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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS

___________________________________ : :

In re STONE & WEBSTER, INC. : SECURITIES LITIGATION :

: No. 00-CV-10874-RWZ : : : JURY TRIAL DEMANDED

___________________________________ :

SECOND CONSOLIDATED AND AMENDED CLASS ACTION COMPLAINT

Lead Plaintiffs, Ram Trust Services, Inc. and Lens Investment Management, LLC, and

plaintiffs Robert A.G. Monks, John P.M. Higgins, Richard Schultz, Robert M. White, Trustee for

the Robert M. White Trust and Kevin C. Frye, on behalf of all purchasers of Stone & Webster,

Inc. securities between and including January 22, 1998 to May 8, 2000 (collectively the

“plaintiffs”), by and through their attorneys, allege the following upon information and belief,

except as to those allegations concerning plaintiffs, which are alleged upon personal knowledge.

Plaintiffs’ information and belief are based upon, among other things, their investigation,

including without limitation: (a) review and analysis of filings made by Stone & Webster, Inc.

(Stone & Webster, Inc. and its various subsidiaries are hereinafter referred to as “S&W” or the

“Company”) with the Securities and Exchange Commission (“SEC”); (b) review and analysis of

press releases, public statements, news articles and other publications disseminated by or

concerning S&W and defendants H. Kerner Smith (“Smith”) and Thomas L. Langford

(“Langford”); (c) review and analysis of securities analysts’ reports concerning S&W;

Case 1:00-cv-10874-RWZ Document 227-1 Filed 11/06/2006 of 140

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(d) review and analysis of a slide presentation given by Smith at Donaldson, Lufkin & Jenrette

Securities’ 1999 Environmental Services and Engineering and Construction Conference in April

1999; (e) interviews with former S&W employees, including Ray Burke, a former controller for

S&W, Daniel Martino, a former senior accountant for S&W, Timothy McBride, a former

controller for S&W’s industrial division, Roderick Parker (“Parker”), a former global project

coordinator for S&W, Ronald Protasewich (“Protasewich”), a former purchasing project

manager for S&W, Robert Wiesel, a former president of S&W Construction, Edward Sweeny, a

former vice-president of S&W, Dan Gershkowitz, former project manager of S&W, as well as

other former employees, suppliers, vendors and customers of S&W in the United States and

abroad who requested that their identities remain confidential; (f) discussions with John W.

Prosser, Jr., Senior Vice President of Finance for Jacobs Engineering, Inc.; (g) review and

analysis of internal S&W documents; (h) review and analysis of documents filed by S&W,

creditors of S&W and other entities in the United States Bankruptcy Court for the District of

Delaware (the “Delaware Bankruptcy Court”); (i) review and analysis of lawsuits filed against

or by S&W; (j) review and analysis of the testimony of Langford at a Meeting of Creditors

conducted at the Delaware Bankruptcy Court on July 21, 2000, pursuant to 11 U.S.C. §341; and

(k) other publicly available information about S&W.

Plaintiffs believe that further substantial evidentiary support will exist for the allegations

in this Second Consolidated and Amended Class Action Complaint after a reasonable

opportunity for discovery. Most of the facts supporting the allegations contained herein are

known only to the defendants or are exclusively within their custody and/or control.


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SUMMARY OF CLAIMS

1. This case involves a fraudulent scheme by Smith - S&W’s Chairman, President

and CEO, and Langford - S&W’s Executive Vice President and Principal Financial Officer

(Smith and Langford are collectively referred to as the “Individual Defendants”) to manipulate

and distort the Company’s financial statements between and including January 22, 1998 to May

8, 2000 ( the “Class Period”). Smith and Langford manipulated and distorted the Company’s

financial statements by overstating S&W’s profitability and assets. They accrued and booked

phantom revenue and receivables that was never received and they hid the Company’s

deteriorating financial condition from investors, assuring the public that all was well and the

Company was poised for solid growth when they knew S&W could not pay its bills, had no cash

and was on the verge of collapse. Although they hoped to keep S&W’s deteriorating finances

secret long enough to sell the Company and invoke their lucrative change of control agreements,

a prospective buyer uncovered enough of the truth to leave them no choice but to file Chapter 11.

Incredibly, Smith and Langford had hidden the true state of S&W’s finances from investors for

over two years.

2. Smith and Langford accomplished this by establishing and enforcing an unwritten

policy of having the Company underbid projects to ensure that the Company would book as

many jobs as possible. Smith and Langford booked revenue and touted the Company’s job

backlog, growth, asset base and profitability. Eventually, the Individual Defendants’ practice

and policy of underbidding jobs caught up with the Company and S&W began to have

significant cash flow problems which it initially failed to disclose at all, and , never disclosed

adequately. Throughout the Class Period, the defendants represented that S&W had in the area


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of $300 million in net assets, hundreds of millions of dollars in backlog jobs and substantial net

income after some occasional, extraordinary charges. None of these representations were true.

3. The Individual Defendants also attempted to entice prospective purchasers for

S&W by concealing the Company’s true financial situation from those prospective buyers. In

late 1999, S&W desperately scrambled for cash to keep afloat while Smith and Langford tried to

sell the Company. In an effort to raise cash, Smith and Langford callously forced the S&W

retirement plan to buy 1 million shares of S&W stock when they knew the Company was

insolvent and the stock worthless. This rapacious act, impairing the retirement funds of S&W

employees, bordered on criminal misconduct.

4. The dismal state of S&W’s finances only became known because one prospective

buyer, Jacobs Engineering (“Jacobs”), determined that the Company was insolvent and that

Jacobs would only purchase the Company if it filed bankruptcy. By this time, S&W’s cash

problems were so serious, Smith and Langford were desperate to sell the Company and earn their

severance payments. The Individual Defendants announced to the public that the Company was

being sold and was filing for bankruptcy protection.

5. Even then, S&W failed to come clean with investors. Rather than admit that the

Company was in bad financial shape and that Jacobs had discovered this, on April 30, 2000,

S&W announced it was revising its 1999 financial results to include a provision for a $27.5

million charge the Company was taking for a cost overrun “on a key project by a major

subcontractor.” Almost one week later, on May 8, 2000, S&W announced it had signed a letter

of intent with Jacobs for the sale of the Company and that S&W intended to file bankruptcy. In

both its initial 1999 10-K issued on April 14, 2000 and the restated one issued on May 9, 2000,

S&W represented net assets of approximately $320 million. Within a short time after the


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bankruptcy filing, these figures were revealed as completely false and baseless. S&W was

shown to have no net assets. In the space of a few short weeks, $300 million in assets

supposedly vanished. The reason was those assets never existed in the first place. S&W’s

balance sheet, like its income statement, was a fraudulent document that hid the effects of

S&W’s money-losing projects.

6. On April 28, 2000, the last trading day before the initial disclosure of S&W’s

financial problems, the price of the Company’s common stock closed at $13.1875 per share.

Following the announcement of the restatement, the price of S&W common stock fell as low as

$2.50 per share. The market continued to react as additional information regarding S&W’s

finances was revealed. By May 19, 2000, the first trading day after S&W’s announcement on

May 8, 2000 that it intended to file bankruptcy, the stock price had plummeted to $.7188 per

share. Over $177.5 million in shareholder equity was wiped out overnight.

7. The SEC quickly commenced an investigation into S&W’s finances and the

restatement. In addition, on November 1, 2000, the Company sued Smith in the Superior Court

of the Commonwealth of Massachusetts for Middlesex County (C.A. No. 00-5022) seeking to

void Smith’s change of control agreement based upon his responsibility for S&W’s financial

demise.

8. This action is also brought against the Company’s auditing firm,

PricewaterhouseCoopers, LLP (“PWC”), for its role in facilitating Smith and Langford’s

fraudulent scheme to manipulate and distort the Company’s financial statements during the Class

Period. PWC knew of the underbidding policy, knew of the phantom revenue and receivables,

knew the Company could not pay its bills and knew that the Company’s overall financial


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position had deteriorated so that its public statements were false and misleading. Yet, PWC did

nothing until Jacobs forced disclosure of the problems by insisting that S&W file for bankruptcy.

JURISDICTION AND VENUE

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

28 U.S.C. §§1331, 1337 and 1367, and Section 27 of the Securities and Exchange Act of 1934

(the “Exchange Act”), 15 U.S.C. §78aa.

10. The claims asserted herein arise under and pursuant to Sections 10(b), 18, 20(a)

and 20A of the Exchange Act, 15 U.S.C. §§78j(b), 78r, 78t(a) and 78t-1(a), and Rule 10b-5

promulgated thereunder by the SEC, 17 C.F.R. §240.10b-5.

11. Jurisdiction and venue are proper in this District pursuant to Section 27 of the

Exchange Act, 15 U.S.C. §78aa and 28 U.S.C. §1391 (b) and (c). At the time this action was

commenced, S&W maintained its corporate headquarters and executive offices in this District.

In addition, many of the acts and transactions forming the basis for the claims in this action,

including the preparation and dissemination of materially false and misleading information, and

the failure to disclose material information, occurred in substantial part in this District.

12. In connection with the acts and omissions alleged in this Second Consolidated and

Amended Class Action Complaint, defendants, directly and/or indirectly, used the means and

instrumentalities of interstate commerce, including without limitation, the mails, interstate

telephone communications and the facilities of the national securities markets.

THE PARTIES

13. Lead Plaintiffs Ram Trust Services, Inc. (“Ram”) and Lens Investment

Management, LLC (“Lens”) are organized pursuant to the laws of the State of Maine and each

maintains its office and principal place of business at 45 Exchange Street, Portland, Maine

04101. By Order dated August 9, 2000, this Court appointed Lens and Ram as lead plaintiffs


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pursuant to 15 U.S.C. §78u-4. Ram and Lens are members of the Class as demonstrated by their

respective certifications previously filed with this Court. Under the leadership of the renowned

Robert A.G. Monks and Nell Minow, Lens has quickly grown to become an internationally

recognized investment management firm known for maximizing the value of targeted public

companies through shareholder activism. Lens is also recognized worldwide as an authority on

corporate governance issues. During the Class Period, Lens purchased 100,000 and sold 100,000

of S&W shares, and Ram purchased approximately 136,630 shares and sold approximately

70,000 shares of S&W common stock. Lead Plaintiffs purchased the stock of S&W at

artificially inflated prices during the Class Period and have been damaged thereby.

14. Plaintiffs Robert A.G. Monks and John P.M. Higgins are individuals who each

purchased S&W stock on December 6, 1999 and March 22, 2000. Robert A.G. Monks also

purchased S&W stock on March 22, 2000, March 23, 2000, March 24, 2000 and March 28,

2000. John Higgins is the President of Ram and Robert Monks is a director of Ram. Both

Messrs. Higgins and Monks have been principals of Ram from at least January 22, 1998 (the

beginning of the proposed Class Period) to the present and were both involved in the investment

decisions of Ram vis-à-vis S&W. Certifications executed by Messrs. Higgins and Monks are

attached hereto.

15. Plaintiffs Richard Schultz , Robert M. White, Trustee for the Robert M. White

Trust and Kevin C. Frye are individuals who purchased S&W stock on July 27, 1999,

September 29, 1999 and October 27, 1999, respectively.

16. Defendant S&W is incorporated under the laws of the State of Delaware and, until

recently, was a global leader in engineering construction and consulting services for the power,

process, industrial, transportation, environmental and government markets. Additionally, S&W


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owned and operated fourteen cold storage warehousing facilities located primarily in the

southeastern United States. S&W’s consolidated gross revenues for fiscal year 1999 exceeded

$1.2 billion.

17. On June 2, 2000, S&W and several of its direct and indirect subsidiaries filed for

bankruptcy protection under Chapter 11 of Title 11 of the United States Bankruptcy Code, 11

U.S.C. §§101 et seq. in the Delaware Bankruptcy Court (Case No. 00-2142-(RRM)). This case

is presently stayed as to defendant S&W only pursuant to 11 U.S.C. §362(a). On July 14, 2000,

substantially all of S&W’s assets were sold to The Shaw Group, Inc.

18. At all times material hereto, defendant H. Kerner Smith was the Chairman of the

Board, President and Chief Executive Officer of S&W. Smith was first employed by S&W on

February 12, 1996 in the capacity of President and Chief Executive Officer of the Company.

After the Company’s annual meeting on May 8, 1997, Smith became Chairman of the Board of

the Company. During the Class Period, while in possession of material adverse non-public

information concerning the Company, Smith made materially false and misleading statements

concerning S&W.

19. At all times material hereto, defendant Thomas L. Langford was the Executive

Vice President and Chief Financial Officer of S&W. Langford was first employed by S&W on

June 2, 1997 in the capacity of Executive Vice President. Langford signed the majority of the

Company’s materially false and misleading SEC filings despite his knowledge of facts that

seriously undermined the accuracy of the representations made therein.

20. By virtue of the Individual Defendants’ positions within the Company, they had

access to undisclosed adverse information about its business, operations, operational trends,

finances, revenue recognition and backlog policies, markets and present and future business


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prospects. Individual Defendants would ascertain such information through S&W’s internal

corporate documents (including the Company’s operating plans, budgets and forecasts and

reports of actual operations compared thereto), conversations and connections with other

corporate officers and employees, conversations and connections with subcontractors, vendors,

customers and project owners, visits to project sites, attendance at management and Board of

Directors’ meetings and committees thereof, and through reports and other information provided

to them in connection with their roles and duties as S&W executives.

21. It is appropriate to treat the Individual Defendants as a group for pleading

purposes and to presume that the materially false, misleading and incomplete information

conveyed in the Company’s public filings, press releases and other publications as alleged herein

are the collective actions of the Individual Defendants identified above. Both of the Individual

Defendants, by virtue of their high-level positions within the Company, directly participated in

the management of the Company, were directly involved in the day-to-day operations of the

Company at the highest levels and were privy to confidential proprietary information concerning

the Company and its business, operations, prospects, growth, finances, and financial condition,

as alleged herein.

22. The Individual Defendants were involved in drafting, producing, reviewing,

approving and/or disseminating the materially false and misleading statements and information

alleged herein, including SEC filings, press releases, and other public documents, were aware of

or recklessly disregarded the fact that materially false and misleading statements were being

issued regarding the Company, and approved or ratified these statements, in violation of the

federal securities laws.


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23. As officers and controlling persons of a publicly-held company whose common

stock was, and is, registered with the SEC pursuant to the Exchange Act, and was traded on the

New York Stock Exchange (the “NYSE”), and governed by the provisions of the federal

securities laws, Individual Defendants each had a duty to promptly disseminate accurate and

truthful information with respect to the Company’s financial condition and performance, growth,

operations, financial statements, business, markets, management, earnings and present and future

business prospects, and to correct any previously issued statements that had become materially

misleading or untrue, so that the market price of the Company’s publicly traded securities would

be based upon truthful and accurate information. The Individual Defendants’ material

misrepresentations and omissions during the Class Period violated these specific requirements

and obligations.

24. The Individual Defendants, by virtue of their positions of control and authority as

officers and/or directors of the Company, were able to and did control the content of the various

SEC filings, press releases and other public statements pertaining to the Company during the

Class Period. The Individual Defendants were provided with copies of the documents alleged

herein to be misleading prior to or shortly after their issuance and/or had the ability and/or

opportunity to prevent their issuance or cause them to be corrected. Accordingly, both are

responsible for the accuracy of the public reports and releases detailed herein.

25. The Individual Defendants are both liable as participants in a scheme to defraud

or deceive purchasers of S&W common stock by disseminating materially false and misleading

statements and/or concealing material adverse facts regarding S&W’s business, finances,

financial statements and the intrinsic value of S&W common stock.


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26. Defendant PricewaterhouseCoopers, LLP (“PWC”), is a firm of certified public

accountants with offices located nationwide, including Boston, Massachusetts. In 1998, Coopers

& Lybrand, LLP and Price Waterhouse, LLP merged to form PWC (“PWC” as used herein will

refer to PWC and, where appropriate, Coopers & Lybrand). PWC, under the direction of audit

partner Robert Spear (“Spear”), audited S&W’s materially false and misleading financial

statements during the Class Period and issued materially false and misleading opinions on those

financial statements. Additionally, PWC consented to the use of its unqualified opinion letter on

S&W’s 1997, 1998 and 1999 financial statements in reports filed with the SEC and otherwise

disseminated to the investing public. PWC thus participated in the scheme, plan and common

course of conduct described herein.

27. During the Class Period, while providing S&W and its shareholders with

purportedly “independent” accounting and auditing services, PWC personnel were present at the

Company’s offices and had access to and knowledge of S&W’s confidential corporate, financial

and business information. As a result of its longstanding relationship with S&W, PWC knew or

recklessly disregarded the true facts as alleged herein concerning the actual financial condition of

S&W that were concealed from the investing public.

28. Each of the defendants is liable as a participant in a fraudulent scheme and course

of business that operated as a fraud or deceit upon purchasers of S&W securities, by

disseminating materially false and misleading statements and/or concealing material adverse

facts. The scheme deceived the investing public regarding S&W’s business, present and future

prospects, growth, operations and the intrinsic value of S&W’s securities and induced the Class

to purchase S&W securities at artificially inflated prices.


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29. At all relevant times, the market for S&W securities was an efficient market that

promptly digested current information regarding the Company from all publicly available

sources and reflected such information in the price of S&W’s securities. Under these

circumstances, all purchasers of S&W’s securities during the Class Period suffered similar injury

through their purchase of securities at artificially inflated prices and a presumption of reliance

applies.

BACKGROUND

A. S&W’s Business

30. Founded in 1889 by two graduates of the Massachusetts Institute of Technology

principally as an engineering services firm, S&W developed into a global leader in engineering,

construction and consulting services for the power, process, industrial, transportation,

environmental and government markets. Until recently, S&W’s engineering, construction and

consulting business included three divisions and a consulting organization which were

responsible for marketing and executing projects worldwide. S&W also owned and operated

several cold storage warehousing facilities located primarily in the southeastern United States.

S&W has been a public company since 1929 – longer than any other engineering and

construction firm.

31. S&W was an early builder of urban transit systems and public utilities. In

particular, S&W was a pioneer in the nuclear power business for utility and governmental

clients. It constructed and modified nuclear power plants and performed maintenance work on

existing nuclear power plants. In the 1970’s and 1980’s, S&W increasingly focused on nuclear

power plant construction, constructing 17 nuclear facilities, making it the second leading

company in the world in that area. S&W worked on 99 of the 104 nuclear power plants in the

United States.


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32. However, during the late 1980’s and early 1990’s, the Company’s business took a

turn for the worse. Whereas, in 1987, the Company had net income of $49 million, by 1993, the

Company had earnings of only $1.9 million. During this period, S&W shareholders were

increasingly vocal in their criticisms of S&W management.

B. Smith And Langford Assume Control Of S&W With Lucrative Change of Control Provisions

33. S&W’s financial condition worsened in 1994 and 1995. Pressured by a growing

number of disgruntled shareholders, S&W’s Board finally took action. In February 1996, the

Company’s chief executive officer resigned and was replaced by defendant Smith. The

Company instituted a corporate restructuring program consisting of a consolidation of S&W’s

corporate headquarters in New York into the Boston headquarters of the engineering division, a

realignment of the senior management structure, and the sale of real estate properties (in Boston

and Cherry Hill, New Jersey) and non-core assets.

34. In June 1997, S&W hired defendant Langford as Executive Vice President and

Chief Financial Officer. By the end of that year, the Company was representing that Smith and

Langford’s turn-around efforts were successful and that, for the first time in several years, S&W

was profitable. The Company purportedly had revenues of $1.323 billion, operating income of

$47.3 million and net income of $33.5 million. At the time, the Company’s stock price climbed

as high as $55 per share.

35. However, this purported turn-around and profitability, in addition to the

Company’s subsequent claims of success, was a mirage. Smith and Langford had employment

contracts providing for lucrative payments should a “change of control” occur. Therefore, from

the outset, their strategy was to make the Company look good in the short-run to position it for a

sale.


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36. Under their respective change of control agreements, Smith and Langford were

entitled to severance payments equal to three times their most recent annual base salary and three

times their most recent highest bonus as well as continued medical, life and disability benefits

and a lump sum equivalent to certain retirement benefits. In addition, all options outstanding on

the date of a change of control would become immediately and fully exercisable and all

restrictions upon any restricted shares would lapse and all such shares would immediately

become fully vested.

37. Through March 1999, Smith had approximately 221,000 options and Langford

had approximately 42,000 options. Therefore, had a change of control occurred, even at a

modest 30% premium to S&W’s 1999 share price, Smith and Langford could have received

over $17.7 and $3.9 million respectively.

C. Smith and Langford Cook the Books

38. On April 14, 2000, S&W’s 10-K represented that the Company had net assets of

$324.3 million. Within a few short weeks, S&W had filed for bankruptcy and had admitted that

it had no net assets, let alone $324.3 million. Stunned investors wanted to know how $324.3

million in assets had so quickly disappeared. In fact, those assets had never existed in the first

place. Understanding the “vanishing assets” requires an understanding of S&W’s accounting

practices.

39. There are primarily two forms of construction contracts, cost-plus and fixed price.

Generally, cost-plus contracts provide that the contractor receives as payment its cost to

complete the project, plus a pre-agreed upon percentage of the total cost as profit. Fixed price

contracts typically provide that the contractor estimates the total cost at the time the contract is

executed and that estimate constitutes the price of the entire project. Of the two types of

contracts, fixed price presents the greater risk because the contractor bears 100% of the risk for


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cost overruns on a project. If the contractor estimates too aggressively to be sure it gets the bid

award – a technique known as “low-balling” – the project can end up being completed by the

contractor at a loss. When S&W experiences significant cost overruns on fixed-price contracts,

the Company’s earnings are adversely affected.

40. A key figure watched by investors in relation to S&W is backlog. This is the

accumulated amount of the Company’s committed, but unexpended, contractual work. The

amount of a company’s backlog is critical in determining its financial condition because backlog

represents the best indication of a company’s future growth. Generally, a high or growing

backlog indicates a strong financial future. Conversely, a low or decreasing backlog represents

potential financial problems. In addition, competitors and customers can take advantage of

decreasing backlog by demanding more favorable terms.

41. To determine how a particular transaction or event should be accounted for and

reported in the financial statements of a commercial enterprise, accountants utilize Generally

Accepted Accounting Principles (“GAAP”). Because of the breadth of materials that comprise

GAAP, Statement of Auditing Standards (“SAS”) No. 69 was issued to classify and provide

guidance as to the relative importance of the various types of pronouncements. SAS No. 69

outlines four categories of established accounting principles, corresponding to their relative

authoritativeness, that established the private-sector accounting hierarchy that should be

followed in the preparation of financial statements in commercial enterprises.

42. Accounting Research Bulletins (“ARB”) and Accounting Principle Board Opinion

(“APB”) are among Level “A” (the highest) pronouncements. With respect to accounting for

Long-term Construction Contracts, ARB-45, issued in 1955, is controlling. Additional

pronouncements, both Level “B,” were issued in 1981 to provide further guidance in accounting


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for Long-term Construction Contracts: (1) an AICPA Industry Audit and Accounting Guide

entitled, “Construction Contractors”; and (2) Statement of Position of the AICPA Accounting

Standards Executive Committee (“SOP”) 81-1.

43. In accounting for long-term construction contracts, a company must choose

between the two generally accepted methods: the percentage-of-completion method and the

completed-contract method. This choice is governed by the Level A and B pronouncements

identified above.

44. ARB 45, paragraph 15 describes the circumstances in which each method can be

used:

The committee believes that in general when estimates of costs to complete and extent of progress toward completion of long-term contracts are reasonably dependable, the percentage-of-completion method is preferable. When lack of dependable estimates or inherent hazards cause forecasts to be doubtful, the completed-contracts method is preferable.

45. Once a particular method is chosen, ARB-45 governs how the particular method

effects financial reporting. It states:

The percentage-of-completion method recognizes income as work on a contract progresses; recognition of revenues and profits generally is related to costs incurred in providing the services under the contract. The method is based on an estimate of the income earned to-date, less income recognized in earlier periods. Estimates of the degree of completion usually are based on either the relationship of costs incurred to date to expected total costs for the contract, or other measures of progress toward completion, such as engineering estimates.

The completed contracts method recognizes income only when the contract is completed, or substantially so, and all costs and related revenues are reported as deferred items in the balance sheet until that time.

46. Under either method, when the current estimate of total contract costs indicates a

loss, a provision should be made for the loss on the entire contract in the period that the total loss


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estimate is first made. Thus, these accounting conventions are consistent with the well-

established practice of making provisions for foreseeable losses in all transactional matters,

pursuant to Financial Accounting Statements Board’s Financial Accounting Standards No. 5

(“FAS No. 5”). Specifically, according to ARB 45:

Under the Percentage-of-Completion Method – When the current estimate of total contract costs indicates a loss . . . provision should be made for the loss in the entire contract.

Under the Completed-Contract Method – Although the completed contract method does not permit the recording of any income prior to completion, provision should be made for expected losses in accordance with the well established practice of making provision for foreseeable losses.

47. Moreover, according to Paragraph 85 of SOP 81-1, “[p]rovisions for losses should

be made in the period in which they become evident under the percentage-of-completion method

or the completed-contract method.” This rule is also applicable to a newly awarded contract.

Thus, if a contractor deliberately underbids on a project in order to get the contract knowing with

a reasonable degree of certainty that the contract costs will exceed the contract revenue, the

contractor is required to recognize this prospective loss in the period that the contractor first is

obligated to perform the contract.

48. Not only must the contractor record the loss in its income statement, it must

record it on the balance sheet as well. Typically, on a monthly basis, the contractor invoices the

project owner and records an “Accounts Receivable” on the balance sheet at the time of

invoicing. Timing differences between amounts “recognized” and actually incurred are reflected

on the balance sheet as either an asset - “Costs and revenue in excess of billings,” or as a liability

- “Billings in excess of costs and revenue recognized.” To the extent that a contract has a

projected loss, the entire amount of the loss is recognized in the first period of this realization,

and is then adjusted periodically based upon actual results.


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49. During the Class Period, S&W used exclusively the percentage-of-completion

method with respect to its long-term construction contracts.

50. The suspension of a long term construction project can be treated in different

ways depending on the project’s expected outcome. Under GAAP, continuation of the

percentage-of-completion method of accounting for a suspended project is proper if the

contractor has a reasonable expectation of continuing work on the project and the project is

expected to generate a profit.

51. Where the contractor does not have a reasonable degree of certainty that the

project will continue, the entity is precluded from utilizing the percentage-of-completion method

of accounting and the contractor instead must use the completed-contracts methods. Under the

completed-contracts method, no revenue or related costs are recognized until either the contract

is finally completed or the contractor decides that the uncertainty of continuing is too great, and

treats the uncompleted contract as terminated, and thus “completed.” In either of these cases, the

entity may not recognize revenue and associated costs during the period of “suspension,” but

only upon completion or termination. In that situation, upon completion or termination, only the

revenue that has been or will be realized (i.e., collected) should be recognized.

52. As shown below, S&W distorted and misrepresented its results throughout the

Class Period by failing to book known losses on its income statement, by failing to reduce its net

assets to account for its money-losing projects and by booking phantom revenue and receivables

from a suspended job, long after there was no hope the job would be revived.

D. Smith and Langford Begin Their Scheme To Distort The Company’s Results

53. Smith and Langford’s plan to find a buyer for the Company was dependent on

creating the perception that the Company’s turnaround was successful.


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54. To foster that perception, Smith directed, beginning with some projects in 1996,

that S&W should underbid for projects on a fixed price basis. Smith and Langford established

“underbidding” as a policy in 1997 according to many S&W executives including Ray Burke, a

former project manager for S&W, who commented that he, like many S&W veterans disagreed

with Smith’s “business strategy.” This strategy was an effort to increase the number and dollar

magnitude of projects on S&W’s books, create the perception of growth in S&W’s business and

tout an ever-increasing project backlog. Smith and Langford did this even though they knew that

S&W’s backlog figures would then represent money losing projects.

55. This underbidding meant that Smith, often over the objections of his own project

teams, was dictating project terms so that S&W was selling fixed-price jobs either at a loss or

with such small margin for error that the slightest adverse change in a project’s economics would

cause S&W to lose money on the job. As Ronald Protasewich, Purchasing Project Manager

said — “We took jobs at a loss to start with just to get in the market place. If we executed them

perfectly, we wouldn’t make any money.”

56. According to a confidential source who worked for S&W as an assistant corporate

controller before and during the Class Period (“CS-1”), Smith was warned by senior

management that this policy would result in long-term disaster for the Company. Another

confidential source who worked for S&W as the head of its development corporation before and

during the Class Period (“CS-2”) said, after a bid on a project was accepted, it was not good

news. “Winning a job was not good — it was like ’how much money are we going to lose on

this?’“

57. Since Smith was interested only in a short-term illusion of profitability and

growth, he ignored these warnings. In fact, Roger LeFavor, Vice President of Strategic


20

Planning, regularly challenged Smith and told Smith numerous projects could not be done for the

bid price, but Smith overruled his objections.

58. Neither the policy nor the risks associated with selling jobs in this manner was

ever communicated to the investing public. To the contrary, throughout the Class Period, Smith

touted the jobs sold by S&W as proof of the Company’s strength, growth and underlying value.

These money-losing white elephants soured before Smith and Langford could find an

unsuspecting buyer and investors during the Class Period lost the value of their entire investment

in S&W.

59. One of the first jobs Smith insisted on underbidding was a project for U.S. Sugar

in 1997. According to Tim McBride, Controller for the Industrial Division and Assistant

Treasurer, “it was underbid” and Smith knew it was underbid. However, after being awarded

the project, S&W failed to disclose that the project represented revenue, but no opportunity for

income. S&W immediately added the job to its misleading backlog figure.

60. According to S&W employees, Burke, Protasewich, Robert Wiesel, a former

Executive Vice President of S&W, Daniel Martino, a former senior accountant of S&W,

McBride, CS-1, CS-2 and Dan Gershkowitz, a former project manager for S&W, the following

projects were all bid at a loss pursuant to Smith’s and Langford’s undisclosed policy:

a. Taiwan Power Company, Taipei, Taiwan, subcontract award, Third Quarter 1996, $80 million.

b. Volta River Authority, Takoradi Thermal Power Plant, Ghana, June 17, 1997, $55 million engineering, procurement and construction contract.

c. Electricity de Vietnam, Pha Lai II Power Plant, Vietnam, March 17, 1998, $125 million engineering and procurement contract.

d. Energy Management, Inc., Tiverton, Rhode Island and Rumford, Maine, $52.6 million turnkey contract dated as of April 14, 1998.


21

e. Maine Yankee Atomic Power Company, Maine, August 4, 1998, $250 million nuclear plant decommissioning and demolition contract.

f. CalEnergy Co., Salton Sea, California, October 26, 1998, $141 million engineering, procurement and construction contract.

g. Waste Options Nantucket, Nantucket, November 23, 1998, $10 million design, engineering and construction contract.

h. Cordova Energy Co., Illinois, May 4, 1999, $208 million engineering, procurement and construction contract.

i. AES Enterprises, Inc., New Hampshire, December 28, 1999, $300 million engineering, procurement and construction contract.

j. AES Enterprises, Inc., Texas, March 20, 2000, approximately $200 million engineering, procurement and construction contract.

61. Maine Yankee was a particularly risky project on which Smith directed S&W to

underbid. According to Burke, who was the project manager for the Maine Yankee project,

S&W underbid for the project and the reasonably anticipated costs to perform the dismantling

were significantly higher than the Company’s bid. Although Burke conceded that the Maine

Yankee underbidding was only one of a series of underbids, he stated that it was one of the most

dangerous because it represented the first nuclear power plant decommissioning performed on a

lump sum, turnkey basis. According to Burke, Smith knew the project was underbid, but did not

tell the Board, because he wanted S&W to get into this market.

62. According to Gershkowitz, when S&W bid approximately $70-80 million on the

Taiwan nuclear power plant project, the bids of S&W’s competitors, such as Raytheon, to

perform the same work S&W proposed to do were substantially higher. Gershkowitz was told,

for example, that Raytheon’s bid for the same work was $120 million.

63. According to these former S&W insiders, S&W’s underbidding ranged from 10%

to 40%.


22

E. S&W’s Rapid Financial Collapse and Desperate Attempts to Keep the Company Afloat

64. Although investors were kept in the dark, S&W’s financial problems actually

began in early 1998 after problems developed with S&W’s Trans Pacific Petrochemical

Indotama (“TPPI”) project.

65. In 1996, S&W had joined in a consortium of contractors to construct an integrated

ethylene and olefins complex in Indonesia for TPPI for $2.3 billion. S&W’s portion of the total

contract value was $710 million. Initially, there was no written agreement but, according to CS-

1, S&W nonetheless starting issuing purchase orders to vendors. Eventually, TPPI agreed to

execute an interim, written agreement and Smith sent Wiesel to Indonesia to negotiate the

agreement in late 1996. At Smith’s request, Wiesel called Smith on a daily basis to discuss

details of the contract negotiations.

66. According to Parker, after the interim agreement was signed, S&W procured and

transported to Indonesia approximately $332 million worth of equipment for the project. The

interim agreement posed substantial risks for S&W, none of which were disclosed to investors.

The agreement recognized that TPPI’s financing had not been fully committed. Moreover, the

agreement provided no guarantees of payment to S&W. Under the agreement, S&W was

required to assume the risk of all equipment purchases and subcontract work. Consequently, all

of the purchase orders issued by S&W for the equipment and other initial construction

requirements were in S&W’s name. This risk did not become an issue for the Company during

the first year of the project, from late 1996 to late 1997, because TPPI was able to pay S&W in a

timely manner for its work during that period.

67. However, in the fourth quarter of 1997, TPPI suspended work on the project

because it had exhausted its funding for the project. According to Martino, by the time the


23

project was suspended, S&W had already sent millions of dollars in equipment to Indonesia.

S&W was responsible for the payment of all cancellation costs and all outstanding purchase

orders. Thus, according to Parker, when the project stopped in late 1997, S&W had to pay all of

its vendors for the equipment that was shipped to Indonesia and other cancellation costs. CS-

1said that TPPI suggested to S&W that it try to get out of its contracts with its vendors due to the

suspension. Based upon this suggestion, S&W knew in late 1997 that the project was dead even

though they had not received an official termination notice. S&W also knew at this point that it

was unlikely it would ever receive any additional payments on TPPI.

68. CS-1 added that because S&W issued all of the purchase orders relating to the

project in its own name, S&W was responsible to pay the vendors for the equipment. “In the

next two years, we put about $50 million into that project because we had to pay the vendors,”

said CS-1.

69. Because S&W was funding substantial charges on the TPPI project through 1998

after the project was suspended in late 1997, but there was no corresponding revenue as a result

of the project’s suspension, TPPI should have had a significant negative effect on S&W’s

financial statements. According to CS-1, to avoid that negative effect, beginning with the first

quarter of 1998, S&W created phantom revenue and receivables from the TPPI project to cover

S&W’s project related costs by recording revenue equal to the amount of those costs. The

purpose of recording this revenue was to avoid showing a loss from the project on S&W’s

financial statements. Spear and PWC were fully aware of this decision. PWC and Spear allowed

S&W to recognize this phantom revenue and receivables based upon S&W’s representation that

it believed TPPI would be resumed. There was no basis for this false representation and Spear


24

and PWC would have discovered this had they chosen to independently test the representation,

as they should have done for such a material contract.

70. Instead, S&W, according to CS-1, booked $86.9 million of revenue from TPPI in

1998 and $53 million in 1999. Absent this revenue, S&W’s 1998 earnings would have been

negative $108.7 million rather than the negative $49.3 million it announced and its 1999 earnings

would have been a $11.3 million loss as opposed to the $20.5 million of net income that was

announced. Neither S&W’s decision to book these revenues nor the amount that it booked was

ever disclosed to investors.

71. As S&W’s financial position deteriorated as a result of the TPPI debacle, Smith

and Langford responded by bidding even more aggressively on new projects to increase the

Company’s backlog.

72. The effect of the underbidding and the problems at TPPI took a serious toll on the

Company, although the extent of the problems was not disclosed to investors. According to Tim

McBride, a former controller for S&W’s industrial division, by the middle of 1998, S&W knew

that the Company was “starting to get strapped for cash.”

73. According to Daniel Gershkowitz, the original project manager for the Tiverton

and Rumford projects, the Company started having problems paying its vendors on the Tiverton

project in the Summer of 1998. During that time period, certain vendors, such as The Shaw

Group, stopped delivering materials to the project site because S&W had not paid them.

74. Throughout 1998, while the Company was disclosing financial results to the

investing public on the one hand, comprehensive internal financial reports, distributed to

approximately twenty S&W division heads and top executives, that included financials broken

out for all divisions, with details of personnel costs, sales, income and working capital and


25

which also measured S&W’s performance against its plan for the year, showed a materially

worse financial situation and outlook. Recipients of the internal reports knew that by mid-1998,

S&W was in financial trouble and was losing money. According to CS-2, the head of S&W’s

Development Corporation: “Anyone who had access to the monthly financials could see that it

was not what was being said publicly. You could read them and compare them with the

quarterlies he [Smith] was reporting and ask what he was smoking. Knowing what we knew

inside and seeing the quarterlies – they just did not jibe.”

75. By August 1998, S&W had obtained approval from TPPI to resell the project

materials and equipment. Martino said S&W began selling the equipment for “pennies on the

dollar to try to get the money back.”

