united states district court for the district of...

UNITED STATES DISTRICT COURT FOR THE

DISTRICT OF PUERTO RICO

ROBERT FOX, MARQUITA McLAUGHLIN, and PLUMBERS AND PIPEFITTERS LOCAL 51 PENSION FUND, on Behalf of Themselves and All Others Similarly Situated,

Plaintiffs,

vs.

FIRST BANCORP, ANGEL ALVAREZ-PEREZ, ANNIE ASTOR-CARBONELL, LAURA VILLARINO-TUR, and UBS FINANCIAL SERVICES, INC. OF PUERTO RICO,

Defendants.

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

Civ. No. 05-CV-2148 (JG)

AMENDED CLASS ACTION COMPLAINT

Case 3:05-cv-02148-GAG-JA Document 14 Filed 02/13/2006 of 109

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Lead Plaintiffs Plumbers and Pipefitters Local 51 Pension Fund, Robert Fox and

Marquita McLaughlin (collectively, “Lead Plaintiffs” or “Plaintiffs”), individually and on

behalf of all others similarly situated, by their undersigned attorneys, allege upon personal

knowledge as to themselves and their own acts, and information and belief as to all other

matters, based upon, inter alia, the investigation conducted by and through their attorneys,

which included, among other things, a review of the public documents and announcements

issued by First BanCorp (“First BanCorp” or the “Company”), filings with the Securities and

Exchange Commission (“SEC”), interviews with former employees of First BanCorp and a

review of other publicly available information that substantial evidentiary support will exist

for the allegations set forth herein after a reasonable opportunity for discovery.

NATURE OF THE CASE

1. This is a federal securities class action brought on behalf of all those who

purchased or otherwise acquired the common or preferred stock of First BanCorp during

the period from April 16, 2001 to December 13, 2005, inclusive (the “Class Period”) to

recover damages caused by violations of the Securities Act of 1933 (the “Securities Act”)

and the Securities Exchange Act of 1934 (the “Exchange Act”).

2. Defendant First BanCorp operates as the holding company for FirstBank

Puerto Rico (“FirstBank” or the “Bank”), which provides various financial services in

Puerto Rico, the U.S. Virgin Islands, and British Virgin Islands. The Bank attracts various

deposits, including checking accounts, savings accounts, certificates of deposit, and interest

bearing and non-interest bearing accounts and originates residential real-estate loans,

commercial real-estate loans, and construction loans, as well as consumer loans that

comprise personal, auto, boat, credit card, and small loans. First BanCorp is headquartered

in Santurce, Puerto Rico.


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3. This case concerns a massive accounting fraud perpetrated by First BanCorp

and the Individual Defendants (defined below). As detailed herein, First BanCorp issued

materially false and misleading financial statements that violated the federal securities laws

and applicable accounting principles in order to enable First BanCorp to vastly overstate its

residential mortgage portfolio, total capital ratios and profitability. During the Class

Period, FirstBank engaged in a series of transactions whereby the Bank purportedly

purchased fixed rate non-conforming mortgages1 from Doral Financial Corp. (“Doral”) and

R&G Financial Corp. (“R&G”), among others. Unbeknownst to investors, and in order to

conceal the true nature of the mortgage transactions from regulators, other lending

institutions, and investors, First BanCorp received full recourse rights from Doral and R&G

through side deals and oral agreements that were far beyond the scope of the limited

recourse rights provided for in the written contracts between the parties. Contrary to the

First BanCorp Defendants’ (as defined below) representations, FirstBank did not truly

“purchase” the mortgages but instead was simply loaning Doral and R&G money

collateralized by the mortgages. First BanCorp, however, in violation of Generally

Accepted Accounting Principles (“GAAP”), accounted for the transactions as “purchases”

instead of as loans. By doing so, the Company derived tremendous financial, regulatory

and operational benefits and was able to report ever increasing assets, growth, and

profitability throughout the Class Period. In truth, First BanCorp was building its business

1 Non-conforming mortgages are defined as either jumbo loans (where the borrowed principal exceeds a certain limit set by secondary market purchases of mortgage loans, which was as high as $359,000 during the Class Period) or loans made to borrowers who did not meet standard underwriting requirements for income verification or credit history. These loans are not generally purchased by the two major secondary mortgage purchasers, the government sponsored entities, FNMA and FHLMC, and typically carry a higher interest rate than conforming mortgages.


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on a fiction that could not be sustained and when exposed would wreak havoc on the

Company, its business and its finances.

4. During the Class Period, FirstBank repeatedly made bulk “purchases” of

mortgages from Doral and R&G and the Bank’s mortgage portfolio grew exponentially –

rising from $1 billion in 2001 to $4.7 billion in 2005. Once falsely recorded as purchases,

FirstBank had the ability to pledge the purchased mortgages as security to borrow money

from the Federal Home Loan Bank (“FHLB”), which is a federally-chartered financial

institution that, among other things, makes low-cost loans to member institutions with

mortgages pledged as collateral. Many banks, including FirstBank, earn a considerable

portion of their total net income by acquiring money at lower, short-term rates and lending

that same money at higher, longer-term rates. The difference between what a bank pays to

borrow money and what it earns when lending money is called the net interest margin. The

income earned through this practice is called the net interest income. During the Class

Period, First BanCorp’s reported increase of 470% in its mortgage portfolio corresponded

with a marked increase in the Bank’s FHLB borrowings. As of December 31, 2001, First

BanCorp reported an outstanding loan balance of $344 million from FHLB and, by

December 31, 2004, that loan-balance amount was $1.6 billion, or an increase of 471%

during the period.

5. First BanCorp also used its false financial statements to increase the Bank’s

business of brokering certificates of deposit (“CDs”).2 In order to broker CDs without

2 Brokered CDs are sales of CDs through the use of an introducing broker. Typically, the person purchasing a brokered CD has no prior relationship with the institution that accepts the deposit. Brokered CDs usually pay a higher interest rate than other CDs, and investors who purchase brokered CDs are very interest-rate sensitive and not loyal to the institution accepting the deposit. These investors chase yield. Additionally, it is common for brokered


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restriction, a bank must be designated “well-capitalized” by the FDIC. For purposes of

calculating the financial strength of a bank, the FDIC uses several ratios to analyze that

bank’s capital, assets, liabilities, and risk exposure. One such ratio used by the FDIC is a

bank’s total-capital-to-risk-weighted-asset ratio. A bank must have a total-capital-to-risk-

weighted-asset ratio above 10% before it can be considered “well-capitalized” by the FDIC;

and for purposes of determining a bank’s risk-weighted assets, commercial loans are risk-

weighted at 100% and mortgage loans are risk-weighted at 50%. Thus, a bank with $1

billion in total capital and total assets comprised of a $10 billion commercial loan portfolio

would have a total-capital-to-risk-weighted-assets ratio of 10%. In contrast, a bank with $1

billion in total capital and total assets of a $10 billion mortgage portfolio would have a

total-capital-to-risk-weighted-assets ratio of 20%.

6. By classifying the mortgage transactions with Doral and R&G as purchases

rather than commercial loans, FirstBank was able to meet or exceed the capital

requirements of a well-capitalized bank. And the classification of the purchased loans as

mortgage loans rather than commercial loans enabled FirstBank to increase substantially

both its FHLB borrowings and its use of brokered CDs and other interest-bearing liabilities,

thereby substantially increasing the Bank’s financial leverage. During the Class Period,

FirstBank’s CD program expanded dramatically. As of December 31, 2004, FirstBank had

outstanding CD obligations in the amount of $5.7 billion, or 72% of total deposits; as of

year-end 2003, FirstBank brokered CDs in the amount of $4.9 billion, or 72% of total

CDs to be sold in denominations above $100,000, which is the limit of Federal Deposit Insurance Corporation (“FDIC”) insurance. For these reasons, the FDIC closely monitors institutions that have a large brokered CD business to insure that these entities are able to meet their liabilities, and that a destabilizing “run” on an institution does not occur.


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deposits; in 2002, the Bank brokered $3.9 billion in CDs, or 71% of total deposits; and, in

2001, the Bank brokered $3.2 billion in CDs, or 78% of total deposits.

7. The increase in Bank’s borrowings from FHLB and its growing CD business

contributed significantly to the Company’s reported net interest income (and reported net

income) during the Class Period. In fiscal year 2001, First BanCorp recorded $236 million

in net interest income and, by fiscal year 2004, First BanCorp’s net interest income rose to

$383 million, an increase of 62%. The First BanCorp Defendants were able to achieve this

increase in net interest income by falsifying the Company’s financial statements, submitting

falsified data to the FHLB in order to borrow hundreds of millions of dollars, and reporting

inflated levels of total capital to the FDIC. The First BanCorp Defendants achieved this

increase in net interest income by dramatically increasing the Company’s balance of

earning assets, and despite a flattening of the yield curve and a decline in the Company’s

net interest margin, from 4.08% in 2001 to 3.4% in 2004.

8. In addition to improperly inflating the Company’s mortgage portfolio, which

resulted in artificial increases in the Company’s net interest income, the First BanCorp

Defendants also inflated First BanCorp’s net income by approximately $175 million during

the Class Period through the use of improper hedge accounting for interest rate swaps. First

BanCorp was required to value its interest rate swaps on an ongoing basis, which it failed to

do, and is now required to restate its financial statements to reflect an unrealized loss and

negative change in value of the interest rate swaps.

9. As a direct result of First BanCorp’s improper accounting during the Class

Period and violations of applicable banking regulations, as detailed further herein, the

Company reported steadily improving financial results throughout the Class Period. These

financial results were artificially inflated and did not represent the true financial


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performance of the Company. Defendants’ materially false and misleading statements led

to a dramatic increase in the price of First BanCorp common stock, from a split-adjusted

price per share of $7.70 at the beginning of the Class Period to a high of $31.90 on

December 14, 2004 – an increase of more than 414%. During this time, First BanCorp also

raised more than $353 million from sales of preferred stock to the public. The Individual

Defendants were able to sell 450,000 shares in personal holdings of common stock without

disclosing material information regarding the Company’s true financial condition.

10. First BanCorp’s scheme began to unravel in 2005. On August 10, 2005,

after the close of trading, First BanCorp filed a Form 12b-25 with the SEC announcing that

it was delaying the filing of its Form 10-Q for the quarter ended June 30, 2005. According

to the Company’s press release issued the next day, on August 11, 2005, the Audit

Committee (the “Committee”) of First BanCorp’s Board of Directors determined that the

Committee should review the background and accounting for certain purchases of mortgage

loans made by the Bank between 2000 and 2005.

11. On August 25, 2005, after the close of the market, First BanCorp issued a

press release announcing that the SEC was conducting an informal inquiry into the

Company’s accounting. According to the press release, the SEC was investigating the

accounting for mortgage loans purchased by the Company from two other financial

institutions during the calendar years 2000 through 2004.

12. On September 30, 2005, First BanCorp issued a press release announcing a

series of management changes. According to the press release, Defendant Alvarez-Perez

(as defined below) had stepped down as President and Chief Executive Officer and

announced that he would retire effective December 31, 2005, as Chairman of the

Company’s Board of Directors. In addition, according to the Company, Defendant Astor-


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Carbonell (as defined below) had resigned from her position as Chief Financial Officer and

as a member of the Board of Directors, and informed the Company that she would retire on

October 31, 2005.

13. On October 21, 2005, First BanCorp issued a press release announcing that

the SEC had issued a formal order of investigation that related to, among other things,

transactions in which First BanCorp acquired a substantial number of mortgage loans from

other Puerto Rican financial institutions. First BanCorp announced that, although its

analysis was not concluded, it had determined that most of its transactions with R&G

Mortgage Corp. did not qualify as true purchases and that the Company may be required to

restate previously issued financial statements.

14. Finally, on December 13, 2005, First BanCorp issued a press release (the

“December 13, 2005 Press Release”) announcing that a substantial portion of the mortgage-

related transactions that the Company had entered into with Doral and R&G since 1999 did

not qualify as purchases and sales transactions for accounting purposes. First BanCorp

announced that it will restate its previously reported financial statements from January 1,

2001 through March 31, 2005 to correct its accounting for the mortgage-related transactions

and the accounting treatment used for certain interest rate swaps. First BanCorp also

warned investors that previously issued financial statements could not be relied upon.

According to the press release, the impact of the revised classification of the mortgage-

related transactions as secured commercial loans as of March 31, 2005 and December 31,

2004, 2003 and 2002 will be to reduce First BanCorp’s residential real estate loans by

approximately $3.8 billion, $3.4 billion, $1.9 billion and $959 million, respectively, and to

increase commercial loans secured by mortgages as of March 31, 2005 and December 31,

2004, 2003 and 2002 by the same amounts. First BanCorp did not specify the impact that


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the announced restatement would have on its 2001 financial statements, except to say that

these results would have to be restated.

15. The Company further stated in the December 13, 2005 Press Release that the

revised classification of the mortgage-related transactions as secured commercial loans

precludes the use of the mortgages by FirstBank as collateral to secure advances from the

FHLB and that FirstBank now fell below the regulatory threshold for being a “well-

capitalized” bank. A bank that falls below the “well-capitalized” designation may not

broker CDs without restriction, absent a waiver from the FDIC. Any restrictions on

FirstBank’s ability to broker CDs would impair its ability to generate net interest income.

16. Finally, First BanCorp also warned that other additional matters may cause

First BanCorp to further adjust its previously-issued financial results, and that the

Company:

is evaluating whether the Company’s disclosure controls and procedures, including internal control over financial reporting, were effective as of the end of each of the affected historical periods. It is likely that the assessment of internal control over financial reporting will result in the identification of a material weakness and, accordingly, an adverse opinion on the effectiveness of internal control over financial reporting from our independent registered public accounting firm. . . .

17. First BanCorp admitted that the tremendous growth it had reported

throughout the Class Period was based on nothing more than an accounting fiction and that

it was not the “well-capitalized” bank investors believed it to be. In addition, throughout

the Class Period, First BanCorp and Defendants Alvarez-Perez and Astor-Carbonell

misrepresented to investors in signed certifications that the Company maintained adequate

internal controls over financial reporting when, in fact, the Individual Defendants were

deliberately ignoring such controls and reporting false financial results.


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18. From August 11, 2005, when First BanCorp announced that it was

examining certain mortgage transactions, to December 13, 2005, the day that First BanCorp

announced its restatement, the Company’s common stock dropped from $22.73 per share to

$12.24 per share. The Company’s piecemeal disclosures concerning its improper

accounting and false and misleading financial statements caused First BanCorp’s common

stock to drop approximately 46% during this period and were the direct and proximate

cause of the injuries suffered by the Class.

JURISDICTION AND VENUE

19. The claims alleged herein arise under Sections 11, 12(a)(2) and 15 of the

Securities Act, and Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§78j(b) and

78t(a), and Rule 10b-5, 17 C.F.R. §240.10b-5 promulgated thereunder.

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

Section 22 of the Securities Act and Section 27 of the Exchange Act, 15 U.S.C. §78aa and

28 U.S.C. §1331.

21. Venue is proper in this District pursuant to Section 27 of the Exchange Act

and 28 U.S.C. §1391(b). Many of the acts and transactions alleged herein occurred in

substantial part in this District. The Company and Defendants are located in this District,

the Company transacts business in this District, and many of the acts complained of herein

occurred in this District.

22. In connection with the acts, transactions and conduct alleged herein,

defendants, directly and indirectly, used the means and instrumentalities of interstate

commerce, including the United States mails, interstate telephone communications and the

facilities of the national securities exchanges.


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THE PARTIES

23. Lead Plaintiffs Robert Fox, Marquita McLaughlin and the Plumbers &

Pipefitters Local 51 Pension Plan, purchased First BanCorp securities during the Class

Period, as set forth in their respective certifications which have been previously filed in this

litigation and are incorporated herein by reference, and have suffered damages.

24. Defendant First BanCorp operates as the holding company for FirstBank

Insurance Agency, Inc. and FirstBank, which provides various financial services in Puerto

Rico, the U.S. Virgin Islands, and British Virgin Islands. FirstBank has several wholly-

owned subsidiaries, including First Federal Finance Corp. (d/b/a Money Express La

Financiera), a finance company, FirstMortgage, Inc., a residential mortgage loan origination

company, First Leasing and Rental Corporation, a vehicle leasing and daily rental company,

First Insurance Agency, Inc., an insurance agency, and First Trade, Inc., which provides

foreign sales corporation management services, among others. In addition, on March 31,

2005, First BanCorp announced the closing of an all cash merger transaction with Ponce

General Corporation, the parent company of UniBank, a federal savings and loan

association based in Florida.

25. Defendant Angel Alvarez-Perez (“Alvarez-Perez”) was, during the Class

Period, the Chief Executive Officer and Chairman of the Board of Directors of First

BanCorp (“Board”). Alvarez-Perez was also the President and Chief Executive Officer of

FirstBank since 1990, and Chairman since August 1999. Alvarez-Perez was also Chairman

and Chief Executive Officer of several subsidiaries of FirstBank, including: First Federal

Finance Corporation, First Leasing & Rental Corporation, FirstBank Insurance Agency,

Inc., First Insurance Agency, Inc., First Trade, Inc., FirstMortgage, Inc., First Express, Inc.

and FirstBank Overseas Corp. Alvarez-Perez was also a Director of the Federal Home


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Loan Bank of New York from December 1993 to January 1995. On September 30, 2005

First BanCorp announced Perez’s resignation.

26. Defendant Annie Astor-Carbonell (“Astor-Carbonell”) was a member of

First BanCorp’s Board, and Senior Executive Vice President and Chief Financial Officer of

First BanCorp since 1987. From 1984 to 1987, Astor-Carbonell was a Senior Vice

President and Comptroller at the Company. On September 30, 2005, First BanCorp

announced Astor-Carbonell’s resignation.

27. Defendant Laura Villarino-Tur (“Villarino-Tur”) was, during the Class

Period, First BanCorp’s Senior Vice President and Comptroller until her retirement in May

2005. Villarino-Tur was Vice-President and Assistant Comptroller from 1984 until 1987.

Villarino-Tur was appointed Senior Vice-President and Comptroller of First BanCorp in

1987.

28. Defendants Alvarez-Perez, Astor-Carbonell and Villarino-Tur are

collectively referred to hereafter as the “Individual Defendants.” The Individual

Defendants and First BanCorp are collectively referred to as the “First BanCorp

Defendants.”

29. Defendant UBS Financial Services, Inc. of Puerto Rico (“UBS Puerto Rico”)

is a wholly-owned subsidiary of UBS, AG, a diversified financial services corporation.

UBS Puerto Rico is headquartered in Hato Rey, Puerto Rico, and is a wealth manager,

investment banking and securities firm, and an asset manager. UBS Puerto Rico leases

space at thirteen branches of FirstBank in Puerto Rico for the purpose of offering and

selling securities and other investment products. UBS Puerto Rico pays to FirstBank a

monthly rental payment based on a percentage of the commissions earned by them from the

sale of the securities and investment products at FirstBank’s thirteen branches. UBS Puerto


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Rico was the lead underwriter of First BanCorp’s Series E Preferred Stock Offering during

the Class Period. UBS Puerto Rico is named as a defendant solely with respect to the

claims alleging violations of the Securities Act, Counts I and II. UBS Puerto Rico is

referred to herein sometimes as the Underwriter Defendant.

