Beruflich Dokumente
Kultur Dokumente
)
SECURITIES AND EXCHANGE COMMISSION )
)
Plaintiff )
) No. 02C 2180 (Judge
) Manning)
vs.
)
) COMPLAINT
DEAN L. BUNTROCK, PHILLIP B. ROONEY, )
JAMES E. KOENIG, THOMAS C. HAU, ) Jury Trial Demanded
HERBERT A. GETZ, and BRUCE D. )
TOBECKSEN )
)
Defendants. )
SUMMARY
failed to record expenses necessary to write off the costs of impaired and
abandoned landfill development projects,
8. Buntrock first agreed to the Action Steps. Koenig and defendant Thomas C.
Hau then signed it, and the other defendants approved or knew of it. With the
agreement approved and in hand, AA then issued unqualified audit reports on
the Company's financial statements to be relied on by unsuspecting investors.
9. The Company failed to comply with the Action Steps. Compliance would have
prevented defendants from meeting earnings targets and enriching themselves
with performance-based bonuses and could have jeopardized their jobs. Indeed,
in discussing the impact of the Action Steps on a public earnings projection,
defendant Herbert A. Getz, the Company's general counsel, questioned whether
"this is securities fraud."
10. Rather than follow the Action Steps, defendants increasingly resorted to
netting and adopted even bolder accounting manipulations. For example, in
1994, defendant Bruce D. Tobecksen devised a new method to calculate
depreciation of the Company's trucks. When told that the method was flawed
and overstated income, Koenig, Hau, and Tobecksen let the error stand and
grow and concealed it from AA. By 1996, they knew that the cumulative impact
of the error exceeded $100 million.
11. As the fraud progressed, the inflated earnings of prior periods became the
floor for future manipulations one-time adjustments made to achieve a
number in one period had to be replaced in the next and created what Hau
called a "one-off" accounting problem. In early 1997, Hau explained to the audit
committee that "we've had one off accounting every year that has to be
replaced the next year. We've been doing this long enough that the problem
has mounted. . . . Balance sheet created [the] problem by not having
cushions."
13. The accounting review continued, and in February 1998, the Company
acknowledged "past mistakes" and announced that it would restate its financial
statements for the period 1992 through 1996 and the first three-quarters of
1997 (the "Restatement"). It concluded that, for this period, the Company had
overstated its reported pre-tax earnings by approximately $1.7 billion and
understated certain elements of its income tax expense by approximately $190
million. In restating it financial statements, the Company revised every
accounting practice identified in the Action Steps practices that defendants
had agreed, but had failed, to change four years earlier.
14. In the Restatement, the Company acknowledged that its original financial
statements had misstated its net after tax income as follows:
Originally As
Reported Restated Percent
Year (thousands) (thousands) Overstated
The Company acknowledged that, in total, it had overstated its net after-tax
income by over $1 billion.
Ill-gotten Gains
Buntrock $16,917,761
Rooney $9,286,124
Koenig $951,005
Hau $640,100
Getz $472,500
Tobecksen $403,779
19. As a result of their conduct, the defendants each violated section 17(a) of
the Securities Act of 1933 ("Securities Act"), section 10(b) of the Securities
Exchange Act of 1934 ("Exchange Act"), and Exchange Act rule 10b-5. Each of
the defendants also aided and abetted Waste Management's violations of
section 13(a) of the Exchange Act and Exchange Act rules 12b-20, 13a-1, and
13a-13. Defendants Koenig, Hau, and Tobecksen each aided and abetted the
Company's violations of section 13(b)(2)(A) of the Exchange Act and directly
violated Exchange Act rule 13b2-1. Finally, defendants Koenig and Hau each
violated Exchange Act rule 13b2-2. The Commission seeks a final judgment as
to each defendant that permanently enjoins him, orders the disgorgement of ill-
gotten gains plus prejudgment interest, imposes civil penalties as a lesson to
him and to others, and prohibits him from serving as an officer or director of a
public company.
20. The Commission brings this action pursuant to the authority conferred on it
by sections 20(b) and 20(d) of the Securities Act [15 U.S.C. 77t(b) and
77t(d)] and section 21(d) and 21(e) of the Exchange Act [15 U.S.C. 78u(d)
and 78u(e)].
21. This Court has jurisdiction over this action pursuant to section 22(a) of the
Securities Act [15 U.S.C. 77v(a)] and sections 21 and 27 of the Exchange Act
[15 U.S.C. 78u and 78aa].
23. Venue is proper in this District pursuant to section 22(a) of the Securities
Act [15 U.S.C. 77v(a)] and sections 21(d)(1) and 27 of the Exchange Act [15
U.S.C. 78u(d)(1), 78aa] because, among other reasons, most of the conduct
constituting the violations occurred within this District.
DEFENDANTS
26. James E. Koenig, age 54, is a resident of Wheaton, Illinois. Koenig was the
former executive vice president and CFO of Waste Management. In January of
1997, Koenig was stripped of the CFO title because of mounting shareholder
discontent but thereafter continued to have responsibility for financial,
accounting, and reporting matters. Koenig commenced employment with the
Company in July of 1977, first became an officer in 1984, and resigned on
October 29, 1997. Koenig is a certified public accountant. Like every CFO that
preceded him, Koenig was trained as an auditor at Arthur Andersen. Koenig
signed Waste Management's periodic reports on Forms 10-K and 10-Q and
registration statements, as CFO, and participated in making public statements
concerning those reports.
27. Thomas C. Hau, age 66, is a resident of Crown Point, Indiana. Hau was the
vice president and corporate controller and CAO of Waste Management from
September 1990 to October 1997. Hau remained vice president until his
retirement on April 3, 1998. Hau is a certified public accountant. Like every CAO
that preceded him, Hau was trained as an auditor at Arthur Andersen where he
was a partner for thirty years. While at AA, Hau was the partner in charge of
the Waste Management audit from 1976 to 1983 (otherwise referred to as the
"engagement partner") and later became head of the AA audit division that
handled the Waste Management account. Hau was again slotted to become
engagement partner for the Waste Management audit in 1990 but resigned
from AA after Buntrock invited him to join Waste Management. As CAO, he
among other things, prepared initial drafts of the financial statement footnotes
and Management's Discussion and Analysis section of the Company's periodic
reports. During all relevant times, Hau signed Waste Management's annual
reports on Form 10-K as the CAO.
28. Herbert A. Getz, age 46, is a resident of Naperville, Illinois. Getz was the
senior vice president, general counsel, and secretary of Waste Management. He
retired from the Company in late 1998. Getz commenced employment with the
Company in 1983. Prior to coming to Waste Management, Getz was a lawyer at
the firm that had served as outside counsel to Waste Management and its
officers since 1968. Getz is an attorney admitted to the Illinois bar. During all
relevant times, Getz participated in the preparation of the disclosures in the
Company's periodic reports on Forms 10-K and 10-Q, and press releases of
earnings and other financial information.
29. Bruce D. Tobecksen, age 57, is a resident of The Woodlands, Texas.
Tobecksen was the vice president of finance until December of 1997, when he
was asked to leave by the new CFO of Waste Management. Prior to holding that
position, from 1987 to February of 1993, Tobecksen was CFO of Chemical
Waste Management, Inc., a subsidiary of Waste Management. Tobecksen is a
certified public accountant. Before joining Waste Management in 1979, he
worked as an audit manager at AA and during a portion of that time, worked on
the Waste Management audit. Tobecksen participated in the preparation of the
consolidated financial statements and disclosures included in the Company's
periodic reports on Forms 10-K and 10-Q.
RELEVANT ENTITIES
31. Waste Management of North America, Inc. was the Company's wholly
owned and largest subsidiary, providing solid waste management services.
When the Company changed its name to WMX Technologies, Inc. in 1993,
WMNA adopted the name Waste Management, Inc. and then, on May 9, 1997,
changed its name back to Waste Management of North America, Inc. Waste
Management of North America is referred to as WMNA throughout this
Complaint. During the relevant period, WMNA accounted for more than 50% of
the Company's consolidated revenue and approximately 70% of the reported
earnings. Of the $1.7 billion restatement of the Company's consolidated pre-tax
income, approximately $1.4 billion related to WMNA items.
32. Arthur Andersen LLP is a national public accounting firm and, during the
relevant period, maintained a principal office in Chicago, Illinois. AA audited
Waste Management's annual financial statements since before the Company
went public in 1971 until 2002. AA also provided substantial non-audit services
to Waste Management. Until 1997, every CFO and CAO in Waste Management's
history as a public company had previously worked as an auditor at AA. Other
former AA employees worked for Waste Management in key financial and
accounting positions, including the Company's former CFO who served on the
audit committee of Waste Management's Board from 1993 through 1997.
33. Arthur Andersen met regularly with Buntrock, Rooney, Koenig, Hau, and
(beginning with the 1993 audit) Getz. As part of its longstanding audit
protocols, AA had annual audit closing meetings with Koenig and Hau (or their
predecessors) and separate closing meetings with Buntrock and Rooney to
discuss the audit and review Arthur Andersen's PAJEs. The AA engagement
partner utilized and distributed in each meeting the same closing agenda, which
set forth AA's PAJEs and referenced other accounting issues. AA also conducted
separate quarterly meetings with Buntrock, Rooney, and Getz, and with Koenig
and Hau. Among other things, Getz would review the status of landfill
permitting and expansion projects, including projects where the Company was
involved in legal actions challenging the issuance or denial of a permit. Koenig
and Hau would review, among other items, the quality of earnings for the
quarter and the extent to which such earnings were benefited by new
accounting entries made in the quarter. Throughout the relevant period, AA
documented its meetings with Getz and with Koenig and Hau in quarterly review
memoranda.
FACTS
34. Buntrock founded Waste Management in 1968 and took the Company public
in 1971. During the 1970s and 1980s, Buntrock built a vast waste disposal
empire by acquiring and consolidating local waste hauling companies and landfill
operators. At one point, the Company was performing close to 200 acquisitions
a year.
35. The Company experienced tremendous growth in its first twenty years
from the initial public offering in 1971 until the end of 1991, Waste
Management enjoyed 36% average annual growth in revenue and 36% annual
growth in net income; the Company grew from $16 million in revenue in 1971
to become the largest waste removal business in the world, with revenue of
more than $7.5 billion in 1991.
36. Waste Management historic growth was buoyed by a longstanding and well-
known culture of aggressive accounting. According to one former controller,
"[w]e always had a tendency to take aggressive stances. I mean, if there were
two options to look at and one was very conservative and one was very
aggressive we took the more aggressive approach. I mean, that was what we
did." The consistent theme of virtually all of the Waste Management's
"aggressive" accounting was avoidance of expenses or deferral of expenses into
future periods (thereby increasing current period earnings). Practices
euphemistically referred to at Waste Management as "aggressive" in fact
deceived investors and violated generally accepted accounting principles
("GAAP"), which are the accounting standards, conventions, and rules required
for preparing financial statements.
38. Despite these difficulties, Buntrock and others continued publicly to project
the image of a high-flying growth company. However, to sustain unrealistic
growth expectations and achieve predetermined earnings, Waste Management
resorted to fraudulent accounting practices and, in the words of the former head
of the consolidation and reporting department, moved from the gray areas of
accounting into the "black."
Overview of the Scheme
40. First, operating results were recorded by the WMNA operating units, known
as "Groups," using one set of assumptions and reported to headquarters at the
end of each quarter. For example, WMNA recorded the depreciation expense of
each of its trucks utilizing an eight-year useful life and no salvage value. Top-
level adjustments were then recorded using a different set of assumptions. For
example, in 1993 top management assumed trucks had a useful life of 12 years
and a salvage value of $30,000. A macro calculation was then made to estimate
the impact of utilizing the extended life and increased salvage value, and a top-
level adjustment was recorded to reduced WMNA's operating expenses in that
amount. Top management hid the top-level adjustments from the WMNA
Groups and intentionally did not pass back the expense reductions to the field.
Thus, keeping the process secret and centralizing it at corporate made it
especially easy for top management to falsify the financial statements by
plugging in the additional income needed (by way of reduced expenses) to
achieve the desired earnings each quarter. Secrecy also minimized the risk of
complaints from other employees concerning these fraudulent practices.
41. The targeted earnings were set through the annual budget process.
Historically, the Company followed a "top down budgeting process" whereby
Buntrock, Rooney, and others would set aggressive goals for growth in the
coming year, and the operating units would then develop their budgets based
on those goals. These budgets were consolidated with the budget for top-level
adjustments to arrive at the budgeted consolidated earnings. The budgets for
the top-level adjustments were based upon the existing accounting assumptions
being used. The budget, ostensibly created for administration and planning
purposes, became an indispensable tool for top management to manage
earnings.
42. During the quarters, top management monitored the actual results of
operations versus what was budgeted. When the actual operating results were
below budget at the end of a quarter, top management just manipulated the
top-level adjustments and added new or "unbudgeted" entries to fill the actual
to budget "gap." Some unbudgeted entries related to new entries that were
added at the end of a quarter such as the second quarter of 1993 when top
management added new top-level adjustments that discounted one type of
reserve for the first time, added a salvage value to garbage containers for the
first time, and reversed the total amortized costs of all WMNA landfills by an
arbitrary 10%. Unbudgeted adjustments made in other periods included
changing the assumptions underlying existing adjustments, such as when top
management extended the useful lives of trucks by two years and doubled the
salvage values of trucks. Still other unbudgeted adjustments related to
unsupported reversals of reserves into income, which often resulted from
"sweeps" conducted after the close of the quarters. In "sweeps," Koenig and
Hau would canvass the balance sheet accounts of the WMNA Groups to identify
reserves that could be reversed into income. Finally, Koenig and Hau in some
quarters simply "borrowed" from future periods by prematurely recording future
top-level adjustments. Because success depended on leaving investors in the
dark, defendants never once disclosed the impact of the top-level adjustments
(or unbudgeted changes thereto) on the Company's earnings.
45. Throughout the period of the fraud, top management increased the budget
for the top-level adjustments, and each year the actual adjustments far
exceeded the budgeted adjustments. In 14 of the 21 quarters from the first
quarter of 1992 through the first quarter of 1997, top management used
arbitrary top-level adjustments to report earnings that met the internal
budgeted earnings or within the range of the Company's public earnings
projections. In another quarter, top management used arbitrary top-level
adjustments to report earnings, but deliberately left them a penny short of
consensus expectations. More and more top-level adjustments to manage
earnings were required as the scheme progressed. As demonstrated by the
following chart, the top-level adjustments had by 1996 grown to become a
major component of the Company's reported profits:
Fraudulent Accounting Practices and Related Misleading Disclosures
47. The principal fixed assets of Waste Management in the United States and
Canada consisted of garbage trucks, containers, and equipment, representing
approximately $6 billion of the Company's assets during the relevant period.
Accordingly, the Company's depreciation expense was substantial, and rife with
opportunities for manipulation.
50. In the Action Steps, top management, with Getz's knowledge, agreed to
provide support for the salvage values. In March of 1994 six months after the
Company doubled the salvage value of its trucks Koenig instructed a
purchasing agent at WMNA to create a memorandum supporting the
predetermined $30,000 salvage value. The page-and-a-half memorandum
summarily concluded, as Koenig had instructed, that the Company was
"justified" in its position that the salvage value of a 12-year-old truck was
$30,000. However, the memorandum was not based on any empirical data or
meaningful research.
53. In connection with the 1988 audit, AA issued a management letter to the
Board recommending, among other things, that the Company conduct a "site by
site analysis of its landfills to compare recorded land values with its anticipated
net realizable value based on end use." Arthur Andersen instructed that "[a]ny
excess should be amortized over the active site life" of the landfill. Top
management, with the knowledge of Getz, never conducted the study and failed
to reduce the carrying values of overvalued land despite their agreement in the
Action Steps to do so in 1994.
Deferral of Permitting Costs Related to Impaired and Abandoned Projects
56. Prior to 1992, when impaired or abandoned projects could not be bundled
or basketed, they were sometimes written off against reserves. However, top
management was unwilling to pay for the increasing expense of writing off
impaired and abandoned projects, so they developed another non-GAAP policy
in early 1992. As documented in a Company memorandum, "[i]nstead of
writing-off deferred development costs" related to impaired and abandoned
projects, the Company would "defer and amortize these costs over a twenty
year period." For the most part, the Company did not even comply with this
policy. Instead, top management simply left the costs of impaired and
abandoned projects on the balance sheet.
57. Buntrock, Rooney, Koenig, Hau, and Getz were well aware of the increasing
difficulty in obtaining landfill permits and the mounting costs invested in
projects that ultimately were deemed unsuccessful or abandoned. Buntrock and
Rooney carefully monitored the status of greenfield and expansion projects
given the Company's significant and ongoing investment in those projects.