76. CS-1 added that by January 1999, “it was clear that the project would not restart.”

By that time, TPPI had told S&W that the slight prospect that had existed during 1998 that they

would find an investor to fund the project had fallen through. At this point, it was a certainty

that S&W would receive no further payments on TPPI. Nonetheless, S&W kept the project in its

backlog and kept recording phantom revenue and receivables from the project which S&W was

not receiving. In its public filings, S&W repeatedly advised that: “Had the TPPI project been

cancelled as of December 31, 1999, and if resale of the olefins plant were unlikely to be

completed, SW would have recorded a pre-tax charge of approx. $76,800,000 representing

project working capital plus current procurement commitments net of the estimated salvage

value of procured equipment and materials. On a similar basis, the pre-tax charge would have

been $72,400,000 in 1998.” All of these statements were misleading since right from the initial

suspension in December 1997, S&W knew it was unlikely the project would ever restart. By

December 1998, that was a certainty. Nor did S&W ever disclose that it booked $86.9 million in


26

phantom revenue and receivables from TPPI in 1998 after the suspension and $53 million in

phantom revenue and receivables in 1999.

77. According to CS-1, Martino and CS-2, Smith and Langford knew the equipment

sent to Indonesia for the project was being sold for pennies on the dollar and that the project

would not be restarted. Accordingly, S&W’s statements that the TPPI project would likely

restart were misleading and because Smith and Langford knew that the TPPI project would not

resume, S&W should not have kept the TPPI project in the Company’s backlog and should not

have been booking phantom revenue and receivables from the project. To the contrary, S&W

should have booked the entire loss on the TPPI project, at the latest, in the fourth quarter of

1998. Indeed, S&W should have booked the loss in the fourth quarter of 1997 when TPPI

essentially terminated the project and suggested S&W get out of its agreements with its vendors.

78. S&W’s booking of phantom revenue and receivables was contrary to SOP 81-1

which, in accordance with ARB 45, disallows the use of the percentage of completion method of

accounting for a suspended contract where the contractor does not have a reasonable degree of

certainty that the project will continue or the project is not expected to show a profit. Once the

project was suspended in December 1997, neither of these requirements could be met. At a

certainty, they could not be met by December 1998. Thus, S&W and PWC violated GAAP by

recording revenue from the TPPI project that was never received after the project was suspended.

In fact, since S&W actually knew that the TPPI project would not be continued, under GAAP,

S&W was required to evaluate the remaining estimated costs on the project, calculate any

expected, future revenue and determine whether there would be a loss on the project. Since

S&W knew it was going to incur a substantial overall loss on TPPI, FAS No. 5 required that

S&W accrue the loss as a charge to income. S&W and PWC failed to do so.


27

79. Also in January 1999, the Company’s Board of Directors called a special meeting

to review and discuss the TPPI project. By the conclusion of the meeting, it was evident to the

Board that the TPPI project had already caused S&W serious financial problems and that it was

unlikely the project would ever restart.

80. The Company’s cash flow problems worsened through 1998 and by the beginning

of 1999, Gershkowitz, the project manager on S&W’s Tiverton and Rumford projects, was

compelled to travel to S&W’s accounting department in Boston on several occasions to insist

personally that S&W pay the key project vendors on the Tiverton project. By that time, several

of the vendors had threatened to place liens on the project if they were not paid.

81. By February 1999, Gershkowitz said, S&W resorted to using the Company’s

credit cards to purchase materials for the Tiverton project. These credit cards were intended to

be used for merely incidental purchases, not as a primary tool of project finance.

82. In March 1999, Gershkowitz resigned from the Company after realizing that the

Tiverton and Rumford projects were hopeless due to increasing cost overruns. S&W was simply

unable to pay all of the subcontractors and vendors the amounts due.

83. When S&W underbid the Tiverton and Rumford projects, the Company also

agreed to complete the Tiverton project in 19 months and the Rumford project in 20 months.

S&W’s inability to pay its subcontractors and vendors led to work delays which made it

impossible to meet this schedule.

84. After Gershkowitz resigned, S&W assigned Edmond Ghantous to manage the two

projects. Despite the change in project management, the Tiverton and Rumford projects

remained significantly over budget and behind schedule.


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85. Throughout the remainder of the first quarter of 1999, S&W’s cash flow problems

became increasingly worse. S&W’s cash flow problems became so bad that S&W could not pay

vendors and subcontractors’ invoices on many other projects in addition to Tiverton and the

backlog of invoices on nearly every project escalated greatly. According to Daniel Martino, a

project accountant for S&W, “it worsened every month.” By the second quarter of 1999,

Martino said “it got to the point that everyone in project accounting was not answering the

telephones because everyone was calling looking for money.” S&W’s treasurer regularly sent e-

mails to internal staff advising that the Company had no money to pay the vendors’ bills and to

not bother submitting requests for payment.

86. According to Rod Parker, a former global project manager for S&W, S&W

stopped paying its vendors in a timely manner in early 1999. By the Spring of 1999 he had

problems getting vendors to bid on S&W projects because they had not been paid.

Consequently, S&W was not awarded many new projects after the second quarter of 1999.

87. Martino added that some vendors and subcontractors, including Siemens and

Foster- Wheeler, called Smith directly to complain about not being paid. Some subcontractors

also threatened to walk off the projects if they did not get paid. According to several different

sources, those who called Smith regularly to collect money and threaten to walk off a project

were usually the first to get paid. As McBride recounted, “[u]sually, whoever yelled the loudest

got paid.” During June, July and August 1999, S&W went weeks without making any payments

to its vendors and subcontractors.

88. By the Summer of 1999, S&W had instituted a rigorous and continuous review of

outstanding accounts payable to determine which vendors and subcontractors could be stalled


29

off to conserve operating funds, and which had to be paid immediately to prevent S&W’s

business from collapsing.

89. At the same time, S&W’s accountants started keeping track of the Company’s

outstanding obligations by creating an overdue accounts payable list which was first updated

monthly, then weekly, and finally daily. These reports were delivered to Smith, Langford and

Jim Carroll, S&W’s controller. On several different occasions, Smith, whose office was on the

same floor as the project accountants, called Dan Levy, S&W’s corporate controller, asking to

review aging reports on bills. After reviewing those reports, Smith and Levy would usually

decide who to pay. According to Martino, some accounts payable were 600 to 700 days

overdue. Consequently, vendors and subcontractors stopped work on S&W’s projects, or

engaged in work slow-downs. Subcontractors also started filing liens. “Priority lists” of the

most critical contractors to pay were sent to Carroll, who was ultimately responsible for deciding

which contractors were paid and how much they were paid. Carroll paid the subcontractors only

after consulting with Smith or Langford, who were fully aware of the severity of the situation.

90. Carroll hired Jeff Besse to handle the increasing number of collection calls.

Carroll still decided which vendors and subcontractors were to be paid after consulting Smith

and Langford.

91. By the Spring of 1999, S&W’s inability to pay the subcontractors and vendors

working on the Tiverton project had reached desperate proportions. Protasewich would routinely

go to the accounts payable department and look for the longest outstanding bill or the most

critical bill to pay to keep the Tiverton project going. “It wasn’t pretty”, said Protasewich. “We

got together to decide what to say to the contractors.”


30

92. Tiverton’s sister project in Rumford, Maine, was also experiencing cost overruns

as a result of Smith and Langford’s purposeful underbidding of the project. In a June 28, 1999

confidential S&W assessment team report, Tom Herschman, who oversaw various projects for

the Company’s executives, noted his concern about the Company’s ability to keep the Rumford

project within budget: “Based on discussions, 90% sure of making schedule, but do not feel good

at all about the budget.” Of course, Smith and Langford knew S&W could not meet the budget

since the project was underbid.

93. Smith, Langford and other S&W personnel sought to obtain conventional long

term financing through bonds, long or intermediate term bank loans, and preferred stock, but

were unable to do so.

94. Without other alternatives, on July 30, 1999, S&W entered into a Credit

Agreement for short-term financing by which S&W was given a $230 million collateralized line

of credit with various banks which provided up to $130 million in direct borrowing for operating

funds and $100 million in letters of credit. The Credit Agreement was announced in a 10-Q filed

by the Company on August 12, 1999. In the 10-Q, the Company advised that it used the newly

acquired line of credit to repay certain bank loans and long-term debt that was outstanding as of

the end of the second quarter. However, the 10-Q failed to disclose that, at the time S&W

entered into the Credit Agreement, it was already in material default under Sections 6.06 and

9.01(f)(i) of the Credit Agreement, because it had failed to make timely payments to its vendors

and subcontractors as their bills came due.

95. Smith and Langford thus knew that S&W could not reasonably rely on the Credit

Agreement for additional funds because the lenders would immediately be in a position to cancel


31

the availability of future funds and to call in the existing indebtedness due to S&W’s material

defaults.

96. Defendants thus knew on July 30, 1999 that without significant additional capital

beyond that represented by the Credit Agreement, S&W faced financial collapse. None of this

was communicated to investors. Instead, on July 26, 1999, four days before the effective date of

the Credit Agreement, S&W issued a press release reporting higher operating and net income

and other improved results for the Second Quarter of 1999. Smith and Langford touted S&W’s

financial situation and future profitability based on the Company’s purportedly, improved

operating performance during the second quarter and a purportedly higher margin business in its

backlog. The press release was false and misleading for failing to disclose that S&W could not

pay its subcontractors and vendors, and had no future, let alone a bright one.

97. S&W’s short-term financing provided no relief for the worsening cash flow

problems S&W was having with several of its key projects. On September 28, 1999, Ghantous

was notified that one of S&W’s subcontractors on the Tiverton project, MSE, had contacted

S&W, concerned about its outstanding, overdue balance and that it had only received

approximately $100,000 out of $600,000 S&W owed MSE. Ghantous was also notified that

because S&W could not pay MSE, MSE was not able to pay its own suppliers and

subcontractors, and that those subcontractors were threatening to walk off the job site. Ghantous

immediately replied by e-mail to Carroll requesting that S&W expedite its payment to MSE to

save the project from yet more costly delays.

98. By early October 1999, S&W was developing a recovery plan to account for the

delays in the Tiverton and Rumford projects. On or about October 4, 1999, S&W conducted a

meeting to review the final forecasts for the two projects.


32

99. By mid-October 1999, key S&W employees working on the Tiverton project saw

the writing on the wall and knew they had to not only quit working on the project, but resign

from the Company altogether before the projects completely fell apart. As one former S&W

employee put it, “it was like rats deserting a sinking ship.” During the third week of October

1999 alone, Nickolas Droblot and Ralph Segar, two S&W managers who were working on the

Tiverton project, resigned from the Company. Their resignations followed the resignation of

Bob Burke, S&W’s construction manager for the Rumford project and other key S&W

employees, including Leon Greer, another S&W construction manager for the Rumford project.

Apparently unsettled by the practices described above, Burke wrote in his resignation notice that

his “management style [did] not appear to coincide with Stone & Webster’s overall corporate

philosophy.”

100. On October 13, 1999, Callahan e-mailed Rosol asking that he give “immediate

attention” to the fact that Energy Management, Inc. (“EMI”), the owner of the Tiverton project,

told S&W that S&W was not performing its work according to the construction schedule S&W

had promised and that S&W was behind in the mechanical work. Callahan added: “I’m

embarrassed that we are so ignorant of what we are not accomplishing that we have to hear it

first from our customer. I need to bring this to [Pete] Evan’s [an S&W Executive Vice President

and the President and Chief Operating Officer of SWEC] attention, but feel like an idiot saying

we had a recovery plan, gave it to the client for comment, didn’t attempt to follow it, and didn’t

have a supervisory, management or reporting knowledge of our performance.”

101. The very next day, on October 14, 1999, Brad Bradfield e-mailed Callahan,

Rosol, Ian Anderson, Ghantous and Deborah Gustafson to advise them that: (1) the Company

was having problems with the mechanical subcontractor, Power Piping, due to outstanding,


33

overdue invoices; (2) EMI had concerns about S&W’s staff and quality assurance program at

Tiverton; (3) S&W was experiencing problems with the availability of craft personnel at the

Tiverton and Rumford project sites; and (4) S&W had an outstanding invoice payment issue with

several other contractors and suppliers who were only getting paid after they called high level

S&W executives. Bradfield expressed his concern that suppliers and subcontractors would cease

doing business with S&W unless they were paid in advance or immediately after each segment

of work was completed: “I am working with Jim Carroll and doing the best we can with

available cash, but we are precariously close to a situation where suppliers and contractors will

invoke quid pro quo.”

102. On October 28, 1999, Craig D. Olmsted, a Vice President of EMI, wrote to

Ghantous to confirm a November 9, 1999 meeting between S&W and EMI at the Tiverton site.

According to the letter, the purpose of the meeting was “to assess Stone & Webster’s progress

with Tiverton construction since the last project review meeting” held on October 19, 1999.

Among the matters EMI wanted to discuss with S&W at the meeting was S&W’s recovery plan

to get the project back on schedule and whether S&W had considered bringing other

subcontractors to the site.

103. Concerned with S&W’s increasingly questionable ability to complete the project

in a timely manner, during a meeting on November 2, 1999, EMI asked that S&W appoint an

“executive sponsor” to oversee the project. This person would give direction to the project

manager and project team to insure completion in accordance with the terms of the parties’

agreement.

104. Also at this point, internal S&W calculations showed that each day of delay was

costing S&W an additional $60,000.


34

105. The dire financial condition of the project did not go unnoticed by senior

management or S&W’s Board. In an e-mail dated November 5, 1999, Smith wrote to Evans, the

President and Chief Operating Officer of S&W Engineers and Constructors (“SWEC”), and

Callahan, an SWEC manager, advising them:

A number of directors would like to have a review of the EMI [Tiverton] projects, covering the bidding process, the terms and conditions of the contract, what happened to the projects during the execution to date and what we are doing to assure we can meet the current estimates. The meeting would be in a similar vain [sic] to what was done in the post hoc review back at the January board meeting. Members of the board have previously reviewed the TPPI project in the UK. What is envisioned with this review is not a special board meeting but a chance for those board members who are interested to come and sit through the same review in early October with the project.

The board wanted me to assure you that this in no way implies a lack of confidence in your leadership, but they feel it is important to assure that all is in place to prevent the kind of degradation which occurred on Sutton Bridge [an S&W project in England] and Takoradi [an S&W project in Ghana].

106. Also on November 5, 1999, Ghantous e-mailed Manny Garcia, an SWEC

construction manager, to inform him that S&W would be requesting all craft workers go on

overtime in an attempt to get the project up to speed. Ghantous added that S&W should develop

a plan “to track progress and cost” and that S&W should urgently get a plan in place before the

next monthly meeting with EMI. In turn, Garcia e-mailed Evans to advise him that the number

of electricians was being increased from 27 to 61 and that two more roofing and siding crews

were added.

107. By November 8, 1999, S&W’s failure to pay the subcontractors involved in the

Tiverton project became so bad that an Interoffice Memorandum was circulated to S&W

management and staff that read:


35

In an effort to deal with our current payable situation, a team has been established to be the focal point for the project team and suppliers for all payment issues. The goal of the team is to provide consistency and accuracy on what we tell suppliers and to give the project teams support in addressing the need regarding timely information regarding status of invoices.

On that same day, Garcia sent an e-mail to Ghantous telling him that he needed “to get the

project back on track.”

108. S&W was having difficulty keeping EMI in the dark about the Company’s

worsening finances. Sensing S&W’s worsening financial situation, EMI requested an

emergency meeting with Evans and/or Smith to discuss S&W’s “financial strength.”

109. In addition to S&W’s struggles to keep the Tiverton and Rumford projects from

imploding and its efforts to hide its problems with TPPI, the Company faced other serious

problems by November of 1999. The Company’s $250 million Maine Yankee project was

falling apart fast. In early November 1999, several of S&W’s subcontractors filed liens against

the Maine Yankee site. Upon immediate investigation, Maine Yankee determined that the liens

were filed as a result of S&W’s failure to pay the subcontractors for work they had performed at

the site.

110. On November 18, 1999, Maine Yankee notified S&W in writing that it was in

material breach of their contract for failing to pay its subcontractors and suppliers for work

previously performed and for its inability to pay for work that was currently being performed and

scheduled to be performed in the future. A copy was also sent to Federal Insurance Company

(“Federal Insurance”) as surety for S&W.

111. S&W did not notify its shareholders of the Maine Yankee letter, and instead took

immediate steps to keep the matter quiet.


36

112. Within days of receiving Maine Yankee’s letter, Smith, Carroll, and other senior

executives traveled to Maine to meet with Maine Yankee representatives in a desperate effort to

stop Maine Yankee from terminating the project.

113. Defendants knew that the assertions of non-performance were accurate and highly

material and that S&W did not have the capital needed to cure the defaults.

114. Defendants knew, not later than November 18, 1999, that without the removal of

the liens filed by various unpaid S&W subcontractors and the raising of additional funds, Federal

Insurance, the sole surety company that had issued the performance and payment bonds for the

$250 million project, would not issue bonds for any other S&W project; that S&W could not

obtain another bonding company to replace Federal Insurance; and that the lenders under S&W’s

Credit Agreement would not issue letters of credit. Defendants also knew that S&W was risking

its ability to obtain new work from prospective clients and working capital to finish the work

S&W had already undertaken on behalf of its current clients.

115. On November 30, 1999, Maine Yankee and S&W entered into an interim

payment agreement. Under the interim payment agreement, S&W was required to provide to

Maine Yankee vendor certificates before S&W would be paid. Vendor certificates certify that

S&W has paid the particular vendor’s invoices.

116. Under the interim payment agreement, the parties also agreed that on a weekly

basis, financial representatives from each party would meet and S&W would make available its

invoice status log showing payment status to suppliers and subcontractors, terms of payment

invoice dates, due dates and other information. S&W also agreed to provide Maine Yankee with

additional guarantees.

117. Finally, the interim payment agreement stated:


37

SWEC’s [S&W Engineers and Constructors] Controller and Maine Yankee’s Treasurer have met at the Site to discuss MaineYankee’s concerns relative to SWEC’s financial status. It is acknowledged that follow-up meetings may be required and SWEC agrees to provide reasonably available updated financial information, as mutually agreed to, at such meetings with a goal, working in good faith to resolve concerns related to SWEC’s financial capacity.

118. In the meantime, Smith and Langford were desperately trying to generate cash.

They were equally desperate to conceal how dire S&W’s finances really were because there were

numerous prospective buyers looking at S&W. Several prospective buyers, including The Shaw

Group, Jacobs Engineering Group, Morrison Knudsen, Technip, Fluor Corp. and others,

expressed interest in acquiring the Company. Several of the prospective buyers traveled to

S&W’s headquarters to conduct due diligence. Smith and Langford knew that disclosure of the

true state of S&W’s finances would spook investors and prospective buyers, crash the

Company’s stock and send S&W into bankruptcy.

119. On October 27, 1999, S&W announced it was taking steps to raise cash. It

announced that it was selling its headquarters building and its Nordic cold processing and storage

business “to concentrate on core competencies.” In reality, defendants knew that S&W was

attempting to sell such assets because this was the only way in which S&W could obtain any

material amount of cash with which to placate its bank lending consortium and avoid

bankruptcy.

120. By November 19, 1999, S&W’s lenders had discovered the various defaults and

they demanded that the Credit Agreement be restructured. A “Pre-Workout Agreement,” an

agreement lenders require of borrowers who are known to be in financial difficulty and in

present or imminent material default on their loans, was developed. Rather than disclose the true

reason for the restructuring and the terms of the Company’s new borrowing facility, S&W

continued its deception by issuing a press release on December 1, 1999 that announced a $30


38

million increase in the Company’s borrowing facility to a maximum of $160 million and an

extension of the facility through May 31, 2000. The press release was grossly misleading. On

December 1, 1999, defendants knew that S&W’s credit had been exhausted; that it was on the

verge of collapse; and that it was kept in business only at the sufferance of the banks, pending

the sale of certain assets so that the bank lenders could reduce their exposure to a failing

enterprise before the inevitable collapse or bargain sale. Nonetheless, S&W deceived investors

in the press release by suggesting that this was a relatively innocuous restructuring to obtain

more funds.

121. In December, 1999, S&W sold its headquarters building for $187 million. On

December 6, 1999, prior to the sale, S&W had to obtain an emergency adjustment in its lending

arrangements so it could survive long enough to complete the sale. It could obtain such an

adjustment only by reassuring the bank lenders that they would receive all of the net proceeds

from the sale.

122. Upon the sale of S&W’s headquarters building, S&W used $140 million of the

proceeds to reduce the $160 million borrowing facility to $20 million. The remaining $20

million direct borrowing facility had been fully drawn down, with no more funds available.

Moreover, $88.2 million of the $100 million letter of credit facility had also been drawn, together

with miscellaneous other bank letters of credit drawn. Defendants thus knew, not later than

December 6, 1999, that the sale of its headquarters building would not alleviate S&W’s cash

crisis and impending bankruptcy. None of this was disclosed. Instead, S&W said only that the

proceeds from the sale of the Company’s building would be used to reduce debt and for other

general corporate purposes.


39

123. Smith and Langford were so desperate for cash that, on or about December 14,

1999, the Individual Defendants and others caused the Stone & Webster Employee Retirement

Plan Trust (“Plan”) to purchase one million shares of S&W common stock at $15.35 per share,

after first amending both the Plan and the Trust to permit this purchase to be made. S&W

received over $15 million as a result of this transaction.

124. When S&W announced this transaction, the Company advised that the $15.35

share purchase price was determined to be fair to the Retirement Plan in a fairness opinion

delivered by Houlihan Lokey Howard & Zukin. In a press release on December 16, 1999, S&W

also stated that, in addition to S&W’s receipt of over $15 million in new capital as a result of the

transaction, “[t]he Company’s management believes that operating results for FY2000 will meet

current analyst expectations after the dilution resulting from the additional shares.”

125. S&W’s press release was materially misleading in several respects. First, the

statement that S&W would receive $15 million in additional capital was materially misleading

because it failed to disclose that, in essence, the money was already spent and that S&W was

facing imminent collapse due to lack of working capital and inability to raise additional funds.

Second, the statement that the purchase price of the S&W stock sold to the Retirement Plan had

been deemed fair to the Retirement Plan was materially misleading because it failed to disclose

that the fairness opinion was not based upon consideration of S&W’s true financial condition – it

was on the verge of financial collapse, and its stock was essentially worthless. Third, the

statement that management believed “operating results would meet analyst expectations” was

materially misleading because management knew that, analyst expectations were based on the

false and misleading information supplied by the Company and that absent an infusion of


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significant additional funds – which they had no reasonable basis to believe would occur – S&W

faced imminent bankruptcy and could not perform on its existing contracts.

126. After S&W completed the sale of its treasury stock to the Company’s Employee

Retirement Plan, in apparent disagreement with this act of blatant fraud, John P. Merrill, Jr., a

director of the Company since 1996, suddenly resigned. S&W concealed Merrill’s resignation

from its shareholders for several months.

127. Thus, not later than December 14, 1999, defendants knew that S&W was

essentially out of both cash and credit, and that a bankruptcy was inevitable. Despite this

knowledge, they failed to inform the market, and instead issued statements calculated to mislead

and reassure investors, such as S&W’s press release of December 16, 1999.

128. In fact, toward the end of 1999, Smith’s gasoline credit card was discontinued and

newspaper delivery to S&W’s building was halted.

129. At the same time that Smith and Langford were trying to find cash and coverup

the crisis on the Maine Yankee project without disclosing the severity of the situation to the

Company’s investors, the Company’s financial problems on the Tiverton project worsened. On

November 22, 1999, Brant e-mailed Ghantous and Garcia regarding an outstanding invoice from

Power Piping which Brant approved, but Ghantous did not because of a premium time charge.

In the e-mail, Brant reminded Ghantous and Garcia that S&W was late providing materials to

Power Piping, S&W’s mechanical subcontractor for the Tiverton project. In addition to S&W’s

failure to get materials delivered on time due to the lack of payment, a lack of progress at the

project was blamed on the “payment issues” S&W was having with all of its major

subcontractors.


41

130. That same day, November 22, 1999, Garcia sent Ghantous an e-mail regarding

late payments and liens. In the e-mail, Garcia advised that EMI had called him to warn that a

subcontractor was planning to put a lien on EMI’s property as a result of S&W’s failure to pay

the subcontractor’s bills. EMI also expressed concern that S&W was not providing vender

certificates as it had promised to do.

131. In an e-mail to Ghantous from Brant on December 6, 1999, Brant noted that one

of the key subcontractors on the Tiverton project, O’Connor Constructors, Inc. (“O’Connor”),

was owed $1.3 million and was demanding payment. O’Connor also told S&W that it was

reducing the number of hours it was devoting to the project. In the same e-mail, Brant disclosed

that other craftsmen, including pipe-fitters, and key subcontractors, including Power Piping,

were going to leave the project due to S&W’s failure to pay them. Brant concluded, “[L]ooks

like someone is going to have to make some major decisions on contractor payments very soon

or will look like ghost town here. My records show approximately $4.3 million due in

subcontractor payments alone not counting vendors.” Immediately after the e-mail was sent,

Ghantous notified Callahan, Rosol, an executive vice-president of S&W and Anderson that he

would review the impact of O’Connor’s reduction of hours on the project schedule. Ghantous,

noting the Company’s failure to pay the subcontractors, requested that Callahan, Rosol and

Anderson advise Ghantous “when we can get relief on payment.” Pursuant to the Company’s

policy on outstanding invoices, notice of all of these disputes was sent to Carroll, Smith and

Langford.

132. As a result of S&W’s failure to pay its subcontractors and vendors on the Tiverton

project, deliveries of materials were also delayed. Subcontractors found themselves sitting


42

around, although some were billing S&W at premium rates for doing so. This led to S&W

becoming even further behind in its schedule and its budget.

133. By December 13, 1999, trash was building up at the site and spilling out of the

dumpsters because S&W had not paid the bills of the trash hauler. As noted in an e-mail from

Rose Mary Eva to Ghantous dated December 13, 1999, “we have trash on the sides of the

overflowing dumpster - not a good impression for our expected visitors.” Ghantous quickly

replied that it was essential that S&W pay Waste Management, the trash hauler, on an expedited

basis.

134. One of the subcontractors with whom S&W encountered problems was MEI

Constructors (“MEI”), the electrical subcontractor on the project. In December 1999, Power

Piping proposed to replace MEI with a Power Piping affiliated electrical subcontractor, Sturgeon

Electric Company (“Sturgeon”).

135. Although Power Piping was having difficulty obtaining payment on its other

invoices, it was assured by S&W that these problems were temporary and that by April, 2000,

they would be cleared up.

136. Consequently, Sturgeon agreed to handle the project by deferring payment and

extending financing for a flat 2% for the amounts to-be-earned pursuant to the contract until

April 1, 2000, and to provide invoices on a weekly basis for time and materials only. Thereafter,

Sturgeon would return to traditional monthly invoicing and payment. The “rough order of

magnitude estimate” to complete the electrical work that was cited in the proposal letter was

$5,018,548, including a flat fee of $400,000 to cover Sturgeon’s overhead and profit. Further

“scope growth” (i.e., new work in excess of the $5,018,548) would be charged “at cost plus

10%.”


43

137. Accordingly, during the period January 1, 2000 through March 31, 2000, no

invoices were received by S&W from Sturgeon. However, S&W knew that it was incurring a

continuing and growing multi-million dollar liability to Sturgeon, but according to a confidential

source, no amounts were recorded as accounts payable to Sturgeon in the Tiverton financial

statements.

138. In early January 2000, Smith, in an obviously unguarded moment, not only

conceded that the Company had some significant problem projects, but also disclosed that he and

the Company were defrauding its shareholders by not disclosing the true nature of S&W’s

situation.

139. In a letter to the Minister of Petroleum & Mineral Resources of the Kingdom of

Saudi Arabia dated January 7, 2000, Smith disclosed:

Unfortunately, the news of our inability to resolve outstanding project settlements severely impacted our stock price since we had to announce a shortfall in earnings partially caused by the inability to recover these sums. This has meant a loss in market value of over $300 million. Another unfortunate consequence has resulted – we were forced to sell and leaseback our headquarters building in Boston – a location where we have spanned now three decades – as a result of the cash requirement to fund the losses. So far, I have been able to avoid disclosure of the fact that these losses are largely as a result of our difficulties with Aramco; but it is becoming increasingly difficult, and I remain hopeful of reaching a settlement before our Annual Meeting of Shareholders which is in May, 2000, so that we may both put this behind us. [emphasis added]

140. As bad as S&W’s financial problems were, they got worse during the first quarter

of 2000. On March 2, 2000, EMI notified S&W of defaults under Section 3.15 of the Turnkey

Contract in that subcontractors had placed liens on the Tiverton facility and the facility site and

demanded that S&W remedy the default. S&W was, of course, unable to cure the defaults and

failed to discharge the liens or timely pay the subcontractors involved.


44

141. During a meeting on March 14, 2000 between S&W and Sturgeon, S&W learned

that Sturgeon would be submitting its first invoices on April 1, 2000 for approximately $5

million. Moreover, Sturgeon advised S&W that the electrical work was not completed and that it

would cost over $3 million more to complete the work.

142. On April 7, 2000, Sturgeon submitted an invoice for $8.4 million and again

advised that more work was needed. During a telephone call between Rosol and Sturgeon,

Sturgeon projected the final cost of the electrical work at over $12 million. At that time,

according to CS-1, it was well known with S&W that its cost overruns on Tiverton exceeded $27

million.

143. At the same time, Smith and Langford were determined to conceal the Company’s

true financial picture from third parties. According to a confidential source who worked for

S&W as a construction vice-president before and during the Class Period (“CS-3”), in April

2000, Smith wrote a letter which employees were encouraged to show customers and vendors

that said S&W had straightened out its financial problems. However, nothing was further from

the truth. Within weeks, S&W filed bankruptcy and investors lost everything.

144. The reason why Smith and Langford were desperate to conceal S&W’s financial

condition was that they still hoped to sell the Company and trigger their change of control

provisions. At this time, Smith and Langford were negotiating with Jacobs and they were doing

their best to conceal the true state of the Company’s finances from that prospective purchaser.

145. However, during the course of conducting its due diligence, Jacobs requested a

series of meetings between its financial team and S&W’s auditor, PWC, to review, in particular,

TPPI and Tiverton. Following these meetings, John Prosser, the Chief Financial Officer of


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Jacobs, told Smith and Langford that S&W was essentially insolvent and that the only way

Jacobs would buy S&W is if the Company filed for bankruptcy.

146. At the same time these discussions were taking place, the Company issued, on

April 14, 2000, its 10-K for fiscal year 1999. The 1999 10-K reported revenue of $1.17 billion,

net income of $20.5 million, and net assets of $324.3 million. It reassured investors about

S&W’s long-term financial condition by touting the recent infusion of capital from the sale of

the Company’s headquarters and the Company’s backlog and highlighting newly awarded

contracts (without disclosing that the Company underbid for those contracts) although it did

caution that the Company had increased operating losses through 1999. The 10-K included an

unqualified audit opinion by PWC, dated February 14, 2000, attesting that the financial

statements had been prepared according to GAAP.

147. Following the meetings between PWC and Jacobs’ financial team, where Jacobs

questioned PWC’s accounting for TPPI and Tiverton, Robert Spear, PWC’s audit partner for

S&W, decided he had better re-examine these projects. Spear was particularly concerned when

he learned that Jacobs was insisting that S&W file Chapter 11 since Spear knew that this filing

would cause a stock price decline and possibly shareholder lawsuits. Thus, he feared that PWC’s

accounting would be scrutinized and that S&W’s investors would be even more disturbed by that

accounting than Jacobs.

148. With the sale to Jacobs and Chapter 11 looming overhead, Spear directed the

PWC team to hurriedly take another look at TPPI and Tiverton. Although TPPI was by far the

more egregious situation, there was no credible way for PWC to claim any recent change in the

TPPI situation to justify requiring that S&W change its accounting. Tiverton presented a better


46

opportunity for PWC to belatedly show backbone and independence and make a public showing

of correcting S&W’s accounting.

149. Thus, Spear seized on S&W’s cost overruns on the Tiverton project. Spear

advised Langford that these cost overruns had taken place in 1999 and should have been

incorporated into the 1999 financial statements. Because S&W knew of the cost overruns in

1999, PWC was going to force S&W to restate its 1999 financial statements. Langford was very

surprised at this since PWC had known that S&W had substantial cost overruns when PWC first

did the 1999 audit. However, Langford had no choice and S&W agreed to the restatement.

150. Ultimately, on April 30, 2000, S&W issued a press release announcing, among

other things, that it was going to “revise its 1999 financial results to include a provision for a

substantial cost overrun on an ongoing project.” The press release provided the following

explanation for the cost overrun:

Company officials were recently notified of an unanticipated cost overrun on a key project by a major subcontractor related to estimates to complete work during the first half of the current year. As a result, the Company conducted a thorough review of this project and, based on this review, the Company will record a provision of $27.5 million and will revise its 1999 financial statements and amend its 1999 Form 10-K.

The Company further announced that as a result of the allegedly unanticipated cost overruns and

operating losses, the Company was experiencing “liquidity problems” and was in discussions

with potential lenders.

151. In response to this announcement, the price of S&W common stock declined

precipitously, falling from $13.8125 per share to $6.25 per share, and continued to decline during

the next several trading days falling to as low as $2.50 per share.

152. Of course, these cost overruns were neither unanticipated nor previously

unknown, nor were they just discovered pursuant to a review. Smith & Langford knew of the


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cost overruns since Spring of 1999, and had been desperately trying to cope with these problems

while they hid them from investors and prospective buyers.

153. They had hid these problems so well that many investors refused to believe that

the decline in S&W stock was justified. Some comments at the time from the S&W Internet chat

room included:

The company has not filed Chapter 11. Just a short sellers rumor. In effect the company has little debt - only $20 million in bank debt and $20 million in a mortgage against the Houston building (worth itself $50 million). The cold storage operations will fetch $80-$100 million within a month or so. The pension fund is also overfunded by 150% which could amount to $50-$75 million. The only real issue is the banks want their $20 million and are playing hardball due to three earnings surprises. It is possible down the road but would only be temporary they are in not that much debt and do have substantial assets.

Great book value and strong desire to avoid Chapter 11. When they work out the money troubles, could be a quick turnaround, +100% from here.

If SW rebounds, the reward will be seeing go back to $30.

Is it possible for a company that has been in business since 1939, could be overblowing things a bit. Also that stock is not dropping that much anymore with low quantity activity. [A]bout the institutional trading, reading between the lines this could be a risky but profitable investment after panicers [sic] leave.

154. Moreover, S&W and PWC were notably silent about S&W’s biggest financial

fraud – TPPI. As shown, S&W had booked phantom revenue and receivables at TPPI, with

PWC’s knowledge and acquiescence, for over two years. Absent this phantom revenue and

receivables, S&W would have had earnings of negative $108.7 million for 1998 (rather than the

$49.3 million reported) and a net loss of $11.3 million for 1999 (rather than the $20.5 million of

net income it reported).


48

155. On May 8, 2000 the Company announced that it had signed the Letter of Intent

with Jacobs providing for the sale of substantially all of the Company’s assets in exchange for an

immediate $50 million secured revolving credit facility, assumption of substantially all of

S&W’s balance sheet liabilities and $150 million in cash and stock, and that S&W “intends to

file a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code after

the Company signs a definitive sale agreement with Jacobs, which is expected to occur later this

month.” Trading in S&W Stock was temporarily suspended.

156. On May 19, 2000, the first trading day after S&W’s announcement of its intention

to file for bankruptcy, the stock plummeted even further, closing at $.7031 per share. S&W

investors had lost everything. A proud one hundred and eleven year-old company had been

completely devastated and the destruction had been hidden until it was too late for S&W

investors to protect themselves.

157. As announced, on June 2, 2000, S&W and certain of its subsidiaries filed

voluntary petitions for reorganization relief in the Delaware Bankruptcy Court under Chapter 11

of Title 11 of the United States Code, 11 U.S.C. §§101 et seq.

158. The Shaw Group, Inc. (“Shaw Group”) eventually became the successful bidder

for substantially all of S&W’s assets in a sale proceeding under Chapter 11 of the Bankruptcy

Code. Accordingly, S&W’s asset sale agreement with Jacobs was terminated. In connection

with Shaw Group’s successful bid, Jacobs became entitled to a $9 million breakup fee and an

expense reimbursement not to exceed $1 million.

159. Under Shaw Group’s successful bid, Shaw acquired substantially all of S&W’s

assets and assumed certain liabilities of S&W with a total purchase price of approximately $38

million in cash and approximately $105.8 million of Shaw Group’s common stock. Shaw Group


49

also assumed liabilities with a book value of approximately $450 million and acquired assets

with a book value of approximately $600 million. Shaw Group also agreed to complete

substantially all of S&W’s contracts for current and future projects. Contrary to its pre-

bankruptcy representation of April 14, 2000 that it had net assets of $324.3 million, S&W now

admitted that its balance sheet liabilities actually exceeded its balance sheet assets. In the space

of two short months, over $300 million in alleged assets disappeared. Of course, those assets

never existed in the first place. Moreover, nearly $4 billion in claims have been filed against the

Company in Bankruptcy Court. Assuming that merely 20% of the $4 billion in claims are valid,

rather than a $300 million positive net worth, S&W would have had a negative net worth of $800

million. At even 10%, its net worth would be negative $400 million. This was not the most

stunning and sudden reversal in financial history, but instead was a stunning and sudden

disclosure of serious financial problems that had been deliberately hidden for almost two years.