30. By reason of their management positions, membership on the Board, and

ability to make public statements in the name of First BanCorp, the Individual Defendants

were and are controlling persons of the Company, and had the power and influence to cause

(and did cause) First BanCorp to engage in the unlawful conduct complained of herein.

31. By reason of their positions with the Company, the Individual Defendants

had access to internal Company documents, reports and other information, including the

adverse non-public information concerning the Company’s financial condition, and future

prospects, and attended management and/or Board meetings. As a result of the foregoing,

the Individual Defendants were responsible for the truthfulness and accuracy of the

Company’s public filings of financial statements and press releases described herein.

32. The Individual Defendants, as officers and directors of a publicly-held

company, had a duty to disseminate promptly, truthful and accurate information with

respect to First BanCorp and to correct any public filings or statements issued by or on

behalf of the Company that had become false or misleading.

33. Each of the Individual Defendants knew or recklessly disregarded that the

false and misleading statements and omissions complained of herein would adversely affect

the integrity of the market for the Company’s securities and would cause the price of the

Company’s stock to become artificially inflated. Each of the Individual Defendants acted

knowingly or in such a reckless manner as to constitute a fraud and deceit upon Plaintiffs

and the other members of the Class (as defined in ¶259 herein).


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34. The Individual Defendants are liable, jointly and severally as direct

participants, for the wrongs complained of herein. The Individual Defendants, because of

their positions with First BanCorp, were provided with copies of the First BanCorp reports

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.

Accordingly, each of the Individual Defendants is responsible for the accuracy of the public

reports, financial statements and releases detailed herein, and is therefore primarily liable

for the representations contained therein.

SUBSTANTIVE ALLEGATIONS

Background

35. In addition to the banking activities described herein, First BanCorp has

elected with the Federal Reserve to be treated as financial holding company (“FHC”),

which permits it to engage in a broader spectrum of activities than those permitted by other

bank holding company structures. An FHC can engage in any activity that is “financial” in

nature, including insurance underwriting and brokerage, securities dealing and brokerage,

and financing. In recent years, First BanCorp, through its subsidiaries, has broadened its

business beyond traditional retail banking to include financial leases, vehicle rental,

insurance products, and foreign sales corporation management services. The Company

now offers insurance products and services through its other wholly-owned subsidiary,

FirstBank Insurance Agency, Inc. Further, First BanCorp invests in Puerto Rico

government obligations, the U.S. treasury securities, obligations of other U.S. government

agencies, mortgage-backed securities, corporate bonds, and equity securities. The vast

majority of the Company’s revenue, however, is generated by FirstBank. And a significant

portion of FirstBank’s profitability during the Class Period was generated by its ever-

increasing recorded mortgage portfolio.


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36. Since 1999, FirstBank has grown its portfolio of mortgages by purportedly

acquiring mortgages from other mortgage originators in Puerto Rico, specifically Doral and

R&G, who were the largest and second-largest mortgage originators in Puerto Rico. First

BanCorp’s 2004 Annual Report to Shareholders filed on Form 10-K with the SEC on

March 15, 2005 (“2004 10-K”) represents that “[a] significant portion of the increase in

residential mortgage loans is related to bulk purchases from mortgage bankers doing

business in Puerto Rico.”

37. During the Class Period, First BanCorp represented that FirstBank made

“bulk purchases” of non-conforming mortgages with a variable rate based upon the ninety-

day London Interbank Offered Rate (“LIBOR”) limited to the weighted average coupon

rate of the pool of mortgages. The Company further represented that the servicing of the

mortgages was retained by the selling mortgage bank and the “arrangements provide for the

timely payment of interest of the mortgage loans.” First BanCorp also represented that

these mortgage transactions provided only limited recourse in the event of non-payment or

default that “generally obligate the seller to repurchase the loans if loans are 120 days or

more past due or otherwise in default.” Recourse was also generally limited to a period of

time (usually twenty-four months) and up to 15% of the principal amount of the loans sold.

38. FirstBank’s “purchases” of non-conforming mortgages from Doral and R&G

substantially increased the size of the recorded mortgage portfolio on the Company’s

balance sheet. In 2001, FirstBank’s mortgage portfolio was valued at $1 billion, or 23% of

the Company’s total loan portfolio; in 2002, the mortgage portfolio was valued at $1.9

billion, or 33% of the Company’s total loan portfolio; in 2003, the mortgage portfolio was

valued at $2.9 billion, or 41% of the Company’s total loan portfolio; and, in 2004,


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FirstBank’s mortgage portfolio was valued at $4.7 billion, or 49% of the Company’s total

loan portfolio.

39. The cornerstone of the First BanCorp Defendants’ fraudulent scheme was

their false characterization of First BanCorp’s transactions with Doral or R&G as

“purchases” of the mortgages when, in fact, First BanCorp merely made loans to Doral and

R&G that were collateralized by the mortgages. First BanCorp has now acknowledged that

the Company improperly accounted for these transactions as purchases, and that a transfer

of ownership of these mortgages never occurred. Doral also has admitted that it agreed to

provide First BanCorp with full recourse for these mortgages through side agreements and

oral understandings. Further, First BanCorp has admitted that most of its transactions with

R&G involving the transfers of non-conforming mortgages were not true purchases, and

that the Company should not have accounted for those transactions as purchases.

40. By classifying these transactions as purchases rather than loans, First

BanCorp was able to earn and record net interest income, through borrowings from the

FHLB and brokering CDs, that it otherwise would not have been able to record had the

mortgage transactions with Doral and R&G been accounted for properly. As discussed

below, both sources of funds were dependent upon, in whole or in material part, First

BanCorp’s inflated mortgage portfolio, which was caused by the First BanCorp Defendants

improperly entering into side agreements with Doral and R&G and violating GAAP by

falsely accounting for these transactions.

The Federal Home Loan Bank

41. FirstBank is a member of the FHLB system that consists of twelve regional

Federal Home Loan Banks governed and regulated by the Federal Housing Finance Board

(FHFB). The FHLBs serve as reserve or credit facilities for member institutions within


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their assigned regions. They are funded primarily from proceeds derived from the sale of

consolidated obligations of the FHLB system, and they make loans (advances) to members

in accordance with policies and procedures established by the FHLB system and the boards

of directors of each regional FHLB.

42. Each FHLB is capitalized by the capital-stock investments of its members

and its retained earnings. Members purchase stock in proportion to their borrowings from

the FHLB, their holdings of mortgages and mortgage securities, and their assets. The

FHLB raises funds by issuing debt instruments (bonds and notes) in the capital markets.

Because these instruments have “AAA” credit ratings, the FHLB can borrow at very

favorable rates and terms. Lenders eligible for FHLB membership include savings banks,

savings and loan associations, cooperative banks, commercial banks, credit unions, and

insurance companies that are active in housing finance. Through the twelve FHLBs, the

system has more than 8,000 member financial institutions.

43. Under FHLB guidelines, a borrowing bank is required to maintain a

minimum amount of qualifying mortgage collateral with a market value at least 110% of

the outstanding advances. Thus, by falsely characterizing the transactions with Doral and

R&G as “purchases”, FirstBank was able to increase its level of borrowing because it was

reporting increased mortgage assets. FirstBank vastly overstated its mortgage portfolio and

caused the FHLB to loan it more money than it was legally allowed to borrow.

44. In First BanCorp’s 2002 Annual Report to Shareholders, filed on Form 10-K

with the SEC on March 31, 2003, (the “2002 10-K”), the Company stated that: “[a]dvances

are received from the FHLB under an Advances, Collateral Pledge and Security Agreement

(the Collateral Agreement). Under the Collateral Agreement, the Corporation is required to

maintain a minimum amount of qualifying mortgage collateral with a market value at least


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110% of the outstanding advances.” Because FirstBank was purchasing fixed-rate

mortgages that paid a variable rate that was capped by the weighted average coupon rate of

the pool, the secret side agreements providing full recourse protected the Bank from a

possible rise in interest rates that would render the mortgage transactions uneconomical

from the Bank’s perspective. The full recourse provisions were essentially a put option on

these mortgages and created an incentive for FirstBank to enter into these transactions,

among other reasons.

45. During the Class Period, FirstBank borrowed substantial funds at low rates

from the FHLB and used the mortgages it purportedly purchased from Doral and R&G as

collateral. As of December 31, 2001, FirstBank reported an outstanding loan balance of

$344 million from FHLB; as of December 31, 2002, FirstBank reported an outstanding loan

balance of $373 million; as of December 31, 2003, FirstBank reported an outstanding loan

balance of $913 million; and, as of December 31, 2004, the outstanding loan-balance was

$1.6 billion. Borrowings from the FHLB increased 471% during the Class Period.

46. Under FHLB guidelines, commercial loans secured by mortgages (which the

transactions between FirstBank and Doral and R&G were) cannot be used by member

banks as collateral to secure funding. It was important, therefore, that FirstBank account

for its transactions with Doral and R&G as purchases rather than loans in order to secure

additional funding from the FHLB. Without this funding, First BanCorp’s reported net

interest income during the Class Period would have been substantially reduced.

The FDIC

47. Regulations promulgated by the FDIC establish five capital tiers for banks:

“well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly

undercapitalized,” and “critically undercapitalized.” To be in a “well-capitalized” position,


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a bank should have: (i) a leverage ratio of 5% or greater; (ii) a total risk based capital ratio

of 10% or greater; and (iii) a Tier 1 risk-based capital ratio of 6% or greater. Because of

extensive FDIC regulations, it is important for a bank to be deemed well-capitalized, which

imposes the least number of restrictions on a bank’s operations, activities, asset allocation,

and capital structure. As a bank moves down the capital tiers -- from well-capitalized, to

adequately capitalized, etc. -- the FDIC increasingly restricts that bank’s ability to operate.

Ultimately, critically undercapitalized banks are subject to seizure and the appointment of a

receiver by the FDIC. First BanCorp’s 2003 Annual Report to Shareholders filed on Form

10-K with the SEC on March 15, 2004 (“2003 10-K”) states the importance of maintaining

a well-capitalized designation:

Failure to meet capital guidelines could subject an insured bank like the Bank to a variety of prompt corrective actions and enforcement remedies under the FDIC (as amended by FDICIA), including, with respect to an insured bank, the termination of deposit insurance by the FDIC, and to certain restrictions on its business. In general terms, undercapitalized depository institutions are prohibited from making any capital distributions (including dividends), are subject to restrictions on borrowing from the Federal Reserve System, and are subject to growth limitations and are required to submit capital restoration plans.

48. Importantly, First BanCorp can maintain its status as an FHC, and engage in

financial activities beyond banking, so long as it maintains its status with the FDIC as being

both well-capitalized and well managed, which is an examination and management rating

given by FDIC regulators.

49. Moreover, under FDIC regulations, a bank that falls below the well-

capitalized level cannot accept, renew or roll over brokered CDs without a waiver from the

FDIC. A bank that falls below adequately capitalized may not pay an interest rate on any

deposits in excess of 75 basis points over certain prevailing market rates specified by

regulation. There are no such restrictions on a bank that is well-capitalized.


- 19 -

50. For purposes of meeting the FDIC’s requirements for being a well-

capitalized bank, the mortgages that FirstBank received from Doral and R&G proved

advantageous when improperly accounted for as purchases of mortgage loans. Under

applicable guidelines, specifically the total-capital-to-risk-weighted-asset ratio, commercial

loans are risk-weighted at 100% while mortgage loans are risk weighted at 50%. A bank’s

assets are adjusted under the risk-based guidelines to take into account different risk

characteristics, with the categories ranging from 0% (requiring no additional capital) for

assets such as cash to 100%. Thus, in terms of meeting the regulatory requirements for a

well-capitalized bank, a bank’s mortgage loans are deemed 50% less risky than a bank’s

commercial loans. By falsely characterizing its transactions with Doral and R&G as

purchases and not commercial loans, FirstBank was able to meet the regulatory guidelines

for a well-capitalized bank more easily and engage in banking activities such as brokering

CDs without any restrictions.

FirstBank’s CD Program

51. During the Class Period, brokering CDs was a major source of funding for

FirstBank and contributed significantly to the Company’s profitability. FirstBank brokered

CDs at low, fixed interest rates, loaned or invested the money at higher, variable interest

rates and hedged their interest-rate exposure through the use of swap agreements. As of

December 31, 2004, FirstBank had outstanding CDs in the amount of $5.7 billion, or 72%

of total deposits; in 2003, First BanCorp brokered CDs in the amount of $4.9 billion, or

72% of total deposits; in 2002, the Company brokered $3.9 billion in CDs, or 71% of total

deposits; and, in 2001, the Bank brokered $3.2 billion in CDs, or 78% of total deposits.


- 20 -

52. The importance of CDs to First BanCorp’s business was highlighted in the

Company’s 2004 10-K. There, the Company stated that “[t]he use of brokered certificates

of deposits is particularly important in Puerto Rico.” The 2004 10-K further stated that:

[t]he brokered certificates of deposit market is a very competitive and liquid market in which the Corporation has been able to obtain substantial amounts of funding in short periods of time. This strategy has enhanced the Corporation’s liquidity position, since the brokered certificates are unsecured and can be obtained at substantially longer maturities than other regular retail deposits. Also the Corporation has the ability to convert the fixed rate brokered deposits to short term adjustable rate liabilities using interest rate swap agreements.

53. First BanCorp, in fact, made clear to investors that brokering CDs was vital

to the profitability of the Company and a failure by FirstBank to meet the “well-capitalized”

requirements of the FDIC could jeopardize a large portion of its funding. The 2004 10-K

says that:

A large portion of the Corporation’s funding represents retail brokered certificates of deposit gathered by the Bank subsidiary. In the event that the Corporation’s Bank subsidiary falls under the ratios of a well-capitalized institution, it faces the risk of not being able to replace this source of funding.

54. In order to protect the Company’s net interest margins related to brokering

CDs, the Company engaged in swap agreements. The Company’s 2002 10-K states that:

Substantially all swaps currently held by the Corporation form part of structured broker CD’s. In these instruments a fixed rate CD is matched with a swap of the same rate and maturity, thereby converting the fixed rate broker CD to a floating rate instrument which reprices quarterly based on a fixed differential to three month LIBOR. The swaps are recorded at fair value with a corresponding adjustment to CD’s, therefore, for purposes of fair value analysis, these structured broker CD’s are valued at book.

By engaging in these swap agreements, First BanCorp was able to hedge the interest rate risk

that came from brokering CDs at a fixed rate and lending money at a variable rate. These

swap agreements assured First BanCorp that it would earn predictable net interest income by

brokering CDs.


- 21 -

Materially False and Misleading Statements Issued During the Class Period

2001 First Quarter Ended March 31, 2001

55. The Class Period begins on April 16, 2001. On that date, First BanCorp

issued a press release announcing its financial results for the first quarter of 2001, the

period ending March 31, 2001. The Company reported that for the quarter it earned

approximately $18.8 million, or $0.59 per share, an increase in earnings of 14.9% over the

prior-year period, when the Company reported earnings of $16.4 million, or $0.53 per share

and that net interest income for the quarter increased by $4.2 million, to approximately

$52.5 million, compared with the prior-year period. Defendant Alvarez-Perez commented

on the results, stating in pertinent part as follows:

we are very happy at the excellent results of the first three months of 2001. Loan growth was healthy in all areas. Our margins have improved since the previous quarter, as a result of lower funding costs, expenses are very well controlled, other income keeps growing, and asset quality and reserve ratios keep improving. We foresee these very strong results will continue throughout the year.

56. On May 15, 2001, First BanCorp filed its Form 10-Q for the quarter ended

March 31, 2001 with the SEC which was signed by the Defendants Alvarez-Perez and

Astor-Carbonell and contained the Company’s 2001 First Quarter financial results. First

BanCorp stated in its Form 10-Q that the Company’s residential mortgage portfolio was

valued at approximately $799.3 million as of March 31, 2001. The First Quarter 2001

Form 10-Q also stated that “[a]t March 31, 2001 and December 31, 2000, the Corporation

was a well-capitalized institution under the regulatory framework for prompt corrective

action. . . . Management believes that there are no conditions or events since that date that

have changed that classification.”

57. With respect to the presentation of First BanCorp’s financial statements

contained in the First Quarter 2001 Form 10-Q, Defendants Alvarez-Perez and Astor-


- 22 -

Carbonell represented: “In the opinion of Management, the accompanying unaudited

consolidated statements of financial condition and the related unaudited consolidated

statements of income, cash flows, changes in stockholders’ equity and comprehensive

income include all adjustments (consisting only of normal recurring accruals) necessary for

a fair statement of the Corporation’s financial position at March 31, 2001, and the results of

operations and cash flows for the three-month periods ended on March 31, 2001 and 2000.”

58. The statements referenced above in ¶¶55-57 were each materially false and

misleading when issued because they failed to disclose and misrepresented the following

facts: (1) that First BanCorp improperly accounted for the mortgage transactions with Doral

and R&G as purchases, rather than as loans by FirstBank secured by the mortgages; (2) that

First BanCorp had secret side agreements with Doral and R&G -- in addition to the limited

recourse provisions in the written contracts -- that provided for full recourse on these

mortgages; (3) that the Company impermissibly pledged these mortgages as collateral to

borrow money from the FHLB, in violation of FHLB guidelines, which materially inflated

the Company’s net interest income; (4) that, as a result of the Company’s improper

accounting of FirstBank’s mortgage transactions with Doral and R&G, FirstBank was able

to be designated a well-capitalized bank by the FDIC with less capital than it was otherwise

legally required to have, thereby further increasing the Bank’s operating leverage and

inflating its profitability during the period; (5) that, because of the secret side agreements

providing full recourse of the mortgages, the First BanCorp Defendants were aware of

“conditions or events” that could negatively impact FirstBank’s status as a well-capitalized

bank; (6) that the Company’s mortgage portfolio was overstated; (7) that the Company’s

quarterly and annual growth in net income and net interest income was accomplished

because of an improper inflation of FirstBank’s reported mortgage portfolio rather than


- 23 -

growth in the Company’s underlying business; (8) that the First BanCorp Defendants

falsely accounted for the Company’s interest rate swaps, which inflated net income and

capital by approximately $175 million during the Class Period; (9) that the reported

quarterly and annual growth in the brokering of CDs, which contributed significantly to the

Company’s reported net interest income, was based in part on the use of inflated mortgage

portfolio assets; (10) that the Company’s financial statements, including the footnote

disclosures, failed to disclose among other matters, the true nature of the Company’s loans

and were materially false and misleading and presented in violation of GAAP as set forth in

¶¶195-217 below; indeed, First BanCorp has admitted that its financial statements were

prepared in violation of GAAP and has indicated it will be restating its financial statements;

(11) that First BanCorp’s presentation of cash-flows, including its presentation of cash

flows from investing activities, was materially false and misleading and presented in

violation of GAAP; (12) that First BanCorp’s regulatory capital positions as set forth in its

financial statements were materially misstated; and (13) that the Company lacked the

necessary personnel and internal controls to issue accurate financial reports and projections

and failed to disclose material weaknesses in its internal controls in violation of GAAP.

