Capital One 2003 Annual Report Download - page 107

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which occurred in the first quarter of 2003, and is based on LIBOR rates applied to the cost of the building
funded. If, at the end of the lease term, the Company does not purchase the property, the Company guarantees a
maximum residual value of up to $114.8 million representing approximately 72% of the $159.5 million cost of
the building. This agreement, made with a multi-purpose entity that is a wholly-owned subsidiary of one of the
Company’s lenders, provides that in the event of a sale of the property, the Company’s obligation would be equal
to the sum of all amounts owed by the Company under a note issuance made in connection with the lease
inception. As of December 31, 2003, the value of the building was estimated to be above the maximum residual
value that the Company guarantees; thus, no deficiency existed and no liability was recorded relative to this
property.
Other Guarantees
In connection with an installment loan securitization transaction, the transferee (off-balance sheet special purpose
entity receiving the installment loans) entered into an interest rate hedge agreement (the “swap”) with a
counterparty to reduce interest rate risk associated with the transaction. In connection with the swap, the
Corporation entered into a letter agreement guaranteeing the performance of the transferee under the swap. If at
anytime the Class A invested amount equals zero and the notional amount of the swap is greater than zero
resulting in an “Early Termination Date” (as defined in the securitization transaction’s Master Agreement), then
(a) to the extent that, in connection with the occurrence of such Early Termination Date, the transferee is
obligated to make any payments to the counterparty pursuant to the Master Agreement, the Corporation shall
reimburse the transferee for the full amount of such payment and (b) to the extent that, in connection with the
occurrence of an Early Termination Date, the transferee is entitled to receive any payment from the counterparty
pursuant to the Master Agreement, the transferee will pay to the Corporation the amount of such payment. At
December 31, 2003, the maximum exposure to the Corporation under the letter agreement was approximately
$10.4 million.
Securities Litigation
Beginning in July 2002, the Corporation was named as a defendant in twelve putative class action securities
cases. All twelve actions were filed in the United States District Court for the Eastern District of Virginia. Each
complaint also named as “Individual Defendants” several of the Corporation’s executive officers.
On October 1, 2002, the Court consolidated these twelve cases. Pursuant to the Court’s order, Plaintiffs filed an
amended complaint on October 17, 2002, which alleged that the Corporation and the Individual Defendants
violated Section 10(b) of the Exchange Act, Rule 10b-5 promulgated thereunder, and Section 20(a) of the
Exchange Act. The amended complaint asserted a class period of January 16, 2001, through July 16, 2002,
inclusive. The amended complaint alleged generally that, during the asserted class period, the Corporation
misrepresented the adequacy of its capital levels and loan loss allowance relating to higher risk assets. In
addition, the amended complaint alleged generally that the Corporation failed to disclose that it was experiencing
serious infrastructure deficiencies and systemic computer problems as a result of its growth.
On December 4, 2002, the Court granted defendants’ motion to dismiss plaintiffs’ amended complaint with leave
to amend. Pursuant to that order, plaintiffs filed a second amended complaint on December 23, 2002, which
asserted the same class period and alleged violations of the same statutes and rule. The second amended
complaint also added a new Individual Defendant and asserted violations of Generally Accepted Accounting
Principles. Defendants moved to dismiss the second amended complaint on January 8, 2003, and plaintiffs filed a
motion on March 6, 2003, seeking leave to amend their complaint. On April 10, 2003, the Court granted
defendants’ motion to dismiss plaintiffs’ second amended complaint, denied plaintiffs’ motion for leave to
amend, and dismissed the consolidated action with prejudice. Plaintiffs appealed the Court’s order, opinion, and
judgment to the United States Court of Appeals for the Fourth Circuit on May 8, 2003, and a briefing on the
appeal concluded in September 2003. Oral argument was held on February 25, 2004.
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