UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) CASE NO. CLASS ACTION COMPLAINT

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1 UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS SHEET METAL WORKERS LOCAL 28 PENSION FUND, Individually and On Behalf Of All Others Similarly Situated, vs. Plaintiff, THE FIRST MARBLEHEAD CORP., JACK L. KOPNISKY, JOHN A. HUPALO, PETER B. TARR, DONALD R. PECK, STEPHEN E. ANBINDER, LESLIE L. ALEXANDER, and WILLIAM R. BERKLEY, Defendants. ) CASE NO. ) ) ) ) ) ) ) ) ) ) ) ) ) ) CLASS ACTION COMPLAINT Plaintiff Sheet Metal Workers Local 28 Pension Fund ( Plaintiff ) alleges upon personal knowledge as to allegations specifically pertaining to Plaintiff and Plaintiff s counsel, and upon information and belief and in reliance on the investigation of counsel as to all other matters, as follows: NATURE OF THE ACTION 1. This is a federal securities class action brought on behalf of all purchasers of the common stock of The First Marblehead Corp. ( First Marblehead or the Company ) who purchased their shares of the Company s common stock between August 10, 2006 and April 7, 2008, inclusive (the Class Period ), seeking to pursue remedies under the Securities Exchange Act of 1934 (the Exchange Act ). 2. First Marblehead provides outsourcing services for private education lending in the United States. Throughout the Class Period, Defendants reported quarter after quarter of

2 seemingly strong financial results and touted the Company s ability to complete additional securitizations despite a difficult operating environment in the lending industry. As a result of Defendants statements, the stock traded as high as $57.56 per share during the Class Period. 3. On December 4, 2007, after the markets closed, Moody s Investors Service shocked the investing public by announcing that it was performing a review First Marblehead and that it might lower ratings on $822 million of securities created by the Company between 2003 and Moody s stated in its report that loans originated through the Company s direct-to-consumer channel appear to default at a significantly higher rate compared to loans originated through school financial aid offices The next day, Moody s announced that it might lower ratings on an additional $113 million of First Marblehead securities. Other analysts and agencies responded by decreasing their profit forecasts for the Company s near-term financial results, and lowered their ratings on the Company. 5. The market reacted decisively after the announcement, causing the price of First Marblehead stock to plunge $5.05 per share, or 20.2%, to $19.93, a far cry from its 52-week high of $ On December 7, 2007, after the Company announced that it would cut its dividend by 56% to 12 cents per share and that the Company would not securitize any loans during the quarter, First Marblehead shares dropped to $17.85 after dipping down to a new 52-week low of $15.69 in mid-day trading. 6. On March 26, 2008, Moody s confirmed the worst fears of investors that had been weighing on the price of the stock since the announcement of the review, and downgraded the ratings of 18 classes of notes in 11 First Marblehead student loan securitizations, affecting 1 Unless indicated otherwise herein, all emphasis is added. 2

3 approximately $1.09 billion of asset-backed securities. Moody s noted that the downgrades are due to the worse than expected performance of underlying student loans. 7. On April 8, 2008, First Marblehead lost over a third of its value after The Education Resources Institute, Inc. ( TERI ), the Company s guarantor of private student loans, filed for bankruptcy protection. As a result, the Company may incur substantial losses arising from defaults on its student loans. After the TERI bankruptcy announcement, First Marblehead s stock sank to $4.89, a decline of 36.5% from the day before. The Company s stock had already fallen 50 percent in the several months since the truth of its precarious financial position was finally revealed. 8. The Complaint alleges that, throughout the Class Period, Defendants failed to disclose material adverse facts about the Company s financial well-being and future prospects. Specifically, Defendants failed to disclose or indicate that (1) the Company was not properly protected from the risk of default in its underlying student loan securitizations; (2) the credit quality of the Company s underlying student loans was not as strong as the Company had publicly indicated throughout the Class Period; (3) the default rates on securitizations arranged by First Marblehead were significantly higher than on loans issued through financial aid offices; (4) the securitizations in which the Company had a back-end residual interest were materially impaired and, therefore, a portion of First Marblehead s back-end residuals were impaired; (5) TERI was not properly positioned to adequately guarantee First Marblehead s student loans; (6) the Company lacked adequate internal and financial controls; and (7) as a result of the foregoing, the Company s statements about its financial well-being and future business prospects were lacking in any reasonable basis when made. 3

