Downey Financial Corp. may have misrepresented to investors the credit quality of its pool of mortgage assets.

This is a securities fraud class action lawsuit against Downey Financial Corp. and certain officers and directors alleging violations of the Securities Exchange Act of 1934.

Downey is a savings and loan holding company.

The class action complaint alleges that Downey Financial issued materially false and misleading statements regarding Downey's business and financial results. As a result of Downey's false statements, Downey's stock traded at artificially inflated prices during the Class Period, reaching a high of $74.85 per share in June 2007.

On October 10, 2007, Downey announced that it expected to incur an operating loss for the 2007 third quarter due to the continued weakening in the housing market. Then, before the market opened on March 17, 2008, Downey released its monthly selected financial results for the 13 months ended February 29, 2008, which showed a significant increase in non-performing assets to almost 11% of total assets, up from 1.2% in May 2007. Downey had to restructure debt for many borrowers to avoid having their loans fail.

On this news, Downey's stock dropped to close at $18.82 per share on March 17, 2008, a decline from $19.14 per share on March 14, 2008, and a decline of 68% from $59 per share on October 9, 2007.

According to the complaint, the true facts, which were known by the Downey but concealed from the investing public during the Class Period, were as follows:

(a) Downey's portfolio of Option ARMs contained millions of dollars worth of impaired and risky securities, many of which were backed by subprime mortgage loans;

(b) prior to the Class Period, Downey had seen Countrywide's growth and had started to get more aggressive in acquiring loans from brokers such that the loans were extremely risky;

(c) Downey failed to properly account for highly leveraged loans such as mortgage securities;

(d) Downey had very little real underwriting, which led to large numbers of bad loans that would cause huge numbers of defaults; and

(e) Downey had not adequately reserved for Option ARM loans, the terms of which provided that during the initial term of the loan borrowers could pay only as much as they desired with any underpayment being added to the loan balance.