160. Subsequently, the Securities and Exchange Commission (the “SEC”) commenced

an investigation into S&W’s financial reporting.

161. On November 1, 2000, S&W filed suit against Smith in the Middlesex County

Superior Court of Massachusetts to void Smith’s change of control agreement based upon his

responsibility for S&W’s financial demise.

DEFENDANTS’ FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD

Overview

162. S&W’s public disclosures during the Class Period were characterized by

numerous misstatements of financial results and condition, omissions of material adverse

developments, and deliberate misrepresentations of future prospects. Nonexistent revenues and

earnings were reported; massive losses went unreported or their disclosure was improperly


50

delayed; the determination of S&W’s operating liquidity was first hidden, then inadequately

disclosed; material operating failures were not disclosed; and, all the while, Smith and Langford

touted S&W’s backlog and fictional “improved margins” they expected to realize on that

backlog, which in reality was a series of money-losing projects with which they had saddled the

Company in order to maintain the backlog and grow market share.

163. The result of these material misstatements and omissions was that S&W’s

financial problems were hidden from the investing public and were, when disclosed, disclosed

inadequately. As a result, purchasers of S&W stock during the class period eventually lost

hundreds of millions of dollars when S&W’s financial collapse became known.

The January 22, 1998 Press Release

164. On January 22, 1998, S&W issued a press release reporting its results for the

quarter and year ending December 31, 1997 (the “January 1998 Release”). S&W reported

revenue for 1997 of $1,323,000,000, net income of $33.5 million, and earnings per share of

$2.59. Additionally, S&W reported backlog at December 31, 1997 of $2.5 billion.

165. The revenue and earnings figures reported in the January 1998 Release were

materially overstated because they were derived from false profit margins built into S&W’s

percentage of completion accounting method for booking revenues and costs. Smith and

Langford knew that these profit margins would never materialize due to the substantial number

of projects that had been bid and sold at a loss “to get the business” and grow market share.

166. S&W’s backlog figure was also materially misleading. In its Annual Reports on

Form 10-K, S&W attempted to downplay the materiality of backlog information with the

following boilerplate language:

Backlog figures for the registrant’s engineering, construction and consulting services segment historically have not been considered


51

by the registrant to be indicative of any trend in these activities nor material for an understanding of its business. At any given date, the portion of engineering and construction work to be completed within one year can only be estimated subject to adjustments, which can in some instances be substantial, based on a number of factors. Clients frequently revise the scope of the services for which they have contracted with subsidiaries of the registrant, especially on projects subject to regulatory approval or which require environmental permitting licensing. Scope increases and decreases of substantial magnitude are commonplace on such projects and directly affect backlog. Additionally, delays are common and affect the timing of when backlog would be translated into revenues. As a result, the aggregate of such figures in relation to registrant’s consolidated revenues could be misleading unless understood in light of the foregoing contingencies.

Despite this boilerplate caveat, the materiality of backlog information is obvious from the

manner in which S&W’s management, in public statements, press releases, discussions with

analysts and reports filed with the SEC, focus on the dollar amount of backlog and the

purportedly expected margins to be earned on work in backlog. The backlog information

reported by S&W was misleading because it misled investors into believing that S&W would

enjoy strong future growth when, in reality, the backlog represented a series of money-losing

projects that would be a drain on S&W’s bottom line. The January 1998 Release quoted Smith

as stating: “[O]ur anticipated margins in backlog are higher than they have been in several

years.” This statement was directly contrary to Smith’s knowledge that margins would in fact

decline, or be non-existent, due to the substantial number of jobs that had been bid and sold at a

loss “to get the business.”

167. At the same time that S&W was publicly reporting these results, comprehensive

internal financial reports were being distributed to approximately twenty S&W division heads

and top executives. The reports included financials broken out for all divisions, with details of

personnel costs, sales, income and working capital. According to CS-2, these internal reports


52

differed materially from, and “did not jibe” with the financial results reported publicly by Smith

and Langford. Plaintiffs believe from their investigation that these internal reports will add to

the evidence that the financial results publicly disclosed by Smith and Langford were known by

them to be false; however, these documents cannot be obtained without formal discovery in this

action.

168. The January 1998 Release was also materially misleading in its disclosure of

problems with the TPPI project. S&W had committed millions in working capital to purchase

and ship equipment and materials to Indonesia for the project. The January 1998 Release stated,

in reference to TPPI, that “activity on a major project has slowed due to the [Asian] financial

situation.” This statement was false since all work on TPPI had been suspended in the fourth

quarter of 1997. Moreover, S&W had been told to get out of its obligations to pay

subcontractors and for equipment. Thus, S&W knew TPPI was effectively, if not officially,

terminated and that S&W would receive no more payments on TPPI. Therefore, under FAS No.

5, S&W should have taken a charge for any losses on the project at that time. Instead, Smith and

Langford and Spear and PWC decided to book phantom revenue and receivables from the project

through 1998 to cover the equipment and subcontractor costs S&W was obligated to continue

paying under the terms of the agreement. The work had not merely “slowed.”

The 1997 10-K

169. On March 30, 1998, S&W filed with the SEC its Form 10-K for the year ending

December 31, 1997 (the “1997 10-K”), and issued its Annual Report. The 1997 10-K was

signed by Smith and Langford. The 1997 10-K reported revenues of $1,322,540,000, net income

of $33,510,000, and diluted earnings per share of $2.59. S&W reported on its balance sheet


53

total assets of $738,777,000, total liabilities of only $393,545,000, and total shareholders’ equity

of $345,232,000. S&W reported ending backlog for 1997 of $2,519,302,000.

170. S&W’s reported revenue and net income were materially overstated because they

were based on false profit margins built into S&W’s percentage of completion accounting

method for booking revenue and costs. Smith and Langford knew that these profit margins

would never materialize due to the substantial number of projects that had been bid and sold at a

loss “to get the business” and grow market share.

171. S&W’s backlog figure was materially misleading for essentially the same reason:

it misled investors into believing that S&W would enjoy continued strong revenues and revenue

growth and, implicitly, continued strong earnings and growth in earnings, when in reality, the

backlog represented a series of money-losing projects that would be a drain on S&W’s bottom

line.

172. The reported balance sheet figures were materially misleading because of S&W’s

improper failure to recognize known losses on projects that had been sold at a loss, and its failure

to promptly recognize losses on other projects when the losses became known. As a result,

retained earnings and shareholder equity were consistently overstated.

173. Additionally, the 1997 10-K materially misrepresented the level of concentration

in credit risk inherent in S&W’s business. S&W stated that it did “not consider the names of

clients to be material to investors’ understanding of the [Company’s] business taken as a whole”

and that “[c]oncentrations of credit risk with respect to trade receivables are limited due to the

large number of engineering and construction clients comprising the Company’s customer base

and their dispersion across different business and geographic areas.” In reality, however,

defendants knew but did not disclose that S&W’s business was built, for any reporting period,


54

primarily on a handful of massively large and risky contracts, in which defaults or losses could

have a material adverse impact on its financial position and business prospects.

174. The 1997 10-K also stated in the MD&A section that “[m]anagement believes that

the types of businesses in which the Company is engaged require that it maintain a strong

financial condition. The company has on hand and access to sufficient sources of funds to meet

its anticipated operating, dividend, share repurchase and capital expenditure needs. Cash on

hand and temporary investments provide adequate operating liquidity.” This statement was

materially misleading because it failed to disclose that due to massive undisclosed losses on the

TPPI project and other projects, S&W’s cash position and liquidity was precarious at year-end

1997.

175. The 1997 10-K disclosed that the TPPI contract had been suspended and that

TPPI represented $537.9 million of S&W’s 1997 year-end backlog. It failed, however, to

disclose that continuation of the project was not likely and failed to properly recognize a charge

for the project pursuant to FAS No. 5.

176. S&W’s 1997 Annual Report included Smith’s letter to shareholders, in which he

stated, inter alia:

• S&W reported earnings of $2.59 per share for 1997.

• “For the year just ended, revenue rose 14 percent to $1,323 million from the $1,165 million reported for 1996. Our operating income was $47.3 million for the year ended December 31, 1997, compared to an operating loss in 1996.”

• “New orders of $1.3 billion boosted current backlog to more than $2.5 billion and our new proposal and bid review processes enabled us to improve significantly the backlog’s projected operating margins over the previous year. In 1997, our operating margin improved to 3.6 percent, and over the near term we are targeting an operating margin


55

of 5 percent as well as a 15 percent return on equity.”

• “Although the new bidding and operational controls have contributed to current earnings and a stronger margin in backlog, this year’s results include recognition of the expected loss, totaling $1.20 per share, on a contract being executed by a joint venture in the Middle East. The provisions for anticipated losses on this contract are extremely disappointing. It is indicative of our improved financial performance that we can report strong earnings despite the adverse provision due to this joint venture contract.”

Smith’s statements were materially misleading because: (1) the revenue, earnings, operating

profits and operating margins reported were materially overstated due to false profit margins

built into S&W’s percentage of completion accounting method for booking revenues and costs;

(2) the claim that the backlog included stronger margins was false due to Smith’s practice of

bidding and selling jobs at a loss “to get the business”; and (3) Smith’s comments that the fact

that S&W was able to post strong earnings despite the recognition of $1.20 per share in contract

losses was highly misleading because (a) revenues and profits were misstated, as explained

above and (b) S&W had failed to properly recognize additional massive, undisclosed losses on

numerous contracts which resulted both from former management’s underbidding and from

Smith’s practice of selling jobs at a loss, and of which Smith, Langford and other senior S&W

executives were aware.





differed materially from and “did not jibe” with the financial results reported publicly by Smith


56


evidence that the financial results publicly disclosed by Smith and Langford were known by


action.

The March 17, 1998 Press Release

178. On March 17, 1998, S&W issued a press release announcing that it had been

awarded a $125 million contract for the Pha Lai II Power Plant outside of Hanoi in Vietnam (the

“March 17, 1998 Release”).

179. The March 17, 1998 Release was false and misleading in that it did not disclose

that S&W had underbid in order to obtain the Pha Lai project and that S&W knew that it would

actually lose money on the project.

The April 1998 Salomon Smith Barney Analyst Report

180. On April 1, 1998, Salomon Smith Barney raised its investment rating on S&W

following discussions with Smith and Langford and a presentation by them at the Salomon Smith

Barney Industrial Capital Goods Conference.

181. 000At the conference, Smith and Langford once again touted the Company’s

backlog and its growth potential. They also asserted that TPPI was possibly going to restart soon

because of an impending equity investment. Salomon Smith Barney repeated these

representations in its analyst report.

182. All of these statements were false and misleading because: S&W’s backlog figure

was materially misleading since it misled investors into believing that S&W would enjoy strong

revenue and earnings growth, when, in reality, the backlog represented a series of money losing

projects that would be a drain on S&W’s bottom line; and as to TPPI, Smith and Langford knew


57

the project was likely never to resume and they knew that S&W had improperly failed to

recognize and report substantial losses on the project.

The April 21, 1998 Press Release

183. On April 21, 1998, S&W issued a press release reporting financial results for the

quarter ended March 31, 1998 (the “April 1998 Release”). S&W reported first-quarter revenue

of $294 million, net income of $7.6 million and earnings per share of $0.59. S&W reported that

“backlog remained constant at $2.5 billion compared to December 31, 1997.”

184. The revenue and earnings figures reported in the April 1998 Release were





S&W’s backlog figure was materially misleading for essentially the same reason: it misled

investors into believing that S&W would enjoy continued strong revenue and earnings, when, in

reality, the backlog represented a series of money-losing projects that would be a drain on

S&W’s bottom line.

185. The reported revenue and earnings were also misleading because they included

phantom revenue and receivables on the TPPI project. The amount of TPPI phantom revenue

and receivables included within the reported revenue for this quarter is not disclosed and cannot

otherwise be deduced based upon the reported information. However, for the entire year of

1998, according to CS-1, S&W recognized $86.9 million in phantom revenue and receivables

from TPPI.


58

186. The April 1998 Release also stated that “[w]e . . . restructured the Process

Division to reflect suspension of the [TPPI] project.” However, it failed to disclose the material

facts that S&W had committed millions in working capital to this project, that work was unlikely

to continue, and that S&W had improperly failed to recognize and report substantial losses on the

project.









action.

The May 5, 1998 Press Release

188. On May 5, 1998, S&W issued a press release announcing that it had been

awarded a contract to execute pre-decommissioning activities for the Maine Yankee Atomic

Power Company (the “May 1998 Release”). Smith was quoting as saying: “This assignment, at

the first New England nuclear plant to go cold and dark, recognizes our competitive and safety

conscious construction capability”.

189. The May 5, 1998 Release was false and misleading in that it did not disclose that

S&W had underbid in order to obtain the project and that S&W knew that it would actually lose

money on the project.


59

The March 1998 10-Q

190. On May 12, 1998, S&W filed its Report on Form 10-Q for the quarter ending

March 31, 1998 (“the March 1998 10-Q”), signed by Langford. S&W reported revenue for the

quarter of $293,957,000, net income of $7,613,000, and earnings per share of $0.59. S&W also

reported total assets of $722,309,000, total liabilities of only $370,857,000, and shareholders’

equity of $351,452,000. Backlog was reported to be $2.5 billion, unchanged from December 31,

1997.

191. The revenue and earnings figures reported in the March 1998 10-Q were




of projects that had been bid and sold at a loss “to get the business” and grow market share. As

noted in paragraph 183, supra, the revenue and earnings figures were materially misleading for

the additional reason that they included a substantial amount of phantom revenue and receivables

from the TPPI project.

192. S&W’s backlog figure was materially misleading for essentially the same reason:

it misled investors into believing that S&W would enjoy continued strong revenues and earnings

going forward, when, in reality, the backlog represented a series of money-losing projects that

would be a drain on S&W’s bottom line.






60

194. The March 1998 10-Q also stated in the MD&A section that “[t]he Company

believes that the types of businesses in which it is engaged require that it maintain a strong

financial condition. The Company has on hand and has access to sufficient sources of funds to

meet its anticipated operating, dividend and capital expenditure needs. Cash on hand and

temporary investments provide adequate operating liquidity.” This statement was materially

misleading because, as a result of undisclosed losses, S&W’s liquidity and cash position were

becoming increasingly precarious.

195. The March 1998 10-Q stated that the TPPI project had been suspended; however,

it failed to disclose the material facts that S&W had committed millions of dollars in working

capital to the project, that the project was unlikely to be continued, and that S&W had

improperly failed to recognize and report substantial losses on the project.









action.


61

The July 21, 1998 Press Release

197. On July 21, 1998, S&W issued a press release announcing its financial results for

the quarter ending June 30, 1998 (the “July 1998 Release”). S&W reported revenue of $317.0

million, net income of $0.7 million, and earnings per share of $0.05 for the quarter.

198. The revenue and earnings figures reported in the July 1998 Release were





with the reported revenue and earnings information for the first quarter of 1998, the second

quarter information was also materially misleading because it included a substantial amount of

phantom revenue and receivables from the TPPI project.

199. The July 1998 Release also contained the following false and misleading

statements by Smith:

The decline in net income in the second quarter is primarily the result of book provisions for a few large projects initiated prior to the implementation of our new project financial controls.

* * * *

...Excluding the results of certain projects booked a few years ago, we are making significant strides in strengthening our overall profit margin. We continue to win profitable new business.

* * * *

... we expect strong orders on the second half of 1998. We expect the projects which have been suspended or slowed by clients in Asia will be replaced by large new projects in the Middle East, Europe and the Americas.


62

These statements were materially misleading because they were contrary to Smith’s knowledge

that, due to his policy of bidding projects at a loss in order to “get the business,” the impression

that S&W was poised to generate profitable new business was an illusion.

200. The July 1998 Release stated that the TPPI project had been suspended, but also

stated that “[d]iscussions continue with potential investors regarding the additional financing

which will enable the project to proceed.” Additionally, Smith stated that “[w]e believe that the

underlying economics of the TPPI ethylene plant are highly favorable and when the Indonesian

political and economic climate is stabilized, these underlying economics will be attractive to

equity investors. We do not expect construction to resume in 1998. When this project does

resume, we expect a substantial increase in earnings from our process sector.” These statements

were materially misleading for several reasons: (1) Smith knew the project was likely never to

resume; (2) Smith failed to disclose that S&W had substantial losses on the project because

under the terms of its agreement, S&W had committed millions in working capital to the TPPI

project to pay subcontractors and for equipment; and (3) Smith knew that S&W was improperly

recognizing phantom revenue and receivables from the project.

201. The July 1998 Release was also materially misleading because it failed to disclose

that the combination of disclosed and undisclosed losses being suffered by S&W was causing

increasingly severe problems with operating liquidity. By the summer of 1998, S&W was

having difficulty paying suppliers on the Tiverton project. This undisclosed problem was highly

material because such failures to pay subcontractors and suppliers could (and did) have

numerous adverse effects – delays in contract execution (resulting in additional costs to complete

projects, for instance), liens by subcontractors and suppliers, and ultimately the inability to

obtain additional operating funds, performance bonds, and new work.


63









action.

The August 4, 1998 Press Release

203. On August 4, 1998, S&W issued a press release announcing that it had been

selected to execute the decommissioning and decontamination of Maine Yankee Atomic Power

Plant (the “August 4, 1998 Release”). S&W touted the Maine Yankee project as “the largest

commercial nuclear plant decommissioning project awarded to date” with “an estimated value of

$250 million.” S&W also announced that the Maine Yankee project was the latest in a series of

nuclear decommissioning and decontamination project awards that positioned S&W “as the

leader in a market expected to reach $15 billion over the next ten years.”

204. In the August 4, 1998 Release, Smith was quoted as commenting, “[w]e are very

pleased to have won this important contract. The size and scope of this assignment recognizes

our program management, engineering and construction expertise, and commitment to safety. It

is especially fitting, that we are taking this project full circle.”

205. This press release was materially false and misleading because it failed to disclose

that because the Maine Yankee contract was bid and sold at a loss, it would represent a


64

significant drain on S&W’s bottom line. Moreover, by this time, S&W’s operating liquidity

working capital situation had become severely strained, as evidenced by the fact that it had

begun having difficulty paying suppliers on the Tiverton project. Failure to disclose this fact in

connection with the Maine Yankee project announcement was materially misleading because it

concealed the fact that S&W would be unable to adequately perform the contract, and would

incur additional losses as a result.

The June 1998 10-Q

206. On August 12, 1998, S&W filed its report on Form 10-Q for the quarter ended

June 30, 1998 ( the “June 1998 10-Q”), signed by Langford. S&W reported, for the quarter,

revenue of $317,004,000, net income of $651,000 and earnings per share of $0.05. S&W also

reported total assets of $754,640,000, total liabilities of only $409,698,000, and total

shareholders’ equity of $344,942,000.

207. The revenue and earnings figures reported were materially overstated because

they were derived from false profit margins built into S&W’s percentage of completion

accounting method for booking revenues and costs. Smith and Langford knew that these profit

margins would never materialize due to the substantial number of projects that had been bid and

sold at a loss “to get the business” and grow market share. These figures were also materially

misleading because they included phantom revenue and receivables from the TPPI project.

208. The June 1998 10-Q also reported backlog of $2,357,122,000. This figure was

materially misleading in that it induced investors to expect continued strong revenues and

earnings when, in reality, the backlog represented a series of money-losing projects that would

be a drain on S&W’s bottom line.


65





210. The June 1998 10-Q also stated, in the MD&A section, that “[t]he Company


financial condition. The Company has on hand and has access to sufficient sources of funds to

meet its anticipated operating, dividend and capital expenditure needs. Cash on hand and

temporary investments provide adequate operating liquidity.” This statement was materially

misleading because, by this time, S&W had insufficient liquidity to pay subcontractors and

suppliers on a timely basis, and was having difficulty in making required payments on several

projects, including Tiverton.

211. The June 1998 10-Q reported that the TPPI project “continues to be suspended.”

However, it also stated that “[t]he Company believes that it is unlikely that the project will be

cancelled,” although “[h]ad the project been cancelled as of June 30, 1998, the Company would

have recorded a pre-tax charge of approximately $54 million.” These statements were materially

false and misleading because (1) Smith knew the project was likely never to resume; (2) Smith

failed to disclose that S&W had substantial losses on the project because under the terms of its

agreement, S&W had committed millions in working capital to the TPPI project to pay

subcontractors and for equipment; and (3) Smith knew that S&W was improperly recognizing

phantom revenue and receivables from the project. Moreover, the $54 million “hypothetical”

loss figure was materially understated because it was derived from unreasonably high estimates

of the salvage value of the millions of dollars in equipment S&W had purchased for the project.


66

Indeed, S&W had already began selling its TPPI equipment for pennies on the dollar. Moreover,

the continued inclusion of the TPPI project in S&W’s backlog was materially misleading,

because it masked a substantial decline in the work S&W could be expected to perform.









action.

The October 26, 1998 Press Release

213. On October 26, 1998, S&W issued a press release announcing the award of two

contracts with an estimated combined value of $141 million for geothermal power projects

owned by affiliates of Cal Energy Company, Inc. in the Salton Sea geothermal area of Southern

California’s Imperial Valley (the “October 26, 1998 Release”). S&W announced that the

contracts included engineering, procurement and construction of a new 49 megawatt

geothermal plant and additional facilities. Smith was quoted as saying, “We’re pleased to have

won these important contracts,” said Smith. These assignments recognize our expertise in the

geothermal power market and our position as the leading electric power engineer and constructor

as the U.S. market responds to opportunities driven by the deregulation wave. Our power

business will have its best order year in 1998, and there is more to come in the next several


67

years, driven by new demand, and improvement of older facilities to be competitive in the free

market.”

214. The October 26, 1998 Release was false and misleading in that it did not disclose

that S&W had underbid in order to obtain the project and that S&W knew that it would actually

lose money on the project and that S&W’s 1998 orders were the result of Smith’s underbidding

policy and any such orders did not represent future growth but rather a drain on S&W’s bottom

line.


215. On October 27, 1998, S&W issued a press release announcing its financial results

for the quarter ending September 30, 1998 (the “October 27, 1998 Release”). S&W reported

revenues of $350 million, net income of $2.1 million, and earnings per share of $0.17 for the

quarter.

216. The revenue and earnings numbers were materially overstated because they were

derived from false profit margins built into S&W’s percentage of completion accounting method

for booking revenue and costs. Smith and Langford knew that these profit margins would never

materialize due to the substantial number of projects that had been bid and sold at a loss “to get

the business” and grow market share. These figures were also materially misleading because

they included phantom revenue and receivables from the TPPI project.

217. The October 27, 1998 Release highlighted growth in S&W’s backlog. The first

paragraph of the release emphasized that the company had received “new orders for the quarter

of $725 million.” It further trumpeted that “[b]acklog increased during the quarter from $2.4

billion to $2.7 billion.” Smith stated that:

[I]mprovements we have made company-wide to enhance our competitiveness and win new business with greater earnings


68

potential are manifested in our strong orders for the quarter and higher win rates.

* * * *

. . . On the operations side, we have strengthened our management team and improved backlog margins . . . .

* * * *

. . . We’ve reversed the post ’Asian flu’ decline of our backlog.

218. The October 27, 1998 Release statements concerning S&W’s backlog were highly

misleading. Although heralded as good news in terms of future revenues and earnings, in reality

the backlog increasingly represented a series of money-losing projects that would have a severe

negative impact on S&W’s bottom line. Given Smith’s knowledge that most, if not all, of the

new business had been sold at a loss, his statements concerning “greater earnings potential” and

“improved backlog margins” can only be viewed as deliberately false.

219. The October 27, 1998 Release also stated that “[a]s previously reported, work

remains suspended on the [TPPI project]. Discussions continue with potential investors

regarding additional financing for the project and with potential purchasers of the plan design

and equipment.” This statement was materially misleading because it failed to disclose that

resumption of work on the project was unlikely, that S&W had committed millions of dollars in

working capital to the project, and that S&W had failed to properly recognize and report

substantial losses on the project.







69




action.

The September 1998 10-Q

221. On November 13, 1998, S&W filed its Report on Form 10-Q for the quarter

ending September 30, 1998 (the “September 1998 10-Q”), signed by Langford. S&W reported

revenue of $350,443,000, net income of $2,168,000, and earnings per share of $0.17 for the

quarter. S&W reported total assets of $795,782,000, total liabilities of only $440,418,000, and

total shareholders’ equity of $355,364,000. S&W reported backlog of $2.7 billion.

222. The revenue and earnings figures were materially overstated because they were


for booking revenues and costs. Smith and Langford knew that these profit margins would never


the business” and grow market share. As noted above, the revenue and earnings figures were

also misleading because they included phantom revenue and receivables from the TPPI project.

223. Furthermore, the reported backlog figure was materially misleading because it

implied continued strong revenues and earnings, when in reality it represented a series of money-

losing projects that would be a drain on S&W’s bottom line. Additionally, the backlog figure

was inflated by approximately $500 million corresponding to the TPPI project.




70



225. The September, 1998 10-Q also stated, in the MD&A section, that “[t]he

Company believes that the types of businesses in which it is engaged require that it maintain a

strong financial condition. The Company has on hand and has access to sufficient sources of

funds to meet its anticipated operating, dividend and capital expenditure needs. Cash on hand

and temporary investments provide adequate operating liquidity.” This statement was materially

misleading because S&W’s liquidity and working capital situation was growing increasingly

difficult, with mounting problems in making required subcontractor and supplier payments on a

timely basis.

226. With respect to TPPI, the September 30, 1998 10-Q stated:

the [TPPI] project continues to be suspended pending resolution of financing issues by the client. If refinancing efforts are successful, it is possible that the project could be restarted during 1999. The Company has obtained approval to resell or use committed materials and procured equipment to reduce costs of project suspension. The Company has also had substantive discussions with potential purchasers of the olefins plant which constitutes the majority of the Company’s scope for the project. Had the project been cancelled as of September 30, 1998, the Company would have recorded a pre-tax charge of approximately $63 million . . . .

These statements were materially misleading because: (1) Smith knew the project was likely

never to resume; (2) Smith failed to disclose that S&W had substantial losses on the project

because under the terms of its agreement, S&W had committed millions in working capital to the

TPPI project to pay subcontractors and for equipment; and (3) Smith knew that S&W was

improperly recognizing phantom revenue and receivables from the project. Moreover, the

reported “hypothetical” loss of $63 million was materially understated because, inter alia, it was

based upon unreasonably high estimates of the salvage value of equipment and materials.


71









action.

The November 16, 1998 Press Release

228. On November 16, 1998, S&W issued a press release (the “November 1998

Release”) in conjunction with a voluntary early retirement program it was offering some

employees. The release touted S&W’s enhanced competitiveness. It stated:

In addition to the early retirement plan, Stone & Webster has taken a number of actions over the last three years to enhance its competitiveness. These include more aggressively pursuing emerging markets, such as nuclear plant decommissioning and decontamination, increased global reach and the development of a Competitive Leadership Process to streamline operations and improve business performance and project management.

229. The November 1998 Release was false and misleading because it misrepresented

that S&W’s success in obtaining new projects was due to its competitiveness, business

performance and project management when in fact, that success was due to Smith and

Langford’s policy of underbidding jobs.

The January 1999 Analyst Statement

230. In early 1999, Smith and Langford reported to analysts that S&W had “scrubbed

the backlog,” implying that all hidden losses had been recognized, and that it was achieving


72

higher margins in new backlog. These statements were materially false and misleading because

in reality, the Company had failed to recognize massive undisclosed losses that were embedded

in backlog, and the claim of higher backlog margins was simply false. These false and

misleading statements were communicated to the market in Morgan Stanley Dean Witter’s

January 27, 1999 Company report on S&W.


231. On January 26, 1999, S&W issued a press release announcing its financial results

for the year and quarter ended December 31, 1998 (the “January 1999 Release”). For the year,

S&W reported revenue of $1.25 billion, and net losses of $49.3 million. For the quarter, S&W

reported revenue of $287 million, net losses of $59.7 million, and net losses per share of $4.64.

S&W reported year-end backlog of $2.6 billion.

232. The revenue and earnings numbers reported in the January 1999 Release were


percentage of completion method for backing revenues and costs. Smith and Langford knew that

these profit margins would never materialize due to the substantial number of projects that had

been bid and sold at a loss “to get the business” and grow market share. The figures also

included $86.9 million of phantom revenue and receivables from TPPI. Thus, the Company’s

actual losses were substantially higher than those reported.

233. Absent the phantom revenue and receivables from TPPI, S&W would have

reported a net loss of $108.7 million for 1998, rather than the $49.3 million net loss it actually

reported.

234. S&W’s backlog figure in the January 1999 Release was materially misleading for

essentially the same reason: it misled investors into believing that S&W would enjoy continued


73

strong revenues, when, in reality, the backlog represented a series of money-losing projects that


235. The January 1999 Release quoted Smith as stating:

[I]n the past year we have significantly strengthened our operating management team, our project management operations and our global management systems, and we have become more competitive as a result of several corporate-wide initiatives. We believe that improved front-end project controls, higher margins in a newer, stronger backlog, and the new management team that is now completely in place will result in 1999 earnings approaching 1997 levels – the best in ten years – even under the current difficult market conditions in the hydrocarbon business.

Smith’s statement was materially misleading for several reasons. First, the reference to “higher

margins in a newer, stronger backlog” was directly at odds with Smith’s knowledge that, due to

his policy and practice of selling projects at a loss “to get the business,” the backlog in fact

represented a series of money-losing projects. Second, Smith’s references to new management

compounded the deceptive nature of his statements; in reality, because S&W was saddled with

money-losing contracts, new management was irrelevant.

236. Smith also attempted to explain S&W’s losses for 1998 as an isolated event

explainable by unanticipated circumstances that would not re-occur. He said:

Our financial performance in the fourth quarter was predominantly affected by a number of provisions and costs incurred to provide for completion of certain engineering and construction projects, as well as non-cash items including the incentive retirement program and change in estimated useful life of certain assets.

237. This statement was materially false and misleading because Smith knew that

S&W’s losses were not caused by isolated, unanticipated events but by his and Langford’s policy

of underbidding and the undisclosed serious problems at TPPI.

238. With respect to TPPI, the January 1999 Release stated:


74

As previously reported, work remains suspended on the [TPPI project]. Discussions continue with the owners and other contractors regarding a financial restructuring of the project. Stone & Webster has obtained a written release from TPPI to resell material and equipment procured for the project and has made considerable progress in the marketing and sale of major equipment and components.

These statements were materially misleading because: (1) S&W failed to disclose that there was

no likelihood that work on the project would be resumed; (2) S&W failed to disclose that it

failed to properly recognize and report substantial losses on the project; and (3) S&W failed to

disclose that its salvage efforts were yielding only pennies on the dollar. Moreover, by

December 1998, any slight chance that TPPI would ever restart was completely dead. Therefore,

a charge pursuant to FAS No. 5 should have been taken.









action.

The 1998 10-K

240. On March 26, 1999, S&W filed its Report on Form 10-K for the year ended

December 31, 1998 (the 1998 10-K”), and issued its Annual Report. The 1998 10-K was signed

by Smith and Langford. S&W reported revenues of $1,248,780,000, net losses of $49,302,000,

and losses per share of $3.83. S&W reported total assets of $834,682,000, total liabilities of only


75

$543,106,000, and total shareholders’ equity of $291,576,000. S&W reported backlog at year-

end of $2,636,000,000.

241. The revenue and earnings figures reported in the 1998 10-K were materially

overstated because they were derived from false profit margins built into S&W’s percentage of

completion accounting method for booking revenues and costs. Smith and Langford knew that


been bid and sold at a loss “to get the business” and grow market share. The revenue and

earnings figures were also materially misleading because they included $86.9 million in phantom

revenue and receivables from the TPPI project, as noted above. Had the phantom revenue and

receivables from TPPI not been reported, S&W’s net loss for 1998 would have been $108.7

million, or $8.43 per share.

242. The backlog figure reported in the 1998 10-K was materially misleading for








244. The 1998 10-K also stated in the MD&A section that “[m]anagement believes that

the types of businesses in which the Company is engaged require that it maintain a strong

financial condition. Management believes that it has on hand and access to sufficient sources of

funds to meet its anticipated operating, dividend, share repurchase and capital expenditure needs.


76

Management believes bank lines of credit totaling $115.2 [million] and cash on hand provide

adequate operating liquidity. At December 31, 1998 $106.4 [million] was outstanding under the

Company’s banking facilities.” This statement was materially misleading because it failed to

disclose S&W’s worsening liquidity problems, which were resulting in cost overruns,

undisclosed snowballing losses, and escalating liquidity and operating difficulties.

245. With respect to TPPI, the 1998 10-K stated:

In 1996, the Company entered into a contract with [TPPI] for construction of an integrated ethylene and olefins complex for $2.3 billion to be executed by a consortium of contractors. The Company’s portion of the total contract value was $710 [million]. In the fourth quarter of 1997, work on the project was suspended pending resolution of financing issues by the client. The TPPI project is included in the Company’s backlog in the amount of $451 [million].

* * * *

The TPPI project continues to be suspended pending resolution of financing issues by the client. If refinancing efforts are successful, it is possible that the project will restart on a phased basis in 1999 with execution of the Company’s scope of work commencing in 2000. The Company has obtained approval from the owner to resell or use committed materials and procured equipment to reduce costs of project suspension. The Company also has had substantive discussions with potential purchasers of the olefins plant which constitutes the majority of the Company’s scope for the project and, subsequent to the end of 1998, has signed a conditional memorandum of understanding to sell the plant. Had the TPPI project been cancelled as of December 31, 1998, and if resale of the olefins plant were unlikely to be completed, the Company would have recorded a pre-tax charge of $72.4 [million]....

These statements were materially misleading because: (1) there was no likelihood that work on

the project would resume; (2) sale of the olefins plant was unlikely; (3) S&W had failed to

properly recognize and report substantial losses on the project; and (4) the reported


77

“hypothetical” loss of $72.4 million was materially understated, because, inter alia, it was based

on unreasonably high estimates of the salvage value of materials and equipment.

246. S&W’s Annual Report for 1998 included Smith’s letter to shareholders in which

he stated, inter alia:

• “The Asian economic crisis, unstable oil prices, global political turmoil, reduced capital expenditures for petrochemical manufacturing and problems associated with contracts some of which were initiated more than three years ago, stalled our turnaround.”

• Revenue for 1998 was $1.2 billion, net loss was $49.3 million.

• “[W]e made substantial progress throughout 1998 toward becoming a premier global engineering, procurement and construction company well positioned for growth in revenue and a return to the positive track we began in 1996.”

• “[We] [i]ncreased our backlog to $2.6 billion and new orders to $1.9 billion”

• “Received the largest contract ever awarded for decontaminating and decommissioning a commercial nuclear power plant.”

• “With tighter front-end controls and higher as-sold margins in a stronger backlog, we expect in the new term to bring our profitability back to levels approaching those achieved in 1997.”

Smith’s statements were materially misleading because (1) S&W’s problems were primarily

internal, and not fundamentally attributable to external economic events such as the “Asian

economic crisis”; (2) Revenue and earnings (loss) figures reported were materially overstated

due to false profit margins built into S&W’s percentage of completion accounting method, as

explained above; (3) due to the substantial number of money-losing or defunct projects included

in backlog, Smith knew that S&W faced a bleak future and was not “well-positioned for growth


78

in revenues and a return to the positive track [it] began in 1997;” (4) S&W had failed to

recognize massive undisclosed losses on numerous contracts, of which Smith was aware (5) the

“increased backlog” and “stronger backlog” to which Smith referred was in reality a series of

money-losing projects that would be a drain on S&W’s bottom line; (6) liquidity problems were

escalating, ensuring further losses and inability to perform adequately on important projects; and

(7) the “profitability” achieved in 1997, to which Smith falsely promised a return, was in fact an

illusion, as explained above.





differed materially from, and “did not jibe” with the financial results reported publicly by Smith




action.


248. On April 15, 1999, S&W issued a press release announcing that, based on

preliminary analysis of its results for the first quarter of 1999, it expected to report an operating

loss of approximately $4.50 per share for the quarter (the “April 15, 1999 Release”). Smith

explained that the results reflected provisions of approximately $74 million to cover anticipated

costs of completing two international projects, and claimed that “[w]ithout these provisions,


79

earnings would have been approximately $0.25 per share, which is within the range of analysts’

estimates for the quarter.”

249. Smith’s statement that earnings would have been $0.25 per share for the quarter

was materially misleading because the earnings figure was derived from false profit margins

built into S&W’s percentage of completion accounting method for booking revenues and costs.

Smith and Langford knew that these profit margins would never materialize due to the

substantial number of projects that had been bid and sold at a loss “to get the business” and grow

market share. In addition, Smith’s efforts to explain the Company’s results as unanticipated and

caused by isolated events and unrelated to the Company’s fundamental business position were

materially false and misleading. The Company’s problems were due to Smith’s and Langford’s

undisclosed policy of underbidding and S&W’s problems at TPPI.