4 9. As a result of Defendants wrongful acts, false and misleading statements and omissions, and the precipitous decline in the market value of the Company s securities, Plaintiff and other Class members have suffered significant losses and damages. JURISDICTION AND VENUE 10. The claims asserted herein arise under and pursuant to 10(b) and 20(a) of the Exchange Act [15 U.S.C. 78j(b) and 78t(a)] and Rule 10b-5 promulgated thereunder by the SEC [17 C.F.R b-5]. 11. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. 1331, 1337 and 1367 and Section 27 of the Exchange Act (15 U.S.C. 78aa). 12. Venue is proper in this District pursuant to Section 27 of the Exchange Act (15 U.S.C. 78aa) and 28 U.S.C. 1391(b) and (c). First Marblehead maintains its corporate headquarters in this District, and many of the acts charged herein, including the preparation and dissemination of materially false and misleading information, occurred in substantial part in this District. 13. In connection with the acts and omissions alleged in this complaint, Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications, and the facilities of the national securities markets. PARTIES 14. Plaintiff Sheet Metal Workers Local 28 Pension Fund, as set forth in the accompanying certification and incorporated by reference herein, purchased the publicly traded securities of First Marblehead at artificially inflated prices during the Class Period and has been damaged thereby. 4

5 15. Defendant First Marblehead is incorporated in Delaware and maintains its principal executive offices at 800 Boylston Street, 34 th Floor, Boston, Massachusetts First Marblehead is a financial services corporation that provides clients with an integrated suite of tailored design, implementation and securitization services for private student loan programs. The Company s common stock was traded on the New York Stock Exchange ( NYSE ) under the symbol FMD at all relevant times during the Class Period. 16. Defendant Jack L. Kopnisky ( Kopnisky ) has served as the Company s Chief Executive Officer, President and Chief Operating Officer since September 2005 and as a director of the Company since November Defendant John A. Hupalo ( Hupalo ) has served as the Company s Chief Financial Officer and Senior Executive Vice President since November Hupalo also served as Executive Vice President and Group Head, Capital Markets from March 2003 to November Defendant Peter B. Tarr ( Tarr ) has served as the Company s Chairman of the Board since October 2005 and as General Counsel since July Defendant Donald R. Peck ( Peck ) served as First Marblehead s Executive Vice President and Chief Financial Officer since April 2003, Treasurer since July 2003, and Secretary since November 2004, until his resignation from the Company on November 1, Defendant Stephen E. Anbinder ( Anbinder ) has served as Vice Chairman of the Board since May Anbinder is a co-founder of the Company and previously served as President, from December 1995 to May 2002, and Treasurer, from May 2002 to June During the Class Period, Anbinder sold 829,900 shares of First Marblehead stock for proceeds of approximately $36 million. 5

6 21. Defendant Leslie L. Alexander ( Alexander ) has served as a director of the Company since December During the Class Period, Alexander sold 1,150,700 shares of First Marblehead stock for proceeds of over $75 million. 22. Defendant William R. Berkley ( Berkley ) has served as a director of the Company since December During the Class Period, Berkley sold 694,180 shares of First Marblehead stock for proceeds of approximately $39 million. 23. Defendants Kopnisky, Hupalo, Tarr, Peck, Anbinder, Alexander and Berkley are collectively referred to herein as the Individual Defendants. 24. During the Class Period, the Individual Defendants, as senior executive officers and/or directors of First Marblehead, were privy to confidential, proprietary and material adverse non-public information concerning First Marblehead, its operations, finances, financial condition and present and future business prospects via access to internal corporate documents, conversations and connections with other corporate officers and employees, attendance at management and/or board of directors meetings and committees thereof, and via reports and other information provided to them in connection therewith. Because of their possession of such information, the Individual Defendants knew or recklessly disregarded that the adverse facts specified herein had not been disclosed to, and were being concealed from, the investing public. 25. The Individual Defendants are liable as direct participants in the wrongs complained of herein. In addition, the Individual Defendants, by reason of their status as senior executive officers and/or directors, were controlling persons within the meaning of 20(a) of the Exchange Act and had the power and influence to cause the Company to engage in the unlawful conduct complained of herein. Because of their positions of control, the Individual 6

7 Defendants were able to and did, directly or indirectly, control the conduct of First Marblehead s business. 26. The Individual Defendants, because of their positions with the Company, controlled and/or possessed the authority to control the contents of its reports, press releases and presentations to securities analysts and through them, to the investing public. The Individual Defendants were provided with copies of the Company s 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. Thus, the Individual Defendants had the opportunity to commit the fraudulent acts alleged herein. 27. As senior executive officers and/or directors and as controlling persons of a publicly traded company whose common stock was, and is, registered with the Securities Exchange Commission ( SEC ) pursuant to the Exchange Act, and was traded on the New York Stock Exchange ( NYSE ) and governed by the federal securities laws, the Individual Defendants had a duty to disseminate promptly accurate and truthful information with respect to First Marblehead s financial condition and performance, growth, operations, financial statements, business, products, markets, management, earnings, and present and future business prospects, to correct any previously issued statements that had become materially misleading or untrue, so the market price of First Marblehead s securities would be based on truthful and accurate information. The Individual Defendants misrepresentations and omissions during the Class Period violated these specific requirements and obligations. 28. The Individual Defendants are liable as participants in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of First Marblehead s publicly 7

