23 :.''•. for the district of massachusetts'' adele...

Case 1:00-cv-10874-RWZ Document 1 Filed 05/08/00 of

STATES DISTRICT COURT' :'

23

:.''•.FOR THE DISTRICT OF MASSACHUSETTS''

ADELE BRODY, on behalf of herself andall others similarly situated, Civil ti No.

Plaintiff, C' 1, 4 ROL-against- SECURITIES CLASS _, cn --^

STONE & WEBSTER, INC., H. KERNERACTION COMPLAINT

SMITH and THOMAS LANGFORD,

Defendants. JURY TRIAL DEMANDED'

cR

Plaintiff, by her undersigned attorneys for her Class Action Complaint alleges, based,

inter alia, on the investigation conducted by her attorneys and their staffs, including reviews and

analyses of public filings with the Securities and Exchange Commission, securities analysts'

reports and press releases, news articles, and other media reports as to all other matters, as

follows:

NATURE OF THE ACTION

1. This is a securities class action on behalf of public investors who purchased the

securities of Stone & Webster, Inc. ("S&W" or the "Company") between April 27, 1999 and

April 28, 2000, inclusive (the "Class Period"). Named as defendants are S&W, H. Kerner Smith

and Thomas Langford. The case involves a manipulation of financial statements in which,

among other acts of deception, defendants knowingly or recklessly overstated S&W's results of

operations, revenues, expenses, net worth and income for the fiscal year 1999.

•

2. During the Class Period, defendants assured investors that the Company's

earnings were increasing each quarter. Indeed, the defendants stated that S&W was experiencing

G.'',

Case 1:00-cv-10874-RWZ Document 1 Filed 05/08/00 of 23

record revenues and income. On April 30, 2000, the Company dropped a bombshell on investors

when it was disclosed that it will restate its 1999 financial results. In truth, the Company's

earnings were not in the amounts that had been represented by the Company during fiscal 1999

because defendants had improperly allocated revenue and expenses in violation of Generally

Accepted. Accounting Principles ("GAAP").

3. GAAP are those principles recognized by the accounting profession as the

conventions, rules and procedures necessary to define accepted accounting practice at a particular

time. Regulation S-X (17 C.F.R. § 210.4.01(a)(1)) states that financial statements filed with the

SEC which are not prepared in accordance with GAAP are presumed to be misleading and

inaccurate. Regulation S-X also requires that interim financial statements comply with GAAP.

17 C.F.R. § 2.10.10.01(a).

4. On April 30, 2000, the Company disclosed that it would restate its financials for

fiscal 1999. By restating its financials, the defendants admitted that the representations made in

the financial statements for fiscal 1999 were materially false and misleading when made. APB

No. 20 ¶ 13.

5. During the Class Period, S&W shares traded as high as $29 per share on October

1, 1999. On April 28, 2000, the last trading day before the initial disclosure of accounting

problems at S&W, the price of the Company's common stock closed at $13 3/16 per share. The

day after the full disclosure and announcement of the restatement, the price of S&W common

stock fell to a closing average price of to $6.25 per share - a loss of more than 53% of the value

of the stock since the initial revelation on April 30, 2000.

2


JURISDICTION AND VENUE

6. This Court has jurisdiction over the subject matter of this action pursuant to

Section 27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78aa, and

28 U.S.C. § 1331.

7. The claims asserted herein arise under Sections I0(b), and 20(a) of the Exchange

Act, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule I Ob-5 promulgated thereunder by the Securities

and Exchange Commission (the "SEC"), 17 C.F.R. 240.1Ob-5.

8. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28

U.S.C. § 1391(b) and (c). The principal executive offices of S&W are located in this district, the

defendants transact business in this district, and many of the acts and transactions constituting the

violations of law alleged herein, including the preparation, issuance, and dissemination of

materially false and misleading statements to the investing public, occurred in this district.

9. In connection with the acts, conduct and other wrongs alleged herein, defendants,

directly and indirectly, used the means and instrumentalities of interstate commerce, including

the United States mails and interstate telephone communications.