250. The April 15, 1999 Release also quoted Smith as stating that “[w]e expect the

improved margins included in our substantial backlog of work to be performed, and our

continuing drive to reduce costs and operating expenses, to produce improved results in the

second half of this year. . . . The Company’s expectations are that, excluding the provisions

mentioned above, earnings per share for the year would have been approximately $2.13 per

share.”

251. Smith’s statement was materially misleading because (1) the projected figure of

$2.13 per share in earnings (excluding the first quarter charge) was derived from false profit

margins built into S&W’s percentage of completion accounting method for booking revenues

and costs, and (2) the reference to “improved margins included in our substantial backlog” was

an illusion for the same reason. Smith and Langford knew that the “profit margins” would never

materialize and that, in fact, S&W’s backlog represented a series of money-losing projects that


80

would be a drain on S&W’s bottom line. In fact, approximately $450 million of that “substantial

backlog” was attributable to the TPPI project, which was dead and should have resulted in

additional charges of over $70 million. Instead, S&W continued to recognize substantial

phantom revenue and receivables on this defunct project. Smith and Langford knew these facts

but deliberately failed to properly reflect them in the Company’s publicly reported financial

results.









action.

The April 1999 DLJ Presentation

253. In April 1999, Smith gave a presentation at the Donaldson, Lufkin & Jenrette

Environmental Services and Engineering and Construction Conference in New York (the “DLJ

Conference”). At the DLJ Conference, Smith stated, inter alia:

• “As a way to broaden our offerings, we have built our business through internal growth and acquisitions. This provides kind of a flywheel toward the company’s balance sheet to enable us to do large and complex projects with some security for our clients.”

• “We did have strong orders in the second half of last year, actually doubling the year-ago pace. This order level, we


81

believe, will be sustained as a result of some of the markets that we are in and because we are a little more focused in terms of market targets than some of the other firms that seek more diversity . . . . [T]he order growth we are experiencing is very good and should contribute to a rebound in earnings to levels approaching those we achieved in 1997....”

• “Furthermore, we have a strong asset base. We own and operate some real estate that we also house engineering and construction people in, and we do have quite a bit of operating leverage. We think that at our current stock price of $22.50 we are undervalued and positioned for good appreciation when our earnings rebound after we resolve some of those recent problems I mentioned earlier.”

• “Given our backlog strength, our recent order level, cost reduction programs, new management team, the high level of hard assets in our backlog - - not construction equipment type assets but businesses or real estate - - I think it is easy to see why some analysts have said that Stone & Webster is greatly ’under-followed and under-valued.’“

• “Earnings from operations for 1999, excluding [extraordinary operating] charges, are anticipated to meet analysts expectations of $2.13 per share.”

• “On new bids, we are driving as-sold operating margins to 8-10% by being more focused and selective and sticking to the four core business areas that I am covering.”

• “Looking forward, our E&C earnings are expected to improve markedly in the second half of the year.”

• “We do have improved as-sold margins. They are approximately double the backlog margins that we had when I joined the company.”

Smith’s statements were materially misleading because: (1) due to Smith & Langford’s policy

and practice of bidding and selling jobs at a loss “to get the business,” order growth was not a

sign of strength but instead represented continuing losses that would drain cash and ultimately

undermine the Company’s ability to execute on existing contracts; (2) Smith’s claims of

improved margins in backlog were simply false; (3) S&W had failed to recognize massive


82

undisclosed losses and the reported numbers included undisclosed phantom revenue and

receivables from TPPI; (4) S&W was facing immediate liquidity problems which were leading to

snowballing losses as the Company failed to meet contract execution goals; and (5) Smith knew

that as 1999 progressed additional charges on money-losing contracts were inevitable and

therefore earnings would not improve, losses would be reported, and net worth would decline. In

addition, Smith knew the Company’s reported net asset strength was an illusion since it did not

reflect the losses at TPPI or the projects that Smith had bid at a loss.


254. On April 27, 1999, S&W issued a press release formally announcing its financial

results for the quarter ending March 31, 1999 (the “April 27, 1999 Release”). S&W reported

revenue of $266.1 million, net losses of $58.7 million, and net loss per share of $4.50. S&W

reported backlog of $2.5 billion.

255. The revenue and earnings (loss) figures were materially overstated because they

were derived from false profit margins built into S&W’s percentage of completion accounting

method for booking revenues and costs. Smith and Langford knew that these profit margins

would never be realized due to the substantial number of projects that had been bid and sold at a

loss “to get the business” and grow market share. Furthermore, S&W continued to recognize

and report nonexistent revenue from the TPPI project. The backlog figure was materially

misleading for essentially the same reason: it misled investors into believing that S&W would

enjoy continued strong revenues, when, in reality, the backlog represented a series of money-

losing projects that would be a drain on S&W’s bottom line.

256. The April 27, 1999 Release quoted Smith as stating: “[w]e expect to regain

momentum over the next few quarters, based on projects in negotiation and the stronger trends in


83

the power sector as well as recent increases in crude oil and petrochemical prices. We have also

taken steps to be more selective in avoiding high risk, lower margin business. We expect that the

improved margins included in our backlog, and our continuing drive to reduce costs and

operating expenses, will produce improved results in the second half of this year.”

257. Smith’s statements were materially misleading because he knew that, due to the

continuing practice of bidding and selling jobs at a loss “to get the business,” and due to the

substantial number of jobs that had been so bid and sold, the “improved margins” in the backlog

to which he referred were fictional. Additionally, he knew that S&W’s severe operating liquidity

problem would continue to escalate, undermining S&W’s ability to achieve improved results.

Smith knew that S&W’s downward slide would continue. Smith’s statements were also

materially misleading because he attempted to attribute S&W’s poor financial results to factors

external to S&W stating that they were due to a delay and disruption resulting from changes in

work scope and jobsite conditions, and the rework of certain deficiencies principally with vendor

supplied equipment, when in reality S&W’s poor performance was attributable to Smith’s and

Langford’s policy and practice of bidding jobs at a loss to “get the business.”









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action.

The May 5, 1999 Credit Suisse First Boston Analyst Report

259. On May 5, 1999, Credit Suisse First Boston issued an analyst report (the “May

1999 Analyst Report”) based upon discussions with Smith and Langford. The May 1999

Analyst Report touted S&W’s growing backlog and future market opportunities and profitability.

260. The May 1999 Analyst Report, based upon representations from Smith and

Langford, estimated 17% growth in S&W revenues in 1999 and increased operating margins.

The report also touted the Company’s strong balance sheet. It also stated that it was likely that

TPPI would be restarted soon. Lastly, it opined that S&W’s valuation was too low given its

strong growth prospects.

261. All of these representations were materially false and misleading since they failed

to explain that S&W’s growth was fueled by its underbidding policy. Therefore, the Company

would not be profitable in the future. In addition, TPPI was effectively, if not officially,

terminated and S&W’s valuation was not too low. Rather, it was too high since it was based

upon fraudulent financial reporting that overstated revenues, income and net assets.

The March 1999 10-Q

262. On May 13, 1999, S&W filed its Report on Form 10-Q for the quarter ended

March 31, 1999, signed by Langford. S&W reported revenues of $266,098,000, net losses of

$58,694,000, and net loss per share of $4.50. S&W reported total assets of $839,324,000, total

liabilities of only $607,825,000, and total shareholders’ equity of $231,499,000. S&W reported

backlog of $2.5 billion.


85



method for booking revenues and costs. Smith and Langford knew that those profit margins


loss “to get the business” and grow market share. Furthermore, S&W continued to report

substantial nonexistent revenue from the TPPI project.

264. The backlog figure was materially misleading for essentially the same reason: it

misled investors to believe that S&W would enjoy strong revenues going forward, when in

reality the backlog represented a series of money-losing ventures that would be a drain on






266. The March 1999 10-Q also stated in the MD&A section that “[m]anagement

believes that the types of businesses in which the Company is engaged require that it maintain a

strong financial condition. Management believes that it has on hand and has access to sufficient

sources of funds to meet its anticipated operating, dividend and capital expenditure needs. The

Company has bank lines of credit totaling $123.4 million . . . . As a result of losses experienced

in the fourth quarter of 1998 and the first quarter of 1999, the Company currently is not in

compliance with certain of its credit facility covenants and is in negotiations to restructure its

credit facilities. In addition, the Company had $106.0 million outstanding under its banking

facilities at the end of the quarter “ These statements were materially misleading because they


86

failed to disclose that there was no reasonable basis for management’s stated belief that the

company had sufficient liquidity for its operating needs. In fact, by this time, the combination of

disclosed and undisclosed losses had placed S&W on the verge of financial collapse. As

explained in detail in paragraph 86 supra., by mid-1999, S&W’s cash situation was so bad that it

had instituted continuous and rigorous review of accounts payable to decide which

subcontractors and suppliers absolutely had to be paid to keep S&W’s operations going, and

which could be delayed. Its inability to pay subcontractors and suppliers ensured snowballing

losses as the Company failed to meet contract performance requirements.

267. With respect to TPPI, the March 31, 1999 10-Q essentially reported the

statements made in the 1998 10-K, with the exceptions that, without any explanation, S&W

dropped the language suggesting that resumption of work on the project was possible and that

the backlog attributed to the TPPI project was reduced to $426 million. The March 31, 1999 10-

Q’s statements concerning TPPI were misleading for the same reasons explained in connection

with the 1998 10-K.









action.


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The June 28, 1999 Press Release

269. On June 28, 1999, S&W issued a press release announcing that it had been

awarded a $200 million contract from Cordova Energy Company to design and build a 500-

megawatt combined-cycle power plant in Cordova, Illinois (the “June 28, 1999 Release”).

270. In the June 28, 1999 Release, Smith stated that S&W was “gratified in Cordova

Energy’s confidence in our ability to deliver a cost-effective and technically superior solution,”

and that through S&W’s “extensive experience in developing power plants and in our value

engineering approach to save capital costs, we are able to offer our clients more capacity and

better performance for their investment.”

271. The June 28, 1999 Release was false and misleading in that it did not disclose that

S&W had underbid in order to obtain the Cordova Energy project and that S&W knew that it

would actually lose money on the project.


272. On July 26, 1999, S&W issued a press release announcing its financial results for

the quarter ending June 30, 1999. S&W reported revenues of $310.3 million, net income of $6.2

million, and earnings per share of $0.48 (the “July 1999 Release”). S&W reported backlog of

$2.6 billion.





the business” and grow market share. Furthermore, S&W continued to report phantom revenue

and receivables from the TPPI project. The backlog figure was materially misleading for


88

essentially the same reason: it misled investors to believe that S&W would enjoy continued

strong revenues, when in reality the backlog represented a series of money-losing projects that


274. The July 1999 Release quoted Smith as stating: “[B]ased on our improved

operating performance during the second quarter, coupled with our higher margin business in

backlog, we believe that our profitability will continue to increase throughout the remainder of

1999.” This statement was materially misleading because, as noted above, the “improved

operating performance” was an illusion created by false profit margins built into S&W’s

percentage of completion accounting method, and the “higher margins” in backlog were a

fiction.









action.

The June 1999 10-Q

276. On August 12, 1999, S&W filed its Report on From 10-Q for the quarter ended

June 30, 1999, signed by Langford. S&W reported revenue of $310,310,000, net income of

$6,214,000, and earnings per share of $0.48. S&W reported total assets of $851,892,000, total


89

liabilities of only $615,988,000, and total shareholders’ equity of $235,904,000. S&W reported

backlog of $2.6 billion.




be realized due to the substantial numbers of projects that had been bid and sold at a loss “to get

the business” and grow market share. Furthermore, S&W continued to report nonexistent

revenue from the TPPI project.


misled investors to believe that S&W would enjoy continued strong revenues, when, in reality,

the backlog represented a series of money-losing projects that would be a drain on S&W’s

bottom line.





280. The June 1999 10-Q also stated in the MD&A section that “[m]anagement


financial condition. The Company has on hand and access to sufficient sources of funds to meet

its anticipated operating, dividend, and capital expenditure needs. At June 30, 1999, the

Company had bank lines of credit available totaling $120.8 million . . . . In addition, the

Company had $106.5 million outstanding under its banking facilities at the end of the quarter.

Subsequent to the close of the second quarter, the Company finalized negotiations on a $230.0


90

million collateralized line of credit with a group of banks, which will provide operating funds

and letters of credit. Upon closing the new facility, the Company repaid the bank loans and

certain long-term debt that were outstanding at the end of the second quarter.” This statement

was materially misleading because the Company did not in fact have access to adequate

operating funds and because it failed to disclose that S&W was already in material default under

the new credit facility for failure to pay subcontractors and suppliers on a timely basis. As

explained in paragraphs 86-87 supra, by this time, S&W’s operating liquidity situation was so

bad that S&W had instituted a rigorous and continuous review of outstanding accounts payable

(some of which were 600 to 700 days overdue) to determine which vendors and subcontractors

could be stalled off to conserve operating funds and which had to be paid immediately to prevent

S&W’s business from collapsing, while vendors and subcontractors stopped work on S&W

projects, engaged in work slow-downs, and started filing liens. Smith and Langford had direct

knowledge of the severity of the operating liquidity situation, failed to disclose it, and instead

issued disclosures designed to reassure investors that the company had “on hand or access to”

funds sufficient not only to continue normal operations, but also to pay dividends and make

capital expenditures.

281. With respect to TPPI, the June 30, 1999 10-Q essentially repeated the statements

made in the March 31, 1999 10-Q, except that the backlog attributable to TPPI was reduced to

$410 million and the “hypothetical” loss as of June 30, 1999 was stated to be $75 million. The

statements concerning TPPI were materially misleading for the same reasons explained in

connection with the 1998 10-K.




91







action.


283. On October 27, 1999, S&W issued a press release announcing its financial results

for the quarter ended September 30, 1999 (the “October 27, 1999 Release”). S&W reported

revenue of $297.8 million, net losses of $6.9 million, and net loss per share of $0.52. S&W







nonexistent revenue from the TPPI project. The backlog figure was materially misleading for

essentially the same reason: it misled investors to believe that S&W would enjoy continued



285. The October 27, 1999 Release also stated:

To enhance liquidity and focus on its core competencies, the Company intends to sell its corporate headquarters building in


92

Boston, Massachusetts, and its cold storage business. Sale of these assets, which are currently carried on the Company’s books for $125 million, is expected to yield in excess of $300 million in gross proceeds.

Because of the losses in the third quarter, the Company requested waivers from its bank group regarding certain covenants in its principal credit agreement for which it is not in compliance, and the banks have waived those covenants until November 29, 1999. The credit agreement matures at the end of January, 2000. The Company will require additional short-term funding to continue normal operations, and it is in active discussions with its principal lenders to obtain such funding.

These statements were materially misleading because they failed to disclose that as of the end of

the third quarter, S&W was facing financial collapse. Its credit facilities were fully drawn, no

additional funds were available, and its lack of operating working capital made it impossible to

pay subcontractors, who were delaying work and filing liens against several S&W projects.

These failures in turn threatened impending defaults on major contracts, including the Maine

Yankee project and Tiverton, which would result in additional massive losses and unavailability

of credit and bonding to secure performance of additional work. Moreover, the expected

proceeds from the sale of S&W’s headquarters were committed to reduce bank indebtedness and

pay already past-due accounts, and would not be available to fund continuing operations.

Finally, although the October 1999 Release stated that S&W was negotiating with lenders to

provide funding beyond January 2000, it failed to disclose that due to impending defaults on

major projects and additional undisclosed massive losses, there was no reasonable likelihood that

adequate additional funding would be available. At the time of the release, Smith and Langford

both knew that S&W was facing imminent collapse.

286. The October 27, 1999 Release quoted Smith as stating:

[a] critical review of our backlog of fixed-price projects by our new operating management team revealed a few projects that are forecast to exceed their cost estimates upon completion. With


93

these provisions now made, we look forward to benefitting from the continued strengths in the electric power market as well as strong current performance in our consulting business.

* * * *

The unacceptable financial results of our engineering and construction business in the past 24 months were primarily caused by scope changes and cost increases on major international projects. The Company has taken strong measures to prevent these types of losses from recurring, including recruiting a new senior management team, revising bidding and contract execution procedures, implementing a more selective process to determine which prospects will be bid and establishing higher as-sold margins. The international projects that have severely impacted results are now complete with one exception, which should be competed this quarter, and should have no further negative impact on earnings.

* * * *

We continue to expect that the improved margins included in our substantial backlog of work will be realized, and our continuing drive to reduce operating expenses will improve financial results.

These statements were materially misleading in several ways. First, Smith’s claim that a “review

of backlog” had uncovered “a few” projects that would be completed at a loss was materially

misleading because it created the impression that a complete review had been conducted and that

all losses contained in the backlog had been recognized and charges had been taken, when, in

reality, the backlog contained further projects that were known to Smith and Langford to contain

massive losses that would ultimately have to be recognized and would severely impact S&W’s

revenues, earnings and net worth. Further, Smith’s claim created the impression that these “few”

projects had become unprofitable when, in fact, he knew they were bid on at a loss. Second,

Smith’s claim that new projects would be bid at “higher as-sold margins” was simply false. New

projects continued to be bid and sold at a loss “to get the business.” Smith’s statements were

intended to create the false impression that a complete house-cleaning had been accomplished


94

and that S&W was now poised to produce earnings unimpacted by the money- losing projects

included in the backlog, and to conceal the fact that further massive losses were on the horizon.









action.

The October 28, 1999 Press Report

288. Following S&W’s announcement that it was selling its corporate headquarters,

Smith reassured the public that S&W was not nearing insolvency.

289. During an interview with the Boston Globe on October 27, 1999, as reported in an

article dated October 28, 1999, Smith advised that the Company was not considering bankruptcy

and that S&W “didn’t want anybody to think we had some crisis that couldn’t be handled with

strong management.”

290. This statement was materially false and misleading because, as Smith knew,

S&W was insolvent and Smith knew that without an additional infusion of cash or a buyer, S&W

would have no choice but to file for bankruptcy.



95

291. On November 15, 1999, S&W filed its report on Form 10-Q for the quarter

ending September 30, 1999, signed by Langford. S&W reported revenue of $286,071,000, net

losses of $6,854,000, and net loss per share of $0.52. S&W reported total assets of

$872,665,000, total liabilities of only $646,293,000, and total shareholders’ equity of

$226,372,000. S&W reported backlog of $2.5 billion.



method for booking revenues and costs. Smith and Langford knew that those profit margins


loss “to get the business” and grow market share. Furthermore, S&W continued to recognize

nonexistent revenue and receivables on the TPPI project.


misled investors to believe that S&W would enjoy continued strong revenues, when, in reality,


line.





295. The September 1999 10-Q also disclosed that S&W’s liquidity and financial

condition had deteriorated. S&W reported that: losses incurred in the past 24 months had

negatively impacted S&W’s cash position; as of the end of the third quarter of 1999, S&W had

fully drawn the cash available to it under its credit facility; the amount of S&W’s past due trade


96

receivables had increased with certain of its vendors and subcontractors having delayed work to

be performed by them; the company had retained financial advisors to arrange interim and longer

term financing and to assist with asset sales to improve cash liquidity; the company was not in

compliance with certain covenants in its principal credit agreement and had received waivers of

those covenants until November 29, 1999; and the credit agreement would mature at the end of

January 2000 and S&W would require additional short-term funding to continue normal

operations, which it was attempting to obtain.

296. These disclosures were belated, inadequate and materially misleading. The

disclosures downplayed the severity of S&W’s situation by making it appear as if S&W was

merely experiencing cash flow problems that could be alleviated by a new credit agreement and

that it had problems with a limited number of vendors. S&W failed to disclose that its liquidity

problems had been ongoing for over one year, S&W was already in default on several major

projects (including Maine Yankee, Tiverton and others), the Company knew it was not going to

be able to obtain additional operating funds, the Company was effectively insolvent, the

Company was paying all of its vendors late, some of its accounts were as late as 600-700 days,

and that work stoppages and delays were rampant and widespread.

297. Moreover, the 10-Q provided investors with a false assurance that whatever

S&W’s cash flow problems, the Company still had over $300 million in net assets. This

representation gave shareholders comfort that the value of their S&W shares would be protected

even if S&W was unable to obtain financing. The Defendants knew this representation was false

because they knew that S&W’s net assets were fraudulently overstated.

298. With respect to TPPI, the September 1999 10-Q essentially repeated the

statements made in the June 30, 1999 10-Q, with the exception that the backlog attributed to the


97

project was reduced to $401.7 million and the “hypothetical” loss reported increased to $75.5

million. The statements concerning TPPI were materially misleading for the same reasons

explained in connection with the 1998 10-K.







evidence that the financial results publicly disclosed by Smith & Langford were known by them

to be false; however, these documents cannot be obtained without formal discovery in this

action.

The December 1, 1999 Restructuring Press Release

300. On December 1, 1999, S&W issued a press release (the “December 1999

Restructuring Release”) and announced that it had reached an agreement “with its principal bank

lending group to expand and extend its current credit facility”.

301. The December 1999 Restructuring Release stated:

Under the agreement, Stone & Webster’s borrowing facility has been increased by $30 million to a maximum of $160 million and extended through May 31, 2000. A portion of the new funding is available immediately, with the remainder to be provided in two tranches based on specific events expected to occur by the middle of December. The previous $130 million facility had been scheduled to expire in January 2000.

* * * *

Stone & Webster also announced that substantial progress has been made in the previously announced sale of its headquarters building in Boston. At present, the company is in negotiations with a


98

potential buyer and expects to conclude the sale in late December or early January. The sale of the building is expected to generate more than $185 million in proceeds, which will be used to reduce debt and for other general corporate purposes.

302. Smith was quoted as saying:

In addition to the actions we are taking to address our liquidity issues and establish a longer-term capital structure, we are also continuing to focus on winning and executing projects successfully. We have an excellent backlog of business, which has been further strengthened by the recent influx of new orders in our power business. We also are seeing improved markets for our process and environmental operations.

303. The release also touted S&W’s future growth by stating that in the last month

alone, “The Company announced approximately $500 million of new contract awards.” Smith

added that: “These new contracts speak well of Stone & Webster’s global recognition and of the

competencies of our people and our project execution”.

304. The December 1999 Restructuring Release was materially false and misleading in

that the expansion and extension it touted was actually a restructuring demanded by S&W’s

lenders because S&W was in a workout situation. The restructuring was done so S&W could

remain operational while it sold assets for the benefit of its lenders. All of the additional funds

under the agreement were committed to its lenders from S&W’s prospective headquarters sale.

305. S&W’s representation that the proceeds from its headquarters sale would be used

to reduce debt and for general corporate purposes was false and misleading since the proceeds

were committed to pay the very banks who were providing this credit facility, the purpose of

which was to keep S&W afloat until the headquarters was sold and the banks could obtain the

proceeds. The representation that this credit agreement was a reflection of the strength of

S&W’s business was an outright falsehood.


99

306. Smith’s statements about the strength of the Company’s business and its

competitive position were also outright falsehoods since he knew the Company’s new projects

were obtained by underbidding and that S&W was insolvent and on the verge of bankruptcy.

The December 16, 1999 ESOP Press Release

307. On December 16, 1999, S&W issued a press release announcing that it had sold

one million shares of its common stock held in treasury to its Employee Retirement Plan (the

“December 1999 ESOP Release”). The press release stated that the purchase price was

determined to be fair to the Retirement Plan in a fairness opinion delivered by Houlihan Lokey

Howard & Zukin. The press release also stated that S&W would receive in excess of $15 million

in new capital as a result of the transaction, and that “[t]he Company’s management believes that

operating results for FY2000 will meet current analyst expectations after the dilution resulting

from the additional shares.”

308. The December 1999 ESOP Release was materially misleading in several respects.

First, the statement that S&W would receive $15 million in additional capital was materially

misleading because it failed to disclose that, in essence, the money was already spent and that

S&W was facing imminent collapse due to lack of working capital and inability to raise

additional funds. Second, the statement that the purchase price of the S&W stock sold to the

Retirement Plan had been determined fair to the Retirement Plan was materially misleading

because it failed to disclose that the fairness opinion was not based upon consideration of S&W’s

true financial condition – it was on the verge of financial collapse, and its stock was essentially

worthless. Third, the statement that management believed “operating results would meet analyst

expectations” was materially misleading because management knew that, absent infusion of

significant additional funds – which they had no reasonable basis to believe would occur – S&W


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faced imminent bankruptcy, could not perform on its existing contracts, and, thus, could not

“meet analyst expectations” absent further manipulation of its financial statements.

The December 21, 1999 Building Sale Press Release

309. On December 21, 1999, S&W issued a press release (the “Building Sale Release”)

announcing that it expects the sale of its headquarters building at 245 Summer Street in Boston

to Fidelity Corporate Real Estate LLC (“Fidelity”) to close on December 28, 1999 and that the

sale will generate in excess of $185 million in cash proceeds and a significant after-tax gain for

S&W.

310. The Building Sale Release stated that “The Company plans to use the proceeds to

reduce debt substantially and for other general corporate purposes”.

311. It quoted Smith saying:

This milestone significantly strengthens our financial position. We believe we are well positioned to benefit from the many opportunities we see on the horizon for our engineering and construction business, particularly in the power market, which is experiencing rapid growth due to deregulation and environmental requirements.

312. The Building Sale Release was materially false and misleading in that it

represented that the sale would contribute to S&W’s future growth when, in fact, all of the

proceeds were committed to S&W’s existing lenders and even after payment of those amounts,

S&W would still be unable to pay its ordinary business expenses. In addition, Smith knew that

S&W was not well positioned for growth but instead was insolvent.

The December 28, 1999 Press Release

313. On December 28, 1999, S&W issued a press release announcing that it had been

awarded an engineering, procurement and construction (“EPC”) contract from AES Enterprise,


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Inc., for a 720-megawatt power plant to be built in Londonderry, New Hampshire and that the

award was the largest EPC contract S&W received in 1999 (the “December 28, 1999 Release”).

314. The December 28, 1999 Release was false and misleading in that it did not

disclose that S&W had underbid in order to obtain the project and that S&W knew that it would


The December 30, 1999 Salomon Smith Barney Analyst Report

315. On December 30, 1999, Salomon Smith Barney issued an analyst report based

upon discussions with Smith and Langford. The report questioned S&W’s explanation for its

poor results; however, it went on to tout:

• S&W’s $2.5 billion in backlog and the profitable, high margin nature of that backlog;

• S&W’s strong cash position after the sale of its headquarters; and

• S&W’s recently awarded high margin projects.

316. Based upon these representations, the report suggested a target price of $20.00 per

share for S&W.

317. The report was materially false and misleading in that: S&W’s backlog

represented money-losing projects obtained pursuant to S&W’s policy of underbidding; S&W

would still have no cash or liquidity after its headquarters sale; and its recently awarded projects

were obtained through its underbidding policy and did not represent profitable business, let alone

high margin business. In fact, S&W was insolvent at this point and was only still operating

outside bankruptcy while its lenders sought to recover the amounts owed them and S&W tried to

find a buyer.


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318. On January 25, 2000, S&W issued a press release announcing its financial results

for the quarter and year ended December 31, 1999 (the “January 25, 2000 Release”). For the

year, S&W reported revenue of $1.17 billion, net income of $20.5 million, and earnings per

share of $1.56. For the quarter, S&W reported net income of $79.8 million ($6.01 per share),

which included a gain of $151.3 million from sale of S&W’s headquarters building in Boston.

S&W reported backlog of $2.6 billion at year-end 1999.

319. The revenue and earnings figures reported were materially overstated because


accounting method of booking revenues and costs. Furthermore, the revenue and earnings

figures were materially overstated because S&W had reported another $53 million total in

nonexistent revenue from the defunct TPPI project during 1999. Absent this phantom revenue

and receivables from TPPI, S&W would have reported a net loss for 1999 of $11.3 million, or

$0.86 per share. The backlog figure was materially misleading for essentially the same reason: it

misled investors to believe that S&W would enjoy continued strong revenues, when in reality the


line.

320. The revenue and earnings numbers were also misleading because, although they

reflected a charge of $38 million for operating losses in the fourth quarter, they failed to reflect

additional losses known to Smith, Langford, and other S&W senior managers but not reported,

including but not limited to over $25 million in losses at the Tiverton project.

321. The January 25, 2000 Release quoted Smith as stating:

The results of our Engineering and Construction operations have improved significantly since the first quarter . . . . Provisions were


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taken for certain international projects in the first quarter, for which we are pursuing recovery from clients. We expect to realize recovery of a substantial portion of those costs in year 2000.

* * * *

. . . [W]ith our solid backlog of business, strength in the power sector, and anticipated improvements in process and environmental markets, we are well-positioned for the year 2000.

* * * *

Based on the aggressive actions we took in 1999 to reduce debt and overhead costs and strengthen our core engineering, construction and consulting businesses we are well prepared to compete in today’s and tomorrow’s improving global environment and pursue new opportunities as a strong, revitalized enterprise.

* * * *

We have made substantial progress in implementing our financial restructuring plans announced after our third quarter. Our liquidity has been improved through the sale of assets, the renegotiation of our bank facilities through May 31, 2000, and the sale of stock to our Retirement Plan. Our improved financial position has been reaffirmed to strengthen of our business and we have expanded our bonding capability with new surety arrangements. The system and controls we have implemented to reduce the number of non-performing projects and the continued reductions of overhead costs position the company for improved financial performance in 2000. When the construction markets return from their current 25 year lows, we will be one of the top performing firms in the industry.

These statements were materially misleading because: (1) performance of the Engineering &

Construction business had not improved, but instead was characterized by as yet undisclosed

massive losses and was crippled by lack of working capital; (2) S&W did not in fact expect to

recover any substantial portion of charges it took in 1999 from clients; (3) backlog was not

“solid”, but instead consisted of a series of defunct or money losing projects; (4) backlog was

irrelevant because S&W lacked the working capital to proceed with the projects; and (5) S&W’s


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efforts at improving liquidity had failed to accomplish anything but paying certain bank

indebtedness, and no new working capital had been obtained or was likely to be obtained.









action.


323. On March 20, 2000, S&W issued a press release (the “March 20, 2000 Release”)

announcing that it had been selected as the engineering, procurement and construction (“EPC”)

contractor by AES Enterprises, Inc., for a 730-megawatt power plant to be built in Granbury,

Texas.

324. In the March 20, 2000 Release, Smith stated that the selection showed S&W’s

“core competency regarding engineering and construction services in the power business.”

325. The March 20, 2000 Release was false and misleading in that it did not disclose

S&W had underbid in order to obtain the project and that S&W knew that it would actually lose

money on the project.


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The March 30, 2000 NT 10-K

326. On March 30, 2000, S&W filed a form NT 10-K, signed by Langford, announcing

that its Report on Form 10-K for the year ending December 31, 1999 would be filed late. In the

Form NT 10-K, S&W reported information concerning the financial results of its Engineering,

Construction and Consulting business. It reported revenue of $1.168 billion, income from

continuing operations of $15.3 million ($1.17 per share), which included $92.2 million ($7.03

per share) from the sale of S&W’s corporate headquarters building, an operating loss of $115

million for 1999, and backlog of $2,574,000,000 at year-end.

327. The Form NT 10-K also stated that the results for 1999 included charges totaling

$122.6 million, including $74.2 million in the first quarter, $10.4 million in the third quarter, and

$38.0 million in the fourth quarter.

328. These disclosures were materially misleading because: (1) the revenue and

earnings (loss) figures were materially overstated because they were derived from false profit

margins built into S&W’s percentage of completion accounting method and included $53 million

in nonexistent revenue from TPPI; (2) the backlog did not represent strong revenues going

forward, but instead a continuing series of losses; and (3) the reported charges failed to include

additional massive losses of which Smith, Langford and other senior S&W executives were

aware.

The 1999 10-K

329. On April 14, 2000, S&W filed its Report on Form 10-K for the year ended

December 31, 1999, signed by Smith & Langford. S&W reported revenue of $1,167,848,000,

net income of $20,472,000, and earnings per share of $1.56. S&W reported total assets of


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$933,296, total liabilities of only $608,947,000, and total shareholders’ equity of $324,349,000.

S&W reported backlog of $2,574,469,000.




materialize because of the substantial number of projects that had been bid and sold at a loss “to

get the business” and grow market share. The revenue and earnings (loss) numbers were also

materially misleading because they failed to include additional massive losses known to Smith,

Langford, and other senior S&W executives. Furthermore, as noted above, the revenue figure

included $53 million in phantom revenue and receivables from the defunct TPPI project, without

which S&W would have reported a net loss for 1999 of $11.3 million ($0.86 per share). The

backlog figure was materially misleading because it misled investors to believe that S&W would

expect continued strong revenue, when, in reality, the backlog represented a series of money-

losing or defunct projects that would be a drain on S&W’s bottom line.





332. With respect to S&W’s operating liquidity, the 1999 10-K stated:

As of the end of the third quarter of 1999, the Company had fully drawn the cash available to it under its credit facility and the amount of the Company’s past due trade payables had increased, with certain of the Company’s vendors and subcontractors having delayed work to be performed by them. As a result, provisions were established in the fourth quarter of 1999 for acceleration of certain of the affected projects. In order to improve the Company’s cash liquidity, the Company retained financial advisors


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who are continuing to work with the Company to arrange both interim and longer term financing, to restructure the Company’s balance sheet and assist with the planned sale of Nordic.

On November 29, 1999, the company reached an agreement with its principal bank-lending group to expand and extend its current credit facility. Under the agreement, the borrowing facility was increased by $30.0 to a maximum of $160.0 and extended through May 31, 2000. Upon sale of the Boston headquarters building, $140.0 of borrowings was repaid permanently reducing the amount available to be borrowed to $20.0. As of December 31, 1999, the entire $20.0 available for direct borrowings had been borrowed and $88.2 of letters of credit were outstanding under this new agreement. In addition, at December 31, 1999, $7.2 of letters of credit were outstanding under other bank arrangements. As of December 31, 1999, the company had foreign subsidiary banking facilities available totaling $8.4 of which $2.8 was utilized. The available amount for issuance of letters of credit was $11.8 as of December 31, 1999.

The Company has experienced recurring operating losses and liquidity problems during the past year. To address these issues, on April 14, 2000, the Company completed negotiations and entered into an agreement with its current lending group to extend the credit facility to January 31, 2001. The amended credit facility contains certain quarterly financial covenants and stipulates that proceeds from the sale of the discontinued operation will be used to repay the outstanding direct borrowings and to provide support to the lending group for the Company’s outstanding letters of credit. The remaining proceeds will be used to enhance the Company’s working capital position. The credit agreement also requires the Company to deposit with the lending group $ 5.0 per month for three months beginning in October 2000, as additional support for the Company’s letters of credit.

These statements were materially misleading because they suggested that S&W’s liquidity crisis

had been resolved by the extension and amendment of its credit facility, when, in reality, S&W

was out of cash, unable to pay its bills and unable to continue normal operations absent a sale.

April & May 2000: S&W’s Financial Collapse Is Finally Revealed

333. On April 30, 2000, S&W issued a press release announcing, among other things,

that it “will revise its 1999 financial results to include a provision for a substantial cost overrun


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on an ongoing project.” The press release provided the following explanation for the cost

overrun:

Company officials were recently notified of an unanticipated cost overrun on a key project by a major subcontractor related to estimates to complete work during the first half of the current year. As a result, the Company conducted a thorough review of this project and, based on this review the Company will record a provision of $27.5 million and will revise its 1999 financial statements and amend its 1999 Form 10-K.

S&W further reported that due to the additional charge and previously reported operating losses,

it was experiencing liquidity problems and absent an agreement with subcontractors extending

terms of payment, its ability to continue as a going concern would be in question.

334. There was no explanation how a $27.5 million charge could cause liquidity

problems for a company that only eleven days earlier had reported over $20 million in net

income and net assets over $324 million.

335. In response to this announcement, the market price of S&W’s common stock fell

from $13.8125 to $6.25 per share. The share price continued to decline during the next several

trading days, falling as low as $2.50 per share.

336. On May 8, 2000, S&W issued a press release announcing that it had signed a

letter of intent with Jacobs Engineering Group regarding a proposed transaction pursuant to

which Jacobs would acquire substantially all of S&W’s assets in exchange for an immediate $50

million secured revolving credit facility, assumption of substantially all of S&W’s balance sheet

liabilities, and $150 million in cash and stock. S&W announced that in conjunction with this

transaction, it intended to file a voluntary petition for bankruptcy reorganization under Chapter

11.


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337. Despite the fact that it had reported over $324 million in total shareholders’ equity

in its audited financial statements for 1999 filed with its 1999 10-K, the May 8 press release

stated:

Stone & Webster cautioned that because the proposed sale of assets is expected to occur in the context of a pending Chapter 11 case, it is not possible to determine what value if any will ultimately be received by Stone & Webster’s stockholders.

Thus, it became suddenly apparent that S&W’s public statements, press releases, and financial

disclosures filed with the SEC had been grossly misleading. The market reacted accordingly –

on May 19, 2000, the first trading day after S&W’s announcement of its intention to file for

bankruptcy, the price of S&W’s shares plummeted to just over 70 cents.

338. The defendants’ materially false and misleading disclosures had operated to

conceal from the market the fact that S&W was insolvent, its $324 million of net assets was a

mirage, and its common stock was worthless. The worthlessness of the shares was confirmed in

connection with S&W’s Chapter 11 case.

339. By the time S&W’s balance sheet assets and liabilities were transferred to the

eventual buyer, Shaw Group, it was apparent that those balance sheet assets and liabilities were

roughly equivalent. This was a sharp contrast to the $324 million in net assets reported in April.