8 traded securities by disseminating materially false and misleading statements and/or concealing material adverse facts. PLAINTIFF S CLASS ACTION ALLEGATIONS 29. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of all persons who purchased or otherwise acquired First Marblehead common stock during the Class Period and who were damaged thereby (the Class ). Excluded from the Class are Defendants, members of the immediate family of each of the Individual Defendants, any subsidiary or affiliate of First Marblehead and the directors, officers and employees of the Company or its subsidiaries or affiliates, or any entity in which any excluded person has a controlling interest, and the legal representatives, heirs, successors and assigns of any excluded person. 30. 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 Plaintiff at this time and can only be ascertained through appropriate discovery, Plaintiff believes that there are thousands of members of the Class located throughout the United States. Throughout the Class Period, First Marblehead stock was actively traded on the NYSE (an open and efficient market) under the symbol FMD. As of October 31, 2007, the Company had over 93 million shares of common stock outstanding. Record owners and other members of the Class may be identified from records maintained by First Marblehead and/or its transfer agents and may be notified of the pendency of this action by mail, using a form of notice similar to that customarily used in securities class actions. 8

9 31. Plaintiff s claims are typical of the claims of the other members of the Class as all members of the Class were similarly affected by Defendants wrongful conduct in violation of federal law that is complained of herein. 32. Plaintiff will fairly and adequately protect the interests of the members of the Class and have retained counsel competent and experienced in class and securities litigation. 33. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting 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 and omissions as alleged herein; b. whether Defendants participated in and pursued the common course of conduct complained of herein; c. whether documents, press releases, and other statements disseminated to the investing public and the Company s shareholders during the Class Period misrepresented material facts about the business, finances, financial condition and prospects of First Marblehead; d. whether statements made by Defendants to the investing public during the Class Period misrepresented and/or omitted to disclose material facts about the business, finances, value, performance and prospects of First Marblehead; e. whether the market price of First Marblehead common stock during the Class Period was artificially inflated due to the material misrepresentations and failures to correct the material misrepresentations complained of herein; and 9

10 f. the extent to which the members of the Class have sustained damages and the proper measure of damages. 34. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this suit as a class action. SUBSTANTIVE ALLEGATIONS Background 35. First Marblehead, together with its subsidiaries, provides outsourcing services for private education lending in the United States. The Company provides an integrated suite of design, implementation, and securitization services for student loan programs to national and regional financial institutions and educational institutions, as well as businesses, education loan marketers, and other enterprises. The Company s services include program design and marketing; borrower inquiry and application; loan origination and disbursement; loan securitization; and loan servicing activities, as well as other services in connection with private label loan products. First Marblehead primarily focuses on loan programs for undergraduate, graduate, and professional education, as well as on the primary and secondary school market. The Company was founded in 1991 and is headquartered in Boston, Massachusetts. 36. The Company s website also provides the following regarding First Marblehead s Corporate Governance: First Marblehead Corporation strives to maintain the confidence of our stockholders by adhering to the highest ethical and business standards. During 10

11 the past year, we have been reviewing our corporate governance policies and procedures and comparing them against those identified as best practices by various authorities in corporate governance and the practices of other public companies. We have also been mindful of the provisions of the Sarbanes-Oxley Act of 2002, the new and proposed rules of the SEC and the requirements of the New York Stock Exchange. In December 2005, we amended our Code of Conduct to establish a more stringent policy with respect to gifts and gratuities. We will continue to review and, when appropriate, take additional steps in the future to strengthen our corporate governance practices to ensure that we are focused on the long-term benefit of our stockholders. 37. Despite these assurances of adhering to the highest ethical and business standards and of maintaining a focus on the long-term benefit of our stockholders, the Company issued and disseminated false and misleading financial statements and omissions during the Class Period, as alleged in greater detail herein. 38. First Marblehead disclosed several factors that could materially affect the Company s financial results, including the demand for private education financing; the competition for providing private education financing; the education financing preferences of students and their families; applicable laws and regulations, which may affect the terms upon which the Company s clients agree to make private student loans and the cost and complexity of First Marblehead s loan facilitation operations; the private student loan securitization market, including the costs or availability of financing; the general interest rate environment, including its effect on the Company s discount rates; borrower default rates; and prepayment rates on private student loans, including prepayments through loan consolidation. 39. First Marblehead considers several assumptions when assessing the performance of its securitizations: discount rates, prepayment rates, trends in interest rates, default rates and recovery rates. 11

12 40. First Marblehead has several key relationships that it relies upon for continued business growth and success. One of these relationships is with TERI, which serves as the guarantor on the Company s student loans pursuant to which TERI agrees to reimburse lenders for all unpaid principal and interest on defaulted student loans, in exchange for a fee based on the loan type and risk profile of the borrower. 41. First Marblehead and TERI are intertwined and each has extensive knowledge of the other s business and operations. In fact, First Marblehead purchased TERI s operating assets in 2001 and, according to the Master Service Agreement made public regarding this transaction, the Company agreed to manage TERI portfolio risk profile and recommend guarantee fee structure, provide default management services, perform default prevention, default processing and administrative services, and guarantee claims management and administrative services. 42. Pursuant to its agreements with First Marblehead and other parties to the student loans it guarantees, TERI is required to maintain an escrow or Pledged Account to secure TERI s obligation to purchase defaulted student loans. TERI is permitted to keep a portion of guaranty fees as an administrative fee rather than place them in the Pledged Account. 43. Pursuant to one of the agreements between First Marblehead and TERI, TERI is permitted to reduce the amount of funds in the Pledged Account below a set level (this level was redacted from the public filings), and [First Marblehead] agrees to consult with the Rating Agencies from time to time regarding reduction of such percentage below [**] and to cause such reduction to be included in the terms of future Securitization Transactions to the extent that it can be effected without adverse effect upon either the credit rating or the financial terms of such transactions. 12