2001 Second Quarter Ended June 30, 2001

59. On July 12, 2001, First BanCorp issued a press release announcing its

financial results for the second quarter of 2001 the period ending June 30, 2001. The

Company reported that for the quarter it recorded earnings of $20.2 million, or $0.64 per

share, an increase of 22.4%, compared to earnings of $16.5 million, or $0.55 per share, for

the prior-year period and that net interest income for the quarter increased to $58.1 million,

or by 20.3%, as compared with the same period in 2000. Defendant Alvarez-Perez

commented on the results, stating in pertinent part that “we have experienced substantial


- 24 -

loan growth and a notable rise in the quality of our core, or operational earnings; these are

excellent results, no matter how you analyze them.”

60. On June 27, 2001, First BanCorp filed an amended Prospectus and

Registration Statement dated June 26, 2001 in connection with a public offering of 3.6

million shares of its 7.40% Noncumulative Perpetual Monthly Income Preferred Stock,

Series C, at $25.00 per share. The Series C Registration Statement/Prospectus contained

the Company’s financial results for its first quarter of 2001, incorporated by reference the

Company’s Form 10-Q for the same period, and was signed by the Individual Defendants.

The Company raised net proceeds of approximately $87 million from its Series C Preferred

Stock Offering.

61. On August 15, 2001, First BanCorp filed its Form 10-Q for the quarter

ended June 30, 2001 with the SEC, which was signed by Defendants Alvarez-Perez and

Astor-Carbonell and included the Company’s financial statements. First BanCorp stated in

its Form 10-Q that the Company’s residential mortgage portfolio was valued at

approximately $849.7 million as of June 30, 2001. The Second Quarter 2001 Form 10-Q

also stated that “[a]t June 30, 2001 and December 31, 2000, the Corporation was a well-

capitalized institution under the regulatory framework for prompt corrective action. . . .

Management believes that there are no conditions or events since that date that have

changed that classification.”

62. With respect to the presentation of First BanCorp’s financial results

contained in the Second Quarter 2001 Form 10-Q, Defendants Alvarez-Perez and Astor-


consolidated statements of financial condition and the related consolidated statements of

income of comprehensive income, of cash flows, and of changes in stockholders’ equity


- 25 -

include all adjustments (consisting only of normal recurring accruals) necessary for a fair

statement of the Corporation’s financial position at June 30, 2001, and the results of

operations and cash flows for the three and six months ended on June 30, 2001, and 2000.”

63. The statements referenced above in ¶¶59-62 were materially false and

misleading when issued because they failed to disclose and misrepresented the facts set

forth in ¶¶58, and 195-217.

2001 Third Quarter Ended September 30, 2001

64. On October 16, 2001, First BanCorp issued a press release announcing its

financial results for the third quarter 2001, the period ending September 20, 2001. The

Company reported that for the quarter it earned $23 million, or $0.67 per share, an increase

in earnings of 37.8% over the prior-year period, when the Company reported earnings of

$16.7 million, or $0.56 per share. Net interest income for the quarter was approximately

$62 million. Defendant Alvarez-Perez commented on the results stating in pertinent part as

follows: ‘“[w]e have experienced healthy loan growth and a notable rise in the quality of

our core, or operational earnings; we are very satisfied with these excellent results.’”

65. On November 13, 2001, First BanCorp filed its Form 10-Q for the quarter

ending September 30, 2001 with the SEC, which was signed by Defendants Alvarez-Perez

and Astor-Carbonell and included the Company’s financial statements. First BanCorp

stated in its Form 10-Q that the Company’s residential mortgage portfolio was valued at

approximately $949 million as of September 30, 2001. The First Quarter 2001 Form 10-Q

also stated that “[a]t September 30, 2001 and December 31, 2000, the Corporation was a

well-capitalized institution under the regulatory framework for prompt corrective action. . .

. Management believes that there are no conditions or events since that date that have



- 26 -


contained in the Third Quarter 2001 Form 10-Q, Defendants Alvarez-Perez and Astor-





a fair statement of the Corporation’s financial position at September 30, 2001, and the

results of operations and cash flows for the three-month periods ended on September 30,

2001 and 2000.”



forth in ¶¶58 and 195-217.

68. On January 28, 2002, First BanCorp filed an amended Prospectus and

Registration Statement, dated January 28, 2002, in connection with a public offering of 3.2

million shares of its 7.25% Noncumulative Perpetual Monthly Income Preferred Stock,

Series D, at $25.00 per share with the SEC. The Series D Registration

Statement/Prospectus contained the Company’s unaudited 2001 fourth quarter and year-end

results, selected consolidated financial and operating data of First BanCorp for the nine-

month periods ended September 30, 2001 and 2000 and for each of the five years in the

period ended December 31, 2000. It also incorporated by reference the Form 10-Q

Quarterly Reports filed with the SEC for the periods ended March 31, 2001, June 30, 2001

and September 30, 2001 and was signed by the Individual Defendants. The Series D

Preferred Stock Offering raised approximately $77 million for First BanCorp.


- 27 -

2001 Fourth Quarter and Fiscal Year Ended on December 31, 2001

69. On January 15, 2002, First BanCorp issued a press release announcing its

financial results for the 2001 fourth quarter and fiscal year ended on December 31, 2001.

The Company reported that for the quarter it earned $24 million, or $0.71 per share,

compared to $0.57 per share for the prior-year period. These results represent an earnings

increase of 35.4% for the 2001 fourth quarter. The year-end results were “another record

year” for First BanCorp, with earnings of $86 million, or $2.60 per share, compared to

$67.3 million, or $2.21 per share, in the prior-year period. First BanCorp reported an

earnings increase of 27.8% for the year 2001. Net interest income for fiscal year 2001 was

$236.1 million, an increase of $45.3 million over the prior-year period. According to the

Company, the increase in net interest income for the year was “the result of volume

increases of $1,307.2 million in the Corporation’s average loan and investment portfolios,

and improvement in the net interest margin.” According to the press release, “[t]he

earnings increase is attributable mostly to increases in the Corporation’s net interest

income, net of increases in operating expenses and income taxes.”

70. On March 26, 2002, First BanCorp filed its Form 10-K for the year ended

December 31, 2001, with the SEC (the “2001 10-K”), which was signed by the Individual

Defendants. The 2001 10-K also contained a clean audit opinion from the Company’s

auditors, PricewaterhouseCoopers LLP. The 2001 10-K represented that the Company’s

average balance in 2002 for brokered CDs was $2.17 billion, and for FHLB loans it was

$256.4 million. The average yield paid by First BanCorp on these sources of funds was

4.96% and 4.91%, respectively, and the Company’s yield on average earnings investments

for 2001 was 8.42%. Based upon the average net interest margin in 2001 from brokering

CDs and FHLB borrowings (average yield paid subtracted from the average earnings yield),


- 28 -

and the respective average balances of brokered CDs and borrowing from the FHLB in

2001, the net interest income on tax equivalent basis generated from these two sources of

funds was approximately $85.1 million, or 36% of the Company’s total net interest income,

which was $236 million, reported for 2001.

71. The 2001 10-K further represented that First BanCorp was in full

compliance with Statement of Financial Accounting Standards (“SFAS”) No. 140, which

was recently adopted and concerned the transfer of financial assets. According to SFAS

No. 140, a financial asset transfer (all or a portion of a financial asset) in which the

transferor surrenders control over those financial assets shall be accounted for as a sale to

the extent that consideration (other than beneficial interests in the transferred assets) is

received in exchange. The transferor has surrendered control over transferred assets if and

only if all of the following conditions are met: 1) the transferred assets are isolated from the

transferor; 2) the transferee has the right to pledge or exchange assets; and 3) the transferor

does not maintain effective control.

72. First BanCorp acknowledged in its 2001 10-K that SFAS No. 140 “provides

consistent standards for distinguishing transfers of financial assets that are sales from

transfers that are secured borrowings,” and assured investors that the Company “fully

adopted this statement effective April 1, 2001.” The 2001 10-K states:

The Corporation also adopted SFAS No. 140, “Accounting for Transfer and Servicing of Financial Assets and Liabilities - A Replacement of SFAS 125” which revises the standards of accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of the provisions of SFAS 125 without reconsideration. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. It was effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001. This statement also required recognition and reclassification of collateral and disclosures relating to securitization transactions and collateral at December 31, 2000. The Corporation fully adopted this statement effective April 1, 2001.


- 29 -

Effective December 31, 2000 the required disclosures for collateral and securitization transactions were incorporated in the financial statements. [Emphasis added.]



forth in ¶¶58 and 195-217. In addition, First BanCorp’s 2001 10-K materially

misrepresented that the Company was in full compliance with SFAS No. 140 and that the

Company had incorporated all required disclosures for collateral and securitization

transactions into its financial statements.


74. On April 17, 2002, First BanCorp issued a press release announcing its

financial results for the 2002 first quarter, the period ending March 31, 2002. The

Company reported that for the quarter it earned approximately $25.6 million, or $0.73 per

share, an increase in earnings of 36.5% over the prior-year period, when the Company

reported earnings of $18.8 million, or $0.59 per share. Net interest income for the quarter

was $69.3 million, which was an increase of $16.8 million over the prior-year period.

Defendant Alvarez-Perez commented on the results, stating in pertinent part as follows:

We are very excited about the excellent results for the first three months of 2002. Loan growth was healthy in all areas. Our margins have improved since the previous quarter, expenses are very well controlled, other income keeps growing, and asset quality and reserve ratios keep improving. We foresee these very strong results will continue throughout the year.

75. On May 14, 2002, First BanCorp filed a Form 10-Q with the SEC for the

period ended March 31, 2002, which was signed by Defendants Alvarez-Perez and Astor-

Carbonell and contained the Company’s financial statements. First BanCorp stated in its

Form 10-Q that the Company’s residential mortgage portfolio was valued at approximately

$1,067 million as of March 31, 2002. The First Quarter 2002 Form 10-Q also stated that

“[a]t March 31, 2002 and December 31, 2001, the most recent notification from FDIC,


- 30 -

categorized the Corporation as a well-capitalized institution under the regulatory framework

for prompt corrective action. . . . Management believes that there are no conditions or

events since that date that have changed that classification.”










misleading when issued because they failed to disclose and misrepresented the adverse facts

set forth in ¶¶58 and 195-217.



financial results for the second quarter of 2002, the period ending June 30, 2002. The

Company reported that for the quarter it earned approximately $27 million, or $0.76 per

share, an increase in earnings of 33.7% over the prior-year period, when the Company

reported earnings of $20.2 million, or $0.64 per share. Net interest income for the quarter

was $68.5 million.

79. On August 16, 2002, First BanCorp filed its Form 10-Q/A for the quarter

ended June 30, 2002, with the SEC which was signed by Defendants Alvarez-Perez and

Astor-Carbonell and contained the Company’s financial statements. First BanCorp stated


- 31 -

in its Form 10-Q that the Company’s residential mortgage portfolio was valued at

approximately $1,228 million as of June 30, 2002. The Second Quarter 2002 Form 10-Q

also stated that “[a]t June 30, 2002 and December 31, 2001, the most recent notification

from FDIC, categorized the Corporation as a well-capitalized institution under the

regulatory framework for prompt corrective action. . . . Management believes that there are

no conditions or events since that date that have changed that classification.”







a fair statement of the Corporation’s financial position at June 30, 2002, and the results of

operations and cash flows for the three-month periods ended on June 30, 2002 and 2001.”



forth in ¶¶58 and 195-217.



financial results for the third quarter of 2002, the period ending September 30, 2002. The

Company reported that for the quarter it earned approximately $27.4 million, or $0.52 per

share, an increase in earnings of 19% over the prior-year period, when the Company

reported earnings of $23 million, or $0.45 per share. Net interest income for the quarter

was $60.3 million.


- 32 -

83. On November 14, 2002, First BanCorp filed its Form 10-Q for the period

ending September 30, 2002, with the SEC which was signed by Defendants Alvarez-Perez

and Astor-Carbonell and contained the Company’s financial statements. First BanCorp


approximately $1,349 million as of September 30, 2002. The Third Quarter 2002 Form 10-

Q also stated that “[a]t September 30, 2002 and December 31, 2001, the most recent

notification from FDIC, categorized the Corporation as a well-capitalized institution under

the regulatory framework for prompt corrective action. . . . Management believes that there

are no conditions or events since that date that have changed that classification.”


contained in the Third Quarter 2002 Form 10-Q, the Defendants Alvarez-Perez and Astor-






results of operations and cash flows for the three-month periods ended on September 30,

2002 and 2001.”



forth in ¶¶58 and 195-217.

2002 Fourth Quarter and Fiscal Year Ended December 31, 2002

86. On January 16, 2003, First BanCorp issued a press release announcing its

financial results for its fourth quarter and fiscal year 2002 ended December 31, 2002. The


- 33 -

Company reported that for the quarter earnings were $28 million, or $0.53 per share,

compared to earnings of $24 million, or $0.47 per share, for the same period in the prior

year. For the year ended December 31, 2002, First BanCorp announced “another record

year” with earnings of $108 million, or $2.04 per share, compared to $86 million, or $ 1.74

per share. This was an increase of 25.5% over the prior-year period. Commenting on the

year 2002 achievements, Defendant Alvarez-Perez stated that “we feel very satisfied that

we have earned record profits, through the continuous growth of our loan portfolios,

especially commercial and residential loans.”

87. On March 31, 2003, First BanCorp filed with the SEC its 2002 10-K, which

was signed by the Individual Defendants. The 2002 10-K contained a clean audit opinion

from the Company’s auditors, PricewaterhouseCoopers LLP. The 2002 10-K also

contained certifications signed by Defendants Alvarez-Perez and Astor-Carbonell submitted

to the SEC pursuant to Section 302 of Sarbanes-Oxley Act. The certifications state:

1. I have reviewed this Annual Report on Form 10-K of First BanCorp;

2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report;

3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material information


- 34 -

relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the “Evaluation Date”); and

c) Presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

88. The 2002 10-K represented that First BanCorp’s total mortgage loan

portfolio as of December 31, 2002, was approximately $1.85 billion, with non-conforming

mortgages valued at $959 million, or 52% of the Company’s total mortgage loan portfolio

in 2002. The 2002 10-K also represented that as of December 31, 2002, the Bank’s

brokered CD balance was $3.88 billion, and its FHLB balance was $373 million. The

average yield paid by FirstBank in 2002 on these sources of funds was 3.13% and 4.72%,

respectively, and the Company’s yield on average earnings investments for 2002 was


- 35 -

6.77%. Based upon the average net interest margin in 2002 from brokering CDs and FHLB

borrowings (average yield paid subtracted from the average earnings yield), and the

respective balances of brokered CDs and borrowing from the FHLB as of December 31,

2002, the net interest income on a tax-equivalent basis generated from these two sources of

funds was approximately $148.9 million, or 56% of the Company’s total net interest

income reported for 2002, which was $266.9 million.

89. The 2002 10-K represented that the increase in the Company’s earnings is

mainly “attributed to the net interest income earned on the growing portfolio of average

earning assets and other income, net of increases in operating expenses.” The 2002 10-K

further represented that “[t]he Corporation’s objective is to maintain a solid capital position

above the ‘well-capitalized’ classification under the federal banking regulations. . . . At

December 31, 2002 the Corporation had a leverage ratio of 7.35%; a total risk based capital

ratio of 13.75%; and a Tier 1 risk-based capital ratio of 11.90%.”



forth in ¶¶58 and 195-217. Additionally, the certifications signed by Defendants Alvarez-

Perez and Astor-Carbonell were materially false and misleading because the Individual

Defendants were aware that: (1) the 2002 10-K contained untrue statements of material

fact; (2) the financial statements presented therein were materially false and misleading;

and (3) the Company’s internal controls and procedures suffered from material weaknesses.


91. On April 15, 2003, First BanCorp issued a press release announcing its

financial results for the first quarter of 2003 ended March 31, 2003. The Company reported

that earnings for the quarter were $36.4 million, or $0.74 per share, compared to earnings of


- 36 -

$25.6 million, or $0.49 per share, for the first quarter of 2002. Net interest income was

$72.4 million, an increase of $3.1 million from $69.3 million reported for the first quarter

of 2002. The Company attributed the increase in its net interest income to a $954.6 million

increase in average earning assets since March of 2002. Commenting on First BanCorp’s

first quarter 2003 results, Defendant Alvarez-Perez stated that “[t]his has been a very good

quarter overall.”

92. On May 15, 2003, First BanCorp filed its Form 10-Q for the quarter ended

March 31, 2003, with the SEC which was signed by Defendants Alvarez-Perez and Astor-
















In addition, the Form 10-Q contained certifications submitted to the SEC pursuant to


- 37 -

Section 302 of the Sarbanes-Oxley Act, signed by Defendants Alvarez-Perez and Astor-

Carbonell that, in sum and substance, were identical to the certifications in the Company’s

2002 10-K.



forth in ¶¶58 and 195-217.



financial results for the second quarter of 2003, the period ending June 30, 2003. The

Company reported that earnings for the quarter were $29.3 million, or $0.56 per share,

compared to earnings of $27 million, or $0.51 per share, for the second quarter of 2002.

Net interest income for the quarter was approximately $68.5 million. Commenting on this

quarter’s results, Defendant Alvarez-Perez stated that “[o]ur core lending operations have

continued to grow, especially commercial, auto, and residential mortgages.” In the press

release, First BanCorp also represented that First BanCorp was “well-capitalized” and

represented that the Company’s total assets were $9,934 million as of June 30, 2003.

96. On August 14, 2003, First BanCorp filed its Form 10-Q with the SEC for the

period ended June 30, 2003, which was signed by Defendants Alvarez-Perez and Astor-



$2,303 million as of June 30, 2003. The Second Quarter 2003 Form 10-Q also stated that

“[a]t June 30, 2003 and December 31, 2002, the most recent notification from FDIC,



- 38 -










operations and cash flows for the three-month periods ended on June 30, 2003 and 2002.”

In addition, the Form 10-Q contained certifications submitted to the SEC pursuant to

Section 302 of Sarbanes-Oxley Act, signed by Defendants Alvarez-Perez and Astor-

Carbonell, using language that is virtually identical to the certifications in the Company’s

2002 10-K.



forth in ¶¶58 and 195-217.

99. On September 26, 2003, First BanCorp filed a Prospectus and Registration

Statement, dated September 25, 2003 in connection with a public offering of 7.584 million

shares of its 7.00% Noncumulative Perpetual Monthly Income Preferred Stock, Series E, at

$25.00 per share with the SEC. The Series E Registration Statement/Prospectus (the

“Series E Registration Statement/Prospectus”) contained the Company’s financial results

for fiscal year 2002 and for the six-month period ended on June 30, 2003. The Series E

Preferred Stock offering incorporated by reference an S-3 Registration Statement first


- 39 -

declared effective by the SEC on or about January 24, 2002, which was signed by the

Individual Defendants. The Series E Registration Statement- Prospectus included selected

consolidated financial and operating data of First BanCorp for the six-month periods ended

June 30, 2003 and 2002 and for each of the five years in the period ended December 31,

2002. It also incorporated by reference the Form 10-Q Quarterly Reports filed with the

SEC for the periods ended March 31, 2001, June 30, 2001 and September 30, 2001.