In addition, over $4 billion in off-balance sheet liabilities were registered with the Delaware

Bankruptcy Court.

340. Thus, a company that had reported total assets of $915.3 million, total liabilities

of only $610.3 million, and total shareholders’ equity of $305 million dollars in its audited

financial statements on May 9, 2000 in reality had a negative net worth which if only 20% of the

claims are valid would be as much as $800 million. Stronger evidence of a massive fraud is hard

to imagine.


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PRICEWATERHOUSECOOPERS’ PARTICIPATION IN THE FRAUD

341. Plaintiffs incorporate by reference all allegations above as if fully set forth herein.

342. Coopers and Lybrand, which merged with PriceWaterhouse in 1998 to form

PWC, served as S&W’s purportedly “independent” outside auditor for over 50 years. In recent

years, PWC received over $1 million in fees per year from S&W for auditing, tax and other

consulting services.

343. As a result of its longstanding relationship with S&W and the nature of the

accounting and auditing services rendered to the Company, PWC personnel, including Robert

Spear, the PWC audit partner responsible for the S&W account, were regularly present at S&W’s

corporate headquarters throughout the year and had continual access to and knowledge of

S&W’s private and confidential corporate financial and business information, including internal

monthly financing statements, Board minutes and internal memoranda, and thus was aware of

the true facts as alleged herein concerning the true nature of S&W’s actual financial condition

and business prospects. PWC therefore knew of or recklessly disregarded the following adverse

facts concerning S&W that rendered the Company’s reported financial results during the Class

Period, including the Company’s 1997, 1998, and 1999 financial statements (collectively

referred to as the “Financial Statements”) and PWC’s unqualified opinions thereon, materially

false and misleading:

(1) That S&W’s pattern of cost overruns and associated charges suggested that S&W was either underbidding contracts purposely, in which case, losses should have been booked to the income statement and the balance sheet, or S&W was unable to estimate costs accurately in which case they violated GAAP by using the percentage of completion method. In addition, PWC knew that S&W’s explanations for these charges were false and misleading in that S&W consistently attempted to blame these charges on “unanticipated” events that were the


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responsibility of third parties, rather than the fault of S&W.

(2) That S&W was booking phantom revenue and receivables from the TPPI project and that S&W’s disclosures were incomplete because S&W never disclosed that it had booked $86.9 million of revenue in 1998 and $53 million of revenue in 1999. That absent that revenue, S&W would have reported a net loss of $108.7 million for 1998 (rather than the net loss of $49.3 million actually reported) and a net loss of $11.3 million for 1999 (rather than the net income of $20.5 million actually reported).

(3) That S&W was having significant cash flow problems, starting in 1998, which by1999 caused S&W to fall as far as 600-700 days behind in paying some vendors and resulted in the need for special approval by the corporate controller before any vendor was paid, thus rendering S&W’s public statements about its cash and liquidity position false and misleading.

(4) That S&W’s disclosures regarding TPPI were purposely misleading from the outset. That when S&W announced that work on TPPI had slowed, it had actually been suspended. That when S&W announced that it believed the project was likely to resume, it had no basis for this claim as S&W had been told to terminate its equipment and subcontractor agreements. That S&W had no basis for claiming it could recover $332 million from equipment sales as it was selling the equipment for a fraction of that amount.

(5) That there were cost overruns, delays, subcontractor liens, and work stoppages at the Tiverton project throughout 1999 and early 2000 as a result of S&W’s inability to pay its bills.

(6) That S&W’s disclosures about its restructured credit agreement in November 29, 1999 and headquarters sale were both false and misleading in that S&W mislead investors by claiming that funds from the agreement and sale would be available for general corporate purposes when all of those funds were used up or committed to S&W’s lenders.

(7) That S&W’s statements about its growth prospects, particularly in late 1999, were false and misleading since


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S&W was in a workout situation with its lenders, was on the verge of bankruptcy, and would have to file if it could not find a buyer.

(8) That S&W, on the verge of bankruptcy, sold 1 million shares of treasury stock to its employee retirement plan when S&W was effectively insolvent and on the verge of bankruptcy, and that S&W obtained a fairness opinion on the transaction by supplying its investment banker with false and outdated financial information.

344. Based upon PWC’s knowledge of these facts, PWC knew, or recklessly

disregarded, that throughout the Class Period S&W fraudulently reported revenue and income,

had a policy and practice of underbidding projects, failed to disclose the inevitable losses

associated with its backlog figure, and also fraudulently reported its net assets.

345. Nonetheless, PWC issued an unqualified audit opinion dated February 12, 1998

on S&W’s 1997 financial statements in which it stated that the financial statements were

presented in conformity with GAAP and that PWC’s audit was performed in accordance with

Generally Accepted Auditing Standards (“GAAS”):

We have audited the consolidated financial statements and the financial statements schedule of Stone & Webster, Incorporated and Subsidiaries listed in Item 14 of the Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financing statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


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In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stone & Webster, Incorporated and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.

346. PWC also issued an unqualified audit opinion dated February 12, 1999 on S&W’s

1998 financial statements in which it stated that the 1998 financial statements were presented in

conformity with GAAP and that PWC’s audit was performed in accordance with GAAS:

In our opinion, the accompanying consolidated balance sheets and related consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Stone & Webster, Incorporated and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluation the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.

347. PWC also issued an unqualified audit opinion dated February 14, 2000 on S&W’s

1999 financial statements in which it stated that the 1999 financial statements were presented in

conformity with GAAP and that PWC’s audit was performed in accordance with GAAS:

In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 14 (a) (1) (i)


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present fairly, in all material respects, the consolidated financial position of Stone & Webster, Incorporated, and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14 (a) (1) (ii) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.

348. PWC stated in its “Report of Independent Accountants” that its audit of S&W’s

financial statements was conducted in accordance with GAAS; that S&W’s financial statements

for the year-ended December 31, 1999 were presented in accordance with GAAP and, as a result

of their planning and performance of the audit, they had obtained reasonable assurance that

S&W’s financial statements were free of material misstatement.

349. PWC turned a blind eye to Smith and Langford’s systemic and pervasive scheme

of underbidding projects, their fraudulent inflation of S&W’s backlog, and their misleading

statements about revenue and net assets. PWC issued unqualified audit opinions on S&W’s

Financial Statements, even though PWC knew or recklessly disregarded the fact that: (a) the

financial statements had not been prepared in conformity with GAAP and did not present fairly,

in all material respects, the financial position of S&W and its subsidiaries as of December 31,


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1997, December 31, 1998 and December 31, 1999, and the results of their operations and cash

flow for the periods ending on those dates; and (b) PWC had not audited S&W’s Financial

Statements in accordance with GAAS.

350. Among other things, PWC knew or recklessly disregarded the fact that S&W’s

Financial Statements violated GAAP and were materially false and misleading and inherently

unreliable because, as more fully described in paragraph 339 above, S&W fraudulently

recognized and reported revenue, and fraudulently reported net assets and made misleading

statements about backlog. In addition, PWC’s approval of S&W’s usage of percentage-of-

completion accounting violated GAAP because SOP 81-1 requires an entity reporting under this

methodology to be able to “to determine costs incurred on a contract with a relatively high

degree of precision.” PWC, as independent auditors, should have required that S&W convert to

the completed contract method for certain contracts, including TPPI, pursuant to SOP 81-1.

PWC’s failure in this regard also violated Statement on Auditing Standards (“SAS”) No. 69,

“The Meaning of ’Presents Fairly in Conformity With Generally Accepted Accounting

Principles’ in the Independent Auditor’s Report.”

351. In certifying S&W’s Financial Statements, PWC also falsely represented that its

examinations were made in accordance with GAAS. Under the AICPA Audit and Accounting

Guide for Construction Contractors, the auditor is required to:

(1) critically review representations of management, (2) obtain explanations of apparent disparities between estimates and past performance on contracts, experience on other contracts, and information gained in other phases of the audit, and (3) document the results of work in these areas.

GAAS provides that accounting data alone is not sufficient to support an opinion on financial

statements (SAS Nos. 31 and 48, AU §326.16). Before rendering an opinion, the auditor must


116

obtain evidential matter to support the financial statements. “Evidential matter” consists of the

underlying accounting data and all corroborating information available to the auditor. (AU

§326.15). Corroborating evidential matter includes both documents obtained during the

fieldwork and information obtained from inquiry, observation, inspection and physical

examination. (AU §326.17).

352. In addition, the Guide provides that the auditor should review at least the

following information:

• A review of project engineer reports and interim financial data, including reports and data issued after the balance sheet date, with explanations for unusual variances or changes in projections. Of particular importance would be a review of revised or updated estimates of cost to complete and a comparison of the estimates with the actual costs incurred after the balance sheet date.

• A review of information received from customers or other third parties in confirmations and in conversations about disputes, contract guarantees, and so forth that could affect total contract revenue and estimated cost to complete.

• Discussions with the contractor’s engineering personnel and project managers who are familiar with, and responsible for, the contract in process.

• A review of the reports of independent architects and engineers.

• A review of information received from the contractor’s attorney that relates to disputes and contingencies.

AICPA Accounting Guide for Construction Contractors: Major Auditing Procedures for Contractors.

353. PWC failed to comply with GAAS because it failed to take the steps identified

above as required by GAAS and failed to design its audit plan to provide reasonable assurance

of detecting material error as required by SAS No. 82 and AU §316. Based upon the numerous

red flags set forth below, GAAS required PWC to develop an audit plan that accounted for the


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risk that S&W’s financial statements included misstatements arising from fraudulent financial

reporting. (AU §315.16-18). At a minimum, PWC was required to complete the field work

described above. It did not do so. These red flags included:

(1) That S&W’s pattern of cost overruns and associated charges suggested that S&W was either underbidding contracts purposely, in which case, losses should have been booked to the income statement and the balance sheet, or S&W was unable to estimate costs accurately in which case they violated GAAP by using the percentage of completion method. In addition, PWC knew that S&W’s explanations for these charges were false and misleading in that S&W consistently attempted to blame these charges on unanticipated events that were the responsibility of third parties, rather than the fault of S&W.





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(5) That there were cost overruns, delays, subcontractor liens, work stoppages at the Tiverton project throughout 1999 and early 2000 as a result of S&W’s inability to pay its bills.


(7) That S&W’s statements about its growth prospects, particularly in late 1999, were false and misleading since S&W was in a workout situation with its lenders, was on the verge of bankruptcy, and would have to file if it could not find a buyer.

(8) That S&W, on the verge of bankruptcy, sold 1 million shares of treasury stock to its employee retirement plan, when S&W was effectively insolvent and on the verge of bankruptcy and that S&W obtained a fairness opinion on the transaction by supplying its investment banker with false and outdated financial information.

354. Other red flags were present at S&W, including (i) motivation for management to

engage in fraudulent financial reporting such as tying bonuses, stock options and other incentives

to report unduly aggressive targets for operating results, financial position or cash flow; (ii) a

practice by management of committing to analysts, creditors and other third parties to achieve

what appear to be unduly aggressive or clearly unrealistic forecasts; (iii) high turnover of project

management and senior corporate management; (iv) inability to generate cash flow from

operations, while reporting earnings and earnings growth; (v) assets, liabilities, revenues or

expenses based on significant estimates that are subject to potential significant change that may

have a financially disruptive effect on the entity; and (vi) unusually high dependence on debt or

marginal ability to meet debt repayment requirements, or debt covenants that are difficult to

maintain.


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355. PWC knowingly or recklessly failed to examine sufficient corroborating

evidential data, including those areas of examination delineated in the AICPA Construction

Contractors Guide as required by GAAS prior to rendering its opinions. PWC’s responsibility,

as S&W’s independent auditor, was to obtain “sufficient competent evidential matter . . . to

afford a reasonable basis for an opinion regarding the financial statements under audit” as to the

“fairness with which they present, in all material respects, financial position, results of

operations, and its cash flows in conformity with generally accepted accounting principles.” AU

§§110, 150. PWC failed to do so because it failed to take any of the steps required by the

AICPA Guide. Had PWC taken those steps, it would have uncovered the fraudulent nature of

S&W’s financial reporting. Its failure to do so, despite its responsibility under GAAP and

GAAS, and the presence of the many red flags identified above, constitutes either knowledge of

the fraud or reckless disregard of it.

356. PWC also violated GAAS because its audits were not performed in accordance

with GAAS in the following ways:

(a) PWC violated GAAS Standard of Reporting No. 1 that requires the audit

report to state whether the financial statements are presented in accordance with GAAP. PWC’s

opinion falsely represented that S&W’s Financial Statements were presented in conformity with

GAAP when they were not for the reasons herein alleged, and as evidenced by the restatement of

the 1999 financial statement and insolvency proceeding.

(b) PWC violated GAAS Standard of Reporting No. 4 which requires that,

when an opinion on the financial statements as a whole cannot be expressed, the reasons therefor

must be stated. PWC should have stated that no opinion could be issued by it on S&W’s

Financial Statements or issued an adverse opinion stating that the Financial Statements were not


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fairly presented. PWC also failed to require S&W to restate its previously issued materially false

and misleading 1997 and 1998 financial statements and allowed S&W to make material

misrepresentations regarding the Company to its shareholders and to the investing public during

the Class Period. The failure to make such a qualification, correction, modification and/or

withdrawal was a violation of GAAS, including the Fourth Standard of Reporting.

(c) PWC violated GAAS General Standard No. 2 that requires that an

independence in mental attitude be maintained by the auditor in all matters related to the

assignment.

(d) PWC violated SAS No. 54 in that PWC failed to perform the audit

procedures required in response to possible improper acts by S&W in connection with its audit

of S&W’s Financial Statements. PWC knew or recklessly disregarded the fact that cost to

complete estimates prepared at the project level were overridden by senior management in order

to falsely portray viable projects.

(e) PWC violated GAAS and the standards set forth in SAS Nos. 1 and 53 at a

minimum by, among other things, failing to adequately plan its audit and properly supervise the

work of assistants and to establish and carry out procedures reasonably designed to search for

and detect the existence of errors and irregularities which would have a material effect upon the

financial statements, as such procedures are listed in the AICPA Construction Contractors’

Guide.

(f) PWC violated GAAS General Standard No. 3 that requires that due

professional care must be exercised by the auditor in the performance of the audit and the

preparation of the report, as opposed to the reckless disregard described herein.


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(g) PWC violated GAAS Standard of Field Work No. 2 which requires the

auditor to make a proper study of existing internal controls, including accounting, financial and

managerial controls, to determine whether reliance thereon was justified, and if such controls are

not reliable, to expand the nature and scope of the auditing procedures to be applied. The

standard provides that a sufficient understanding of an entity’s internal control structure be

obtained to adequately plan the audit and to determine the nature, timing and extent of tests to be

performed. AU §150.02. In all audits, the auditor should perform procedures to obtain a

sufficient understanding of three elements of an entity’s internal control structure: the control

environment, the accounting system, and control procedures. AU §319.02. The control

environment, which includes management’s integrity and ethical values, is the foundation of

internal control and provides discipline, structure and sets the tone of an organization. After

obtaining an understanding of an entity’s internal control structure, the auditor assesses the

entity’s control risk. AU §319.02. Control risk is the risk that a material misstatement in an

assertion by management contained in a company’s financial statements will not be prevented or

detected on a timely basis by an entity’s internal control structure policies or procedures. AU

§319.29. The ultimate purpose of assessing control risk is to aid the auditor in evaluating the

risk that material misstatements exist in the financial statements. AU §319.61.

357. In determining the nature, timing and extent of audit procedures, the auditor

should consider, among other factors, materiality and audit risk. Materiality is defined in the

FASB’s Statement of Financial Accounting Concepts No. 2 as “the magnitude of an omission or

misstatement of account information that, in the light of the surrounding circumstances, makes it

probable that the judgment of a reasonable person relying on the information would have been

changed or influenced by the omission or misstatement.” Audit risk refers to the possibility that


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financial statements are materially misstated even when the auditor issues an unqualified opinion

on the statements. SAS No. 47 (Audit Risk and Materiality in Conducting an Audit) explains

how the auditor should integrate the concepts of materiality and audit risk into the planning and

execution of an audit engagement (AU §312.01).

358. PWC violated AU §312 - Audit Risk and Materiality in Conducting an Audit in its

failure to measure and plan for the appropriate levels of materiality and risk associated with

S&W’s key projects. For example, PWC failed to conduct an extensive field investigation on the

TPPI project in light of the project’s known materiality. PWC also ignored its professional

responsibilities under SAS No. 53 - The Auditor’s Responsibility to Detect and Report Errors

and Irregularities by accepting S&W’s misleading estimates to complete its key projects even

though S&W had a pattern of missing these estimates. Thus, PWC failed to exercise the

“professional skepticism” required by SAS No. 53 in the planning and performance of the audit.

359. As a result of its failure to accurately report on S&W’s Financial Statements,

PWC utterly failed in its role as an auditor as defined by the SEC. SEC Accounting Series

Release No. 296, Relationships Between Registrants and Independent Accountants, Securities

Act Release No. 6341, Exchange Act Release No. 18044, states in part:

Moreover, the capital formation process depends in large part on the confidence of investors in financial reporting. An investor’s willingness to commit his capital to an impersonal market is dependent on the availability of accurate, material and timely information regarding the corporations in which he has invested or proposes to invest. The quality of information disseminated in the securities markets and the continuing conviction of individual investors that such information is reliable are thus key to the formation and effective allocation of capital. Accordingly the audit function must be meaningfully performed and the accountant’s independence not compromised. The auditor must be free to decide questions against his client’s interests if his independent professional judgment compels that result. [Emphasis added.]


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ADDITIONAL ALLEGATIONS EVIDENCING DEFENDANTS’ SCIENTER

360. As alleged herein, defendants Smith and Langford had both the motive and

opportunity to commit fraud. Their opportunity to cause S&W to issue false and misleading

disclosures to the investing public is obvious and beyond dispute: as the CEO and CFO of S&W,

they were the chief spokesmen for the Company in all public statements and dealings with

analysts and other market participants, and had control, responsibility, and direct involvement

with the contents of press releases and documents filed with the SEC and disseminated to the

market. Their motives to commit fraud were: (1) to position S&W for sale, so that they could

take advantage of their lucrative change of control agreements; and (2) concealing their own

mismanagement of the Company.

361. Smith and Langford’s scienter is demonstrated by much more, however, than

motive and opportunity. Their conduct is inexplicable by anything other than the intent to

defraud. Examples of their patently fraudulent conduct include:

• The deliberate selling of jobs at a loss for the purpose of adding them to backlog, thereby creating the false impression of strong growth, despite warnings that this strategy would result in financial disaster for S&W.

• Their knowingly false claims that the work in backlog was expected to be performed at “improved margins,” when in reality the backlog increasingly consisted of loss contracts as a direct result of their program of underbidding.

• Their decision not to report losses on TPPI after the project was suspended and effectively terminated, and they knew S&W would not receive any additional payments on TPPI, but instead to report nonexistent, phantom revenue and receivables from the project totaling over $150 million over a two-year period.

• Their failure to report losses on contracts they bid and sold at a loss as soon as the loss was determined, i.e., when S&W became committed to perform each loss contract, as required by GAAP.


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• Their deliberate misrepresentations concerning the adequacy of S&W’s cash resources to fund normal operations during the period from mid-1998 through early 2000, which concealed S&W’s financial collapse from the investing public until S&W announced that it intended to file for bankruptcy.

Finally, the ultimate revelation of S&W’s true financial condition in the context of its Chapter 11

proceeding constitutes overwhelming evidence that Smith and Langford had succeeded in

perpetrating a massive fraud on the investing public. While it had reported total shareholders’

equity of over 300 million in its audited financial statements for 1999, it became clear in the

bankruptcy that S&W had a negative net worth of at least $800 million (assuming that only 20%

of the approximately $4 billion in claims filed against the estate were given effect).

362. As alleged herein, defendants acted with scienter in that defendants knew that the

public documents and statements issued or disseminated in the name of the Company were

materially false and misleading; knew that such statements or documents would be issued or

disseminated to the investing public; and knowingly and substantially participated or acquiesced

in the issuance or dissemination of such statements or documents as primary violations of the

federal securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their

receipt of information reflecting the true facts regarding S&W, their control over, and/or receipt

and/or modification of S&W’s allegedly materially misleading misstatements and/or their

associations with the Company which made them privy to confidential proprietary information

concerning S&W, participated in the fraudulent scheme alleged herein.

363. As alleged herein, PWC either had knowledge of the fraud or recklessly

disregarded it by ignoring the many red flags listed below:

(1) That S&W’s pattern of cost overruns and associated charges suggested that S&W was either underbidding contracts purposely, in which case, losses should have been booked to the income statement and the balance sheet, or


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S&W was unable to estimate costs accurately in which case they violated GAAP by using the percentage of completion method. In addition, PWC knew that S&W’s explanations for these charges were false and misleading in that S&W consistently attempted to blame these charges on unanticipated events that were the responsibility of third parties, rather than the fault of S&W.




(5) That there were cost overruns, delays, subcontractor liens, work stoppages at the Tiverton project throughout 1999 and early 2000 as a result of S&W’s inability to pay its bills.

(6) That S&W’s disclosures about its restructured credit agreement in November 29, 1999 and headquarters sale were both false and misleading in that S&W mislead investors by claiming that funds from the agreement and sale would be available for general corporate purposes


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when all of those funds were used up or committed to S&W’s lenders.



Spear and PWC had an obvious desire to continue to receive the millions of dollars in accounting

and consulting fees paid by S&W. Once the magnitude of S&W’s financial collapse began to

manifest itself, not later than the spring of 1999, in S&W’s inability to pay its vendors, PWC’s

audit team had a personal interest in concealing their reckless and unprofessional performance on

the S&W audits, which had permitted a massive fraud to be perpetrated on the investing public.

This motivation prevailed until the proposed transaction with Jacobs made disclosure inevitable,

at which point PWC devised an artifice to attempt to save face - forcing a belated restatement of

S&W’s 1999 financials based upon what was only a small portion of the fraud.

APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE

364. At all relevant times, the market for S&W’s securities was an efficient market for

the following reasons, among others:

(a) S&W’s stock met the requirements for listing, and was listed and actively

traded on the NYSE, a highly efficient and automated market;

(b) As a regulated issuer, S&W filed periodic public reports with the SEC and

the NYSE;


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(c) S&W regularly communicated with public investors via established

market communication mechanisms, including through regular disseminations of press releases

on the national circuits of major newswire services and through other wide-ranging public

disclosures, such as communications with the financial press and other similar reporting services;

(d) S&W was followed by several securities analysts employed by major

brokerage firms who wrote reports which were distributed to the sales force and certain

customers of their respective brokerage firms. Each of these reports was publicly available and

entered the public marketplace.

(e) the misrepresentations alleged herein would tend to induce a reasonable

investor to misjudge the value of S&W common stock; and

(f) plaintiffs and the Class purchased or otherwise acquired their common

stock during the Class Period without knowledge of the omitted or misrepresented facts.

365. As a result of the foregoing, the market for S&W’s securities promptly digested

current information regarding S&W from all publicly available sources and reflected such

information in S&W’s stock price. Under these circumstances, all purchasers of S&W’s

securities during the Class Period suffered similar injury through their purchase of S&W’s

securities at artificially inflated prices and a presumption of reliance applies.

S&W’s GUIDANCE TO SECURITIES ANALYSTS AND USE OF THEM TO PROVIDE FALSE INFORMATION TO THE SECURITIES MARKET

366. As described below, among other wrongful conduct, defendants communicated

materially false and misleading information to securities analysts to promote the Company and to

artificially inflate the price of S&W stock during the Class Period.

367. At all times relevant to this Consolidated and Amended Class Action Complaint,

S&W was followed by securities analysts employed by brokerage houses and/or broker/dealers


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which issued reports and made recommendations concerning S&W’s common stock and

securities to their clients.

368. In writing these reports, these analysts relied in substantial part upon information

provided by the Company directly and through its public statements and reports and conference

calls, and upon information provided to the analysts privately by the Individual Defendants and

assurances by the Individual Defendants and the Company that information in the analysts’

reports did not materially vary from the Company’s internal knowledge of its operations and

prospects.

369. Defendants used their communications with analysts to assure them that their

estimates of S&W’s business were accurate and that the Company was on track to achieve strong

earnings and growth.

370. Prior to and during the Class Period, it was the Company’s practice to have its top

officers and directors, including the Individual Defendants, communicate regularly with various

securities analysts and securities firms on a regular basis to discuss, among other things, the

Company’s operating results and anticipated revenues and to provide detailed “guidance” to

these analysts and firms with respect to the Company’s business and anticipated revenues and

earnings. These communications included, but were not limited to, conference calls, meetings,

and analyst briefings where defendants discussed relevant aspects of the Company’s operations

and financial prospects.

371. The defendants knew that by participating in these regular and periodic direct

communications with analysts, the Company could disseminate information to the investment

community and that investors would rely and act upon such information (i.e., make purchases

and sales of the Company’s securities). The Individual Defendants had these communications


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with analysts in order to cause or encourage them to issue favorable reports concerning S&W –

which the analysts did – and defendants used these communications to falsely present the

operations and allegedly successful prospects of S&W to the marketplace in order to artificially

inflate the market price of S&W’s common stock. Despite their duty to do so, the Individual

Defendants failed to correct these statements of which they were the sources or which they had

caused or facilitated during the Class Period.

372. The investment community and, in turn, investors, relied and acted upon the

information communicated in these written reports, many of which recommended that investors

purchase S&W common stock and touted the purported appreciation prospects of the shares.

Defendants manipulated and inflated the market price of S&W stock by falsely presenting to

analysts, through regular meetings and during both telephonic and written communications, the

prospects of the Company and by failing to disclose the true adverse information about the

Company that was known only to them.

373. During the Class Period, the Individual Defendants occupied positions that made

them privy to non-public information concerning S&W. Because of this access, the Individual

Defendants knew that the adverse facts specified herein were being concealed and that the public

statements being made by the Company were false.

INAPPLICABILITY OF STATUTORY SAFE HARBOR

374. As alleged herein, defendants acted with scienter in that defendants knew that the

public documents and statements issued or disseminated in the name of the Company were

materially false and misleading or omitted material facts; knew that such statements or

documents would be issued or disseminated to the investing public; knew that persons were

likely to reasonably rely on those misrepresentations and omissions; and knowingly and

substantially participate or were involved in the issuance or dissemination of such statements or


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documents as primary violations of the federal securities law. As set forth elsewhere herein in

detail, defendants, by virtue of their receipt of information reflecting the true facts regarding

S&W, their control over, and/or receipt of S&W’s allegedly materially misleading misstatements

and/or their association with the Company which made them privy to confidential proprietary

information concerning S&W which were used to inflate financial results and which defendants

caused or were informed of, participated in and knew of the fraudulent scheme alleged herein.

With respect to non-forward-looking statements and/or omissions, defendants knew and/or

recklessly disregarded the falsity and misleading nature of the information which they caused to

be disseminated to the investing public.

375. Defendants’ false and misleading statements and omissions do not constitute

forward-looking statements protected by any statutory safe harbor. The statements alleged to be

false and misleading herein all relate to facts and conditions existing at the time the statements

were made. No statutory safe harbor applies to any of S&W’s false or misleading statements.

376. Alternatively, to the extent that any statutory safe harbor is intended to apply to

any forward-looking statement pled herein, defendants are liable for the false forward-looking

statement pled because, at the time each forward-looking statement was made, the speaker knew

or had actual knowledge that the forward-looking statement was materially false or misleading,

and the forward-looking statement was authorized and/or approved by a director and/or

executive officer of S&W who knew that the forward-looking statement was false or misleading.

None of the historic or present tense statements made by defendants were assumptions

underlying or relating to any plan, projection or statement of future economic performance, as

they were not stated to be such assumptions underlying or relating to any projection or statement

of future economic performance when made nor were any of the projections or forecasts made


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by defendants expressly related to or stated to be dependent on those historic or present tense

statements when made.

PLAINTIFFS’ CLASS ACTION ALLEGATIONS

377. This is a class action pursuant to Rule 23 of the Federal Rule of Civil Procedure

on behalf of all persons and entities who purchased S&W common stock during the Class Period

and who suffered damages as a result of their purchases. Excluded from the Class are

defendants, the officers and directors of the Company, at all relevant times, members of their

immediate families and their legal representatives, heirs, successors or assigns and any entity in

which defendants have or had a controlling interest.

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

impracticable. Throughout the Class Period, S&W common shares were actively traded on the

NYSE National Market under the symbol “SW.” While the exact number of Class members is

unknown to Plaintiffs at this time and can only be ascertained through appropriate discovery,

Plaintiffs believe that there are thousands of members in the proposed Class. As of March 31,

2000, S&W had over 14.2 million shares outstanding. Record owners of S&W stock and other

members of the Class may be identified from records maintained by S&W or its transfer agent

and may be notified of the pendency of this action by mail, using the form of notice similar to

that customarily used in securities class actions.

379. Plaintiffs’ claims are typical of the claims of the members of the Class. Plaintiffs

will fairly and adequately protect the interest of the members of the Class and have retained

counsel experienced in class action and securities litigation. Plaintiffs have no interests that are

adverse or antagonistic to the Class.

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

adjudication of this controversy. Because the damages suffered by many individual Class


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members may be relatively small, the expense and burden of individual litigation makes it

virtually impossible for the Class members individually to seek redress for the wrongful conduct

alleged.

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

predominate over any questions solely affecting 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 the documents, releases, and statements disseminated to the

investing public and shareholders during the Class Period omitted and/or misrepresented

material facts about the business affairs, financial condition and future prospects of S&W;

(c) whether defendants acted willfully or recklessly in omitting to state and/or

misrepresenting material facts about the financial condition, profitability and future prospects of

S&W;

(d) whether the market price of the S&W common stock during the Class

Period was artificially inflated due to the nondisclosures and/or misrepresentations complained

of herein; and

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

what is the proper measure thereof.

382. Plaintiffs know of no difficulty which will be encountered in the management of

this litigation which would preclude its maintenance as a class action.


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383. The names and addresses of the record owners of the shares of S&W common

stock purchased during the Class Period are available from the Company’s transfer agent(s).

Notice can be provided to such record owners by first class mail.

CLAIMS FOR RELIEF

COUNT I

Violations Of Section 10(b) Of The Exchange Act And Rule 10b-5 Promulgated Thereunder Against All Defendants

384. Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein.

385. This Count is asserted by plaintiffs and the Class against all defendants and is

based upon Section 10(b) of the Exchange Act, 15 U.S.C. §78j(b), and Rule 10b-5 §240.10b-5,

promulgated thereunder.

386. During the Class Period, defendants carried out a plan, scheme and course of

conduct which was intended to and, throughout the Class Period, did: (a) deceive the investing

public, including plaintiffs and other Class members, as alleged herein; (b) artificially inflate and

maintain the market price of S&W’s securities; and (c) cause plaintiffs and other members of the

Class to purchase S&W’s securities at artificially inflated prices. In furtherance of this unlawful

scheme, plan and course of conduct, defendants, and each of them, took the actions set forth

herein.

387. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made

untrue statements of material fact and/or omitted to state material facts necessary to make the

statements not misleading; and (c) engaged in acts, practices, and a course of business which

operated as a fraud and deceit upon the purchasers of the Company’s securities in an effort to


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maintain artificially high market prices for S&W’s securities in violation of Section 10(b) of the

Exchange Act and Rule 10b-5.

388. Defendants engaged in the fraudulent activity described above knowingly and

intentionally, or in such a reckless manner as to constitute willful deceit and fraud upon plaintiffs

and the Class. Defendants knowingly caused their reports and statements to contain

misstatements and omissions of material fact as alleged herein.

389. As a result of defendants’ fraudulent activity, the market price of S&W securities

was artificially inflated during the Class Period.

390. In ignorance of the true financial condition of S&W, plaintiffs and other members

of the Class, relying on the integrity of the market and/or on the statements and reports of S&W

containing the misleading information, purchased S&W stock at artificially inflated prices.

391. The market price of S&W stock has declined materially upon the public

disclosure of the true facts which had been misrepresented or concealed as alleged herein.

392. As a direct and proximate cause of defendants’ wrongful conduct, plaintiffs and

other members of the Class suffered damages in connection with their respective purchases and

sales of S&W securities during the Class Period.

COUNT II

Violations Of Section 20(a) Of The Exchange Act Against Individual Defendants


set forth herein.

394. S&W committed a primary violation of Section 10(b) of the Exchange Act, 15

U.S.C. §78j(b) and Rule 10b-5 §240.10b-5, promulgated thereunder by disseminating the

materially false and misleading statements described herein knowingly and intentionally or in

such reckless manner as to constitute willful deceit, causing the market price of S&W securities


135

to be artificially inflated during the Class Period, and causing damages to plaintiffs and other

members of the Class, who, in ignorance of S&W’s true financial condition, relied on the

integrity of the market and/or on the false and misleading statements in purchasing S&W stock.

395. Individual Defendants acted as controlling persons of S&W within the meaning of

Section 20(a) of the Exchange Act, 15 U.S.C. §78t, as alleged herein. By virtue of their high-

level positions, and their ownership and contractual rights, participation in and/or awareness of

the Company’s operations and/or intimate knowledge of the false financial statements filed by

the Company with the SEC and disseminated to the investing public, the Individual Defendants

had the power to influence and control and did influence and control, directly or indirectly, the

decision-making of the Company, including the content and dissemination of the various

statements which plaintiffs contend are false and misleading. Individual Defendants were

provided with or had unlimited access to copies of the Company’s reports, press releases, public

filings and other statements alleged by plaintiffs to be misleading prior to and/or shortly after

these statements were issued and had the ability to prevent the issuance of the statements or

cause the statements to be corrected.

396. In particular, both of the Individual Defendants had direct and supervisory

involvement in the day-to-day operations of the Company and, therefore, are presumed to have

had the power to control or influence the particular transactions giving rise to the securities

violations as alleged herein, and exercised the same.

397. As controlling persons within the Company, Individual Defendants are liable

pursuant to Section 20(a) of the Exchange Act for S&W’s primary violation of Section 10(b) and

Rule 10b-5. As a direct and proximate result of the Individual Defendants’ wrongful conduct,


136

plaintiffs and other members of the Class suffered damages in connection with their purchases of

the Company’s securities during the Class Period.

COUNT III

Violations of Section 18 of the Exchange Act Against All Defendants


set forth herein.

399. As set forth above, in reports filed with the SEC, defendants made or caused to be

made statements which were, at the time and in light of the circumstances under which they were

made, false or misleading with respect to material facts.

400. Plaintiffs read and relied upon each statement from the reports and documents

filed with the SEC, including the Form 10-Qs for the quarters ended March 31, 1998, June 30,

1998, September 30, 1998, March 31, 1999, June 30, 1999, September 30, 1999 and March 31,

2000, and the Form 10-Ks for fiscal years 1997, 1998 and 1999.

401. Plaintiffs relied upon the statements contained in the reports and documents set

forth above not knowing that such statements were false and misleading.

402. Each of the above reports was filed with the SEC.

403. Defendants knew or should have known by exercising due diligence that such

statements were false and misleading because defendants: (a) knew or had access to the

materially adverse non-public information about S&W’s financial results and then existing

business conditions; (b) participated in drafting, reviewing and/or approving the misleading

statements, releases, reports and other public representations about S&W which were filed with

the SEC; and (c) had an obligation to inform themselves of the accounting policies and

procedures, as well as the financial statements of the Company.


137

404. Defendants’ conduct resulted in the Company issuing false and misleading

statements with respect to its revenues, income, earnings per share and backlog. Defendants’

conduct also resulted in the Company misrepresenting that its financial statements for the Class

Period were presented in conformity with GAAP or principles of fair reporting.

405. In connection with the purchase of S&W securities, plaintiffs had a right to rely

and reasonably did rely upon the false and misleading statements of the Company’s financial

status in reports and other documents filed with the SEC.

406. When the truth was finally revealed about the false and misleading statements

made by defendants in reports and other documents filed with the SEC, plaintiffs were

significantly damaged by the resulting impairment of shareholder equity and the drop in the

stock’s trading price.

407. By virtue of the foregoing, defendants have violated Section 18 of the Exchange

Act.

408. As a direct and proximate result of defendants’ wrongful conduct, plaintiffs

suffered damages in connection with its purchases of S&W’s common stock during the relevant

time period.


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WHEREFORE, plaintiffs pray for relief and judgment, as follows:

(a) Determining that this action is a proper class action, and certifying plaintiffs

as class representatives under Rule 23 of the Federal Rules of Civil Procedure;

(b) Awarding compensatory damages in favor of plaintiffs and the other Class

members against all defendants, jointly and severally, for all damages sustained as a result of

defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

(c) Awarding plaintiffs and the Class their reasonable costs and expenses

incurred in this action, including counsel fees and expert fees; and

(d) Awarding such other and further relief as the Court may deem just and

proper.


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JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury on all claims so triable.