THE PARTIES

The Plaintiff

10. Plaintiff Adele Brody purchased 100 shares of S&W common stock during the

Class Period, as represented in the attached Certification, and was damaged thereby.

The Defendants

11. Defendant S&W is a corporation with its executive offices and principal place of

business located at 245 Summer Street, Boston, Massachusetts 02210, The Company provides

3


professional, engineering, construction and consulting services for power, process, governmental,

industrial, transportation and civil works projects. The Company, through its subsidiaries,

constructs from plans developed by others, makes engineering reports and business

examinations, undertakes consulting engineering work, and offers information management and

computer systems expertise to clients. It also offers a full range of services in environmental

engineering and sciences, including complete execution of environmental projects. In addition,

S&W offers advanced computer systems development services and products in the areas of

information systems, systems integration, computer-aided design, expert systems and database

management.

12. Defendant H. Kerner Smith ("Smith") is and was, during the Class Period, the

Company's Chairman, President and CEO.

13. Defendant Thomas Langford ("Langford") is and was, during the Class Period, the

Company's Executive Vice President and CFO.

PLAINTIFF'S CLASS ALLEGATIONS

14. Plaintiff brings this action as a class action pursuant to Rule 23(a) and (b)(3) of

the Federal Rules of Civil Procedure on behalf of a class consisting of all persons and entities

who purchased securities of S&W between April 27, 1999 and April 28, 2000 (both dates

inclusive), and were damaged thereby (the "Class"). Excluded from the Class are defendants

herein, officers and directors of S&W, members of their immediate families, and the heirs,

successors or assigns of any of the foregoing.

15. The members of the Class are so numerous that joinder of all members is

impracticable. While the exact number of Class members is unknown to the plaintiff at this time

4


and can only be ascertained through appropriate discovery, the plaintiff believes there are, at a

minimum, thousands of members of the Class who purchased S&W securities during the Class

Period. The Company has over 13 million shares of its common stock outstanding, and trades on

the NYSE National Market under the symbol SW.

16. Common questions of law and fact exist as to all members of the Class and

predominate over any questions affecting solely individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by defendants' acts as

alleged herein;

(b) whether S&W issued false and misleading financial statements during the

Class Period;

(c) whether the Individual Defendants caused S&W to issue false and

misleading financial statements during the Class Period;

(d) whether defendants acted knowingly or recklessly in issuing false and

misleading financial statements;

(e) whether the market prices of S&W securities during the Class Period were

artificially inflated because of the defendants' conduct complained of herein; and

(f) whether the members of the Class have sustained damages and, if so, what

is the proper measure of damages.

17. Plaintiff s claims are typical of the claims of the members of the Class as plaintiff

and members of the Class sustained damages arising out of defendants' wrongful conduct in

violation of federal laws complained of herein.

5


18. Plaintiff will fairly and adequately protect the interests of the members of the

Class and has retained counsel competent and experienced in class actions and securities

litigation. Plaintiff has no interests antagonistic to or in conflict with those of the Class.

19. A class action is superior to other available methods for the fair and efficient

adjudication of the controversy since joinder of all members of the Class is impracticable.

Furthermore, because the damages suffered by the individual Class members may be relatively

small, the expense and burden of individual litigation makes it impracticable for the Class

members individually to redress the wrongs done to them. There will be no difficulty in the

management of this action as a class action.

20. Plaintiff will rely, in part, upon the presumption of reliance established by the

fraud-on-the-market doctrine in that:

(a) defendants made public misrepresentations or filed to disclose material

facts during the class Period;

(b) the omissions and misrepresentations were material;

(c) the securities of the Company traded in an efficient market;

(d) the misrepresentations and omissions alleged would tend to induce a

reasonable investor to misjudge the value of the Company's securities; and

(e) plaintiff and members of the Class purchased their S&W stock between

the time the defendants failed to disclose or misrepresented material facts and the time the true

facts were disclosed, without knowledge of the omitted or misrepresented facts.