13 44. Accordingly, excessive reduction in the amount of funds deposited into the Pledged Accounts would adversely affect TERI s credit rating or the financial terms of its securitization transactions. 45. In the Company s annual report filed with the SEC on Form 10-K for the fiscal year ended June 30, 2006 ( 2006 Form 10-K ), First Marblehead provided the following description of its relationship with TERI: In 2001, we entered into a strategic relationship with TERI, intended to enhance significantly our risk management and loan processing capabilities. We acquired TERI s historical database and loan processing operations, but not its investment assets or guarantee liabilities. In addition, 161 members of TERI s staff became our employees. TERI remains, however, an independent, private not-for-profit organization with its own management and board of directors. We issued promissory notes totaling $7.9 million and paid approximately $1.0 million in cash to TERI in connection with the transaction. Under the terms of a master loan guaranty agreement that we entered into with TERI in 2001, we also agreed to provide a beneficial interest for TERI of 25% of the residual value of TERIguaranteed program loans owned by the securitization trusts that purchase the loans, and a right of first refusal to guarantee our private label clients existing and future loan programs. In connection with the transaction, we also entered into a series of agreements with respect to loan processing services, database updates and the securitization of TERI-guaranteed loans. These include a master servicing agreement and a database purchase and supplementation agreement with TERI. Pursuant to the master servicing agreement, TERI engages us to provide loan origination, preclaims, claims and default management services. Under TERI s agreements with lenders, lenders delegate their loan origination functions to TERI, and TERI has the right to subcontract these functions. Pursuant to the database purchase and supplementation agreement, TERI provides updated information to us about the performance of the student loans it has guaranteed, so that we can continue to supplement and enhance our database. 46. The 2006 Form 10-K provided the following regarding the effect to the Company if TERI s ratings were downgraded: Our business could be adversely affected if TERI s ratings are downgraded. In its role as guarantor in the private education lending market, TERI agrees to reimburse lenders for unpaid principal and interest on defaulted loans. TERI is the 13

14 exclusive provider of borrower default guarantees for our clients private label loans. As of June 30, 2006, TERI had a Baa3 counterparty rating from Moody s Investors Service, which is the lowest investment grade rating, and an insurer financial strength rating of A+ from Fitch Ratings. If these ratings are lowered, our clients may not wish to enter into guarantee arrangements with TERI. In addition, we may receive lower structural advisory fees because the costs of obtaining financial guarantee insurance for the asset-backed securitizations that we structure could increase. Finally, the inability of TERI as student loan guarantor to meet its guaranty obligations could reduce the amount of principal or interest paid to the holders of asset-backed securities, which could adversely affect our residual interests in securitization trusts or harm our ability to structure securitizations in the future. In each such case, our business would be adversely affected. False and Misleading Statements 47. The Class Period begins on August 10, 2006 when First Marblehead issued a press release after the markets closed announcing its financial and operating results for the fourth quarter of fiscal 2006 and for the fiscal year ended June 30, The press release stated in pertinent part as follows: BOSTON--(BUSINESS WIRE)--Aug. 10, The First Marblehead Corporation (NYSE: FMD) today announced its financial and operating results for its fourth quarter of fiscal 2006 and for the fiscal year ended June 30, Total service revenues for the fourth quarter of fiscal 2006 increased to $148.8 million, up 24% from $120.2 million in the fourth quarter of fiscal During the fourth quarter of fiscal 2006, the Company facilitated the securitization of $756 million of private student loans, which generated $115.4 million of service revenues. During the same fiscal quarter last year, the Company facilitated the securitization of $740 million of private student loans, which generated $90.5 million of service revenues. Net income rose to $70.8 million, or $1.12 per diluted share, in the fourth quarter of fiscal 2006, an increase of 65% in net income and 72% in diluted earnings per share. In its fourth quarter of last fiscal year, the Company reported net income of $43.0 million, or $.65 per diluted share. Total service revenues for the fiscal year ended June 30, 2006 increased 35% to $563.6 million from $418.0 million in the same prior-year period, as securitization volumes and yields improved between the periods. 14