100. Under the terms and conditions of the underwriting agreement, First

BanCorp was obligated to sell, and the Underwriters were obligated to purchase, all 6.6

million shares of the Series E Preferred Stock. The Underwriters also had an over-

allotment option and sold a total of 7.584 million shares of Series E Preferred Stock to the

public at offering price of $25.00. First BanCorp raised approximately $189.6 million, and

the Underwriters reaped commissions of approximately $6.7 million, in connection with the

Series E Preferred Stock Offering.

101. In a press release dated September 26, 2003, the Company stated:

“We are extremely please at the support our 55-year-old institution has received from our Puerto Rico investors. This preferred stock issue is being sold primarily in Puerto Rico, and we have had to increase the offer to meet the demand for our stock.”

“The $189.6 million First BanCorp Series E Preferred Stock issue is the largest transaction of its type to be completed in our market. The orders received for the transaction exceeded $200 million. This confirms the reliability and credibility associated with First BanCorp’s name, as well as the significant depth and maturity of the Puerto Rico capital market.”

102. The statements referenced above in ¶¶99 and 101, including the financial

statements included in the Series E Registration Statement/Prospectus, were materially false

and misleading when issued because they failed to disclose and misrepresented the facts set

forth in ¶¶58 and 195-217.


- 40 -

2003 Third Quarter ended September 30, 2003


financial results for the third quarter, the period ending September 30, 2003. The Company

reported that earnings for the quarter were $31.7 million, or $0.62 per share, compared to

earnings of $27.4 million, or $0.52 per share, in the year-ago period and that net interest

income increased by $11.6 million from $60.3 million during the third quarter of 2002, to

$71.9 million during the third quarter of 2003. When compared to the immediately

preceding quarter, it also increased by $8 million.

104. On November 14, 2003, First BanCorp filed its quarterly report with the

SEC on Form 10-Q. The Company’s Form 10-Q was signed by Defendants Alvarez-Perez


stated in its 10-Q that the Company’s residential mortgage portfolio was valued at



notification from FDIC, categorized the Corporation as a well-capitalized institution under

the regulatory framework for prompt corrective action. . . . Management believes that there

are no conditions or events since that date that have changed that classification.”


contained in the Third Quarter 2003 Form 10-Q, Defendants Alvarez-Perez and Astor-

Carbonell stated: “In the opinion of Management, the accompanying unaudited






- 41 -

results of operations and cash flows for the three and nine-month periods ended on

September 30, 2003 and 2002.” Additionally, the Form 10-Q contained certifications

submitted to the SEC pursuant to Section 302 of the Sarbanes-Oxley Act, signed by

Defendants Alvarez-Perez and Astor-Carbonell that, in sum and substance, were identical

to the certifications in the Company’s Form 10-K filed with the SEC on March 31, 2003.


misleading when issued as they failed to disclose and misrepresented the facts set forth in

¶58 and 195-217.


107. On January 21, 2004, First BanCorp announced its financial results for the

fourth quarter and full year of 2003. For the fourth quarter, net income was $55 million, or

$1.12 per share, compared to earnings of $28 million, or 53 cents per share, for the fourth

quarter of 2002. Net interest income was $84.0 million for this quarter, as compared to

$68.7 million for the fourth quarter of 2002 and $71.9 million for the third quarter of 2003.

108. For the year ended December 31, 2003, First BanCorp reported “another

record year,” with earnings of $152.3 million, or $3.04 per share, compared to $108

million, or $2.04 per share, an earnings increase of 41.1% for the year 2003.

109. Commenting on the year 2003 achievements, Defendant Alvarez-Perez said,

“2003 was a challenging year, as related to interest rates and the general economic environment. Notwithstanding this, we have earned record profits, through the continuous growth of our loan portfolios, especially commercial and residential loans and maintaining low delinquencies in a difficult economic environment, especially in the consumer portfolios. In addition during this year, we restructured our investment portfolio which enabled us to record substantial profits on the securities sold, while at the same time giving us the opportunity to reinvest in a mortgage backed securities portfolio with more attractive yields and shorter maturities.”

110. Net interest income in 2003 increased by $25.4 million for the year, to end

the year at $292.2 million. According to the Company, the increase in net interest income


- 42 -

for the year is the result of volume increases of $1,571 million in First BanCorp’s average

loan and investment portfolios.

111. On March 15, 2004, First BanCorp filed its 2003 10-K. The 2003 10-K was

signed by the Individual Defendants and included the Company’s audited financial

statements. With respect to the presentation of its financial results, defendants’ auditors,

PricewaterhouseCoopers LLP, issued a clean audit opinion on first BanCorp’s financial

statements:

In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows present fairly, in all material respects, the financial position of First BanCorp and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

112. Additionally, Defendants Alvarez-Perez and Astor-Carbonells signed

materially false and misleading certifications stating that:

1. I have reviewed this annual report on Form 10-K of First BanCorp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those


- 43 -

entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter the case of an Annual Report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting, and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

113. The 2003 10-K stated that First BanCorp’s total mortgage loan portfolio as

of December 31, 2003, was $2.88 billion. The non-conforming mortgages received from

Doral and R&G, which are the subject of the Company’s restatement, in 2003 was valued at

$1.9 billion or 66% of the Company’s total mortgage loan portfolio in 2003.

114. The 2003 10-K also stated that as of December 31, 2003, the Company’s

brokered CD balance was $4.94 billion, and its FHLB balance was $913 million. The

average yield paid by First BanCorp on these sources of funds was 2.34% and 3.06%,




- 44 -



2003, the net interest income generated from these two sources of funds would be

approximately $187.7 million, or 64% of the Company’s total net interest income reported

for 2003, which was $292.2 million.

115. The 2003 10-K also stated that “[t]he increase in net interest income for the

year 2003 was mainly driven by volume increases of $1,571 million in the Corporation’s

average earning assets, specially commercial and residential real estate loans.”



¶¶58 and 195-217. Additionally, the certifications signed by Defendants Alvarez-Perez and

Astor-Carbonell were materially false and misleading because they were aware that: (1) the

2003 10-K contained untrue statements of material fact; (2) the financial statements

presented therein were materially false and misleading; and (3) the Company’s internal

controls and procedures suffered from material weaknesses.


117. On April 22, 2004, First BanCorp announced its financial results for the

quarter ended March 31, 2004. Net income was $40.2 million, or $0.35 per share,

compared to earnings of $36.4 million, or $0.74 per share, for the first quarter of 2003. Net

interest income increased by $11.8 million from $72.4 million during the first quarter of

2003 to $84.2 million during the first quarter of 2004. Commenting on these first quarter

2004 results, Defendant Alvarez-Perez stated that “[t]his has been a very good quarter

overall. Our loan portfolios continue to grow, and our non-performing assets and charge

offs continue to decline. Earnings this quarter include a $3.2 million, or 8 cents per diluted


- 45 -

share gain (net of tax), on the sale of a credit card portfolio. However, earnings of March

2003 first quarter included a $13.7 million, or 34 cents per diluted share gain, on the sale of

a portfolio of mortgage backed securities done in connection with a restructuring of this

portfolio.”

118. On May 10, 2004, First BanCorp filed its quarterly report with the SEC on

Form 10-Q. The Company’s Form 10-Q was signed by Defendants Alvarez-Perez and


in its 10-Q that the Company’s residential mortgage portfolio was valued at approximately






119. With respect to the presentation of its financial results, the Individual

Defendants represented: “In the opinion of Management, the accompanying unaudited






Additionally, the Form 10-Q contained materially false and misleading certifications

submitted to the SEC pursuant to Section 302 of the Sarbanes-Oxley Act, signed by

Defendants Alvarez-Perez and Astor-Carbonell that, in sum and substance, were identical

to the certifications in the Company’s 2003 10-K filed with the SEC on March 15, 2004.


- 46 -



¶¶58 and 195-217.


121. On July 22, 2004, First BanCorp reported earnings for the quarter ended

June 30, 2004. Net income was $40 million, or $0.74 per share, for the second quarter of

2004, compared to earnings of $29.3 million, or $0.56 per share, for the second quarter of

2003. Net interest income increased by $30.4 million from $63.9 million during the second

quarter of 2003 to $94.3 million during the second quarter of 2004. Commenting on the

quarter’s results, Defendant Alvarez-Perez stated: “[t]his has been an excellent quarter. Our

core lending operations have continued to grow, especially commercial, auto and residential

mortgages. With the increase in long-term rates, we have been able to replenish a portion

of our investment portfolio at higher yields, and the prepayments on the existing mortgage-

backed securities portfolio have slowed. As a result of the positive outcome in both,

lending and investment operations net interest income has rebounded significantly.”

122. On August 9, 2004, First BanCorp filed its quarterly report with the SEC on



in its 10-Q that the Company’s residential mortgage portfolio was valued at approximately

$3,489 million as of June 30, 2004. The Second Quarter 2004 Form 10-Q also stated that

“[a]t June 30, 2004 and December 31, 2003, the most recent notification from federal

banking regulators, categorized the Corporation as a well-capitalized institution under the

regulatory framework for prompt corrective action. . . . Management believes that there are

no conditions or events since that date that have changed that classification.”


- 47 -








operations and cash flows for the six-month periods ended on June 30, 2004 and 2003.”

Additionally, the Form 10-Q contained materially false and misleading certifications signed

by Defendants Alvarez-Perez and Astor-Carbonell that, in sum and substance, were nearly

identical to the certifications in the Company’s 2003 10-K.



¶¶58 and 195-217.


125. On October 21, 2004, First BanCorp reported earnings for the quarter ended

September 30, 2004. Net income was $49.1 million, or $0.97 per share, for the third

quarter of 2004, compared to earnings of $31.7 million, or $0.62 per share, for the third

quarter of 2003. Net interest income increased by $31.4 million from $71.9 million during

the third quarter of 2003 to $103.3 million during the third quarter of 2004.

126. Commenting on First BanCorp’s 2004 third quarter results, Defendant

Alvarez-Perez stated that:

“[o]ur earnings have grown significantly as a result of a strong increase of $31.4 million in net interest income, when compared to the same period in 2003. Both loans and investments have had healthy growth, but it is particularly important to mention that at the end of the previous quarter we


- 48 -

were able to make significant longer term investments, after we had stayed on the sidelines for a few months, awaiting the opportunity to make these investments, which have now contributed significantly to our bottom line.”

127. On November 15, 2004, First BanCorp filed its quarterly report with the

SEC on Form 10-Q. The Company’s Form 10-Q was signed by Defendants Alvarez-Perez





notification from federal banking regulators, categorized the Corporation as a well-

capitalized institution under the regulatory framework for prompt corrective action. . . .

Management believes that there are no conditions or events since that date that have


128. With respect to the presentation of its financial results, Defendants Alvarez-

Perez and Astor-Carbonell represented: “In the opinion of Management, the accompanying

unaudited consolidated statements of financial condition and the related unaudited

consolidated statements of income, cash flows, changes in stockholders’ equity and

comprehensive income include all adjustments (consisting only of normal recurring

accruals) necessary for a fair statement of the Corporation’s financial position at September

30, 2004, and the results of operations and cash flows for the nine-month periods ended on

September 30, 2004 and 2003.”

129. Additionally, the Form 10-Q contained materially false and misleading

certifications submitted to the SEC pursuant to Section 302 of the Sarbanes-Oxley Act,

signed by Defendants Alvarez-Perez and Astor-Carbonell that, in sum and substance, were

nearly identical to the certifications in the Company’s 2003 10-K.


- 49 -



¶¶58 and 195-217.


131. On January 27, 2005, First BanCorp issued a press release announcing

record results for the year 2004. According to the Company, 2004 “was another record

year for First BanCorp,” with earnings of $178.9 million, or $3.44 per share, compared to

$152.3 million, or $3.04 per share, for the year ended December 31, 2003. Net interest

income increased by $91 million for the year, to $383.2 million. According to the

Company, the increase in net interest income for the year is the result of “volume increases

of $3.2 billion in the Corporation’s average loan and investment portfolios.”

132. For the fourth quarter, net income was $49.7 million, or $0.98 per share,

compared to earnings of $55 million, or $1.12 per share, for the fourth quarter of 2003. Net

interest income was $101.5 million for this quarter, as compared to $84.0 million for the

fourth quarter of 2003.

133. Commenting on the year 2004 achievements, Defendant Alvarez-Perez, said:

“2004 was a challenging year due to the uncertainty of the interest rates scenario. Notwithstanding this, we have earned record profits, through the continuous growth of our loan portfolios, especially commercial and residential loans and maintaining low delinquencies and write offs. In addition, during this year, we reinvested most of our investment portfolio, which had been maintained short-term, waiting for the market to give us a re-entry opportunity.”

134. On March 16, 2005, First BanCorp filed its 2004 10-K. The 2004 10-K was

signed by the Individual Defendants and reaffirmed its financial results that were

announced on January 27, 2005, which were materially false and misleading when issued.


- 50 -

135. In the 2004 10-K, the Company highlighted that its earnings increase was

the result, in part of “of a significant growth of $3.2 billion in the average balance of

earning assets.” The 2004 10-K states:

The Corporation’s earnings increase is mainly the result of a significant growth of $3.2 billion in the average balance of earning assets and from increases in the average yield on investment securities, together with lower cost of funding. The increase in interest income, when compared to 2003, is mainly attributed to the growth in the Corporation’s loan and investment portfolios; the average balance of these portfolios increased by $1.7 billion and $1.5 billion, respectively. The increase in the loan portfolio was mainly driven by the origination and purchase of residential mortgage loans. . . . Total yield on earning assets on a taxable equivalent basis was 5.62% for 2004 as compared to 5.66% for 2003.

136. The 2004 10-K stated that First BanCorp’s total mortgage loan portfolio as

of December 31, 2004, was $4.68 billion. The non-conventional mortgages received from

Doral and R&G, which are the subject of the Company’s restatement, in 2004 was valued at

$3.4 billion or 73% of the Company’s total mortgage loan portfolio in 2004.

137. The 2004 10-K also stated that as of December 31, 2004, the Company’s

brokered CD balance was $5.74 billion, and its FHLB balance was $1.6 billion. The

average yield paid by First BanCorp on these sources of funds was 2.54% and 2.95%,





2004, the net interest income generated from these two sources of funds would be

approximately $219.6 million, or 57% of the Company’s total net interest income reported

for 2004, which was $ 383.2 million.

138. The 2004 10-K states:


- 51 -

The Corporation’s principal funding sources are branch-based deposits, retail brokered deposits, institutional deposits, federal funds purchased, securities sold under agreements to repurchase, notes payable and FHLB advances. As of December 31, 2004, total liabilities amounted to $14.4 billion, an increase of $2.8 billion as compared to $11.6 billion increase as of December 31, 2003. The net increase in total liabilities was mainly due to: (1) $1.1 billion increase in total deposits, including $641.6 million increase in retail brokered certificates of deposit, (2) $571.2 million increase in federal funds and securities sold under agreements to repurchase, (3) $685.0 million increase in advances from FHLB, (4) $176.8 million increase in notes payable, and (5) an increase of $231.5 in other borrowings.

139. The 2004 10-K also highlighted the importance of FirstBank’s mortgage-

loan portfolio and designation as a well-capitalized bank in maintaining access to FHLB

borrowings. The 2004 10-K says that:

FirstBank is a member of the Federal Home Loan Bank (FHLB) system and obtains advances to fund its operations under a collateral agreement with the FHLB that requires the Bank to maintain minimum qualifying mortgages as collateral for advances taken. . . . As of December 31, 2004, First BanCorp and FirstBank were in compliance with all the regulatory capital requirements that were applicable to them as a financial holding company, and a state non-member bank, respectively (i.e., total capital and Tier 1 capital to risk-weighted assets of at least 8% and 4%, respectively, and Tier 1 capital to average assets of at least 3%). . . . As of December 31, 2004, FirstBank was considered a well-capitalized bank for purposes of the prompt corrective action regulations adopted by the FDIC.

140. The 2004 10-K also states that “FirstBank purchases non-conforming

residential mortgage loans from local mortgage bankers. . . . These residential mortgage

loan purchases are subject to limited recourse arrangements that generally obligate the

seller to repurchase the loans if loans are 120 days or more past due or otherwise in

default.”

141. With respect to the presentation of its financial results, defendants’ auditors,

PricewaterhouseCoopers LLP, issued the following clean audit opinion:

Consolidated financial statements

In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows present fairly, in all


- 52 -

material respects, the financial position of First BanCorp and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control -Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit.

142. Additionally, Defendants Alvarez-Perez and Astor-Carbonell signed

materially false and misleading certifications stating that:

(1) I have reviewed this annual report on Form 10-K of First BanCorp.;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated


- 53 -

subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter the case of an Annual Report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting, and

(d) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditor and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

143. The statements referenced above in ¶¶131-140 and 142 were materially false

and misleading when issued as they failed to disclose and misrepresented the facts set forth

in ¶¶58, 195-217. Additionally, the certifications signed by Defendants Alvarez-Perez and

Astor-Carbonell were materially false and misleading because the Individual Defendants

were aware that: (1) the 2004 10-K contained untrue statements of material fact; (2) the


- 54 -

financial statements presented therein were materially false and misleading; and (3) the

Company’s internal controls and procedures suffered from material weaknesses.

144. By December 31, 2004, when the restatement announced on December 13,

2005 is considered, FirstBank’s adjusted total-capital-to-risk-weighted-assets ratio was

approximately 9%, which is below the 10% minimum threshold for a well-capitalized bank.

FirstBank’s failure to meet the FDIC’s minimum threshold for a well-capitalized bank as of

December 31, 2004 was not disclosed to investors.

145. On April 19, 2005, Doral announced that it was restating its financial results

for 2000 through 2004. The restatements were announced as corrections to the accounting

treatment for the value of its IO Strip portfolio. Doral stated that its restatement will result

in a decrease in the fair value of the securities by $400 to $600 million. Doral estimated

that it will eventually have to take a $290 million to $435 million charge for the required

adjustments over the prior-year periods.

146. On April 25, 2005, R&G issued a press release announcing that it would

restate its previously reported earnings for its fiscal years 2003 and 2004, and all interim

quarters, due to an overstatement of the market valuations R&G used in valuing residual

interests retained in securitization mortgage transactions of the Company. R&G stated that

it had “preliminarily estimated that the fair value of its residual interests would be reduced

as of December 31, 2004 by an amount equal to between approximately $90 million to

$150 million.”

147. Notwithstanding the restatement announcements by Doral and R&G relating

to mortgages purportedly sold to First BanCorp, in the ensuing months the First BanCorp

Defendants continued to conceal the problems stemming from its mortgage portfolio and

misled investors by issuing positive statements regarding the Company’s financial results,


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continued growth, assets and capitalization when they knew that their fraudulent scheme

was starting to fall apart.