6


THE FALSE AND MISLEADING STATEMENTS

21. On April 27, 1999, the Company issued a press release reporting its

financial results for the first quarter of fiscal 1999. The press release reported:

a net loss of $58.7 million or $4.50 per share, compared with netincome of $7.6 million, or $0.59 per share for the same period in1998. Gross revenue was $339.8 million, a 15.6 percent increasefrom the first quarter of 1998. Net revenue for the current quarter,after the adjustment for the loss provision, was $266.1 million.New orders were $148.8 million compared with $226.5 million forthe first quarter of 1998. Backlog was $2.5 billion compared to$2.6 billion at December 31, 1998. Operating loss for the quarterwas $67.4 million compared to operating income of $11.6 millionreported for the same period in 1998.

Mr. Smith commented: While we are extremely disappointed inour Engineering and Construction operating results, we are takingappropriate actions to improve our performance. We intend toaggressively pursue recovery of the extra costs incurred incompleting the projects that negatively affected our operatingresults. While new orders were somewhat lower than anticipatedin the first quarter, we expect to regain momentum over the nextfew quarters, based on projects in negotiation and the strongertrends in the power sector as well as recent increases in crude oiland petrochemical prices. We have also taken steps to be moreselective in avoiding high risk, low margin business. We expectthat the improved margins included in our backlog, and ourcontinuing drive to reduce costs and operating expenses, willproduce improved results in the second half of this year.

22. On May 13, 1999, S&W filed its Form 10-Q for the first quarter of fiscal 1999,

ended March 31, 1999 with the SEC. The Form 10-Q repeated the financial information

announced in the press release dated April 27, 1999, above, and stated that "all adjustments

necessary for a fair presentation of results of the interim periods have been made and such

adjustments were of a normal and recurring nature." The Form IO-Q was signed by defendant

Langford.

7


23. On July 26, 1999 the Company issued a press release in which it announced

higher operating and net income for the second quarter of 1999 compared to the same period in

1998.

For the quarter ended June 30, 1999, Stone & Webster reported netincome of $6.2 million or $0.48 per share, compared with netincome of $0.7 million or $0.5 per share for the same period in1998. Operating income for the quarter was $7.7 million comparedwith operating income of $1.2 million for the same period in 1998.

Although the industrial and process sectors have been weak overthe past year, we are definitely encouraged by our second quarterresults, which reflect the actions a have taken to streamline ourbusinesses and strengthen our operational focus, said H. KernerSmith, Stone & Webster's Chairman and Chief Executive Officer.

For the six months ended June 30, 1999, Stone & Webster reporteda net loss of $52.5 million or $4.02 per share, compared with netincome of $8.3 million or $0.64 per share for the same period in1998; the current six months results were significantly impacted byprovisions of approximately $74.0 million to cover anticipatedcosts of completing two international projects, as reported for thefirst quarter of 1999. Operating loss for the six months ended June30, 1999 was $59.6 million compared with operating income of$12.8 million for the same period last year. Severance costsreduced operating income by $2.5 million in the current quarter.Revenue for the quarter was $310.3 million, a decrease of 2.1percent from the $317.0 million reported in the same period in1998. Revenue for the first six months of 1999 was $576.4 millioncompared with $374.4 million for the first six months of 1998.Backlog at June 30, 1999 was $2.6 billion, consistent with levelsreported in December 31, 1998.

Mr. Smith commented, provisions taken in the first quarter tocover the anticipated costs of completing two international projectsadversely affected the Company's financial performance in the firsthalf of 1999. However, based on our improved operatingperformance during the second quarter, coupled with our highermargin business in backlog, we believe that our profitability willcontinue to increase through the remainder of 1999. We alsobelieve our markets are now beginning to strengthen due to the

8


recovery from oil sector prices and the Asian recession, as well asthe surge in power generation projects in North America.

24. On August 12, 1999, S&W filed its Form 10-Q for the second quarter of fiscal

1998, ended June 30, 1999 with the SEC. The Form 10-Q Repeated the financial information

announced in the press release dated July 26, 1999, above, and stated that "all adjustments

necessary for a fair presentation of results of the interim periods have been made and such

adjustments were of normal and recurring nature." The Form 10-Q was signed by defendant

Langford.

