state material facts necessary to make the statements not misleading; and (c) engaged

in acts, practices, and a course of business that operated as a fraud and deceit upon the


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purchasers of the SRAC Debt Securities in an effort to maintain artificially high market prices

for such securities.

The Impact of Sears Credit on Sears and SRAC

60. During the Class Period, one of Sears' primary business segments was its credit

and financial products operations ("Sears Credit"). Through Sears Credit, Sears issued

proprietary retail credit cards to Sears customers. Proprietary retail cards differ from general

purpose credit cards ("bank cards") in that they can be used only within the issuing store, usually

carry higher interest rates and offer lower credit limits. Retailers such as Sears prefer proprietary

cards because they can induce consumers to shop at the issuing store. During the Class Period,

Sears offered four types of credit cards: Sears Card, Sears ChargePlus, Home Improvement

Account (collectively, "Sears Cards"), and Sears MasterCard.

61. One of the critical factors facing Sears during the Class Period was ensuring that

the holders of its credit cards were capable of repaying the card balances, and that the debt would

not turn out to be uncollectible due to the card holder's financial instability. Generally Accepted

Accounting Principles ("GAAP") require credit card issuers such as Sears to establish reserves

for uncollectible debts. A loan portfolio that is comprised of borrowers with riskier credit

profiles will generally require a larger "debt reserve" to cover the cost of uncollectible debts

associated with that portfolio. Increases in a company's bad debt reserves must be funded by an

offsetting charge against earnings. Thus, an increase in bad debt reserves will decrease corporate

earnings. In short, accurate and regular assessments of portfolio strength, or weakness, are

essential if a company is to determine the profitability of a company's lending operation.


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62. Thus, investors in SRAC Debt Securities, just as investors in Sears, would pay

attention to the size of Sears' loan loss reserves. Such reserves would be an indicator of the

stability and risk of Sears' loan portfolio, and of Sears' ability to absorb losses without having to

take additional future charges against earnings.

63. Sears was, for many years, one of the largest credit card issuers in the country.

However, although revenues from Sears Credit were far below those from its Retail segment for

several years immediately preceding the beginning of the Class Period, Sears Credit contributed

more than half of Sears' operating income. According to Sears' SEC Form 10-K for the year

ending December 31, 2001, Sears' Retail Segment accounted for nearly 89% of Sears' revenues

in 1998 and 1999, but only 29% of its operating income. In contrast, during the same period,

Sears Credit accounted for only 11% of Sears' revenues, but 58% of its operating income.

64. Sears did not accept any credit cards other than its own until 1993. Once it began

to accept general credit cards, however, use of Sears proprietary cards dropped drastically, from

60% of sales in 1993, to 47.9% in 1999. By mid-2000, Sears' credit card operations had

flattened out, 24 million out of a total of 60 million Sears credit card accounts were either

inactive or failed to carry a balance.

65. During this same time, Sears' retail sales were also suffering. Sears steadily lost

market share in its more profitable lines, e.g., apparel, to discount retailers such as Wal-Mart and

Kohl's. And while sales of Sears' appliances were better, those items had relatively low profit

margins. Indeed, as Lacy himself stated in a presentation to analysts on November 8, 2002:

"[W]e've disappointed people in the last few years…. We recognize we don't make enough

money in the retail business," "[w]e accept the fact that the retail performance overall is too

varied and is not delivering consistent sales growth as we would have liked," "[w]e're not happy


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with the underlying financial performance," and "[t]here's no question that softlines has not

performed up to the levels of our expectations over the last three years." (See Financial Times,

November 9, 2000; AFX News, November 8, 2000; Chicago Tribune, November 9, 2000; WWD,

November 9, 2000.)

66. In October 2000, Sears' then-President and CEO Arthur Martinez retired and was

replaced by Lacy. Lacy had formerly headed Credit Services at Sears and had also served as

Sears' CFO.

67. At the same time, as part of the effort to boost the profitability of its credit

business, Sears was in the early stages of launching its Sears MasterCard program. The Sears

MasterCard was a general-purpose credit card which, unlike the proprietary Sears credit card,

would be accepted wherever MasterCard was accepted. Unlike the Sears card, the Sears

MasterCard carried an annual fee and would generate additional fee income to Sears whenever it

was used at an outside location. Because the MasterCard was intended for use as a general credit

card, it carried higher lines of credit, from $2000 up to as much as $20,000, whereas the Sears

card credit line ranged from $250 to as high as $5,000. Sears hoped that the Sears MasterCard

would both stimulate sales and help regain income Sears had lost in recent years due to the

decline of its proprietary cards.

68. In its press releases and communications with analysts, Sears repeatedly

emphasized the importance of the Sears MasterCard initiative to Sears' overall strategy. In

November 2000, Lacy singled out the Sears MasterCard as one of Sears' top areas to target for

growth.


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69. Sears began its campaign to switch customers to the Sears MasterCard in 2000 by

targeting existing Sears card holders who either paid off their Sears Cards every month, or whose

accounts had been dormant. Sears informed these customers by mail that they would shortly

receive a Sears MasterCard, and that their old Sears Cards would be cancelled. The new Sears

MasterCard offered special "teaser" interest rates, particularly for customers who transferred

balances from other cards to their new Sears MasterCard. As Lacy explained in a February 2001

conference call, the Sears MasterCard was targeted for particularly creditworthy consumers:

"[T]he thrust of the MasterCard portfolio to date has been to get a more attractively priced

product to people that are clearly more credit worthy than the historical portfolio."

70. By February 2001, the Sears MasterCard carried $1.4 billion in receivables, and

Sears (through its Sears National Bank subsidiary) had become one of the top 25 bank card

issuers. As American Banker reported on February 15, 2001:

Mr. [Kevin] Keleghan [President of Sears Credit] said Sears' private-label customers give it a competitive advantage. Because Sears could evaluate the credit quality of its customers with inactive accounts, it could target those with the highest credit ratings for the MasterCards it sent out unsolicited. Mr. Keleghan said Sears has succeeded in trying to resuscitate flagging Sears card accounts without extending bad loans. So far, half of the people who received the MasterCards have activated them, and the active customers have an average Fair, Isaac & Co. credit score of 760. The score, which most lenders use to assess creditworthiness, is based on a formula developed by Fair, Isaac, and 800 is considered about the highest score. "It's a very pristine group, almost too pristine," Mr. Keleghan said. "We don't expect significant delinquencies since we're starting out with a low-risk group." In addition to its MasterCard portfolio of seven million accounts, Sears has 60 million private–label accounts. Together, the MasterCard and private–label portfolios include about $27 billion in loans, which Sears says makes it the seventh-largest U.S. card issuer. "Our objective is to be in the top five," Mr. Keleghan said. (emphasis added)


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71. While Sears continued to invest in the roll-out of the MasterCard, Sears' retail

segment continued to deliver disappointing results. On January 4, 2001, Sears issued a press

release stating that it was closing 89 under–performing stores, and that retail sales for the quarter

were down from the prior year. The release also announced that Sears was writing down its

investment in an unprofitable termite and pest control business. On April 19, 2001, Sears

announced that its retail sales had declined again in the first quarter of 2001. In an analyst

presentation that same day, Lacy admitted that Sears was "unhappy with our retail profitability."

72. However, consistent with Sears' increasing emphasis on the credit side of

operations, at the April 19 presentation, Lacy asserted that Sears' credit segment was "a great

business. It's a fabulous franchise for us. It's strategically very important for us, not only to our

retail business in terms of driving retail results, but it's also very important to Sears Roebuck and

Company from both the financial standpoint and the customer relationship standpoint." Lacy also

assured investors that Sears' credit segment had a "strong portfolio quality overall," and that

although Sears was continuing to spend money to fund "an additional MasterCard roll-out as we

go to more subscribers," profits from the credit segment would increase as the teaser rates from

the initial MasterCard rollout expired.

Undisclosed Adverse Facts Impacting Sears' Credit Business During the Class Period

73. In the remaining months before the start of the Class Period, as well as throughout

the Class Period, the Sears Defendants continued to tout the purported success of Sears' credit

operations, and repeatedly portrayed the quality of Sears' credit portfolio as "strong," "stable,"

and "adequately reserved," and regularly compared its credit business favorably those of

competing credit card issuers.


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74. In reality, both immediately before and during the Class Period, Sears' credit

operations suffered from several severe weaknesses and problems. These problems, hidden from

the market and discussed in detail below, were so deeply rooted that six months after the truth

concerning Sears' credit operations was finally disclosed to the market, Sears announced that it

would sell its credit business -- even though this business had accounted for nearly 70% of Sears'

reported operating income during much of the Class Period.

Sears' Aggressive Extensions of Credit

75. During the Class Period, Sears aggressively marketed its credit cards, and in

particular the Sears MasterCard, in order to create the appearance of a growing, profitable loan

portfolio. To that end, Sears intentionally lowered its acceptable credit profile so as to allow

more consumers to qualify, while assuring the market that it was targeting only high-quality

consumers and was employing state-of-the-art risk management technology. Sears also

deliberately avoided its customary limits for extending credit under its credit scoring policies by

offering multiple Sears credit cards to consumers who did not qualify for an increase in the credit

limit on their existing cards.

76. The lending industry divides consumers according to their credit-risk profiles.

"Prime" or "superprime" borrowers are the most stable; "subprime" borrowers have weaker or

damaged histories that render them a credit risk. Although many lenders have internal models

that they use to segment consumers, industry standards are set by various criteria, including the

scores created by Fair, Isaac & Company. A Fair, Isaac score (FICO score) of 660 or below is

generally considered "subprime." As of June 2002, on average, the credit card portfolios of

United States card issuers consisted of 36.6% subprime loans.


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77. During the Class Period, and unknown to the market, Sears' credit portfolio was

heavily weighted toward the subprime market. By the end of the Class Period, nearly half of

Sears' portfolio consisted of subprime loans while, at the beginning of the Class Period,

approximately 54% of Sears' portfolio was subprime. Rather than use "prudent underwriting"

standards, as Sears claimed to do, Sears used aggressive marketing strategies designed to appeal

to low-income or unstable borrowers, such as the use of unsolicited direct mailings, and offering

free balance transfers and convenience checks. While aggressive strategies expanded Sears'

credit portfolio, it did so at the expense of increasing trouble with delinquent accounts.

78. Sears also deliberately took various steps to avoid revealing the rising

delinquencies and charge-offs to the public, both through the misleading statistics it selectively

chose to release to the public, and through the methods it used to avoid classifying accounts as

delinquent or charged-off in the first place. Through these techniques, Sears was able to present

the false and misleading picture that its credit operations were stable and increasingly profitable,

and compared favorably to those of the credit card industry as a whole.

Selective Reporting of Delinquency and Charge-Off Rates

79. During the Class Period, Sears reported the charge-off and delinquency rates of its

cards to the public on a portfolio-wide basis, without reporting the performances of the Sears

Card and the Sears MasterCard separately. Key differences in the characteristics of the

portfolios caused such reporting methods to present a materially misleading picture of portfolio

performance.

80. Sears offered the Sears MasterCard with higher credit lines than had been

traditionally offered under the Sears proprietary card. Additionally, the brand-new MasterCard


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accounts had delinquency and charge-off rates that were lower than those of the proprietary card.

These factors, when combined with the dramatic increases in MasterCard receivables, declining

Sears proprietary card receivables, the fact that the Sears proprietary card portfolio was much

larger than the new MasterCard portfolio, created an interesting phenomenon during the Class

Period. When the two portions of the portfolio were examined separately, they revealed a

striking rise in delinquencies and charge-offs every quarter. However, when the portfolio was

considered as a whole, the delinquencies and charge-offs appeared to be relatively stable,

because the Sears Card receivables overweighted the average of the two groups.

81. In fact, both Sears Card and Sears MasterCard charge-off and delinquency rates

were increasing at an alarming pace during this period. Nonetheless, Defendants reported only

the "combined" delinquency data during the Class Period - and concealed data that showed the

actual deterioration of the portfolios.

82. It was only after the end of the Class Period, when Sears filed its quarterly report

for the third quarter of 2002 that Sears finally broke out the separate data for the two major credit

portfolios.

Failing to Record Delinquencies and Charge-Offs

83. In 1995, Sears created Sears National Bank, thereby avoiding certain state usury

laws. Because the Sears National Bank was not subject to the same rules and regulatory

oversight as ordinary bank card issuers, it was easier for Sears to adopt more lenient policies

relative to its competitors with respect to recording accounts as delinquent or uncollectible. For

example, Sears "re-aged" its delinquent accounts (a practice which effectively converted

delinquent accounts to current status) and charged-off bad debts on terms that were decidedly


- 28 -

more lax than its bank card competitors. These practices served to disguise the losses inherent in

the portfolio until the end of the Class Period. For example:

(a) Ordinarily, federal regulations require banks to charge-off delinquent credit card loans after 180 days. Sears did not charge-off such loans until after 240 days, and thus avoided charging-off uncollectible loans for an additional two months.

(b) Sears relied on generous "renewal" policies that allowed it to

understate charge-off ratios. If an account were 150 days past due, Sears would offer to make the account "current" if the customer made a single minimum payment, an amount substantially less than the total balance due. Sears would then close the account, and use a workout installment plan to collect the balance due, usually allowing a customer 50 to 52 months to pay off the debt. Sears thereby avoided recording the account as a charge-off.

(c) Federal regulations permit delinquent accounts to be "cured" ("re-

aged") after three consecutive on-time minimum payments, but forbid re-aging more than once in twelve months or twice in five years. Sears, however, had a policy of re-aging accounts after only two consecutive payments, and did not forbid re-aging more than twice in five years.

(d) Sears promoted its cards, particularly the MasterCard, by

frequently offering zero percent financing promotions. These promotional programs allowed cardholders to minimize, or even completely avoid, payments for periods up to a year. By making it difficult, or even impossible, for cardholders to fall behind in their payments, Sears was able to delay reporting such accounts as delinquent, regardless of how unstable the borrowers were.

(e) During Keleghan's tenure as President of Sears Credit, Sears

repeatedly altered its policies so as to lower minimum monthly payments. This had the effect of permitting people with poorer credit histories to purchase higher priced items on more extended payment schedules, thus increasing Sears' income from finance charges, but also increasing its exposure to bad debt and delaying charge-offs.

(f) Although it is industry practice to report delinquencies after 30

days or sooner, Sears would not report delinquencies until after 60 days.


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84. These policies, individually and collectively, distorted the reported quality of

Sears' portfolio. Worse, they misled investors because Sears represented that its statistics were

compared favorably to those of its competitors, when in fact such comparisons only appeared to

be favorable because, inter alia, they were done on an "apples to oranges" basis. However, as

Sears itself ultimately admitted at the end of the Class Period, Sears' results were "not directly

comparable" to its competitors in the bank card industry.

Fraudulent Billings

85. During the Class Period, Sears strongly encouraged its employees to induce

consumers to purchase additional services, such as life insurance, credit protection, and extended

warranties on appliances. The incentives to make such sales were so strong that it became a

regular practice for salespersons to put such items on customers' accounts without their

knowledge or consent. Additionally, the reckless manner in which Sears distributed the Sears

MasterCard had the predictable result of drastically increasing the potential for credit card fraud.

These practices, described below, helped drive up the high levels of reported receivables that

Sears knew to be uncollectible.

FALSE AND MISLEADING STATEMENTS AND OMISSIONS DURING THE CLASS PERIOD

86. Before the start of the Class Period, defendants began issuing numerous material

false and misleading statements deceive the investing public that Sears' credit operations, on

which SRAC's own operations principally depended, were far better, more successful and

profitable, than was actually the case.

87. On October 24, 2001, Sears issued a press release, filed as an SEC Form 8-K and

signed by Richter, announcing its results for the third quarter of 2001. Sears announced that it


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had increased earnings by 5.3% per share over the prior year, despite a decline in revenues in its

retail segment. The release further stated with respect to Sears Credit:

The net charge-off rate increased to 5.62 percent from 4.97 percent a year ago. This increase was expected due to higher credit customer bankruptcy filings this year. Bankruptcy filings have declined in the third quarter from second quarter levels. Delinquencies at the end of the third quarter improved to 7.41 percent versus 7.47 percent in last year's quarter. 88. At a meeting with analysts on that same day, Lacy stated that Sears' credit

segment had posted "our first increase in four quarters as we're now coming out of that period

where we've been investing behind growth in new products, in particular the MasterCard."

89. At this same meeting, Liska praised the performance of the credit segment,

repeatedly emphasizing the quality of the portfolio, and the credit-worthiness of Sears'

customers:

[A]verage management... receivables grew to $26.1 billion. $600 million increase over last year reflecting the continued success of the MasterCard roll-out. Kevin [Keleghan] will talk to you about that success story. Our portfolio yield declined about 36 basis points to 19.34%. Basically it was due to lower late fees due to lower delinquencies which is important to know when I talk about the quality of our portfolio, our delinquencies are actually going down. That's why we're feeling good about our portfolio.... 90. Liska also stated that although charge-offs had increased due to a generally higher

rate of bankruptcies, the MasterCard "is a higher quality portfolio that we're adding into the

Sears' portfolio," and affirmed that "we feel very comfortable with our portfolio going forward

again." Liska also told investors that "[O]ur 60+ day delinquency rates or trends remain very

stable. While... the 60+ delinquency rate at the end of the third quarter was slighter higher than

quarter two, it was down from the prior year and overall, the 60+ delinquency rates continues...

[to show] continued strength in this portfolio."