148. On April 19, 2005, First BanCorp reported earnings for the quarter ended

March 31, 2005. Net income was $53.4 million, or $1.07 per share, for the first quarter of

2005, compared to earnings of $40.2 million, $0.75 per share, for the first quarter of 2004.

Net interest income increased by $21.4 million from $88.2 million during the first quarter

of 2004 to $109.6 million during the first quarter of 2005. Commenting on these first

quarter 2005 results, Defendant Alvarez-Perez stated:

“This has been a very good quarter overall. Our loan portfolios continue to grow, and our non-performing assets and charge offs continue to decline. Earnings this quarter include a gain on sale of investments, net of derivatives losses, of $8.4 million. However, comparable earnings of the March 2004 first quarter included $6.7 million in special items due to an after-tax gain on the sale of a credit card portfolio of $3.2 million and gains on sale of investments net of derivative losses of $3.5 million.”

149. On May 10, 2005, First BanCorp filed its quarterly report with the SEC on



in its Form 10-Q that the Company’s residential mortgage portfolio was valued at

approximately $5,557 million as of March 31, 2005. The First Quarter 2005 Form 10-Q

also stated that “[a]t March 31, 2005 and December 31, 2004, the most recent notification

from the FDIC and OTS, [categorized the Corporation as a] well-capitalized institution

under the regulatory framework for prompt corrective action. . . . Management believes

that there are no conditions or events since that date that have changed that classification.”



Carbonell represented “In the opinion of Management, the accompanying unaudited


- 56 -






151. Additionally, the Form 10-Q contained certifications submitted to the SEC

pursuant to Section 302 of the Sarbanes-Oxley Act, signed by Defendants Alvarez-Perez

and Astor-Carbonell that, in sum and substance, were nearly identical to the certifications in

the Company’s 2004 10-K filed with the SEC on March 16, 2005.



¶¶58 and 195-217.

Investor Presentations

153. In the wake of the problems confronted by Doral and R&G in early 2005,

First BanCorp continued to represent to investors that its business was healthy and its past

and future growth was predicated on solid financial footing. Thus, in addition to issuing

quarterly financial press releases and filing the Company’s financial statements with the

SEC, the First BanCorp Defendants made detailed presentations to investors and made

those presentations available to the public via the Company’s website.

154. In an Investors Presentation to Cohen Bros. & Company, dated March 18,

2005, which was also made available on the Company’s website, the First BanCorp

Defendants touted the purported financial strengths of the Company. The presentation

highlighted every aspect of the Company’s financial growth from 1991 through 2004. In

particular, the presentation indicated that from 1991 through 2004, First BanCorp reported:


- 57 -

• a 721% increase in assets;

• a 720% increase in net interest income;

• a 1,671.3% increase in net income; and

• a 7,898.4% rise in its common stock price.

155. The presentation also highlighted First BanCorp’s “[s]trengths,” citing the

fact that it is “[b]ottom [l]ine [o]riented,” and had demonstrated “[c]onsistent earnings

increases for last 14 years” and “[a]bove average profitability ratios for past 14 years.” The

presentation further highlighted the Company’s false financial results, which included

slides showing the Company’s growth in net interest income and net interest margin from

fiscal year 2000 through fiscal year 2004, as well as the 49% growth in its residential

mortgage loan portfolio from fiscal year 2003 to fiscal year 2004.

156. The slide show also emphasized the Company’s purported capital levels and

capital ratios, and further misled investors by claiming that First BanCorp’s “[e]xcellent

governance, internal controls, and regulatory compliance are key to our strategy.”

157. The Company’s efforts to generate investor interest did not end with this

presentation. On June 23, 2005 First Bancorp made another “Investor Presentation,” which

was made available to the public on the Company’s website. This presentation highlighted

the same financial metrics presented at Cohen Bros. & Company on March 18, 2005, which

were also updated to include the Company’s (misleading) financial results through March

31, 2005. In addition, the June 23 presentation highlighted the Company’s sources of

revenue, stating that its income and growth was generated from residential mortgages and

emphasizing that the “Growth in Loan Portfolio [was] Fueling NII [net interest income]

Earnings Growth.”


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158. In a further statement to investors that First BanCorp was financially strong,

on May 24, 2005 the Company announced its quarterly common stock dividend and a two-

for-one stock split for record holders as of June 15, 2005.


159. On July 19, 2005, First BanCorp issued a press release reporting earnings for

the quarter ended June 30, 2005. Net income was $57 million, or $0.58 per share, for the

second quarter of 2005, compared to earnings of $40 million, or $0.37 per share, for the

second quarter of 2004. Net interest income was $130.2 million, an increase of $33.7

million over the prior-year period.

160. Commenting on these second quarter 2005 results, Defendant Alvarez-Perez

stated: “[t]his has been an excellent quarter. Our loan origination has been outstanding,

increasing our loan portfolio by $659 million, and our non-performing assets and charge

offs levels continue very stable. Net interest income increased substantially as a result of

the increased volume of loans and investments.”

161. The statements referenced above in ¶¶154-157 and 159-160 were materially

false and misleading when issued as they failed to disclose and misrepresented the facts set

forth in ¶¶58 and 195-217.

162. The continued positive statements during 2005 from the First BanCorp

Defendants, in the face of the negative disclosures about Doral and R&G, had its intended

effect. Following the announcement on July 19, 2005 concerning its second quarter

financial results, while First BanCorp continued to conceal its mortgage portfolio problems,

the Company’s common stock jumped more than $4 from the prior day’s closing price to

$26.07 per share.


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First BanCorp Delays Filing of Second Quarter Form 10-Q

163. On August 10, 2005, First BanCorp filed a Form 12b-25 with the SEC

stating that First BanCorp was delaying the filing of its Form 10-Q for the quarter ended

June 30, 2005. According to a press release issued by First BanCorp the next day, the

Audit Committee of First BanCorp determined on August 1, 2005, that the Committee

“should review the background and accounting for certain purchases of mortgage loans

made by the Company between 2000 and 2005.”

164. The Company also stated that the Audit Committee’s decision to undertake

this review was based on “several factors,” including discussions with the Company’s

external auditors, and that the Audit Committee has engaged independent counsel to

undertake this review.

165. First BanCorp added that “[t]he transactions to be reviewed involve the

Company’s purchases of mortgage loans originated by other financial institutions. The

Company has accounted for these transactions as regular purchases of mortgage loans with

variable contractual rates payable to the Company. . . . The issues currently being reviewed

by the Committee are related to the terms and conditions of the purchase contracts.”

166. Despite acknowledging for the first time that the accounting treatment of the

mortgage transactions between FirstBank and Doral and R&G needed to be reviewed, the

Company continued to mislead investors by also stating that “[a]t the present time, the

Company believes its accounting for these transactions was made in accordance with

generally accepted accounting principles.”

167. In reaction to this announcement, the price of First BanCorp stock fell from

$22.73 per share on August 10, 2005 to $21 per share on August 11, 2005, a one-day drop

of $1.73 per share, or 7.61 percent, on unusually heavy trading volume.


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168. On August 25, 2005, First BanCorp announced, after the market closed, that

the SEC was conducting an informal inquiry into the Company’s accounting. More

specifically, First BanCorp stated that “[t]he inquiry pertains, among other things, to the

accounting for mortgage loans purchased by the Company from two other financial

institutions during the calendar years 2000 through 2004.”

169. In this same press release, First BanCorp also stated that the Committee is

reviewing the terms of these transactions and the accounting for these transactions.

Specifically: 1) whether the Company should have recorded any such transactions as loans

made by the Company to the sellers of the mortgage loans, rather than as purchases of

mortgage loans under SFAS No. 140; and 2) whether any of the transactions resulted in

derivatives requiring the application of SFAS No. 133.

170. The press release concluded by stating that:

[t]he issues being reviewed by the Committee could potentially affect the Company’s financial statements for the years 2000 through 2004 and the first two quarters of 2005. The Committee has not yet made any determinations with respect to the potential impact of these issues on the Company’s prior financial statements. As indicated above, the Company was the purchaser of mortgage loans in these transactions. The income recorded by the Company in connection with these transactions was interest income on the mortgage loans purchased by the Company. . . . At the present time, the Company is uncertain when the Committee’s review will be completed and when the Company will be able to file its Form 10-Q for the quarter ended June 30, 2005.

171. In reaction to this announcement, the price of First BanCorp stock dropped

from $20.02 per share on August 25, 2005 to $18.23 per share on August 26, 2005, a one-

day drop of $1.79 per share, or 8.94 percent, on unusually heavy trading volume. The

fallout continued the next day when the stock fell another $1.01 or 6.49% on unusually

heavy volume.


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172. On August 26, 2005, credit rating agency Fitch Ratings (“Fitch”) issued a

press release stating the ratings of First BanCorp were placed on “Rating Watch Negative,”

due in large measure to the announced SEC inquiry and Audit Committee investigation

concerning First BanCorp’s mortgage loan portfolio. Fitch was particularly concerned that

any restatement could impact the Company’s liquidity and capital ratios that, by at least one

measure, were already “low relative to similarly rated peers.” The press release stated, in

part, that:

FBP’s capitalization ratios could be negatively affected by the financial review. The company’s capitalization levels have declined as asset growth has exceeded internal capital formation. Loan receivables increased by 48.6% to $11.0 billion at March 31, 2005, as compared with $7.4 billion at the comparable period in 2004 and $9.5 billion as of Dec. 31, 2004. FBP’s tangible common equity ratio (4.07%) is the low relative to similarly rated peers. Further deterioration in capitalization levels could pressure the current ratings.

The Rating Watch Negative will be evaluated following Fitch’s review with management of any restated financials, impact to capitalization levels, liquidity analysis, and future asset growth in conjunction with funding and capitalization.

173. On September 30, 2005, First BanCorp, after the market closed, announced a

series of management changes. According to the Company, Defendant Alvarez-Perez had

stepped down as President and Chief Executive Officer and announced that he would retire

effective December 31, 2005, as Chairman of the Board of Directors. In addition,

according to the Company, Defendant Astor-Carbonell had resigned from her position as

Chief Financial Officer and as a member of the Board of Directors, and informed the

Company that she would retire on October 31, 2005.


$16.92 per share on September 30, 2005 to $15.56 per share on October 3, 2005, a one-day

drop of $1.36 per share, or 8.04 percent, on unusually heavy trading volume.


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175. On October 21, 2005, after the close of the market, First BanCorp

announced that the SEC had issued a formal order of investigation concerning the

Company’s accounting of its mortgage portfolio. According to First BanCorp, the

investigation, which stemmed out of an informal inquiry announced by the Company in late

August 2005, appeared to relate to, among other things, transactions in which First

BanCorp acquired a substantial number of mortgage loans from other Puerto Rican

financial institutions. The press release stated, in part, as follows:

One issue under review by the Audit Committee is whether the mortgage transactions at issue were properly classified for accounting purposes as purchases of the mortgage loans by FirstBank or whether they should have been treated as loans by FirstBank to the other financial institutions, secured by the mortgages. Although the Company’s accounting analysis is not complete, FirstBank has concluded that most of its transactions with one financial institution, R&G Mortgage Corp, did not qualify as true sales as a legal matter. Accordingly, these transactions may need to be accounted for as a secured loan to that financial institution. As a result, First BanCorp may be required to restate its previously issued financial statements for the period from 2000 through the first quarter of 2005.

Any reclassification of the transactions as secured loans rather than as purchases of mortgages would affect the notes to the Company’s financial statements as well as the Company’s presentation of its cash flow from investing activities. The Company is reviewing the adequacy of its allowance for loan losses relating to the potential reclassified secured loans as well as the regulatory capital implications of the reclassifications. Any need to change the allowance for loan losses would impact previously reported net income and loans net of allowance for loan losses.

The analysis of the mortgage transactions with other financial institutions, including Doral Financial Corporation, is not complete. To the extent that the Company concludes that any transactions are considered to be true sales, it also will need to determine whether such transactions include various terms that should have been accounted for as derivatives. Any need to restate historical financial statements to reflect such derivatives could substantially decrease or increase First BanCorp’s net income for particular periods between 2000 and the first quarter of 2005. The Audit Committee’s continuing review of this matter as well as other matters may result in the need for the Company to restate its financial statements.


$15.25 per share on October 21, 2005 to $14.03 per share on October 24, 2005, a one-day


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drop of $1.22 per share, or 8 percent, on unusually heavy trading volume. Over the next

two days the price of the common stock dropped to $13.39 and $11.85, a decline of

approximately 12%. The Series C, D, and E Preferred shares also dropped substantially in

price. During the following two days, the Series C shares dropped from $25.07 to $22.30, a

decline of 11%; the Series E shares dropped from $24.19 to $21.83, a decline of 10%, and

the Series D shares dropped from $24.67 to $23.19, a decline of 6%.

177. On October 24, 2005, Fitch issued a press release stating that it had lowered

the ratings of First BanCorp and its subsidiary, FirstBank Puerto Rico, to ‘BB’ from ‘BBB-’

(long-term) and to ‘B’ from ‘F3’ (short term). In addition, the Individual Rating has been

downgraded to ‘C/D’ from ‘C’, and that First BanCorp’s Rating Outlook is “Negative.”

178. Fitch also noted that “the financial restatement process likely could result in

pressure on capital ratios as well as the need for increased loan loss reserves and changes in

previously reported levels of net income.” Moreover, Fitch was concerned that the

Company could experience a “potential disruption in funding” because, it noted, mortgage

loans serve as a key piece of collateral for First BanCorp. Fitch stated that “[i]f the

mortgage loans in question are deemed to have not been purchased by FBP, its available

collateral pool for funding could be reduced.”

179. Finally, Fitch noted that First BanCorp’s “funding profile also shows a

heavy reliance on brokered deposits, a source of funds that the regulators may restrict

FBP’s use of until greater certainty on the financial restatement process is achieved.” Fitch

went on to say that:

Further pressuring capitalization and increasing the risk related to uncertain funding plans, FBP has undergone significant growth in its commercial loan portfolio during the first half of 2005, exclusive of the above-mentioned reclassification. Growth in the first half of 2005 reduced the total risk-based capital ratio by nearly 200 basis points based on FBP’s regulatory report filing. Management will need to revisit growth plans and likely seek ways to


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restrain asset growth until greater certainty can be achieved regarding available sources of funds. . . . Looking forward, FBP’s return to normal growth will likely necessitate increased levels of overall capital, with attention paid to ensure there is appropriate balance between common equity and more expensive forms of preferred and hybrid instruments.

180. On October 25, 2005, Doral stated in a press release that it no longer expects

to file its amended 10-K for fiscal-year 2004 by November 10, 2005, because of “new

information” regarding the Company’s mortgage loan sales to local financial institutions,

which later was revealed to be First BanCorp, among other banks. According to Doral, the

questionable transactions may not qualify as “sales” under SFAS 140 and, therefore, “the

Company would record the transaction as a loan payable secured by mortgage loans and

reverse the gain previously recognized with respect to such transaction.” Although First

BanCorp later issued partial financial results in a press release dated November 21, 2005,

the release did not disclose the extent of its financial problems.

First BanCorp Announces a Broad Restatement and Failure to Meet Regulatory Capital Requirements

181. On December 13, 2005 the Company announced a multi-year restatement of

the Company’s historical financial statements. First BanCorp announced that a substantial

portion of the mortgage-related transactions that the Company entered into with Doral and

R&G since 1999 do not qualify as purchases and sales for accounting purposes. As a

consequence, First BanCorp will restate its previously reported financial statements from

January 1, 2001 through March 31, 2005 to correct its accounting for the mortgage-related

transactions and the accounting treatment used for certain interest rate swaps. As a result of

the information disclosed in this press release, the statements by the First BanCorp

Defendants from August 10, 2005, through the issuance of this press release (¶¶163-166;

168-170, 173, 175, and 180) were materially false and misleading as set forth in ¶¶58 and

195-217.


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182. The mortgage-related transactions with Doral and R&G are reflected in First

BanCorp’s previously issued historical financial statements as purchases of residential real

estate loans, mainly secured by first mortgages, and commercial mortgage loans. The

restatement will reflect these mortgage-related transactions as commercial loans secured by

mortgages. The impact of the revised classification of the mortgage-related transactions as

secured commercial loans as of March 31, 2005 and December 31, 2004, 2003 and 2002

will be to reduce residential real estate loans by approximately $3.8 billion, $3.4 billion,

$1.9 billion and $959 million, respectively, and to increase commercial loans secured by

mortgages as of March 31, 2005 and December 31, 2004, 2003 and 2002 by the same

amounts.

183. The December 13, 2005 press release also stated that “the revised

classification of the mortgage-related transactions as secured commercial loans precludes

the use by First BanCorp of the mortgages as collateral to secure advances from the

FHLB.”

184. The Company also warned in its December 13, 2005 Press Release that other

additional matters may cause First BanCorp to further adjust its previously-issued financial

results. The Company stated that its “management and Audit Committee are continuing

their review of other transactions reflected as mortgage-related acquisitions as well as

certain other matters.” Accordingly, “additional matters may come to the attention of First

BanCorp that may require adjustments to its financial statements.”

185. The Company further stated that it:

is evaluating whether the Company’s disclosure controls and procedures, including internal control over financial reporting, were effective as of the end of each of the affected historical periods. It is likely that the assessment of internal control over financial reporting will result in the identification of a material weakness and, accordingly, an adverse opinion on the effectiveness


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of internal control over financial reporting from our independent registered public accounting firm. . . .

186. Finally, First BanCorp was advised by the FDIC on December 7, 2005 that

the revised classification of the mortgage-related transactions will result in such

transactions being viewed for regulatory capital purposes as loans to mortgage companies

rather than loans secured by one-to-four family residential properties. “[T]he revised

classification of the mortgage transactions and the correction of the accounting for the

interest rate swaps would cause the [Company’s] ratio of Total Capital to Risk Weighted

Assets as of September 30, 2005 to be slightly below the well-capitalized level.” This

designation may impact FirstBank’s ability to accept, renew or roll over brokered

certificates of deposit in accordance with regulatory rules.

187. On December 13, 2005, First BanCorp’s common stock declined from

$13.15 to $12.24, a decline of 7%. The decline in First BanCorp’s stock on December 13,

2005, was directly and proximately caused by the Company’s announcement that it intends

to restate its financial statements for the period 2001 through the first quarter of 2005.

188. A December 15, 2005, press release issued by Doral shed further light on the

mortgage transactions between First BanCorp and Doral. Doral announced that it intended

to restate its financial statements to reflect an aggregate of $3.9 billion in mortgage

transactions between Doral and First BanCorp as loans payable secured by mortgage loans,

rather than as sales of mortgages as these transactions had originally been recorded. Doral

further stated that the restatement was necessary because “it is likely that at the time of the

transactions there were oral agreements or understandings between former members of

[Doral] and FirstBank providing recourse beyond the limited recourse established in the

written contracts.” Significantly, Doral is under criminal investigation by the United States


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Department of Justice with respect to its restatement and how it accounted for its mortgage-

related transactions.

Impact of Restatement on First BanCorp’s Future Profitability

189. The Company’s ability to generate revenues and profits will be materially,

adversely affected by the reclassification of the mortgages acquired from Doral and R&G.