25. On October 27, 1999, the Company issued a press release reporting its financial

results for the third quarter of fiscal 1999, ended September 30, 1999. The press release reported

"a net loss of $6.9 million or $0.52 per share, compared with net income of $2.2 million or $0.17

per share for the same period in 1998. Operating loss for the quarter was $4.6 million compared

with operating income of $3.9 million for the same period in 1998."

Several events contributed to the shortfall in earnings for thequarter. These included a provision of $10.4 million to coveranticipated costs to complete three major projects, a delay in therelease to start work on certain new projects which the Companyhas been advised it has won, and the impact of hurricanes andfloods in Southeast that adversely affected Stone & Webster's coldstorage business. The Company also anticipated some reversal ofpast losses through settlement of claims on certain projectsperformed in prior years, and although progress is being made innegotiations, no settlements were reached this quarter.

We are extremely disappointed in our third quarter operatingresults and the fact that these problems occurred after we posted animproved second quarter, said H. Kerner Smith, Stone &Webster's Chairman and Chief Executive Officer. Our Companyhas undergone over three years of restructuring and housecleaning.However, a critical review of our backlog of fixed-price projects byour new operating management team revealed a few projects that

9


are forecast to exceed their cost estimates upon completion. Withthese provisions now made, we look forward to benefitting fromthe continued strength in the electric power market as well asstrong current performance in our consulting business. Theimproving process and industrial markets, which are emergingfrom a 20-year low, should contribute to increased business in thissegment as well.

For the nine months ended September 30, 1999, Stone & Websterreported a net loss of $59.3 million or $4.54 per share, comparedwith net income of $10.4 million or $0.81 per share for the sameperiod in 1998. The current nine months results were significantlyimpacted by provisions of approximately $74.0 million to coveranticipated costs of completing two international projects, asreported for the first quarter of 1999, and $10.4 million to coveranticipated costs of completing three domestic projects in thecurrent quarter. Operating loss for the nine months endedSeptember 30, 1999 was $64.3 million compared with operatingincome of $16.7 million for the same period last year. Revenue forthe current quarter was $297.8 million, a decrease of 15.0 percentfrom the $350.4 million reported in the same period in 1998.Revenue for the first nine months of 1999 was $874.2 millioncompared with $961.4 million reported in the same period in 1998.New orders were $719.4 million compared with $725.1 million forthe first nine months of 1998. Backlog at September 30, 1999 was$2.5 billion, down from $2.6 billion at December 31, 1998.

26. On November 15, 1999, S&W filed its Form 10-Q for the third quarter of fiscal

1998, ended September 30, 1999 with the SEC. The Form 10-Q repeated the financial

information announced in the press release dated October 27, 1999, above, and stated that "all

adjustments necessary for a fair presentation of results of the interim periods have been made and

such adjustments were of a normal and recurring nature." The Form 10-Q was signed by

defendant Langford.

27. On January 25, 2000, the Company issued a press release reporting financial

results for the fourth quarter and year ended December 31, 1999.

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For the quarter ended December 31, 1999, Stone & Websterreported net income of $79.8 million or $6.01 per share, whichincludes a gain of $151.3 million ($92.2 million after tax or $6.94per share) from the sale of the Company's headquarters building inBoston. This compares with a net loss of $59.7 million or $4.64per share for the same period last year. Operating loss was $44.3million and $91.6 million, respectively, for the quarters endedDecember 31, 1999 and 1998.

Full year revenue for 1999 was $1.17 billion, compared with $1.21billion for 1998. The Company reported net income of $20.5million, or 41.56 per share, for the year ended December 31, 1999,compared with a net loss of $49.3 million, or $3.83 per share, forthe year ended December 31, 1998.

The sale of Stone & Webster's headquarters building in the fourthquarter generated $187.0 million in gross proceeds which wereused to reduce bank debt and vendor payables, and increase cashequivalents. The Company has leased it s current corporateheadquarters through March 2002 and, after carefully examining itsworkplace needs, will seek a more cost-effective headquarters inthe Boston area.