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91. Because of the purported "quality" of Sears' credit portfolio, Liska assured

investors that Sears had established adequate reserves for uncollectible debt:

Given the stability of our portfolio quality... we continue to still believe that it is very adequately and conservatively reserved in the current environment.... Also you have to remember that our portfolio [is] significantly benefiting by the fact that the growth is actually coming from the Sears MasterCard, which by nature, is a better quality receivable. So again, given all these facts, we expect the chargeoff rate to decline.... All else being equal, we believe we're appropriately reserved and well-positioned to mitigate any... farther economic downturns there may be. 92. Keleghan was even more enthusiastic about the quality of Sears' credit card

portfolio:

As far as our credit quality performance is concerned, for a number of years now we've been very prudent with our underwriting. We have invested very heavily in scoring technology and systems technology to do a better job of discriminating credit risk in the new account environment. Now we use a lot of customer segmentation. We have fourteen different new account scorecards to make sure that we're doing a very targeted approval process to get the best credit risk customers and the customers with the most profit potential to drive sales in the store. We continue to hold quality improvements on recent vintages. We've been very targeted in improving the risk over the last four or five years... [W]e're bringing much more of that upper class customer who is lower risk. Another way of looking at this is in the direct mail, We've continually improved the quality of the accounts that we've booked... [W]e're doing a much better job of underwriting. So to summarize, our portfolio quality has continually improved over the last several years.... On the portfolio side, or, also in acquisition, our ability to do risk based pricing is allowing us to attract a better quality customer also. So... if we target very good risk customers with quality products with a low price offer we'll still get a very good return for our shareholders and increase this response rate lower to the cost of foreign accounts and as a result we're attracting better quality balances. And, as Paul [Liska] mentioned, since the delinquency rate of these customers is a very pristine group, is about half of that is Sears Card and the mix grows more towards MasterCard there will be a lower allowance requirement, but these are


- 32 -

very good credit quality accounts. So, you'll see as our delinquencies goes down, as our bankruptcy filings go down, and as our Mastercard receivables continue to grow, the pressure on [bad debt] allowance is just not there. (emphasis added) 93. Keleghan also attested to Sears' advanced technology for monitoring the credit

card portfolio for any hint of instability:

On the portfolio side, most of our competition has what they call a behavior score where they look at internal information and credit year information and they score an account once a month. We have the capability to look at the account on a daily basis, so as a result, in our system, if an account goes another five days past due, if they bounce a check, if they go over limit, we have 12 different triggers. That night, we rescore the account, re-identify their credit quality and then as a result, that score can dynamically drive how we work with our customers in the future, so it'll control the point of sale profit, where we can immediately shut down a very high risk account at the point of sale, we can manage their credit lines down, particularly if they are delinquent customers and then we can drive a collection strategy to immediately move an account into collection. So the fact that we're up to date on a daily basis, we feel we can address a high risk account much sooner than the competition.... So, in summary, we're achieving our credit quality objectives. We're mitigating the economic pressures due to very good risk management and pricing flexibility.... (emphasis added) 94. Keleghan also spoke of particular initiatives that were helping to drive Sears

MasterCard growth:

And we're seeing a lot of strong convenience check and balance transfer response which is very profitable for us..... We're also experimenting with MasterCard in direct mail and the point of sale right now, and as we get results and if they're positive we'll roll that out. 95. Finally, Keleghan assured investors that Sears targeted only the most creditworthy

customers by stating that: “We don’t target the subprime market, we avoid it and we try to target

the middle market.”

96. Sears reiterated its third quarter results in its Report on Form 10-Q for the quarter,

filed with the SEC on November 9, 2001, signed by Richter.


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97. However, as defendants knew or should have known, Sears' repeated

representations concerning its credit operations and its reported financial performance were

materially false and misleading. For example:

(a) Sears represented that "our delinquencies are actually going down," and that "our portfolio quality has continually improved," and focused on comparing its reported charge-off and delinquency rates of 5.62% and 7.41% for the third quarter of 2001 for the combined portfolio to the rates that had been reported in the third quarter of 2000 (4.97% charge-offs and 7.47% delinquencies). In truth:

• During the third quarter of 2001, Sears Card charge-offs rose to 6.03%

and Sears Card delinquencies rose to 8.13%. • The Sears MasterCard portfolio had already reached 2.02% charge-

offs and 1.93% delinquencies, up from 0.90% charge-offs and 1.20% delinquencies from the prior quarter, and continuing in its steady quarter-over-quarter rise in losses.

• Contrary to defendants' representations, these statistics demonstrated

portfolio delinquencies were not going down, and quality had not improved, but instead had deteriorated; and

(b) The Sears Defendants failed to disclose that Sears had systematically

targeted the subprime market for years and, at the time of these statements, more than half of Sears' credit portfolio consisted of subprime borrowers. By contrast, in June 2002, the average credit card portfolio for the industry contained 36.6% subprime loans.

98. On November 26, 2001, Liska held another conference call with analysts, where

he again represented that Sears' portfolio was "adequately reserved" and that "we think the

quality of our portfolio is quite good and we are very happy with where we're positioned right

now." However, these statements were also materially false and misleading, as he knew or

should have known that reserves were not adequate and that the composition of the credit

portfolio was heavily weighted with subprime customers, and therefore increasingly more risky


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99. On January 10, 2002, Sears issued a press release, filed an SEC Form 8-K, again

signed by Liska, announcing preliminary results for the fourth quarter of 2001. The release

stated in pertinent part:

Sears, Roebuck and Co. (NYSE: S) today announced preliminary fourth quarter and full year 2001 earnings. The company anticipates that earnings per share, excluding non-comparable items, for the fourth fiscal quarter of 2001, ended December 29, will increase by 11 percent to approximately $2.02, versus $1.82 in the fourth quarter of last year. For the full year 2001, earnings per share, excluding non-comparable items, will be approximately $4.22, essentially flat with comparable 2000 earnings per share of $4.21. The Credit and Financial Products segment delivered very strong operating profit growth in the fourth quarter. "We continue to be pleased with the improving trends in the balance and revenue growth in our credit business, "said Lacy. "In addition, portfolio quality remains solid, with delinquency levels flat compared to the prior year period. 100. On January 17, 2002, Sears issued another press release regarding its 2001 fourth

quarter, filed with the SEC and signed by Richter. The release stated that for the quarter, the

portfolio delinquency rate was 7.58%, as compared to the delinquency rate for the fourth quarter

of 2000 of 7.56%. The charge-off rate for the quarter was listed at 5.23%, as compared to the

charge-off rate for the prior year of 4.79%. The release then explained:

Credit and Financial Products

Operating income excluding non-comparable items increased by $86 million or 25.3 percent to $426 million as favorable funding costs and higher revenues offset higher provision expense. Fourth quarter domestic credit and financial products revenues increased 1.8 percent from a year ago, to $1.33 billion due to higher average receivable balances. Credit receivables at the end of the fourth quarter grew 2.2 percent over the prior year to $27.6 billion.... Portfolio quality remains stable with flat year-over-year delinquencies. The domestic allowance for uncollectible accounts of $1.1 billion is flat as a percentage of ending credit receivables.


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101. Finally, the release declared that, for all of 2001, Sears had earned $2.202 billion

in operating income, with a whopping $1.5 billion coming from Sears Credit alone, despite the

fact that Sears Credit accounted for only 12.6% of Sears' revenues.

102. Also on January 17, 2002, Sears held a conference call with investors to discuss

its fourth quarter results. Lacy stated that

Our credit business also had a very good fourth quarter. Driving this performance in credit were higher receivable balances and credit revenue and increased credit revenue and lower funding expenses. Importantly, the quality of our receivables portfolio has remained strong and our outlook is stable looking into 2002.... In regard to 2002, our preliminary earnings guidance is that earnings per share on a comparable basis would grow 13 to 15%.... This is conservative guidance which we believe is appropriate.... (emphasis added) 103. Liska provided further detail:

The strong receivable growth reflects the success of the Sears MasterCard products which stood at over $5 billion in balances at the end of the year.... The provision for uncollectible accounts increased by $52M in the quarter to $391M. The provision reflects a $26M addition to the allowance.... The addition to the reserve was made to reflect growth in receivables and not because of concern about portfolio quality. Our leading indicators of portfolio quality remain stable with bankruptcy filings having moderated from the highs we've experienced early in 2001 and 60+ days delinquencies essentially flat with a year ago at 7.58%.... We continue to monitor the macro economic picture very closely. At this point we feel very comfortable that credit quality will remain in good shape throughout 2002. As you know from the presentations we've made on this topic, we made numerous investments in the credit business to help us manage credit risk to respond timely and dynamically to changes that we observe.... Our credit and financial products we anticipate that receivables will grow in the low single digit range and continue growth in the Sears MasterCard product. We expect that the next charge off rates will remain roughly flat with 2001 with stable credit quality in the portfolio. (emphasis added) 104. In response to an analyst's question about the unexpected growth of the

MasterCard portfolio, Lacy also stated:

I think that we've had, we now have 19 million accounts on the MasterCard product. People are, in large measure, using it as their primary payment product


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and therefore it is becoming a very important part of their purchasing activity which is driving as we anticipate substantially higher average balances than they would have had on their prior Sears card. So, I think the strategies are working very well. The credit team has really been executing it superbly. 105. Although the market responded favorably to the Sears Defendants' statements

concerning Sears' fourth quarter 2001 results, the Sears Defendants knew or should have known

that Sears' repeated representations concerning its credit operations and reported financial

performance were still materially false and misleading. For example:

(a) Although Sears represented that delinquencies had remained "flat," that charge-offs had increased from 4.79% at year end 2000 to 5.23% at year end 2001 (an increase of 9%), and that the portfolio was "stable," in truth:

• Sears Card delinquencies had increased to 8.91%, representing a drastic

increase as compared to the Sears Card delinquency rate of 7.94% for the fourth quarter of 2000. Meanwhile, Sears Card charge-offs had increased to 5.78%, a 20% increase over the reported 4.79% charge-off rate at year end 2000.

• Sears MasterCard delinquencies had jumped from a delinquency rate of

0.38% at year-end 2000, and 1.94% in the third quarter of 2001, to 1.97% in the fourth quarter of 2001. Meanwhile, MasterCard charge-offs had increased from 2.02% in the third quarter to 2.09% in the fourth quarter.

(b) Despite such representations as "[W]e feel very comfortable that credit

quality will remain in good shape throughout 2002," and "We expect that the next charge off rates will remain roughly flat with 2001," Sears had experienced, and knew it would continue to experience, rising delinquency and charge-off rates.

106. On March 7, 2002, UBS Warburg issued a report discussing Sears' credit card

business that stated:

We recently visited with Kevin Keleghan, President of Sears' Credit business, to gain a better understanding of the growth prospects of the business that in FY:01 represented close to 70% of Sears' consolidated operating income.... Credit quality seems to have remained benign in recent months, presumably benefiting in part, from the rapid growth of the Gold MasterCard portfolio.... While management seems focused on employing a prudent and risk averse growth


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strategy, its annual 5% operating profit growth target would require total receivables growth of greater than 5%.… With regards to credit, we note the inherent quality of risk of every credit business, though we believe that Sears has invested the requisite time and dollars needed to monitor credit quality properly. 107. UBS Warburg's report of credit quality and management's "risk averse" growth

strategy clearly repeated statements by Keleghan to UBS Warburg with the intention that such

statements be repeated to the market. However, as Keleghan knew or should have known, these

statements were false and misleading at the time they were made.

108. On March 14, 2002, Sears filed its SEC Form 10-K for 2001, signed by

defendants Lacy, Liska, and Bergmann. The 2001 10-K repeated the financial information

contained in the January 17, 2002 Form 8-K, and further stated:

Management maintains a system of internal controls that it believes provides reasonable assurance that, in all material respects, assets are maintained and accounted for in accordance with management's authorizations and transactions are recorded accurately in the books and records. The concept of reasonable assurance is based on the premise that the cost of internal controls should not exceed the benefits derived. To assure the effectiveness of the internal control system, the organizational structure provides for defined lines of responsibility and delegation of authority. The Company's formally stated and communicated policies demand of employees high ethical standards in their conduct of its business. These policies address, among other things, potential conflicts of interest; compliance with all domestic and foreign laws, including those related to financial disclosure; and the confidentiality of proprietary information. As a further enhancement of the above, Sears' comprehensive internal audit program is designed for continual evaluation of the adequacy and effectiveness of its internal controls and measures adherence to established policies and procedures. 109. The 2001 Form 10-K went on to state:

In 2001, total Retail and Related Services revenues decreased 1.8% to $31.4 billion and comparable store sales decreased by 2.3%. The percentage of merchandise sales and services transacted with Sears credit cards in 2001 declined to 47.0% from 47.4% in 2000, due to a greater preference for other payment methods. However, the Sears MasterCard product, which was


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launched in 2000, has been successful in offsetting the declining trend in average managed balances in 2001. Credit and Financial Products selling and administrative expense increased 2.8% in 2001 from 2000 levels. The increase is primarily due to an increase in consumer fraud costs, payroll and benefits, customer notification expenses and costs associated with the continued roll-out of the Sears MasterCard product. Charge-offs increased by $446 million reflecting the inclusion in 2001 of charge-offs for the previously sold and securitized receivables and an increase in the net charge-off rate in 2001 to 5.32% from 5.12% in 2000; primarily due to increased customer bankruptcy filings. Despite the increase in bankruptcy filings in 2001, the delinquency rate for 2001 remained relatively flat with 2000. At December 29, 2001, the year-end allowance as a percent of on-book receivables was 4.04%, or $1.1 billion versus 4.03% or $649 million at year-end 2000.... The Company grants retail, consumer credit based on the use of proprietary and commercially available credit histories and scoring models. The Company promptly recognizes uncollectible accounts and maintains an adequate allowance for uncollectible accounts to reflect losses inherent in the owned portfolio as of the balance sheet date. Credit card receivables are shown net of an allowance for uncollectible accounts. The Company calculates an allowance for uncollectible accounts using a model that analyzes factors such as bankruptcy filings, delinquency rates, historical charge-off patterns, recovery rates and other portfolio data. The Company's calculation is then reviewed by management to assess whether, based on recent economic events, additional analyses are required to appropriately estimate losses inherent in the portfolio.

110. In addition, Sears reported total assets of $44.317 billion, of which $28.155

billion -- or 64% -- were credit card receivables.

111. The statements contained in the 2001 Form 10-K were also materially false and

misleading. Despite Sears' reported "flat" delinquency rate for the year as compared to 2000,

both the Sears Card and the Sears MasterCard had seen their delinquencies rise every quarter.

Thus, by the end of the year, Sears Card delinquencies had increased by 13% from 7.86% at the

beginning of the year to 8.91% at year's end. For the Sears MasterCard, the numbers were even


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more striking -- delinquencies had increased 73% over the course of the year, from 1.15% in the

first quarter to 1.97% in the fourth quarter.

112. On March 14, 2002, The American Banker carried a story titled "A Catalog

Reasons for Sears' Card Profits," detailing the reasons for Sears' "success" in the credit-card

business. The article observed that Sears placed "a heavy emphasis on risk management…."

113. On March 28, 2002, the Chicago Sun-Times reported:

Sears credit card switch hikes customer spending

Sears, Roebuck and Co. said customers who switched to the retailer's Gold MasterCard from its in-store card are spending more at the chain's stores than before. Those who changed in 2000 increased spending during the next 11 months an average 35 percent from the prior period, said Kevin Keleghan, president of credit and financial products. Sears has transferred about 19 million of its 60 million card holders to the MasterCard to help boost profit while sales at its stores slump. The MasterCard offers customers a higher credit line than Sears' regular one, and can be used elsewhere, so Sears can earn more from interest and fees if shoppers use it as a main card. "Credit's been a positive for them," said analyst Matt Spitznagle of Northern Trust Global Investments, a division of Northern Trust Corp. that has 1.4 million Sears shares in its $330 billion in assets. "Most of the operating income growth is coming in the credit business." Sears' credit cards and financial services accounted for $1.53 billion, or 69 percent, of operating income last year, spokesman Bill Masterson said. That is an increase from 65 percent in 2000 and 58 percent in 1999. The income has provided Sears with the funds to improve stores and invest in new projects, investors said. Sears' same-store sales fell or were little changed in the past 10 months.

114. On April 10, 2002, Sears issued a press release, filed with the SEC and signed by

Bergmann, announcing preliminary earnings for the first quarter of 2002 that beat Wall Street's


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projections by more than 50%. Although store sales declined in March from the prior year, just

as they had done for the previous two months, Sears reported that operating earnings increased

107% for the quarter due to cost-cutting in the Retail segment and "a very strong quarter" in

Sears Credit, resulting in an earnings increase of 20%. As a result, Sears increased its earnings

projections for 2002, to growth of 17% over the prior year. Previously, Sears had projected an

earnings increase of only 13 to 15% per share.

115. On April 18, 2002, Sears issued another press release, filed on Form 8-K and

signed by Liska, repeating the numbers cited in its earlier April 10 release and stating:

Credit and Financial Product's operating income, excluding non-comparable items, increased by $78 million or 21.4 percent to $443 million as favorable funding costs and higher revenues offset higher provision and selling and administrative expenses. First quarter domestic Credit and Financial Products comparable revenues increased 1.4 percent from a year ago, to $1.32 billion due to higher average receivable balances. Credit receivables at the end of the first quarter grew 5.1 percent over the prior year to $27.0 billion. The provision for uncollectible accounts on a comparable basis, increased by $37 million or 11.1 percent over last year's period. The net charge-off rate for the quarter increased to 5.43 percent from 5.07 percent last year primarily due to increased customer bankruptcy filings over last year. Year-over year delinquencies decreased 19 basis points from 7.50 percent to 7.31 percent, indicating stable portfolio quality. The domestic allowance for uncollectible accounts of $1.1 billion is 4.13 percent of ending credit receivables compared with 4.14 percent at the end of last year's quarter. 116. The release further reported that out of the total operating income for the quarter,

$443 million was attributed to Sears Credit, with only $87 million attributed to the Retail

segment. Most strikingly, although prior press releases -- including the one issued just eight days

earlier -- had described Sears as "a leading U.S. retailer of apparel, home and automotive


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products and services," the new press release issued April 18 described Sears as "a broadline

retailer with significant service and credit businesses."

117. Also on April 18, Sears held a conference call with analysts to discuss Sears' first

quarter results. During the call, Lacy represented that it had been a "record first quarter" for

Sears, and that "[o]ur credit and financial products business had an outstanding quarter, with

operating income growing by 21% on a comparable basis. This was the result of higher revenues

and favorable funding costs. The Sears MasterCard product continues to be a valuable growth

vehicle for us, with balances now over $6 billion." Lacy reiterated Sears' new projection of a

17% increase in earnings for the year, characterizing the projection as "conservative."

118. During the April 18 call, Liska also represented that although Sears had expected

decreased Retail revenues for the quarter, Sears' actual results for the Retail segment were even

worse than Sears had expected. However, with respect to Sears Credit, Liska reported:

The receivable growth reflects the continued success of the Sears MasterCard product which now how has a receivable balance of over $6 billion. For the quarter, credit and financial products revenue increased 1.4% to $1.3 billion primarily due to higher average balances. The allowance stands at $1.1 billion, or 5.13% of all receivables. In rate terms, this is flat with the prior year and up slightly versus the end of 2001. The net charge-off rate in the quarter increased by 36 basis points over last year to 5.43%, primarily the reflection of an uptick in bankruptcy filings. The 60 plus days delinquencies are down in the first quarter, approximately 20 basis points to 7.31% versus a year ago at 7.5%. Combined, all factors point toward overall stable portfolio quality For credit and financial products, while the current macro economic outlook remains uncertain at this point, we feel good about our credit quality and feel comfortable that it will remain in good shape throughout 2002. The consensus economic forecast seems to point to a rebound in the economy. However, as an improvement in unemployment may somewhat lag that of the broader economy, there may some incremental charge off risk in the portfolio for the balance of the year. However, as we have consistently stated, our investments in risk management systems and processes well position us to manage the situation and any potential risk of a charge off line should be quite modest in relation to the Credit Segment's overall results.... On an operating income basis, we are


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cautiously optimistic that credit will do better than the mid-single digit increase guidance we previously communicated. (emphasis added) 119. In response to a question, Lacy reiterated: "[W]e are feeling better about the

organic growth of the portfolio in aggregate because of the continued success of MasterCard.