Since at least as early as the 1980s, they regularly received quarterly operating
reports ("QORs") that contained information on amounts spent on greenfields
and expansion projects and their likelihood of success. Among other things, the
QORs provided a narrative status update and rated the project's probability of
success on a "high," "medium," or "low/dead" basis.
58. As early as 1991, at an annual strategic planning meeting, the controller for
the West Group of WMNA informed Rooney, Buntrock, and others that there
were approximately $60 million of deferred permitting costs in the West Group
for "low probability" or "dead" projects for which no reserves existed on the
books of WMNA. The West Group controller continued to raise the issue at
subsequent strategic planning and budget meetings. The West Group
experience was symptomatic of a much larger problem related to impaired and
abandoned projects. However, top management simply left the permitting costs
of impaired and abandoned projects on the balance sheet until future netting or
bundling/basketing opportunities arose.
59. Pursuant to the Action Steps, top management, with Getz's knowledge,
agreed in 1994 to write off $40 million in dead projects, quantified as PAJEs,
over ten years (a practice that still did not comply with GAAP), and promptly
write off future impairments and abandonments as they arose. But this never
happened. Instead, top management, with the knowledge of Getz, used
"netting" in 1994, 1995, 1996, and 1997 to "bury" the write-offs related to
impaired and abandoned projects.
60. Throughout the fraud, defendants did not disclose failed investments in
landfill development or expansion projects or the accounting practices that
concealed those failures. For example, defendants never disclosed the use of
bundling and basketing or the policy to write off dead projects over twenty-
years. Defendants also failed to disclose in the Management's Discussion and
Analysis ("MD&A") or elsewhere that there were in fact substantial impaired or
abandoned projects that had not been written off.
62. Instead of writing off impaired and abandoned landfill permitting projects
and disclosing the impact of such write-offs, defendants disclosed only a risk of
future write-offs related to projects in the Part I disclosure of the Form 10-K,
which is the section that describes the nature of, and risks inherent in, the
Company's business. Through 1994, the Part I disclosure represented that
"adverse decisions by governmental authorities on permit applications
submitted by the Company may result in abandonment of projects, premature
closure of facilities or restriction of operations, which could have a material
adverse effect on the Company's earnings for one or more fiscal quarters or
years." Similarly, beginning in 1995, the Part I disclosures were changed to
expressly reference the risk of the potential write-off of deferred permitting
costs related to impaired or abandoned projects: "If the inability to obtain and
retain necessary permits, the failure of a facility to achieve the desired disposal
volume or other factors cause Waste Management to terminate development
efforts for a facility, the capitalized development expenses of the facility may
need to be written off." In the 1996 annual report, defendants announced the
Company's adoption of a new accounting standard that clarified when write-offs
for impairments should be recorded, Statement of Financial Accounting
Standards ("FAS") No. 121. The MD&A falsely represented that "[t]he adoption
of FAS 121 did not have a material impact on the financial statements as the
Company's previous accounting was substantially in compliance with the new
standard." Contrary to these disclosures, the Company as a matter of practice
did not write off the deferred permitting costs of impaired or abandoned
projects.
63. Koenig and Hau also reduced current period expenses by using an improper
method for capitalizing interest on landfill construction costs. GAAP allows
interest to be capitalized as part of the cost of acquiring assets that take time to
bring to the condition required for use. Once the asset becomes substantially
ready for its intended use, GAAP requires that interest capitalization cease. A
landfill qualifies for interest capitalization because a relatively long period is
required to obtain permits, construct the facility, and prepare it to begin
receiving waste.
65. With the Action Steps, top management, with Getz's knowledge, agreed
that the Company would develop and implement, effective January 1, 1994, a
new capitalized interest methodology that conformed with GAAP. Although a
GAAP method was developed in 1994, top management, with Getz's knowledge,
chose not to adopt it that year because they did not want to suffer the hit to
income. Koenig and Hau determined that the new method would increase
interest expense by $25 million annually (which also meant that as of the end of
1994 the cumulative impact of using the non-GAAP method since 1989 was
approximately $150 million). Instead, they elected to phase-in the adoption of
the new methodology over a three-year period beginning in 1995 in order to
minimize the impact of, and conceal, the accounting change. By 1997, the
Company was still using the NBV Method and had not implemented the GAAP
method the Company developed in 1994.
66. The Company improperly capitalized other costs rather than record them as
expenses in the period in which they were incurred. For example, Koenig and
Hau improperly capitalized systems development costs, such as overhead costs,
and used excessive amortization periods (ten and twenty year periods for the
two largest systems) that did not recognize the impact of technological
obsolescence on useful lives. In 1991 and subsequent years, AA quantified
PAJEs to write off improperly deferred systems costs and repeatedly
recommended that the Company shorten the amortization periods. In each
year, top management refused to record the adjustment. With the Action Steps,
top management, with the knowledge of Getz, agreed to shorten the
amortization periods and to write off over five years the financial statement
misstatements resulting from improperly capitalized systems costs. The
Company did not change the amortization periods until 1995 and then used
"netting" to write off the improperly capitalized systems costs.
67. Beginning in late 1993, the Company also improperly capitalized expenses
through a wholly owned captive insurer, Mountain Indemnity. Mountain
Indemnity provided indemnification to Waste Management's operating units for
landfill claims not covered by traditional insurance, i.e., Mountain Indemnity
insured against such items as property damage claims arising out of
environmental contamination, natural disasters, and other causes. Generally,
GAAP requires that costs to repair or return property to its original condition,
such as remediation costs, be expensed when incurred. However, Hau directed
that all claim costs submitted to Mountain Indemnity be capitalized without
analyzing whether the expenditures were for properly capitalizable items.
Further, most capitalized claims were amortized over an arbitrary 15-year
period regardless of the nature of the costs. The result was to inflate reported
earnings.
69. First, Koenig and Hau charged certain unrelated operating expenses to
previously established environmental reserves instead of expensing such costs
out of current period income. This had the effect of improperly reducing current
period expenses and increasing income. Arthur Andersen told Koenig and Hau
that this practice violated GAAP. In the Action Steps, top management, with the
knowledge of Getz, agreed that the Company would stop the practice. That
never happened.
70. Second, Koenig and Hau incorrectly applied purchase acquisition accounting
principles. Waste Management acquired a number of companies that owned,
operated, or transported waste to, landfills. As part of purchase accounting,
GAAP required that pre-acquisition liabilities be included in the purchase
allocation. Instead of determining the appropriate remediation liability for each
acquired business, Koenig and Hau utilized an arbitrary method that assigned
an inflated liability based solely upon the amount paid for the acquisition. The
inflated liabilities were established by increasing the amount of acquisition
goodwill, which was then amortized over a forty-year period. The Company
assessed the sufficiency of its liabilities for identified environmental remediation
projects at year-end. Koenig and Hau then used over-accruals established for
newly acquired companies to offset under-accruals for the identified liabilities of
unrelated landfills. The Company, in effect, took these amounts into income
because it avoided recording a current period expense to increase the reserves
for the under-accrued liabilities of unrelated landfills. AA told top management
and Getz that this practice violated GAAP and recommended that it cease.
Notwithstanding their agreement in the Action Steps to cease, top
management, with the knowledge of Getz, continued the practice.
72. Waste Management was self-insured for certain risks incident to its
business. The Company historically under-accrued its liabilities arising from self-
insured losses. In 1991, Arthur Andersen's actuarial experts determined that
the Company's methodology for calculating its insurance reserve was improper.
Among other things, Koenig and Hau failed to include certain criteria necessary
for evaluating incurred but not yet reported losses, and used an inappropriate
discounting methodology for reported claims. Each year between 1991 and
1996, AA quantified the financial statement misstatement that resulted from the
under-accrual in Waste Management's insurance reserve, and in each year, top
management refused to correct the misstatement. In the Action Steps, top
management, with Getz's knowledge, agreed that the Company would write off
the estimated insurance misstatement over seven years and change its
discounting methodology. That never happened. The Company continued to use
the improper methodology and excessive discount rate, and the misstatements
continued and accumulated into 1997.
73. Waste Management also was required to recognize corporate federal and
state income tax liabilities each year and to record an expense in the period for
those taxes. However, Koenig and Hau accrued for these liabilities using a
combined tax rate that was too low. Each year between 1991 and 1996 AA
quantified the financial statement misstatement that resulted from the under-
accrual, and in each year, top management refused to correct the
misstatement. In the Action Steps, top management, with Getz's knowledge,
agreed that the Company would write off the income tax misstatement over five
years, but they never did so. The Company continued to under-accrue income
tax liabilities and the misstatements continued and accumulated into 1997.
74. Defendants went to extraordinary lengths to conceal their fraud. The Action
Steps agreement was one aspect of the cover-up. Spreading the write-offs of
misstatements in the Company's financial statements over periods up to 10
years was designed to conceal the write-offs and minimize their impact on
earnings. Similarly, the three-year phase-in of the new capitalized interest
methodology concealed the changeover from the non-GAAP method and
lessened the impact of implementing the GAAP method.
75. Geography entries likewise were designed to cover up items that would lead
analysts and investors to question the Company's reported results. These
entries simply moved tens-of-millions of dollars from one income statement
category of expense to another from the correct one to an incorrect one
with the sole purpose of disguising the true trends of the business. When
pressed by new management in 1997 to defend the practice, Koenig confessed
that the entries were recorded to "make the financials look the way we want to
show them." Tobecksen likewise admitted to new management that the entries
had to continue year-to-year to avoid an "explanation problem."
76. Netting was another practice Buntrock, Rooney, Koenig, Hau, and Getz used
to conceal accounting errors. Netting made approximately $490 million in
current period expenses and prior-period misstatements (which resulted from
the understatement of expenses) simply disappear. This practice was consistent
with top management's refusal to correct known accounting errors unless it
could be done surreptitiously with no impact on current period operating results.
77. The scheme was kept afloat by the false and misleading disclosures.
Defendants never disclosed the Company's actual accounting practices or the
substantial impact of the "one-off" entries recorded each quarter to achieve the
desired profits. To the contrary, Buntrock, Rooney, and others trumpeted
WMNA's purported success and attributed it to their own skill in internalizing
costs and recognizing efficiencies.
79. At the onset of the fraud, Waste Management capped Arthur Andersen's
audit fees. However, Hau advised the new AA engagement partner, who also
was the marketing director for AA's Chicago office and responsible for cross-
selling AA's non-audit services to Waste Management, that AA could earn
additional fees for "special work" e.g., consulting services. Over the
succeeding years, AA's corporate audit fees remained flat (approximately $7.5
million in audit fees in total) while the fees for special work multiplied. AA's
non-audit fees, as well as the fees of its then related firm, Andersen Consulting,
generally increased and were more than double the audit fees approximately
$17.8 million during the same period.
80. Shortly after the Action Steps agreement was negotiated and Andersen
issued its unqualified audit report on the Company's 1993 financial statements,
Buntrock rewarded AA by awarding a $3.7 million consulting project, titled the
"Strategic Review," to Andersen Consulting. The AA engagement partner was
instrumental in the contract being awarded to Andersen Consulting, and at
Buntrock's request, the engagement partner took an active role in overseeing
the project. The Strategic Review lasted eleven-months and resulted in a
proposed operating model for the Company that was utilized for less than a
year and then abandoned. A former Board member who had approved and
reviewed the Strategic Review later described it as a "boondoggle."
81. Buntrock and Rooney were responsible for reviewing all annual reports on
Form 10-K, which they also signed, and all quarterly reports on Form 10-Q.
They reviewed and authorized press releases of annual and quarterly earnings,
made statements therein regarding the results of operations, and signed the
annual letters to stockholders. Koenig signed the periodic reports on Forms 10-
K and 10-Q, as well as registration statements filed with the Commission
pursuant to the Securities Act. He reviewed all drafts of annual and quarterly
reports, along with Hau, Getz, Tobecksen, and others. After being replaced as
CFO, Koenig continued to participate in the preparation and dissemination of
periodic reports and related public statements, including press releases, through
the end of the first quarter of 1997. Hau drafted the financial statement
footnotes and MD&A for the periodic reports on Forms 10-K and 10-Q and
signed the Form 10-K. Getz drafted, reviewed, and authorized the MD&A and
other disclosures in the Company's periodic reports on Forms 10-K and Form
10-Q. He reviewed and authorized press releases of annual and quarterly
earnings, including the release of public earnings projections in 1994 and 1996.
Tobecksen prepared books and records that were incorporated into the periodic
reports on Forms 10-K and 10-Q. Finally, Buntrock, Koenig, and Hau certified in
annual and quarterly representation letters to AA that they were "responsible
for the fair presentation in the consolidated financial statements of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles."
83. On April 16, 1992, the Company reported earnings for the first quarter at
$0.39 per share and stated that both net income and revenue had increased
16% from the same quarter in 1991. In the press release, Buntrock trumpeted
the Company's continued progress in controlling costs and realizing productivity
enhancements.
84. While reported revenue was $139 million below the Company's internal
budget, the reported earnings of $0.39 per share met the budget. These
earnings were achieved only by materially understating expenses. Among other
things, top management recorded approximately $20 million in unbudgeted top-
level adjustments (representing over $0.02 per share in earnings).
85. On or about May 22, 1992, the Company filed with the Commission its
quarterly report on Form 10-Q for the quarter ended March 31, 1992. The
report included the financial information that was disclosed in the April 16, 1992
press release. The Company's financial statements for the quarter contained
material misstatements resulting from the non-GAAP accounting practices
discussed above, including the improper accounting for overvalued land,
deferred permitting costs, capitalized interest, purchase acquisition and
environmental reserves, income tax and self-insurance reserves, discount rate
for the self-insurance reserve, and other practices that were the subject of
PAJEs. The misstatements materially understated expenses (thereby overstating
reported earnings).
87. In the second quarter of 1992, the Company realized a gain resulting from
the Company's successful initial public offering ("IPO") of shares in its Waste
Management International, plc subsidiary. The gain provided top management
an "opportunity" improperly to eliminate accumulated accounting misstatements
and reduce current period expenses to achieve a publicly set earnings target.
88. Top management used a portion of the actual gain of $351 million to offset
approximately $111 million in unrelated current period expenses and prior
period misstatements. The netted items related to, among other things,
uncollectable receivables in Venezuela, anticipated costs associated with the
subsequent change of Waste Management, Inc.'s name to WMX Technologies,
Inc., and the write-off of Kuwaiti equipment losses (i.e., the unrecovered costs
of bulldozers shipped to Kuwait in the aftermath of the 1991 Gulf War). None of
these expenses or the prior period misstatements related to the IPO. The
Company reported only a $240 million gain on the IPO, as a line item in the
income statement, "Gains from stock transactions of subsidiaries." It used the
other $111 million of the gain to eliminate, without disclosure, current period
expenses and prior period misstatements. This inflated the Company's
profitability and deceived investors concerning the actual performance of its
core business WMNA, which was managed by Rooney.
89. Prior to the close of the quarter, on June 29, 1992, the Company issued a
revised projection for second quarter earnings of between $0.43 and $0.45 per
share, down from consensus analyst estimates of $0.47 per share (excluding
the impacts of unusual income and expense items). In the release, the
Company blamed the lowered expectations on the weak economy.
90. On July 16, 1992, the Company released its earnings for the second quarter
in line with its public earnings projection. The release stated that "excluding the
impacts of these unusual items of income and expense from 1992 [the IPO gain
and special charges], Waste Management's net income for the second quarter
rose 11 percent" to $0.43 per share from $0.39 per share a year earlier. The
reported $0.43 per share was realized, however, only through the IPO netting
and other improper accounting.
91. For example, the netting significantly reduced current period expenses. If
top management had properly and truthfully recorded those expenses and not
netted them, the reported net income before unusual items would have been
reduced, and the Company would have reported a substantial decline in
earnings, not an 11% increase.
93. On or about August 19, 1992, the Company filed with the Commission its
quarterly report on Form 10-Q for the quarter ended June 30, 1992. The report
included the financial information that was disclosed in the July 16, 1992 press
release. The Company's financial statements for the quarter contained material
misstatements resulting from the netting and other non-GAAP accounting
practices that continued from the prior period. The misstatements materially
understated expenses (thereby overstating reported earnings).
95. On October 15, 1992, the Company reported earnings for the third quarter
at $0.44 per share. The release stated that net income had increased from
$0.42 per share in the same quarter in 1991 (representing a 5% growth rate).
97. On or about November 19, 1992, the Company filed with the Commission
its quarterly report on Form 10-Q for the quarter ended September 30, 1992.
The report included the financial information that was disclosed in the October
15, 1992 press release. The Company's financial statements for the quarter
contained material misstatements resulting from non-GAAP accounting practices
that continued from the prior period, which understated expenses (thereby
overstating reported earnings).