In fact, the Company stated that, as a result of its announced restatement, its present total-

capital-to-risk-weighted-assets ratio has caused FirstBank to fall below the minimum

regulatory threshold for being “well-capitalized.”

190. Under FDIC regulations, a bank that falls below the well-capitalized level

cannot accept, renew or roll over brokered CDs without a waiver from the FDIC. A bank

that is adequately capitalized, which is the level below well-capitalized, may not pay an

interest rate on any deposits in excess of 75 basis points over certain prevailing market rates

specified by regulation. There are no such restrictions on a bank that is well-capitalized.

The Company’s 2002 10-K states that:

Under FDIC regulations, a bank cannot accept, roll over or renew brokered deposits, which term is defined also to include any deposit with an interest rate more than 75 basis points above prevailing rates, unless (i) it is well-capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC.

191. Temporarily, the FDIC has permitted FirstBank to continue to broker CDs as

an “adequately capitalized bank,” pending a decision on the Company’s request for a

waiver of the capital ratio requirements. But without a significant restructuring of

FirstBank’s balance sheet, or a waiver from the FDIC, the Bank’s business of brokering

CDs and its ability to increase its net interest income will be severely hampered.

192. First BanCorp’s announced restatement will negatively impact its income

statement in other ways as well. The Bank is a member of the FHLB and, as a member,

was able to borrow billions of dollars during the Class Period from FHLB by collateralizing


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the mortgages received from Doral and R&G. As a result of the restatement, FirstBank can

no longer pledge these mortgages as collateral to borrow from the FHLB and the Bank has

lost a significant source of low-cost funding which previously fueled, in large measure, its

growth in revenue and income. Because a key source of funding for FirstBank has

disappeared, its net interest income in future periods will be negatively impacted.

Negative Impact of Failing “Well-Capitalized” Test

193. Under the Gramm-Leach-Bliley Act, bank holding companies, such as First

BanCorp, all of whose depository institutions are “well-capitalized” and “well managed,”

as defined in the Bank Holding Company Act of 1956, and which obtain satisfactory

Community Reinvestment Act ratings, may elect to be treated as FHCs. FHCs are

permitted to engage in a broader spectrum of activities than those permitted to other bank

holding companies. FHCs can engage in any activities that are “financial” in nature,

including insurance underwriting and brokerage, and underwriting and dealing in securities

without a revenue limit or a limit on underwriting and dealing in equity securities

applicable to foreign securities affiliates. First BanCorp is presently designated an FHC

and has started several financial businesses unrelated to banking in recent years, including

insurance and a broker-dealer.

194. Under the Gramm-Leach-Bliley Act, if First BanCorp fails to meet the

requirements for being an FHC and is unable to correct such deficiencies within certain

prescribed time periods, the Federal Reserve could require First BanCorp to divest control

of its depository institution subsidiaries or alternatively to cease conducting activities that

are not permissible for bank holding companies that are not FHCs. If First BanCorp is

unable to cure the capital deficiencies at FirstBank, the Company may be forced by the


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FDIC to divest itself of its businesses in Insurance, Brokerage, Leasing, and Management

Services, among others.

First BanCorp’s Financial Reporting During the Class Period Was Materially False and Misleading and Violated GAAP

195. At all relevant times during the Class Period and as set forth herein, First

BanCorp represented that its financial results were prepared in accordance with U.S.

GAAP. These representations were materially false and misleading because First

BanCorp’s financial reporting was materially misstated and violated GAAP during the

Class Period.3

196. In fact, First BanCorp has now stated that its “interim and audited annual

financial statements for the periods from January 1, 2001 through March 31, 2005 should

no longer be relied upon.” [Emphasis added.] Indeed, the First BanCorp Defendants knew

that the Company’s financial reporting during the Class Period was materially false and

misleading because, as noted herein, First BanCorp deliberately entered into secret, oral

“side agreements” to circumvent the requirements of GAAP. As a result, the Company is

now the subject of an on-going investigation by the SEC.

197. Section 13 of the Exchange Act (i.e., the Foreign Corrupt Practices Act)

requires companies to devise and maintain a system of internal controls sufficient to

reasonably assure that transactions are recorded in accordance with GAAP. In addition, the

SEC’s Staff Accounting Bulletin (“SAB”) Nos. 101 and 104 require companies to create

3 GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practices at a particular time. Generally Accepted Auditing Standard (“GAAS”) §AU 411.02. Regulation S-X [17 C.F.S §210.4-01(a)(1)] states that financial statements filed with the SEC that are not prepared in conformity with GAAP are presumed to be misleading and inaccurate. Regulation S-X requires that interim financial statements must also comply with GAAP. 17 C.F.R. 210.01-01.


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and maintain policies, procedures, and internal controls sufficient to ensure that any

agreements or alterations to contracts by “side agreements” are properly recognized and

reported.

198. On December 13, 2005, First BanCorp admitted that “a substantial portion”

of its mortgage related transactions with Doral and R&G since 1999 were accounted for

improperly. On that date, the Company also disclosed:

. . . First BanCorp announced today that its management, with the concurrence of its Board, determined, as a result of the Audit Committee’s independent review of the mortgage-related transactions and recently obtained legal opinions, to restate its previously reported financial statements to correct its accounting for the mortgage-related transactions. In addition, First BanCorp announced that it will also restate its financial statements to correct the accounting treatment used for certain interest rate swaps. Accordingly, First BanCorp’s previously-filed interim and audited annual financial statements for the periods from January 1, 2001 through March 31, 2005 should no longer be relied upon.

* * *

First BanCorp’s management and Audit Committee are continuing their review of other transactions reflected as mortgage-related acquisitions as well as certain other matters, and First BanCorp has not issued financial statements for the quarters ended June 30 and September 30, 2005, pending completion of the review and the preparation of audited restated financial statements. Accordingly, additional matters may come to the attention of First BanCorp that may require adjustments to its financial statements

As a result of the need to restate financial statements to correct the accounting for the mortgage-related transactions and certain interest rate swaps, management is evaluating whether the Company’s disclosure controls and procedures, including internal control over financial reporting, were effective as of the end of each of the affected historical periods. It is likely that the assessment of internal control over financial reporting will result in the identification of a material weakness and, accordingly, an adverse opinion on the effectiveness of internal control over financial reporting from our independent registered public accounting firm, but the Company’s review of internal control over financial reporting is ongoing. [Emphasis added.]

199. Indeed, the following evidences the First BanCorp Defendants’ intent to

misstate the Company’s financial reporting during the Class Period:


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• First BanCorp will restate its previously-filed interim and audited annual financial statements to correct approximately $3.9 billion of improperly recorded mortgage loan transactions occurring over more than a four year period;

• First BanCorp created secret, oral “side agreements” with Doral so that it could deliberately circumvent GAAP’s requirements. First BanCorp’s failure to disclose the existence of such “side agreements” otherwise evidences the Company’s proclivity to mislead investors;

• First BanCorp is the subject of an on-going investigation by the SEC;

• Defendant Alvarez-Perez resigned from his positions as First BanCorp President and Chief Executive Officer and Defendant Astor-Carbonell resigned from her positions as BanCorp First Senior Executive Vice President, Chief Finanical Officer and Director; and

• First BanCorp has concluded that “it is likely” that material weaknesses exist in its internal controls over financial reporting and that its auditors will issue an adverse opinion on the effectiveness of the Company’s internal controls over financial reporting.

200. The magnitude and duration of First BanCorp’s improper accounting

coupled with the above actions, resignations, concealment of its accounting malfeasance,

and internal control deficiencies are not indicative of innocent record keeping mistakes.

Rather, these conditions are associated with purposeful fraudulent financial reporting.

201. In fact, while First BanCorp has failed to do so, Doral, in announcing its

financial restatement associated with the mortgage-related transactions with First BanCorp,

disclosed that it had:

. . . decided to record the mortgage sales transactions with FirstBank Puerto Rico (“FirstBank”) as loans payable secured by mortgage loans and to reverse the gains previously recognized with respect to such transactions, because it is likely that at the time of the transactions there were oral agreements or understandings between former members of the Company’s management and FirstBank providing recourse beyond the limited recourse established in the written contracts. During the restatement period, the Company entered into loan sale transactions with FirstBank aggregating to approximately $3.9 billion. [Emphasis added.]


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202. Indeed, the only reason why such “side agreements” needed to exist was to

allow First BanCorp to surreptitiously mask the true terms and conditions of almost four

billion dollars of mortgage-related loans with Doral over more than a four year period.

First BanCorp’s Violations of GAAP

Violations of SFAS 140:

203. Transfers of financial assets in which the transferor retains an interest in the

transferred assets or is involved with the transferee raise questions about whether the

transfer should be accounted for as a sale or a secured borrowing. Accordingly, GAAP

provides that several criteria must be met to conclude that a sale has occurred and control

over the asset sold has been surrendered to the purchaser; when control has not been

surrendered, the transaction is accounted for by both parties as a secured borrowing.

204. SFAS No. 140 is the primary GAAP applicable to transfers of financial

assets.4 Pursuant to SFAS No. 140, a transfer of financial assets (or a portion of a financial

asset) should be accounted for as a sale only if, and to the extent that, the transferor both:

(1) surrenders control over those financial assets; and (2) receives cash or other proceeds in

exchange for the financial assets.

205. In this regard, GAAP provides that the transferor has surrendered control

over transferred assets only if all of the following conditions are met:

(1) Isolation: The transferred assets have been isolated from the transferor; that is

they are put presumptively beyond the reach of the transferor and its creditors, even in

bankruptcy or other receivership;

4 SFAS No. 140 replaced SFAS No. 125 for transfers occurring after March 31, 2001.


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(2) Transferee can pledge or exchange the transferred assets: Each transferee has

the right to pledge or exchange the assets it received, and no condition both: (1) constrains

the transferee from taking advantage of its right to pledge or exchange; and (2) provides

more than a trivial benefit to the transferor; and

(3) Transferor does not effectively control the transferred assets: The transferor

does not maintain effective control over the transferred assets through either: (1) an

agreement that both entitles and obligates the transferor to repurchase or redeem them before

their maturity; or (2) the ability to unilaterally cause the holder to return specific assets, other

than through a cleanup call.

206. If all of the above conditions are met, SFAS No. 140 provides that the

transfer is to be accounted for as a sale; if not, the transfer should be accounted for as a

secured borrowing.5 Indeed, the First BanCorp Defendants knew of, or recklessly ignored,

requirements of SFAS No. 140 in that each of the above conditions have been heavily

interpreted and have been the subject of much interest and attention by financing

institutions.

207. Moreover, SFAS No. 140 was issued, in part, to provide more detailed

guidance than previously existing GAAP on the issues of isolation, conditions that

constrain a transferee, accounting for transfers of partial interests, measurement of retained

interests, servicing of financial assets, securitizations, securities lending transactions, and

loan syndications and participations.

5 The accounting treatment under SFAS No. 140 is intended to be symmetrical. That is, if the parties conclude that the transferor has surrendered control, then the transferee must be in control and the transfer should be accounted for as a sale and purchase, respectively. Likewise, if the transferor has not surrendered control, both parties should account for the transfer as a secured borrowing.


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208. These GAAP requirements were not lost on the First BanCorp Defendants.

In fact, in its 2000 Annual Report to Shareholders filed with the SEC Form 10-K for the

fiscal year ended December 31, 2000, which was signed by the Individual Defendants, First

BanCorp disclosed:

The FASB recently issued SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS No. 125.” SFAS No. 140 revises the standards for accounting for security transactions and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125’s provisions without reconsideration. SFAS No. 140 is generally effective for transactions occurring after March 31, 2001. However, the provisions with respect to recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral are required for fiscal years ending after December 15, 2000. Management understands that the adoption of SFAS No. 140 will not have a material effect, if any, on the Corporation’s financial position or results of operations. [Emphasis added.]

209. As noted in its 2001 10-K, also signed by the Individual Defendants, First

BanCorp adopted SFAS No. 140 effective April 1, 2001 and, as of December 31, 2000,

incorporated in its financial statements the required disclosures for collateral and

securitization transactions.

210. Now, Doral has admitted that it and First BanCorp entered into “side

agreements” that were designed to circumvent the provisions of SFAS No. 140.

Violations of SFAS 133:

211. In addition to improperly accounting for mortgage transactions with Doral

and R&G, First BanCorp has now admitted to violating SFAS 133. The December 13,

2005, press release states:

First BanCorp has used interest rate swaps to hedge the interest rate risk inherent in its brokered certificates of deposit and medium term notes and in order to better match its asset liability composition. Economically, these hedges have fulfilled, and continue to fulfill, their intended results.

Since First BanCorp first implemented Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging


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Activities” (“SFAS 133”), on January 1, 2001, it has used the short-cut method to account for certain interest rate swaps. First BanCorp has concluded that it should not have used the short-cut method because of technical issues involving the interpretation of the use of the method primarily for those interest rate swaps where upfront fees are received.

SFAS 133 permits the use of the short-cut method of accounting for certain hedge relationships. Where the technical requirements to the use of this method are met, including the necessary documentation of the hedge positions, a corporation is entitled to assume that the changes in the fair value of a hedged item exactly offset the changes in the value of the related derivative. Where the criteria for the short-cut method are not met, a corporation is required to evaluate the effectiveness of the hedging relationships on an ongoing basis and calculate the changes in the fair value of the derivatives and related hedged items independently.

“As part of our ongoing accounting review, we have determined that we did not meet the technical and complex requirements relating to hedge accounting in SFAS 133,” said First BanCorp President and CEO Luis Beauchamp. “While the hedges are economically effective, we must restate our results to properly apply the rule.”

The Corporation believes that, because of rising interest rates in recent years, the impact of this change in its hedge accounting as of November 30, 2005 will be a cumulative non-cash unrealized loss of approximately $175 million, without regard to tax effects. The Corporation intends to hold the swaps until they mature because, economically, these transactions are satisfying their intended results. As a result, the unrealized cumulative loss will be reversed over the remaining lives of the swaps.

212. Pursuant to SFAS No. 133, in order to use hedge accounting, an entity needs

to assess a hedge’s effectiveness at the time it enters into a hedge and, at least, every three

months thereafter. However, SFAS No. 133 provides an exception for an interest rate swap

used to hedge interest rate risk, provided certain criteria are met. In those situations, the

entity may assume that the hedge is completely effective and elect to use “the shortcut

method,” thereby avoiding the need to formally assess hedging effectiveness at inception

and on a continuing basis.6 Thus, due to an environment of rising interest rates in recent

6 Under the shortcut method, changes in the fair value of the swap are assumed to equal the changes in the carrying amount of the instrument (for fair value hedges) or are accumulated


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years, First BanCorp, in an effort to avoid booking a loss on its interest rate swap

transactions, adopted the shortcut method under SFAS 133 despite the fact it did not satisfy

the requirements for using that method.

213. The following summarizes the conditions that must be met if the shortcut

method is to be used to hedge interest rate risk on an interest rate swap:

Fair value hedge:

• The notional amount of the swap matches the principal amount of the interest-bearing asset or liability;

• The fair value of the swap at the inception of the hedging relationship is zero;

• The fixed rate is the same throughout the term, and the variable rate is based on the same index and includes the same constant adjustment or no adjustment;

• The interest-bearing asset or liability is not pre-payable, except under certain conditions;

• The index on which the variable leg of the swap is based matches the benchmark interest rate designated as the interest rate risk being hedged for that hedging relationship;

• Any other terms in the interest-bearing financial instruments or interest rate swaps are typical of those instruments and do not invalidate the assumption of effectiveness;

• The expiration date of the swap matches the maturity date of the interest-bearing asset or liability;

• There is no floor or ceiling on the variable interest rate of the swap; and

• The interval between repricings of the variable interest rate in the swap is frequent enough to justify an assumption that the variable payment or receipt is at market rate (generally three to six months or less).

in other comprehensive income (for cash flow hedges). This greatly simplifies the accounting for the hedging relationship.


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Cash flow hedge:

• The notional amount of the swap matches the principal amount of the interest-bearing asset or liability;

• The fair value of the swap at the inception of the hedging relationship is zero;

• The fixed rate is the same throughout the term, and the variable rate is based on the same index and includes the same constant adjustment or no adjustment;

• The interest-bearing asset or liability is not pre-payable, except under certain conditions;

• The index on which the variable leg of the swap is based matches the benchmark interest rate designated as the interest rate risk being hedged for that hedging relationship;

• Any other terms in the interest-bearing financial instruments or interest rate swaps are typical of those instruments and do not invalidate the assumption of no ineffectiveness;

• All interest receipts or payments on the variable-rate asset or liability during the term of the swap are designated as hedged, and no interest payments beyond the term of the swap are designated as hedged;

• There is no floor or cap on the variable interest rate of the swap unless the variable-rate asset or liability has a floor or cap. In that case, the swap must have a floor or cap on the variable interest rate that is comparable to the floors or caps on the variable-rate asset or liability; and

• The repricing dates match those of the variable-rate asset or liability.

214. First BanCorp has now admitted that its accounting for interest rate swaps

violated GAAP during the Class Period, and is now required to restate its fiscal-year 2001

to first quarter 2005 financial statements to reflect a loss of $175 million related to its

interest rate swaps.


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Other GAAP Violations:

215. The First BanCorp Defendants had the responsibility to apply GAAP in a

manner appropriate to reflect First BanCorp’s business activities in accordance with Section

13 of the Exchange. As Section 13 of the Securities Exchange provides:

Every issuer which has a class of securities registered pursuant to Section 12 of this title and every issuer which is required to file reports pursuant to Section 15(d) of this title shall - -

A. make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and

B. devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that - -

i. transactions are executed in accordance with management’s general or specific authorization;

ii. transactions are recorded as necessary (a) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (b) to maintain accountability for assets;

iii. access to assets is permitted only in accordance with management’s general or specific authorization; and

iv. the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

216. In addition to the accounting improprieties stated above, First BanCorp

presented its financial statements during the Class Period in a manner which also violated at

least the following provisions of GAAP:


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(a) The concept that “financial reporting should provide information that

is useful to present and potential investors and creditors and other users in making rational

investment, credit and similar decisions” (Concepts Statement No. 1, 34);

(b) The concept that financial reporting should provide information about

the economic resources of an enterprise, the claims to those resources, and the effects of

transactions, events and circumstances that change resources and claims to those resources

(Concepts Statement No. 1, 40);

(c) The concept 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

(Concepts Statement No. 1, 50);

(d) The concept 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 (Concepts Statement No. 1, 42);

(e) The concept that financial reporting should be reliable in that it

represents what it purports to represent. That information should be reliable as well as

relevant is a notion that is central to accounting (Concepts Statement No. 2, 58-59);


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(f) The concept 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 (Concepts Statement No. 2, 79);

(g) The concept 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 represents what it purports to represent (Concepts Statement No. 2, 95, 97); and

(h) The principle that “interim financial reporting should be based upon

the same accounting principles and practices used to prepare annual financial statements”

(APB No. 28, 10).