The results for our Engineering and Construction operations haveimproved significantly since the first quarter, and we areexperiencing improvement in end markets for power generationplants and service contracts awarded within the power industry,said H. Kerner Smith, Stone & Webster's Chairman and ChiefExecutive Officer.

New orders of $387 million were booked in the fourth quarter of1999; in addition, an important award for a 720-megawattcombined-cycle power plant will be booked in the first half of2000 after completion of owner financing; several others are innegotiation. Backlog was $2.6 billion at both December 31, 1999and 1998.

Engineering, Construction and Consulting revenue was $329million for the quarter ended December 31, 1999, compared with$275 million for the same period a year ago. Operating income forthe quarter, excluding non-recurring charges, was $6.8 million,compared with $6.6 million for the same period in 1998. Includingnon-recurring charges, the operating loss was $44.3 million,

11


compared to a loss of $91.6 million for the quarter endedDecember 31, 1998. In the fourth quarter of 1999, while theCompany was working to improve its liquidity position, delays inpayments to vendors adversely impacted delivery of vendormaterials and services, and consequently, job scheduling andsequencing was affected. As a result, provisions of $38.0 millionwere established for additional expenditures to accelerate certainprojects an increased anticipated costs to complete other projects.In addition, a voluntary incentive retirement program in the fourthquarter of 1999 resulted in a non-cash charge of $13.1 million.

Engineering, Construction and Consulting revenue for 1999 was$1.17 billion compared with $1.21 billion in 1998. Operating lossfor 1999 was $115.0 million compared with an operating loss of$81.0 million reported in 1998. The Company's 1999 performancewas impacted by the fourth quarter items mentioned above and byprovisions of 474.2 in the first quarter and $10.4 million in thethird quarter to cover anticipated costs of completing twointernational projects, and three North American projects,respectively.

Based on aggressive actions we took in 1999 to reduce debt andoverhead costs and strengthen our core Engineering, Constructionand Consulting businesses, we are well prepared to compete intoday's and tomorrow's improving global environment and pursuenew opportunities as a strong, revitalized enterprise, said Mr.Smith.

We have made substantial progress in implementing our financialrestructuring plans announced after our third quarter, Mr. Smithsaid. Our liquidity has been improved through the sale of assets,the renegotiation of our bank facilities through Mary 31, 2000, andthe sale of stock to our retirement Plan. Our improved financialposition has reaffirmed the strength of our business, and we haveexpanded our bonding capability with new surety arrangements.The systems and controls we have implemented to reduce thenumber of non-performing projects and the continued reduction ofoverhead costs position to the Company for improved financialperformance in 2000. When the construction markets return fromthe current 25 year lows, we will be one of the top performingfirms in the industry.

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28. The statements in paragraphs 21-27, above, were false and misleading when made

because the defendants knew or recklessly disregarded the fact that the Company had not

properly allocated revenues and expenses for fixed contracts, and as such, its representations of

revenue growth and positive financial results were issued in violation of GAAP.

29. S&W violated the following generally accepted accounting principles in its

financial statements:

(a) That financial reporting should provide information that is useful to

present and potential investors and creditors in making rational investment, credit and similar

decisions (FASB Statement of Concepts No. 1, 134);

(b) That financial reporting should provide information about the economic

resources of an enterprise, the claims to those resources, and the effects of transactions, events,

and circumstances that change resources and claims to those resources (FASB Statement of

Concepts No. 1, ¶ 40);

(c) That financial reporting should provide information about how

management of an enterprise has discharged its stewardship responsibilities to owners

(shareholders) for the use of enterprise resources entrusted to it — to the extent that management

offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for

accountability to prospective investors and to the public in general (FASB Statement of Concepts

No. 1, ¶ 50);

(d) That financial reporting should provide information about an enterprise's

financial performance during a certain time period (FASB Statement of Concepts No. 1 ¶ 42);

13


(e) That financial reporting should be reliable in that it represents what it

purports to represent --- that information should be reliable as well as relevant is a central

principle of accounting (FASB Statement of Concepts No. 2, 11 ¶ 58-59);

(f) That information is complete and nothing is left out that may be necessary

to insure that it validly represent underlying events and conditions (FASB Statement of Concepts

No. 2, ^ 79); and,

(g) That conservatism be used as a prudent reaction in uncertainty to try to

ensure that uncertainties and risk inherent in business situations are adequately considered

(FASB Statement of Concepts No. 2, 11 95, 97).