98. During the relevant period, the footnotes to the Company's annual financial
statements reported for WMNA and other subsidiary and affiliated companies
"Income from Operations," which was defined as the difference between
revenue and the combined operating expenses, goodwill amortization, and
selling, general and administrative ("SG&A") expenses. Likewise, the discussion
of the "results of operations" in the MD&A in quarterly and annual reports
separately analyzed WMNA's operating results, which included a discussion of
the year-to-year trends in WMNA's "Operating Margins" (which was Income
from Operations as percentage or revenue), and trends in WMNA's operating
and SG&A expenses as a percentage of revenue. Throughout the relevant
period, defendants highlighted and explained in MD&A even the slightest change
(e.g., a few tenths of a percentage point) in the trends in Operating Margins
and expenses. Typically, defendants identified external factors to explain away
any negative trend while falsely crediting any reported positive trends to
operating efficiencies, the benefits from restructuring, and other self-serving
factors.
99. The MD&A for in the quarterly report for the third quarter of 1992 bolstered
the misrepresentations in the Company's financial statements by making false
and misleading claims concerning the Company's financial results and how
those results had been achieved. In the quarterly report for the third quarter of
1992, the MD&A noted that the Operating Margin was 21.5% through the first
nine months of 1992, versus 22.6% for the same period in 1991. For example,
the MD&A stated that WMNA's "operating expenses as a percentage of revenue
are under upward pressure in the domestic solid waste segment in part due to
shifting public attitudes and legislative and regulatory mandates." The MD&A
went on to note that SG&A expense as a percentage of revenue showed some
improvement as a result of a cost reduction program and other factors.
However, the MD&A failed to disclose, among other things, the material impact
the IPO netting had on WMNA's Operating Margins and the reported trends in
income and expenses with respect to the results through the first three quarters
of the year. But for the netting, the Company would have reported a significant
decline in the Operating Margins of WMNA through the first nine months of
1992.
Arthur Andersen's Audit Closing Meetings with Buntrock, Rooney, Koenig, and
Hau
100. In separate year-end closing meetings with Buntrock, with Rooney, and
with Koenig and Hau, AA presented PAJEs of $90 million to correct, among
other items, shortfalls in the Company's insurance and income tax reserves and
to write off deferred systems costs and deferred permitting costs. The PAJEs
represented 8.3% of the Company's reported net income before unusual income
and expense items. Top management refused to record any of the proposed
adjustments. Had they booked the PAJEs as AA proposed (by recording all of
the PAJEs as a charge against 1992 earnings), the adjustments would have had
a material impact on the Company's reported results, reversing the Company's
reported 7% growth in earnings that year.
101. Arthur Andersen's PAJEs themselves represented only the tip of the
iceberg as there were additional misstatements resulting from non-GAAP
accounting practices that were not quantified as PAJEs by AA. Most notably, the
PAJE in 1992 for improperly deferred permitting costs was only $15 million
when the actual misstatements were substantially higher. For example, in a
November 1992 meeting with the Arthur Andersen engagement team, Hau
reported that permitting costs associated with impaired and abandoned landfill
projects "may approximate $100 million on a consolidated basis." Nevertheless,
top management avoided the expense of writing off these projects by
maintaining the deferred permitting costs as assets on the Company's balance
sheet. Years later, top management wrote off some of these projects but did so
fraudulently by netting the deferred permitting costs against one-time gains,
without disclosure, and thus avoided any charge to operating expenses.
102. Also during the 1992 audit, AA reviewed the land values recorded "for
landfills at sites anticipated to close within 15 years" and concluded, "in none of
the instances did we find that the Company had undertaken a detail study to
assess net realizable value." For example, AA identified for Koenig and Hau one
site where the "end-use plans did not support the $8 million recorded for the
site which is scheduled to close in three years." Koenig and did not write off the
overvalued land as AA had recommended.
103. Koenig and Hau improperly charged approximately $8.2 million related to
overhead and legal costs to Waste Management's environmental remediation
reserves. They also offset $18 million in under-accruals for known
environmental liabilities (current period expenses) against overstated reserves
for unrelated landfills established through purchase acquisition accounting.
Arthur Andersen objected to these practices, but as usual, Koenig and Hau
ignored AA's concerns.
104. On February 4, 1993, the Company reported its earnings for 1992. The
release noted that, excluding the impact of unusual income and expense items
(the IPO gain and special charges that year), net income was $1.68 per share
for 1992 versus $1.57 per share in 1991. By artificially boosting earnings
through the fraudulent accounting discussed above, top management received
bonuses equal to between 30% and 50% of their salaries.
105. On or about March 29, 1993, the Company filed with the Commission its
annual report on Form 10-K for 1992. The report included the financial
information that was disclosed in the February 4, 1993 press release. The
financial statements in the annual report contained material misstatements
resulting from the non-GAAP accounting practices discussed above. The
misstatements materially understated expenses (thereby overstating reported
earnings for 1992).
106. The annual report likewise contained numerous false and misleading
disclosures regarding the Company's accounting practices, results from
operations, financial position, and financial performance. For example, top
management failed to disclose its accounting practices related to deferred
permitting costs, misrepresented that its capitalized interest practices
conformed with GAAP, falsely implied that the Company had conducted a study
of the net realizable value of its landfills, and failed to disclose the netting of the
IPO gain.
108. In the MD&A, top management misrepresented the extent of the decline in
WMNA's operating performance. They attributed external factors, such as
shifting public attitudes and legislative and regulatory mandates, as adding
"upward pressure" on operating expenses that caused a slight decline in the
Operating Margins to 21.0% of revenue in 1992 compared with 22.5% in 1991.
In fact, the increase in the cost of operations was much worse than reported
and was mitigated only by the netting of the IPO gain and other improper
accounting practices.
109. In the Restatement, the Company acknowledged that the reported net
income in its original 1992 financial statements was overstated by 15%. The
total restatement for 1992 (not including tax restatements) was approximately
$132 million and included, among other things, approximately $37 million for
the under-accrual of the self-insurance reserve, $16 million for impaired and
abandoned solid waste projects, $18 million for the misapplication of acquisition
accounting principles, and $8 million for overvalued land. This was on top of
approximately $260 million in restatements for 1991 and prior years for
essentially the same issues. The restatement for the tax under-accrual was $24
million for 1992 and $18 million for 1991 and earlier periods.
111. Even with the non-GAAP accounting practices that continued from the prior
years top management still added new accounting entries to manage earnings,
achieve a public earnings projection in the second quarter, and stave off
plummeting earnings. Ultimately, the Company's aggressive growth
expectations for the year would not be met.
112. By April of 1993, analysts began trimming earnings estimates for the
Company and questioning whether the Company could ever regain the rapid
growth it enjoyed during most of the 1980s. The April 12, 1993 Wall Street
Journal contained an unfavorable article about the Company, entitled "Allure of
Waste Management is Fading." The article noted that the first quarter "could
provide yet another disappointment" for Waste Management. The following day,
as the Company's stock price was dropping precipitously, the Company
responded with a press release stating that the Company's first quarter
earnings "would be in line with the published estimates of leading financial
analysts . . . in the range of $0.40 to $0.41 per share."
113. On April 20, 1993 the Company announced its first quarter earnings of
$0.41 per share. The release noted that net income had increased $0.02 per
share from the same quarter a year ago. In the press release, Buntrock boasted
about the Company's purported continued growth in North America and
internationally and its continued success in managing costs.
114. In fact, the Company achieved the desired earnings only by top
management's recording more than $47 million (or $0.06 in earnings per share)
in unbudgeted and undisclosed top-level adjustments. These adjustments
included approximately $35 million in reversals of purchase acquisition,
environmental, and bad debt reserves into income. Without these adjustments,
the Company would have reported a substantial decline in earnings, and not the
moderate 5% growth that was reported. As noted in AA's quarterly review
memorandum, "Tom [Hau] indicated that it was a difficult quarter to achieve
earnings expectations."
115. On or about May 14, 1993, the Company filed with the Commission its
quarterly report on Form 10-Q for the quarter ended March 31, 1993, which
included the financial information that was disclosed in the April 20, 1993 press
release. The financial statements for the quarter contained material
misstatements resulting from the non-GAAP accounting practices discussed
above, including the improper accounting for overvalued land, deferred
permitting costs, capitalized interest, purchase acquisition and environmental
reserves, income tax and self-insurance reserves, discount rate for the self-
insurance reserve, other items quantified as PAJEs, and the improper reversal of
reserves into income. The misstatements materially understated expenses
(thereby overstating reported earnings).
118. Things turned from bad to worse in the second quarter. Actual results were
far behind budget and, as a result, the Company issued on June 21, 1993 a
revised projection for second quarter earnings. The release noted that the
Company expected to be $0.02 to $0.03 per share below leading industry
financial analysts' consensus estimates of $0.45 to $0.46 per share. The
Company blamed the shortfall on a decline in earnings of Chemical Waste
Management, a wholly owned subsidiary, yet still highlighted the expected
"modest improvements" in WMNA's operations.
119. On July 20, 1993, the Company reported second quarter earnings of $0.43
per share (excluding extraordinary items) compared with $0.43 per share in the
same quarter the prior year. The reported earnings were consistent with the
June 21, 1993 projection. In the press release, Buntrock proclaimed: "[t]he
growth of our company continues domestically and oversees. . . . [WMNA's]
operations, which represent about 50 percent of our revenue, are improving,
although not as rapidly as we had hoped."
120. In fact, the Company was not growing at all. The reported earnings for the
quarter were achieved only by recording unbudgeted top-level adjustments
after the close of the quarter that significantly reduced expenses. In particular,
top management made the following improper and undisclosed reversals of
approximately $46 million in reserves into income as follows: (i) $15 million of
the environmental remediation reserve, (ii) $20 million of a reserve for
closure/post-closure costs associated with landfills, (iii) $5.5 million of the self-
insurance reserve, and (iv) $5 million of bad debt reserves. They also added for
the first time a salvage value to garbage containers, which resulted in a $2.3
million reduction of depreciation expenses, and increased landfill lives
purportedly because of new technologies, which resulted in the reversal into
income of $3.75 million of amortized landfill costs.
121. These reversals of reserves and other changes alone, which totaled $52
million, increased reported earnings by 16% (excluding extraordinary items)
and represented approximately $0.06 of the reported $0.43 per share in
earnings. In fact, the $52 million in adjustments enabled top management
falsely to report flat earnings growth instead of a substantial decline.
Nevertheless, the impact of such changes was never disclosed. In contrast to
the Company's public statements about its continued growth, Hau admitted in
AA's quarterly review meeting that it was a "difficult quarter" and that he had
"borrowed from [the] 3rd and 4th quarter" to attain an additional $0.05 to $0.06
in earnings per share for the quarter.
122. On or about August 12, 1993, the Company filed with the Commission its
quarterly report on Form 10-Q for the quarter ended June 30, 1993, which
included the financial information that was disclosed in the July 20, 1993 press
release. The Company's financial statements for the quarter contained material
misstatements resulting from the non-GAAP accounting practices that continued
from the prior periods.
124. The third quarter was even worse than the second, as the Company's
actual results were significantly behind budget. As they had in previous
quarters, top management masked the true, dire picture of the Company's
earnings by making further unbudgeted top-level adjustments after the close of
the quarter. Even the inflated earnings still fell short of expectations. Hau
concluded his quarterly review with AA by noting that "the quarter was indeed a
difficult one, and the analysts would likely be disappointed."
125. On October 19, 1993, the Company announced third quarter earnings of
$0.39 per share (excluding special charges), which represented a decline in
earnings from the same quarter in the prior year. In the press release, Buntrock
noted that the Company was "streamlin[ing] the administration of [WMNA],"
under the direction of Rooney, who " will serve as Chairman of [WMNA] . . .
[and] provide increased focus on the growth and profitability of the unit with a
particular emphasis on cost control and increasing return on invested capital."
On the day following the release, the Company's stock plunged $4.87 to close
at $24, a 17% drop in response to disappointing third quarter results.
126. The actual deterioration of WMNA's operations, however, was far worse
than top management disclosed. The most significant unbudgeted top-level
adjustment made to conceal the deterioration involved changes in the
estimated useful lives and salvage value of trucks. Buntrock and Rooney, who
viewed themselves as the experts on the value of trucks and how long they
lasted, authorized the unsupported, undisclosed, and improper changes, in
consultation with Koenig and Hau. Without competent support, they extended
the useful life of front-end loaders from 8 years to 10 years and rear-end
loaders and roll-off trucks from 10 to 12 years. At the same time, they doubled
the salvage value of all trucks from $15,000 to $30,000. They made the
changes without any research.
127. The new salvage value, especially in light of the extended lives, was
patently overstated. Top management effectively found that a garbage truck
"driven into the ground" for two additional years would be worth twice as much.
As Hau later admitted, the salvage value of trucks was "excessive given 11 year
life" and that the "better [salvage value] estimate is probably $10,000."
Moreover, the $30,000 salvage value was contrary to the Company's own
operating experience. The Company ran its trucks until they could be run no
more. To control costs, Buntrock and Rooney instructed the Groups to maximize
the use of the older trucks. When taken out of service, the old trucks were
cannibalized and almost all usable, transferable parts were retained for spare
parts. The value of the junkyard cannibalized parts, which represented the true
measure of the economic value to the Company, was nowhere near $30,000.
Nevertheless, in representation letters to AA, Buntrock, Koenig, and Hau
misrepresented that "fixed asset useful lives and salvage values adopted by the
Company reflect the Company's actual experience to date and its best estimates
of future experience."
128. Even if the new estimates had been made in good faith, rather than to
pump up earnings, the new estimates were applied improperly. As they had in
the past, Koenig and Hau applied the changes cumulatively from the beginning
of the year, rather than prospectively from the time the changes were made.
129. The unsupported changes in estimates reduced operating expenses for the
quarter by approximately $35 million and continued to reduce future period
expenses. These changes provided over $0.04 of the Company's reported $0.39
per share in third quarter earnings (excluding extraordinary items) and
improved the quarter's earnings by approximately 13%. Top management,
however, did not disclose the changes, or their impact on reported earnings, to
investors.
130. On or about November 12, 1993, the Company filed with the Commission
its quarterly report on Form 10-Q for the quarter ended September 30, 1993,
which included the financial information that was disclosed in the October 19,
1993 press release. The financial statements for the quarter contained material
misstatements resulting from the falsified depreciation adjustments and other
non-GAAP accounting practices that continued from prior periods.
132. More accounting changes were made in the fourth quarter. Mountain
Indemnity, the wholly owned captive insurer, began processing claims in the
fourth quarter and the accounting for such claims provided an additional boost
to earnings. Hau reduced fourth quarter expenses by more than $20 million by
improperly capitalizing Mountain Indemnity claims. In addition, Koenig and Hau,
with Tobecksen's assistance, initiated the "geography" entries. In the fourth
quarter alone, they "moved" more than $56 million between line items on the
income statement as follows: $56 million of operating expense was reclassified
to SG&A expense ($31 million), offsets to revenue ($15 million), interest
expense ($9 million) and other expense ($1 million). Among other things, the
entries significantly improved the trend in operating expenses as a percentage
of revenue by decreasing both revenue and operating expenses.
133. The excessive use of unbudgeted top-level adjustments in the first three
quarters of 1993 not only benefited earnings but resulted in the reporting of
improved margins. During the year, top management boasted that "continued
progress in internalizing disposal volume" had reduced operating expenses as a
percentage of revenue. In the MD&A of the annual report, top management
would have to provide a reason for any change in the trends (even the slightest
of changes) in the fourth quarter. A dramatic change would be harder to explain
away and might lead readers of the report to question the Company's
operations. Thus, the geography entries were used to conceal the scheme and
report a more consistent trend in operating expenses as a percentage of
revenue.
135. The WMNA corporate controller prepared a schedule listing, among other
things, the anticipated basketing opportunities for impaired and abandoned
projects. By basketing such deferred permitting costs, the Company would
avoid write-offs. The controller also identified $40 million in dead, "past life
support" projects that had no potential basketing opportunities. Instead of
taking any write-offs for those dead projects in 1993, which GAAP required, the
Company placed the costs in a "corporate pool" pending future write-offs
through netting. The deferred projects schedules were provided to Rooney,
Koenig, Hau, and others and were updated periodically.
Arthur Andersen's Audit Closing Meetings with Buntrock, Rooney, Koenig, Hau,
and Getz
136. The AA engagement partner held separate closing meetings with Buntrock,
with Rooney, and with Koenig and Hau in February of 1994, using the same
agenda for each meeting. In addition, the engagement partner held a closing
meeting with Getz, a practice that continued thereafter. In the meetings, the
engagement partner presented cumulative PAJEs representing 14.11% of
income after taxes but before special items (or approximately $115 million on
an after-tax basis). The accounting practices that gave rise to the 1993 PAJEs
essentially were the same old frauds from 1992. However, the 1993 cumulative
PAJEs increased by approximately 50% over the 1992 PAJEs. Once again, top
management, with the knowledge of Getz, refused to book a penny of the
PAJEs.
