The recent woes of Compucredit Corp., a four-year-old subprime credit card lender, are a reminder of how fragile and volatile that end of the business can be. After the company revealed that its third-quarter chargeoff rate was higher than expected, its stock got slammed and shareholders began slapping lawsuits on the Atlanta firm.

Compucredit - which started life as a marketing firm that got other credit card banks to issue its cards, then won a banking charter of its own - sells cards and fee services (such as accident insurance and payment protection) primarily to people with damaged credit histories or little history at all.

Its central product is an unsecured card called the Aspire Visa, which comes in different varieties, but always offers a low credit limit. The Aspire Platinum Visa, for example, has a maximum credit limit of $10,000.

For the past several years, with the economy booming, many subprime lenders have been doing well, and Compucredit, which went public in April 1999, had been among them. In mid-October the company's stock was trading at over $50 a share, largely because executives upgraded their financial projections for 2001 and 2002 on Sept. 26, the company's first day dedicated to a presentation to investors.

At that time Compucredit's leadership predicted that its third-quarter chargeoff rates would be no higher than 10% to 10.5% - high by the standards of more conservative lenders, but not unreasonable in the subprime sector.

Analysts were apparently pleased by what they heard. Some of them rated the stock as a "strong buy" and raised their 12-month price targets as high as $72.

But the good times came to a crashing halt on Oct. 24, when the company announced that its chargeoff rate was in fact 11%. The next day Compucredit's stock dropped 43%, to $29 a share. Most analysts were disturbed by the higher chargeoff figure and downgraded Compucredit's stock, which was trading at $17.4375 midday Wednesday.

Soon after the chargeoff announcement, the lawsuits started to come. At least nine law firms have filed suits on behalf of shareholders, and the cases have been rolled into a class action. Judge Clarence Cooper of the U.S. District Court for the Northern District of Georgia has given potential plaintiffs until Jan. 5 to file suit.

The class action names both Compucredit and its chairman and chief executive officer, David G. Hanna, as defendants. The suit alleges that when Mr. Hanna and other executives announced their relatively rosy projections, they knew that the chargeoff rate and other financial circumstances would be worse than they were saying.

The class action claims that Compucredit was trying to inflate its stock price so that it would have an easier time raising money. On Aug. 30 the company issued more than $600 million of asset-backed notes - backed by the company's credit card receivables - for sale to the public. According to Dennis James, Compucredit's director of business development, the bond transaction was closed Sept. 7.

In an interview with American Banker on Nov. 22, Mr. Hanna said the allegations in the suit are false. He said he is confident the company will weather the storm, and predicted the class action would be dismissed as frivolous.

Analysts contacted for this article said they did not think that Mr. Hanna or the company purposely made misleading comments, but some analysts questioned Compucredit's handling of its accounting.

A chargeoff rate is calculated by taking the number of bad loans, total loans, and expectations of new loans. Compucredit's bad loan numbers came in about right, but the company fell short in acquiring new accounts, analysts said.

Derek S. Derman, an analyst at Wedbush Morgan Securities in Los Angeles, said the situation "could be a continuous problem if they're not growing their receivables fast enough."

Mark Alpert, an analyst for Deutsche Bank Alex. Brown in New York, said that Compucredit "would have been caught in the downdraft anyway."

There has been a selloff of credit card company stock in the past few months, and other subprime lenders - including Providian Financial Corp., Capital One Financial Corp., and Metris Cos. - have felt the squeeze, Mr. Alpert said. "Anyone associated with subprime lending and credit card lending has been under pressure."

In early April, to increase its customer base, Compucredit entered into an agreement with Fleet Credit Card Services under which consumers who request a Fleet credit card but do not meet the credit criteria of the FleetBoston Financial Corp. subsidiary receive an offer for Compucredit's Aspire card.

Compucredit has a similar relationship with Provident Financial Group Inc. of Cincinnati and is working out comparable deals with two other companies.

John McDonald, an analyst for UBS Warburg in New York, said there is "some concern these partnerships are not throwing off as many referrals as Compucredit had hoped."

Compucredit has also fallen short of expectations in its fee-based business. In mid-April the company signed an agreement to merge with Citadel Group Inc. of Daytona Beach, Fla., which markets auto and travel club credit insurance to Aspire card holders.

However, Mr. Hanna said the company's fee-based revenues "were basically flat" from the second quarter to the third, and that the company hopes those revenues will rise in the fourth quarter.

Analysts say it is unlikely that Mr. Hanna would purposely deceive the public for the sake of a short profit gain, among other reasons because he and other company insiders own the bulk of its stock. Mr. Hanna said he did not sell his stock when it was high.

Mr. McDonald said this is "more a case of management not having a good understanding of their numbers, rather than an intentional misrepresentation" by Compucredit officials.

"You don't need fraud to be scared of the stock," Mr. McDonald said. "You've got a young company that has a high-risk model that created very high expectations and disappointed on those in a very short period of time, and it has shaken the confidence of the Street."

Most analysts said they have not given up on the company's stock completely. "When a stock is down 40%, it becomes a different risk-reward," Mr. McDonald said.

Mr. Hanna said that the company hopes to have the lawsuit dismissed, but that "even if it is not dismissed, the litigation should not be a significant distraction" for the company.


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