217. In failing to file financial statements with the SEC which conformed to the

requirements of GAAP, First BanCorp disseminated financial statements that were

presumptively misleading and inaccurate. The Company’s Class Period Forms 10-K and

10-Q filed with the SEC were also materially false and misleading in that they failed to

disclose known trends, demands, commitments, events, and uncertainties that were

reasonably likely to have a material adverse effect on the Company’s liquidity, cash flows,

revenues, capital and income from continuing operations, as required by Item 303 of

Regulation S-K.

First BanCorp’s Financial Misstatements During the Class Period Were Material

218. As a result of the foregoing deceptions, First BanCorp will restate its interim

and annual financial statements from 2001 through March 31, 2005. In so doing, First

BanCorp has made the determination that such financial statements were materially

misstated because GAAP, in Accounting Principles Board (“APB”) Opinion No. 20,

provides that only materially misstated financial statements need be retroactively restated.


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First BanCorp has not yet issued any restated financials and has informed investors that

they can no longer rely upon previously issued audited and unaudited financial statements

from 2001 through 2005.

219. First BanCorp wrongfully used its purported residential real estate loan

portfolio to secure favorable financing from the FHLB. For example, First BanCorp’s 2004

10-K discloses:

Advances are received from the FHLB under an Advances, Collateral Pledge and Security Agreement (the Collateral Agreement). Under the Collateral Agreement, the Corporation is required to maintain a minimum amount of qualifying mortgage collateral with a market value of generally 110% or higher of the outstanding advances. At December 31, 2004, specific mortgage loans with an estimated value of $1.7 billion (2003 - $994 million), as computed by Federal Home Loan Bank for collateral purposes, were pledged to the FHLB as part of the Collateral Agreement. The carrying value of such loans at December 31, 2004 amounted to $2.2 billion (2003 - $1.3 billion). In addition, securities with an approximate market value of $1.5 million (2003 -$2.1 million) and a carrying value of $1.6 million (2003 - $2.2 million) were pledged to the FHLB.

220. As noted in the chart below, the amount of financing First BanCorp secured

from the FHLB skyrocketed during the Class Period:


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50 67

344 373

913

1598

1999 2000 2001 2002 2003 20040

500

1000

1500

2000in millions

First BanCorpFHLB AdvancesAt December 31,

221. Such FHLB advances were a source of funds that allowed First BanCorp to

significantly increase its growth and net interest income during the Class Period.7 For

example, the table below depicts the average interest rate First BanCorp reported on its

interest earning assets and the weighted-average interest rate the Company incurred on its

new FHLB advances8:

2000 2001 2002 2003 2004

Average Interest Rate Earned

7 Net interest income represents the residual interest income First BanCorp reported on its interest earning assets after subtracting the interest expense it reported on its interest bearing liabilities.

8 First BanCorp reports the average interest rate on its interest earning assets on a tax equivalent basis. A taxable equivalent basis adjusts First BanCorp’s average reported interest to what it would have been had the tax-exempt securities been taxed at the statutory rate. The rates depicted in the table for First BanCorp’s FHLB advances is a weighted-average interest rate of the Company’s new FHLB advances during the year.


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on First BanCorp’s Interest Earning Assets 9.21% 8.42%

6.77% 5.66% 5.62%

Weighted Average Interest Rate First BanCorp Incurred on New FHLB Advances 6.33% 4.33%

1.44% 1.12% 2.49%

Spread 2.88% 4.09% 5.33% 4.54% 3.13%

New FHLB Advances during the Year (in 000s) $67,000 $293,700

$50,000 $590,000 $1,275000

222. Such advances allowed First BanCorp to increase its reported net interest

income by tens of millions of dollars a year, on average, during the Class Period. In

addition, such advances afforded First BanCorp the means to purchase assets upon which it

recorded realized and/or unrealized gains during the Class Period.

223. First BanCorp’s financial misrepresentations also made its loan receivable

portfolio look much less risky. As illustrated in the chart below, the charge-off rate

associated with First BanCorp’s commercial loan portfolio was much greater than that

associated with its residential real estate portfolio during the Class Period.

0.0067%

0.2050%

0.0201%

0.2437%

0.0387%

0.2002%

20 04 20 03 20 020.0000%

0.0500%

0.1000%

0.1500%

0.2000%

0.2500%

0.3000%

Residential Loans Commercial Loans

First BanCorpA nnual Loan Chargeoffs

As A Pe rc entage Of A verage Loan Portfolio

224. In fact, First BanCorp’s commercial loan charge off rate was more than 30

times greater than its residential real estate charge off rate in 2004 and 12 times greater in


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2003. Indeed, concerning its commercial loans, First BanCorp’s 2004 10-K states,

“[a]lthough commercial loans involve a greater credit risk because they are larger in size

and more risk is concentrated in a single borrower, the Corporation has and continues to

develop an effective credit risk management infrastructure that mitigates potential losses

associated with commercial lending, including strong underwriting and loan review

functions, sales of loan participations, and continuous monitoring of concentrations within

portfolios.”

225. In addition, First BanCorp has also admitted that “the impact of [its

improper accounting for interest rate swaps] as of November 30, 2005 will be a cumulative

non-cash unrealized loss of approximately $175 million, without regard to tax effects.”

Had this loss been properly accounted for by First BanCorp, its capital levels and

corresponding ratios would have been lower.

First BanCorp’s False and Misleading Reporting and Certifications of Disclosure and Internal Controls

226. As a result of the rash of recent corporate accounting scandals, Congress

enacted the Sarbanes-Oxley Act (“SOA”), in part, to heighten the responsibility of public

company directors and senior managers associated with the quality of financial reporting

and disclosures made by their companies. The SEC revised Item 307 and added Item 308

of Regulation S-K [17. C.F.R. 229.307 and 308] to require companies to disclose the

conclusions of its principal executive and principal financial officer on the effectiveness of

the Company’s disclosure controls and procedures and disclose a report by management on

its internal control over its financial reporting.9

9 The Exchange Act Rules and Regulations define disclosure controls as: (1) controls and other procedures designed to ensure that the information required to be disclosed to investors under The Securities Exchange Act is recorded, processed, summarized and reported; and (2)


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227. Indeed, the First BanCorp Defendants knew of the requirements of the SOA

because First BanCorp’s fiscal 2003 and 2004 Forms 10-K, signed by the Individual

Defendants, disclosed:

On July 20, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (“SOA”), which implemented legislative reforms intended to address corporate and accounting fraud. SOA contains reforms of various business practices and numerous aspects of corporate governance. Most of these requirements have been implemented pursuant to regulations issued by the Securities and Exchange Commission (the “SEC”). The following is a summary of certain key provisions of SOA.

* * *

SOA requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willingly violate this certification requirement. . . . Under this new law, longer prison terms will apply to corporate executives who violate federal securities laws; the period during which certain types of suits can be brought against a company or its officers is extended and bonuses issued to top executives prior to restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct.

* * *

SOA also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company’s financial statements for the purpose of rendering the financial statements materially misleading. SOA also has provisions relating to inclusion of certain internal control reports and assessments by management in the annual report to stockholders.

228. Concerning First BanCorp’s internal controls, the Individual Defendants

signed the following report which was included in First BanCorp’s fiscal 2004 10-K:

Management’s Report on Internal Control Over Financial Reporting

internal control over financial reporting as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.


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To the Board of Directors and Stockholders of First BanCorp:

The management of First BanCorp (the Corporation) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a−15(f).

First BanCorp’s management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2004. In making this assessment, it used the criteria set forth by the Committee of the Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on the results of this assessment, the Corporation’s management concluded that its internal control over financial reporting was effective as of December 31, 2004.

229. In addition, First BanCorp’s fiscal 2002, 2003 and 2004 Forms 10-K

disclosed:

2002 10-K

Within the 90-day period prior to the filing of this Annual Report on Form 10−K, an evaluation was carried out under the supervision and with the participation of First BanCorp Management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a−14 (c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

2003 10-K

(a) Evaluation of disclosure controls and procedures. The Corporation’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Exchange Act Rules 13a−15(e) and 15d−14(e)), have concluded that, as of December 31, 2003, the Corporation’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Corporation and its consolidated subsidiaries would be made known to them by others within those entities.

(b) Changes in internal controls. There were no significant changes in the Corporation’s internal controls or in other factors that could significantly affect the Corporation’s disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Corporation’s internal controls. As a result, no corrective actions were required or undertaken.


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2004 10-K

Evaluation of Disclosure Controls and Procedures − The Corporation’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Corporation’s disclosure and controls and procedures (as defined in Exchange Act Rules 13a015(e) and 15d−14(e)), have concluded that, as of December 31, 2004, the Corporation’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Corporation and its consolidated subsidiaries would be made known to them by other within those entities. Under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, the Corporation concluded an evaluation of the Corporation’s disclosure controls and procedures (as defined in Exchange Act Rules 13a015(e) and 15d−14(e)). Based on this evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2004, the Corporation’s disclosure controls and procedures were effective and designed to provide reasonable assurance that material information relating to the Corporation and its consolidated subsidiaries required to be included in the Corporation’s periodic filings under the Exchange Act would be made known to them by other within those entities.

Internal Controls over Financial Reporting − During the quarter ended December 31, 2004, there were no changes in the Corporation’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

230. First BanCorp has now admitted that it was “likely” that these

representations were materially false and misleading when made:

As a result of the need to restate financial statements to correct the accounting for the mortgage-related transactions and certain interest rate swaps, management is evaluating whether the Company’s disclosure controls and procedures, including internal control over financial reporting, were effective as of the end of each of the affected historical periods. It is likely that the assessment of internal control over financial reporting will result in the identification of a material weakness and, accordingly, an adverse opinion on the effectiveness of internal control over financial reporting from our independent registered public accounting firm, but the Company’s review of internal control over financial reporting is ongoing. [Emphasis added.]

231. As set forth in ¶¶228-229 above, First BanCorp’s false and misleading

representations about its disclosure and internal controls during the Class Period, were then

wrongfully certified by the Individual Defendants and included as part of First BanCorp’s


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2002, 2003 and 2004 Forms 10-K filed with the SEC and in First BanCorp’s 10-Q’s as

described herein.

LOSS CAUSATION/ECONOMIC LOSS

232. During the Class Period, the First BanCorp Defendants engaged in a course

of conduct that artificially inflated the Company’s securities and operated as a fraud or

deceit on purchasers of First BanCorp securities. The prices of First BanCorp securities fell

when the truth concerning the Company’s materially false and misleading statements was

finally disclosed to investors. As a result, Plaintiffs and other members of the Class

suffered damages.

233. The false claims concerning First BanCorp’s financial statements and

operating results caused and maintained the artificial inflation in the price of First

BanCorp’s securities throughout the Class Period and until the full truth was finally

disclosed to the market.

234. The First BanCorp Defendants’ false and misleading statements had the

intended effect and caused First BanCorp securities to trade at artificially inflated levels

throughout the Class Period, trading as high as $32.09 per common share.

235. In early 2005, Doral and R&G began to disclose the problems they were

confronting. Indeed, after Doral disclosed, on May 26, 2005, that it was reviewing its

mortgage sales, shares of First BanCorp stock were extraordinarily heavily traded

downward on extremely high volume, with more than 2.249 million shares traded. Then,

on August 10, 2005, First BanCorp revealed in a 12b-25 filing with the SEC that it was

delaying the release of its second quarter Form 10-Q because the Board’s Audit Committee

was reviewing mortgages previously recorded on its financial statements and it had retained

a law firm to conduct an internal investigation. The next day the Company issued a press


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release concerning the delay and First BanCorp’s stock dropped $1.73, or 7.5%, to close at

$21.00.

236. On August 25, 2005, First BanCorp announced that the SEC was conducting

an informal inquiry into the Company’s accounting related to “mortgage loans purchased

by the Company from two other financial institutions during the calendar years 2000

through 2004.” In this same press release, First BanCorp also stated that the Audit

Committee was reviewing the terms and accounting of these transactions. In reaction to this

announcement, the price of First BanCorp common stock fell from $20.02 per share on

August 25, 2005 to $18.23 per share on August 26, 2005, a one-day drop of $1.79 per share,

or 8.94 %.

237. On October 21, 2005, First BanCorp issued a press release announcing that

the SEC had issued a formal order of investigation that related to, among other things,

transactions in which First BanCorp acquired a substantial number of mortgage loans from

other Puerto Rican financial institutions. First BanCorp announced that, although its

analysis was not concluded, it had determined that most of its transactions with R&G

Mortgage Corp. did not qualify as true purchases and that the Company may be required to

restate previously issued financial statements. In reaction to this announcement, the price

of the common stock dropped from $15.23 to $14.03, a decline of approximately 8%. The

Series C, D, and E shares also dropped substantially in price on this announcement. In the

following two days, the Series D shares dropped from $24.67 to $23.19, a decline of 6%;

the Series C shares dropped from $25.07 to $22.30, a decline of 11%; and the Series E

shares dropped from $24.19 to $21.83, a decline of 10%.

238. Finally, on December 13, 2005 the Company announced a multi-year

restatement of the Company’s historical financial statements. As a consequence, First


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BanCorp will restate its previously reported financial statements from January 1, 2001

through March 31, 2005 to correct its accounting for the mortgage-related transactions and

the accounting treatment used for certain interest rate swaps. On December 13, 2005, First

BanCorp’s common stock declined from $13.15 to $12.24, or a decline of 7%.

239. As a direct result of First BanCorp Defendants’ admissions and the public

revelations regarding the truth about First BanCorp’s financial statements and operating

condition, the prices of First BanCorp’s securities plummeted. From August 11, 2005,

when the Company announced that it was examining its mortgage transactions with Doral

and R&G, to December 13, 2005, the day that First BanCorp announced its restatement, the

Company’s stock dropped from $22.73 to $12.24, a decline of 46%. Similarly, from

October 25, 2005, the day that First BanCorp announced that it may have to restate its

financial results, through November 9, 2005, the Series E, D & C Preferred Shares declined

by approximately 18%, 15% and 15%, respectively.

FRAUD ON THE MARKET ALLEGATIONS

240. The market for First BanCorp 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, First BanCorp securities traded at artificially inflated

prices during the Class Period. Plaintiffs and other members of the Class purchased or

otherwise acquired First BanCorp securities relying upon the integrity of the market price

of First BanCorp securities and market information relating to First BanCorp, and have

been damaged thereby.

241. During the Class Period, the First BanCorp Defendants materially misled the

investing public, thereby inflating the price of First BanCorp securities, by publicly issuing

false and misleading statements and omitting to disclose material facts necessary to make


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the First BanCorp Defendants’ statements, as set forth herein, not false and misleading.

These statements and omissions were materially false and misleading in that they failed to

disclose material adverse information and misrepresented the truth about the Company, its

business and operations.

242. 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 Class.

As described herein, during the Class Period, the First BanCorp Defendants made or caused

to be made a series of materially false or misleading statements about First BanCorp’s

business, accounting and financial results. These material misstatements and omissions had

the cause and effect of creating in the market an unrealistically positive assessment of First

BanCorp and its business and operations, thus causing the Company’s securities to be

overvalued and artificially inflated at all relevant times. Numerous analysts, rating agencies

and financial reports followed the Company and issued reports to the market. The First

BanCorp Defendants’ materially false and misleading statements during the Class Period

resulted in Plaintiffs and other members of the Class purchasing the Company’s securities

at artificially inflated prices, thus causing the damages complained of herein.

SCIENTER

243. As alleged herein, the First BanCorp Defendants acted with scienter in that

they knew that the public documents and statements issued or disseminated in the name of

the Company were materially false and misleading, knew that such statements or

documents would be issued or disseminated to the investing public, and knowingly and

substantially participated or acquiesced in the issuance of such statements or documents in

violation of the federal securities laws. As set forth elsewhere herein in detail, the First


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BanCorp Defendants, by virtue of their receipt of information reflecting the true facts

regarding First BanCorp, their control over and/or receipt and/or modification of First

BanCorp’s allegedly materially misleading misstatements, and their positions with the

Company, were made privy to confidential proprietary information concerning First

BanCorp, and participated in the fraudulent scheme alleged herein.

244. Because of their executive and managerial positions with First BanCorp, the

Individual Defendants had access to the adverse non-public information about the business,

finances, markets and present and future business prospects of First BanCorp particularized

herein via access to internal corporate documents, conversations or connections with

corporate officers or employees, attendance at management meetings and committees

thereof and/or via reports and other information provided to them in connection therewith.

245. The First BanCorp Defendants had a duty to disseminate or cause to be

disseminated, accurate and truthful information with respect to First BanCorp’s operations

and financial condition and to correct promptly any previously disseminated information

that was misleading to the market. As a result of the First BanCorp Defendants failure to

do so, the price of First BanCorp’s securities was artificially inflated during the Class

Period, damaging Plaintiffs and the Class.

246. The Individual Defendants, because of their positions with First BanCorp,

controlled the contents of the Company’s quarterly reports, annual reports, public

statements and press releases disseminated throughout the Class Period. Each Individual

Defendant was provided with or had access to copies of the reports and press releases

alleged herein to be false and/or misleading prior to or shortly after their issuance and had

the ability and opportunity to prevent their issuance or cause them to be corrected. Because

of their positions and access to material non-public information, the Individual Defendants


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knew or recklessly disregarded that the adverse facts specified herein had not been

disclosed to and were being concealed from the public and that the positive representations

that were being made were false and misleading. As a result, each of the Individual

Defendants is responsible for the accuracy of First BanCorp’s corporate statements and

financial reports detailed herein and is therefore responsible and liable for the

representations contained therein.

247. Each of the First BanCorp Defendants is liable as a primary violator in

making false and misleading statements, and for participating in a fraudulent scheme and

course of business that operated as a fraud or deceit on purchasers of First BanCorp

securities during the Class Period.

248. As alleged herein, the First BanCorp Defendants acted with scienter in that

each such defendant knew or recklessly disregarded that the public documents and

statements, issued or disseminated by or in the name of the Company were materially false

and misleading, knew or recklessly disregarded that such statements or documents would

be issued to the investing public, and knowingly and substantially participated or

acquiesced in the issuance of such statement or documents as primary violators of the

federal securities laws. The First BanCorp Defendants, by virtue of their receipt of

information reflecting the true facts regarding First BanCorp and its business practices,

their control over and/or receipt of First BanCorp’s allegedly materially misleading

misstatements, and/or their associations with the Company which made them privy to

confidential proprietary information concerning First BanCorp, were active and culpable

participants in the fraudulent scheme alleged herein. The First BanCorp Defendants knew

and/or recklessly disregarded the falsity and misleading nature of the information that they

caused to be disseminated to the investing public. The ongoing fraudulent scheme


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described in this complaint could not have been perpetuated over a substantial period of

time, as has occurred, without the knowledge and complicity of the Individual Defendants.

249. Among other things, the First BanCorp Defendants participated in secret,

undisclosed side agreements with Doral and R&G, whereby the true extent and nature of

the recourse provisions attached to the pools of non-conforming mortgages that were

transferred to First BanCorp remained undisclosed to the public.

250. The First BanCorp Defendants were well-aware that the transfer of these

mortgages did not qualify as purchases under FASB No. 140, yet accounted for these

transactions on First BanCorp’s financial statements as purchases nonetheless.