Self-insurance reserve
Closure/Post-closure reserve
Environmental Reserve
Depreciation/Salvage Value
Discount rates.
140. For example, top management agreed to stop their improper use of
purchase accounting and to cease the practice reversing of reserves into
income, such as the reversal of reserves discussed above that were recorded in
1993 to manage earnings. They also agreed to develop and implement in 1994
a new capitalized interest method that conformed with GAAP and agreed to
provide reports AA had been requesting for years a study supporting the
end-use value of land and analytical support for the changes in truck
depreciation estimates. In addition to the must-do steps, the agreement
proposed two other alternatives labeled "reasonable" and "conservative" to
which the Company should aspire.
141. Buntrock, Rooney, Koenig, Hau, and Getz were the only persons at the
Company who received a copy of the Action Steps and knew the details of the
agreement. Tobecksen later learned of the agreement.
143. Koenig and Hau discussed the Action Steps during their closing meeting
with AA the day after the Buntrock meeting. Following a heated exchange with
the AA engagement partner, Koenig and Hau negotiated additional time to write
off one of the misstatements, thereby reducing the annual impact of
implementing the Action Steps. They then signed the agreement along with the
engagement partner and initialed the negotiated changes. Contemporaneous
notes show that the earnings impact of implementing the must do portion of the
Action Steps was discussed at the Koenig and Hau closing meeting. The annual
impact of writing off the misstatements alone was calculated to be between $46
million and $52 million (or approximately $0.06 in earnings per share annually).
The estimated $0.06 per share per year was especially significant because the
Company's projected 5% to 10% growth amounted to an increase of only $0.07
to $0.14 per share in 1994 earnings.
144. The AA engagement partner also reviewed the Action Steps agreement in
his closing meeting with Rooney, which occurred a few days later, and focused
on the "must do" items for which Rooney had the greatest responsibility: the
changes in depreciation estimates, the deferred permitting costs, and the need
to conduct an appropriate study to assess net realizable value of land.
145. Getz had his closing meeting with the AA engagement partner on February
11 and bluntly identified one obvious concern when presented with the Action
Steps. According to the contemporaneous notes from the meeting by a senior
member of the AA engagement team, Getz remarked: "Does our plan [the
Action Steps] support the budget? Per Herb, this is securities fraud if we know
now." Having raised the issue, Getz then learned of or recklessly disregarded
the earnings impact of implementing the Action Steps and its impact on the
projection in the February 8, 1994 press release. Neither Getz nor top
management revised the Company's public projection.
146. On February 16, 1994, after reviewing the Action Steps agreement with
each of Buntrock, Rooney, Koenig, Hau, and Getz, AA signed its unqualified
audit report on the Company's 1993 financial statements.
147. In its February 8, 1994 press release of earnings, the Company reported
that, excluding the impact of unusual income and expense items, 1993 earnings
were $1.53 per share compared with $1.68 in 1992. In the press release,
Buntrock stated that "[w]e are obviously disappointed with our 1993
performance, as we know our shareholders are . . . but we believe that we have
now taken the steps necessary to return our Company to a position of overall
earnings growth for 1994. Our target is a 5 percent to 10 percent growth in
earnings per share in 1994." The Company's earnings were significantly below
analysts' expectations and the market reacted negatively. The following day the
Company's stock price dropped 11.5% from $28.25 to $25 per share. No
bonuses were paid for 1993. However, at Buntrock's recommendation, the
Board increased by up to 30% the amount of bonuses defendants could receive
in 1994.
148. On or about March 30, 1994, the Company filed with the Commission its
1993 annual report on Form 10-K. The report included the 1993 financial
information that was disclosed in the February 8, 1994 press release. The
financial statements in the annual report contained material misstatements
resulting from the inflated salvage values, improper capitalization of Mountain
Indemnity claims, and other the non-GAAP accounting practices discussed
above. The misstatements materially understated expenses (thereby
overstating reported earnings). The improper accounting practices identified in
the Action Steps resulted in hundreds of millions of dollars in current and prior
period misstatements.
149. In addition, Buntrock, Rooney, Koenig, Hau, and Getz failed to disclose in
the annual report the Company's accounting practices related to deferred
permitting costs, misrepresented that its capitalized interest practices
conformed with GAAP, and falsely implied that the Company had conducted a
study of the net realizable value of its landfills. They similarly failed to disclose
new accounting practices adopted in 1993, including the discounting of the
closure/post-closure reserve for the first time, the improper capitalization of
Mountain Indemnity claims, geography entries, and the impact of changes in
depreciation estimates, the inflated salvage values used, or the manner in
which they were applied.
150. The MD&A also failed to disclose the Action Steps agreement and bolstered
the misrepresentations in the Company's financial statements by making false
and misleading claims concerning the Company's financial results and how
those results had been achieved. For example, the impact of the changes in
depreciation estimates and reversals of reserves into income (over $100 million
alone related to WMNA) was never disclosed. Moreover, the MD&A also
misrepresented the trend in WMNA's gross margins: "Operating expenses as a
percentage of revenue benefited from increased volumes to absorb the fixed
portion of such costs as well as [WMNA's] progress in internalizing disposal
volume, but price weakness largely offset these gains." The significant reduction
of WMNA's operating expenses through changes in accounting practices and
estimates, as well as the geography entries, concealed the fact that, contrary to
the Company's disclosure, the margins were declining, not improving.
151. In the Restatement, the Company acknowledged that the reported net
income in its original 1993 financial statements was overstated by 57%. The
Company restated for all of the accounting practices identified in the Actions
Steps. The total restatement for 1993 alone (not including income tax
restatements) was approximately $211 million and included, among other
things, $97 million for depreciation, $44 million for impaired and abandoned
solid waste projects, $21 million for the misapplication of acquisition accounting
principles, $22 million for improperly capitalized Mountain Indemnity claims,
and $6 million for overvalued land. The restatement for the income tax under-
accrual was approximately $19 million. With respect to the salvage value of
trucks, the Company determined in the Restatement that the appropriate
salvage value was $12,000 (i.e., the $30,000 salvage value adopted in the third
quarter was overstated by 150%). The cumulative restatement for the
overstated salvage value through the third quarter of 1997 was $141 million.
154. In the first quarter, the Company sold its interest in Modulaire, a company
that manufactured modular office trailers. The gain of approximately $25 million
provided top management with another netting opportunity. In a February 22,
1994 memorandum copied to Rooney and Hau, the WMNA corporate controller
asked the Groups to identify "overvalued assets" and compile a "confidential
shopping list" of items that could be netted against the Modulaire gain. The
responses far exceeded the projected $25 gain two Groups alone identified
over $90 million in overvalued assets. Only $10 million of the items identified
(all current period expenses) and $15 million in other unrelated expenses and
misstatements, including certain "must do" Action Steps items, were netted
against the Modulaire gain. Among the expenses buried through netting were a
$1 million gift sought by Buntrock to the Chicago Symphony Orchestra and Civic
Opera and its "Buntrock Symphony Hall."
155. Koenig and Hau, with Tobecksen's assistance, recorded geography entries
in the first quarter that manipulated the reported trends and margins. For
example, the geography entries materially improved the Operating Margin by
reducing reported operating expenses by more than $12 million and making an
equivalent increase in interest expense, which was not included in the
calculation of the Operating Margin.
156. On April 19, 1994, the Company reported earnings for the first quarter at
$0.34 per share, which exactly met the Company's internal budget and public
earnings projection and consensus analysts' expectations. In the press release,
Buntrock trumpeted WMNA's "improvements" in managing costs and improving
returns and noted that "[w]e expect to return to positive earnings growth in
1994 and believe our stated target of 5% to 10% growth in earnings is
achievable."
157. On or about May 16, 1994, the Company filed with the Commission its
quarterly report on Form 10-Q for the quarter ended March 31, 1994. The
report included the financial information that was disclosed in the April 19, 1994
press release. The Company's financial statements for the quarter contained
material misstatements resulting from the non-GAAP accounting practices
discussed above, including the improper accounting for overvalued land,
deferred permitting costs, income tax and self-insurance reserves, discount rate
for the self-insurance reserve, other items previously quantified as PAJEs,
capitalized interest, purchase acquisition and environmental reserves, other
accounting practices identified in the Action Steps agreement, Mountain
Indemnity claims, geography entries, inflated salvage values, and the Modulaire
netting. The misstatements materially understated expenses (thereby
overstating reported earnings).
159. On July 19, 1994, the Company reported earnings for the second quarter
at $0.42 per share, which exactly met the Company's internal budget and public
earnings projection and consensus analysts' expectations. In the press release,
Buntrock again emphasized "our overall growth is in line with our expectations
at this point in the year," and WMNA's purported success in improving
"profitability and managing costs."
162. On or about August 12, 1994, the Company filed with the Commission its
quarterly report on Form 10-Q for the quarter ended June 30, 1994. The report
included the financial information that was disclosed in the July 19, 1994 press
release. The Company's financial statements for the quarter contained material
misstatements resulting from the non-GAAP accounting practices that continued
from the prior period.
164. On October 18, 1994, the Company reported earnings for the third quarter
at $0.44 per share, which exactly met the Company's internal budget and public
earnings projection and consensus analysts' expectations. In the press release,
Buntrock again trumpeted results "in line with our expectations at this point in
the year" and highlighted WMNA's "strong performance."
165. In fact, top management, with the knowledge of Getz, achieved the
claimed earnings only by recording unbudgeted and undisclosed top-level
adjustments. For example, during the third quarter, Waste Management
obtained a $50 million insurance litigation settlement for environmental
remediation liabilities. Instead of crediting the entire recovery to its
environmental reserves as agreed to in the Action Steps, Koenig and Hau left
the environmental reserves under-accrued and took half of the insurance
proceeds directly into income by recording a top-level adjustment that reduced
operating expenses by $25 million. As Hau explained to AA in their quarterly
review, $25 million of the settlement "was . . . taken to income to generate
$.03/share in order to achieve the [reported] $0.44" in earnings per share,
which was "consistent with market expectations and plan." Despite the fact that
the recovery increased the Company's earnings for the third quarter by 7.7%,
and was the difference between making and not making the Company's publicly
set earnings target, Getz, in consultation with Hau, claimed that the impact of
the recovery was not material and did not need to be disclosed.
166. Koenig and Hau, with Tobecksen's assistance, recorded geography entries
in the third quarter that manipulated the reported trends and margins. For
example, the geography entries reduced SG&A expenses by approximately $9
million and increased operating expenses by $15 million. By reducing SG&A
expenses, the entries improved the reported trend in SG&A expenses as a
percentage of revenue. By increasing operating expenses, the entries smoothed
the reported trend in operating expenses as a percentage of revenue and
helped conceal the $25 million reduction of operating expenses that resulted
from the accounting for the insurance recovery.
167. On or about November 14, 1994, the Company filed with the Commission
its quarterly report on Form 10-Q for the quarter ended September 30, 1994.
The report included the financial information that was disclosed in the October
18, 1994 press release. The Company's financial statements for the quarter
contained material misstatements resulting from the non-GAAP accounting
practices that continued from the prior period.
169. After the close of the fourth quarter, defendants made accounting changes
once again to inflate reported earnings. Top management manipulated the truck
depreciation estimates yet again they added a year to the useful lives of
some trucks, subtracted a year from the lives of other trucks, and fixed the
salvage value at $25,000. To offset these changes, Tobecksen developed a new
way to calculate the top-level adjustment for useful lives. Tobecksen's method
did not account for fully depreciated vehicles and, as a result, miscalculated the
top-level adjustment and overstated income.
170. Internal accountants at the Company pointed out the error to Koenig, Hau,
and Tobecksen and informed them that the error resulted in a $21 million
overstatement of 1994 income. The accountants further told Koenig, Hau, and
Tobecksen the amount by which the error grew each year, estimating in 1996
the cumulative impact of the error to be approximately $100 million.
Nevertheless, none of these defendants corrected the error because they
pretended that the amount was not material. But to be safe, Koenig and Hau
made sure that Arthur Andersen never learned of the error.
171. The Company still was behind budget even after the additional income
generated by Tobecksen's changes. Thus, after WMNA and its Groups had
closed their books for the quarter and year-end, Hau and Koenig called the
Group controllers and conducted a "sweep" to find out if there was additional
"income" that could be generated by reversing reserves into income. Following
the controllers' responses, Koenig and Hau recorded a $15 million top-level
adjustment at headquarters (because the Groups' books had been closed for
the quarter). Koenig and Hau allowed the $15 million entry to remain on the
headquarters' books until the fourth quarter of 1995 when it was reversed by
netting it against a one-time gain.
172. Finally, Koenig and Hau, with Tobecksen's assistance, again recorded
geography entries in the fourth quarter that manipulated the reported trends
and margins. The fourth quarter geography entries reduced SG&A expenses by
approximately $13 million and increased operating expenses by $13 million. The
combined effect of all of geography entries recorded during the quarters in 1994
was to reclassify over $22 million of SG&A expenses to operating expenses,
interest expense, and other items.
Arthur Andersen's Audit Closing Meetings With Buntrock, Rooney, Koenig, Hau,
and Getz
174. In his closing meetings with Buntrock, Rooney, Koenig, Hau, and Getz, the
AA engagement partner "expressed his disappointment" over the Company's
lack of progress on the Action Steps and presented them with a "scorecard"
documenting that little was done to implement the "must do" items. The
scorecard indicated that the Company failed to implement over two-thirds of the
"must do" steps and failed to make changes that would have had a negative
impact on earnings. For example, the scorecard indicated that the Company
continued its improper accounting for understated environmental liabilities by
(i) recording $25 million of an insurance recovery in income instead of deferring
it, (ii) charging $9 million in non-remedial costs to the reserve, and (iii) using
reserves established in purchase acquisition accounting improperly to offset
under-accruals in other environmental reserves.
175. Capitalized interest was another area in which the Company made no
meaningful progress in 1994. In the Action Steps, top management, with Getz's
knowledge, agreed to develop a new method that complied with GAAP and
apply it retroactive as of January 1, 1994. Development of the new method
known as the "3A Model" was finalized in December of 1994, and AA
determined that the new method conformed with GAAP. However, because the
new method would increase interest expense by $25 million annually (or reduce
earnings by $0.03 per share), Koenig and Hau opted for creeping compliance.
Instead of adopting the new method in 1994, Koenig and Hau elected to phase
it in over a three-year period beginning in 1995 the new method would not
be placed in operation until 1998 and in the intervening years, Koenig and Hau
would record an adjustment decreasing the amount capitalized, thus increasing
interest expense, by $8 million in 1995, $16 million in 1996, and $25 million in
1997. The phase-in did not comply with GAAP.
176. In addition to the lack of progress on the Action Steps, the engagement
partner discussed AA's "disappointment" with the lack of progress on reducing
the PAJEs. The engagement partner presented Buntrock, Rooney, Koenig, Hau,
and Getz with a schedule of PAJEs (both current and prior period) in the amount
of $196 million (on a pre-tax equivalent basis) or 14.2% of pre-tax income
before special items. Once again top management, with Getz's knowledge,
refused to book any of the PAJEs. According to an AA memorandum
summarizing the closing meeting, Buntrock "voiced his complete agreement"
that improvement in reducing the PAJEs "absolutely must be made in fiscal
1995."
177. As in prior years, top management knew that there were additional
misstatements not posted as PAJEs. The failure to implement the Action Steps,
reduce the PAJEs, and correct other known misstatements, in addition to the
Modulaire netting and the three-year phase in of the new capitalized interest
methodology, provides yet another illustration of the defendants' overarching
scheme they refused to correct known accounting errors because they did
not want to suffer the hit to income. Instead, defendants allowed known errors
to accumulate until future netting opportunities arose.
178. On February 6, 1995, the Company reported its 1994 year-end earnings at
$1.62 per share. The press release noted that, excluding special charges and
extraordinary items, earnings grew from $1.53 in 1993 to $1.63 in 1994, which
was exactly in line with the budgeted earnings, represented a 7.2% growth in
earnings, and was within the 5% to 10% target announced at the start of the
year. By reporting the budgeted earnings, Buntrock, Koenig, Hau, Getz, and
Tobecksen pocketed bonuses equal to 80%, 50%, 40%, 50%, and 30% of their
salaries respectively. Under the incentive plan, no bonuses would have been
paid if the Company reported anything less than $1.60 in earnings per share.