15 First Marblehead s full year operating margins continued to grow. Operating income for fiscal 2006 increased to $375.8 million, or 67% of revenue, compared to operating income of $273.8 million, or 66% of revenue last year. During the fourth quarter of fiscal 2006, the Company adopted tax allocation strategies that resulted in a reduction of the Company s effective tax rate for the fiscal year to approximately 38.5% in fiscal 2006 from 42.4% in fiscal Net income for the fiscal year ended June 30, 2006 increased to $236.0 million, or $3.68 per diluted share, an increase of 48% in net income and 54% in diluted earnings per share. For fiscal 2005, the Company reported net income of $159.7 million, or $2.39 per diluted share. The volume of loans facilitated during the fourth quarter of fiscal 2006 that are available for securitization increased 51% to $569 million, compared with $376 million facilitated and available for securitization during the fourth quarter last fiscal year. The rolling twelve month volume of loans available for securitization increased 34% to $2.92 billion for the twelve months ended June 30, 2006, compared with $2.18 billion for the twelve months ended June 30, Commenting on the financial results in the press release, Defendant Kopnisky stated the following: Fiscal year 2006 was one of the strongest years in First Marblehead s history, as revenue, earnings and EPS all exceeded our expectations. We continue to demonstrate that our team can consistently deliver strong operating results. Looking forward, we are confident in our business model and believe a foundation is in place for significant growth into the future. 49. In a conference call on August 10, 2006 discussing the Company s financial results, Defendant Peck stated the following regarding First Marblehead s securitizations: We do anticipate that there will be some volatility and residual valuations from quarter to quarter, potentially up or down, as the timing of prepayments, defaults, and recoveries varies from how they are modeled for a particular quarter. The trusts continue, generally, to perform consistent with our expectations, as they have all year, and we have not altered our assumptions regarding future prepayments, defaults, and recoveries. As with all of our assumptions, we will continue to monitor trust performance, and we will make appropriate adjustments as circumstances warrant. 50. On September 12, 2006, First Marblehead filed its 2006 Form 10-K. The 2006 Form 10-K, which was signed and/or certified by Defendants Kopnisky, Peck, Tarr, Anbinder, 15

16 Alexander and Berkley, stated the following regarding the Company s dependency on its securitization services: services: Our level of profitability depends on our ability to earn structural advisory fees and residuals from facilitating securitizations of private label and GATE loans. We may in the future enter into arrangements with private label lenders under which we provide outsourcing services but do not have the exclusive right to securitize the loans that they originate. We also receive fees as the administrator of the trusts that have purchased the private label and GATE loans, and in this capacity monitor the performance of the loan servicers. 51. The 2006 Form 10-K also provided the following description of its securitization We receive several types of fees in connection with our securitization services: Structural advisory fees. We charge structural advisory fees that are paid in two portions: Up-front. We receive a portion of the structural advisory fees at the time the securitization trust purchases the loans, or shortly thereafter. In exchange for these fees, we structure the debt securities sold in the securitization, coordinate the attorneys, accountants, trustees, loan servicers, loan originators and other transaction participants and prepare the cash flow modeling for rating agencies as needed. In securitizations we facilitated in fiscal 2006 and fiscal 2005, these fees ranged from 1.6% to 8.5% of the aggregate principal and capitalized interest of the loans securitized; and Additional. We receive a portion of the structural advisory fees over time, based on the amount of loans outstanding in the trust from time to time over the life of the trust. This portion accumulates monthly from the date of a securitization transaction at a rate of 15 to 30 basis points per year. We begin to receive this additional portion, plus interest, once the ratio of trust assets to trust liabilities, which we refer to as the parity ratio, reaches a stipulated level, which ranges from 103.0% to 105.0%. The level applicable to a particular trust is determined at the time of securitization. We currently expect to receive the additional fees beginning five to seven years after the date of a particular securitization transaction. Residual. We also have the right to receive a portion of the residual interests that these trusts create. This interest is junior in priority to the rights of the holders of the debt sold in the securitizations and entitles us to receive: 16

17 in connection with the securitizations of exclusively private label loans, 75% to 88% of the residual cash flows once a parity ratio of 103.0% to 103.5%, depending on the particular trust, is reached and maintained; in connection with securitizations in the NCT trusts, our share of residual cash flows once all of the debtholders of the securitization trust have been repaid, plus, in the case of GATE loans securitized in fiscal years prior to fiscal 2005, an additional 10% of the residual cash flows. We are entitled to receive 100% of the residual cash flows for GATE loans securitized in fiscal 2005 and for GATE and Chela Loans securitized in fiscal Our residual interest derives almost exclusively from the services we perform in connection with each securitization rather than from a direct cash contribution to the securitization trust. In the case of securitizations of exclusively private label loans, we currently expect to receive the residuals beginning approximately five to six years after the date of a particular securitization. In the case of securitizations in the NCT trusts that occurred prior to fiscal 2005, we expect to receive the residuals beginning 12 to 15 years after the date of a particular securitization. In the case of the securitization in the NCT trusts that occurred in fiscal 2005 and fiscal 2006, we currently expect to receive residuals beginning five to six years after the date of securitization. Administrative and other fees. Our administrative and other fees represent primarily the administrative fees we receive from the trusts for their daily management and services we provide in obtaining information from the loan servicers and reporting this and other information to the parties related to the securitization. We receive fees ranging from 5 to 20 basis points per year based on the student loan balance in the trust. Our administrative and other fees also include the reimbursement of out of pocket costs we receive from the securitization trusts related to marketing coordination services performed for some of our clients. 52. In addition, in the 2006 Form 10-K, the Company acknowledged that an increase in default rates in its student loans or a downgrade of its credit rating would have negative consequences on its business and operations: A number of factors, some of which are beyond our control, may adversely affect our securitization activities and thereby adversely affect our results of operations. 17