251. The First BanCorp Defendants engaged in this scheme to falsify reports and

records submitted to, among other entities, the FDIC and FHLB. This allowed FirstBank to

borrow impermissibly billions of dollars from the FHLB during the Class Period and meet

the “well-capitalized” requirements established by the FDIC with significantly less capital

than otherwise would have been necessary had the mortgage transactions been accounted

for properly.

252. The First BanCorp Defendants further participated in the preparation, and

authorized the release, of public filings and press releases that materially misstated and

omitted facts related to the real condition of First BanCorp’s financial statements.

253. The repeated and multiple violations of GAAP committed by the First

BanCorp Defendants are further evidence of scienter.

254. The Individual Defendants either directly engaged in the secret, undisclosed

side agreements between FirstBank and Doral and R&G or knew and consented to them.

The Individual Defendants were members of the Investment Committee for First BanCorp,

which monitors the investment portfolio of the Company. According to the 2004 10-K, this


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Committee is composed of the President and CEO, the Chief Financial Officer, the

Executive Vice President for Retail and Mortgage Banking, the Senior Vice President of

Treasury and Investments and the Economist, and meets on a weekly basis. The Committee

meetings focus on, among other things, “reviews of liquidity, unrealized gains and losses in

securities, recent or proposed changes to the investment portfolio, alternative funding

sources and their costs, hedging and the possible purchase of derivatives such as swaps and

caps, and any tax or regulatory issues which may be pertinent to these areas.” These senior

officers also on a quarterly basis perform “a comprehensive asset/liability review,

examining the measures of interest rate risk described below together with other matters

such as liquidity and capital.” It is inconceivable, given the Individual Defendants’ control

of the Company, the magnitude of the transfers of mortgages to First BanCorp from Doral

and R&G, and the impact that these mortgages had on First BanCorp’s reported assets,

capital ratios, net interest income and net income, that the Individual Defendants were

unaware of the secret side agreements.

255. Additional evidence of the First BanCorp Defendants scienter were the

efforts to conceal the problems in the Company’s mortgage portfolio in the face of multiple

announcements of significant restatements by Doral and R&G regarding the same

mortgages purportedly purchased by First BanCorp.

256. The Individual Defendants engaged in such a scheme to materially

misrepresent First BanCorp’s financial statements in order to: (i) artificially inflate First

BanCorp’s net interest income during the Class Period through FirstBank’s borrowings

from the FHLB and increased amounts of brokered CDs; (ii) complete the public offerings

of the Series C, D and Series E Preferred Stock which raised more than $353 million for the

Company on terms that were otherwise more favorable than if the true financial condition


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of the Company had been disclosed; (iii) to sell a substantial portion of their First BanCorp

stock holdings at artificially-inflated prices; and (iv) to protect and enhance their executive

positions and the substantial compensation obtained from First BanCorp in connection with

the Company’s reported levels of net income and growth.

257. During the Class Period, Defendant Alvarez-Perez sold 400,000 shares of

First BanCorp stock for proceeds of approximately $11.4 million and Defendant Astor-

Carbonell sold 20,000 shares of First BanCorp stock during the Class Period for proceeds

of approximately $640,000. Defendant Villarino-Tur sold 30,000 shares of First BanCorp

stock at prices ranging from $31.05 - $31.58 for proceeds of approximately $940,000 on or

about December 28, 2004.

258. Alvarez-Perez and Astor-Carbonell also received significant performance

bonuses and stock-option grants that were tied to the reported financial performance of First

BanCorp during the Class Period. During the Class Period, Alvarez-Perez received

discretionary cash bonuses totaling $3.1 million and options to purchase 555,000 shares of

First BanCorp stock; and Astor-Carbonell received cash bonuses of $1,110,000 and options

to purchase 111,000 shares of First BanCorp stock during the Class Period. According to

the Company’s 2004 Proxy Statement, filed with the SEC on or about March 24, 2005, the

awards to Alvarez-Perez were based, in part, on “the continued significant increase in First

BanCorp’s earnings. . . and the achievement of goals that are geared to ensure the

Corporation’s continued trend of earnings growth.” If the mortgage transactions with Doral

and R&G had been accounted for properly by First BanCorp, and the accounting, SEC and

regulatory guidelines properly followed, the Individual Defendants’ bonuses and stock-

option grants, based upon the Company’s own stated criteria, either would not have been

awarded at all or would have been significantly less.


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CLASS ACTION ALLEGATIONS

259. Plaintiffs bring this action as a class action pursuant to Federal Rules of

Civil Procedure 23(a) and (b)(3) on behalf of a class (the “Class”) consisting of all persons

who purchased or otherwise acquired the common or preferred stock of First BanCorp

during the Class Period, a period previously defined as from April 16, 2001 through and

including December 13, 2005. Excluded are the Defendants, any entity in which the

Defendants have a controlling interest or is a parent or subsidiary of or is controlled by the

Company, and the officers, directors, employees, affiliates, legal representatives, heirs,

predecessors, successors and assigns of defendants, and the immediate families of the

Individual Defendants.

260. The members of the Class are so numerous that joinder of all members is

impracticable. While the exact number of Class members is unknown to Plaintiffs at this

time and can only be ascertained through appropriate discovery, Plaintiffs believe there are

thousands of members of the Class who purchased First BanCorp Securities during the

Class Period.

261. Questions of law and fact are common to all members of the Class and

predominate over any questions affecting solely individual members of the Class. Among

the questions of law and fact common to the Class are:

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

as alleged herein;

(b) whether the Company issued materially false and misleading financial

statements during the Class Period;

(c) whether the First BanCorp Defendants acted knowingly or recklessly

in issuing materially false and misleading financial statements;


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(d) whether the market prices of the Company’s securities during the

Class Period were artificially inflated because of the First BanCorp Defendants’ conduct

complained of herein; and

(e) whether the members of the Class have sustained damages and, if so,

what is the proper measure of damages.

262. Plaintiffs’ claims are typical of the claims of the members of the Class as

Plaintiffs and the other members of the Class each sustained damages arising out of the

Defendants’ wrongful conduct in violation of federal law as complained of herein.

263. Plaintiffs will fairly and adequately protect the interests of the members of

the Class and have retained counsel competent and experienced in class actions and

securities litigation. Plaintiffs have no interests antagonistic to or in conflict with those of

the Class.

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

adjudication of the controversy because joinder of all members of the Class is

impracticable. Furthermore, because the damages suffered by the individual Class

members may be relatively small, the expense and burden of individual litigation make it

impossible for the Class members individually to redress the wrongs done to them.

Plaintiffs anticipate no unusual difficulties in the management of this action as a class

action.

265. Plaintiffs will rely, in part, upon the presumption of reliance established by

the fraud on the market doctrine in that:

(a) the First BanCorp Defendants made public misrepresentations or

failed to disclose material facts during the Class Period;

(b) such omissions and misrepresentations were material;


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(c) the Company’s securities traded in an efficient market and their prices

were inflated artificially during the Class Period because of Defendants’ misrepresentations

and omissions detailed herein;

(d) the misrepresentations and omissions alleged induced a reasonable

investor to purchase the Company’s securities at inflated prices; and

(e) Plaintiffs and the other members of the Class purchased First BanCorp

securities between the time the Defendants failed to disclose or misrepresented material facts

and the time the true facts were disclosed, without knowledge of the omitted or

misrepresented facts.

266. Based upon the factors set forth in the preceding paragraph, Plaintiffs and

the other members of the Class are entitled to the presumption of reliance upon the integrity

of the market.

NO STATUTORY SAFE HARBOR

267. The statutory safe harbor provided for forward-looking statements under

certain circumstances does not apply to any of the false statements pleaded in this

Complaint because none of the statements pleaded herein are “forward-looking” statements

nor were they identified as “forward-looking statements” when made. Nor did meaningful

cautionary statements identifying important factors that could cause actual results to differ

materially from those in any purportedly forward looking statements. In the alternative, to

the extent that the statutory safe harbor does apply to any statements pleaded herein that are

deemed to be forward-looking, the First BanCorp Defendants are liable for those false

forward-looking statements because at the time each of those statements was made the

speaker knew those forward-looking statement were false and/or the statement was


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authorized and/or approved by an executive officer of First BanCorp who knew that the

statements were false when made.

COUNT II

Violation of Section 11 of the Securities Act Against All Defendants

268. Plaintiff McLaughlin repeats and realleges each and every allegation

contained above, excluding all allegations above that contain facts necessary to prove any

elements not required to state a Section 11 claim, including without limitation, scienter and

loss causation. Plaintiff McLaughlin, for purposes of this claim, disclaims any allegations

of fraud.

269. This claim is brought on behalf of all persons or entities who purchased First

BanCorp Series E Preferred Stock pursuant to and/or traceable to the Registration

Statement/Prospectus.

270. The Defendants are liable under this claim because the Series E Registration

Statement/Prospectus contained untrue statements or omitted material facts required to be

stated or necessary to make the statements therein not misleading.

271. First BanCorp is the issuer of the stock sold via the Series E Registration

Statement/Prospectus. As issuer of the stock, the Company is strictly liable to plaintiff

McLaughlin and the class members who purchased Series E Preferred Stock for the

material misstatements and omissions therein.

272. The Underwriter Defendant and the Individual Defendants, as signatories to

the Series E Registration Statement/Prospectus, or as an officer, director and control person

of First BanCorp, owed to the purchasers of the stock obtained through the Series E

Registration Statement/Prospectus the duty to make a reasonable and diligent investigation

of the statements contained in the Series E Registration Statement/Prospectus at the time it

become effective to ensure that such statements were true and correct and that there was no


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omission of material facts required to be stated in order to make the statements contained

therein not misleading. Defendants knew, or in the exercise of reasonable care should have

known, of the material misstatements and omissions contained in or omitted from the Series

E Registration Statement/Prospectus as set forth herein. As such, Defendants are liable to

the purchasers of the Series E Preferred Stock.

273. None of the Defendants made a reasonable investigation or possessed

reasonable grounds for the belief that the statements contained in the Series E Registration

Statement/Prospectus were true or that there was no omission of material facts necessary to

make the statements made therein not misleading.

274. Defendants issued and disseminated, caused to be issued and disseminated,

and participated in the issuance and dissemination of, material misstatements to the

investing public that were contained in the Series E Registration Statement/Prospectus,

which misrepresented the Company’s true financial results for fiscal-years 2001, 2002 and

the six-month period ended on June 30, 2003. By reason of the conduct herein alleged,

each defendant violated and/or controlled a person who violated §11 of the Securities Act.

275. Plaintiff McLaughlin and other members of the Class who purchased or

otherwise acquired Series E Preferred Stock of First BanCorp, did so without knowledge of

the facts concerning the misstatements or omissions alleged herein at the time they acquired

their Series E Preferred Stock.

276. This claim is brought within one year after discovery of the untrue

statements and omissions in the Series E Registration Statement/Prospectus should have

been made through the exercise of reasonable diligence, and within three years of the

effective date of the Series E Registration Statement/Prospectus.


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277. By virtue of the foregoing, Plaintiff McLaughlin and the other members of

the Class who purchased or otherwise acquired the Company’s Series E Preferred Stock are

entitled to recover damages from the Defendants under Section 11.

COUNT III

Violation of Section 12(a)(2) of the Securities Act Against All Defendants


contained above, excluding all allegations above that contain facts necessary to prove any

elements not required to state a Section 12 (a)(2) claim, including without limitation,

scienter and loss causation. Plaintiff McLaughlin, for purposes of this claim, disclaims any

allegations of fraud.

279. This Count is brought pursuant to Section 12(a)(2) of the Securities Act on

behalf of all persons or entities who purchased First BanCorp’s Series E Preferred Stock

from the Company pursuant to the Series E Preferred Stock Registration

Statement/Prospectus, against all Defendants.

280. Defendants were sellers and offerors of the shares sold pursuant to the Series

E Registration Statement/Prospectus.

281. The Series E Registration Statement/Prospectus contained untrue statements

of material fact, omitted to state other facts necessary to make the statements made not

misleading and concealed and failed to disclose material facts. The Individual Defendants’

actions of solicitation included participating in the preparation and dissemination of the

false and misleading Series E Registration Statement/Prospectus.

282. Defendants owed to the purchasers of the Series E Preferred Stock directly

on the Offering, including Plaintiff and other class members, the duty to make a reasonable

and diligent investigation of the statements contained in the Series E Registration


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Statement/Prospectus to ensure that such statements were true and that there was no

omission to state a material fact required to be stated in order to make the statements

contained therein not misleading. Defendants knew of, or in the exercise of reasonable care

should have known of, the misstatements and omissions contained in the Series E

Registration Statement/Prospectus as set forth above.

283. Plaintiff McLaughlin did not know, or in the exercise of reasonable diligence

could not have known, of the untruths and omissions contained in the Series E Registration

Statement/Prospectus.

284. Plaintiff McLaughlin, individually and representatively, hereby offer to

tender to Defendants those shares that Plaintiff and the other Class members continue to

own, on behalf of all members of the Class who continue to own First BanCorp’s Series E

Preferred Stock, in return for the consideration paid for those securities together with

interest thereon. Class members who have sold their Series E Preferred Stock are entitled

to rescissory damages.

COUNT IV

Violation of Section 15 of the Securities Act Against the Individual Defendants


contained above, excluding all allegations above that are not required to state a Section 15

claim including, without limitation, scienter and loss causation. Plaintiff McLaughlin, for

purposes of this claim, disclaims any allegations of fraud.

286. This count is asserted against the Individual Defendants and is based upon

Section 15 of the Securities Act.

287. The Individual Defendants, by virtue of their stock ownership, offices,

directorships and specific acts were, at the time of the wrongs alleged herein and as set


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forth herein, a controlling person of First BanCorp. The Individual Defendants had the

power and influence and exercised the same to cause First BanCorp to engage in the acts

described herein.

288. The Individual Defendants were senior executives and Board members of

First BanCorp and knew of the underlying violations of Sections 11 and 12.

289. By virtue of the conduct alleged herein, the Individual Defendants are liable

for the aforementioned wrongful conduct and are liable to the plaintiffs and the Class for

damages.

COUNT V

Violation of Section 10(b) of the Exchange Act and Rule 10b-5 Brought Against the First BanCorp Defendants

290. Plaintiffs repeat and reallege each and every allegation contained in the

foregoing paragraphs as if fully set forth herein.

291. During the Class Period, the First BanCorp Defendants directly engaged in a

common plan, scheme, and unlawful course of conduct, pursuant to which they knowingly

or recklessly engaged in acts, transactions, practices, and courses of business that operated

as a fraud and deceit upon plaintiffs and the other members of the Class, and made various

deceptive and untrue statements of material facts and omitted to state material facts that, in

order to make the statements made, in light of the circumstances under which they were

made, not misleading. The purpose and effect of the scheme, plan, and unlawful course of

conduct was, among other things, to deceive the investing public, including Plaintiffs and

the other members of the Class, and to induce Plaintiffs and the other members of the Class

to purchase First BanCorp securities during the Class Period at artificially inflated prices.

292. During the Class Period, the First BanCorp Defendants, pursuant to said

scheme, plan, and unlawful course of conduct, knowingly and/or recklessly issued, caused


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to be issued, participated in the issuance of, the preparation and/or issuance of deceptive

and materially false and misleading statements to the investing public as particularized

above.

293. As a result of the First BanCorp Defendants’ dissemination of and/or failure

to correct the false and misleading statements set forth above, the market prices of First

BanCorp’s securities were artificially inflated during the Class Period. Unaware of the

false and misleading nature of the statements described above and the deceptive and

manipulative devices and contrivances employed by the First BanCorp Defendants,

Plaintiffs and the other members of the Class who purchased First BanCorp securities on

the open market, relied, to their detriment, on the integrity of the market price in purchasing

First BanCorp securities.

294. Had Plaintiffs and the other members of the Class known the truth, they

would not have purchased First BanCorp shares at all, or would not have purchased them at

the inflated prices that they did.

295. Plaintiffs and the other members of the Class have suffered damages as a

result of the wrongs herein alleged in an amount to be proved at trial.

296. By reason the foregoing, the First BanCorp Defendants have violated

Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and are liable to

Plaintiffs and the other members of the Class for damages which they suffered in

connection with their purchases of First BanCorp stock during the Class Period.

COUNT VI

Violation of Section 20(a) of the Exchange Act Brought Against the Individual Defendants

297. Plaintiffs repeat and realleges each and every allegation contained in each of

the foregoing paragraphs as if set forth fully herein.


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298. The Individual Defendants acted as controlling persons of the Company

under the meaning of section 20(a) of the Exchange Act as alleged herein. By virtue of

their high-level positions, and active participation in and/or awareness of the Company’s

day-to-day operations, and/or intimate knowledge of the Company’s business plans, each

Individual Defendant had the power to influence and control, and did influence and control,

directly or indirectly, the decision-making of the Company, including the content and

dissemination of the various statements that plaintiffs allege are false and misleading. The

Individual Defendants were provided with, or had unlimited access to, copies of the

Company’s reports, press releases, public filings and other statements alleged herein to be

misleading prior to or shortly after these statements were issued to the public, and had the

ability to prevent the issuance of the statements or cause the statements to be corrected.

299. In particular, the Individual Defendants had direct and supervisory

involvement in the day-to-day operations of the Company and, therefore, are 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. The Individual Defendants

participated in and knew of the Company’s violations of Section 10(b) and Rule 10b-5.

300. By virtue of their positions as controlling persons, the Individual Defendants

are liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result

of the wrongful conduct, plaintiffs and the other members of the Class suffered damages in

connection with their purchases of the Company’s securities during the Class Period.

PRAYER FOR RELIEF

WHEREFORE, Plaintiffs, on their own behalf and on behalf of the Class, pray for

judgment as follows:


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(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 Class defined herein;

(b) Awarding Plaintiffs and the other members of the Class damages in an

amount that may be proven at trial, together with interest thereon;

(c) Awarding Plaintiffs and the members of the Class pre-judgment and

post-judgment interest, as well as their reasonable attorneys’ and experts’ witness fees and

other costs;

(d) With respect to Count II, ordering that Defendants rescind First

BanCorp’s Series E Preferred Stock offering in return for the consideration paid for those

securities together with interest thereon or rescissory damages for Class members who have

sold their Series E Preferred Stock; and

(e) Such other relief as this Court deems appropriate.

JURY DEMAND

Plaintiffs demand a trial by jury.

DATED: February 13, 2006 DE JESUS HEY & VARGAS CHARLES S. HEY-MAESTRE (USDC-PR NO. 201906)

s/Charles S. Hey-Maestre CHARLES S. HEY-MAESTRE


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ZWERLING, SCHACHTER & ZWERLING, LLP KEVIN M. MCGEE 595 South Federal Highway, Suite 600 Boca Raton, FL 33432 Telephone: 561/544-2500 561/544-2501 (fax)

LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP SAMUEL H. RUDMAN 58 South Service Road, Suite 200 Melville, NY 11747 Telephone: 631/367-7100 631/367-1173 (fax

Attorneys for Plaintiff


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