Rooney, whose bonus was based in large part on achieving the targeted results
of WMNA, likewise collected a bonus of 102% of his salary, which otherwise
would not have been paid had the Company, among other things, fully
implemented the Action Steps.
179. On or about March 30, 1995, the Company filed with the Commission its
annual report on Form 10-K for 1994. The report included the financial
information that was disclosed in the February 6, 1995 press release. The
Company's financial statements contained material misstatements resulting
from the non-GAAP accounting practices discussed above, including the
improper accounting for overvalued land, deferred permitting costs, income tax
and self-insurance reserves, discount rate for the self-insurance reserve, other
items quantified as PAJEs, capitalized interest, purchase acquisition and
environmental reserves, other accounting practices identified in the Action
Steps agreement, Mountain Indemnity claims, geography entries, inflated
salvage values, the Modulaire netting, the insurance settlement recorded in
income, the post-close "sweep" of reserves, and the depreciation calculation
error. The misstatements materially understated expenses (thereby overstating
reported earnings).
180. Although the improper accounting practices identified in the Action Steps
and the PAJEs resulted in hundreds of millions of dollars in current and prior
period misstatements, Buntrock and Rooney publicly proclaimed 1994 a
resounding success. In the annual letter to the shareholders, they lauded the
accomplishments of WMNA:
181. The MD&A disclosure in the Form 10-K likewise bolstered the
misrepresentations in the Company's financial statements by making false and
misleading claims concerning the Company's financial results and how those
results had been achieved. The MD&A did not disclose the Action Steps or top
management's failure to change the improper accounting practices identified
therein. The MD&A also failed to mention, among other things, the Modulaire
netting, the insurance settlement recorded in income, the post-close "sweep" of
reserves, and the depreciation calculation error or how those items had reduced
expenses and improved earnings. Instead, defendants touted the reported
improvement of the Operating Margin of WMNA from 20.4% in 1993 to 20.8%
in 1994, attributing it to productivity increases, stronger pricing, and increased
volume. In fact, Operating Margins were much worse than presented. The
netting or insurance recovery alone reversed the reported trend Operating
Margins.
182. The MD&A disclosure on capitalized interest also did not mention the
Company's plan to adopt a new method of capitalizing interest in 1995 or that it
would result in a decrease in capitalized interest (thereby increasing interest
expense). Instead, the disclosure falsely explained that "[t]he Company expects
capitalized interest to decline in 1995 as a number of significant capital projects
were completed near the end of 1994."
183. In the Restatement, the Company acknowledged that the reported net
income in its original 1994 financial statements was overstated by 25%. All of
the Action Steps items were restated. The total restatement for 1994 alone (not
including income tax restatements) was approximately $211 million, about the
same as the restatement for 1993 and included, among other things, $115
million for depreciation, $46 million for impaired and abandoned solid waste
projects, $18 million for the misapplication of acquisition accounting principles,
$8 million for overvalued land, and $10 million for improperly capitalized
Mountain Indemnity claims. The cumulative restatement to correct for the error
in Tobecksen's methodology for calculating the depreciation top-level
adjustment was $110 million through the third quarter of 1997.
184. The Company, based upon goals set by Buntrock, Rooney, and others,
budgeted earnings to grow in 1995 to $1.74 per share (or 6.7% over the prior
year). The projection was revised upward at the end of the first quarter to 10%
growth in earnings for the year. To achieve the 10% growth target, defendants
invented new accounting entries during the year, failed to write off new asset
impairments that arose in 1995, still refused to correct known accounting errors
and other improper practices including the items identified in the Action Steps,
and netted without disclosure approximately $160 million in current period
expenses and prior period misstatements against a one-time gain.
185. On April 19, 1995 the Company announced its first quarter earnings of
$0.40 per share excluding special charges. The reported $0.40 per share
exactly met consensus analysts' expectations. The release highlighted the
Company's continued success in managing costs, noting that WMNA's operating
margins improved for the fifth consecutive quarter. The release also noted
WMNA's strong growth was helped by "better pricing and healthier commodities
markets for recycled materials."
186. In fact, top management achieved the reported earnings only by recording
more than $22 million (or approximately $0.03 in earnings per share) in
unbudgeted and undisclosed top-level adjustments, which included yet another
change in depreciation estimate. This time the change involved adding a
salvage value to the more than one million garbage containers.
189. In addition to the entry recognizing a salvage value for containers, other
significant unbudgeted top-level adjustments for the first quarter included
approximately $16 million in reversals of insurance, environmental, legal, and
bad debt reserves into income, and a $7 million entry to recognize for the first
time a recycling inventory. Koenig and Hau also reduced the estimated income
tax rate by half a percentage point, which, according to AA's first quarter review
memorandum, was based upon unsupported assumptions. At year end, AA
proposed PAJEs related to the improper $7 million entry for recycling inventory
as well as PAJEs related to the under-accrual of the insurance, environmental,
legal, and income tax reserves.
190. Because the reported first quarter results exceeded the budget, the
Company revised its quarterly earnings targets upwards for the remainder of
the year. Koenig thus advised the analysts that the Company was anticipating
10% growth in earnings for the remainder of the year with the earnings for the
year projected to be approximately $1.80 per share.
191. On or about May 15, 1995, the Company filed with the Commission its
quarterly report on Form 10-Q for the quarter ended March 31, 1995. The
report included the financial information that was disclosed in the April 19, 1995
press release. The Company's financial statements for the quarter contained
material misstatements resulting from the non-GAAP accounting practices
discussed above, including the improper accounting for overvalued land,
deferred permitting costs, income tax and self-insurance reserves, discount rate
for the self-insurance reserve, other items quantified as PAJEs, the phase-in of
the new capitalized interest methodology, purchase acquisition and
environmental reserves, other accounting practices identified in the Action
Steps agreement, Mountain Indemnity claims, geography entries, inflated
salvage values on trucks and containers, and the depreciation calculation error.
The misstatements materially understated expenses (thereby overstating
reported earnings).
193. On July 18, 1995 the Company announced its second quarter earnings of
$0.46 per share (before a "LYONs" charge). The reported $0.46 per share
exactly met consensus analysts' expectations. In the press release, Buntrock
highlighted WMNA's "continued efforts to reduce costs." What Buntrock did not
disclose, however, was that the so-called "continued efforts to reduce costs"
involved geography entries and other fraudulent accounting practices.
194. On or about August 11, 1995, the Company filed with the Commission its
quarterly report on Form 10-Q for the quarter ended June 30, 1995. The report
included the financial information that was disclosed in the July 18, 1995 press
release. The Company's financial statements for the quarter contained material
misstatements resulting from non-GAAP accounting practices that continued
from the prior period.
196. On October 17, 1995 the Company announced its third quarter earnings of
$0.48 per share, which exactly met consensus analysts' expectations. In the
release, Buntrock claimed that "[o]ur earnings for the third quarter were
improved over 1994. . . . [WMNA's] operations continued to perform well and
again contributed substantially to our continued growth despite a recent decline
in market prices for recyclables."
197. To offset the drop in prices of recyclables and stay on target for its
projected 10% growth in earnings, top management added new unbudgeted
top-level adjustments. For example, they reversed over $17 million of reserves
into income, which included the "borrowing" of a budgeted fourth quarter top-
level adjustment, and improperly accelerated the recognition of $9.8 million in
income related to a bio-remediation project. They also reversed $3 million in
asset impairment write-offs recorded at the Group level earlier in the year.
(Acknowledging that there was no basis for the reversal, top management
netted the $3 million reversal against a one-time gain in the following quarter).
These new accounting entries alone represented $0.04 in earnings per share
and increased the Company's reported third quarter earnings by 10%.
198. Koenig and Hau, with Tobecksen's assistance, recorded geography entries
to manipulate the trends in the various expenses categories. For example, the
geography entries reduced SG&A and increased operating expenses by over $10
million. The reduction of SG&A expenses improved the reported trend of such
expenses as a percentage of revenue. By increasing operating expenses, the
geography entries also concealed the significant reduction of expenses resulting
from the unbudgeted top-level adjustments in the quarter. The net effect of the
geography entries was to smooth over and improve the reported trends while
concealing items that might lead investors to question the reported results.
199. On or about November 14, 1995, the Company filed with the Commission
its quarterly report on Form 10-Q for the quarter ended September 30, 1995.
The report included the financial information that was disclosed in the October
17, 1995 press release. The Company's financial statements for the quarter
contained material misstatements resulting from non-GAAP accounting practices
that continued from the prior period.
201. In fact, the Company's actual results were much worse than presented.
Among other things, absent the unbudgeted and improper top-level
adjustments and geography entries, the Company would have reported
significantly unfavorable trends in the margins of WMNA.
Failure to Write off Live Oak Impairment and Correct Other Known
Misstatements
202. While defendants were pushing hard to conceal expenses and "create"
earnings, new impairments arose in 1995 and were once again ignored. For
example, top management failed to write down the value of, and revise the
amortization and accrual rates for, WMNA's Live Oak landfill in Fulton County,
Georgia. In 1989, the Company had acquired over 227 acres of land adjoining
the Live Oak landfill. A zoning ordinance specifically prohibited use of the 227
acres as a "waste dump." The Company's amortization and accrual periods
nevertheless included the additional landfill capacity and life that would be
obtained by using the 227 acres as a waste dump. In 1994, the Company
applied for a special use permit to expand its Live Oak operations onto the
restricted property arguing that a "sanitary landfill" was not the same as a
"waste dump" and, therefore, expansion was not precluded by the zoning
ordinance. The Atlanta city council denied the permit application in September
of 1994. Separately, the State of Georgia enacted a law in April 1995 that
prohibited expansion of Live Oak onto the adjoining property.
203. Consistent with their practice deferring all costs regardless of GAAP's
requirements, top management did not record a write-down for the Live Oak
impairment in 1995. Instead, the Company continued to account for Live Oak as
though it could expand operations onto the restricted property and maintained
an extended amortization and accrual period, which reduced the annual costs to
operate the site.
204. The potential for an impairment charge at Live Oak had been quantified for
Buntrock, Rooney, Koenig, Hau, and Getz as early as 1994 in annual budget
meetings. The Company's outside counsel likewise informed Rooney (and Getz)
that expansion was not probable. In 1996, because "expansion [was] not a
certainty," the Group controller also increased the amortization rates at Live
Oak. Rooney, however, instructed the controller to change the amortization
rates back to include the expansion.
205. Other misstatements were identified but not corrected in 1995 because, in
Hau's words, the Company "[could not] afford it with everything else." As a
result, defendants did not correct other known misstatements or change the
underlying improper accounting practices.
207. Top management, with Getz's knowledge, used the $160 million gain to
eliminate unrelated current period expenses and prior period misstatements
without disclosing the gain or the netted items. Many of the netted items
related to Arthur Andersen's PAJEs, which top management had previously
agreed to write off with the Action Steps. For example, the netted items
included $54 million in deferred permitting costs related to unsuccessful
projects (including dead projects previously identified by the Company), $12
million related to the understatement of the Company's income tax accrual, and
$12 million for improperly capitalized computer systems costs. The netted items
also included items that were not previously quantified by AA as PAJEs. For
example, $27 million of the netting related to miscellaneous errors identified by
Koenig and Hau, which included $15 million related to the reversal of the fourth
quarter 1994 "sweep" of Group reserves.
208. By netting, top management made $160 million of expenses disappear and
effectively admitted that the prior period netted items were in fact
misstatements. The ServiceMaster netting further illustrates top management's
steadfast refusal to correct known misstatements unless and until it could be
done surreptitiously and without reducing net income or Income from
Operations.
Arthur Andersen's Audit Closing Meetings With Buntrock, Rooney, Koenig, Hau,
and Getz
210. The AA engagement partner held separate closing meetings with Buntrock,
Rooney, and Getz, and with Koenig and Hau in February of 1996, using the
same agenda for each meeting. In the meetings, the engagement partner
presented and reviewed a detailed agenda that included a schedule of Arthur
Andersen's PAJEs. The schedule listed misstatements for 1995 at $218 million
(before netting), which represented 14.8% of the Company's 1995 income
before special charges. The schedule itemized the netted items and showed that
netting $151 million of misstatements against the ServiceMaster gain would
make AA's PAJEs $67 million. (The remaining $9 million of the $160 million gain
was recorded in income.) Top management, with the knowledge of Getz,
refused to record any of the $67 million remaining as PAJEs.
211. The agenda also included, among a whole host of accounting issues that
were not the subject of PAJEs and a table listing the earnings per share impact
of certain unbudgeted top-level adjustments recorded in 1995, including the
$0.03 per share impact of the addition of a salvage value for containers. The
table illustrated that but for such adjustments, the Company would not have
been able to report its 10% increase in earnings. The agenda also the
highlighted that no legal reserves had been provided for certain legal matters.
213. On February 6, 1996, the Company released its earnings for the fourth
quarter and year-end 1995. Excluding special charges, the Company reported
that earnings per share from continuing operations for 1995 were $1.78 versus
$1.61 for 1994, an increase of 10%. In the press release, Buntrock touted the
positive results, noting that "[w]e are very pleased that our earnings from
continuing operations grew approximately 10 percent." By fraudulently
reporting double-digit earnings growth, Buntrock, Koenig, Hau, Getz, and
Tobecksen rewarded themselves with bonuses equal to between 30% and 128%
of their salaries. Rooney likewise made off with a bonus equal to 114% of his
salary as a result of the accounting manipulations and inflated earnings of
WMNA.
214. On or about March 29, 1996, the Company filed with the Commission its
annual report on Form 10-K for 1995. The report included the financial
information that was disclosed in the February 6, 1996 press release. The
Company's financial statement contained material misstatements resulting from
the non-GAAP accounting practices discussed above, including the improper
accounting for overvalued land, deferred permitting costs, income tax and self-
insurance reserves, discount rate for the self-insurance reserve, other items
quantified as PAJEs, the phase-in of the new capitalized interest methodology,
purchase acquisition and environmental reserves, the insurance settlement
recorded in income, other accounting practices identified in the Action Steps
agreement, Mountain Indemnity claims, geography entries, inflated salvage
values of trucks and containers, the ServiceMaster netting, the Live Oak
impairment, and the depreciation calculation error. The misstatements
materially understated expenses (thereby overstating reported earnings).
216. The MD&A in the Form 10-K likewise bolstered the misrepresentations in
the Company's financial statements by making false and misleading claims
concerning the Company's financial results and how those results had been
achieved. For example, the disclosure highlighted the Company's earnings
growth and included a chart illustrating that reported earnings from continuing
operations (before special items) had grown by approximately 7% in 1994 and
10% in 1995. In fact, the Company's targeted growth was achieved only
through hundreds of millions of dollars worth of fraudulent accounting entries.
217. Moreover, the MD&A did not disclose the existence of, or the failure to
implement, the Action Steps agreement and omitted reference to the
ServiceMaster gain or the netted items, the Live Oak impairment, the addition
of a salvage value to containers, or the recording of insurance settlements in
income. The MD&A likewise did not disclose the phase-in of the GAAP method
for capitalizing interest and instead misrepresented that capitalized interest
"declined substantially in 1995 as a number of significant capital projects were
completed and became operational near the end of 1994." In fact, the decline
was due in large part to the $8 million entry recorded as part of the phase-in. In
addition, citing "productivity enhancements," the MD&A boasted that WMNA's
margins improved, with operating and SG&A expenses both declining as a
percentage of revenue:
Operating expenses were 67.5% of revenue in 1995 and 68.4% in 1994. Milder
weather in 1995, [WMNA's] pricing effectiveness program, improved safety
performance, higher recyclable commodity prices, internalization of recycling
processing, and continuing productivity enhancements all contributed to the
improvement. Selling and administrative expenses were 10.2% of revenue in
1995 compared with 10.8% in 1994. Although such expenses increased in
absolute dollars, productivity enhancements have enabled [WMNA] to manage a
higher revenue base with relatively modest selling and administrative expense
increases, the majority of which result from acquisitions and pay-for-
performance compensation plans.
219. In the Restatement, the Company acknowledged that the reported net
income in its original 1995 financial statements was overstated by 78%. The
total restatement for 1995 (not including income tax restatements) was
approximately $340 million, the largest of any of the years restated. The
restatements included, among other things, $133 million for depreciation, $170
million for capitalized interest, $25 million for the misapplication of acquisition
accounting principles, and $5 million for improperly capitalized Mountain
Indemnity claims. The restatement for the income tax under-accrual was
approximately $14 million. The Restatement also reclassified and restated the
$160 million netting of the ServiceMaster gain. With respect to the restatement
for the salvage value of containers, the appropriate salvage value, based on
scrap steel prices, was determined to be only 3% of cost (or one-tenth the
salvage value top management used in 1995) for a cumulative restatement of
$61 million through the third quarter of 1997. Finally, the restatements for
1995 included $47 million for the Live Oak impairment. Long after the
Restatement, the Company obtained a permit that allowed limited vertical
expansion of the existing Live Oak facility. The permit application was submitted
in November of 1998 and approved in August of 1999. The vertical expansion
was based upon a technology that did not previously exist. The Company never
obtained a permit for the horizontal expansion it previously sought but was
barred from obtaining.