Dated: November 6, 2006 /s/ Sidney S. Liebesman Jay W. Eisenhofer Sidney S. Liebesman GRANT & EISENHOFER P.A. Chase Manhattan Centre 1201 North Market Street Wilmington, DE 19801 Telephone: (302) 622-7000 Facsimile: (302) 622-7100 Lead Counsel for Plaintiffs

Of Counsel:

MILBERG WEISS BERSHAD & SCHULMAN LLP Ariana J. Tadler One Pennsylvania Plaza New York, NY 10119 Telephone: (212) 594-5300

Norman M. Berman (BBO# 040460) Bryan A. Wood (BBO# 648414) BERMAN, DEVALERIO, PEASE, TABACCO, BURT & PUCILLO One Liberty Square Boston, MA 02109 Telephone: (617) 542-8300 Facsimile: (617) 542-1194

Liaison Counsel for Plaintiffs


CERTIFICATE OF SERVICE

I HEREBY CERTIFY that on this date, the foregoing Second Consolidated and Amended Class Action Complaint was electronically filed with the Clerk of the Court using the USDC ECF system, and thus served on all counsel identified in the resulting Notice of Electronic Filing, and further, was sent via First Class Mail, postage prepaid to: Jordan D. Hershman, Esquire Bingham McCutchen LLP 150 Federal Street Boston, MA 02110 Attorneys for Defendant H. Kerner Smith

John D. Donovan, Esquire Ropes & Gray LLP One International Place Boston, MA 02110 Attorneys for Defendant Thomas Langford

Matthew E. Miller, Esquire Foley Hoag, LLP World Trade Center West 155 Seaport Boulevard Boston, MA 02210 Attorneys for Defendant PricewaterhouseCoopers LLP

Nancy B. Reiner, Esquire Robert L. Harris, Esquire Brown Rudnick Berlack Israels LLP One Financial Center Boston, MA 02111 Attorneys for Defendant Stone & Webster, Inc

Dated: November 6, 2006 /s / Sidney S. Liebesman Sidney S. Liebesman Grant & Eisenhofer P.A. Chase Manhattan Centre 1201 North Market Street Wilmington, DE 19801 Tel: 302-622-7000 Fax: 302-622-7100


UNITED STATES DISTRICT COURTFOR THE DISTRICT OF MASSACHUSETT S

In re :

S TONE & WEBSTER, INC .. : No. 00-CV- 10874-RWZSECURITIES LITIGATIO N

CERTIFICATION OF ROBERT A.,G. MONKS

Robert A .G .. Monks, pursuant to 15 U .S .C . §78u-4, states as follows :

(1) 1 have reviewed the Second Consolidated and Amended Class Action Complaint

filed in the above-captioned matter and authorized its filin g

(2) I am a Director of Ram Trust Services, Inc .. ("Ram") I have been a principal o f

Ram fiom at least ,January 22, 1998 to the present .

(3) 1 have reviewed the records of Ram's transactions in Stone & Webster Inc .' s

("S&W" or the "Company") securities for the time period between January 22, 1998 through an d

including May 8, 2000 (the "Class Period" )

(4) The transactions effected by Ram in S&W securities on my behalf' during th e

Class Period are listed in the chart attached hereto at Schedule A ..

(5) Neither myself' or Ram purchased S&W securities at the direction of plaintiff's '

counsel or in order- to participate in any private action arising under the federal securities laws ..

Ram invested in S&W securities solely for its own business purposes and effected th e

transactions in S&W securities set forth in the attached Schedule A at my bequest and on m y

behalf' .

(6) I am willing to serve as a representative patty on behalf of the class of S&W

shareholders, including providing testimony at depositions and trial, I intend to pursue thi s

litigation for the best interests of all class members ..

(7) During the three-year period preceding the date of this Certification, I have no t

served, nor sought to serve as a lead plaintiff' in any case arising under- the federal securities law s

(8) I will not accept any payment for serving as a representative party on behalf of th e

class beyond the plaintiff's' pro rata share of any recovery, except as ordered and approved by th e

Court .

I declare under penalty of perjury under the laws of the United States that the foregoing i s

true and correct.

,Dated : November 3 , 20067u

Robert A .G. Monks

Schedule A

No. Shares Purchase/Sale Date Price/Share

30,000 Purchase 12/6/1999 $17 .89

3,750 Purchase 3/22/2000 $13 .45

250 Purchase 3/23/2000 $14 .1 4

700 Purchase 3/24/2000 $13 .68

250 Purchase 3/28/2000 $13 .70

17,450 Sale 5/4/2000 $6 49

620 Sale 5/4/2000 $6.49

UNITED STATES DISTRICT COURTFOR THE DISTRICT OF MASSACHUSETTS

In re :

STONE & WEBSIER, INC . : No.. 00-CV-10874-RWZSECURITIES LITIGATION

CERTIFICATION OF JOHN P .M., HIGGINS

John P .M Higgins, pursuant to 15 U .S C . § 78u-4, states as follows :

(1) I have reviewed the Second Consolidated and Amended Class Action Complain t

filed in the above-captioned matter and authorized its tiling .

(2) 1 am the President of Ram Trust Services, Inc .. ("Ram") . . I have been a principal

of Ram from at least Januaiy 22, 1998 to the present ..

(3) 1 have reviewed the records of Ram's transactions in Stone & Webster Inc .' s

("S&W' or the "Company") securities for the time period between January 22, 1998 through and

including May 8, 2000 (the "Class Period")

(4) The transactions effected by Ram in S&W securities on my behalf' during th e

Class Period are listed in the chart attached hereto at Schedule A .

(5) Neither myself or Ram purchased S&W securities at the direction of plaintiffs '

counsel or in order to participate in any private action arising under the federal securities laws .

Ram invested in S&W securities solely for its own business purposes and effected the

transactions in S&W securities set forth in the attached Schedule A at my bequest and on my

behalf.

(6) 1 am willing to serve as a representative patty on behalf of the class of S&W

shareholders, including providing testimony at depositions and trial . I intend to pursue this

litigation for the best interests of all class members

(7) During the three-year period preceding the date of this Certification, I have no t

served, not sought to serve as a lead plaintiff in any case arising under the federal securities laws .

(8) 1 will not accept any payment for serving as a representative party on behalf of the

class beyond the plaintiffs' pro rata share of any recovery, except as ordered and approved by the

Court ..

I declare under penalty of perjury under- the laws of the United States that the foregoing i s

true and correct .

Dated : November 3, 2006

JohnP i i s

Schedule A

No. Shares PurrchaselSale Date Price/Share

4,650 Purchase 12/6/1999 $17 .89

815 Purchase 12/6/1999 $17 .89

2905 Purchase 3/22/2000 $13 45

15 P=hase 3/22/2000 $13 45

830 Purchase 3/22/2000 $13 .45

16,600 Sale 5/4/2000 $6 .49

UNITED STATES DISTRICT COURTFOR THE DISTRICT OF MASSACHUSETTS

___________________________________::

In re STONE & WEBSTER, INC. :SECURITIES LITIGATION :

: No. 00-CV-10874-RCLRWZ::: JURY TRIAL DEMANDED

___________________________________ :

SECOND CONSOLIDATED AND AMENDED CLASS ACTION COMPLAINT

Lead Plaintiffs, Ram Trust Services, Inc. and Lens Investment Management, LLC, and

plaintiffs Robert A.G. Monks, John P.M. Higgins, Richard Schultz, Robert M. White, Trustee for

the Robert M. White Trust and Kevin C. Frye, on behalf of all purchasers of Stone & Webster,

Inc. securities between and including January 22, 1998 to May 8, 2000 (collectively the

“plaintiffs”), by and through their attorneys, allege the following upon information and belief,

except as to those allegations concerning plaintiffs, which are alleged upon personal knowledge.

Plaintiffs’ information and belief are based upon, among other things, their investigation,

including without limitation: (a) review and analysis of filings made by Stone & Webster, Inc.

(Stone & Webster, Inc. and its various subsidiaries are hereinafter referred to as “S&W” or the

“Company”) with the Securities and Exchange Commission (“SEC”); (b) review and analysis of

Case 1:00-cv-10874-RWZ Document 227-4 Filed 11/06/2006 Page 1 of 147

(d) review and analysis of a slide presentation given by Smith at Donaldson, Lufkin & Jenrette

Securities’ 1999 Environmental Services and Engineering and Construction Conference in April

1999; (e) interviews with former S&W employees, including Ray Burke, a former controller for

S&W, Daniel Martino, a former senior accountant for S&W, Timothy McBride, a former

controller for S&W’s industrial division, Roderick Parker (“Parker”), a former global project

coordinator for S&W, Ronald Protasewich (“Protasewich”), a former purchasing project

manager for S&W, Robert Wiesel, a former president of S&W Construction, Edward Sweeny, a

former vice-president of S&W, Dan Gershkowitz, former project manager of S&W, as well as

other former employees, suppliers, vendors and customers of S&W in the United States and

abroad who requested that their identities remain confidential; (f) discussions with John W.

Prosser, Jr., Senior Vice President of Finance for Jacobs Engineering, Inc.; (g) review and

analysis of internal S&W documents; (h) review and analysis of documents filed by S&W,

creditors of S&W and other entities in the United States Bankruptcy Court for the District of

Delaware (the “Delaware Bankruptcy Court”); (i) review and analysis of lawsuits filed against

or by S&W; (j) review and analysis of the testimony of Langford at a Meeting of Creditors

conducted at the Delaware Bankruptcy Court on July 21, 2000, pursuant to 11 U.S.C. §341; and

(k) other publicly available information about S&W.

Plaintiffs believe that further substantial evidentiary support will exist for the allegations

in this Second Consolidated and Amended Class Action Complaint after a reasonable

opportunity for discovery. Most of the facts supporting the allegations contained herein are


SUMMARY OF CLAIMS

1. This case involves a fraudulent scheme by Smith - S&W’s Chairman, 1.

President and CEO, and Langford - S&W’s Executive Vice President and Principal Financial

Officer (Smith and Langford are collectively referred to as the “Individual Defendants”) to

manipulate and distort the Company’s financial statements between and including January 22,

1998 to May 8, 2000 ( the “Class Period”). Smith and Langford manipulated and distorted the

Company’s financial statements by overstating S&W’s profitability and assets. They accrued

and booked phantom revenue and receivables that was never received and they hid the

Company’s deteriorating financial condition from investors, assuring the public that all was well

and the Company was poised for solid growth when they knew S&W could not pay its bills, had

no cash and was on the verge of collapse. Although they hoped to keep S&W’s deteriorating

finances secret long enough to sell the Company and invoke their lucrative change of control

agreements, a prospective buyer uncovered enough of the truth to leave them no choice but to

file Chapter 11. Incredibly, Smith and Langford had hidden the true state of S&W’s finances

from investors for over two years.

2. Smith and Langford accomplished this by establishing and enforcing an 2.

unwritten policy of having the Company underbid projects to ensure that the Company would

book as many jobs as possible. Smith and Langford booked revenue and touted the Company’s

job backlog, growth, asset base and profitability. Eventually, the Individual Defendants’

practice and policy of underbidding jobs caught up with the Company and S&W began to have


of $300 million in net assets, hundreds of millions of dollars in backlog jobs and substantial net

income after some occasional, extraordinary charges. None of these representations were true.

3. The Individual Defendants also attempted to entice prospective purchasers 3.

for S&W by concealing the Company’s true financial situation from those prospective buyers.

In late 1999, S&W desperately scrambled for cash to keep afloat while Smith and Langford tried

to sell the Company. In an effort to raise cash, Smith and Langford callously forced the S&W

retirement plan to buy 1 million shares of S&W stock when they knew the Company was

insolvent and the stock worthless. This rapacious act, impairing the retirement funds of S&W

employees, bordered on criminal misconduct.

4. The dismal state of S&W’s finances only became known because one 4.

prospective buyer, Jacobs Engineering (“Jacobs”), determined that the Company was insolvent

and that Jacobs would only purchase the Company if it filed bankruptcy. By this time, S&W’s

cash problems were so serious, Smith and Langford were desperate to sell the Company and earn

their severance payments. The Individual Defendants announced to the public that the Company

was being sold and was filing for bankruptcy protection.

5. Even then, S&W failed to come clean with investors. Rather than admit 5.

that the Company was in bad financial shape and that Jacobs had discovered this, on April 30,

2000, S&W announced it was revising its 1999 financial results to include a provision for a

$27.5 million charge the Company was taking for a cost overrun “on a key project by a major

subcontractor.” Almost one week later, on May 8, 2000, S&W announced it had signed a letter


bankruptcy filing, these figures were revealed as completely false and baseless. S&W was

shown to have no net assets. In the space of a few short weeks, $300 million in assets

supposedly vanished. The reason was those assets never existed in the first place. S&W’s

balance sheet, like its income statement, was a fraudulent document that hid the effects of

S&W’s money-losing projects.

6. On April 28, 2000, the last trading day before the initial disclosure of 6.

S&W’s financial problems, the price of the Company’s common stock closed at $13.1875 per

share. Following the announcement of the restatement, the price of S&W common stock fell as

low as $2.50 per share. The market continued to react as additional information regarding

S&W’s finances was revealed. By May 19, 2000, the first trading day after S&W’s

announcement on May 8, 2000 that it intended to file bankruptcy, the stock price had plummeted

to $.7188 per share. Over $177.5 million in shareholder equity was wiped out overnight.

7. The SEC quickly commenced an investigation into S&W’s finances and the 7.

restatement. In addition, on November 1, 2000, the Company sued Smith in the Superior Court

of the Commonwealth of Massachusetts for Middlesex County (C.A. No. 00-5022) seeking to

void Smith’s change of control agreement based upon his responsibility for S&W’s financial

demise.

8. This action is also brought against the Company’s auditing firm, 8.

PricewaterhouseCoopers, LLP (“PWC”), for its role in facilitating Smith and Langford’s

fraudulent scheme to manipulate and distort the Company’s financial statements during the Class


position had deteriorated so that its public statements were false and misleading. Yet, PWC did

nothing until Jacobs forced disclosure of the problems by insisting that S&W file for bankruptcy.

JURISDICTION AND VENUE

9. This Court has jurisdiction over the subject matter of this action pursuant to 9.

28 U.S.C. §§1331, 1337 and 1367, and Section 27 of the Securities and Exchange Act of 1934

(the “Exchange Act”), 15 U.S.C. §78aa.

10. The claims asserted herein arise under and pursuant to Sections 10(b), 18, 10.

20(a) and 20A of the Exchange Act, 15 U.S.C. §§78j(b), 78r, 78t(a) and 78t-1(a), and Rule 10b-5

promulgated thereunder by the SEC, 17 C.F.R. §240.10b-5.

11. Jurisdiction and venue are proper in this District pursuant to Section 27 of 11.

the Exchange Act, 15 U.S.C. §78aa and 28 U.S.C. §1391 (b) and (c). At the time this action was

commenced, S&W maintained its corporate headquarters and executive offices in this District.

In addition, many of the acts and transactions forming the basis for the claims in this action,

including the preparation and dissemination of materially false and misleading information, and

the failure to disclose material information, occurred in substantial part in this District.

12. In connection with the acts and omissions alleged in this Second 12.

Consolidated and Amended Class Action Complaint, defendants, directly and/or indirectly, used

the means and instrumentalities of interstate commerce, including without limitation, the mails,

interstate telephone communications and the facilities of the national securities markets.

THE PARTIES


04101. By Order dated August 9, 2000, this Court appointed Lens and Ram as lead plaintiffs

pursuant to 15 U.S.C. §78u-4. Ram and Lens are members of the Class as demonstrated by their

respective certifications previously filed with this Court. Under the leadership of the renowned

Robert A.G. Monks and Nell Minow, Lens has quickly grown to become an internationally

recognized investment management firm known for maximizing the value of targeted public

companies through shareholder activism. Lens is also recognized worldwide as an authority on

corporate governance issues. During the Class Period, Lens purchased 100,000 and sold

100,000 of S&W shares, and Ram purchased approximately 136,630 shares and sold

approximately 70,000 shares of S&W common stock. Lead Plaintiffs purchased the stock of

S&W at artificially inflated prices during the Class Period and have been damaged thereby.

Plaintiffs Robert A.G. Monks and John P.M. Higgins are individuals who each 14.

purchased S&W stock on December 6, 1999 and March 22, 2000. Robert A.G. Monks also

purchased S&W stock on March 22, 2000, March 23, 2000, March 24, 2000 and March 28,

2000. John Higgins is the President of Ram and Robert Monks is a director of Ram. Both

Messrs. Higgins and Monks have been principals of Ram from at least January 22, 1998 (the

beginning of the proposed Class Period) to the present and were both involved in the investment

decisions of Ram vis-à-vis S&W. Certifications executed by Messrs. Higgins and Monks are

attached hereto.

Plaintiffs Richard Schultz , Robert M. White, Trustee for the Robert M. White 15.

Trust and Kevin C. Frye are individuals who purchased S&W stock on July 27, 1999,


the power, process, industrial, transportation, environmental and government markets.

Additionally, S&W owned and operated fourteen cold storage warehousing facilities located

primarily in the southeastern United States. S&W’s consolidated gross revenues for fiscal year

1999 exceeded $1.2 billion.

15. On June 2, 2000, S&W and several of its direct and indirect subsidiaries 17.

filed for bankruptcy protection under Chapter 11 of Title 11 of the United States Bankruptcy

Code, 11 U.S.C. §§101 et seq. in the Delaware Bankruptcy Court (Case No. 00-2142-(RRM)).

This case is presently stayed as to defendant S&W only pursuant to 11 U.S.C. §362(a). On July

14, 2000, substantially all of S&W’s assets were sold to The Shaw Group, Inc.

16. At all times material hereto, defendant H. Kerner Smith was the Chairman 18.

of the Board, President and Chief Executive Officer of S&W. Smith was first employed by

S&W on February 12, 1996 in the capacity of President and Chief Executive Officer of the

Company. After the Company’s annual meeting on May 8, 1997, Smith became Chairman of the

Board of the Company. During the Class Period, while in possession of material adverse non-

public information concerning the Company, Smith made materially false and misleading

statements concerning S&W.

17. At all times material hereto, defendant Thomas L. Langford was the 19.

Executive Vice President and Chief Financial Officer of S&W. Langford was first employed by

S&W on June 2, 1997 in the capacity of Executive Vice President. Langford signed the majority

of the Company’s materially false and misleading SEC filings despite his knowledge of facts that


finances, revenue recognition and backlog policies, markets and present and future business

prospects. Individual Defendants would ascertain such information through S&W’s internal

corporate documents (including the Company’s operating plans, budgets and forecasts and

reports of actual operations compared thereto), conversations and connections with other

corporate officers and employees, conversations and connections with subcontractors, vendors,

customers and project owners, visits to project sites, attendance at management and Board of

Directors’ meetings and committees thereof, and through reports and other information provided

to them in connection with their roles and duties as S&W executives.

19. It is appropriate to treat the Individual Defendants as a group for pleading 21.

purposes and to presume that the materially false, misleading and incomplete information

conveyed in the Company’s public filings, press releases and other publications as alleged herein

are the collective actions of the Individual Defendants identified above. Both of the Individual

Defendants, by virtue of their high-level positions within the Company, directly participated in

the management of the Company, were directly involved in the day-to-day operations of the

Company at the highest levels and were privy to confidential proprietary information concerning

the Company and its business, operations, prospects, growth, finances, and financial condition,

as alleged herein.

20. The Individual Defendants were involved in drafting, producing, reviewing, 22.

approving and/or disseminating the materially false and misleading statements and information

alleged herein, including SEC filings, press releases, and other public documents, were aware of


21. As officers and controlling persons of a publicly-held company whose 23.

common stock was, and is, registered with the SEC pursuant to the Exchange Act, and was

traded on the New York Stock Exchange (the “NYSE”), and governed by the provisions of the

federal securities laws, Individual Defendants each had a duty to promptly disseminate accurate

and truthful information with respect to the Company’s financial condition and performance,

growth, operations, financial statements, business, markets, management, earnings and present

and future business prospects, and to correct any previously issued statements that had become

materially misleading or untrue, so that the market price of the Company’s publicly traded

securities would be based upon truthful and accurate information. The Individual Defendants’

material misrepresentations and omissions during the Class Period violated these specific

requirements and obligations.

22. The Individual Defendants, by virtue of their positions of control and 24.

authority as officers and/or directors of the Company, were able to and did control the content of

the various SEC filings, press releases and other public statements pertaining to the Company

during the Class Period. The Individual Defendants were provided with copies of the documents

alleged herein to be misleading prior to or shortly after their issuance and/or had the ability

and/or opportunity to prevent their issuance or cause them to be corrected. Accordingly, both

are responsible for the accuracy of the public reports and releases detailed herein.

23. The Individual Defendants are both liable as participants in a scheme to 25.

defraud or deceive purchasers of S&W common stock by disseminating materially false and


24. Defendant PricewaterhouseCoopers, LLP (“PWC”), is a firm of certified 26.

public accountants with offices located nationwide, including Boston, Massachusetts. In 1998,

Coopers & Lybrand, LLP and Price Waterhouse, LLP merged to form PWC (“PWC” as used

herein will refer to PWC and, where appropriate, Coopers & Lybrand). PWC, under the

direction of audit partner Robert Spear (“Spear”), audited S&W’s materially false and

misleading financial statements during the Class Period and issued materially false and

misleading opinions on those financial statements. Additionally, PWC consented to the use of

its unqualified opinion letter on S&W’s 1997, 1998 and 1999 financial statements in reports filed

with the SEC and otherwise disseminated to the investing public. PWC thus participated in the

scheme, plan and common course of conduct described herein.

25. During the Class Period, while providing S&W and its shareholders with 27.

purportedly “independent” accounting and auditing services, PWC personnel were present at the

Company’s offices and had access to and knowledge of S&W’s confidential corporate, financial

and business information. As a result of its longstanding relationship with S&W, PWC knew or

recklessly disregarded the true facts as alleged herein concerning the actual financial condition

of S&W that were concealed from the investing public.

26. Each of the defendants is liable as a participant in a fraudulent scheme and 28.

course of business that operated as a fraud or deceit upon purchasers of S&W securities, by

disseminating materially false and misleading statements and/or concealing material adverse

facts. The scheme deceived the investing public regarding S&W’s business, present and future


27. At all relevant times, the market for S&W securities was an efficient 29.

market that promptly digested current information regarding the Company from all publicly

available sources and reflected such information in the price of S&W’s securities. Under these

circumstances, all purchasers of S&W’s securities during the Class Period suffered similar injury

through their purchase of securities at artificially inflated prices and a presumption of reliance

applies.

BACKGROUND

A. S&W’s BusinessA.

28. Founded in 1889 by two graduates of the Massachusetts Institute of 30.

Technology principally as an engineering services firm, S&W developed into a global leader in

engineering, construction and consulting services for the power, process, industrial,

transportation, environmental and government markets. Until recently, S&W’s engineering,

construction and consulting business included three divisions and a consulting organization

which were responsible for marketing and executing projects worldwide. S&W also owned and

operated several cold storage warehousing facilities located primarily in the southeastern United

States. S&W has been a public company since 1929 – longer than any other engineering and

construction firm.

29. S&W was an early builder of urban transit systems and public utilities. In 31.

particular, S&W was a pioneer in the nuclear power business for utility and governmental

clients. It constructed and modified nuclear power plants and performed maintenance work on


company in the world in that area. S&W worked on 99 of the 104 nuclear power plants in the

United States.

30. However, during the late 1980’s and early 1990’s, the Company’s business 32.

took a turn for the worse. Whereas, in 1987, the Company had net income of $49 million, by

1993, the Company had earnings of only $1.9 million. During this period, S&W shareholders

were increasingly vocal in their criticisms of S&W management.

B. Smith And Langford Assume Control Of S&WB.With Lucrative Change of Control Provisions

31. S&W’s financial condition worsened in 1994 and 1995. Pressured by a 33.

growing number of disgruntled shareholders, S&W’s Board finally took action. In February

1996, the Company’s chief executive officer resigned and was replaced by defendant Smith.

The Company instituted a corporate restructuring program consisting of a consolidation of

S&W’s corporate headquarters in New York into the Boston headquarters of the engineering

division, a realignment of the senior management structure, and the sale of real estate properties

(in Boston and Cherry Hill, New Jersey) and non-core assets.

32. In June 1997, S&W hired defendant Langford as Executive Vice President 34.

and Chief Financial Officer. By the end of that year, the Company was representing that Smith

and Langford’s turn-around efforts were successful and that, for the first time in several years,

S&W was profitable. The Company purportedly had revenues of $1.323 billion, operating

income of $47.3 million and net income of $33.5 million. At the time, the Company’s stock

i li b d hi h $55 h


the outset, their strategy was to make the Company look good in the short-run to position it for a

sale.

34. Under their respective change of control agreements, Smith and Langford 36.

were entitled to severance payments equal to three times their most recent annual base salary and

three times their most recent highest bonus as well as continued medical, life and disability

benefits and a lump sum equivalent to certain retirement benefits. In addition, all options

outstanding on the date of a change of control would become immediately and fully exercisable

and all restrictions upon any restricted shares would lapse and all such shares would immediately

become fully vested.

35. Through March 1999, Smith had approximately 221,000 options and 37.

Langford had approximately 42,000 options. Therefore, had a change of control occurred, even

at a modest 30% premium to S&W’s 1999 share price, Smith and Langford could have received

over $17.7 and $3.9 million respectively.

C. Smith and Langford Cook the BooksC.

36. On April 14, 2000, S&W’s 10-K represented that the Company had net 38.

assets of $324.3 million. Within a few short weeks, S&W had filed for bankruptcy and had

admitted that it had no net assets, let alone $324.3 million. Stunned investors wanted to know

how $324.3 million in assets had so quickly disappeared. In fact, those assets had never existed

in the first place. Understanding the “vanishing assets” requires an understanding of S&W’s

accounting practices.


price contracts typically provide that the contractor estimates the total cost at the time the

contract is executed and that estimate constitutes the price of the entire project. Of the two types

of contracts, fixed price presents the greater risk because the contractor bears 100% of the risk

for cost overruns on a project. If the contractor estimates too aggressively to be sure it gets the

bid award – a technique known as “low-balling” – the project can end up being completed by the

contractor at a loss. When S&W experiences significant cost overruns on fixed-price contracts,

the Company’s earnings are adversely affected.

38. A key figure watched by investors in relation to S&W is backlog. This is 40.

the accumulated amount of the Company’s committed, but unexpended, contractual work. The

amount of a company’s backlog is critical in determining its financial condition because backlog

represents the best indication of a company’s future growth. Generally, a high or growing

backlog indicates a strong financial future. Conversely, a low or decreasing backlog represents

potential financial problems. In addition, competitors and customers can take advantage of

decreasing backlog by demanding more favorable terms.

39. To determine how a particular transaction or event should be accounted for 41.

and reported in the financial statements of a commercial enterprise, accountants utilize Generally

Accepted Accounting Principles (“GAAP”). Because of the breadth of materials that comprise

GAAP, Statement of Auditing Standards (“SAS”) No. 69 was issued to classify and provide

guidance as to the relative importance of the various types of pronouncements. SAS No. 69

outlines four categories of established accounting principles, corresponding to their relative


40. Accounting Research Bulletins (“ARB”) and Accounting Principle Board 42.

Opinion (“APB”) are among Level “A” (the highest) pronouncements. With respect to

accounting for Long-term Construction Contracts, ARB-45, issued in 1955, is controlling.

Additional pronouncements, both Level “B,” were issued in 1981 to provide further guidance in

accounting for Long-term Construction Contracts: (1) an AICPA Industry Audit and Accounting

Guide entitled, “Construction Contractors”; and (2) Statement of Position of the AICPA

Accounting Standards Executive Committee (“SOP”) 81-1.

41. In accounting for long-term construction contracts, a company must choose 43.

between the two generally accepted methods: the percentage-of-completion method and the

completed-contract method. This choice is governed by the Level A and B pronouncements

identified above. 42. ARB 45, paragraph 15 describes the circumstances in which each

method can be used:

ARB 45, paragraph 15 describes the circumstances in which each method can be 44.

used:

The committee believes that in general when estimates of costs to complete and extent of progress toward completion of long-term contracts are reasonably dependable, the percentage-of-completion method is preferable. When lack of dependable estimates or inherent hazards cause forecasts to be doubtful, the completed-contracts method is preferable.

43. Once a particular method is chosen, ARB-45 governs how the particular 45.

method effects financial reporting. It states:

Th f l h d i i k


the contract, or other measures of progress toward completion, such as engineering estimates.

The completed contracts method recognizes income only when the contract is completed, or substantially so, and all costs and related revenues are reported as deferred items in the balance sheet until that time.

44. Under either method, when the current estimate of total contract costs 46.

indicates a loss, a provision should be made for the loss on the entire contract in the period that

the total loss estimate is first made. Thus, these accounting conventions are consistent with the

well-established practice of making provisions for foreseeable losses in all transactional matters,

pursuant to Financial Accounting Statements Board’s Financial Accounting Standards No. 5

(“FAS No. 5”). Specifically, according to ARB 45:

Under the Percentage-of-Completion Method – When the current estimate of total contract costs indicates a loss . . . provision should be made for the loss in the entire contract.

Under the Completed-Contract Method – Although the completed contract method does not permit the recording of any income prior to completion, provision should be made for expected losses in accordance with the well established practice of making provision for foreseeable losses.

45. Moreover, according to Paragraph 85 of SOP 81-1, “[p]rovisions for losses 47.

should be made in the period in which they become evident under the percentage-of-completion

method or the completed-contract method.” This rule is also applicable to a newly awarded

contract. Thus, if a contractor deliberately underbids on a project in order to get the contract

knowing with a reasonable degree of certainty that the contract costs will exceed the contract


46. Not only must the contractor record the loss in its income statement, it must 48.

record it on the balance sheet as well. Typically, on a monthly basis, the contractor invoices the

project owner and records an “Accounts Receivable” on the balance sheet at the time of

invoicing. Timing differences between amounts “recognized” and actually incurred are reflected

on the balance sheet as either an asset - “Costs and revenue in excess of billings,” or as a liability

- “Billings in excess of costs and revenue recognized.” To the extent that a contract has a

projected loss, the entire amount of the loss is recognized in the first period of this realization,

and is then adjusted periodically based upon actual results.

47. During the Class Period, S&W used exclusively the percentage-of-49.

completion method with respect to its long-term construction contracts.

48. The suspension of a long term construction project can be treated in 50.

different ways depending on the project’s expected outcome. Under GAAP, continuation of the

percentage-of-completion method of accounting for a suspended project is proper if the

contractor has a reasonable expectation of continuing work on the project and the project is

expected to generate a profit.

49. Where the contractor does not have a reasonable degree of certainty that the 51.

project will continue, the entity is precluded from utilizing the percentage-of-completion method

of accounting and the contractor instead must use the completed-contracts methods. Under the

completed-contracts method, no revenue or related costs are recognized until either the contract

is finally completed or the contractor decides that the uncertainty of continuing is too great, and


only upon completion or termination. In that situation, upon completion or termination, only the

revenue that has been or will be realized (i.e., collected) should be recognized.

50. As shown below, S&W distorted and misrepresented its results throughout 52.

the Class Period by failing to book known losses on its income statement, by failing to reduce its

net assets to account for its money-losing projects and by booking phantom revenue and

receivables from a suspended job, long after there was no hope the job would be revived.

D. Smith and Langford Begin Their Scheme To Distort The Company’s D.Results

51. Smith and Langford’s plan to find a buyer for the Company was dependent 53.

on creating the perception that the Company’s turnaround was successful.

52. To foster that perception, Smith directed, beginning with some projects in 54.

1996, that S&W should underbid for projects on a fixed price basis. Smith and Langford

established “underbidding” as a policy in 1997 according to many S&W executives including

Ray Burke, a former project manager for S&W, who commented that he, like many S&W

veterans disagreed with Smith’s “business strategy.” This strategy was an effort to increase the

number and dollar magnitude of projects on S&W’s books, create the perception of growth in

S&W’s business and tout an ever-increasing project backlog. Smith and Langford did this even

though they knew that S&W’s backlog figures would then represent money losing projects.

53. This underbidding meant that Smith, often over the objections of his own 55.

project teams, was dictating project terms so that S&W was selling fixed-price jobs either at a

l i h h ll i f h h li h d h i j ’


54. According to a confidential source who worked for S&W as an assistant 56.

corporate controller before and during the Class Period (“CS-1”), Smith was warned by senior

management that this policy would result in long-term disaster for the Company. Another

confidential source who worked for S&W as the head of its development corporation before and

during the Class Period (“CS-2”) said, after a bid on a project was accepted, it was not good

news. “Winning a job was not good — it was like ’how much money are we going to lose on

this?’“

55. Since Smith was interested only in a short-term illusion of profitability and 57.

growth, he ignored these warnings. In fact, Roger LeFavor, Vice President of Strategic

Planning, regularly challenged Smith and told Smith numerous projects could not be done for the

bid price, but Smith overruled his objections.

56. Neither the policy nor the risks associated with selling jobs in this manner 58.

was ever communicated to the investing public. To the contrary, throughout the Class Period,

Smith touted the jobs sold by S&W as proof of the Company’s strength, growth and underlying

value. These money-losing white elephants soured before Smith and Langford could find an

unsuspecting buyer and investors during the Class Period lost the value of their entire investment

in S&W.

57. One of the first jobs Smith insisted on underbidding was a project for U.S. 59.

Sugar in 1997. According to Tim McBride, Controller for the Industrial Division and Assistant

Treasurer, “it was underbid” and Smith knew it was underbid. However, after being awarded


58. According to S&W employees, Burke, Protasewich, Robert Wiesel, a 60.

former Executive Vice President of S&W, Daniel Martino, a former senior accountant of S&W,

McBride, CS-1, CS-2 and Dan Gershkowitz, a former project manager for S&W, the following

projects were all bid at a loss pursuant to Smith’s and Langford’s undisclosed policy:

a. Taiwan Power Company, Taipei, Taiwan, subcontract award, Third Quarter 1996, $80 million.

b. Volta River Authority, Takoradi Thermal Power Plant, Ghana, June 17, 1997, $55 million engineering, procurement and construction contract.

c. Electricity de Vietnam, Pha Lai II Power Plant, Vietnam, March 17, 1998, $125 million engineering and procurement contract.

d. Energy Management, Inc., Tiverton, Rhode Island and Rumford, Maine, $52.6 million turnkey contract dated as of April 14, 1998.

e. Maine Yankee Atomic Power Company, Maine, August 4, 1998, $250 million nuclear plant decommissioning and demolition contract.

f. CalEnergy Co., Salton Sea, California, October 26, 1998, $141 million engineering, procurement and construction contract.

g. Waste Options Nantucket, Nantucket, November 23, 1998, $10 million design, engineering and construction contract.

h. Cordova Energy Co., Illinois, May 4, 1999, $208 million engineering, procurement and construction contract.

i. AES Enterprises, Inc., New Hampshire, December 28, 1999, $300 million engineering, procurement and construction contract.

j. AES Enterprises, Inc., Texas, March 20, 2000, approximately $200 million engineering, procurement and construction contract.

59. Maine Yankee was a particularly risky project on which Smith directed 61.

S&W to underbid According to Burke who was the project manager for the Maine Yankee


of the most dangerous because it represented the first nuclear power plant decommissioning

performed on a lump sum, turnkey basis. According to Burke, Smith knew the project was

underbid, but did not tell the Board, because he wanted S&W to get into this market.

60. According to Gershkowitz, when S&W bid approximately $70-80 million 62.

on the Taiwan nuclear power plant project, the bids of S&W’s competitors, such as Raytheon, to

perform the same work S&W proposed to do were substantially higher. Gershkowitz was told,

for example, that Raytheon’s bid for the same work was $120 million.

61. According to these former S&W insiders, S&W’s underbidding ranged 63.

from 10% to 40%.

E. S&W’s Rapid Financial Collapse and Desperate Attempts to Keep the E.Company Afloat

62. Although investors were kept in the dark, S&W’s financial problems 64.

actually began in early 1998 after problems developed with S&W’s Trans Pacific Petrochemical

Indotama (“TPPI”) project.

63. In 1996, S&W had joined in a consortium of contractors to construct an 65.

integrated ethylene and olefins complex in Indonesia for TPPI for $2.3 billion. S&W’s portion

of the total contract value was $710 million. Initially, there was no written agreement but,

according to CS-1, S&W nonetheless starting issuing purchase orders to vendors. Eventually,

TPPI agreed to execute an interim, written agreement and Smith sent Wiesel to Indonesia to

negotiate the agreement in late 1996. At Smith’s request, Wiesel called Smith on a daily basis to

di d il f h i i


to investors. The agreement recognized that TPPI’s financing had not been fully committed.

Moreover, the agreement provided no guarantees of payment to S&W. Under the agreement,

S&W was required to assume the risk of all equipment purchases and subcontract work.

Consequently, all of the purchase orders issued by S&W for the equipment and other initial

construction requirements were in S&W’s name. This risk did not become an issue for the

Company during the first year of the project, from late 1996 to late 1997, because TPPI was able

to pay S&W in a timely manner for its work during that period.

65. However, in the fourth quarter of 1997, TPPI suspended work on the 67.

project because it had exhausted its funding for the project. According to Martino, by the time

the project was suspended, S&W had already sent millions of dollars in equipment to Indonesia.

S&W was responsible for the payment of all cancellation costs and all outstanding purchase

orders. Thus, according to Parker, when the project stopped in late 1997, S&W had to pay all of

its vendors for the equipment that was shipped to Indonesia and other cancellation costs. CS-

1said that TPPI suggested to S&W that it try to get out of its contracts with its vendors due to the

suspension. Based upon this suggestion, S&W knew in late 1997 that the project was dead even

though they had not received an official termination notice. S&W also knew at this point that it

was unlikely it would ever receive any additional payments on TPPI.