18 Our financial performance and future growth depend in part on our continued success in structuring securitizations. Several factors may affect both our ability to structure securitizations and the revenue we generate for providing our structural advisory and other services, including the following: degradation of the credit quality or performance of the loan portfolios of the trusts we structure, which could reduce or eliminate investor demand for future securitizations that we facilitate ; any material downgrading or withdrawal of ratings given to securities previously issued in securitizations that we structured, or any occurrence of an event of default with respect to such securities, which could reduce demand for additional securitizations that we structure. 53. The 2006 Form 10-K also stated the following regarding the Company s loan performance assumptions regarding default rates: Except for the change to the discount rate applied to additional structural advisory fees to account for the change in the market rate of 10-year U.S. Treasury Notes, we did not materially change any loan performance assumptions regarding default rates, recovery rates or discount rates in valuing projected trust cash flows during fiscal 2006 or fiscal During the second quarter of fiscal 2006, we increased our estimate of the fair value of structural advisory fees by approximately $0.5 million and increased our estimate of the fair value of residuals receivables by approximately $3.1 million as a result of refinements to our prepayment rate assumptions and use of an enhanced cash flow model. During the fourth quarter of fiscal 2006, loans in the securitization trusts experienced higher prepayment rates than we had estimated would occur during this period of time, which reduced the positive net accretion that comes from updating the carrying value of our structural advisory fees and residuals receivables for the passage of time. We do not believe it is necessary at this time to alter our assumptions regarding future prepayments that we use to estimate the fair value of these receivables. We continue to monitor the performance of trust assets against our expectations, and will make such adjustments to our estimates as we believe are necessary to value properly our receivables balance at each balance sheet date. 54. The 2006 Form 10-K also provided the following regarding TERI s reduction in funds deposited into the Pledged Account: In October 2005, we entered into a supplement to the master loan guaranty agreement. Under the terms of the 2005 supplement, for securitizations of TERIguaranteed loans during fiscal 2006, TERI s administrative fee of 150 basis points 18

19 increased, and the amount deposited by TERI into the pledged account decreased, by 90 basis points. In addition, TERI s residual interest in the trusts created at the time of the securitizations was correspondingly reduced to account for the 90 basis point reduction in the pledged account. As a result, the administrative fee for securitizations of TERI-guaranteed loans in fiscal 2006 was 240 basis points multiplied by the principal balance of the loans originated and securitized. For securitizations completed during fiscal 2006, TERI s ownership of the residual value of the TERI-guaranteed loans securitized ranged from 12 to 15 percent. In August 2006, we entered into a supplement to the master loan guaranty agreement that provides as follows: For each securitization closing between August 1, 2006 and June 30, 2007, TERI will be entitled to elect to adjust the amount of its administrative fee, and adjust the amount deposited into the pledged account, within specified parameters. As a result, the amount of the administrative fee applicable to securitizations closing between August 1, 2006 and June 30, 2007 may range from 150 basis points to 240 basis points, at TERI s election. We have agreed to attempt in good faith to structure our securitization transactions to accommodate TERI s election. 55. Implicit in First Marblehead s agreement to allow TERI to reduce the funds deposited into the Pledged Account, was the Company s prior agreement to consult with ratings agencies regarding such reductions and to avoid any adverse effect upon either the credit rating or the financial terms of the transaction. 56. On September 8, 2006, First Marblehead issued a press release announcing a planned $1.56 billion securitization of private student loans guaranteed by TERI. The press release stated in pertinent part as follows: BOSTON--(BUSINESS WIRE)--Sept. 8, The First Marblehead Corporation (NYSE: FMD) today announced the scheduled closing of a securitization enabling the purchase of private student loans by The National Collegiate Student Loan Trust (the Trust) and the related issuance of Student Loan Asset Backed Notes by the Trust. The National Collegiate Funding LLC, as sponsor and depositor of the securitization, has filed with the Securities and Exchange Commission a Free Writing Prospectus regarding this transaction. The Company expects the transaction to close on or about September 28, The loans were originated by several different banks under various loan programs that were structured with the assistance of First Marblehead. The Trust expects to 19