220. During 1996, a continued drop in pricing for recyclable commodities added
to the significant earnings pressure the Company was already facing. In the
February 6, 1996 press release of the Company's 1995 earnings, Buntrock
noted that the Company anticipated only a "5 to 10 percent earnings growth
rate for 1996." The projection was based on the Company's budgeted earnings
of $1.90 per share for the year, which was based on the goals set by Rooney,
Buntrock, and others.
221. In the press release, Buntrock blamed the moderate growth projection on
the "uncontrollable factors" of the drop in prices for recyclable commodities and
severe winter weather conditions. The Company revised its earnings projection
downward twice during the year but still had to resort to new accounting
manipulations to create additional earnings just to meet the lowered target.
Ultimately, these "one-off" manipulations sowed the seeds for the unraveling of
the scheme one year later.
222. At the close of the first quarter, the WMNA Groups were, in Rooney's
words, "$20 million off our first quarter profit target." Because WMNA's true
operating results could not deliver the budgeted earnings, top management
recorded unbudgeted accounting entries to erase the $20 million budget deficit.
223. On April 17, 1996 the Company announced favorable first quarter earnings
from continuing operations of $0.38 per share, which was above budget and
kept the Company on track with its public projection. The reported earnings
represented a slight decline ($0.02 per share) from the first quarter 1995
earnings (before special charges), which Buntrock blamed this time on the
weather and another drop in commodities prices for recyclable materials:
First quarter results in the recycling and solid waste business in North America
and Europe were hurt by severe weather conditions, Mr. Buntrock indicated.
Additionally, commodities prices for the recyclable materials the Company
handles, especially paper fiber, remained at substantially lower levels than a
year ago, which also impacted results.
224. Top management achieved the reported $0.38 in earnings per share by,
among other things, recording an entire $35 million insurance recovery in
income. Yet again, recording the recovery in income was contrary to the
Company's agreement in the Action Steps. As recently as February of 1996, the
AA engagement partner told Buntrock, Rooney, Koenig, Hau and Getz in audit
closing meetings that the Company must credit insurance recoveries to the
environmental reserve. In fact, AA had posted a PAJE in 1995 for the under-
accrual of the environmental reserves. The $35 million insurance recovery
recorded in income alone increased the Company's reported first quarter
earnings by 12.9%. Nevertheless, as a result of a decision by Hau and Getz,
there was no disclosure of the recovery.
225. Other adjustments made after the close of the quarter included the
reversal into income of $12 million in reserves maintained by the various WMNA
Groups. As noted in another AA quarterly review memorandum, "[AA's]
discussion with various accounting officers of the Company have indicated that
there were some adjustments to the reported results from the groups required
to meet the earnings levels reported."
226. On or about May 15, 1996, the Company filed with the Commission its
quarterly report on Form 10-Q for the quarter ended March 31, 1996. The
report included the financial information that was disclosed in the April 17, 1996
press release. The Company's financial statements for the quarter contained
material misstatements resulting from the non-GAAP accounting practices
discussed above, including the improper accounting for overvalued land,
deferred permitting costs, income tax and self-insurance reserves, discount rate
for the self-insurance reserve, other items previously quantified as PAJEs, the
phase-in of the new capitalized interest methodology, purchase acquisition and
environmental reserves, the insurance settlement recorded in income, other
accounting practices identified in the Action Steps agreement, Mountain
Indemnity claims, geography entries, inflated salvage values of trucks and
containers, the Live Oak impairment, and the depreciation calculation error. The
misstatements materially understated expenses (thereby overstating reported
earnings).
228. Beginning in 1996, the Company reorganized its subsidiary and affiliated
companies into four lines of business: Waste Services, Clean Energy, Clean
Water, and Environmental and Infrastructure Engineering and Consulting. This
reorganization was one of the major recommendations to come out of the
Strategic Review. The Waste Services line of business, representing 84% of
total consolidated revenue, primarily consisted of the operations of WMNA. The
MD&A for the first quarter reported, with respect to the Solid Waste line of
business, that operating expenses increased only slightly as a percentage of
revenue while SG&A expenses remained constant from the same quarter in the
prior year. Similar to what they had done in the past, defendants blamed the
increase in operating expenses on uncontrollable factors: "The increase [in
operating expenses as a percentage of revenue] was a function of the severe
weather, which hampered operations, and the decline in the price of recyclable
commodities." In reality, the true results were much worse than presented as
the significant reduction of expenses through the reversal of reserves and
recording of the insurance recovery in income concealed the actual decline in
operations. To sustain the fraud, the effect of the new accounting entries that
provided a one-time increase to earnings in the first quarter would have to be
made up in the next.
230. When the Groups closed the books on the quarter, the Company was still
far behind even its lowered earnings target. Thus, as had been done in other
quarters, new accounting manipulations again were recorded to achieve the
reported $0.45 second quarter earnings per share from continuing operations,
which was just at the low range of the Rooney's earnings projection a month
earlier.
231. During the second week of July (after the WMNA Groups had closed their
books for the quarter and reported the results to headquarters), Koenig and
Hau ordered another "sweep" of the WMNA balance sheet. They requested that
controllers identify potential income opportunities and, as in the past, further
instructed the controllers to ignore asset impairments or reserves that were
under accrued. Buntrock and Rooney knew of the sweep. They met with Koenig
and Hau to discuss the quarter's results on July 16, 1996, one day before the
Company released its second quarter earnings. That same day, Koenig and Hau
finalized the results of the "sweep" and improperly recorded a $29 million a top-
level adjustment to reflect the reversals of various reserves into income. The
adjustment improved reported earnings by approximately $0.04 per share (or
approximately 8.8%).
232. When later asked by the WMNA corporate controller whether the entries
were ever recorded at corporate in consolidation, Hau falsely replied that the
entries had not been recorded because the items were "not needed." Hau stated
that the books and records of the Groups therefore did not have to be adjusted
to reflect the decrease in the reserves. In the first quarter of 1997, Hau, with
the knowledge of Buntrock and Koenig, used a portion of an unrelated gain to
net the entries related to the second quarter 1996 sweep. The netting again
reflects their acknowledgement that the second quarter sweep entries were
improper in the first instance.
233. On July 17, 1996, the Company announced second quarter earnings from
continuing operations of $0.45 per share. The reported earnings from
continuing operations represented a slight increase ($0.01 per share) from the
second quarter 1995 earnings. In the press release, Rooney stated that "[o]ur
core North American waste services business remains strong and we are making
good progress in implementing our Business Improvement 2000 Initiative" but
that the Company's income was constrained by current market conditions and
the "poor prices for recyclable commodities." As a result, Rooney again revised
the Company's projected 1996 results "to be around $1.85 per share."
235. Koenig and Hau, with Tobecksen's assistance, recorded geography entries
to manipulate the reported trends and margins. Among other things, the
geography entries reduced operating expenses by approximately $18 million.
236. On or about August 12, 1996, the Company filed with the Commission its
quarterly report on Form 10-Q for the quarter ended June 30, 1996. The report
included the financial information that was disclosed in the July 17, 1996 press
release. The Company's financial statements for the quarter contained material
misstatements resulting from the second quarter sweep, the Rust E&C netting
and misclassification, and other non-GAAP accounting practices that continued
from the prior period.
239. The financial statements and MD&A also falsely represented the accounting
for the sale of Rust E&C. The financial statement footnotes and MD&A
referenced the sale in the section on discontinued operations but failed to
disclose that, in fact, a portion of the gain was used to offset operating
expenses and other items and the remainder was used to increase income from
continuing operations.
240. On October 6, 1996, the Company announced its third quarter earnings of
$0.50 per share. Rooney once again blamed the uncontrollable factors for the
negligible earnings growth but highlighted anticipated measures to reduce
costs:
[WMNA] performed satisfactorily in the quarter but its results were negatively
affected by continuing weak prices in the markets for recyclable commodities . .
. . We are on track with our business improvement programs and we made
good progress on a series of key incentives designed to enhance our
competitive position, which we expect will reduce operating costs, increase
efficiency and improve our sales and marketing capabilities.
241. The reported earnings of $0.50 per share were deliberately a penny shy of
the analysts' expectations. Contemporaneous notes from the quarterly review
with Hau and Tobecksen indicate that the Company "decided to disappoint by 1
penny" because the "4th quarter could be tough." Again, the necessary earnings
to reach the $0.50 per share were created through unbudgeted top-level
adjustments and misclassifications.
243. Also in the third quarter, Waste Management netted and misclassified a
$65 million gain (pre-tax and pre-minority interest) realized on the sale of Rust
Scaffolding. Like the gain from the sale of Rust E&C, top management netted
$42 million of the gain against certain unrelated operating expenses and
misclassified the balance as income from continuing operations. The effect of
the netting and misclassification of the two Rust transactions was to inflate pre-
tax income from continuing operations by $85.1 million.
244. The netting of the Rust gains in the second and third quarters came at a
time when analysts were continuing to question the Company's propensity to
take special charges. As noted in an Arthur Andersen workpaper, "[a]nalysts
complained they could not figure out WMX base line earnings due to these
special charges. Therefore, Rooney promised to curtail special charges."
Rooney's promise was made in a May 1996 interview with the Wall Street
Journal, in which he stated that "[w]e don't plan to have any more special
charges. We are sensitive that we have to be predictable. We have to build
credibility. Charges . . . aren't some kind of pattern." What was a pattern,
however, was the use of netting to, in Arthur Andersen's words, "bury charges
for balance sheet cleanups."
245. Koenig and Hau, with Tobecksen's assistance, also recorded geography
entries that manipulated the reported trends and margins. For example, the
geography entries increased operating expenses by approximately $12 million,
decreased SG&A and interest expenses by approximately $16 and $18 million,
and buried the remainder in Sundry Income and minority interest. The net
effect of the entries was to smooth over the reported trends and conceal the
extent to which the unbudgeted top-level adjustments had reduced operating
expenses in the quarter.
246. On or about November 8, 1996, the Company filed with the Commission
its quarterly report on Form 10-Q for the quarter ended September 30, 1996.
The report included the financial information that was disclosed in the October
6, 1996 press release. The Company's financial statements for the quarter
contained material misstatements resulting from the Rust Scaffolding netting
and misclassification and other non-GAAP accounting practices that continued
from the prior period.
Operating expenses were 70.6% of revenue for the 1996 [third] quarter
compared with 70.0% for the third quarter of 1995, and 71.3% for the second
quarter of 1996. Depressed commodity prices, higher fuel costs, low margin
construction revenue on the West Kowloon transfer station in Hong Kong, and
volume declines in Europe have increased 1996 operating expenses as a
percentage of revenue compared with 1995. However, continuing productivity
improvements have mitigated this impact and have resulted in sequential
reductions in operating expense percentages in each 1996 quarter.
248. In fact, numerous undisclosed and improper accounting entries in the third
quarter significantly reduced operating expenses, including the reversal of
reserves into income, "borrowing" a top-level adjustment budgeted for the
fourth quarter, and the Rust Scaffolding netting.
251. In the fourth quarter, large investor groups increased pressure on Rooney
and the Company. Investors had been clamoring for the Company to create
more shareholder value, and one major investor group demanded the removal
of the long-time management team of Buntrock, Rooney, and Koenig. Proxy
fights were threatened. A December 23, 1996 article in Crain's Chicago
Businessreported that Rooney had led the investor group to believe that Koenig
would be replaced as CFO, but that that did not happen.
252. Adding to the external pressures the Company was facing, on December
11, 1996, a United States district court awarded more than $76 million in
compensatory damages and $15 million of punitive damages against the
Company's subsidiary, Chemical Waste Management, Inc. ("CWM"), for a
massive fraud involving a contract to pay royalty fees for an acquired landfill
(Emelle). The fraud occurred while Tobecksen was the CFO of CWM, and in a
strongly worded opinion, the court admonished senior officers at CWM for their
"well defined plan to cheat Plaintiffs out of money." The court concluded that
"[w]hat is troubling about this case is that fraud, misrepresentation and
dishonesty apparently became part of the operating culture of the Defendant
corporation." Gregory v. Chemical Waste Management, Inc., 38 F. Supp. 2d
598, 623-24 (W.D. Tenn. 1996). The Company had not previously accrued any
reserve for the lawsuit despite AA's suggestion to do so.
253. Meanwhile, top management dug themselves deeper into the hole with
more accounting manipulations in the fourth quarter and sought to conceal their
predicament. One of the most blatant examples involved a $20 million entry
based on anticipated insurance settlements that were still being negotiated. The
Company was in litigation with certain of its insurers and had rejected the
insurers' offers of settlement. However, based upon the amount of the rejected
offers, Koenig and Hau rationalized that, because $20 million was the minimum
that the Company presumably would recover later, they could record that
amount as income in the quarter. The premature recognition of the hoped for
litigation settlement was in clear violation of GAAP.
255. Also for the fourth quarter, Tobecksen, at the direction or with knowledge
of the other defendants, recorded a $17 million "cumulative catch-up" for the
addition of salvage value to Spotter Tractors and other heavy vehicles. These
vehicles consisted of approximately 1,069 vehicles used in landfill operations
that previously had not been assigned any salvage value. Tobecksen increased
the salvage value from $0 to $25,000, rationalizing that these miscellaneous
vehicles were no different than the garbage trucks that had been assigned a
$25,000 salvage. The Company had no evidence to support that assumption. In
recording a salvage value on these vehicles for the first time, Tobecksen
recorded a "cumulative catch-up" that effectively recognized in the fourth
quarter the benefit of the salvage value cumulatively from the first year the
vehicles were put into service. The adjustment another blatant violation of
GAAP had the effect of recapturing seven years worth of depreciation
expense of the salvage values in a single quarter.
256. Once again, the Company had no support for the introduction of the new
and bogus salvage value assigned to Stopper Tractors and heavy vehicles. In
fact, earlier in 1996 the WMNA corporate controller had initiated a one-time
study to determine the appropriate lives and salvage of all of the Company's
vehicles, equipment, and containers. Koenig put an end to the project when a
January 10, 1996 memorandum setting forth results of the study contradicted
the salvage values in use. He then had the document destroyed and deleted
from the author's computer hard drive, making sure that AA never got a copy.
Similarly, Koenig and Hau failed to advise AA of the error in the depreciation
calculation, which had grown significantly. In September of 1996, internal
Company accountants told Koenig, Hau, and Tobecksen that the error
overstated income in 1996 by an estimated $45 million and that the cumulative
impact of the error was approximately $100.
257. Koenig and Hau, with Tobecksen's assistance, also recorded geography
entries in the fourth quarter that manipulated the reported trends and margins.
The fourth quarter geography entries reduced SG&A and interest expenses by
approximately $34 million and $19 million respectively and increased operating
and income tax expenses by $ 39 million and $14 million. The combined effect
of all of geography entries recorded during the quarters in 1996 was to
reclassify $46 million of SG&A and $51 million interest expense to other
expense ($37 million), operating expenses ($33 million) and income tax
expense ($27 million).
259. The AA engagement partner held audit closing meetings with Buntrock,
Getz, Koenig, Hau, and others in February of 1997, using the same agenda for
each meeting. In the meetings, AA presented and reviewed a detailed agenda
that included a schedule of the PAJEs and a whole host of other accounting
issues that had arisen that year.
260. Although more than $65 million in netting had addressed some of the
prior-period misstatements, the PAJEs grew again in 1996 because the
defendants never changed the Company's improper accounting practices,
including those practices identified in the Action Steps that gave rise to
misstatements. The closing agenda listed Arthur Andersen's PAJEs for 1996 at
$96 million, which represented approximately 6.5% of the Company's pre-tax
income (before special charges). The agenda further indicated that the PAJEs
had increased from 1995 (after accounting for the netting of the ServiceMaster
gain) by approximately 37%. Top management, with the knowledge of Getz,
once again refused to record any of the PAJEs.
261. During the audit, Koenig and Hau also refused to record AA's Proposed
Reclassification Journal Entry ("PRJE") in connection with the improper netting
and misclassification of the Rust gains. The PRJE of $85.1 million, if recorded,
would have further reduced pre-tax income from continuing operations before
special charges by 5.6%.
262. The agenda also noted that the Company still had not completed a net
realizable study that could "provide support for realizability or write off" of the
land values carried on the balance sheet. In addition, the agenda identified
"exposures" of $229 million related to at risk deferred permitting and project
costs, $60 million of which related to Live Oak. AA recommended that reserves
be recorded for these exposures and other legal matters, but top management
rejected that recommendation.