Yeah, there is the yield shift that takes place with that, but I think that, we feel right now that the

credit environment's pretty stable, that we've got an improving visibility to top line with

MasterCard's success." When an analyst asked about the adequacy of the allowance for bad

debt, Liska responded: "We're very comfortable with the absolute level of that reserve."

120. During the April 18, 2002 call, Lacy further touted Sears' success in encouraging

balance transfers onto the Sears MasterCard:

We've been very successful to date on balance transfer activity to the MasterCard, which we think is a very encouraging sign.... So, I would say that the balance transfer activity, we are pleased, we've done some things in terms of account stimulation program to activate more third party spending on the MasterCard product.

121. After the main presentation concluded, Lacy and Liska accepted questions from

the analysts. One analyst specifically asked what Sears' management had said, or could say,

about what Sears expected with respect to its "loss experience to be with the MasterCard

portfolio."

122. With this question, Lacy and Liska were squarely presented with the choice of

coming clean and disclosing the true condition of the portfolio, or continuing the fraud by

refusing to inform investors that both the Sears Card segment, and the Sears MasterCard

segment, were experiencing gross escalations in delinquencies and defaults. Faced with this

clear opportunity to set the market straight, Lacy and Liska gave the following responses:


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Liska: [W]e're approaching this on a portfolio basis, because as you probably know, we originally... substituted people out of the Sears card into the Sears MasterCard that were of better credit quality or had stopped using their Sears card. So, we look at it more as managing a portfolio and we're probably never going to be in that position that we're going to talk about them as discreet portfolios because we don't manage it like that. And it would probably be misleading if we did that. So, we're just going to comment on it on a total portfolio basis.

Lacy: I think in terms of the specific numbers of the loss experience and so on, Paul

[Liska]'s exactly right. I think that we have started off because we felt we had, with the most pristine credits within the Sears proprietary card base, because those are the people that like Sears but they weren't using the payment product... [I]n the 19 million accounts that we've done to date, they've been very much focused on those people that are very strong credit quality people. Now, as we go forward, that's going to get more blended... So, I think to date a very pristine credit quality group. As we go forward, it might actually look a little bit more, not ultimately probably, but will look maybe a little bit more like the normal portfolio.

123. On May 7, 2002, Sears filed a 10-Q for the first quarter of 2002, signed by

Bergmann. The 10-Q repeated the financial information contained in the Form 8-K, and stated:

Credit and Financial Products revenues increased 1.4% to $1.3 billion for the 13 weeks ended March 30, 2002 from the comparable prior year period.... The Sears MasterCard portfolio has continued to grow with balances now over $6 billion at March 30, 2002. Credit and Financial Products selling and administrative expense as a percentage of Credit and Financial Products revenues increased to 17.3%, an increase of 240 basis points in the first quarter of 2002 from the comparable 2001 period. The increase was primarily due to higher customer notification costs and increased consumer collection costs. Excluding the impact of securitizations, charge-offs increased by $38 million reflecting an increase in the net charge-off rate in 2002 to 5.43% from 5.07% in 2001, primarily due to increased customer bankruptcy filings. Despite the slight increase in bankruptcy filings in 2002, the delinquency rate for 2002 decreased 19 basis points compared with 2001. At March 30, 2002, the period-end allowance as a percent of on-book receivables was 4.13%, or $1.1 billion, versus 4.14% or $567 million at period-end 2001.


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representations concerning its credit operations and Sears' reported financial performance for the

first quarter of 2002 were materially false and misleading. For example:

(a) Sears contended, inter alia, that credit quality remained "stable," reported that delinquencies had decreased by "19 basis points" as compared to the first quarter of 2001, and reported a 7% rise in charge-offs from 5.07% to 5.43%. In fact:

• Sears MasterCard charge-offs had soared from .80% in the first quarter of

2001 to 2.65% in the first quarter of 2002, an increase of 230%, while MasterCard delinquencies had shot up from 1.15% in the first quarter of 2001 to 2.55% in the first quarter of 2002, an increase of 122% (or 140 basis points); and

• Sears' proprietary card charge-offs had gone up from 5.29% in the first

quarter of 2001 to 6.16% in the first quarter of 2002, an increase of 16.4%, while its store card delinquencies had jumped from 7.86% in the first quarter of 2001 to 8.77% in the first quarter of 2002, an increase of 11.6% (or 91 basis points).

(b) Despite such representations as " [w]e feel good about our credit quality

and feel comfortable that it will remain in good shape throughout 2002," Sears had experienced, and knew it would continue to experience, rising delinquency and charge-off rates.

125. On May 9, 2002, Sears announced that its April store sales had decreased from

the prior year. At a shareholders meeting that day, Lacy admitted that the environment for Sears'

softlines remained "challenging," and that the only turnaround that could be expected in apparel

sales would not come until 2003.

126. Days later, in an attempt to shore up its struggling apparel sales, Sears announced

on May 13 that:

Sears, Roebuck and Co. (NYSE: S) and Lands' End, Inc. (NYSE: LE), have entered into a definitive agreement for Sears to acquire the direct merchant in a cash tender offer for $62 per Lands' End share, or approximately $1.9 billion. Upon completion of the transaction, expected in June, Lands' End will become a


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wholly owned subsidiary of Sears and will continue to be headquartered in Dodgeville. Lands' End is the largest specialty apparel catalog company and seller of apparel on the Internet in the U.S. Lacy said the transaction does not alter Sears' outlook for the year. The transaction is expected to be slightly dilutive to break-even in 2002 and 2003 and significantly accretive in 2004. "Considering the minimal impact to 2002 earnings, we continue to expect 2002 full year comparable earnings per share, including Lands' End, to increase approximately 17 percent from the prior year amount of $4.22," Lacy said. Sears does not expect to record a special charge for the Lands' End transaction. 127. The announcement brought an immediate surge in Sears' stock price, causing it to

jump 9% in one week from its closing price of $51.81 on May 10 to $56.46 on May 17. The

bond prices likewise reacted favorably. Although the acquisition surprised many analysts, these

same analysts nevertheless viewed the acquisition as a wise strategic move.

128. The market's assessment of Sears' common stock rose on news of the transaction.

On May 14, 2002, UBS Warburg upgraded its rating on Sears to Buy from Hold, stating that the

upgrade reflected the change in its "previously negative view of the prospects for S's [Sears']

apparel business." Other Wall Street analysts were similarly positive on the Sears-Land's End

transaction.

129. In addition to Sears, SRAC Debt Securities also benefited from the Land's End

transaction, On May 14, 2002, the rating service agency Standard & Poor's ("S&P") reaffirmed

its "A-" rating on both Sears and SRAC debt. In support of the Land's End transaction as a

positive development for Sears and SRAC, S&P analyst Gerald Hirschberg was quoted as

saying:

"We believe that Lands End represents a unique opportunity for Sears to strengthen its position in apparel retailing, in line with its goal of boosting the sales productivity and margins from full-line stores …." * * * "Moreover, the $1.9 billion purchase price, which is expected to be funded with debt, does not materially impact the company's [i.e., Sears'] overall financial condition."


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130. On May 23, 2002 and on June 6, 2002, Sears used SRAC and another finance

subsidiary, Sears Credit Accounts Master Trust II, to raise the funds needed to complete the

Lands' End acquisition. The acquisition was completed on June 17, 2002. Of the $1.6 billion

raised in these offerings, $629 million was directly backed by Sears' credit card receivables.

131. Throughout the Class Period, SRAC issued and sold the SRAC Debt Securities.

Defendants continued to issue material false and misleading statements deceiving the investing

public that Sears' credit operations, on which SRAC's own operations principally depended, were

better, more successful and profitable, than was actually the case.

132. On July 18, 2002, Sears issued a press release, filed with the SEC on Form 8-K

and signed by Bergmann, reporting results for the second quarter of 2002. The release stated:

Sears, Roebuck and Co. today reported record second quarter 2002 net income of $420 million, or $1.31 per share, a 36 percent per share increase over the prior year comparable second quarter of $0.96 per share. The increase is due to the continuing performance improvements in the company's retail and credit businesses. "Profits for the quarter showed solid increases across all segments," said Chairman and Chief Executive Officer Alan J. Lacy. "Margin rate improvements continue to benefit the retail businesses, while Credit and Financial Products results were driven by the growth of the Sears MasterCard product and a favorable interest rate environment." "First half earnings exceeded our expectations," said Lacy. "As a result, we now expect 2002 full year comparable earnings per share to be approximately $5.15, a 22 percent increase over the prior year amount of $4.22".... Previous expectation was for full year comparable earnings per share to increase approximately 17percent. Credit and Financial Products' operating income, excluding non-comparable items, increased by $67 million or 19.4 percent to $412 million as favorable funding costs and higher revenues offset higher provision and selling and administrative expenses.


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Second quarter domestic Credit and Financial Products revenues increased 3.5 percent from a year ago to $1.3 billion, due primarily to higher average receivable balances. Credit receivables at the end of the second quarter grew 8.8 percent over the prior year to $28.2 billion.... The net charge-off rate for the quarter decreased to 5.32 percent from 5.42 percent last year primarily due to decreased customer bankruptcy filings. Year-over-year delinquencies decreased 39 basis points from 7.26 percent to 6.87 percent, indicating stable portfolio quality. The domestic allowance for uncollectible accounts of $1.4 billion is 5.1 percent of ending credit receivables compared with 5.24 percent at the end of last quarter.

Overall, Sears reported total operating income for the quarter of $666 million, of which $412

million came from Sears Credit.

133. Significantly, the press release also announced the following "accounting

change":

The company announced a change in its accounting for the allowance for uncollectible accounts in the credit business. Sears historical allowance methodology provided for uncollectible principal and accrued finance charges on past due accounts. Sears has changed its allowance methodology to include current balances and accrued credit card fees in the methodology. The company believes that this change in its methodology moves it appropriately to a more conservative position in regard to its allowance for uncollectible accounts. As a result of the accounting change, the company recorded a cumulative effect, non-cash charge of $191 million as of the beginning of the fiscal 2002 year. The change did not impact second quarter 2002 results. 134. In other words, Sears admitted that until this point, it had entirely failed to create

reserves for probable losses for accounts that were not delinquent, thus creating a false

impression that its portfolio was larger and more profitable than was actually the case.

Moreover, the error was compounded by the fact that Sears' lax payment policies allowed it to

delay categorizing an account as "delinquent" in the first instance. With more accounts classified


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as "current," Sears, until now, could avoid estimating the losses likely to be associated with those

accounts.1

135. Also on July 18, 2002, Sears held a conference call with analysts to discuss its

second quarter 2002 results and -- in light of Capital One’s recent disclosures regarding bank

regulators’ insistence that it increase its capitalization and reserves -- to reassure investors that

Sears’ credit portfolio was not so weighted to subprime consumers that Sears would be required

to increase its capitalization and reserves. As Lacy told investors:

[I]n light of recent announcements in the credit card industry, there is increased concern regarding the credit quality of our portfolio. The general concern seems to revolve around the quality of receivables growth of certain issuers.... The credit quality of our receivables portfolio has also improved. Both our delinquency and the charge-off rates have improved versus last year. Furthermore, we have made investments in risk management systems and processes that position us well to manage in this uncertain economic environment. Therefore we continue to feel good about our credit quality and feel comfortable that our credit business will perform well this year. (emphasis added)

136. Additionally, although Sears announced that it was changing its accounting

methodology in a manner that would increase its allowance for uncollectible accounts, Lacy

assured investors that the change was in no way indicative of any concerns about portfolio

quality:

In light of the current environment every company is stepping back and reviewing their accounting policies. We are no different. We have reviewed our accounting method with regard to the allowance for un-collectable accounts relative to the industry. There is a wide-range of practices. Although our previous method was both acceptable and consistently applied, we believe our new method is preferable. This new method moves us to a more conservative position in regard to the allowance for uncollectible accounts. Most importantly, it is non-cash and does not imply any change in our portfolio credit quality or the economics of our credit business.

1 Sears would ultimately be required to restate its first and second quarter 10-Qs, due to its faulty insistence on backdating this accounting change to the first quarter, thus avoiding taking a prospective charge to earnings.


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137. During the July 18, 2002 conference call, Lacy concluded by again increasing

Sears' earnings projections for the year:

Finally, we are delighted with the progress that we are making in our strong first-half results. And as a result, we are increasing guidance for comparable 2002 earnings per share growth to $5.15, a 22% increase over last year.

138. Liska then reinforced Lacy's remarks:

I want to highlight that this is a change in accounting method only. This change is a non-cash item. It has no economic impact and doesn't reflect any underlying change and portfolio quality. In fact, delinquency in net write-offs have both improved versus last year. While the previous method was acceptable under GAAP consistently applied again within industry practice, we believe this new methodology moves us to a more conservative position.... In summary, while the previous method was clearly proper this change makes it more conservative, and once again let me remind you that it has no effect on our operations, our outlook, or the economics of our credit business. Turning to the credit of financial products segments, receivables are up 8.8% versus last year at the end of the quarter to $28.2 billion. This receivable growth reflects the continued success of the Sears MasterCard product, which now has a receivable balance of over $8.5 billion.... The net charge off rate in the quarter improved by 10 basis points from last year to 5.32%. And as I said before, 60 + day delinquencies improved in the second quarter 39 basis points to 6.87% versus a year ago at 7.26%. These two factors indicate stable portfolio quality.... Credit SG&A [selling, general, and administrative expense] increased in the quarter $52 million or.4%/.5%. This was the result of a combination of increased marketing spent behind the Sears MasterCard and increased fraud losses.... Overall, credit and financial products operating income increased strongly by 19.4% to $412 million in the second quarter. [W]e anticipate that receivables will grow in the mid-single digit range, and continued growth in the Sears MasterCard product.... We continue to feel good about our credit quality and feel comfortable that it will remain in good shape for the remainder of 2002. We expect that write-offs will remain stable versus 2001. Delinquency rates are forecasted to decline throughout the year. On an operating income basis, we are confident that credit will deliver solid performance with improvement in the low double digits, an increase from our previous guidance of a mid-single digit increase.

139. In addition, during the July 18 call, Lacy misrepresented the quality of Sears’

credit card portfolio as follows:


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We are growing our credit business now by actually having a product that is more fitting for better credit quality customers than our old product. You know, we have never intentionally lended [sic] to subprime people, people as they get into trouble do migrate to being subprime, but we never intentionally lent to subprime people, but I think very importantly here, what we've been about with our MasterCard product, is having a product that has a better rate structure and more convenience, that's more appealing to better credit quality customers. So, our growth… is being based on a payment product that is appealing to even better risk customers and therefore, as we grow, we are in fact improving the overall credit risk of our portfolio. (emphasis added)

140. Lacy then went on to compare the Sears portfolio to other issuers generally:

I guess to just to overkill this maybe for the moment.... We had historically thought of our credit business as a business that could be leveraged conservatively at a 9:1 debt equity ratio.... That capital ratio is significantly less leveraged than the traditional monoline credit card issuers. Credit card issuers typically are leveraged in the 1 S:1 category. So we have a balance sheet today that has a far lower level of leverage relative to our credit business than the monoline credit cards.

141. In response to another question about the MasterCard, Lacy added:

Sears billed MasterCard balances at the end of the quarter were $8.5 billion, so this has been a very successful product launch for us. In fact, it's gone better today than we thought it might. We've been very, very pleased with the pace of growth in that product and the customers' response to it. We have not projected forward how much receivables we will have on the MasterCard product. I think it is just safe to say that it is a very important product launch, not only for Sears credit, but also for Sears Roebuck & Company, because we do view that as being the principle growth vehicle going forward. In terms of the basis of competition in the industry, we have historically had, I think, a surprising success with a proprietary store card. I mean, the Sears Card, I think, has been a remarkable product in the scheme of the financial services industry and that it's been $20 plus billion dollars worth of balances for a very long time, it's very profitable, and we've had very good performance from it.

142. Finally, at the end of the July 18, 2002 conference call, Liska also reassured

investors that:

On the risk management side, we've also invested significantly in risk management systems and capable people and feel that, having had some issues back in the mid-90's that we clearly were under investing there and have brought


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that up to, we think, a very contemporary capability as well. So our risk management systems, our operating systems, I would also say that our collections systems have also been upgraded, so we feel very good about the systems environment. We've put a lot of money and time there over the last few years.

143. The market again reacted favorably to Sears' statements concerning its second

quarter 2002 performance. For example, on the day of the July 18 conference call, Sears stock

closed at $45.75, up from the previous day's closing price of $44.33. The bond prices also

reacted favorably.

144. Wall Street analysts also reacted favorably to Sears' announcements. For

example:

(a) In an analyst report dated July 18, 2002, UBS Warburg reported:

Importantly, credit quality remained strong in 2Q, and in fact improved versus the prior year. Performance bucked the trend of recent credit woes at some mono-line card issuers.... An accounting change was made retroactive to 1 Q, which essentially increased the allowance... in a one-time event that represents a shift towards more conservative allowance measures by the company.... [M]anagement reiterated that this was an optional move on their part, and that the old method continues to be allowed under current accounting standards.... We view the move as a proactive shift towards a more conservative management of risk in anticipation of future receivables growth. (b) Similarly, in an analyst report dated July 19, 2002, Banc One reported:

The Credit quality has improved, as demonstrated by lower charge-offs and delinquencies versus last year.... Within the credit operations, debt/equity is roughly 9 times, a much lower figure than those of other competitors in the consumer credit business. Moreover, Sears does not lend to subprime customers…. (c) Additionally, in an analyst report dated July 18, 2002, Merrill Lynch

stated:

Sears announced a change in the way in which they manage their allowance for uncollectible accounts.... The charge and the change will have no effect on operations. By increasing the allowance, the new method reflects increased conservatism in Sears credit division accounting.