30. S&W materially overstated its revenue and earnings that were reported in the

Company's publicly disseminated financial statements for the interim period of fiscal year 1999.

As a result of defendants' actions, the financial statements were materially false and misleading

and failed to disclose the true financial status of S&W.

31. In light of the forgoing allegations, the Company had presented its results for the

interim periods of fiscal year 1999 in a manner which violated GAAP and principles of fair

reporting. Further, the adverse information misrepresented and/or concealed by defendants

during the Class Period is the type of information which, because of SEC regulations, regulations

of the national stock exchanges and customary business practice, is expected by investors and

securities analysts to be disclosed and is known by corporate officials and their legal and

financial advisors to be the type of information which is expected to be and must be disclosed.

14


THE REVELATIONS

32. On April 30, 2000, the Company issued a press release in which it reported

financial results for the first quarter ended March 31, 2000, and stated that it will revise its 1999

financial results to include a provision for a substantial cost overrun on an ongoing project. The

Company also announced that it is currently engaged in substantive discussions regarding

possible strategic transactions, including the sale of all or part of its engineering and construction

business.

Company officials were recently notified of an unanticipated costoverrun on a key project by a major subcontractor related toestimates to complete work during the first half of the current year.As a result, the Company conducted a thorough review of thisproject and, based on this review, the Company will record aprovision of $27.5 million ($19.3 million after-tax or $1.47 pershare) and will revise its 1999 financial statements and amend its1999 Form 19-K.

As a result of the unanticipated overrun, coupled with previouslyreported operating losses, the Company is experiencing liquidityproblems and is in substantive discussions with potential lendersand strategic partners to provide interim and long-term financing.The Company has also initiated discussions with certainsubcontractors with regard to extended terms of payment.However, there are no assurances that these discussions will resultin any ultimate agreement. If these efforts prove unsuccessful, theCompany's independent public accountants have indicated that theCompany's ability to continue as a going concern will be broughtinto question and, upon issuance of the amended 1999 Form 10-K,the independent accountants will modify their report previouslyissued on April 14, 2000.

The issuance of a modified opinion by the Company's independentpublic accountants would be an event of default under theCompany's credit agreement with its principal bank lenders.Based on discussions with the agent bank for such lenders, theCompany expects to enter into a forbearance agreement with suchlenders if and when such event of default occurs.

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33. The response to this news by the market was swift, with the price of S&W

common stock dropping to $6.25, down $6.9375 or 53% of its value, in trading May 1, 2000,

34. An article published in The Boston Globe on May 2, 2000, stated that a cost

overrun at one project has created liquidity problems, forcing the Company to restate 1999

results and try to renegotiate payments. If its efforts aren't successful, the Company said, its

accountants think its "ability to function as a going concern will be brought into question." The

problems could also lead to default with lenders including Bank of America, though Stone &

Webster said it expects to enter into a "forbearance agreement" with banks in case of such

default. Solomon Smith Barney analyst Tobias Levkovich said bankruptcy "is a possibility" for

Stone & Webster if it can't arrange a sale or some other extensive partnership. According to the

article, even before the most recent cost overrun, related to work on an undisclosed domestic

power project, the Company's cash position had fallen dramatically. It listed $36.9 million in

cash and equivalents at the end of March, down from $106.5 million a the same time a year ago.

16


CLAIMS FOR RELIEF

COUNT

(Against All Defendants For Violations ofSection 10(b) and Rule I0b-5 Promuleated Thereunder

35. Plaintiff repeats and re-alleges each and every allegation contained in the

foregoing paragraphs as if fully set forth herein.