20 raise approximately $1.56 billion from the sale of asset-backed securities, and plans to acquire private student loans with a principal and accrued interest balance of approximately $1.18 billion in the transaction. The Trust expects that approximately 70% of the loans to be purchased at closing will be Direct to Consumer loans, and that the remaining 30% of the loans to be purchased at closing will be School Channel loans. The loans are guaranteed by The Education Resources Institute, Inc. (TERI), the nation s oldest and largest guarantor of private student loans. 57. On September 14, 2006, First Marblehead issued a press release announcing that, in connection with the planned securitization of private student loans, the Company expected to receive up-front structural advisory fees of approximately $175 million. The press release stated in pertinent part as follows: BOSTON--(BUSINESS WIRE)--Sept. 14, As previously announced, The First Marblehead Corporation (NYSE: FMD) has scheduled the closing of a securitization enabling the purchase of private student loans by The National Collegiate Student Loan Trust (the Trust) and the related issuance of Student Loan Asset Backed Notes by the Trust. The Company expects the transaction to close on or about September 28, In connection with that securitization, the Trust filed today with the Securities and Exchange Commission a Term Sheet providing additional preliminary details regarding the anticipated transaction. In that filing, the Trust announced that the amount that it expects to raise from the sale of asset-backed securities has increased to approximately $1.84 billion, and that the principal and accrued interest balance of private student loans that it expects to acquire has increased to approximately $1.39 billion. The Trust expects that 71% of the loans to be purchased at closing will be Direct to Consumer loans, and that the remaining 29% of loans to be purchased at closing will be School Channel loans. At the closing of the transaction, First Marblehead expects to receive up-front structural advisory fees of approximately $175 million, or 12.6% of the private student loan balance securitized. This revenue estimate is preliminary and subject to change based on a number of factors, including the variance, if any, between the estimated and actual amount of private student loans purchased by the Trust at the time of closing, as well as the pricing of the debt securities to be issued in this transaction, which pricing has not yet been completed. First Marblehead expects to be in a position to estimate the discounted present value of its additional structural advisory fees and residual revenue related to this transaction at approximately the time of closing. 20

21 58. On September 26, 2006, First Marblehead issued a press release announcing that, as part of the previously announced $1.84 billion securitization of private student loans, the Company expects to receive up-front structural advisory fees of approximately $173.3 million, structural advisory fees with an estimated discounted present value of approximately $17 million, as well as residual revenue with an estimated discounted present value of approximately $53 million. The press release stated in pertinent part as follows: BOSTON, Sep 26, 2006 (BUSINESS WIRE) -- The First Marblehead Corporation (NYSE: FMD) today announced its estimated additional structural advisory fees and residual revenue in connection with a previously announced securitization involving The National Collegiate Student Loan Trust (the Trust). The Trust expects to raise approximately $1.84 billion from the sale of asset-backed securities, and expects to acquire private student loans with a principal and accrued interest balance of approximately $1.39 billion, in a transaction that is expected to close later this week. At the closing of the transaction, First Marblehead expects to receive up-front structural advisory fees of approximately $173.3 million, or 12.5% of the private student loan balance securitized. In addition, over the term of the Trust, First Marblehead expects to receive additional structural advisory fees from the Trust with an estimated discounted present value of approximately $17 million, or 1.2% of the loan balance securitized, as well as residual revenue with an estimated discounted present value of approximately $53 million, or 3.8% of the loan balance securitized. First Marblehead used discounted cash flow modeling techniques involving several key assumptions, including discount rates and estimates of future prepayments, credit losses and recoveries, to approximate the present fair value of the expected additional structural advisory fees and residual revenue. These revenue estimates are also subject to change based on a number of factors, including the variance, if any, between the estimated and actual amount of private student loans purchased by the Trust at the time of closing. 59. Commenting on the announcement, Defendant Kopnisky stated the following: We are very pleased with the results of this securitization, which is our largest securitization of private student loans to date. Current market conditions presented our Capital Markets Group the opportunity to structure this securitization with a class of investment grade notes expected to be rated Baa2 by Moody s Investors Service, Inc., BBB by Standard & Poor s Ratings Services and BBB by Fitch, Inc., thereby generating higher cash yields for First Marblehead. 21

22 60. On October 26, 2006, First Marblehead issued a press release announcing the Company s financial results for the first quarter of fiscal The press release stated in pertinent part as follows: BOSTON--(BUSINESS WIRE)--Oct. 26, The First Marblehead Corporation (NYSE: FMD) today announced its financial and operating results for its first quarter of fiscal 2007, which ended on September 30, Total service revenues for the first quarter of fiscal 2007 were $301.8 million, compared to total service revenues of $35.1 million during the first quarter of fiscal This past quarter, the Company facilitated the securitization of $1.39 billion of private student loans -- the largest securitization transaction in its history. This transaction generated $247 million of service revenues, including $173.3 million of up-front structural advisory fees received in cash at the time of the securitization closing. During the first quarter of fiscal 2006, the Company did not complete a securitization transaction. Net income for the first quarter of fiscal 2007 was $141.0 million, or $2.23 per diluted share, compared to a net loss during the first quarter of fiscal 2006 of $5.4 million, or $0.08 per diluted share. The Company also just completed a record summer processing season, with volume of loans facilitated during the first quarter of fiscal 2007 that are available for securitization increasing 38% to $1.52 billion, compared with $1.10 billion facilitated and available for securitization during the first quarter last fiscal year. The rolling twelve month volume of loans available for securitization also increased 38% to $3.34 billion for the twelve months ended September 30, 2006, compared with $2.41 billion for the twelve months ended September 30, Commenting on the financial results, Defendant Kopnisky stated the following: We are pleased with the strong results from this past quarter. Our team continues to maximize value derived from our securitizations, deliver strong loan volume growth and expand our market leadership position. With our continued addition of new clients and expanded programs, we are poised to seize future growth opportunities and will continue our relentless focus on delivering optimal value to our shareholders. 62. During a conference call on October 26, 2006 discussing the financial results, Defendant Kopnisky participated in the following exchange: 22