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In response to concerns over the growth of the credit card business… management [stated] : (1) current growth is coming from the Sears MasterCard product, which is aimed at higher quality customers than the Sears store card; (2) Sears does not engage in any sub prime lending; and (3) the Sears credit division debt/equity ratio is currently 9x, well below the typical 15x of traditional monoline credit card issuers.

145. However, as defendants were aware, Sears' repeated representations concerning

its credit operations and Sears' reported financial performance were materially false and

misleading. For example:

(a) Sears contended, inter alia, that delinquencies had decreased by "39 basis points from 7.26 percent to 6.87 percent," and that charge-offs had decreased from "5.32 percent from 5.42 percent." In fact:

• Sears MasterCard charge-offs had soared from.90% in the second quarter

of 2001 to 2.99% in the second quarter of 2002, an increase of 232%, while MasterCard delinquencies had shot up from 1.20% in the first quarter of 2001 to 2.57% in the first quarter of 2002, an increase of 114% (or 137 basis points); and

• Sears' proprietary card charge-offs had gone up from 5.78% in the second

quarter of 2001 to 6.20% in the second quarter of 2002, an increase of 7.2%, while its store card delinquencies had jumped from 7.86% in the second quarter of 2001 to 8.75% in the second quarter of 2002, an increase of 14% (or 89 basis points).

(b) Despite such representations as… "[W]e have never intentionally lended

[sic] to subprime people, people as they get into trouble do migrate to being subprime, but we never intentionally lent to subprime people," as Sears would not reveal until the end of the Class Period, Sears had systematically targeted the subprime market for years, and at the time of these statements, more than half of Sears' credit portfolio consisted of subprime borrowers. By contrast, in June 2002, the average credit card portfolio for the industry contained 36.6% subprime loans;

(c) [T]he techniques Sears employed to delay recording delinquencies and

charge-offs rendered its results "not directly comparable" to the results of its competitors. Indeed, as Bear Stearns reported after the end of the Class Period: "[W]e believe that [Sears has] the most aggressive policy in the credit card industry and that it is disguising the real loss rate to a certain extent."


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146. Moreover, even as Sears was admitting that its financial statements had been

entirely out of compliance with GAAP for failing to create reserves for outstanding loans that

were not yet delinquent, Sears nonetheless portrayed itself as "conservative" with respect to its

accounting.

147. When W.R. Hambrecht & Co. initiated coverage of Sears on July 31, 2002, it

stated that, due to "little evidence for consistent organic retail growth," it was "thus inclined to

value Sears... as a credit card company."

148. On July 22, 2002, the OCC, the Federal Reserve, the Federal Deposit Insurance

Corp. ("FDIC"), and the Office of Thrift Supervision (together, FFIEC) issued draft new

guidelines on credit card lending. These guidelines provided, inter alia, that:

(a) Card issuers should carefully consider risk exposure not only when increasing lines of credit, but also when issuing additional cards;

(b) "Workout" programs should not permit payments to extend longer than 48

months; and

(c) Lenders should utilize proper risk controls to ensure that they have adequately reserved for losses.

149. In an interview with Bloomberg reported on July 25, 2002, when asked about

Sears' reaction to new guidelines on credit-card lending, Keleghan stated, "From everything I

read, I feel we're already there….I don't suspect we'll come under the same scrutiny [as other

lenders.] We don't do subprime lending at all in the MasterCard portfolio. All my growth is

coming from prime and superprime."

150. The Bloomberg article appeared on July 25, 2002. The next day, Sears stock

closed at $47.17, up from the July 24, 2002 closing price of $46.32. At about this same time, the

SRAC Debt Securities issued pursuant to the 6/21/02 Offering had been issued and were being


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sold on the open market. These same securities would shortly be available for trading over the

NYSE.

151. However, Keleghan’s statements reported on July 25, 2002 were false or

misleading because, inter alia:

(a) Sears was not in compliance with the new guidelines, in that: (1) Sears recklessly issued new cards to consumers who did not qualify for extensions of credit on their existing accounts; (2) Sears workout programs typically lasted 50 to 52 months (and, in fact, even the 48 month maximum set by the OCC was far longer than industry practice); and (3) Sears did not create proper allowances for loan losses in accord with agency requirements; and

(b) Keleghan falsely stated that "all of Sears' MasterCard growth came from

"prime" and "superprime" consumers, even though Sears had drastically lowered its lending criteria in order to extend MasterCard credit.

152. On July 30, 2002, The American Banker reported on Sears' plans to partner with

other retailers who would then accept the Sears store card at their own establishments. The

article explained that Keleghan was not concerned that Sears store cardholders might be too risky

to justify the plan. As the article explained:

Mr. Keleghan downplayed the credit quality concern. "The majority of these customers are very creditworthy," he said, adding that customers typically have five credit cards in their wallets. "There is a risk there, but we think it's minimal."

153. However, Keleghan’s statement was materially false and misleading because,

inter alia:

(a) As would later be revealed, the Sears portfolio was heavily weighted toward risky, subprime consumers; and

(b) As would later be revealed, delinquencies and charge-offs in the Sears

Card portfolio had been steadily increasing for a year and half, thus demonstrating the extremely unstable quality of the portfolio.

154. On August 5, 2002, UBS Warburg issued a report stating:


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Late last week we hosted a roadshow with EVP and CFO Paul Liska... Key points made during presentations included:... (2) credit risk being tightly controlled and accelerated receivables growth is of high quality. Credit business very conservatively managed and we are confident that receivables growth is of high quality. Sears has invested heavily in risk management technology during the past few years and is putting that technology to good use as evidenced by improving delinquency and charge off rates relative to banks and monoline companies.... We believe that accelerated conversion of Sears private label cardholders to Gold MasterCard reflects the fact that a large number of the 60 million private label card holders are not sub prime.

However, these representations, which parroted Liska's comments that had been made with the

intention that they be communicated to the market, were materially false and misleading in light

of the true condition of Sears’ credit business and delinquency / charge-off rates known to Liska

at the time he made these representations.

155. On August 9, 2002, Sears filed its Form 10-Q for the second quarter of 2002,

signed by Bergmann. In addition to repeating information contained in its July 18, 2002 Form 8-

K, the second quarter 2002 Form 10-Q explained Sears' change in accounting policy as follows:

During the second quarter, Sears compared its methodology for computing the allowance for uncollectible accounts to the methodologies of participants in the bank card industry. The Company felt that a comparison to bank card issuers was appropriate given the growth of the Sears MasterCard product (approximately $8.5 billion in balances at the end of the second quarter of 2002) and the recent changes to the Sears Card product that are meant to provide a wider range of services to the Sears Card holder (e.g., balance transfers, convenience checks, broader acceptance, etc.).... Based on its comparison, Sears has changed its methodology to provide an allowance for principal and finance charge balances on current and past due accounts as well as for credit card fee balances. The Company believes that this new methodology for determining its allowance is preferable, as it is consistent with more conservative industry practices in this area.

156. Sears' second quarter 2002 Form 10-Q further stated:

Credit and Financial Products selling and administrative expense as a percentage of Credit and Financial Products revenues increased to 20.0%, an increase of 340 basis points in the second quarter of 2002 from the comparable 2001 period. The


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increase was primarily due to higher account services expenses, increased marketing and in-store credit card promotions and increased fraud losses, experienced due to the conversion of accounts to the MasterCard product. The domestic provision for uncollectible accounts increased by $43 million to $393 million for the 13 weeks ended June 29, 2002 from the comparable prior year period. Charge-offs increased by $17 million despite a decline in the net charge-off rate to 5.32% in 2002 from 5.42% in 2001 and a decline in customer bankruptcy filings. The increase in the provision and charge-offs is primarily due to the increase in the receivables portfolio. The delinquency rate for 2002 decreased 39 basis points compared with 2001. At June 29, 2002, the period-end allowance as a percent of receivables was 5.10%, or $1.4 billion.

157. However, these statements were materially false and misleading. Additionally,

Sears' claim that "a comparison to bank card issuers was appropriate" was false and misleading

because, as Sears would later reveal, the information released on its portfolio was not

comparable to bank card issuers because Sears had "the most aggressive policy in the credit card

industry" that "disguis[ed] the real loss rate" with respect to characterizing loans as performing

and delaying the recognition of charge-offs. As Sears' SEC filings would later admit after the

close of the Class Period: "[t]he Company's delinquency rate is not directly comparable to

participants of the bankcard industry."

158. On August 12, 2002, Sears filed an Form 8-K in which, pursuant to the

requirements of Sarbanes-Oxley Act, Lacy and Liska personally attested to the accuracy of the

Sears 2001 Form 10-K and all reports filed thereafter.

THE TRUTH BEGINS TO EMERGE

159. In October 2002, a series of announcements by Sears suddenly began to reveal the

true condition of its credit portfolios that had been concealed from investors.

160. On Friday, October 4, 2002, Sears abruptly issued the following press release:


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Sears, Roebuck and Co. has named Paul Liska executive vice president and president, Credit and Financial Products. Liska, 46, who joined Sears as executive vice president and chief financial officer in June 2001, succeeds Kevin Keleghan, who has left the company. In his new position, Liska retains his responsibilities for overseeing Sears' information technology, supply chain, real estate and corporate procurement functions. Sears also has promoted Glenn Richter, 40, to senior vice president and chief financial officer, succeeding Liska. Richter most recently served as senior vice president, Finance. He joined Sears in 2000 as vice president and controller.

161. On the following Monday, October 7, 2002, Sears issued another press release:

Sears reaffirmed its 2002 full-year outlook for a 22 percent increase in comparable earnings per share to $5.15, although guidance was revised for its principle business segments. The company now expects comparable earnings increases in the low- to mid-thirty percent range in its retail and related services segment and in the mid-single digit percent range in its credit and financial products segment.

162. Although this revised guidance reflected a projected improvement in Sears' Retail

business compared to Sears' earlier projections from July 18 (which had projected that Retail

would grow by a "mid to upper 20's percentage"), the new guidance of only "mid-single digit"

percentage growth in the credit area was a major downward revision from Sears' prior July 18

guidance that Credit would grow "in the low double digits." In response to this news, Sears stock

started to trade down.

163. Later that same day, at a hastily scheduled a conference call with analysts, Lacy

explained that Sears would formally announce third quarter earnings results on October 17,

2002, as previously scheduled, and tried to emphasize the positive by stressing that Sears was

"reaffirm[ing]" its July 2002 earnings guidance for the year of a 22°% increase in earrings per

share.

164. With respect to Sears' Credit business, Lacy further stated as follows:


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In our credit business, receivables continue to grow and the 3[third quarter] average receivables increased approximately 10% versus the prior year. For the quarter the allowance for uncollectible accounts also increased approximately 10% versus last year. The majority of this increase reflects the growth in our receivables portfolio, but apart of it also reflects a worsening economic outlook. We expect a further increase in the [fourth quarter]. As a result we are revising our guidance for the credit and financial product segment to an operating increase in the mid single digit range versus our low double digit increase.

165. Lacy also discussed the abrupt departure of Kevin Keleghan as the President of

Sears Credit as follows:

Kevin left the company at my request, because I lost confidence in his personal credibility. To discuss it further than that does not serve any purpose. His departure is not related to business performance and does not indicate a change in our credit strategy. We will continue to grow the credit business while we reposition and restructure our retail operations [emphasis added]. 166. In response to the cryptic partial disclosures about the reasons for Keleghan's

departure, and to the negative news about Sears' Credit business, on October 7, 2002, Sears

shares plunged from a previous closing price of $37.64 on October 4, 2002 to a closing price of

$32.25 on October 7, 2002.

167. Similarly, the price of SRAC Debt Securities issued pursuant to the 6/21/02

Offering fell 11.7%, from an October 8, 2002 close of $24.81 per share to an October 10, 2002

close of $21.91 per share.

168. In subsequent reports, analysts expressed confusion about the import of Sears'

sudden announcement. As W.R. Hambrecht wrote on October 7, 2002:

Kevin Keleghan, who had been the head of Sears credit card division, unexpectedly left the company last Friday. When this was announced, we initially thought it was a matter of CEO Alan Lacy and Paul Liska further fashioning the company.... This morning, however, we got incrementally bad news.... CEO Lacy stated that he asked Keleghan to leave because he had lost confidence in Keleghan's personal credibility. We don't know what that means, exactly; but, we believe it bodes poorly for Sears Credit operations which


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represent approximately 65% of operating profit and creates even greater uncertainty about the quality of earnings at the credit division....

169. In reality, Lacy's assurances that Keleghan's departure was "not related to

business performance," and that operating income from Sears' Credit business would continue to

grow (albeit at a reduced rate) were all materially false and misleading because, inter alia:

(a) Keleghan's departure was most definitely related to poor business performance, and to Sears' desire to try to focus future blame for Sears' deceit on only one or two individuals, in that he had systematically lied to investors about the performance of Sears Credit while implementing risky models that made it easier for risky borrowers to get credit; and

(b) Given the true condition of Sears' credit business, even the revised

earnings projections for the year could not be achieved given the current state of Sears Credit, and were known at the time to be unachievable.

170. As a result of Lacy's and Sears' efforts to downplay the significance of Keleghan's

departure, and in the absence of any further bad news, the price of Sears stock stabilized in the

following week, closing at $33.95 on October 16, 2002.

171. But the biggest shock was yet to come. On October 17, 2002, Sears issued a press

release in which it announced that it would be increasing its allowance for bad debt by $222

million. The charge against earnings taken to cover this increase allowance reduced Sears'

earnings for the quarter by 26% as compared to the prior year, and also caused Sears to reduce its

projections for year-end results. Although just 10 days earlier Sears had reaffirmed that it

expected a 22% increase in earnings per share for the year, Sears announced that it was now

estimating an increase of only two-thirds that amount (i.e., an increase of only 15%), and that the

credit segment was "down 28 percent compared to the prior year." The release further

commented on the $222 million charge as follows:

The domestic provision for uncollectible accounts increased $222 million over the prior year period due to a $189 million increase to the allowance for uncollectible


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accounts. The allowance increase reflects receivables growth, recent increases in charge-off trends and a cautious economic outlook for the remainder of the year. The net charge-off rate for the quarter decreased to 5.55 percent from 5.62 percent last year, reflecting increased charge-offs offset by the effect of receivables growth. 172. In an analyst meeting on that day, Lacy attributed Sears' problems in its credit

business to the duplicity of Keleghan and Vishwanath:

[I]t became clear to me that Kevin [Keleghan] was not being forthcoming about these issues that this business was facing... and had become a barrier to getting an objective situation assessment as to what was happening in our business and I terminated him for basically my personal loss of confidence in him relative to his personal credibility.... You should also know that during the course of our analysis we determined that the VP of Risk Management and Credit [Vishwanath] had also withheld information and had led us to terminate his employment effective yesterday. 173. When Liska took over the conference call to explain the credit situation, he

effectively admitted that Sears had misrepresented the quality of its portfolios. Specifically,

even though Lacy, Liska, and Keleghan had stated on October 24, 2001, and July 18, July 25,

and in early August 2002, that Sears did not target subprime consumers, Liska now admitted:

[I]n situations like this, where there are a number of incorrect perceptions and rumors in the marketplace, the solution is to provide a greater degree of transparency so that people have the opportunity to draw their own conclusion as they should desire. One of the disclosures that make today centers around a portion of our portfolio that is Middle American. A large portion of the proprietary card, our proprietary card portfolio is Middle America. We will show you data all the way back to 1998 so that you can see that we are not increasing our exposure to this Middle American segment.

174. Despite the euphemism, it soon became clear that the "Middle America" that

formed "[a] large portion of the proprietary card" was simply another way of saying "subprime."

As Liska further stated:

As you can see from this chart, a portion of the portfolio attributable to customers in the prime segments increased from 23% of the portfolio a year ago, to 26% of


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the portfolio today. If you go back to 1998, as a general point of reference, the prime segment has increased from 17% to 26%. Bank segment accounts are also increasing. These bank accounts represent 23% of our portfolio in 1998, the same percentage in 2001 and 26% of our portfolio in 2002. As these higher quality credit quality accounts become a larger portion of our portfolio, middle America accounts become a smaller portion of our portfolio. In 1998 Middle America balances represent 60% of our portfolio. They represent 48% today. Last year the segment represented 54% of our portfolio.... As I told you in the very beginning of this presentation, the majority of proprietary card accounts are middle America. It is generally recognized that middle America accounts deteriorate more quickly in a tough economy than prime accounts do. (emphasis added)

In other words, Sears' credit portfolio had been disproportionately subprime for years -- a

disclosure that starkly contrasted with Sears' past portrayals of the quality of its credit card

portfolios.

175. Liska then also admitted that Sears had engaged in aggressive marketing tactics

that had been responsible for part of the losses:

[W]e would like to be more cautious on the portion of our portfolio that is attributable to convenience checks and balance transfers. We have experienced higher charge-off rates on accounts that have used either convenience checks or had been balance transfers. We believe that the full impact of any of the higher risk portfolio, profile customers, that use convenience checks and balance transfers, is reflected in the forecasted charge-off rate as well as our projected allowance for doubtful accounts and what we did recently.... [W]e have found that there is a lot of adverse selection associated with accounts that are acquired over the web. Today we only approve around 6% of all web applications. While our web approval rates have always been very low, we did reduce the approval rate by 60% in the last year.

176. Analysts were shocked and unforgiving about Sears' October 17, 2002

disclosures. For example, as W.R. Hambrecht reported:

This shocking 26% decrease in earnings, which was announced on the morning of Sears' very well attended Analysts meeting held at the company's headquarters outside of Chicago, stunned the Street and all in attendance. Frankly, it was the realization of our worst-case scenario regarding the state of the company's credit operations, which represent more than 60% of Sears' operating profit.


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177. In reaction to the stunning disclosures of October 17, 2002, the price of Sears

common stock plummeted, falling $10.80 per share -- or approximately 32% -- to close at $23.15

on October 17, on extraordinary trading volume of 36 million shares -- 12 times greater than

Sears' daily trading average of 2.9 million shares during the Class Period.

178. Moreover, as was true after the October 9 disclosure, SRAC Debt Securities also

had an immediate and adverse reaction to the press release, and fell 8.6%, from an October 16,

2002 close of $24.05 per share to an October 17, 2002 close of $21.99 per share -- on trading of

153,600 Notes, six times the daily trading average of 25,000 shares.

179. Sears' October 17, 2002 disclosure also had a dramatic and adverse effect on the

cost for SRAC to issue debt securities to the market. As discussed above, shortly before the end

of the Class Period, SRAC announced its intention to offer approximately $800 million of three-

year SRAC Debt Securities at an interest rate 13 to 14 basis points above the one-month Libor.