36. During the Class Period, defendants engaged in a plan, scheme, conspiracy and

course of conduct, pursuant to which they knowingly or recklessly engaged in acts transactions,

practices and courses of business which operated as a fraud and deceit upon plaintiff and the

other members of the Class; made various untrue statements of material facts and omitted to state

material facts necessary in order to make the statements made, in light of the circumstances under

which they were made, not misleading; and employed devices, schemes and artifices to defraud

in connection with the purchase and sale of securities. Such scheme was intended to, and

throughout the Class Period, did: (a) conceal the adverse facts concerning the Company's

operations, particularly with respect to its financial condition; (b) artificially inflate and maintain

the market price of S&W securities; and (c) cause plaintiff and the other members of the Class to

purchase S&W securities at inflated prices.

37. Pursuant to the above plan, scheme, conspiracy and course of conduct, each of the

defendants participated directly or indirectly in the preparation and/or issuance of the quarterly

and annual reports, SEC filings, press releases and other statements and documents described

above, including statements made to securities analysts and the media that were designed to

influence the market for S&W securities. Such reports, filings, releases and statements were

17


materially false and misleading in that they failed to disclose material adverse information and

misrepresented the truth about S&W's finances and business prospects.

38. By virtue of their positions at the Company, defendants had actual knowledge of

the materially false and misleading statements and material omissions alleged herein and

intended thereby to deceive plaintiff and the other members of the Class, or, in the alternative,

defendants acted with reckless disregard for the truth in that they failed or refused to ascertain

and disclose such facts as would reveal the materially false and misleading nature of the

statements made, although such facts were readily available to defendants. Said acts and

omissions of defendants were committed willfully or with reckless disregard for the truth. In

addition, each defendant knew or recklessly disregarded that mater facts were being

misrepresented or omitted as described above.

39. Information showing that defendants acted knowingly or with reckless disregard

for the truth is peculiarly within defendants' knowledge and control. As the senior managers and

directors of the Company, the Individual Defendants had knowledge of the details of the

Company's internal affairs.

40. The Individual Defendants are liable both directly and indirectly for the wrongs

complained of herein. Because of their positions of control and authority, the Individual

Defendants were able to and did, directly or indirectly, control the content of the statements of

the Company. As officers and directors of a publicly-held company, the Individual Defendants

had a duty to disseminate timely, accurate, and truthful information with respect to the

Company's business, operations, financial condition and prospects. As a result of the

dissemination of the aforementioned false and misleading reports, releases and public statements,

18


the market price of S&W securities was artificially inflated throughout the Class Period. In

ignorance of the adverse facts concerning S&W's business and financial condition which were

concealed by defendants, plaintiff and the other members of the Class purchased S&W securities

at artificially inflated prices and relied upon the price of the securities, the integrity of the market

for the stock and/or upon statements disseminated by defendants and were damaged thereby.

41. During the Class Period, S&W securities were traded on an active and efficient

market. Plaintiff and the other members of the Class, relying on the materially false and

misleading statements described herein, which the defendants made, issued or caused to be

disseminated, or relying upon the integrity of the market, purchased S&W securities at prices

artificially inflated by defendants' wrongful conduct. Had plaintiff and the other members of the

Class known the truth, they would not have purchased said shares or would not have purchased

them at the inflated prices that were paid. At the time of the purchases by plaintiff and the Class,

the true value of S&W securities was substantially lower than the prices paid by plaintiff and the

other members of the Class_ The market price of S&W securities declined sharply upon public

disclosure of the facts alleged in this complaint.

42. By reason of the conduct alleged herein, defendants knowingly or recklessly,

directly or indirectly, have violated Section 10(b) of the Exchange Act and Rule 10-5

promulgated thereunder.

19


COUNT II

(Violations of Section 20(a) of theExchange Act Against The Individual Defendants)

43. Plaintiff repeats and re-alleges each and every allegation contained in the

foregoing paragraphs as if fully set forth herein.