23 <Q> On the forbearance data, can you just let us know how that s tracking relative to your expectations and how what is the duration of a loan that s in forbearance before it either becomes a delinquency or is secured? <A Jack Kopnisky>: Well, I can. What we see generally is there are two opportunities there in the 20 year period to seek a forbearance. And each forbearance period lasts up to six months. In detail, what we see is that the forbearance is not as required for delinquency and indeed many students generally take up forbearance right after they get out of college and pass through their grace period, they need some more time to get their feet under them and indeed they become very good payers after they come out of forbearance. <Q>: And how are these numbers tracking relative to your expectations and price? <A Jack Kopnisky>: It s spot on. 63. On November 13, 2006, First Marblehead issued a press release announcing a planned $1.0 billion securitization of private student loans guaranteed by TERI. The press release stated in pertinent part as follows: BOSTON, Nov 13, 2006 (BUSINESS WIRE) -- The First Marblehead Corporation (NYSE: FMD) today announced the scheduled closing of a securitization enabling the purchase of private student loans by The National Collegiate Student Loan Trust (the Trust) and the related issuance of Student Loan Asset Backed Notes by the Trust. The National Collegiate Funding LLC, as sponsor and depositor of the securitization, has filed with the Securities and Exchange Commission a Free Writing Prospectus regarding this transaction. The Company expects the transaction, which is scheduled to close on or about December 7, 2006, to be substantially similar in structure to the transaction that closed in September The loans were originated by several different banks under various loan programs that were structured with the assistance of First Marblehead. The Trust expects to raise approximately $1.025 billion from the sale of asset-backed securities, and plans to acquire private student loans with a principal and accrued interest balance of approximately $725 million in the transaction. The Trust expects that approximately 93% of the loans to be purchased at closing will be Direct to Consumer loans, and that the remaining 7% of the loans to be purchased at closing will be School Channel loans. The loans are guaranteed by The Education Resources Institute, Inc. (TERI), the nation s oldest and largest guarantor of private student loans. 23

24 64. On December 5, 2006, First Marblehead issued a press release announcing that the expected revenue on the Company s $1.0 billion private student loan securitization. First Marblehead expected to receive up-front structural advisory fees of approximately $89.6 million, additional structural advisory fees with an estimated discounted present value of approximately $8.8 million, and residual revenue with an estimated discounted present value of approximately $48.7 million. The press release stated in pertinent part as follows: BOSTON, Dec 05, 2006 (BUSINESS WIRE) -- The First Marblehead Corporation (NYSE: FMD) today announced its estimated revenues in connection with a previously announced securitization involving The National Collegiate Student Loan Trust (the Trust ). The Trust expects to raise approximately $1.025 billion from the sale of asset-backed securities, and expects to acquire private student loans with a principal and accrued interest balance of approximately $725 million, in a transaction that is expected to close later this week. At the closing of the transaction, First Marblehead expects to receive up-front structural advisory fees of approximately $89.6 million, or 12.4% of the private student loan balance securitized. In addition, over the term of the Trust, First Marblehead expects to receive additional structural advisory fees from the Trust with an estimated discounted present value of approximately $8.8 million, or 1.2% of the loan balance securitized, as well as residual revenue with an estimated discounted present value of approximately $48.7 million, or 6.7% of the loan balance securitized. The blended yield for the securitization, representing total securitization revenues as a percentage of the total principal and accrued interest balance of loans securitized, is expected to be approximately 20.3%. The Trust expects that approximately 93% of the loans to be purchased at closing will be direct to consumer loans and that the remaining 7% of the loans to be purchased will be school channel loans. Up-front structural advisory fees attributable to direct to consumer loans are expected to represent approximately 12.7% of the direct to consumer loan balance securitized, and additional structural advisory fees and residual revenues attributable to direct to consumer loans are expected to represent approximately 1.2% and 7.1%, respectively, of the direct to consumer loan balance securitized. Up-front structural advisory fees attributable to school channel loans are expected to represent approximately 7.3% of the school channel loan balance securitized, and additional structural advisory fees and residual revenues attributable to school channel loans are expected to represent approximately 1.2% and 2.1%, respectively, of the school channel loan balance securitized. 24