However, after Sears' had disclosed the true state of its credit card operations, the interest rate on

these SRAC Debt Securities rose dramatically.

180. The three-year SRAC Debt Securities were priced at 38 points above Libor.

Thus, as a direct result of the downward change in Sears' financial condition and future, SRAC

suffered as well.

POST-CLASS PERIOD EVENTS

181. In the weeks that followed, the conditions of Sears continued to deteriorate. For

example, on November 7, 2002, W.R. Hambrecht reduced its estimates in reaction to the recent

"stunning credit disaster," and criticized Sears' "extremely limited visibility" with respect to the

makeup of its credit portfolio:


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[W]e expect the shares to continue to come under pressure, especially given the lack of clarity on what exactly is going on and whether more problems will emerge. Investors were stunned by the credit blow-up, especially since management had reaffirmed guidance a week before the analyst meeting.... Given the extremely limited visibility we would resist the temptation to buy on weakness....

182. On November 12, 2002, Sears filed its Form 10-Q for the third quarter of 2002

and, for the first time, revealed to investors how both the Sears proprietary card segment and the

Sears MasterCard segment had each significantly deteriorated during the Class Period. It offered

the following explanation:

During the third quarter of 2002, delinquency rates trended upwards from first and second quarter levels for both the Sears Card and Gold MasterCard portfolios. The 60-plus day delinquency rate for the Sears Card portfolio increased to 9.71% at September 28, 2002, compared to 8.73% at June 29, 2002, and 8.13% at September 30, 2001. The 60-plus day delinquency rate for the MasterCard portfolio increased to 3.00% at September 28, 2002, compared to 2.58% at June 29, 2002, and 1.94% at September 30, 2001.... Because the MasterCard portfolio has a lower delinquency rate than the Sears Card, the growth in the MasterCard portfolio coupled with the decline in the Sears Card portfolio led to an improvement in the total portfolio delinquency rate as compared to the third quarter of 2001.

183. In its Form 10-Q, Sears also stated "The Company charges off accounts at 240

days where as most bankcard issuers charge off at 180 days. Therefore Sears' delinquency rate is

not directly comparable to participants of the bankcard industry."

184. Finally, Sears began to be more forthcoming about its re-aging policies,

disclosing for the first time in its SEC filings that:

The Company's net charge-offs consist of principal balances charged-off less current period recoveries. The Company's current credit processing system charges off an account automatically when a customer's number of missed monthly payments reaches eight, except that accounts can be re-aged once per year when a customer makes two consecutive monthly payments. Also, accounts may be charged off sooner in the event of customer bankruptcy. Finance charge and credit card fee revenue is recorded until an account is charged off at which point the charged off balances are presented as a reduction of revenue. The


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Company provides for the estimated balance of uncollectible finance charges and credit card fees in its allowance for uncollectible accounts.

185. Tellingly, Sears' third quarter Form10-Q also disclosed a huge jump in

administrative expenses, due in part to "higher marketing and fraud loss expenses in both the 13

and 39 week periods, and increased collection expenses in the 39 week period" in the credit

segment.

186. As The Street.com responded in an article discussing the third quarter results,

"Sears' brutal stock slide continued Wednesday after the retailer released new data that showed a

big jump in bad loans in its fast-growing MasterCard portfolio... Wednesday's new data... shows

deep deterioration in the MasterCard portfolio. A back-of-the-envelope calculation suggests

that, if this rot continues, the company may have to make loan provisions in 2003 that could

wipe out a large part of the earnings analysts currently forecast."

187. Other analysts continued to be unsatisfied with Sears' disclosure. For example, on

November 20, Bear Stearns criticized the lack of even more disclosure by Sears:

We had hoped for increased disclosure.... Delinquency and net charge-off rates for the two portfolios will be disclosed on a quarterly basis, but not on a monthly basis. Sears also will not disclose FICO scores for its portfolio.... We believe that the charge-off rates could significantly increase in the next 6 to 12 months until the entire portfolio seasons and we are uneasy as to whether Sears has adequately accounted for the potential level of charge-offs.... Another key concern is the aggressive write-off policy that Sears uses.... [W]e [] believe that this is the most aggressive policy in the credit card industry and that it is disguising the real loss rate to a certain extent.... Sears did mention that the average active SGMC [Sears MasterCard] account has a FICO score of approximately 720. We believe that this value is decent but again, the average could be boosted by a relatively low number of very high credit quality customers who opened an account for a one-time home appliance purchase, and the majority of accounts may have much lower FICO scores.


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188. On January 16, 2003, Sears issued a press release announcing that it was adding

another $150 million to its reserves for uncollectible accounts, in part due to "increases in the net

charge-off rate and delinquencies."

189. On February 28, 2003, Sears fell from the list of A-rated companies when

Standard & Poor's downgraded its rating on Sears debt. Associated Press reported that S&P

"attributed the rating action to the introduction of the Sears MasterCard back in 2000." An S&P

analyst stated that "[t]he rating action reflects greater-than-anticipated charge-offs related to the

company's Sears MasterCard, and the adverse impact that the card has had on the credit business

as a whole." S&P's downgrade followed earlier downgrades by Fitch and Moody's Investor

Service.

190. On March 12, 2003, Sears filed its 2002 Report on Form 10-K. The Form 10-K

repeated the delinquency and charge-off information that had been contained in Sears' third

quarter 2002 SEC filings, and provided additional data on the continuing deterioration at the end

of the year. The Form 10-K explained:

During 2002, 60-plus day delinquency rates for the portfolio increased by 11 basis points as compared to 2001. Because the MasterCard portfolio has a lower delinquency rate than the Sears Card portfolio, the growth in the MasterCard portfolio coupled with the decline in the Sears Card portfolio resulted in only an 11 basis point increase in the total portfolio delinquency rate as compared to 2001 despite the fact that the delinquency rates for both the Sears Card and MasterCard portfolios experienced larger increases. The 60-plus day delinquency rate for the Sears Card portfolio increased to 10.34% at December 28, 2002, compared to 8.91 at December 29, 2001 and 7.94% at December 30, 2000. The 60-plus day delinquency rate for the MasterCard portfolio increased to 3.76% at December 28, 2002, compared to 1.97% at December 29, 2001 and 0.38% at December 30, 2000.


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191. For the first time, Sears also disclosed the percentage of loans in "workout"

programs -- numbers which, if considered as charge-offs, would demonstrate the charge-off rates

to be considerably higher than had thus far been disclosed. Sears also admitted:

[T]he Company contractually charges off accounts at 240 days, whereas most bank card issuers charge off at 180 days. As a result, Sears' delinquency rates are not directly comparable to participants in the bank card industry.

192. At its height, Sears' credit operations had represented almost 70% of Sears'

earnings, and by 2003 Sears had become the third largest issuer of MasterCard (behind only

Citigroup and MBNA). However, on March 26, 2003 Sears announced that it would seek to sell

all of its credit operations "in an attempt to create value for all investors and focus on its

profitable core retail and related services business.”

THE SEARS' DEFENDANTS' FALSE AND MISLEADING FINANCIAL STATEMENTS

Violations of Generally Accepted Accounting Principles (GAAP)

193. At all relevant times during the Class Period, the Sears Defendants represented

that Sears' financial statements when issued were prepared in conformity with GAAP, which are

recognized by the accounting profession and the SEC as the uniform rules, conventions and

procedures necessary to define accepted accounting practice at a particular time. However, in

order to artificially inflate the price of Sears and SRAC securities, the Sears Defendants used

improper accounting practices in violation of GAAP and SEC reporting requirements to falsely

inflate Sears' reported earnings and receivables in the interim quarters and fiscal years during the

Class Period.

194. Specifically, Sears Defendants caused Sears to violate GAAP by:


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• improperly failing to consider the loss inherent in both delinquent and non-delinquent accounts in its impairment analysis; and

• improperly failing to adjust for various factors, including changes

in the risk model, in calculating appropriate loss allowances.

195. As set forth in Financial Accounting Standards Board ("FASB") Statements of

Concepts ("Concepts Statement") No. 1, one of the fundamental objectives of financial reporting

is that it provide accurate and reliable information concerning an entity's financial performance

during the period being presented. Concepts Statement No. 1, paragraph 42, states:

Financial reporting should provide information about an enterprise's financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors' and creditors' expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance. 196. Asset forth in SEC Rule 4-01(a) of SEC Regulation S-X, "[f]inancial statements

filed with the [SEC] which are not prepared in accordance with [GAAP] will be presumed to be

misleading or inaccurate." 17 C.F.R. § 210.4-01(a)(1). Management is responsible for preparing

financial statements that conform with GAAP. As noted by the AICPA professional standards:

financial statements are management's responsibility.... [M]anagement is responsible for adopting sound accounting policies and for establishing and maintaining internal control that will, among other things, record, process, summarize, and report transactions (as well as events and conditions) consistent with management's assertions embodied in the financial statements. The entity's transactions and the related assets, liabilities and equity are within the direct knowledge and control of management.... Thus, the fair presentation of financial statements in conformity with Generally Accepted Accounting Principles is an implicit and integral part of management's responsibility.

A. Failure to Create Adequate Reserves Against Probable Losses

197. As discussed above, lenders are required to establish allowances, or reserves, to

account for the fraction of their loan portfolio that is likely to become uncollectible. "The assets


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of an enterprise may include receivables that arose from credit sales, loans, or other transactions.

The conditions under which receivables exist usually involve some degree of uncertainty about

their collectibility, in which case a contingency exists.... Losses from uncollectible receivables

shall be accrued when both conditions in paragraph 8 are met. Those conditions may be

considered in relation to individual receivables or in relation to groups of similar types of

receivables. If the conditions are met, accrual shall be made even though the particular

receivables that are uncollectible may not be identifiable." SFAS No. 5.

198. GAAP provides that an estimated loss from a loss contingency "shall be accrued

by a charge to income" if: (a) information available prior to issuance of the financial statements

indicated that it is probable that an asset had been impaired or a liability had been incurred at the

date of the financial statements; and (b) the amount of the loss can be reasonably estimated.

SFAS No. 5, at ¶ 8. SFAS No. 5 also requires that financial statements disclose contingencies

when it is at least reasonably possible (e.g., a greater than slight chance) that a loss may have

been incurred. The disclosure shall indicate the nature of the contingency and shall give an

estimate of the possible loss, a range of loss or state that such an estimate cannot be made.

199. The SEC considers the disclosure of loss contingencies to be so important to an

informed investment decision that it promulgated Regulation S-X, which provides that

disclosures in interim period financial statements may be abbreviated and need not duplicate the

disclosure contained in the most recent audited financial statements, except that, "where material

contingencies exist, disclosure of such matters shall be provided even though a significant

change since year end may not have occurred." 17 C.F.R. § 210.10-01.


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200. Sears violated the GAAP requirement by failing to take a proper provision for

loan losses in its interim financial statements, as indicated by APB Opinion No. 28, Interim

Financial Reporting:

The amounts of certain costs and expenses are frequently subjected to year-end adjustments even though they can be reasonably approximated at interim dates. To the extent possible such adjustments should be estimated and the estimated costs and expenses assigned to interim periods so that the interim periods bear a reasonable portion of the anticipated annual amount.

201. In addition, FASB Statement of Concepts No. 5 states, "[a]n expense or loss is

recognized if it becomes evident that previously recognized future economic benefits of an asset

have been reduced or eliminated...."

202. The Sears Defendants violated GAAP in that Sears improperly failed to consider

the inherent likely losses in both delinquent and non-delinquent accounts in its impairment

analysis. For most of the Class Period, Sears only created reserves for losses likely to occur for

accounts that had already become delinquent; however, Sears did not create reserves for accounts

that were not yet delinquent, even though those receivables, just as with delinquent accounts,

necessarily carried with them some degree of risk of nonpayment. It was only on July 18, 2002,

or three quarters of the way into the Class Period, that the Sears Defendants announced that they

would change their accounting and provide reserves for nondelinquent, as well as delinquent

accounts. This change had the effect of increasing Sears' reserves, its reported earnings, and

reducing its receivables in the amount of $300 million. Moreover, Sears classified the change as

a new "method" of accounting, thus allowing Sears to backdate the change to the first quarter of

2002, so that it would not have to absorb a loss in its current or future earnings. In fact, the

change was not one of "accounting method," but was instead a re-estimate of probable loss, and

as such, should have been absorbed at the time of the change, i.e., in its second quarter financial


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statements. The SEC ultimately forced Sears to restate both its first and second quarter 10-Qs to

take the charge in July, when the change was made.

203. Sears additionally failed to create adequate reserves by failing to account for the

risks inherent in its alterations of its credit models. Sears lowered its credit standards when

issuing its cards during the Class Period, deliberately targeted a segment of the population on

which it had little data, avoided its risk models by offering additional cards to Sears cardholders

who would not qualify for credit increases, and altered payment terms so as to allow consumers

to pay their bills over longer -- and thus riskier -- schedules. Nonetheless, Sears failed to account

for the additional risk of nonpayment inherent in such policies in contravention of GAAP. As a

result, Sears' Class Period financial statements, which are incorporated by reference in each of

the prospectuses issued during the Class Period, materially overstated earnings and, to the extent

that Sears' receivables were shown net of reserves, Sears' financial statements materially

overstated the true size of the loan portfolio.

204. Finally, Sears failed to create adequate reserves by classifying fraudulent billings

as expenses in the quarter in which they came due, rather than by classifying them as bad debt

and building an allowance for them. Given the sheer magnitude and persistency of the problems,

which were themselves created by Sears' heavy-handed selling tactics -Sears knew that

complaints of fraudulent billing had skyrocketed, and would necessarily lead to charge-offs;

however, it did not account for these probable future losses. Such accounting materially

understated the risk of loss inherent in the portfolio.

205. Indeed, as Sears would ultimately admit, the net effect of these machinations and

irregularities contributed to an additional charge to earnings for uncollectible accounts of $222


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million for the 13-week period ended September 28, 2002 as compared to the prior year, as set

forth in the 10-Q filed on November 12, 2002. The additional charge brought the total provision

for the 39 weeks ended September 28, 2002 to $1.685 billion as compared to the prior year's

$929 million, a $756 million or 79% increase.

B. Improper Failure to Timely Write Down Impaired Loans

206. GAAP, in SFAS No. 5, requires that financial statements account for existing

uncertainties as to probable losses. Such loss contingencies must be recognized and reported as a

charge against income when: (a) information available prior to issuance of the financial

statements indicates that it is probable (e.g., likely) that an asset has been impaired or a liability

has been incurred; and (b) the amount of such loss can be reasonably estimated. SFAS No. 5, 18.

When condition (a) above has been met and a range of contingent loss can be reasonably

estimated, but no single amount within the range is a better estimate than any other amount, the

minimum amount must be charged against income. FASB's Interpretation No. 14.

207. Sears, through its strategies of extending credit to risky borrowers through high

limits and multiple cards, extending credit to delinquent borrowers, failing to charge-off accounts

until they were 240 days past due, and utilizing generous workout and re-aging policies, avoided

writing down accounts even after it became "probable" that the borrower would not be able to

repay the entire loan.

208. As a result of these accounting improprieties, the Sears Defendants caused Sears'

reported financial results to violate, among other things, the following provisions of GAAP for

which each defendant is necessarily responsible:

(a) The principle that financial reporting should provide information that is useful to present and potential investors in making rational investment decisions and that information should be


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comprehensible to those who have a reasonable understanding of business and economic activities (FASB Statement of Concepts No. 1, ¶ 34);

(b) The principle of materiality, which provides that the omission or

misstatement of an item in a financial report is material if, in light of the surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item (FASB Statement of Concepts No. 2, ¶ 132);

(c) The principle that financial reporting should provide information

about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it. To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and to the public in general. (FASB Statement of Concepts No. 1);

(d) The principle that financial reporting should provide information

about an enterprise's financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors' expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance. (FASB Statement of Concepts No. 1, ¶ 42);

(e) The principle that financial reporting should be reliable in that it

represents what it purports to represent. The notion that information should be reliable as well as relevant is central to accounting. (FASB Statement of Concepts No. 2, ¶¶ 58-59);

(f) The principle of completeness; which means that nothing is left out

of the information that may be necessary to ensure that it validly represents underlying events and conditions. (FASB Statement of Concepts No. 2, ¶ 80);

(g) The principle that conservatism be used as a prudent reaction to

uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered. The best way to avoid injury to investors is to try to ensure that what is reported


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represents what it purports to represent. (FASB Statement of Concepts No. 2, ¶¶ 95, 97); and

(h) The principle that contingencies that might result in gains are not

reflected in accounts since to do so might be to recognize revenue prior to its realization and that care should be used to avoid misleading investors regarding the likelihood of realization of gain contingencies. (SFAS No. 5, Accounting for Contingencies).

ADDITIONAL SCIENTER ALLEGATIONS

WITH RESPECT TO THE TRADER CLASS SECTION 10B-5 CAUSES OF ACTION

209. As alleged herein, during the Class Period, the Individual Defendants were fully

aware of the problems inherent in the portfolio because of a detailed reporting system that

enabled them to monitor the credit ratings of each consumer on a regular basis. Thus, by issuing

false and misleading statements about the size, profitability, and quality of Sears' credit portfolio,

the Individually Defendants knowingly and/or recklessly deceived the investing public as to the

true value of Sears and, as a direct result, SRAC Debt Securities. The following additional

allegations provide further support for Plaintiffs' scienter allegations.

210. Management represented in Sears' 2001 Form 10-K that it maintained a system of

internal controls to ensure proper accounting and financial disclosures, and that it reviewed loan

loss reserves to ensure that such reserves were adequate to account for likely losses inherent in

the portfolio. Additionally, both Lacy and Liska filed separate statements, under oath, attesting

to the accuracy of the 2001 Form 10-K and all SEC filings dealing with Sears' performance in

2002.

211. The Individual Defendants repeatedly disclosed selected pieces of information

about the MasterCard segment and the Sears Card segment separately, thus demonstrating that

they had knowledge of the performances of these segments on an individual basis and were

aware of the delinquency and charge-off rates for each. For instance, each of Sears' quarterly


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and annual financial statements discussed the average receivables for the Sears MasterCard and

the Sears Card separately, and each discussed the fees and interest charges for these two

segments separately.

212. Additionally, defendants Lacy and Liska admitted on April 18, 2002, that they

were aware of the separate performances of the Sears MasterCard and Sears Card segments.

When directly confronted with a question about the charge-off rate of the Sears MasterCard, the

defendants averred that such data would be "misleading," thus demonstrating that they had both

sets of data, and had made a choice to reveal only information about the combined portfolio.