44. (a) During the Class period, defendant Smith participated in the operation and

management of the Company, and conducted and participated, directly and indirectly, in the

conduct of S&W's business affairs. Because of Smith's senior positions, he knew the adverse

non-public information about S&W's inflated revenues and false financial statements.

(b) As an officer and director of a publicly owned company, Smith had a duty

to disseminate accurate and truthful information with respect to S&W's financial condition and

results of operations, and to correct promptly any public statements issued by S&W which had

become materially false or misleading.

(c) Because of his positions of control and authority as a senior officer and

director of S&W, Smith was able to, and did, control the contents of the various reports, press

releases and public filings which S&W disseminated in the marketplace during the Class Period

concerning the Company's results of operations. Throughout the Class Period, Smith exercised

his power and authority to cause S&W to engage in the wrongful acts complained of herein.

Smith, therefore, was a "controlling person" of S&W within the meaning of Section 20(a) of the

Exchange Act. In this capacity, he participated in the unlawful conduct alleged which artificially

inflated the market price of S&W securities.

20


45. (a) During the Class Period, defendant Langford participated in the operation

and management of the Company, and conducted and participated, directly and indirectly, in the

conduct of S&W's business affairs. Because of Langford's senior positions, he know the adverse

nonpublic information about S&W's inflated revenues and false financial statements.

(b) As an officer of a publicly owned company, Langford had a duty to

disseminate accurate and truthful information with respect to S&W's financial condition and

results of operations, and to correct promptly any public statements issued by S&W which had

become materially false or misleading.

(c) Because of his position of control and authority as a senior officer of

S&W, Langford was able to, and did, control the contents of the various reports, press releases

and public filings which S&W disseminated in the marketplace during the Class Period

concerning the Company's results of operations. Throughout the Class Period, Langford

exercised his power and authority to cause S&W to engage in the wrongful acts complained

herein. Langford, therefore was a "controlling person" of S&W within the meaning of Section

20(a) of the Exchange Act. In this capacity, he participated in the unlawful conduct alleged

which artificially inflated the market price of S&W securities.

46. Each of the Individual Defendants, therefore, acted as a controlling person of

S&W. By reason of their senior management positions and as directors of the Company, each of

the Individual Defendants had the power to direct the actions of, and exercise the same to cause,

the Company to engage in the unlawful acts and conduct complained of herein. Each of the

Individual Defendants exercised control over the general operations of the Company and

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possessed the power to control the specific activities which comprise the primary violations

about which plaintiff and the other members of the Class complain.

47. By reason of the above conduct, the Individual Defendants are liable pursuant to

Section 20 of the Exchange Act for the violations of S&W.

WHEREFORE, plaintiff demands judgment against defendants as follows:

A. Determining that the instant action may be maintained as a class action under Rule

23, Federal Rules of Civil Procedure, and certifying the named class plaintiff;

B. Requiring defendants to pay damages sustained by plaintiff and the Class by

reason of the acts and transactions alleged herein;

C. Awarding plaintiff and the other members of the Class prejudgment and post-

judgment interest, as well as their reasonable attorney's fees, expert fees and other costs; and

D. Awarding such other and further relief as this Court may dem just and proper.

JURY TRIAL DEMANDED

Plaintiff demands a jury trial of all issues so triable.

Dated: May 8, 2000

BERMAN, DEVALERIO & PEASE, LLP

w Jeffrey C. Block (B O# 600747)Michael Sullivan (BBO# 637100 )One Liberty SquareBoston, MA 02109Telephone: (617) 542-8300

Attorneys for Plaintiff

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OF COUNSEL:

WEISS & YOURMANJoseph fl. Weiss551 Fifth Avenue, Suite 1600New York, NY 10176Telephone: (212) 682-3025

THE LAW OFFICES OF JEFFREY S. ABRAHAMJeffrey S. Abraham60 East 42" Street, Suite 4700New York, NY 10165Telephone: (212) 692-0555

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23 :.''•. for the district of massachusetts'' adele...

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