263. Finally, the agenda included a chart illustrating the "quality of earnings"
issue. The chart noted that the Company's "reported `recurring' income from
continuing operations" for 1996 was $857 million (after tax) while the "actual
`recurring' income from continuing operations" was only $743 million. The
difference between the "actual" and "reported" income from continuing
operations $114 million (after tax) or over 13% of the "reported" amount
would "need to be `replaced' through other sources in 1997." The $114 million
(after tax) difference was attributed to the "non-recurring, non-operating"
income resulting from the misclassification of the Rust gains, the salvage value
assigned to Spotter Tractors and other vehicles, the insurance recoveries
recorded as income, and the remedial reserve increase though purchase
acquisition accounting.
264. Rooney was briefed on AA's closing meeting with Koenig and Hau the new
CFO who was to replace Koenig. The CFO reviewed with Rooney the audit
closing agenda provided by Arthur Andersen and expressed his concerns over
the non-recurring, non-operating income.
265. The excessive use of one-time accounting entries to create the desired
earnings in 1996 created what AA, Hau, and others referred to as a "one-off"
accounting problem. The term "one-off" accounting generally was used to
describe the Company's practice of making one-time adjustments benefiting
reported current period earnings that the Company would have to "replace" in
the following year in order to maintain the same level of reported earnings.
Even with the "one-off" accounting manipulations, the Company continued to
disappoint the market.
267. On or about March 28, 1997, the Company filed with the Commission its
annual report on Form 10-K for 1996. The report included the financial
information that was disclosed in the February 4, 1997 press release. The
Company's financial statements contained material misstatements resulting
from the fraudulent accounting practices discussed above, including the
improper accounting for overvalued land, deferred permitting costs, income tax
and self-insurance reserves, discount rate for the self-insurance reserve, other
items quantified as PAJEs, the phase-in of the new capitalized interest
methodology, purchase acquisition and environmental reserves, other improper
accounting practices identified in the Action Steps agreement, Mountain
Indemnity claims, geography entries, inflated salvage values of trucks and
containers, the depreciation calculation error, the Live Oak impairment, the
"second quarter sweep," the Rust nettings and misclassifications, actual and
anticipated insurance settlement recorded in income, and the cumulative catch-
up for Spotter Tractors and other heavy vehicles. The misstatements materially
understated expenses (thereby overstating reported earnings).
We have a strong and profitable Company. We are the industry's global leader.
The initiatives we are taking build on several important and fundamental WMX
strengths:
270. The financial statement footnotes in the Form 10-K failed to disclose the
addition of a salvage value for Spotter Tractors and other heavy vehicles. In
reviewing drafts of the footnotes, AA proposed disclosing the change in estimate
but, as usual, Hau rejected the suggestion. The footnotes also represented that
the discontinued Rust businesses had been segregated in the financial
statements under discontinued operations. In fact, the gains from the sale of
the discontinued Rust businesses had been netted and misclassified in income
from continuing operations. Finally, the footnotes falsely disclosed that the
Company as a matter of practice wrote off deferred permitting costs of impaired
or abandoned projects (as well as other impairments) in accordance with FAS
121.
272. In the Restatement, the Company acknowledged that the reported net
income in its original 1996 financial statements was overstated by over 100%.
The total restatement for 1996 (not including income tax restatements) was
approximately $319 million and included, among other things, $145 million for
depreciation, $38 million for improperly capitalized Mountain Indemnity claims,
$38 million for capitalized interest, $20 million for impaired and abandoned solid
waste projects, $12 million for the misapplication of acquisition accounting
principles, $11 million for the under-accrual of the self-insurance reserve, and
$9 million for impaired and abandoned projects. The restatement for the income
tax under-accrual was approximately $15 million.
273. In its February 5, 1997 release of earnings for 1996, the Company
announced its projection of anticipated earnings from continuing operations for
1997 at a mere $1.75 per share, which was the same as the reported earnings
from continuing operations in 1996. As in prior years, the Company's guidance
was based on the budget for the year, which originated with goals set by
Rooney, Buntrock, and others. However, the 1997 budget for the top-level
adjustments was compiled hastily and was rife with problems. Shortly after the
budget was finalized and the $1.75 per share projection released, Hau and
others determined that certain budgeted top-level adjustments (as much as
$0.16 per share in earnings) were too "aggressive" or indefinite and could not
be recorded. Thus, it was apparent that the Company would not make its $1.75
projection if the Groups merely met their budgeted results from operations.
274. In an attempt to rectify the budget problems, Rooney laid down another
challenge to the operating units, similar to his "Commitment '96" program.
Ultimately, the Company resorted to its old tricks to meet the projected
earnings for the first quarter and again used netting to conceal the continuing
fraud.
276. At the end of the first quarter, the Company was significantly behind the
budget. Hau and Buntrock, who was acting CEO, determined that the Company
would "borrow 5 cents" in earnings from top-level adjustments budgeted for the
last half of the year. Thus, the Company was able to conceal the truth and
continue the fraud for yet another quarter.
277. The "borrowed" adjustments amounted to over $35 million and included
reversals of the insurance, income tax, and restructuring reserves into income
as well as the booking in income of anticipated insurance litigation settlements
that were still being negotiated.
280. On April 21, 1997, the Company announced its first quarter earnings from
continuing operations of $0.37 per share, compared with $0.37 per share from
the same quarter a year ago. The release quoted Buntrock, who emphasized
that the Company met its earnings expectations for the quarter as follows:
"Our businesses are off to a satisfactory start in 1997, and have met our
expectations for the first quarter. We continue to take steps to operate our
businesses as efficiently as possible and, through process improvement and
other efforts, to lower our operating costs."
281. In fact, the Company achieved its expected earnings by, among other
things, "borrowing" top-level adjustments and netting. The so-called borrowed
adjustments alone boosted reported earnings from continuing operations by
over 15%.
282. On or about May 8, 1997, the Company filed with the Commission its
quarterly report on Form 10-Q for the quarter ended March 31, 1997. The
report included the financial information that was disclosed in the April 21, 1997
press release. The Company's financial statements for the quarter contained
material misstatements resulting from the non-GAAP accounting practices
discussed above, including the improper accounting for overvalued land,
deferred permitting costs, income tax and self-insurance reserves, discount rate
for the self-insurance reserve, other items quantified as PAJEs, the phase-in of
the new capitalized interest methodology, purchase acquisition and
environmental reserves, Mountain Indemnity claims, geography entries, inflated
salvage values of trucks and containers, the depreciation calculation error, the
Live Oak impairment, the ServiceMaster II netting, and the recording of
anticipated insurance settlements in income. The misstatements materially
understated expenses (thereby overstating reported earnings) and allowed the
Company to report earnings in line with its February 4th earnings projection.
284. The Company also disclosed in MD&A only a slight increase in consolidated
operating expenses as a percentage of revenue, yet touted continued
improvements in reducing SG&A expenses that purportedly resulted from "the
ongoing focus on overhead cost control throughout the Company." In fact,
through the unbudgeted top-level adjustments, netting, and geography entries,
Hau manipulated the trends in SG&A and operating expenses to present those
items how the Company wanted.
285. Finally, the MD&A failed to disclose the netting of the ServiceMaster II gain
and, in fact, misrepresented the accounting for the transaction. The MD&A
falsely reported that the gain had been recorded in Sundry Income: "Sundry
income previously consisted primarily of earnings from the investments in
Wessex and ServiceMaster. The decline in sundry income in 1997 [$12.5 million
for the first quarter of 1997 $17 million for the same quarter in 1996] reflects
the loss of this income, partially offset by a gain recognized when the
ServiceMaster shares were reclassified as trading securities and marked-to-
market." In fact, had the gain been properly recorded without the netting, the
reported Sundry Income would have increased by $129 million representing a
substantial quarter-to-quarter increase, not the slight decline reported in the
financial statements
288. On October 10, 1997, the Company issued a press release admitting that
the Company's reported earnings from continuing operations for the third
quarter of 1996 had been materially inflated by 20% due to the inclusion of the
non-recurring items. In particular, the release stated that "earnings for the third
quarter of 1996 were benefited [approximately $0.09 to $0.11 per share] by
certain non-recurring items, including gains on sales of divested operations,
income from settlement of claims against insurance carriers, and lower
depreciation and casualty claim expense in the quarter." The press release
further noted that the Company was conducting an analysis of its North
American operating assets and investments to determine whether they were
appropriately valued.
289. Following the issuance of the October 10 press release, the Company's
stock fell almost 10%, from a closing price of $33.75 per share on October 9,
1997, to a closing price of $30.625 per share on October 10, 1997, on
extraordinary volume of 10,207,700 shares. Securities analysts commenting on
the October 10, 1997 press release stated that the disclosure about the
Company's "puffed up" third quarter 1996 earnings indicated that non-recurring
income and reserve reversals must have inflated the Company's reported
results for the first half of 1997 as well, based principally on an analysis of the
Company's actual operating profit margins in the third quarters of 1996 and
1997.
290. On October 29, 1997, the new CEO resigned, reportedly calling the
Company's accounting "spooky." That same day, a Board member was
appointed acting Chairman and CEO. The abrupt departure fueled speculation
that a restatement was imminent and the stock price fell further, to a closing
price of $23.25 per share on October 30, 1997, from a closing price of $29.00
per share on October 29. Media reports in the following days reported that the
acting CEO said that "the [Waste Management] audit committee could
determine that a restatement is appropriate," and that Buntrock would no
longer have an active role on committees of Waste Management's Board.
291. On or about November 14, 1997, the Company filed with the Commission
its quarterly report on Form 10-Q for the quarter ended September 30, 1997.
The Company reported a pre-tax charge of $173.3 million, which related to the
increase of environmental and legal reserves, as well as to the write-down of
certain overvalued assets. Certain of those charges involved items that Arthur
Andersen had identified for years as PAJEs or as resulting from improper
accounting practices.
292. In addition, the MD&A had a revised discussion of the prior period results
and disclosed various non-recurring items that benefited results from the first
three quarters of 1996 and 1997, including the netting of the Rust and
ServiceMaster II gains. As a result of reclassification entries related to the Rust
gains, the Company restated its second and third quarter 1996 financial
statements to reduce income from continuing operations by $0.04 per share
and $0.05 per share, respectively. The Company also reversed all of the
geography entries that were recorded in the prior periods, and the revised the
financial statements in for the first three quarters of 1996 and first quarter of
1997 to reflect those changes. The revised financial statements indicated that
operating and SG&A expenses originally reported for the first three quarters of
1996 were overstated approximately $43 million, which had improved the
consolidated Operating Margins.
294. The details of the massive Restatement finally came in early 1998. In
February 1998, Waste Management announced that it was restating its financial
statements for the period 1992 through 1996 and the first three quarters of
1997. At the time, the Restatement was the largest in history. In the
Restatement, the Company admitted that, through the first three quarters of
1997, it had materially overstated its reported pre-tax earnings by
approximately $1.7 billion and understated certain elements of its tax expense
by $190 million as follows:
296. All of the improper accounting practices identified in the Action Steps were
subject to restatements. Impaired and abandoned projects that previously were
written off through netting were, in the Restatement, expensed in the periods in
which the projects became impaired or abandoned. Moreover, the Restatement
included explanatory disclosures on a variety of matters that previously had
been concealed from investors. In fact, Hau drafted the financial statement
footnotes and MD&A disclosures in the Restatement.
Buntrock
297. For the periods from the first quarter of 1992 through the first quarter of
1997, Buntrock knew or recklessly disregarded facts indicating that the
Company's publicly disseminated financial information contained in periodic
reports on Forms 10-K and 10-Q, registration statements incorporating those
periodic reports, annual letters to shareholders, and press releases of annual
and quarterly earnings misstated and omitted material facts. During that same
period, he exercised control over Waste Management and all of its executives in
connection with the preparation and filing of periodic reports on Forms 10-K and
10-Q.
300. Buntrock knew that, as early as 1989, AA requested that the Company
conduct a net realizable value study of its landfills and amortize any excess
value over the remaining lives of the landfills. He knew that the Company
agreed in the Action Steps to conduct such a study and then to take any
necessary write-offs. He knew that by the end of 1996, the Company still had
not completed a study. Buntrock did not see to it that an appropriate study was
performed because he knew or recklessly disregarded facts indicating that such
a study would result in the Company's having to record expenses to write down
overvalued land. By reason of the foregoing, Buntrock knew or recklessly
disregarded facts indicating that the Company's accounting for unamortized
land violated GAAP and that the Company's financial statements and disclosures
during the relevant periods contained material misstatements and omissions as
a result.
301. Buntrock knew the Company had a history of repeatedly revising its
depreciation estimates to increase current and future earnings by reducing
reported operating expenses. Buntrock approved the third quarter 1993
changes in the estimated useful lives and salvage value for trucks; was
consulted on, and approved, the addition of a salvage value to containers; and
was made aware of the addition of a salvage value to Spotter Tractors and
other heavy vehicles at the end of 1996. By reason of the forgoing, Buntrock
knew or recklessly disregarded facts indicating that the impact of the 1993,
1995 and 1996 changes in depreciation estimates was material to the
Company's current and future period earnings. He further knew or recklessly
disregarded facts indicating that, by failing to disclose the changes, the
Company's disclosures regarding its depreciation policies and results of
operations were materially false and misleading. Buntrock also knew or
recklessly disregarded facts indicating that the inflated salvage values assigned
to trucks and containers were unsupported, improper, and violated GAAP and
that the Company's financial statements and disclosures contained material
misstatements and omissions as a result. In addition, he knew or recklessly
disregarded facts indicating that the repeated changes in depreciation
estimates, the use of excessive salvage values, and lack of disclosure were part
of the Company's scheme to manage earnings and conceal the operating
realities of the Company.
302. Prior to the release of 1993 earnings, Buntrock agreed that the Company
would implement the Action Steps agreement beginning in 1994. Buntrock knew
or recklessly disregarded facts indicating that the Action Steps agreement
identified non-GAAP accounting practices employed by the Company and that
implementation of the "must do" items in the agreement was part of a scheme
to secretly and improperly conceal those practices and write off known errors
over an extended period. Buntrock knew or recklessly disregarded facts
indicating that the Company's disclosures were materially false and misleading
because they did not disclose the existence, impact, and nature of the Action
Steps, or the subsequent failure change the improper accounting practices
identified in the Action Steps.
303. Buntrock approved or ratified the netting of the IPO gain in 1992, the
Modulaire gain in 1994, the ServiceMaster gain in 1995, the Rust gains in 1996,
and the ServiceMaster II gain in 1997. He knew that the netting was used to
secretly eliminate or reduce balance sheet misstatements, among other things.
Buntrock knew of the netted items and that they included PAJEs that the
Company had refused to record, as well as current period expenses and other
items identified by the Company. By reason of the foregoing, Buntrock knew or
recklessly disregarded facts indicating that the netting violated GAAP and that
the Company's financial statements and disclosures were materially false and
misleading as a result. Buntrock also knew or recklessly disregarded facts
indicating that the netting and the lack of disclosure thereof was part of a
scheme to manage earnings, improve the margins, and hide the operating
realities of the Company. In addition, he knew or recklessly disregarded facts
indicating that the netting and the lack of disclosure were part of a scheme to
write off known accounting errors only if it could be done secretly without
having to reduce Income from Operations.
304. Buntrock knew of the deed restrictions, zoning difficulties, and state law
prohibiting expansion on the adjacent property to Live Oak. He knew that the
failure to obtain a horizontal expansion would have a financial statement
impact, which was quantified for him in 1994, 1995, and 1996. He also knew or
recklessly disregarded facts indicating that the failure to write off the Live Oak
impairment and revise amortization and accrual rates violated GAAP and that
the Company's financial statements and disclosures were materially false and
misleading as a result. Buntrock further knew or recklessly disregarded facts
indicating that such failure and lack of disclosure was part of the Company's
scheme to manage earnings and conceal the operating realities of the
Company.
305. Buntrock knew that the Company's 1996 results were benefited by the
undisclosed non-recurring, non-operating income and by the second quarter
sweep. Buntrock knew or recklessly disregarded facts indicating that the
Company's financial statements and disclosures were materially false and
misleading as a result of the second quarter sweep and the inclusion of non-
recurring, non-operating income in reported income from continuing operations.
He also knew or recklessly disregarded facts indicating that such practices
violated GAAP and were part of the Company's scheme to manage earnings and
conceal the operating realities of the Company.