213. All of Sears' policies for extending credit and increasing credit lines were created

by top Sears executives, as explained below; thus, Sears and the Individual Defendants were

fully aware of its lowered standards during the Class Period.

214. Sears' policies for granting credit, and its risk profiles, were developed at Sears

National Bank in Arizona. The President of the Bank reported directly to Kevin Keleghan, and

worked directly with Vishwanath, to develop profiles for extending credit. These policies were

built into models used by customer services representatives operating at the ground level at

Sears' regional credit centers. There was no discretion at the ground level -- extensions of credit,

and exceptions to credit policies, were entirely controlled by policies set by Sears. Moreover, if

a customer wanted a grant of credit beyond what the profiles would allow, the representative

would have to call the Sears National Bank for authorization.

215. Collections and account services were handled from regional credit centers. Each

center had a collections division and an account services division. The collections division

handled matters pertaining to payment, and account services handled initial grants of credit,


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alterations of credit limits, and general consumer inquiries. For each division, ground level

service representatives or collectors were organized into teams of 10 to 15 people. Each team

had a team manager, who reported to a department manager. Each department manager handled

2-4 teams, and so forth, up to the Director of Asset Management and the Director of Account

Services, each of whom controlled their region. These regional directors each reported to a

National Director. The National Director of Asset Management reported to the Vice President of

Asset Management and Risk Management, and the National Director of Account Services

reported to the Vice President of Account Services. These two Vice Presidents reported to

Keleghan, as the President of Sears Credit, and worked directly with Vishwanath, who also

reported to Keleghan.

216. Every month, information was gathered from the regional centers and compiled

into reports detailing delinquency and charge-off rates. Every quarter, the entire Sears portfolio

would be rescored for credit history based both on Sears' internal data, and on external data from

the various credit bureaus. Reports were compiled detailing the credit scores of Sears

cardholders. These reports were provided to, inter alia, Vishwanath, Keleghan, and Lacy for

their review. Additionally, as Keleghan attested, Sears would rescore particular credit profiles

immediately upon receiving new information about the customer.

217. In fact, according to a former Sears’ employee who served as an analyst in the

credit finance division until November 2001, all senior executives and management received a

Monthly Operating Review (MOR) from each division. MORs, which were circulated in the

second week of each month, compiled all pertinent financial information for each division.

According to this former employee, the MOR from the credit cards division contained profit and


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loss information, including the amount of profits derived from late fees, up-to-date delinquency

figures, and other important information.

218. Significantly, as this former Sears analyst has stated, not only were MORs

distributed to all executive staff, but certain executives would meet to discuss the information

contained therein. As such, in light of their positions within Sears and SRAC, all of the

Individual Defendants would have received MORs containing the information on charge-offs

and delinquencies, the composition of their customers, and/or loan loss reserves. A former

director of information technology at Sears, who was employed at Sears from 1977 to 2003, has

confirmed the preparation and distribution of MORs.

219. In addition to MORs, which kept management directly informed of the problems

in Sears’ credit business, there were monthly meetings at Sears headquarters where such

problems and related issues would be discussed. According to a former head of technology for

the Sears credit division from September 2000 through January 2004 – which encompasses the

Class Period – all Sears credit delinquencies were tracked and discussed in monthly meetings. In

attendance at such meetings were executives in the credit division who worked under Keleghan –

these included Keleghan himself and the vice presidents of risk, marketing, and compliance, as

well as the chief financial officer of the credit division and other employees in that division.

220. Moreover, according to this former credit division employee, not only did

Keleghan meet routinely with Sears CFO Liska to discuss matters addressed in the division

meetings, but he also met with Sears CEO Lacy on occasion. Thus, it is clear that organizational

structures were in place which facilitated the flow of information, through meetings and reports,

to senior management at Sears and SRAC. It is also abundantly apparent that Keleghan, as a


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routine attendee of these monthly meetings, was well aware of the problems in Sears’ credit

business.

221. Further, Sears would hold quarterly meetings for all of the managers and directors

responsible for collections around the country. These meetings were typically held at Sears'

headquarters in Hoffman Estates. Keleghan usually led the meeting but defendant Lacy would

attend as well. The meetings involved extensive discussions of promotional policies, such as the

zero-pay and zero-finance charge arrangements, as well as discussions of delinquency statistics,

credit scores, the effectiveness of the collections operations, and so forth. Each meeting also

included discussions of similar reports that were generated and available at headquarters, and in

the field, detailing payment, delinquency, and charge-off data on a monthly basis.

222. Through these reports, Sears' top management (including the Sears Defendants)

were made personally aware of the credit scores of the entire Sears credit portfolio. Thus, the

Individual Defendants were fully aware throughout the Class Period both of the creditworthiness

of Sears' cardholders and the poor quality of Sears' credit portfolio, and, in addition, the very

deceptive picture the Individual Defendants were giving to investors of both.

223. Additionally, according to another former Sears employee, a twenty-year veteran

of the Company who served as director of finance for Sears’ retail division from 1993 through

2001, senior management held major planning meetings two or three times a year, attended by

all division finance directors, vice presidents, and CEO Alan Lacy’s staff – including CFO Paul

Liska. At these planning meetings, in addition to discussing business strategies, each division

presented key financial information, analyses of each division’s performance, and comparative

analyses with previous years’ performance and projections. These meetings further demonstrate

the flow of information within Sears, and how senior management – including the Individual


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Defendants – were certainly aware of the condition of the credit business when they made the

misrepresentations alleged herein.

224. Vishwanath was particularly familiar with the performance of the portfolio. As

Vice President of Risk Management, it was Vishwanath's job to develop models for granting and

extending credit, models for the expected delinquencies and charge-offs associated with grant or

extension of credit, and to then monitor the actual performance of the portfolio to determine

whether the accounts were behaving as predicted by the models. Indeed, according to a former

senior manager of capital planning and director of finance for information technology who was

employed by Sears from August 2000 through October 2003, and who worked directly with

Vishwanath, all credit finance models within the Company were under Vishwanath’s control. It

was, according to this former senior manager, Vishwanath who directly supervised the

consultants who built the credit models and it was Vishwanath who controlled the data that was

released and disseminated.

225. Each Sears cardholder had a billing cycle, lasting about one month, but the cycle

start and end dates varied among accounts. Vishwanath would receive reports from the regional

credit centers on at least a weekly basis detailing the payment, delinquency, and charge-off rates

for each of the cycles that had been completed in that past week. Through such detailed

information, Vishwanath was kept fully aware of the true status of delinquencies and charge-offs

within the Sears portfolio.

226. Sears and the Individual Defendants were kept apprised of the state of the credit

business by virtue of a DOS-based computer program known as TSYS, which stands for Total

System. According to a former Sears national management employee, who worked at Sears


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from June 2002 until January 2003, TSYS processed and tracked all credit card transactions, as

well as delinquencies and charge-offs. If a credit card payment was not received by the time that

it was due, the account was automatically updated in the TSYS system. Significantly, TSYS

could be viewed at any point in time so that managers could be kept informed of current

delinquency and charge-off data – which, significantly, was the very type of information, inter

alia, that the Individual Defendants were misrepresenting. Thus, the TSYS system made

available to each Individual Defendant the true state of Sears’ delinquency and charge-off rates.

227. Moreover, Sears and the Individual Defendants were made aware of the problems

in the MasterCard portfolio through the difficulties encountered in collecting on those accounts.

Sears' financial statements show increases in administrative costs associated with collections.

228. Indeed, Sears was no stranger to precisely the kinds of problems that occur when

credit is extended to risky borrowers. In 1993, when Sears first allowed third party credit cards

to be used in its stores, Sears had aggressively marketed its proprietary cards and lowered its

credit standards, doubling its card base by 1996. In March 1997, Sears' then-President of Credit,

Steven Goldstein, told the industry publication Credit Card Management that the rapid increase

in size did not pose a threat to the stability of the business: "We continue to refine our models...

We have maintained or improved our underwriting standards over the past few years. We

maintain a very sound credit portfolio." Despite these reassurances, by the fourth quarter of that

same year, Sears had taken a huge charge to deal with uncollectible accounts, and finished the

year as a creditor in more than one third of all personal bankruptcies. Both Lacy and Keleghan

were deeply involved with Sears' problems at the time - Lacy was Chief Financial Officer, and

succeeded Goldstein when he was forced out as President of Credit in 1997. Keleghan served as


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Vice President of Sears Credit Risk Management from 1996 until he succeeded Lacy as

President of Credit in 1999.

229. In fact, in the early days of the MasterCard rollout, Lacy explicitly promised

investors that history would not repeat itself. In a conference call on April 19, 2001, Lacy told

analysts:

It's [the credit card business] well managed. We had some issues several years ago but really, it's a whole new team in our credit organization and Kevin [Keleghan] in particular gets a lot of credit from me in terms of the j ob that he's done assembling a best-in-class team and really taking that business to a new level. And it does have improving growth prospects, particularly with the MasterCard launch. 230. Finally, Sears was aware of the problems with fraudulent billings. Additionally,

Sears' financial statements for throughout the Class Period admit to ever-higher expenses as a

result of increasing losses due to fraud, particularly fraud associated with the MasterCard rollout.

231. The Individual Defendants were also motivated to commit fraud. Sears' Retail

segment was failing, particularly with respect to its apparel lines. By artificially inflating its

earnings and the value of its credit portfolio, Sears was able to use credit-card backed securities

and higher debt ratings to raise the funds to purchase Lands' End, a desperately needed addition.

232. Sears was also able to use its phantom earnings to finance expensive initiatives

intended to revitalize its ailing Retail Segment. For instance, Lacy repeatedly stated that he

placed a high priority on Sears' Great Indoors line of stores. He identified the Great Indoors as

one of three major Company initiatives in October 2000, but the stores required extremely high

startup costs and were not immediately profitable.

233. Keleghan, in his role as President of Sears Credit, was personally responsible for

the implementation of Sears' risk management policies with respect to its credit portfolio.


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Additionally, according to a former director of information technology at Sears, who worked for

the Company between 1977 and 2003, Keleghan, with the assistance of Vishwanath, developed a

computer program that conducted risk analyses for the credit card portfolio. This program,

which was launched in 1999, was integrated with the TSYS system – and its tracking of

delinquency, charge-off, and other data -- to analyze the portfolio and inform management,

including Keleghan and Vishwanath, about its strengths and weaknesses.

234. The Individual Defendants had a duty to undertake adequate due diligence and

disseminate accurate and truthful information with respect to Sears' operations and its credit

portfolio, or to cause and direct that such information be disseminated. As a result of their

failure to do so, the price of SRAC Debt Securities was artificially inflated during the Class

Period, damaging Plaintiffs and the Trader Class.

APPLICABILITY OF PRESUMPTION OF RELIANCE WITH RESPECT TO THE TRADER CLASS:

FRAUD-ON-THE-MARKET DOCTRINE

235. The market for the SRAC Debt Securities was open, well-developed and efficient

at all relevant times. As a result of these materially false and misleading statements and failures

to disclose, the SRAC Debt Securities traded at artificially inflated prices during the Class

Period. Plaintiff and other members of the Class purchased or otherwise acquired the SRAC

Debt Securities relying upon the integrity of the market price of the SRAC Debt Securities and

market information relating to Sears and/or SRAC, and have been damaged thereby.

236. During the Class Period, the Individual Defendants materially misled the

investing public, thereby inflating the price of the SRAC Debt Securities by publicly issuing

false and misleading statements and omitting to disclose material facts necessary to make the

Individual Defendants' statements, as set forth herein, not false and misleading. Said statements


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and omissions were materially false and misleading in that they failed to disclose material

adverse information and misrepresented the truth about Sears, its business and operations, as

alleged herein.

237. At all relevant times, the material misrepresentations and omissions particularized

in this Complaint directly or proximately caused or were a substantial contributing cause of the

damages sustained by Plaintiffs and other members of the Trader Class. As described herein,

during the Class Period, defendants made or caused to be made a series of materially false or

misleading statements about Sears' and/or SRAC's business, prospects and operations. These

material misstatements and omissions had the cause and effect of creating in the market an

unrealistically positive assessment of Sears and its business, prospects and operations – which

had a material impact on SRAC owing to its inter-relationship with Sears -- thus causing Sears'

securities to be overvalued and artificially inflated at all relevant times. Defendants' materially

false and misleading statements during the Class Period resulted in members of the Trader Class

purchasing SRAC Debt Securities at artificially inflated prices, thus causing the damages

complained of herein.

238. At all relevant times, the market for the SRAC Debt Securities was efficient for

the following reasons, among others:

(a) SRAC's securities met the requirements for listing, and was listed and actively traded on both the NYSE and the NASDAQ Fixed Income Pricing System, a highly efficient and automated market;

(b) As a regulated issuer, SRAC filed periodic public reports with the

SEC and the NYSE; and (c) Through Sears, public investors were apprised of SRAC via

established market communication mechanisms, including through regular disseminations of press releases on the national


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circuits of major newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services.

239. In connection with their analysis of Sears, several securities analysts employed by

major brokerage firms also followed SRAC. These analysts wrote reports that were distributed

to the sales force and certain customers of their respective brokerage firms. Each of these reports

was publicly available and entered the public marketplace.'

240. SRAC was also followed by several ratings agencies which wrote reports

regarding SRAC Debt Securities. Each of these reports was publicly available and entered the

public marketplace.

241. As a result of the foregoing, the market for the SRAC Debt Securities promptly

digested current information regarding both Sears and SRAC from all publicly available sources

and reflected such information in the SRAC Debt Securities price and yield. Under these

circumstances, all purchasers of the SRAC Debt Securities during the Class Period suffered

similar injury through their purchase of the SRAC Debt Securities at artificially inflated prices

and yields. A presumption of reliance therefore applies.

NO SAFE HARBOR

242. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

Many of the specific statements pleaded herein were not forward looking, but were instead false

representations of the current value of SRAC Debt Securities and false representations of Sears'

internal risk management policies and the direct impact of those policies on SRAC and its

operations. Additionally, many of the statements were included in documents that were claimed

to have been prepared in accordance with GAAP, thus excluding them from the safe harbor. To


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the extent there were any forward-looking statements, any cautions provided to investors were

inadequate to warn of the precarious state of Sears' and SRAC's investment portfolio. Moreover,

defendants are liable for those false forward-looking statements because at the time each of those

forward-looking statements was made, the particular speaker knew that the particular forward-

looking statement was false, and/or the forward-looking statement was authorized and/or

approved by an executive officer of Sears or SRAC who knew that those statements were false

when made.

FIRST CLAIM (On Behalf of the Issuer Class)

Violation Of Section 11 Of The Securities Act [15 U.S.C. §77k]

Against Defendants SRAC, Trost, Slook, Liska, Raymond, Richter, Bergmann, CSFB and Goldman Sachs In Connection With The 3/18/02 Offering

243. This Claim for relief is brought pursuant to § 11 of the Securities Act, 15 U.S.C. §

77k, against defendants SRAC, Trost, Slook, Liska, Raymond, Richter, Bergmann, CSFB and

Goldman Sachs in connection with the 3/18/02 Offering.

244. Plaintiffs incorporate by reference and reallege all paragraphs previously alleged,

except that, for purposes of this Count, Plaintiffs do not allege that the defendants named herein

are liable for fraudulent, reckless or intentional conduct and disclaim any allegations of such

conduct, and of scienter, as it relates to this Count.

245. This Count is brought by Plaintiffs against defendants SRAC, Trost, Slook, Liska,

Raymond, Richter, Bergmann, CSFB and Goldman Sachs, on behalf of all persons and entities

who purchased or otherwise acquired SRAC Debt Securities pursuant to the 3/18/02 Offering.

246. The SRAC Debt Securities were issued pursuant to a Registration Statement and

accompanying Prospectus (the "Registration Statement") filed with the SEC on or about


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September 3, 1998, and to a Prospectus and Prospectus Supplement filed with the SEC on or

about March 18, 2002.

247. Defendant SRAC was the issuer of the SRAC Debt Securities at the time of the

filing the Registration Statement with respect to which liability is asserted

248. Defendants Trost, Slook, Liska, Raymond, Richter and Bergmann were each a

director (or person performing similar functions) of SRAC, the issuer of the SRAC Debt

Securities, at the time of the filing of the part of the Registration Statement with respect to which

liability is asserted.

249. CSFB and Goldman Sachs are each liable as an underwriter in connection with

the 3/18/02 Offering.

250. The Registration Statement, including the documents incorporated therein, when

they became effective, contained untrue statements of material facts. The defendants named

herein failed to make a reasonable investigation or possess reasonable grounds for believing that

the representations contained in the Registration Statement, including the documents

incorporated therein, were true and without omissions of any material facts and were not

misleading. By virtue of the misleading representations contained in the Registration Statement,

including the documents incorporated therein, members of the Issuer Class that purchased SRAC

Debt Securities issued pursuant to the 3/18/02 Offering were damaged.

251. Pursuant to the Registration Statement, SRAC offered $600 million of 6.70%

SRAC Debt Securities due April 15, 2012. The SRAC Debt Securities were the direct,

unsecured and unsubordinated obligations of SRAC that would rank equally with all of SRAC's

other unsecured and unsubordinated debt.


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252. The Registration Statement, including the documents incorporated therein,

contained misleading statements about SRAC's and Sears' finances, financial condition and

present and future business prospects that had a material and adverse effect on the value of

SRAC Debt Securities issued thereunder, the ratings assigned to such securities and the interest

rate under which they were issued to the market. Specifically, defendants named herein misled

investors by portraying Sears' credit operations and its credit portfolio as strong and stable. The

reality was that Sears' credit operations and portfolio were anything but strong and stable. For

example, delinquencies in the credit portfolio had risen every quarter during the Class Period.

253. SRAC Debt Securities at issue in this Count were directly and commensurately

impacted by adverse information relating to Sears. The parent-subsidiary relationship between

the Sears and SRAC was such that the market value of SRAC Debt Securities, the credit rating

assigned to those securities by the various rating agencies (Standard & Poor's, Moody's, Fitch's)

and the interest rate under which those securities were offered to the market, led investors to

believe that when they purchased a SRAC Debt Security they were, in effect, making an

investment directly related to, and affected by, Sears' finances, financial condition and present

and future operations. Consequently, purchasers of SRAC Debt Securities, were damaged by the

same false and misleading statements that artificially inflated the price of Sears common stock


254. As demonstrated herein, both SRAC and the SRAC Defendants misrepresented

the poor quality of Sears' operations and credit portfolio in the Registration Statement, including

the documents incorporated therein. These defendants failed to undertake a reasonable

investigation or possess reasonable grounds for the belief that the statements in the Registration


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Statement, including the documents incorporated therein, were true and without omissions of any

material facts and were not misleading. As a result, these defendants failed to disclose the truth

about Sears' operations and credit portfolio and misled investors into believing that the value of

the SRAC Debt Securities, including the ratings assigned to such securities as well as the interest

rate under which they were sold, accurately reflected Sears' and SRAC's finances, financial

condition and present and future operations.