66. CS-1 added that because S&W issued all of the purchase orders relating to 68.

the project in its own name, S&W was responsible to pay the vendors for the equipment. “In the

next two years, we put about $50 million into that project because we had to pay the vendors,”


result of the project’s suspension, TPPI should have had a significant negative effect on S&W’s

financial statements. According to CS-1, to avoid that negative effect, beginning with the first

quarter of 1998, S&W created phantom revenue and receivables from the TPPI project to cover

S&W’s project related costs by recording revenue equal to the amount of those costs. The

purpose of recording this revenue was to avoid showing a loss from the project on S&W’s

financial statements. Spear and PWC were fully aware of this decision. PWC and Spear

allowed S&W to recognize this phantom revenue and receivables based upon S&W’s

representation that it believed TPPI would be resumed. There was no basis for this false

representation and Spear and PWC would have discovered this had they chosen to independently

test the representation, as they should have done for such a material contract.

68. Instead, S&W, according to CS-1, booked $86.9 million of revenue from 70.

TPPI in 1998 and $53 million in 1999. Absent this revenue, S&W’s 1998 earnings would have

been negative $108.7 million rather than the negative $49.3 million it announced and its 1999

earnings would have been a $11.3 million loss as opposed to the $20.5 million of net income that

was announced. Neither S&W’s decision to book these revenues nor the amount that it booked

was ever disclosed to investors.

69. As S&W’s financial position deteriorated as a result of the TPPI debacle, 71.

Smith and Langford responded by bidding even more aggressively on new projects to increase

the Company’s backlog.

70. The effect of the underbidding and the problems at TPPI took a serious toll 72.


71. According to Daniel Gershkowitz, the original project manager for the 73.

Tiverton and Rumford projects, the Company started having problems paying its vendors on the

Tiverton project in the Summer of 1998. During that time period, certain vendors, such as The

Shaw Group, stopped delivering materials to the project site because S&W had not paid them.

72. Throughout 1998, while the Company was disclosing financial results to 74.

the investing public on the one hand, comprehensive internal financial reports, distributed to

approximately twenty S&W division heads and top executives, that included financials broken

out for all divisions, with details of personnel costs, sales, income and working capital and

which also measured S&W’s performance against its plan for the year, showed a materially

worse financial situation and outlook. Recipients of the internal reports knew that by mid-1998,

S&W was in financial trouble and was losing money. According to CS-2, the head of S&W’s

Development Corporation: “Anyone who had access to the monthly financials could see that it

was not what was being said publicly. You could read them and compare them with the

quarterlies he [Smith] was reporting and ask what he was smoking. Knowing what we knew

inside and seeing the quarterlies – they just did not jibe.”

73. By August 1998, S&W had obtained approval from TPPI to resell the 75.

project materials and equipment. Martino said S&W began selling the equipment for “pennies

on the dollar to try to get the money back.”

74. CS-1 added that by January 1999, “it was clear that the project would not 76.

restart.” By that time, TPPI had told S&W that the slight prospect that had existed during 1998


which S&W was not receiving. In its public filings, S&W repeatedly advised that: “Had the

TPPI project been cancelled as of December 31, 1999, and if resale of the olefins plant were

unlikely to be completed, SW would have recorded a pre-tax charge of approx. $76,800,000

representing project working capital plus current procurement commitments net of the estimated

salvage value of procured equipment and materials. On a similar basis, the pre-tax charge would

have been $72,400,000 in 1998.” All of these statements were misleading since right from the

initial suspension in December 1997, S&W knew it was unlikely the project would ever restart.

By December 1998, that was a certainty. Nor did S&W ever disclose that it booked $86.9

million in phantom revenue and receivables from TPPI in 1998 after the suspension and $53

million in phantom revenue and receivables in 1999.

75. According to CS-1, Martino and CS-2, Smith and Langford knew the 77.

equipment sent to Indonesia for the project was being sold for pennies on the dollar and that the

project would not be restarted. Accordingly, S&W’s statements that the TPPI project would

likely restart were misleading and because Smith and Langford knew that the TPPI project

would not resume, S&W should not have kept the TPPI project in the Company’s backlog and

should not have been booking phantom revenue and receivables from the project. To the

contrary, S&W should have booked the entire loss on the TPPI project, at the latest, in the fourth

quarter of 1998. Indeed, S&W should have booked the loss in the fourth quarter of 1997 when

TPPI essentially terminated the project and suggested S&W get out of its agreements with its

vendors.


degree of certainty that the project will continue or the project is not expected to show a profit.

Once the project was suspended in December 1997, neither of these requirements could be met.

At a certainty, they could not be met by December 1998. Thus, S&W and PWC violated GAAP

by recording revenue from the TPPI project that was never received after the project was

suspended. In fact, since S&W actually knew that the TPPI project would not be continued,

under GAAP, S&W was required to evaluate the remaining estimated costs on the project,

calculate any expected, future revenue and determine whether there would be a loss on the

project. Since S&W knew it was going to incur a substantial overall loss on TPPI, FAS No. 5

required that S&W accrue the loss as a charge to income. S&W and PWC failed to do so.

77. Also in January 1999, the Company’s Board of Directors called a special 79.

meeting to review and discuss the TPPI project. By the conclusion of the meeting, it was evident

to the Board that the TPPI project had already caused S&W serious financial problems and that it

was unlikely the project would ever restart.

78. The Company’s cash flow problems worsened through 1998 and by the 80.

beginning of 1999, Gershkowitz, the project manager on S&W’s Tiverton and Rumford projects,

was compelled to travel to S&W’s accounting department in Boston on several occasions to

insist personally that S&W pay the key project vendors on the Tiverton project. By that time,

several of the vendors had threatened to place liens on the project if they were not paid.

79. By February 1999, Gershkowitz said, S&W resorted to using the 81.

Company’s credit cards to purchase materials for the Tiverton project. These credit cards were


80. In March 1999, Gershkowitz resigned from the Company after realizing 82.

that the Tiverton and Rumford projects were hopeless due to increasing cost overruns. S&W

was simply unable to pay all of the subcontractors and vendors the amounts due.

81. When S&W underbid the Tiverton and Rumford projects, the Company 83.

also agreed to complete the Tiverton project in 19 months and the Rumford project in 20 months.

S&W’s inability to pay its subcontractors and vendors led to work delays which made it

impossible to meet this schedule.

82. After Gershkowitz resigned, S&W assigned Edmond Ghantous to manage 84.

the two projects. Despite the change in project management, the Tiverton and Rumford projects

remained significantly over budget and behind schedule.

83. Throughout the remainder of the first quarter of 1999, S&W’s cash flow 85.

problems became increasingly worse. S&W’s cash flow problems became so bad that S&W

could not pay vendors and subcontractors’ invoices on many other projects in addition to

Tiverton and the backlog of invoices on nearly every project escalated greatly. According to

Daniel Martino, a project accountant for S&W, “it worsened every month.” By the second

quarter of 1999, Martino said “it got to the point that everyone in project accounting was not

answering the telephones because everyone was calling looking for money.” S&W’s treasurer

regularly sent e-mails to internal staff advising that the Company had no money to pay the

vendors’ bills and to not bother submitting requests for payment.

84. According to Rod Parker, a former global project manager for S&W, S&W 86.


85. Martino added that some vendors and subcontractors, including Siemens 87.

and Foster- Wheeler, called Smith directly to complain about not being paid. Some

subcontractors also threatened to walk off the projects if they did not get paid. According to

several different sources, those who called Smith regularly to collect money and threaten to walk

off a project were usually the first to get paid. As McBride recounted, “[u]sually, whoever

yelled the loudest got paid.” During June, July and August 1999, S&W went weeks without

making any payments to its vendors and subcontractors.

86. By the Summer of 1999, S&W had instituted a rigorous and continuous 88.

review of outstanding accounts payable to determine which vendors and subcontractors could be

stalled off to conserve operating funds, and which had to be paid immediately to prevent S&W’s

business from collapsing.

87. At the same time, S&W’s accountants started keeping track of the 89.

Company’s outstanding obligations by creating an overdue accounts payable list which was first

updated monthly, then weekly, and finally daily. These reports were delivered to Smith,

Langford and Jim Carroll, S&W’s controller. On several different occasions, Smith, whose

office was on the same floor as the project accountants, called Dan Levy, S&W’s corporate

controller, asking to review aging reports on bills. After reviewing those reports, Smith and

Levy would usually decide who to pay. According to Martino, some accounts payable were 600

to 700 days overdue. Consequently, vendors and subcontractors stopped work on S&W’s

projects, or engaged in work slow-downs. Subcontractors also started filing liens. “Priority


subcontractors only after consulting with Smith or Langford, who were fully aware of the

severity of the situation.

88. Carroll hired Jeff Besse to handle the increasing number of collection calls. 90.

Carroll still decided which vendors and subcontractors were to be paid after consulting Smith

and Langford.

89. By the Spring of 1999, S&W’s inability to pay the subcontractors and 91.

vendors working on the Tiverton project had reached desperate proportions. Protasewich would

routinely go to the accounts payable department and look for the longest outstanding bill or the

most critical bill to pay to keep the Tiverton project going. “It wasn’t pretty”, said Protasewich.

“We got together to decide what to say to the contractors.”

90. Tiverton’s sister project in Rumford, Maine, was also experiencing cost 92.

overruns as a result of Smith and Langford’s purposeful underbidding of the project. In a June

28, 1999 confidential S&W assessment team report, Tom Herschman, who oversaw various

projects for the Company’s executives, noted his concern about the Company’s ability to keep

the Rumford project within budget: “Based on discussions, 90% sure of making schedule, but do

not feel good at all about the budget.” Of course, Smith and Langford knew S&W could not

meet the budget since the project was underbid.

91. Smith, Langford and other S&W personnel sought to obtain conventional 93.

long term financing through bonds, long or intermediate term bank loans, and preferred stock,

but were unable to do so.


funds and $100 million in letters of credit. The Credit Agreement was announced in a 10-Q filed

by the Company on August 12, 1999. In the 10-Q, the Company advised that it used the newly

acquired line of credit to repay certain bank loans and long-term debt that was outstanding as of

the end of the second quarter. However, the 10-Q failed to disclose that, at the time S&W

entered into the Credit Agreement, it was already in material default under Sections 6.06 and

9.01(f)(i) of the Credit Agreement, because it had failed to make timely payments to its vendors

and subcontractors as their bills came due.

93. Smith and Langford thus knew that S&W could not reasonably rely on the 95.

Credit Agreement for additional funds because the lenders would immediately be in a position to

cancel the availability of future funds and to call in the existing indebtedness due to S&W’s

material defaults.

94. Defendants thus knew on July 30, 1999 that without significant additional 96.

capital beyond that represented by the Credit Agreement, S&W faced financial collapse. None

of this was communicated to investors. Instead, on July 26, 1999, four days before the effective

date of the Credit Agreement, S&W issued a press release reporting higher operating and net

income and other improved results for the Second Quarter of 1999. Smith and Langford touted

S&W’s financial situation and future profitability based on the Company’s purportedly,

improved operating performance during the second quarter and a purportedly higher margin

business in its backlog. The press release was false and misleading for failing to disclose that

S&W could not pay its subcontractors and vendors, and had no future, let alone a bright one.


S&W, concerned about its outstanding, overdue balance and that it had only received

approximately $100,000 out of $600,000 S&W owed MSE. Ghantous was also notified that

because S&W could not pay MSE, MSE was not able to pay its own suppliers and

subcontractors, and that those subcontractors were threatening to walk off the job site. Ghantous

immediately replied by e-mail to Carroll requesting that S&W expedite its payment to MSE to

save the project from yet more costly delays.

96. By early October 1999, S&W was developing a recovery plan to account 98.

for the delays in the Tiverton and Rumford projects. On or about October 4, 1999, S&W

conducted a meeting to review the final forecasts for the two projects.

97. By mid-October 1999, key S&W employees working on the Tiverton 99.

project saw the writing on the wall and knew they had to not only quit working on the project,

but resign from the Company altogether before the projects completely fell apart. As one former

S&W employee put it, “it was like rats deserting a sinking ship.” During the third week of

October 1999 alone, Nickolas Droblot and Ralph Segar, two S&W managers who were working

on the Tiverton project, resigned from the Company. Their resignations followed the resignation

of Bob Burke, S&W’s construction manager for the Rumford project and other key S&W

employees, including Leon Greer, another S&W construction manager for the Rumford project.

Apparently unsettled by the practices described above, Burke wrote in his resignation notice that

his “management style [did] not appear to coincide with Stone & Webster’s overall corporate

philosophy.”


schedule S&W had promised and that S&W was behind in the mechanical work. Callahan

added: “I’m embarrassed that we are so ignorant of what we are not accomplishing that we have

to hear it first from our customer. I need to bring this to [Pete] Evan’s [an S&W Executive Vice

President and the President and Chief Operating Officer of SWEC] attention, but feel like an

idiot saying we had a recovery plan, gave it to the client for comment, didn’t attempt to follow it,

and didn’t have a supervisory, management or reporting knowledge of our performance.”

99. The very next day, on October 14, 1999, Brad Bradfield e-mailed Callahan, 101.

Rosol, Ian Anderson, Ghantous and Deborah Gustafson to advise them that: (1) the Company

was having problems with the mechanical subcontractor, Power Piping, due to outstanding,

overdue invoices; (2) EMI had concerns about S&W’s staff and quality assurance program at

Tiverton; (3) S&W was experiencing problems with the availability of craft personnel at the

Tiverton and Rumford project sites; and (4) S&W had an outstanding invoice payment issue with

several other contractors and suppliers who were only getting paid after they called high level

S&W executives. Bradfield expressed his concern that suppliers and subcontractors would cease

doing business with S&W unless they were paid in advance or immediately after each segment

of work was completed: “I am working with Jim Carroll and doing the best we can with

available cash, but we are precariously close to a situation where suppliers and contractors will

invoke quid pro quo.”

100. On October 28, 1999, Craig D. Olmsted, a Vice President of EMI, wrote to 102.

Ghantous to confirm a November 9, 1999 meeting between S&W and EMI at the Tiverton site.


to get the project back on schedule and whether S&W had considered bringing other

subcontractors to the site.

101. Concerned with S&W’s increasingly questionable ability to complete the 103.

project in a timely manner, during a meeting on November 2, 1999, EMI asked that S&W

appoint an “executive sponsor” to oversee the project. This person would give direction to the

project manager and project team to insure completion in accordance with the terms of the

parties’ agreement.

102. Also at this point, internal S&W calculations showed that each day of delay 104.

was costing S&W an additional $60,000.

103. The dire financial condition of the project did not go unnoticed by senior 105.

management or S&W’s Board. In an e-mail dated November 5, 1999, Smith wrote to Evans, the

President and Chief Operating Officer of S&W Engineers and Constructors (“SWEC”), and

Callahan, an SWEC manager, advising them:

A number of directors would like to have a review of the EMI [Tiverton] projects, covering the bidding process, the terms and conditions of the contract, what happened to the projects during the execution to date and what we are doing to assure we can meet the current estimates. The meeting would be in a similar vain [sic] to what was done in the post hoc review back at the January board meeting. Members of the board have previously reviewed the TPPI project in the UK. What is envisioned with this review is not a special board meeting but a chance for those board members who are interested to come and sit through the same review in early October with the project.

The board wanted me to assure you that this in no way implies a l k f fid i l d hi b h f l i i i


104. Also on November 5, 1999, Ghantous e-mailed Manny Garcia, an SWEC 106.

construction manager, to inform him that S&W would be requesting all craft workers go on

overtime in an attempt to get the project up to speed. Ghantous added that S&W should develop

a plan “to track progress and cost” and that S&W should urgently get a plan in place before the

next monthly meeting with EMI. In turn, Garcia e-mailed Evans to advise him that the number

of electricians was being increased from 27 to 61 and that two more roofing and siding crews

were added.

105. By November 8, 1999, S&W’s failure to pay the subcontractors involved in 107.

the Tiverton project became so bad that an Interoffice Memorandum was circulated to S&W

management and staff that read:

In an effort to deal with our current payable situation, a team has been established to be the focal point for the project team and suppliers for all payment issues. The goal of the team is to provide consistency and accuracy on what we tell suppliers and to give the project teams support in addressing the need regarding timely information regarding status of invoices.

On that same day, Garcia sent an e-mail to Ghantous telling him that he needed “to get the

project back on track.”

106. S&W was having difficulty keeping EMI in the dark about the Company’s 108.

worsening finances. Sensing S&W’s worsening financial situation, EMI requested an

emergency meeting with Evans and/or Smith to discuss S&W’s “financial strength.”

107. In addition to S&W’s struggles to keep the Tiverton and Rumford projects 109.

f i l di d i ff hid i bl i h TPPI h C f d h i


were filed as a result of S&W’s failure to pay the subcontractors for work they had performed at

the site.

108. On November 18, 1999, Maine Yankee notified S&W in writing that it was 110.

in material breach of their contract for failing to pay its subcontractors and suppliers for work

previously performed and for its inability to pay for work that was currently being performed

and scheduled to be performed in the future. A copy was also sent to Federal Insurance

Company (“Federal Insurance”) as surety for S&W.

109. S&W did not notify its shareholders of the Maine Yankee letter, and 111.

instead took immediate steps to keep the matter quiet.

110. Within days of receiving Maine Yankee’s letter, Smith, Carroll, and other 112.

senior executives traveled to Maine to meet with Maine Yankee representatives in a desperate

effort to stop Maine Yankee from terminating the project.

111. Defendants knew that the assertions of non-performance were accurate and 113.

highly material and that S&W did not have the capital needed to cure the defaults.

112. Defendants knew, not later than November 18, 1999, that without the 114.

removal of the liens filed by various unpaid S&W subcontractors and the raising of additional

funds, Federal Insurance, the sole surety company that had issued the performance and payment

bonds for the $250 million project, would not issue bonds for any other S&W project; that S&W

could not obtain another bonding company to replace Federal Insurance; and that the lenders

under S&W’s Credit Agreement would not issue letters of credit. Defendants also knew that


113. On November 30, 1999, Maine Yankee and S&W entered into an interim 115.

payment agreement. Under the interim payment agreement, S&W was required to provide to

Maine Yankee vendor certificates before S&W would be paid. Vendor certificates certify that

S&W has paid the particular vendor’s invoices.

114. Under the interim payment agreement, the parties also agreed that on a 116.

weekly basis, financial representatives from each party would meet and S&W would make

available its invoice status log showing payment status to suppliers and subcontractors, terms of

payment invoice dates, due dates and other information. S&W also agreed to provide Maine

Yankee with additional guarantees.

115. Finally, the interim payment agreement stated:117.

SWEC’s [S&W Engineers and Constructors] Controller and Maine Yankee’s Treasurer have met at the Site to discuss MaineYankee’s concerns relative to SWEC’s financial status. It is acknowledged that follow-up meetings may be required and SWEC agrees to provide reasonably available updated financial information, as mutually agreed to, at such meetings with a goal, working in good faith to resolve concerns related to SWEC’s financial capacity.

116. In the meantime, Smith and Langford were desperately trying to generate 118.

cash. They were equally desperate to conceal how dire S&W’s finances really were because

there were numerous prospective buyers looking at S&W. Several prospective buyers, including

The Shaw Group, Jacobs Engineering Group, Morrison Knudsen, Technip, Fluor Corp. and

others, expressed interest in acquiring the Company. Several of the prospective buyers traveled

to S&W’s headquarters to conduct due diligence. Smith and Langford knew that disclosure of


117. On October 27, 1999, S&W announced it was taking steps to raise cash. It 119.

announced that it was selling its headquarters building and its Nordic cold processing and

storage business “to concentrate on core competencies.” In reality, defendants knew that S&W

was attempting to sell such assets because this was the only way in which S&W could obtain any

material amount of cash with which to placate its bank lending consortium and avoid

bankruptcy.

118. By November 19, 1999, S&W’s lenders had discovered the various defaults 120.

and they demanded that the Credit Agreement be restructured. A “Pre-Workout Agreement,” an

agreement lenders require of borrowers who are known to be in financial difficulty and in

present or imminent material default on their loans, was developed. Rather than disclose the true

reason for the restructuring and the terms of the Company’s new borrowing facility, S&W

continued its deception by issuing a press release on December 1, 1999 that announced a $30

million increase in the Company’s borrowing facility to a maximum of $160 million and an

extension of the facility through May 31, 2000. The press release was grossly misleading. On

December 1, 1999, defendants knew that S&W’s credit had been exhausted; that it was on the

verge of collapse; and that it was kept in business only at the sufferance of the banks, pending

the sale of certain assets so that the bank lenders could reduce their exposure to a failing

enterprise before the inevitable collapse or bargain sale. Nonetheless, S&W deceived investors

in the press release by suggesting that this was a relatively innocuous restructuring to obtain

more funds.


an adjustment only by reassuring the bank lenders that they would receive all of the net proceeds

from the sale.

120. Upon the sale of S&W’s headquarters building, S&W used $140 million of 122.

the proceeds to reduce the $160 million borrowing facility to $20 million. The remaining $20

million direct borrowing facility had been fully drawn down, with no more funds available.

Moreover, $88.2 million of the $100 million letter of credit facility had also been drawn,

together with miscellaneous other bank letters of credit drawn. Defendants thus knew, not later

than December 6, 1999, that the sale of its headquarters building would not alleviate S&W’s

cash crisis and impending bankruptcy. None of this was disclosed. Instead, S&W said only that

the proceeds from the sale of the Company’s building would be used to reduce debt and for other

general corporate purposes. 121. Smith and Langford were so desperate for cash that, on or

about December 14, 1999, the Individual Defendants and others caused the Stone & Webster

Employee Retirement Plan Trust (“Plan”) to purchase one million shares of S&W common stock

at $15.35 per share, after first amending both the Plan and the Trust to permit this purchase to be

made. S&W received over $15 million as a result of this transaction.

Smith and Langford were so desperate for cash that, on or about December 14, 123.

1999, the Individual Defendants and others caused the Stone & Webster Employee Retirement

Plan Trust (“Plan”) to purchase one million shares of S&W common stock at $15.35 per share,

after first amending both the Plan and the Trust to permit this purchase to be made. S&W

received over $15 million as a result of this transaction.


1999, S&W also stated that, in addition to S&W’s receipt of over $15 million in new capital as a

result of the transaction, “[t]he Company’s management believes that operating results for

FY2000 will meet current analyst expectations after the dilution resulting from the additional

shares.”

123. S&W’s press release was materially misleading in several respects. First, 125.

the statement that S&W would receive $15 million in additional capital was materially

misleading because it failed to disclose that, in essence, the money was already spent and that

S&W was facing imminent collapse due to lack of working capital and inability to raise


Retirement Plan had been deemed fair to the Retirement Plan was materially misleading because

it failed to disclose that the fairness opinion was not based upon consideration of S&W’s true

financial condition – it was on the verge of financial collapse, and its stock was essentially

worthless. Third, the statement that management believed “operating results would meet analyst

expectations” was materially misleading because management knew that, analyst expectations

were based on the false and misleading information supplied by the Company and that absent an

infusion of significant additional funds – which they had no reasonable basis to believe would

occur – S&W faced imminent bankruptcy and could not perform on its existing contracts.

124. After S&W completed the sale of its treasury stock to the Company’s 126.

Employee Retirement Plan, in apparent disagreement with this act of blatant fraud, John P.

Merrill, Jr., a director of the Company since 1996, suddenly resigned. S&W concealed Merrill’s


knowledge, they failed to inform the market, and instead issued statements calculated to mislead

and reassure investors, such as S&W’s press release of December 16, 1999.

126. In fact, toward the end of 1999, Smith’s gasoline credit card was 128.

discontinued and newspaper delivery to S&W’s building was halted.

127. At the same time that Smith and Langford were trying to find cash and 129.

coverup the crisis on the Maine Yankee project without disclosing the severity of the situation to

the Company’s investors, the Company’s financial problems on the Tiverton project worsened.

On November 22, 1999, Brant e-mailed Ghantous and Garcia regarding an outstanding invoice

from Power Piping which Brant approved, but Ghantous did not because of a premium time

charge. In the e-mail, Brant reminded Ghantous and Garcia that S&W was late providing

materials to Power Piping, S&W’s mechanical subcontractor for the Tiverton project. In

addition to S&W’s failure to get materials delivered on time due to the lack of payment, a lack of

progress at the project was blamed on the “payment issues” S&W was having with all of its

major subcontractors.

128. That same day, November 22, 1999, Garcia sent Ghantous an e-mail 130.

regarding late payments and liens. In the e-mail, Garcia advised that EMI had called him to

warn that a subcontractor was planning to put a lien on EMI’s property as a result of S&W’s

failure to pay the subcontractor’s bills. EMI also expressed concern that S&W was not

providing vender certificates as it had promised to do.

129. In an e-mail to Ghantous from Brant on December 6, 1999, Brant noted that 131.


Brant disclosed that other craftsmen, including pipe-fitters, and key subcontractors, including

Power Piping, were going to leave the project due to S&W’s failure to pay them. Brant

concluded, “[L]ooks like someone is going to have to make some major decisions on contractor

payments very soon or will look like ghost town here. My records show approximately $4.3

million due in subcontractor payments alone not counting vendors.” Immediately after the e-

mail was sent, Ghantous notified Callahan, Rosol, an executive vice-president of S&W and

Anderson that he would review the impact of O’Connor’s reduction of hours on the project

schedule. Ghantous, noting the Company’s failure to pay the subcontractors, requested that

Callahan, Rosol and Anderson advise Ghantous “when we can get relief on payment.” Pursuant

to the Company’s policy on outstanding invoices, notice of all of these disputes was sent to

Carroll, Smith and Langford.

130. As a result of S&W’s failure to pay its subcontractors and vendors on the 132.

Tiverton project, deliveries of materials were also delayed. Subcontractors found themselves

sitting around, although some were billing S&W at premium rates for doing so. This led to

S&W becoming even further behind in its schedule and its budget.

131. By December 13, 1999, trash was building up at the site and spilling out of 133.

the dumpsters because S&W had not paid the bills of the trash hauler. As noted in an e-mail

from Rose Mary Eva to Ghantous dated December 13, 1999, “we have trash on the sides of the

overflowing dumpster - not a good impression for our expected visitors.” Ghantous quickly

replied that it was essential that S&W pay Waste Management, the trash hauler, on an expedited


Power Piping proposed to replace MEI with a Power Piping affiliated electrical subcontractor,

Sturgeon Electric Company (“Sturgeon”).

133. Although Power Piping was having difficulty obtaining payment on its 135.

other invoices, it was assured by S&W that these problems were temporary and that by April,

2000, they would be cleared up.

134. Consequently, Sturgeon agreed to handle the project by deferring payment 136.

and extending financing for a flat 2% for the amounts to-be-earned pursuant to the contract until

April 1, 2000, and to provide invoices on a weekly basis for time and materials only. Thereafter,

Sturgeon would return to traditional monthly invoicing and payment. The “rough order of

magnitude estimate” to complete the electrical work that was cited in the proposal letter was

$5,018,548, including a flat fee of $400,000 to cover Sturgeon’s overhead and profit. Further

“scope growth” (i.e., new work in excess of the $5,018,548) would be charged “at cost plus

10%.”

135. Accordingly, during the period January 1, 2000 through March 31, 2000, 137.

no invoices were received by S&W from Sturgeon. However, S&W knew that it was incurring a

continuing and growing multi-million dollar liability to Sturgeon, but according to a confidential

source, no amounts were recorded as accounts payable to Sturgeon in the Tiverton financial

statements.

136. In early January 2000, Smith, in an obviously unguarded moment, not only 138.

conceded that the Company had some significant problem projects, but also disclosed that he and


137. In a letter to the Minister of Petroleum & Mineral Resources of the 139.

Kingdom of Saudi Arabia dated January 7, 2000, Smith disclosed:

Unfortunately, the news of our inability to resolve outstanding project settlements severely impacted our stock price since we had to announce a shortfall in earnings partially caused by the inability to recover these sums. This has meant a loss in market value of over $300 million. Another unfortunate consequence has resulted – we were forced to sell and leaseback our headquarters building in Boston – a location where we have spanned now three decades – as a result of the cash requirement to fund the losses. So far, I have been able to avoid disclosure of the fact that these losses are largely as a result of our difficulties with Aramco; but it is becoming increasingly difficult, and I remain hopeful of reaching a settlement before our Annual Meeting of Shareholders which is in May, 2000, so that we may both put this behind us. [emphasis added]

138. As bad as S&W’s financial problems were, they got worse during the first 140.

quarter of 2000. On March 2, 2000, EMI notified S&W of defaults under Section 3.15 of the

Turnkey Contract in that subcontractors had placed liens on the Tiverton facility and the facility

site and demanded that S&W remedy the default. S&W was, of course, unable to cure the

defaults and failed to discharge the liens or timely pay the subcontractors involved.

139. During a meeting on March 14, 2000 between S&W and Sturgeon, S&W 141.

learned that Sturgeon would be submitting its first invoices on April 1, 2000 for approximately

$5 million. Moreover, Sturgeon advised S&W that the electrical work was not completed and

that it would cost over $3 million more to complete the work.

140. On April 7, 2000, Sturgeon submitted an invoice for $8.4 million and again 142.

d i d h k d d i l h ll b l d S


141. At the same time, Smith and Langford were determined to conceal the 143.

Company’s true financial picture from third parties. According to a confidential source who

worked for S&W as a construction vice-president before and during the Class Period (“CS-3”),

in April 2000, Smith wrote a letter which employees were encouraged to show customers and

vendors that said S&W had straightened out its financial problems. However, nothing was

further from the truth. Within weeks, S&W filed bankruptcy and investors lost everything.

142. The reason why Smith and Langford were desperate to conceal S&W’s 144.

financial condition was that they still hoped to sell the Company and trigger their change of

control provisions. At this time, Smith and Langford were negotiating with Jacobs and they

were doing their best to conceal the true state of the Company’s finances from that prospective

purchaser.

143. However, during the course of conducting its due diligence, Jacobs 145.

requested a series of meetings between its financial team and S&W’s auditor, PWC, to review, in

particular, TPPI and Tiverton. Following these meetings, John Prosser, the Chief Financial

Officer of Jacobs, told Smith and Langford that S&W was essentially insolvent and that the only

way Jacobs would buy S&W is if the Company filed for bankruptcy.

144. At the same time these discussions were taking place, the Company issued, 146.

on April 14, 2000, its 10-K for fiscal year 1999. The 1999 10-K reported revenue of $1.17

billion, net income of $20.5 million, and net assets of $324.3 million. It reassured investors

about S&W’s long-term financial condition by touting the recent infusion of capital from the sale


unqualified audit opinion by PWC, dated February 14, 2000, attesting that the financial

statements had been prepared according to GAAP.

145. Following the meetings between PWC and Jacobs’ financial team, where 147.

Jacobs questioned PWC’s accounting for TPPI and Tiverton, Robert Spear, PWC’s audit partner

for S&W, decided he had better re-examine these projects. Spear was particularly concerned

when he learned that Jacobs was insisting that S&W file Chapter 11 since Spear knew that this

filing would cause a stock price decline and possibly shareholder lawsuits. Thus, he feared that

PWC’s accounting would be scrutinized and that S&W’s investors would be even more

disturbed by that accounting than Jacobs.

146. With the sale to Jacobs and Chapter 11 looming overhead, Spear directed 148.

the PWC team to hurriedly take another look at TPPI and Tiverton. Although TPPI was by far

the more egregious situation, there was no credible way for PWC to claim any recent change in

the TPPI situation to justify requiring that S&W change its accounting. Tiverton presented a

better opportunity for PWC to belatedly show backbone and independence and make a public

showing of correcting S&W’s accounting.

147. Thus, Spear seized on S&W’s cost overruns on the Tiverton project. 149.

Spear advised Langford that these cost overruns had taken place in 1999 and should have been

incorporated into the 1999 financial statements. Because S&W knew of the cost overruns in

1999, PWC was going to force S&W to restate its 1999 financial statements. Langford was very

surprised at this since PWC had known that S&W had substantial cost overruns when PWC first


for a substantial cost overrun on an ongoing project.” The press release provided the following

explanation for the cost overrun:

Company officials were recently notified of an unanticipated cost overrun on a key project by a major subcontractor related to estimates to complete work during the first half of the current year. As a result, the Company conducted a thorough review of this project and, based on this review, the Company will record a provision of $27.5 million and will revise its 1999 financial statements and amend its 1999 Form 10-K.

The Company further announced that as a result of the allegedly unanticipated cost overruns and

operating losses, the Company was experiencing “liquidity problems” and was in discussions

with potential lenders.

149. In response to this announcement, the price of S&W common stock 151.

declined precipitously, falling from $13.8125 per share to $6.25 per share, and continued to

decline during the next several trading days falling to as low as $2.50 per share.

150. Of course, these cost overruns were neither unanticipated nor previously 152.

unknown, nor were they just discovered pursuant to a review. Smith & Langford knew of the

cost overruns since Spring of 1999, and had been desperately trying to cope with these problems

while they hid them from investors and prospective buyers.

151. They had hid these problems so well that many investors refused to believe 153.

that the decline in S&W stock was justified. Some comments at the time from the S&W Internet

chat room included:

The company has not filed Chapter 11. Just a short sellers rumor. I ff h h li l d b l $20 illi i b k


road but would only be temporary they are in not that much debt and do have substantial assets.

Great book value and strong desire to avoid Chapter 11. When they work out the money troubles, could be a quick turnaround, +100% from here.

If SW rebounds, the reward will be seeing go back to $30.

Is it possible for a company that has been in business since 1939, could be overblowing things a bit. Also that stock is not dropping that much anymore with low quantity activity. [A]bout the institutional trading, reading between the lines this could be a risky but profitable investment after panicers [sic] leave.

152. Moreover, S&W and PWC were notably silent about S&W’s biggest 154.

financial fraud – TPPI. As shown, S&W had booked phantom revenue and receivables at TPPI,

with PWC’s knowledge and acquiescence, for over two years. Absent this phantom revenue and

receivables, S&W would have had earnings of negative $108.7 million for 1998 (rather than the

$49.3 million reported) and a net loss of $11.3 million for 1999 (rather than the $20.5 million of

net income it reported).

153. On May 8, 2000 the Company announced that it had signed the Letter of 155.

Intent with Jacobs providing for the sale of substantially all of the Company’s assets in exchange

for an immediate $50 million secured revolving credit facility, assumption of substantially all of

S&W’s balance sheet liabilities and $150 million in cash and stock, and that S&W “intends to

file a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code after

the Company signs a definitive sale agreement with Jacobs, which is expected to occur later this

month ” Trading in S&W Stock was temporarily suspended


been completely devastated and the destruction had been hidden until it was too late for S&W

investors to protect themselves.

155. As announced, on June 2, 2000, S&W and certain of its subsidiaries filed 157.

voluntary petitions for reorganization relief in the Delaware Bankruptcy Court under Chapter 11

of Title 11 of the United States Code, 11 U.S.C. §§101 et seq.

156. The Shaw Group, Inc. (“Shaw Group”) eventually became the successful 158.

bidder for substantially all of S&W’s assets in a sale proceeding under Chapter 11 of the

Bankruptcy Code. Accordingly, S&W’s asset sale agreement with Jacobs was terminated. In

connection with Shaw Group’s successful bid, Jacobs became entitled to a $9 million breakup

fee and an expense reimbursement not to exceed $1 million.

157. Under Shaw Group’s successful bid, Shaw acquired substantially all of 159.

S&W’s assets and assumed certain liabilities of S&W with a total purchase price of

approximately $38 million in cash and approximately $105.8 million of Shaw Group’s common

stock. Shaw Group also assumed liabilities with a book value of approximately $450 million

and acquired assets with a book value of approximately $600 million. Shaw Group also agreed

to complete substantially all of S&W’s contracts for current and future projects. Contrary to its

pre-bankruptcy representation of April 14, 2000 that it had net assets of $324.3 million, S&W

now admitted that its balance sheet liabilities actually exceeded its balance sheet assets. In the

space of two short months, over $300 million in alleged assets disappeared. Of course, those

assets never existed in the first place. Moreover, nearly $4 billion in claims have been filed


was not the most stunning and sudden reversal in financial history, but instead was a stunning

and sudden disclosure of serious financial problems that had been deliberately hidden for almost

two years.

158. Subsequently, the Securities and Exchange Commission (the “SEC”) 160.

commenced an investigation into S&W’s financial reporting.

159. On November 1, 2000, S&W filed suit against Smith in the Middlesex 161.

County Superior Court of Massachusetts to void Smith’s change of control agreement based

upon his responsibility for S&W’s financial demise.

DEFENDANTS’ FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD

Overview

160. S&W’s public disclosures during the Class Period were characterized by 162.

numerous misstatements of financial results and condition, omissions of material adverse

developments, and deliberate misrepresentations of future prospects. Nonexistent revenues and

earnings were reported; massive losses went unreported or their disclosure was improperly

delayed; the determination of S&W’s operating liquidity was first hidden, then inadequately

disclosed; material operating failures were not disclosed; and, all the while, Smith and Langford

touted S&W’s backlog and fictional “improved margins” they expected to realize on that

backlog, which in reality was a series of money-losing projects with which they had saddled the

Company in order to maintain the backlog and grow market share.