Rooney
307. For the periods from the first quarter of 1992 through February 18, 1997,
Rooney knew or recklessly disregarded facts indicating that the Company's
publicly disseminated financial information contained in periodic reports on
Forms 10-K and 10-Q, registration statements incorporating those periodic
reports, annual letters to shareholders, and press releases of annual and
quarterly earnings misstated and omitted material facts. During that same
period, in connection with the preparation and filing of periodic reports on
Forms 10-K and 10-Q, Rooney exercised control over WMNA and all of its
executives, and when CEO, he also exercised control over Waste Management
and all of its executives.
308. Throughout the relevant period, Rooney received information on the top-
level adjustments and the extent to which the quarterly top-level adjustments,
and unbudgeted increases thereto, improved the results of WMNA's operations,
for which he had primary responsibility. He helped set the earnings targets and
authorized the release of public earnings projections. By reason of the
foregoing, Rooney knew or recklessly disregarded facts indicating that the
Company's increasing use of top-level adjustments and the lack of disclosure
were part of a fraudulent earnings management scheme to reduce expenses,
artificially inflate earnings, and achieve preset earnings targets while, at the
same time, boosting the reported margins and concealing the operating realities
of the Company.
310. Rooney knew that, as early as 1989, AA requested that the Company
conduct a net realizable value study of WMNA's landfills and amortize any
excess value over the remaining lives of the landfills. He knew that the
Company agreed in the Action Steps to conduct such a study and then to take
any necessary write-offs. He knew that by the end of 1996, the Company still
had not completed a study. Rooney did not see to it that an appropriate study
was performed because he knew or recklessly disregarded facts indicating that
such a study would result in the Company's having to record expenses to write
down overvalued land. By reason of the foregoing, Rooney knew or recklessly
disregarded facts indicating that the Company's accounting for unamortized
land violated GAAP and that the Company's financial statements and disclosures
during the relevant periods contained material misstatements and omissions as
a result.
311. Rooney knew the Company had a history of repeatedly revising its
depreciation estimates to increase current and future earnings by reducing
reported operating expenses. Rooney approved the third quarter 1993 changes
in the estimated useful lives and salvage value for trucks; was consulted on,
and approved, the addition of a salvage value to containers; and was made
aware of the addition of a salvage value to Spotter Tractors and other heavy
vehicles at the end of 1996. By reason of the forgoing, Rooney knew or
recklessly disregarded facts indicating that the impact of the 1993, 1995 and
1996 changes in depreciation estimates was material to the Company's current
and future period earnings. He further knew or recklessly disregarded facts
indicating that, by failing to disclose the changes, the Company's disclosures
regarding its depreciation policies and results of operations were materially false
and misleading. Rooney also knew or recklessly disregarded facts indicating that
the inflated salvage values assigned to trucks and containers were unsupported,
improper, and violated GAAP and that the Company's financial statements and
disclosures contained material misstatements and omissions as a result. In
addition, he knew or recklessly disregarded facts indicating that the repeated
changes in depreciation estimates, the use of excessive salvage values, and
lack of disclosure were part of the Company's scheme to manage earnings and
conceal the operating realities of the Company.
312. Rooney knew of the Company's agreement to implement the Action Steps
agreement beginning in 1994. He also knew that the Action Steps primarily
related to accounting for the results of WMNA's operations and that compliance
with the agreement would increase WMNA's expenses and have a negative
impact on its operating results. Rooney knew or recklessly disregarded facts
indicating that the Action Steps agreement identified non-GAAP accounting
practices employed by the Company and that implementation of the "must do"
items in the agreement was part of a scheme to secretly and improperly conceal
those practices and write off known errors over an extended period. Rooney
knew or recklessly disregarded facts indicating that the Company's disclosures
were materially false and misleading because they did not disclose the
existence, impact, and nature of the Action Steps, or the subsequent failure
change the improper accounting practices identified in the Action Steps.
313. Rooney knew of, approved, or ratified the netting of the IPO gain in 1992,
the Modulaire gain in 1994, the ServiceMaster gain in 1995, and the Rust gains
in 1996. He knew that netting was used to secretly eliminate or reduce balance
sheet misstatements, among other things. Rooney knew of the netted items
and that they included PAJEs that the Company had refused to record, as well
as current period expenses and other items identified by the Company. By
reason of the foregoing, Rooney knew or recklessly disregarded facts indicating
that the netting violated GAAP and that the Company's financial statements and
disclosures were materially false and misleading as a result. Rooney also knew
or recklessly disregarded facts indicating that the netting and the lack of
disclosure thereof was part of a scheme to manage earnings, improve the
margins, and hide the operating realities of the Company. In addition, he knew
or recklessly disregarded facts indicating that the netting and the lack of
disclosure were part of a scheme to write off known accounting errors only if it
could be done without having to reduce Income from Operations.
314. Rooney knew of the deed restrictions, zoning difficulties, and state law
prohibiting expansion on the adjacent property to Live Oak. He knew that the
failure to obtain a horizontal expansion would have a financial statement
impact, which was quantified for him in 1994, 1995, and 1996. He was
consulted on the accounting treatment for Live Oak and even overruled the
decision of the Group controller to revise the amortization rates in the face of
the state law prohibiting expansion. He also knew or recklessly disregarded
facts indicating that the failure to write off the Live Oak impairment and revise
amortization and accrual rates violated GAAP and that the Company's financial
statements and disclosures were materially false and misleading as a result.
Rooney further knew or recklessly disregarded facts indicating that such failure
and lack of disclosure was part of the Company's scheme to manage earnings
and conceal the operating realities of the Company.
315. Rooney knew that the Company regularly conducted "sweeps" of the
WMNA balance sheet after the close of the quarters looking only for "income
opportunities" while ignoring balance sheet misstatements, including improperly
deferred permitting costs. He knew that the "second quarter [1996] sweep"
allowed the Company to report earnings for the second quarter of 1996 in line
with his public earnings projection. Rooney knew or recklessly disregarded facts
indicating that the "second quarter sweep" violated GAAP and was part of the
Company's scheme to manage earnings, achieve publicly set earnings targets,
and conceal the operating realities of the Company.
316. Rooney knew that the Company's 1996 results were benefited by the
undisclosed non-recurring, non-operating income and the second quarter
sweep. Rooney further knew or recklessly disregarded facts indicating that the
Company's financial statements and disclosures were materially false and
misleading as a result of the second quarter sweep and the inclusion of non-
recurring, non-operating income in reported income from continuing operations.
He also knew or recklessly disregarded facts indicating that such practices
violated GAAP and were part of the Company's scheme to manage earnings,
achieve public earnings projections he issued, and conceal the operating
realities of the Company.
Koenig
318. For the periods from the first quarter of 1992 through the first quarter of
1997, Koenig knew or recklessly disregarded facts indicating that the
Company's publicly disseminated financial information contained in periodic
reports on Forms 10-K and 10-Q, registration statements incorporating those
periodic reports, and press releases of annual and quarterly earnings misstated
and omitted material facts.
319. Koenig was the spokesperson for the Company on financial matters and
was responsible for all financial, accounting, and reporting decisions. He had
responsibilities for deciding whether to record or "pass" AA's PAJEs, and he
devised, directed, or supervised and approved all of the Company's fraudulent
accounting. He agreed to implement the Action Steps, yet had responsibility for
the Company's failure to do so.
320. As discussed more fully above, Koenig knew or recklessly disregarded facts
indicating that the Company's financial statements and disclosures contained
material misstatements and omissions that resulted from the following:
The failure to assess the net realizable value of land and failure to write
off impairments for overvalued land;
Geography entries;
The failure to write off the Live Oak impairment and revise amortization
and accrual rates in the face of a state law prohibiting, and other
obstacles to, expansion;
321. To perpetuate the scheme, Koenig ordered the destruction of the January
10, 1996 memorandum, which questioned the propriety of top management's
depreciation estimates, and failed to provide a copy to or otherwise inform AA.
Hau
324. For the periods from the first quarter of 1992 through the third quarter of
1997, Hau knew or recklessly disregarded facts indicating that the Company's
publicly disseminated financial information contained in periodic reports on
Forms 10-K and 10-Q, registration statements incorporating those periodic
reports, and press releases of annual and quarterly earnings misstated and
omitted material facts.
325. Hau devised, directed, or supervised and approved all of the Company's
fraudulent accounting and also had responsibilities for deciding whether to
record or "pass" AA's PAJEs. In addition, he signed and agreed to implement the
Action Steps, and had responsibility for the Company's failure to do so.
326. As discussed more fully above, Hau knew or recklessly disregarded facts
indicating that the Company's financial statements and disclosures contained
material misstatements and omissions that resulted from the following:
The failure to assess the net realizable value of land and failure to write
off impairments for overvalued land;
Geography entries;
The failure to write off the Live Oak impairment and revise amortization
and accrual rates in the face of a state law prohibiting, and other
obstacles to, expansion;
327. To perpetuate the scheme, Hau failed to advise AA of the error in the
depreciation calculation.
Getz
329. For the periodic filings starting with the 1993 annual report through the
quarterly report for the third quarter of 1997, Getz knew or recklessly
disregarded facts indicating that the Company's publicly disseminated financial
information contained in periodic reports on Forms 10-K and 10-Q, registration
statements incorporating those periodic reports, and press releases of annual
and quarterly earnings misstated and omitted material facts.
330. Getz had quarterly meetings with AA to discuss audit issues, including
PAJEs, the status of landfill projects and legal matters, the Action Steps, and
the Company's lack of progress in implementing the agreed upon steps. He
further attended all of the audit committee meetings. Getz was the only
attorney at Waste Management who had the full picture of the accounting
irregularities and misstatements. By reason of the forgoing, Getz knew or
recklessly disregarded facts indicating that the Company's accounting practices
were improper and resulted in misstatements in the financial statements. Getz
further authorized the issuance of publicly disseminated financial information
when he knew or was reckless in not knowing of omissions and false disclosures
in MD&A and elsewhere related to the existence and impact of the following: (i)
over $100 million in changes in estimates in 1993; (ii) impaired and abandoned
projects; (iii) the Action Steps agreement, including its impact on the
Company's ability to meet public earnings projections; (iv) netting of the
Modulaire gain in 1994, the ServiceMaster gain in 1995, the Rust gains in 1996,
and the ServiceMaster II gain in 1997; and (v) the Live Oak impairment and the
impact of the state law prohibiting, and other obstacles to, expansion.
331. Getz knew the Company was not crediting insurance litigation settlements
to the environmental reserve as agreed to in the Action Steps. Nevertheless, in
consultation with Hau, Getz approved not disclosing in MD&A or elsewhere the
settlements or their impact on the reported earnings, Operating Margins, or
related trends in periodic reported for 1994, 1995, and 1996. He knew or
recklessly disregarded facts indicating that settlements were material, should
have been disclosed, and were part of the Company's scheme to manage
earnings, achieve public earnings projections, and conceal the operating
realities of the Company.
Tobecksen
333. For the periodic filings starting with the 1994 annual report through the
quarterly report for the first quarter of 1997, Tobecksen knew or recklessly
disregarded facts indicating that the Company's publicly disseminated financial
information contained in periodic reports on Forms 10-K and 10-Q, registration
statements incorporating those periodic reports, and press releases of annual
and quarterly earnings misstated and omitted material facts. .
337. Each defendant profited from his fraud. Among other perks, the incentive
bonus program for the senior officers was tied to the Company's achieving
targeted earnings for the year. The bonus targets were derived from the
Company's budget for the year. Thus, by manipulating the reported results to
achieve budgeted earnings, the defendants also collected substantial bonuses.
For example, Buntrock and Rooney's bonuses in 1994 and 1995 were
approximately equal to their million dollar salaries for those years.
338. The following bonuses were paid based on the Company's inflated earnings
in 1992, 1994, and 1995:
Bonus Paid
But for their fraudulent conduct noted above, the Company would not have paid
bonuses to the defendants in those years.
339. The ill-gotten bonuses had the additional effect of improperly boosting
certain of the defendants' retirement benefits under the Company's
supplemental executive retirement plan ("SERP"). The SERP provided monthly
retirement income for senior executives at the Company. The benefits were
based on the participant's average compensation, including salary and bonus,
for the three consecutive years in which the participant's total compensation
was highest. Thus, the significant bonuses paid in 1994 and 1995 increased the
SERP benefits payable to Buntrock, Hau, and Tobecksen.
340. In addition to the ill-gotten bonuses, Buntrock, Rooney, and Koenig sold
Waste Management stock while the fraud was being perpetuated. In addition to
the sale of Company stock held in his own name, Buntrock directed the sale of
Waste Management shares held by a private foundation he controlled, which
was created to dispense Buntrock's charitable gifts. In the spring of 1996,
Buntrock directed the sale of 310,000 Waste Management shares held by the
foundation, which represented all of the Company stock held by the foundation.
As set forth below, each sold Company stock as follows:
Buntrock's Trading
Loss Avoided
Total Stock (using 10/31
Date Sold Price Sold close)
Buntrock's Individual Trading
11/23-27/92 137,128 $40.00 $5,485,120 $2,305,465
12/30/1992 38,906 $40.50 $1,575,693 $673,560
08/07/1997 94,698 $32.63 $3,089,522 $893,712
08/13/1997 50,000 $32.07 $1,603,250 $443,875
Sub-total 320,732 $11,753,585 $4,316,612
Rooney's Trading
Koenig's Trading
Loss Avoided
Total Stock (using 10/31
Date Sold Price Sold close)
12/31/1992 6,953 $40.38 $280,727 $119,504
CLAIM ONE
SECURITIES FRAUD
345. As set forth more fully above, defendants Buntrock, Rooney, Koenig, Hau,
Getz, and Tobecksen, directly or indirectly, by use of the means or instruments
of transportation or communication in interstate commerce, or by the use of the
mails and of the facilities of a national securities exchange, in connection with
the offer, purchase or sale of securities have employed devices, schemes, or
artifices to defraud, have made untrue statements of material facts or omitted
to state material facts necessary in order to make the statements made, in the
light of the circumstances in under which they were made, not misleading, or
have engaged in acts, practices or courses of business which operate or would
operate as a fraud or deceit upon any person.
347. By reason of the foregoing, defendants Buntrock and Rooney were each a
controlling person of Waste Management and its executives and employees
within the meaning of section 20(a) of the Exchange Act [15 U.S.C. 78t(a)],
and by virtue of that control violated section 17(a) of the Securities Act, Section
10(b) of the Exchange Act, and Exchange Act rule 10b-5.
CLAIM TWO
FILING FALSE PERIODIC REPORTS
349. The Company violated section 13(a) of the Exchange Act and Exchange Act
rules 12b-20, 13a-1, and 13a-13 by filing materially false and misleading
annual reports on Form 10-K and materially false and misleading quarterly
reports on Form 10-Q with the Commission in 1996 and 1997.
CLAIM THREE
FALSIFICATION OF BOOKS AND RECORDS
352. The Company violated section 13(b)(2)(A) of the Exchange Act by failing
to make and keep books, records and accounts that accurately and fairly
reflected Waste Management's transactions and disposition of its assets.
353. By engaging in the conduct described above, defendants Koenig, Hau, and
Tobecksen aided and abetted the Company's violations of section 13(b)(2)(A) of
the Exchange Act.
354. By engaging in the conduct described above, defendants Koenig, Hau, and
Tobecksen directly or indirectly violated Exchange Act rule 13b2-1 by falsifying
and causing to be falsified Waste Management's books, records, and accounts
subject to section 13(b)(2)(A) of the Exchange Act.
CLAIM FOUR
LYING TO AUDITORS
356. By engaging in the conduct described above, defendants Koenig and Hau
directly or indirectly made or caused to be made or caused to be made false
and misleading statements or omitted or caused others to omit to state material
facts necessary in order to make the statements made, in the light of the
circumstances in under which they were made, not misleading to Waste
Management's independent accountants in connection with audits and
examinations of Waste Management's required financial statements and in
connection with the preparation and filing of documents and reports required to
be filed with the Commission.
357. By reason of the foregoing, defendants Koenig and Hau violated Exchange
Act rule 13b2-2.
I.
II.
III.
IV.
Pursuant to section 20(c) of the Securities Act [15 U.S.C. 77t(c)] and section
21(d)(2) [15 U.S.C. 78u(d)(2)] of the Exchange Act, prohibiting each of
Buntrock, Rooney, Koenig, Hau, Getz, and Tobecksen from serving as an officer
or director of a public company; and
V.
Granting such other relief as this Court shall deem appropriate.
Respectfully submitted,
_/S/__________________________
Thomas C. Newkirk
James T. Coffman
Thomas D. Silverstein
Daniel M. Hawke
Robert W. Pommer, III
John D. Worland, Jr.
Local Counsel:
Robert J. Burson, Esquire
Securities and Exchange Commission
175 West Jackson Boulevard, Suite 900
Chicago, IL 60604
Telephone (312) 353-7428
http://www.sec.gov/litigation/litreleases/complr17435.htm