255. Similarly, the Underwriter Defendants named herein misrepresented the poor

quality of Sears' operations and credit portfolio in the Registration Statement, including the

documents incorporated therein. The Underwriter Defendants named herein failed to undertake

a reasonable investigation or possess reasonable grounds for the belief that the statements in the

Registration Statement, including the documents incorporated therein, were true and without

omissions of any material facts and were not misleading. As a result, the Underwriter

Defendants named herein failed to disclose the truth about Sears' operations and credit portfolio

and misled investors into believing that the value of the SRAC Debt Securities, including the

ratings assigned to such securities as well as the interest rate under which they were sold,

accurately reflected Sears' and SRAC's finances, financial condition and present and future

operations.

256. The SRAC Debt Securities issued under the 3/18/02 Offering did not warrant the

rating assigned by various rating agencies, and the interest rate under which the securities were

sold did not accurately reflect the risk inherent in purchasing these securities. The SRAC Debt

Securities were therefore overvalued at the time they were issued to the market.

257. In light of the inter-relationship between SRAC and Sears, as discussed above, it

was reasonable for investors to believe that the ratings and yields on SRAC Debt Securities


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would reflect the finances, financial condition and present and future operations of both SRAC

and Sears. The reasonableness of that belief was furthered by the absence of a "Risk Factor"

section to advise potential investors that the ratings and yields for SRAC Debt Securities were

independent of Sears' financial performance and any positive or adverse information regarding

Sears that was disseminated to the investment community.

258. The purchase of SRAC Debt Securities, including those issued pursuant to the

3/18/02 Offering, was commensurate with purchase and trading in Sears' securities.

Consequently, when Sears reported adverse information regarding its finances, financial

condition and business prospects, and its securities suffered steep declines at the end of the Class

Period, the value of SRAC Debt Securities dropped steeply as well.

259. The Registration Statement filed jointly by SRAC and Sears on September 3,

1998, as did later offering documents issued by SRAC, incorporated by reference various SEC

future filings of both Sears and SRAC, including:

[A]ll documents filed by SRAC or Sears with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus and before SRAC stops offering the debt securities (other than those portions of such documents described in paragraphs (i), (k), and (l) of Item 402 of Regulation S-K promulgated by the Commission). 260. As a result, documents filed with the SEC by Sears and SRAC during the Class

Period were incorporated by reference in the Registration Statement. As alleged more

specifically above, many of these documents were materially false and misleading.

261. For example, during the Class Period, on January 10, 2002 and January 17, 2002,

Sears filed two SEC Forms 8-K with the SEC. The Form 8-K for January 10, 2002 stated that

Sears' management continued to be pleased with the "improving trends in the balance and


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revenue growth in [Sears'] credit business [and] … [Sears' credit] portfolio quality remains solid,

with delinquency levels flat compared to the prior year period." Similarly, the Form 8-K for

January 17, 2002 stated that, for the quarter just ending, Sears' credit portfolio quality had

remained stable with flat year-over-year delinquencies. The domestic allowance for

uncollectible accounts of $1.1 billion is flat as a percentage of ending credit receivables.

262. However, as defendants either knew or should have known, Sears' repeated

representations concerning its credit operations and Sears' reported financial performance were

materially false and misleading. For example, although Sears represented that delinquencies had

remained "flat" and that the credit portfolio was "stable," the truth was that Sears Card

delinquencies had increased to 8.91%, up from 7.94% for the fourth quarter of 2000, and Sears

card charge-offs had increased 20% from year-end 2000. Further, Sears MasterCard

delinquencies had jumped from 0.38% at year-end 2000, to 1.97% in the fourth quarter of 2001,

and MasterCard charge-offs had increased from 2.02% in the third quarter to 2.09% in the fourth

quarter.

263. Sears also filed its annual report, SEC Form 10-K, for the year ending December

29, 2001 (the "Sears 2001 Form 10-K"). The Sears 2001 Form 10-K stated that: (a) the Sears

MasterCard product had been successful in offsetting the declining trend in average managed

balances in 2001; (b) despite increasing bankruptcy filings in 2001, the delinquency rate for 2001

remained relatively flat with 2000; and (c) Sears "promptly recognizes uncollectible accounts

and maintains an adequate allowance for uncollectible accounts to reflect losses inherent in the

owned portfolio as of the balance sheet date." However, despite Sears' claim of "flat"

delinquency rates, the delinquency rates for both Sears' proprietary cards and Sears MasterCard

had risen every quarter. By the end of the year, Sears card delinquencies had increased by 13%


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from 7.86% to 8.91% at year's end. For the Sears MasterCard, delinquencies had increased 73%,

from 1.15% in the first quarter to 1.97% at year's end.

264. In connection with the 3/18/02 offering of SRAC Debt Securities, the defendants

listed in this Count issued a Registration Statement, Prospectus, and Prospectus Supplement that

omitted to disclose material facts which were necessary to make the Registration Statement,

Prospectus, and Supplement not misleading. The Registration Statement, Prospectus, and

Supplement were, for the reasons set forth above, false and materially misleading.

265. By reason of the conduct alleged herein, each defendant named in this Count

violated §11 of the Securities Act. As a direct and proximate result of these defendants'

wrongful conduct, those Class members that purchased SRAC Debt Securities issued pursuant to

the 3/18/02 Offering suffered substantial damage in connection with the purchase of SRAC Debt

Securities.

266. The Defendants named in this Count are liable to those Class members that

purchased SRAC Debt Securities issued pursuant to the 3/18/02 Offering pursuant to the

Registration Statement, Prospectus, and Prospectus Supplement, pursuant to §11 of the Securities

Act. This action was brought within one year after the discovery of the omissions, or after such

discovery should have been made by the exercise of reasonable diligence, and within three years

after the SRAC Debt Securities were offered to the public.

267. By virtue of the foregoing, those Class members that purchased SRAC Debt

Securities issued pursuant to the 3/18/02 Offering have sustained damages as a result of the

wrongful acts of the defendants named herein.


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SECOND CLAIM (On Behalf of the Issuer Class)

Violation Of Section 11 Of The Securities Act [15 U.S.C. §77k

Against Defendants SRAC, Trost, Slook, Liska, Raymond, Richter, Bergmann Morgan Stanley, Bear Stearns and Lehman In Connection With The 5/21/02 Offering

268. This Claim for Relief is brought pursuant to § 11 of the Securities Act, 15 U.S.C.

§ 77k, against defendants SRAC, Trost, Slook, Liska, Raymond, Richter, Bergmann, Morgan

Stanley, Bear Stearns and Lehman in connection with the 5/21/02 Offering.






Raymond, Richter, Bergmann, Morgan Stanley, Bear Stearns and Lehman, on behalf of all

persons and entities who purchased or otherwise acquired SRAC Debt Securities pursuant to the

5/21/02 Offering.




about May 21, 2002.


filing of the Registration Statement with respect to which liability is asserted




- 92 -



274. Morgan Stanley, Bear Stearns and Lehman are each liable as an underwriters in

connection with the 5/21/02 Offering.









276. Pursuant to the Registration Statement, SRAC offered $1 billion of 7.0% SRAC

Debt Securities due June 1, 2032. The SRAC Debt Securities were the direct, unsecured and

unsubordinated obligations of SRAC that would rank equally with all of SRAC's other unsecured

and unsubordinated debt.






investors by portraying Sears' operations and credit portfolio as strong and stable. The reality


- 93 -

was that Sears' credit operations and portfolio was anything but strong and stable. For example,

delinquencies in the credit portfolio had risen every quarter during the Class Period.











279. As demonstrated herein, both SRAC and the SRAC Defendants named herein

misrepresented the poor quality of Sears' operations and credit portfolio in the Registration

Statement, including the documents incorporated therein. These defendants failed to undertake a

reasonable investigation or possess reasonable grounds for the belief that the statements in the


omissions of any material facts and were not misleading. As a result, these defendants failed to

disclose the truth about Sears' operations and credit portfolio and misled investors into believing

that the value of the SRAC Debt Securities, including the ratings assigned to such securities as

well as the interest rate under which they were sold, accurately reflected Sears' and SRAC's

finances, financial condition and present and future operations.


- 94 -

280. Similarly, the Underwriter Defendants named herein misrepresented the poor

quality of Sears' operations and credit portfolio in the Registration Statement, including the

documents incorporated therein. The Underwriter Defendants named herein failed to undertake

a reasonable investigation or possess reasonable grounds for the belief that the statements in the


omissions of any material facts and were not misleading. As a result, the Underwriter

Defendants named herein failed to disclose the truth about Sears' operations and credit portfolio

and misled investors into believing that the value of the SRAC Debt Securities, including the

ratings assigned to such securities as well as the interest rate under which they were sold,

accurately reflected Sears' and SRAC's finances, financial condition and present and future

operations.













- 95 -

283. The purchase of SRAC Debt Securities, including the 7.0% SRAC Debt

Securities, was commensurate with purchase and trading in Sears' securities. Consequently,

when Sears reported adverse information regarding its finances, financial condition and business

prospects, and its securities suffered steep declines at the end of the Class Period, the value of

SRAC Debt Securities dropped steeply as well.

284. The Registration Statement and accompanying Prospectus filed jointly by SRAC

and Sears on September 3, 1998, as did later offering documents issued by SRAC, incorporated

by reference various SEC filings of both Sears and SRAC, including:

[A]ll documents filed by SRAC or Sears with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus and before SRAC stops offering the debt securities (other than those portions of such documents described in paragraphs (i), (k), and (l) of Item 402 of Regulation S-K promulgated by the Commission). 285. As a result, documents filed with the SEC by both Sears and SRAC during the

Class Period were incorporated by reference in the Registration Statement. As alleged more











- 96 -









quarter.

288. Also during the Class Period, on April 10, 2002 and April 18, 2002, Sears filed

two more SEC Forms 8-K with the SEC. As alleged above, both Forms 8-K continued to tout

the performance of Sears' Credit. Similarly, Sears' SEC Form 10-Q for the quarter ending March

31, 2002 repeated the financial information contained in the Form 8-K, and went on the state that

Sears' Credit had continued to perform strongly with continued improvement in delinquency

rates.

289. However, Sears' repeated representations concerning its credit operations and

Sears' reported financial performance for the first quarter of 2002 was materially false and

misleading. In truth, Sears MasterCard charge-offs had soared from .80% in the first quarter of

2001 to 2.65% in the first quarter of 2002. Delinquencies had risen from 1.15% in the first

quarter of 2001 to 2.55% in the first quarter of 2002. Sears' proprietary card charge-offs had also

risen while delinquencies had jumped from 7.86% in the first quarter of 2001 to 8.77% in the

first quarter of 2002.


- 97 -


29, 2001 (the "Sears 2001 Form 10-K"). The Sears 2001 Form 10-K stated that: (a) the Sears



















Securities.

293. The defendants named in this Count are liable to those Class members that



- 98 -





294. By virtue of the foregoing, those members of the Issuer Class that purchased

SRAC Debt Securities issued pursuant to the 5/21/02 Offering have sustained damages as a

result of the wrongful acts of the defendants named herein.

THIRD CLAIM (On Behalf of the Issuer Class)

Violation Of Section 11 Of The Securities Act [15 U.S.C. §77k]

Against Defendants SRAC, Trost, Slook, Liska, Raymond, Richter, Bergmann and Merrill Lynch In Connection With the 6/21/02 Offering

295. This Claim for Relief is brought pursuant to § 11 of the Securities Act, 15 U.S.C.

§ 77k, against defendants SRAC, Trost, Slook, Liska, Raymond, Richter, Bergmann and Merrill

Lynch in connection with the 6/21/02 Offering.






Raymond, Richter, Bergmann and Merrill Lynch, on behalf of all persons and entities who

purchased or otherwise acquired SRAC Debt Securities pursuant to the 6/21/02 Offering.




- 99 -


about June 21, 2002.


filing the Registration Statement with respect to which liability is asserted.





301. Merrill Lynch is liable as an underwriters in connection with the 6/21/02

Offering.









303. Pursuant to the Registration Statement, SRAC offered $250 million of 7.0%

SRAC Debt Securities due July 15, 2032. The SRAC Debt Securities were the direct, unsecured

and unsubordinated obligations of SRAC that would rank equally with all of SRAC's other

unsecured and unsubordinated debt.


- 100 -






investors by portraying Sears' credit operations and its credit portfolio as strong and stable. The

reality was that Sears' credit operations and portfolio was anything but strong and stable. For

example, delinquencies in the credit portfolio had risen every quarter during the Class Period.











306. As demonstrated herein, both SRAC and the SRAC Defendants named herein

misrepresented the poor quality of Sears' operations and credit portfolio in the Registration

Statement, including the documents incorporated therein. These defendants failed to undertake a

reasonable investigation or possess reasonable grounds for the belief that the statements in the


- 101 -


omissions of any material facts and were not misleading. As a result, these defendants failed to

disclose the truth about Sears' operations and credit portfolio and misled investors into believing

that the value of the SRAC Debt Securities, including the ratings assigned to such securities as

well as the interest rate under which they were sold, accurately reflected Sears' and SRAC's

finances, financial condition and present and future operations.

307. Similarly, Merrill Lynch misrepresented the poor quality of Sears' operations and

credit portfolio in the Registration Statement, including the documents incorporated therein.

Merrill Lynch failed to undertake a reasonable investigation or possess reasonable grounds for

the belief that the statements in the Registration Statement, including the documents incorporated

therein, were true and without omissions of any material facts and were not misleading. As a

result, Merrill Lynch failed to disclose the truth about Sears' operations and credit portfolio and

misled investors into believing that the value of the SRAC Debt Securities, including the ratings

assigned to such securities as well as the interest rate under which they were sold, accurately

reflected Sears' and SRAC's finances, financial condition and present and future operations.










- 102 -




310. The purchase of SRAC Debt Securities, including the 7.0% SRAC Debt

Securities, was commensurate with the purchase of, and trading in, Sears' securities.

Consequently, when Sears reported adverse information regarding its finances, financial

condition and business prospects, and its securities suffered steep declines at the end of the Class

Period, the value of SRAC Debt Securities dropped steeply as well.

311. The Registration Statement and accompanying Prospectus filed jointly by SRAC

and Sears on September 3, 1998, as did later offering documents issued by SRAC, incorporated

by reference various SEC filings of both Sears and SRAC, including:

[A]ll documents filed by SRAC or Sears with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus and before SRAC stops offering the debt securities (other than those portions of such documents described in paragraphs (i), (k), and (l) of Item 402 of Regulation S-K promulgated by the Commission). 312. As a result, documents filed with the SEC by both Sears and SRAC during the

Class Period were incorporated by reference in the Registration Statement. As alleged more








- 103 -












quarter.

315. Also during the Class Period, on April 10, 2002 and April 18, 2002, Sears filed

two more SEC Forms 8-K with the SEC. As alleged above, both Forms 8-K for continued to

tout the performance of Sears' Credit. Similarly, Sears' SEC Form 10-Q for the quarter ending

March 31, 2002 repeated the financial information contained in the Form 8-K, and went on the

state that Sears' Credit had continued to perform strongly with continued improvement in

delinquency rates.

316. However, Sears' repeated representations concerning its credit operations and

Sears' reported financial performance for the first quarter of 2002 was materially false and

misleading. In truth, Sears MasterCard charge-offs had soared from.80% in the first quarter of

2001 to 2.65% in the first quarter of 2002. Delinquencies had risen from 1.15% in the first

quarter of 2001 to 2.55% in the first quarter of 2002. Sears' proprietary card charge-offs had also


- 104 -

risen while delinquencies had jumped from 7.86% in the first quarter of 2001 to 8.77% in the

first quarter of 2002.


29, 2001 (the "Sears 2001 Form 10-K"). The Sears 2001 Form 10-K stated that (a) the Sears



















- 105 -


Securities.

320. The Defendants named in this Count are liable to those Class members that






321. By virtue of the foregoing, those Class members that purchased SRAC Debt

Securities issued pursuant to the 6/21/02 Offering have sustained damages as a result of the

wrongful acts of the defendants named herein.

FOURTH CLAIM (On Behalf of the Issuer Class)

Violation Of Section 12(a)(2) of the Securities Act

[15 U.S.C. §77l(a)(2)] Against CSFB and Goldman Sachs In Connection With The 3/18/02 Offering

322. Plaintiffs incorporate by reference and reallege all paragraphs previously alleged

herein, except to the extent such allegations charge these Defendants with intentional or reckless

misconduct as it relates to this claim.

323. This count is brought for violations of Section 12(a)(2) of the Securities Act, on

behalf of the Issuer Class against defendants CSFB and Goldman Sachs

324. This Count is brought by Plaintiffs against the Defendants on behalf of

themselves and all persons or entities who purchased or otherwise acquired securities traceable

to the 3/18/02 Offering and were damaged thereby.


- 106 -

325. Pursuant to the 3/18/02 Offering Prospectus, SRAC, a wholly-owned subsidiary

of Sears, issued 6.70% SRAC Debt Securities with an aggregate face amount of $600 million.

The SRAC Debt Securities were issued in denominations of $1,000, and integral multiples of

$1,000, and had a maturity date of June 1, 2032.

326. The 3/18/02 Offering Prospectus, which contained the documents incorporated by

reference therein, as set forth above, were inaccurate and misleading, contained untrue

statements of material facts, omitted to state other facts necessary to make the statements made

not misleading, and concealed and failed adequately to disclose material facts, as set forth in

greater detail above. CSFB and Goldman Sachs acted to sell shares of the SRAC Debt Securities

by way of the 3/18/02 Offering Prospectus. The actions included participating in the preparation

of the 3/18/02 Offering Prospectus and other material used in the sale of the SRAC Debt

Securities sold through the 3/18/02 Offering.

327. SRAC is the registrant for the SRAC Debt Securities sold through the 3/18/02

Offering and purchased by members of the Issuer Class. SRAC issued, caused to be issued and

participated in the issuance of materially false and misleading written statements to the investing

public which were contained in the 3/18/02 Offering Prospectus, which misrepresented or failed

to disclose, inter alia, the facts set forth above.

328. The actions of Defendants thereby solicited the sale of the SRAC Debt Securities

for their personal financial gain. These actions included participating in the preparation of the

materially false and misleading 3/18/02 Offering Prospectus, and materials incorporated by

reference, used in the sale of the SRAC Debt Securities under the 3/18/02 Offering.


- 107 -

329. Defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though such facts were available to them. Defendants'

material misrepresentations and/or omissions were made knowingly or recklessly and for the

purpose and effect of concealing the truth with respect to the SRAC's and Sears' operations,

business management, performance and prospects from the investing public and supporting the

artificially inflated price of the SRAC Debt Securities.

330. Issuer Class members acquired the SRAC Debt Securities issued pursuant to the

3/18/02 Offering Prospectus and were damaged as a result.

331. At the times they purchased the SRAC Debt Securities, members of the Class

were without knowledge of the facts concerning the wrongful conduct alleged herein and could

not have reasonably discovered those facts.

332. By reason of the conduct alleged herein, Defendants named in this count violated

Section 12(a)(2) of the Securities Act. Members of the Issuer Class who hold the SRAC Debt

Securities, have the right to rescind and recover the consideration paid for the SRAC Debt

Securities and hereby elect to rescind and tender their SRAC Debt Securities to the defendants

sued herein. Members of the Issuer Class who have sold their SRAC Debt Securities are entitled

to rescissory damages.

333. Less than one year has elapsed from the time that Class members discovered or

reasonably could have discovered the facts upon which this Complaint is based to the time of

filing this Complaint. Less than three years has elapsed from the time that those securities upon

which this claim is asserted were bona fide offered to the public to the time of filing this

Complaint.


- 108 -

FIFTH CLAIM (On Behalf of the Issuer Class)

Violation Of Section 12(a)(2) of the Securities Act

[15 U.S.C. §77l(a)(2)] Against Morgan Stanley, Bear Stearns, and Lehman In Connection With The 5/21/02 Offering


herein, except to the extent such allegations charge defendants named herein with intentional or

reckless misconduct as it relates to this claim.

335. This Count is brought for violations of Section 12(a)(2) of the Securities Act, on

behalf of the Issuer Class against defendants Morgan Stanley, Bear Stearns and Lehman.

336. This Count is brought by Plaintiffs against the Defendants on behalf of

themselves and all persons or entities who purchased or otherwise acquired securities traceable

to the 5/21/02 Offering and were damaged thereby.


of Sears, issued 7.0% SRAC Debt Securities with an aggregate face amount of $1 billion. The

SRAC Debt Securities were issued in denominations of $1,000, and integral multiples of $1,000,

and had a maturity date of June 1, 2032.





greater detail above. Morgan Stanley, Bear Stearns and Lehman acted to sell shares of the

SRAC Debt Securities by way of the 5/21/02 Offering Prospectus. The actions included


- 109 -

participating in the preparation of the 5/21/02 Offering Prospectus and other material used in the

sale of the SRAC Debt Securities sold through the 5/21/02 Offering.






340. The actions of Defendants thereby solicited the sale of the SRAC Debt Securities

for their personal financial gain. These actions included participating in the preparation of the

materially false and misleading 5/21/02 Offering Prospectus, and materials incorporated by

reference, used in the sale of the SRAC Debt Securities under the 5/21/02 Offering.

341. Defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though such facts were available to them. Defendants'




artificially inflated price of the SRAC Debt Securities.

342. Issuer Class Members acquired the SRAC Debt Securities issued pursuant to the

5/21/02 Offering Prospectus and were damaged as a result.

343. At the times they purchased the SRAC Debt Securities, members of the Issuer

Class were without knowledge of the facts concerning the wrongful conduct alleged herein and

could not have reasonably discovered those facts.


- 110 -

344. By reason of the conduct alleged herein, Defendants named in this Count violated


Securities, have the right to rescind and recover the consideration paid for the SRAC Debt

Securities and hereby elect to rescind and tender their SRAC Debt Securities to the defendants

sued herein. Members of the Issuer Class who have sold their SRAC Debt Securities are entitled

to rescissory damages.

345. Less than one year has elapsed from the time that Issuer Class members

discovered or reasonably could have discovered the facts upon which this Complaint is based to

the time of filing this Complaint. Less than three years has elapsed from the time that those

securities upon which this claim is asserted were bona fide offered to the public to the time of

filing this Complaint.

SIXTH CLAIM (On Behalf of the Issuer Class)

Violation Of Section 12(a)(2)

of the Securities Act [15 U.S.C. §77l(a)(2)] Against Merrill Lynch In Connection With The 6/21/02 Offering


herein, except to the extent such allegations charge defendant Merrill Lynch with intentional or

reckless misconduct as it relates to this claim.

347. This Count is brought for violations of Section 12(a)(2) of the Securities Act, on

behalf of the Class against defendant Merrill Lynch.

348. This Count is brought by Plaintiffs against the defendant Merrill Lynch on behalf

of themselves and all persons or entities who purchased or otherwise acquired debt securities

traceable to the 6/21/02 Offering and were damaged thereby.


- 111 -


of Sears, issued 7.0% SRAC Debt Securities with an aggregate face amount of $250 million.

The SRAC Debt Securities were issued in denominations of $25, and integral multiples of $25,

and had a maturity date of July 15, 2042.





greater detail above. Merrill Lynch acted to sell shares of the 6/21/02 SRAC Debt Securities by

way of the 6/21/02 Offering Prospectus. The actions included participating in the preparation of

the 6/21/02 Offering Prospectus and other material used in the sale of the SRAC Debt Securities

sold through the 6/21/02 Offering.






352. The actions of defendant Merrill Lynch thereby solicited the sale of the 6/21/02

SRAC Debt Securities for its personal financial gain. These actions included participating in the

preparation of the materially false and misleading 6/21/02 Offering Prospectus, and materials

incorporated by reference, used in the sale of the SRAC Debt Securities under the 6/21/02

offering.


- 112 -

353. Defendant had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that it failed to

ascertain and to disclose such facts, even though such facts were available to it. Defendant's




artificially inflated price of the 6/21/02 SRAC Debt Securities.

354. Plaintiffs and members of the Issuer Class acquired the SRAC Debt Securities

issued pursuant to the 6/21/02 Offering Prospectus and were damaged as a result.

355. At the times they purchased the SRAC Debt Securities, neither Plaintiffs nor

members of the Issuer Class had any knowledge of the facts concerning the wrongful conduct

alleged herein and could not have reasonably discovered those facts.

356. By reason of the conduct alleged herein, Defendant named in this Count violated


Securities, have the right to rescind and recover the consideration paid for the 6/21/02 SRAC

Debt Securities and hereby elect to rescind and tender their 6/21/02 SRAC Debt Securities to the

defendant sued herein. Members of the Issuer Class who have sold their 6/21/02 SRAC Debt

Securities are entitled to rescissory damages.

357. Less than one year has elapsed from the time that Issuer Class members

discovered or reasonably could have discovered the facts upon which this Complaint is based to

the time of filing this Complaint. Less than three years has elapsed from the time that those


- 113 -

securities upon which this claim is asserted were bona fide offered to the public to the time of

filing this Complaint.

SEVENTH CLAIM (On Behalf of the Issuer Class)

Violation Of Section 15

of the Securities Act [15 U.S.C. §77o] Against Defendants Lacy, Richter, Liska, Trost, Slook, Raymond, and Bergmann


herein, except to the extent such allegations charge these individual defendants with intentional

or reckless misconduct as it relates to this claim.

359. The individual defendants set forth in this Count, acted as controlling persons of

SRAC within the meaning of Section 15 of the Securities Act as alleged herein. By virtue of

Sears' sole ownership of all outstanding stock in SRAC, these individual defendants executive

and directorial positions in Sears and SRAC, their participation in and/or awareness of the

SRAC's operations and/or intimate knowledge of the Sears' true business condition, their stock

ownership, and their power and ability to make public statements on behalf of Sears and its

subsidiaries, including SRAC, to shareholders, note holders, potential investors and the media,

they had the power to influence and control and did influence and control, directly or indirectly,

the decision-making of the Sears and SRAC, including the content and dissemination of the

various statements which Plaintiffs contend are false and misleading herein.

360. In particular, each of these individual defendants had direct involvement in the

day-to-day operations of the Sears and/or SRAC and therefore is presumed to have had the

power to control or influence the particular transactions giving rise to the securities violations as

alleged herein, and exercised the same.


- 114 -

361. By virtue of their positions as controlling persons, these individual defendants are

also liable pursuant to Section 15 of the Securities Act. As a direct and proximate result of their

wrongful conduct alleged herein, Plaintiffs and other members of the Issuer Class suffered

damages in connection with their purchases of the SRAC Debt Securities.

EIGHTH CLAIM (On Behalf of the Trader Class)

Violation Of Section 10(b) Of

The Exchange Act And Rule 10b-5 Promulgated Thereunder Against the Sears, SRAC and the Individual Defendants Except Vishwanath

362. Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein.

363. During the Class Period, Sears, SRAC and the Individual Defendants, and each of

them, carried out a plan, scheme and course of conduct which was intended to and, throughout

the Class Period, did: (a) deceive the investing public, including Plaintiffs and members of the

Trader Class, as alleged herein; (b) artificially inflate and maintain the market price of the SRAC

Debt Securities; and (c) cause Plaintiffs and members of the Trader Class to purchase SRAC

Debt Securities at artificially inflated prices. In furtherance of this unlawful scheme, plan and

course of conduct, the Individual Defendants, and each of them, took the actions set forth herein.

364. Sears, SRAC and the Individual Defendants: (a) employed devices, schemes, and

artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material

facts necessary to make the statements not misleading; and (c) engaged in acts, practices, and a

course of business that operated as a fraud and deceit upon purchasers of SRAC Debt Securities

in an effort to maintain artificially high market prices for those securities in violation of Section

10(b) of the Exchange Act and Rule 10b-5. These Defendants are sued either as primary


- 115 -

participants in the wrongful and illegal conduct charged herein or as controlling persons as

alleged below.

365. Sears, SRAC and the Individual Defendants, individually and in concert, directly

and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails,

engaged and participated in a continuous course of conduct to conceal adverse, material

information about the business, operations and future prospects of Sears as specified herein.

366. The defendants named herein employed devices, schemes and artifices to defraud,

while in possession of material, adverse, non-public information and engaged in acts, practices,

and a course of conduct as alleged herein in an effort to assure investors of Sears' value,

performance, and continued substantial growth and, in turn, SRAC's continued value,

performance and operations and earnings. This included the making of, or the participation in

the making of, untrue statements of material facts and omitting to state material facts necessary

in order to make the statements made about Sears, SRAC and their business operations and

future prospects, in the light of the circumstances under which they were made, not misleading,

as set forth more particularly herein, and engaged in transactions, practices and a course of

business which operated as a fraud and deceit upon members of the Trader Class during the

Class Period.

367. The Individual Defendants' primary liability, and controlling person liability,

arises from the following facts: (a) the Individual Defendants were high-level executives and/or

directors at Sears and/or SRAC during the Class Period; (b) the Individual Defendants were

privy to and participated in the creation, development and reporting of Sears' and/or SRAC's

internal budgets, plans, projections and/or reports; and (c) the Individual Defendants were aware


- 116 -

of Sears' and/or SRAC's dissemination of information to the investing public that they knew or

recklessly disregarded was materially false and misleading.

368. The defendants named herein had actual knowledge of the misrepresentations and

omissions of material facts set forth herein, or acted with reckless disregard for the truth in that

they failed to ascertain and to disclose such facts, even though such facts were available to them.

Such Defendants' material misrepresentations and/or omissions were done knowingly or

recklessly and for the purpose and effect of concealing Sears' and SRAC's operating condition

and future business prospects from the investing public and supporting the artificially inflated

price of its securities. As demonstrated by the Individual Defendants' overstatements and

misstatements of the companies' business, operations and earnings throughout the Class Period,

the Individual Defendants, if they did not have actual knowledge of the misrepresentations and

omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining

from taking those steps necessary to discover whether those statements were false or misleading.

369. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market price of the SRAC Debt

Securities was artificially inflated during the Class Period. In ignorance of the fact that market

prices of SRAC's Debt Securities were artificially inflated, and relying directly or indirectly on

the false and misleading statements made by the Individual Defendants, or upon the integrity of

the market in which the securities trade, and/or on the absence of material, adverse information

that was known to or recklessly disregarded by the Individual Defendants but not disclosed in

public statements by the Individual Defendants during the Class Period, Plaintiffs and the


- 117 -

members of the Trader Class acquired SRAC Debt Securities during the Class Period at

artificially high prices and were damaged thereby.

370. At the time of said misrepresentations and omissions, Plaintiffs and members of

the Trader Class were ignorant of their falsity and believed them to be true. Had Plaintiffs and

members of the Trader Class and the marketplace known of the true financial condition and

business prospects of Sears, which were not disclosed by the Individual Defendants, Plaintiffs

and members of the Trader Class would not have purchased or otherwise acquired their SRAC

Debt Securities, or, if they had acquired such securities during the Class Period, they would not

have done so at the artificially inflated prices which they paid.

371. By virtue of the foregoing, Sears, SRAC and the Individual Defendants have each

violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder.

372. As a direct and proximate result of the Individual Defendants' wrongful conduct,

Plaintiffs and members of the Trader Class suffered damages in connection with their respective

purchases and sales of Sears' securities during the Class Period.

NINTH CLAIM (On Behalf of the Trader Class)

Violation Of Section 20(a) Of The Exchange Act

Against The Individual Defendants

373. Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein.

374. This Count is brought against the Individual Defendants.

375. The Individual Defendants acted as a controlling person of SRAC within the

meaning of Section 20(a) of the Exchange Act as alleged in this Complaint. By virtue of their

high level positions, and their ownership and contractual rights, participation in and/or awareness


- 118 -

of both Sears' and SRAC's operations and /or intimate knowledge of the statements filed by the

Sears and/or SRAC with the SEC and disseminated to the investing public, the Individual

Defendants had the power to influence and control and did influence and control/, directly or

indirectly, the decision-making of Sears and/or SRAC, including the content and dissemination

of the SEC filings and other statements that Plaintiffs contend are false and misleading. The

Individual Defendants were provided with or had unlimited access to copies of Sears' and

SRAC's reports, press releases, public filings (including prospectuses and supplements thereto)

and other statements alleged by Plaintiffs to be misleading prior to and/or shortly after these

statements, including the Prospectus, were issued and had the ability to prevent the issuance of

the statements or cause the statements to be corrected.

376. In particular, the Individual Defendants had direct and supervisory involvement in

the day-to-day operations of the Sears and/or SRAC and, therefore, are presumed to have the

power to control or influence the particular transactions giving rise to the securities violations as

alleged herein, and exercised the same.

377. As set forth above, Sears, SRAC and the Individual Defendants each violated

Section 10(b) and Rule 10b-5, promulgated thereunder, by their acts and omissions as alleged in

this Complaint. By virtue of their position as controlling persons, the Individual Defendants are

liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of Sears,

SRAC's and the Individual Defendants' wrongful conduct, Plaintiffs and members of the Trader

Class suffered damages in connection with their purchase of the SRAC Debt Securities during

the Class Period.2

2 In its Order dated September 14, 2005, the Court gave plaintiffs leave to amend their claims under Section 11 of the Securities Act to include defendant SRAC as a primary violator. To the extent this amended complaint re-


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PRAYER FOR RELIEF

WHEREFORE, Plaintiffs pray for relief and judgment, as follows:

A. Declaring this action to be a class action pursuant to Rule 23(a) and (b)(3) of the

Federal Rules of Civil Procedure on behalf of the Classes defined herein;

B. Awarding compensatory damages in favor of Plaintiffs and the other Class

members against all defendants, jointly and severally, for all damages sustained as a result of

defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;

C. Awarding Plaintiffs and the Classes their reasonable costs and expenses incurred

in this action, including counsel fees and expert fees; and

D. Such other and further relief as the Court may deem just and proper

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

Dated: October 28, 2005 Respectfully submitted, MUCH SHELIST FREED DENENBERG AMENT & RUBENSTEIN, P.C.

By: /s/ Carol V. Gilden Carol V. Gilden

Christopher J. Stuart Michael E. Moskovitz 191 North Wacker Drive Suite 1800 Chicago, IL 60606.1615 Tel: 312.521.2000 Fax: 312.521.2100

pleads claims previously dismissed by the Court without leave to amend, however, such repleading is necessary to preserve a right of appeal. See, e.g., Kelley v. Crosfield Catalysts, 135 F. 3d 1202, 120405 (7th Cir. 1998). See also Forsyth v. Humana, Inc., 114 F. 3d 1467, 1474 (9th Cir. 1997) (to the extent plaintiffs sought review of district court's dismissal claims pursuant to Fed. R. Civ. P. 12(b)(6), such claims are waived if plaintiffs fail to reallege them in amended complaint after dismissal).


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Robert M. Roseman Andrew Abramowitz Rachel E. Kopp SPECTOR, ROSEMAN & KODROFF, P.C. 1818 Market Street, 25th Floor Philadelphia, PA 19103 Tel: 215.496.0300 Fax: 215. 496.6611

Lead Counsel for Plaintiffs Mark S. Willis COHEN MILSTEIN HAUSFELD

& TOLL, P.L.L.C. 1100 New York Avenue, N.W. Suite 500 West Washington, D.C. 20005 Tel: 202.408.4600 Fax: 202.408.4699 Counsel for Plaintiffs


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CERTIFICATE OF SERVICE

I, Carol V. Gilden, hereby certify that on October 28, 2005, I caused a true and correct

copy of this Third Amended Complaint to be served on the parties listed below via electronic

mail and First Class mail.

/s/ Carol V. Gilden Carol V. Gilden

Harold C. Hirshman Christopher Q. King Jeffrey S. Davis SONNENSCHEIN NATH & ROSENTHAL, LLP 233 South Wacker Drive 8000 Sears Tower Chicago, IL 60606-6404

Robert Y. Sperling Ronald S. Betman Norman K. Beck William C. O'Neil WINSTON & STRAWN 35 West Wacker Drive Chicago, IL 60601

Russell J. Keller Scott R. Lassar SIDLEY AUSTIN BROWN & WOOD, LLP 10 South Dearborn Street 4800 Bank One Plaza Chicago, IL 60603-2000

SPECTOR, ROSEMAN & KODROFF, P.C. Robert M. Roseman Andrew D. Abramowitz 1818 Market Street, 25th Floor Philadelphia, PA 19103

Warren R. Stern Jeffrey C. Fourmaux WACHTELL LIPTON ROSEN & KATZ 51 West 52nd Street New York, NY 10019


in the united states district court for the northern...

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