161 Th l f h i l i d i i h S&W’163



162. On January 22, 1998, S&W issued a press release reporting its results for 164.

the quarter and year ending December 31, 1997 (the “January 1998 Release”). S&W reported

revenue for 1997 of $1,323,000,000, net income of $33.5 million, and earnings per share of

$2.59. Additionally, S&W reported backlog at December 31, 1997 of $2.5 billion.

163. The revenue and earnings figures reported in the January 1998 Release 165.

were materially overstated because they were derived from false profit margins built into S&W’s




164. S&W’s backlog figure was also materially misleading. In its Annual 166.

Reports on Form 10-K, S&W attempted to downplay the materiality of backlog information with

the following boilerplate language:

Backlog figures for the registrant’s engineering, construction and consulting services segment historically have not been considered by the registrant to be indicative of any trend in these activities nor material for an understanding of its business. At any given date, the portion of engineering and construction work to be completed within one year can only be estimated subject to adjustments, which can in some instances be substantial, based on a number of factors. Clients frequently revise the scope of the services for which they have contracted with subsidiaries of the registrant, especially on projects subject to regulatory approval or which require environmental permitting licensing. Scope increases and decreases of substantial magnitude are commonplace on such projects and directly affect backlog. Additionally, delays are


Despite this boilerplate caveat, the materiality of backlog information is obvious from the

manner in which S&W’s management, in public statements, press releases, discussions with

analysts and reports filed with the SEC, focus on the dollar amount of backlog and the

purportedly expected margins to be earned on work in backlog. The backlog information

reported by S&W was misleading because it misled investors into believing that S&W would

enjoy strong future growth when, in reality, the backlog represented a series of money-losing

projects that would be a drain on S&W’s bottom line. The January 1998 Release quoted Smith

as stating: “[O]ur anticipated margins in backlog are higher than they have been in several

years.” This statement was directly contrary to Smith’s knowledge that margins would in fact

decline, or be non-existent, due to the substantial number of jobs that had been bid and sold at a

loss “to get the business.”

165. At the same time that S&W was publicly reporting these results, 167.

comprehensive internal financial reports were being distributed to approximately twenty S&W

division heads and top executives. The reports included financials broken out for all divisions,

with details of personnel costs, sales, income and working capital. According to CS-2, these

internal reports differed materially from, and “did not jibe” with the financial results reported

publicly by Smith and Langford. Plaintiffs believe from their investigation that these internal

reports will add to the evidence that the financial results publicly disclosed by Smith and

Langford were known by them to be false; however, these documents cannot be obtained without

formal discovery in this action.


in reference to TPPI, that “activity on a major project has slowed due to the [Asian] financial

situation.” This statement was false since all work on TPPI had been suspended in the fourth

quarter of 1997. Moreover, S&W had been told to get out of its obligations to pay

subcontractors and for equipment. Thus, S&W knew TPPI was effectively, if not officially,

terminated and that S&W would receive no more payments on TPPI. Therefore, under FAS No.

5, S&W should have taken a charge for any losses on the project at that time. Instead, Smith and

Langford and Spear and PWC decided to book phantom revenue and receivables from the

project through 1998 to cover the equipment and subcontractor costs S&W was obligated to

continue paying under the terms of the agreement. The work had not merely “slowed.”

The 1997 10-K

167. On March 30, 1998, S&W filed with the SEC its Form 10-K for the year 169.

ending December 31, 1997 (the “1997 10-K”), and issued its Annual Report. The 1997 10-K

was signed by Smith and Langford. The 1997 10-K reported revenues of $1,322,540,000, net

income of $33,510,000, and diluted earnings per share of $2.59. S&W reported on its balance

sheet total assets of $738,777,000, total liabilities of only $393,545,000, and total shareholders’

equity of $345,232,000. S&W reported ending backlog for 1997 of $2,519,302,000.

168. S&W’s reported revenue and net income were materially overstated 170.

because they were based on false profit margins built into S&W’s percentage of completion

accounting method for booking revenue and costs. Smith and Langford knew that these profit



revenue growth and, implicitly, continued strong earnings and growth in earnings, when in



170. The reported balance sheet figures were materially misleading because of 172.

S&W’s improper failure to recognize known losses on projects that had been sold at a loss, and

its failure to promptly recognize losses on other projects when the losses became known. As a

result, retained earnings and shareholder equity were consistently overstated.

171. Additionally, the 1997 10-K materially misrepresented the level of 173.

concentration in credit risk inherent in S&W’s business. S&W stated that it did “not consider

the names of clients to be material to investors’ understanding of the [Company’s] business

taken as a whole” and that “[c]oncentrations of credit risk with respect to trade receivables are

limited due to the large number of engineering and construction clients comprising the

Company’s customer base and their dispersion across different business and geographic areas.”

In reality, however, defendants knew but did not disclose that S&W’s business was built, for any

reporting period, primarily on a handful of massively large and risky contracts, in which defaults

or losses could have a material adverse impact on its financial position and business prospects.

172. The 1997 10-K also stated in the MD&A section that “[m]anagement 174.


strong financial condition. The company has on hand and access to sufficient sources of funds to

meet its anticipated operating, dividend, share repurchase and capital expenditure needs. Cash


TPPI project and other projects, S&W’s cash position and liquidity was precarious at year-end

1997.

173. The 1997 10-K disclosed that the TPPI contract had been suspended and 175.

that TPPI represented $537.9 million of S&W’s 1997 year-end backlog. It failed, however, to

disclose that continuation of the project was not likely and failed to properly recognize a charge

for the project pursuant to FAS No. 5.

174. S&W’s 1997 Annual Report included Smith’s letter to shareholders, in 176.

which he stated, inter alia:

• S&W reported earnings of $2.59 per share for 1997.

• “For the year just ended, revenue rose 14 percent to $1,323 million from the $1,165 million reported for 1996. Our operating income was $47.3 million for the year ended December 31, 1997, compared to an operating loss in 1996.”

• “New orders of $1.3 billion boosted current backlog to more than $2.5 billion and our new proposal and bid review processes enabled us to improve significantly the backlog’s projected operating margins over the previous year. In 1997, our operating margin improved to 3.6 percent, and over the near term we are targeting an operating margin of 5 percent as well as a 15 percent return on equity.”

• “Although the new bidding and operational controls have contributed to current earnings and a stronger margin in backlog, this year’s results include recognition of the expected loss, totaling $1.20 per share, on a contract being executed by a joint venture in the Middle East The provisions for


Smith’s statements were materially misleading because: (1) the revenue, earnings, operating

profits and operating margins reported were materially overstated due to false profit margins

built into S&W’s percentage of completion accounting method for booking revenues and costs;

(2) the claim that the backlog included stronger margins was false due to Smith’s practice of

bidding and selling jobs at a loss “to get the business”; and (3) Smith’s comments that the fact

that S&W was able to post strong earnings despite the recognition of $1.20 per share in contract

losses was highly misleading because (a) revenues and profits were misstated, as explained

above and (b) S&W had failed to properly recognize additional massive, undisclosed losses on

numerous contracts which resulted both from former management’s underbidding and from

Smith’s practice of selling jobs at a loss, and of which Smith, Langford and other senior S&W

executives were aware.





internal reports differed materially from and “did not jibe” with the financial results reported


reports will add to evidence that the financial results publicly disclosed by Smith and Langford

were known by them to be false; however, these documents cannot be obtained without formal

discovery in this action.


176. On March 17, 1998, S&W issued a press release announcing that it had 178.

been awarded a $125 million contract for the Pha Lai II Power Plant outside of Hanoi in Vietnam

(the “March 17, 1998 Release”).

177. The March 17, 1998 Release was false and misleading in that it did not 179.

disclose that S&W had underbid in order to obtain the Pha Lai project and that S&W knew that it

would actually lose money on the project.

The April 1998 Salomon Smith Barney Analyst Report

178. On April 1, 1998, Salomon Smith Barney raised its investment rating on 180.

S&W following discussions with Smith and Langford and a presentation by them at the Salomon

Smith Barney Industrial Capital Goods Conference.

179. 000At the conference, Smith and Langford once again touted the Company’s 181.

backlog and its growth potential. They also asserted that TPPI was possibly going to restart soon

because of an impending equity investment. Salomon Smith Barney repeated these

representations in its analyst report.

180. All of these statements were false and misleading because: S&W’s backlog 182.

figure was materially misleading since it misled investors into believing that S&W would enjoy

strong revenue and earnings growth, when, in reality, the backlog represented a series of money

losing projects that would be a drain on S&W’s bottom line; and as to TPPI, Smith and Langford

knew the project was likely never to resume and they knew that S&W had improperly failed to

recognize and report substantial losses on the project.


revenue of $294 million, net income of $7.6 million and earnings per share of $0.59. S&W

reported that “backlog remained constant at $2.5 billion compared to December 31, 1997.”

182. The revenue and earnings figures reported in the April 1998 Release were 184.





S&W’s backlog figure was materially misleading for essentially the same reason: it misled

investors into believing that S&W would enjoy continued strong revenue and earnings, when, in



183. The reported revenue and earnings were also misleading because they 185.

included phantom revenue and receivables on the TPPI project. The amount of TPPI phantom

revenue and receivables included within the reported revenue for this quarter is not disclosed and

cannot otherwise be deduced based upon the reported information. However, for the entire year

of 1998, according to CS-1, S&W recognized $86.9 million in phantom revenue and receivables

from TPPI.

184. The April 1998 Release also stated that “[w]e . . . restructured the Process 186.

Division to reflect suspension of the [TPPI] project.” However, it failed to disclose the material

facts that S&W had committed millions in working capital to this project, that work was unlikely











The May 5, 1998 Press Release

186. On May 5, 1998, S&W issued a press release announcing that it had been 188.

awarded a contract to execute pre-decommissioning activities for the Maine Yankee Atomic

Power Company (the “May 1998 Release”). Smith was quoting as saying: “This assignment, at

the first New England nuclear plant to go cold and dark, recognizes our competitive and safety

conscious construction capability”.

187. The May 5, 1998 Release was false and misleading in that it did not 189.



The March 1998 10-Q

188. On May 12, 1998, S&W filed its Report on Form 10-Q for the quarter 190.


shareholders’ equity of $351,452,000. Backlog was reported to be $2.5 billion, unchanged from

December 31, 1997.

189. The revenue and earnings figures reported in the March 1998 10-Q were 191.





noted in paragraph 183, supra, the revenue and earnings figures were materially misleading for

the additional reason that they included a substantial amount of phantom revenue and receivables

from the TPPI project.

190. S&W’s backlog figure was materially misleading for essentially the same 192.

reason: it misled investors into believing that S&W would enjoy continued strong revenues and

earnings going forward, when, in reality, the backlog represented a series of money-losing

projects that would be a drain on S&W’s bottom line.





192. The March 1998 10-Q also stated in the MD&A section that “[t]he 194.



misleading because, as a result of undisclosed losses, S&W’s liquidity and cash position were

becoming increasingly precarious.

193. The March 1998 10-Q stated that the TPPI project had been suspended; 195.

however, it failed to disclose the material facts that S&W had committed millions of dollars in

working capital to the project, that the project was unlikely to be continued, and that S&W had

improperly failed to recognize and report substantial losses on the project.











195. On July 21, 1998, S&W issued a press release announcing its financial 197.

results for the quarter ending June 30, 1998 (the “July 1998 Release”). S&W reported revenue

of $317.0 million, net income of $0.7 million, and earnings per share of $0.05 for the quarter.

196. The revenue and earnings figures reported in the July 1998 Release were 198.



with the reported revenue and earnings information for the first quarter of 1998, the second

quarter information was also materially misleading because it included a substantial amount of

phantom revenue and receivables from the TPPI project.

197. The July 1998 Release also contained the following false and misleading 199.

statements by Smith:

The decline in net income in the second quarter is primarily the result of book provisions for a few large projects initiated prior to the implementation of our new project financial controls.

* * * *

...Excluding the results of certain projects booked a few years ago, we are making significant strides in strengthening our overall profit margin. We continue to win profitable new business.

* * * *

... we expect strong orders on the second half of 1998. We expect the projects which have been suspended or slowed by clients in Asia will be replaced by large new projects in the Middle East, Europe and the Americas.

These statements were materially misleading because they were contrary to Smith’s knowledge

that, due to his policy of bidding projects at a loss in order to “get the business,” the impression

that S&W was poised to generate profitable new business was an illusion.

198. The July 1998 Release stated that the TPPI project had been suspended, but 200.

also stated that “[d]iscussions continue with potential investors regarding the additional

financing which will enable the project to proceed.” Additionally, Smith stated that “[w]e


project does resume, we expect a substantial increase in earnings from our process sector.”

These statements were materially misleading for several reasons: (1) Smith knew the project was

likely never to resume; (2) Smith failed to disclose that S&W had substantial losses on the

project because under the terms of its agreement, S&W had committed millions in working

capital to the TPPI project to pay subcontractors and for equipment; and (3) Smith knew that

S&W was improperly recognizing phantom revenue and receivables from the project.

199. The July 1998 Release was also materially misleading because it failed to 201.

disclose that the combination of disclosed and undisclosed losses being suffered by S&W was

causing increasingly severe problems with operating liquidity. By the summer of 1998, S&W

was having difficulty paying suppliers on the Tiverton project. This undisclosed problem was

highly material because such failures to pay subcontractors and suppliers could (and did) have

numerous adverse effects – delays in contract execution (resulting in additional costs to complete

projects, for instance), liens by subcontractors and suppliers, and ultimately the inability to

obtain additional operating funds, performance bonds, and new work.








The August 4, 1998 Press Release

201. On August 4, 1998, S&W issued a press release announcing that it had 203.

been selected to execute the decommissioning and decontamination of Maine Yankee Atomic

Power Plant (the “August 4, 1998 Release”). S&W touted the Maine Yankee project as “the

largest commercial nuclear plant decommissioning project awarded to date” with “an estimated

value of $250 million.” S&W also announced that the Maine Yankee project was the latest in a

series of nuclear decommissioning and decontamination project awards that positioned S&W “as

the leader in a market expected to reach $15 billion over the next ten years.”

202. In the August 4, 1998 Release, Smith was quoted as commenting, “[w]e are 204.

very pleased to have won this important contract. The size and scope of this assignment

recognizes our program management, engineering and construction expertise, and commitment

to safety. It is especially fitting, that we are taking this project full circle.”

203. This press release was materially false and misleading because it failed to 205.

disclose that because the Maine Yankee contract was bid and sold at a loss, it would represent a

significant drain on S&W’s bottom line. Moreover, by this time, S&W’s operating liquidity

working capital situation had become severely strained, as evidenced by the fact that it had

begun having difficulty paying suppliers on the Tiverton project. Failure to disclose this fact in

connection with the Maine Yankee project announcement was materially misleading because it

concealed the fact that S&W would be unable to adequately perform the contract, and would

incur additional losses as a result.


quarter, revenue of $317,004,000, net income of $651,000 and earnings per share of $0.05.

S&W also reported total assets of $754,640,000, total liabilities of only $409,698,000, and total

shareholders’ equity of $344,942,000.

205. The revenue and earnings figures reported were materially overstated 207.

because they were derived from false profit margins built into S&W’s percentage of completion



sold at a loss “to get the business” and grow market share. These figures were also materially

misleading because they included phantom revenue and receivables from the TPPI project.

206. The June 1998 10-Q also reported backlog of $2,357,122,000. This figure 208.

was materially misleading in that it induced investors to expect continued strong revenues and

earnings when, in reality, the backlog represented a series of money-losing projects that would

be a drain on S&W’s bottom line.





208. The June 1998 10-Q also stated, in the MD&A section, that “[t]he 210.


strong financial condition. The Company has on hand and has access to sufficient sources of


suppliers on a timely basis, and was having difficulty in making required payments on several

projects, including Tiverton.

209. The June 1998 10-Q reported that the TPPI project “continues to be 211.

suspended.” However, it also stated that “[t]he Company believes that it is unlikely that the

project will be cancelled,” although “[h]ad the project been cancelled as of June 30, 1998, the

Company would have recorded a pre-tax charge of approximately $54 million.” These

statements were materially false and misleading because (1) Smith knew the project was likely




improperly recognizing phantom revenue and receivables from the project. Moreover, the $54

million “hypothetical” loss figure was materially understated because it was derived from

unreasonably high estimates of the salvage value of the millions of dollars in equipment S&W

had purchased for the project. Indeed, S&W had already began selling its TPPI equipment for

pennies on the dollar. Moreover, the continued inclusion of the TPPI project in S&W’s backlog

was materially misleading, because it masked a substantial decline in the work S&W could be

expected to perform.









211. On October 26, 1998, S&W issued a press release announcing the award of 213.

two contracts with an estimated combined value of $141 million for geothermal power projects

owned by affiliates of Cal Energy Company, Inc. in the Salton Sea geothermal area of Southern

California’s Imperial Valley (the “October 26, 1998 Release”). S&W announced that the

contracts included engineering, procurement and construction of a new 49 megawatt

geothermal plant and additional facilities. Smith was quoted as saying, “We’re pleased to have

won these important contracts,” said Smith. These assignments recognize our expertise in the

geothermal power market and our position as the leading electric power engineer and constructor

as the U.S. market responds to opportunities driven by the deregulation wave. Our power

business will have its best order year in 1998, and there is more to come in the next several

years, driven by new demand, and improvement of older facilities to be competitive in the free

market.”

212. The October 26, 1998 Release was false and misleading in that it did not 214.


actually lose money on the project and that S&W’s 1998 orders were the result of Smith’s

underbidding policy and any such orders did not represent future growth but rather a drain on


213. On October 27, 1998, S&W issued a press release announcing its financial 215.

results for the quarter ending September 30, 1998 (the “October 27, 1998 Release”). S&W

reported revenues of $350 million, net income of $2.1 million, and earnings per share of $0.17

for the quarter.

214. The revenue and earnings numbers were materially overstated because they 216.


method for booking revenue and costs. Smith and Langford knew that these profit margins


loss “to get the business” and grow market share. These figures were also materially misleading

because they included phantom revenue and receivables from the TPPI project.

215. The October 27, 1998 Release highlighted growth in S&W’s backlog. The 217.

first paragraph of the release emphasized that the company had received “new orders for the

quarter of $725 million.” It further trumpeted that “[b]acklog increased during the quarter from

$2.4 billion to $2.7 billion.” Smith stated that:

[I]mprovements we have made company-wide to enhance our competitiveness and win new business with greater earnings potential are manifested in our strong orders for the quarter and higher win rates.

* * * *

. . . On the operations side, we have strengthened our management team and improved backlog margins . . . .

* * * *


reality the backlog increasingly represented a series of money-losing projects that would have a

severe negative impact on S&W’s bottom line. Given Smith’s knowledge that most, if not all, of

the new business had been sold at a loss, his statements concerning “greater earnings potential”

and “improved backlog margins” can only be viewed as deliberately false.

217. The October 27, 1998 Release also stated that “[a]s previously reported, 219.

work remains suspended on the [TPPI project]. Discussions continue with potential investors

regarding additional financing for the project and with potential purchasers of the plan design

and equipment.” This statement was materially misleading because it failed to disclose that

resumption of work on the project was unlikely, that S&W had committed millions of dollars in

working capital to the project, and that S&W had failed to properly recognize and report

substantial losses on the project.











revenue of $350,443,000, net income of $2,168,000, and earnings per share of $0.17 for the

quarter. S&W reported total assets of $795,782,000, total liabilities of only $440,418,000, and

total shareholders’ equity of $355,364,000. S&W reported backlog of $2.7 billion.

220. The revenue and earnings figures were materially overstated because they 222.




loss “to get the business” and grow market share. As noted above, the revenue and earnings

figures were also misleading because they included phantom revenue and receivables from the

TPPI project.

221. Furthermore, the reported backlog figure was materially misleading 223.

because it implied continued strong revenues and earnings, when in reality it represented a series

of money-losing projects that would be a drain on S&W’s bottom line. Additionally, the backlog

figure was inflated by approximately $500 million corresponding to the TPPI project.





223. The September, 1998 10-Q also stated, in the MD&A section, that “[t]he 225.



misleading because S&W’s liquidity and working capital situation was growing increasingly

difficult, with mounting problems in making required subcontractor and supplier payments on a

timely basis.

224. With respect to TPPI, the September 30, 1998 10-Q stated:226.

the [TPPI] project continues to be suspended pending resolution of financing issues by the client. If refinancing efforts are successful, it is possible that the project could be restarted during 1999. The Company has obtained approval to resell or use committed materials and procured equipment to reduce costs of project suspension. The Company has also had substantive discussions with potential purchasers of the olefins plant which constitutes the majority of the Company’s scope for the project. Had the project been cancelled as of September 30, 1998, the Company would have recorded a pre-tax charge of approximately $63 million . . . .

These statements were materially misleading because: (1) Smith knew the project was likely




improperly recognizing phantom revenue and receivables from the project. Moreover, the

reported “hypothetical” loss of $63 million was materially understated because, inter alia, it was

based upon unreasonably high estimates of the salvage value of equipment and materials.




i h d il f l l i d ki i l A di CS 2 h




The November 16, 1998 Press Release

226. On November 16, 1998, S&W issued a press release (the “November 1998 228.

Release”) in conjunction with a voluntary early retirement program it was offering some

employees. The release touted S&W’s enhanced competitiveness. It stated:

In addition to the early retirement plan, Stone & Webster has taken a number of actions over the last three years to enhance its competitiveness. These include more aggressively pursuing emerging markets, such as nuclear plant decommissioning and decontamination, increased global reach and the development of a Competitive Leadership Process to streamline operations and improve business performance and project management.

227. The November 1998 Release was false and misleading because it 229.

misrepresented that S&W’s success in obtaining new projects was due to its competitiveness,

business performance and project management when in fact, that success was due to Smith and

Langford’s policy of underbidding jobs.

The January 1999 Analyst Statement

228. In early 1999, Smith and Langford reported to analysts that S&W had 230.

“scrubbed the backlog,” implying that all hidden losses had been recognized, and that it was

achieving higher margins in new backlog. These statements were materially false and

misleading because in reality, the Company had failed to recognize massive undisclosed losses

that were embedded in backlog, and the claim of higher backlog margins was simply false.


229. On January 26, 1999, S&W issued a press release announcing its financial 231.

results for the year and quarter ended December 31, 1998 (the “January 1999 Release”). For the

year, S&W reported revenue of $1.25 billion, and net losses of $49.3 million. For the quarter,

S&W reported revenue of $287 million, net losses of $59.7 million, and net losses per share of

$4.64. S&W reported year-end backlog of $2.6 billion.

230. The revenue and earnings numbers reported in the January 1999 Release 232.

were materially overstated because they were derived from false profit margins built into S&W’s

percentage of completion method for backing revenues and costs. Smith and Langford knew that


been bid and sold at a loss “to get the business” and grow market share. The figures also

included $86.9 million of phantom revenue and receivables from TPPI. Thus, the Company’s

actual losses were substantially higher than those reported.

231. Absent the phantom revenue and receivables from TPPI, S&W would have 233.

reported a net loss of $108.7 million for 1998, rather than the $49.3 million net loss it actually

reported.

232. S&W’s backlog figure in the January 1999 Release was materially 234.

misleading for essentially the same reason: it misled investors into believing that S&W would

enjoy continued strong revenues, when, in reality, the backlog represented a series of money-

losing projects that would be a drain on S&W’s bottom line.

233. The January 1999 Release quoted Smith as stating:235.


now completely in place will result in 1999 earnings approaching 1997 levels – the best in ten years – even under the current difficult market conditions in the hydrocarbon business.

Smith’s statement was materially misleading for several reasons. First, the reference to “higher

margins in a newer, stronger backlog” was directly at odds with Smith’s knowledge that, due to

his policy and practice of selling projects at a loss “to get the business,” the backlog in fact

represented a series of money-losing projects. Second, Smith’s references to new management

compounded the deceptive nature of his statements; in reality, because S&W was saddled with

money-losing contracts, new management was irrelevant.

234. Smith also attempted to explain S&W’s losses for 1998 as an isolated event 236.

explainable by unanticipated circumstances that would not re-occur. He said:

Our financial performance in the fourth quarter was predominantly affected by a number of provisions and costs incurred to provide for completion of certain engineering and construction projects, as well as non-cash items including the incentive retirement program and change in estimated useful life of certain assets.

235. This statement was materially false and misleading because Smith knew 237.

that S&W’s losses were not caused by isolated, unanticipated events but by his and Langford’s

policy of underbidding and the undisclosed serious problems at TPPI.

236. With respect to TPPI, the January 1999 Release stated:238.

As previously reported, work remains suspended on the [TPPI project]. Discussions continue with the owners and other contractors regarding a financial restructuring of the project. Stone & Webster has obtained a written release from TPPI to resell material and equipment procured for the project and has made

id bl i th k ti d l f j


failed to properly recognize and report substantial losses on the project; and (3) S&W failed to

disclose that its salvage efforts were yielding only pennies on the dollar. Moreover, by

December 1998, any slight chance that TPPI would ever restart was completely dead. Therefore,

a charge pursuant to FAS No. 5 should have been taken.










The 1998 10-K

238. On March 26, 1999, S&W filed its Report on Form 10-K for the year ended 240.

December 31, 1998 (the 1998 10-K”), and issued its Annual Report. The 1998 10-K was signed

by Smith and Langford. S&W reported revenues of $1,248,780,000, net losses of $49,302,000,

and losses per share of $3.83. S&W reported total assets of $834,682,000, total liabilities of

only $543,106,000, and total shareholders’ equity of $291,576,000. S&W reported backlog at

year-end of $2,636,000,000.



of projects that had been bid and sold at a loss “to get the business” and grow market share. The

revenue and earnings figures were also materially misleading because they included $86.9

million in phantom revenue and receivables from the TPPI project, as noted above. Had the

phantom revenue and receivables from TPPI not been reported, S&W’s net loss for 1998 would

have been $108.7 million, or $8.43 per share.

240. The backlog figure reported in the 1998 10-K was materially misleading for 242.








242. The 1998 10-K also stated in the MD&A section that “[m]anagement 244.


strong financial condition. Management believes that it has on hand and access to sufficient

sources of funds to meet its anticipated operating, dividend, share repurchase and capital

expenditure needs. Management believes bank lines of credit totaling $115.2 [million] and cash

on hand provide adequate operating liquidity. At December 31, 1998 $106.4 [million] was


243. With respect to TPPI, the 1998 10-K stated:245.

In 1996, the Company entered into a contract with [TPPI] for construction of an integrated ethylene and olefins complex for $2.3 billion to be executed by a consortium of contractors. The Company’s portion of the total contract value was $710 [million]. In the fourth quarter of 1997, work on the project was suspended pending resolution of financing issues by the client. The TPPI project is included in the Company’s backlog in the amount of $451 [million].

* * * *

The TPPI project continues to be suspended pending resolution of financing issues by the client. If refinancing efforts are successful, it is possible that the project will restart on a phased basis in 1999 with execution of the Company’s scope of work commencing in 2000. The Company has obtained approval from the owner to resell or use committed materials and procured equipment to reduce costs of project suspension. The Company also has had substantive discussions with potential purchasers of the olefins plant which constitutes the majority of the Company’s scope for the project and, subsequent to the end of 1998, has signed a conditional memorandum of understanding to sell the plant. Had the TPPI project been cancelled as of December 31, 1998, and if resale of the olefins plant were unlikely to be completed, the Company would have recorded a pre-tax charge of $72.4 [million]....

These statements were materially misleading because: (1) there was no likelihood that work on

the project would resume; (2) sale of the olefins plant was unlikely; (3) S&W had failed to

properly recognize and report substantial losses on the project; and (4) the reported

“hypothetical” loss of $72.4 million was materially understated, because, inter alia, it was based

on unreasonably high estimates of the salvage value of materials and equipment.


244. S&W’s Annual Report for 1998 included Smith’s letter to shareholders in 246.

which he stated, inter alia:

• “The Asian economic crisis, unstable oil prices, global political turmoil, reduced capital expenditures for petrochemical manufacturing and problems associated with contracts some of which were initiated more than three years ago, stalled our turnaround.”

• Revenue for 1998 was $1.2 billion, net loss was $49.3 million.

• “[W]e made substantial progress throughout 1998 toward becoming a premier global engineering, procurement and construction company well positioned for growth in revenue and a return to the positive track we began in 1996.”

• “[We] [i]ncreased our backlog to $2.6 billion and new orders to $1.9 billion”

• “Received the largest contract ever awarded for decontaminating and decommissioning a commercial nuclear power plant.”

• “With tighter front-end controls and higher as-sold margins in a stronger backlog, we expect in the new term to bring our profitability back to levels approaching those achieved in 1997.”

Smith’s statements were materially misleading because (1) S&W’s problems were primarily

internal, and not fundamentally attributable to external economic events such as the “Asian

economic crisis”; (2) Revenue and earnings (loss) figures reported were materially overstated

due to false profit margins built into S&W’s percentage of completion accounting method, as

explained above; (3) due to the substantial number of money-losing or defunct projects included


“increased backlog” and “stronger backlog” to which Smith referred was in reality a series of

money-losing projects that would be a drain on S&W’s bottom line; (6) liquidity problems were

escalating, ensuring further losses and inability to perform adequately on important projects; and

(7) the “profitability” achieved in 1997, to which Smith falsely promised a return, was in fact an

illusion, as explained above.





internal reports differed materially from, and “did not jibe” with the financial results reported






246. On April 15, 1999, S&W issued a press release announcing that, based on 248.

preliminary analysis of its results for the first quarter of 1999, it expected to report an operating

loss of approximately $4.50 per share for the quarter (the “April 15, 1999 Release”). Smith

explained that the results reflected provisions of approximately $74 million to cover anticipated

costs of completing two international projects, and claimed that “[w]ithout these provisions,


247. Smith’s statement that earnings would have been $0.25 per share for the 249.

quarter was materially misleading because the earnings figure was derived from false profit

margins built into S&W’s percentage of completion accounting method for booking revenues

and costs. Smith and Langford knew that these profit margins would never materialize due to the

substantial number of projects that had been bid and sold at a loss “to get the business” and grow

market share. In addition, Smith’s efforts to explain the Company’s results as unanticipated and

caused by isolated events and unrelated to the Company’s fundamental business position were

materially false and misleading. The Company’s problems were due to Smith’s and Langford’s

undisclosed policy of underbidding and S&W’s problems at TPPI.

248. The April 15, 1999 Release also quoted Smith as stating that “[w]e expect 250.

the improved margins included in our substantial backlog of work to be performed, and our

continuing drive to reduce costs and operating expenses, to produce improved results in the

second half of this year. . . . The Company’s expectations are that, excluding the provisions

mentioned above, earnings per share for the year would have been approximately $2.13 per

share.”

249. Smith’s statement was materially misleading because (1) the projected 251.

figure of $2.13 per share in earnings (excluding the first quarter charge) was derived from false

profit margins built into S&W’s percentage of completion accounting method for booking

revenues and costs, and (2) the reference to “improved margins included in our substantial

backlog” was an illusion for the same reason. Smith and Langford knew that the “profit


should have resulted in additional charges of over $70 million. Instead, S&W continued to

recognize substantial phantom revenue and receivables on this defunct project. Smith and

Langford knew these facts but deliberately failed to properly reflect them in the Company’s

publicly reported financial results.










The April 1999 DLJ Presentation

251. In April 1999, Smith gave a presentation at the Donaldson, Lufkin & 253.

Jenrette Environmental Services and Engineering and Construction Conference in New York

(the “DLJ Conference”). At the DLJ Conference, Smith stated, inter alia:

• “As a way to broaden our offerings, we have built our business through internal growth and acquisitions. This provides kind of a flywheel toward the company’s balance sheet to enable us to do large and complex projects with some security for our clients.”


rebound in earnings to levels approaching those we achieved in 1997....”

• “Furthermore, we have a strong asset base. We own and operate some real estate that we also house engineering and construction people in, and we do have quite a bit of operating leverage. We think that at our current stock price of $22.50 we are undervalued and positioned for good appreciation when our earnings rebound after we resolve some of those recent problems I mentioned earlier.”

• “Given our backlog strength, our recent order level, cost reduction programs, new management team, the high level of hard assets in our backlog - - not construction equipment type assets but businesses or real estate - - I think it is easy to see why some analysts have said that Stone & Webster is greatly ’under-followed and under-valued.’“

• “Earnings from operations for 1999, excluding [extraordinary operating] charges, are anticipated to meet analysts expectations of $2.13 per share.”

• “On new bids, we are driving as-sold operating margins to 8-10% by being more focused and selective and sticking to the four core business areas that I am covering.”

• “Looking forward, our E&C earnings are expected to improve markedly in the second half of the year.”

• “We do have improved as-sold margins. They are approximately double the backlog margins that we had when I joined the company.”

Smith’s statements were materially misleading because: (1) due to Smith & Langford’s policy

and practice of bidding and selling jobs at a loss “to get the business,” order growth was not a

sign of strength but instead represented continuing losses that would drain cash and ultimately

undermine the Company’s ability to execute on existing contracts; (2) Smith’s claims of


snowballing losses as the Company failed to meet contract execution goals; and (5) Smith knew

that as 1999 progressed additional charges on money-losing contracts were inevitable and

therefore earnings would not improve, losses would be reported, and net worth would decline.

In addition, Smith knew the Company’s reported net asset strength was an illusion since it did

not reflect the losses at TPPI or the projects that Smith had bid at a loss.


252. On April 27, 1999, S&W issued a press release formally announcing its 254.

financial results for the quarter ending March 31, 1999 (the “April 27, 1999 Release”). S&W

reported revenue of $266.1 million, net losses of $58.7 million, and net loss per share of $4.50.

S&W reported backlog of $2.5 billion.

253. The revenue and earnings (loss) figures were materially overstated because 255.



margins would never be realized due to the substantial number of projects that had been bid and

sold at a loss “to get the business” and grow market share. Furthermore, S&W continued to

recognize and report nonexistent revenue from the TPPI project. The backlog figure was

materially misleading for essentially the same reason: it misled investors into believing that

S&W would enjoy continued strong revenues, when, in reality, the backlog represented a series

of money-losing projects that would be a drain on S&W’s bottom line.

254. The April 27, 1999 Release quoted Smith as stating: “[w]e expect to regain 256.


the improved margins included in our backlog, and our continuing drive to reduce costs and

operating expenses, will produce improved results in the second half of this year.”

255. Smith’s statements were materially misleading because he knew that, due 257.

to the continuing practice of bidding and selling jobs at a loss “to get the business,” and due to

the substantial number of jobs that had been so bid and sold, the “improved margins” in the

backlog to which he referred were fictional. Additionally, he knew that S&W’s severe operating

liquidity problem would continue to escalate, undermining S&W’s ability to achieve improved

results. Smith knew that S&W’s downward slide would continue. Smith’s statements were also

materially misleading because he attempted to attribute S&W’s poor financial results to factors

external to S&W stating that they were due to a delay and disruption resulting from changes in

work scope and jobsite conditions, and the rework of certain deficiencies principally with vendor

supplied equipment, when in reality S&W’s poor performance was attributable to Smith’s and

Langford’s policy and practice of bidding jobs at a loss to “get the business.”









257. On May 5, 1999, Credit Suisse First Boston issued an analyst report (the 259.

“May 1999 Analyst Report”) based upon discussions with Smith and Langford. The May 1999

Analyst Report touted S&W’s growing backlog and future market opportunities and profitability.

258. The May 1999 Analyst Report, based upon representations from Smith and 260.

Langford, estimated 17% growth in S&W revenues in 1999 and increased operating margins.

The report also touted the Company’s strong balance sheet. It also stated that it was likely that

TPPI would be restarted soon. Lastly, it opined that S&W’s valuation was too low given its

strong growth prospects.

259. All of these representations were materially false and misleading since they 261.

failed to explain that S&W’s growth was fueled by its underbidding policy. Therefore, the

Company would not be profitable in the future. In addition, TPPI was effectively, if not

officially, terminated and S&W’s valuation was not too low. Rather, it was too high since it was

based upon fraudulent financial reporting that overstated revenues, income and net assets.

The March 1999 10-Q

260. On May 13, 1999, S&W filed its Report on Form 10-Q for the quarter 262.

ended March 31, 1999, signed by Langford. S&W reported revenues of $266,098,000, net losses

of $58,694,000, and net loss per share of $4.50. S&W reported total assets of $839,324,000,

total liabilities of only $607,825,000, and total shareholders’ equity of $231,499,000. S&W





report substantial nonexistent revenue from the TPPI project.

262. The backlog figure was materially misleading for essentially the same 264.

reason: it misled investors to believe that S&W would enjoy strong revenues going forward,

when in reality the backlog represented a series of money-losing ventures that would be a drain

on S&W’s bottom line.





264. The March 1999 10-Q also stated in the MD&A section that 266.

“[m]anagement believes that the types of businesses in which the Company is engaged require

that it maintain a strong financial condition. Management believes that it has on hand and has

access to sufficient sources of funds to meet its anticipated operating, dividend and capital

expenditure needs. The Company has bank lines of credit totaling $123.4 million . . . . As a

result of losses experienced in the fourth quarter of 1998 and the first quarter of 1999, the

Company currently is not in compliance with certain of its credit facility covenants and is in

negotiations to restructure its credit facilities. In addition, the Company had $106.0 million

outstanding under its banking facilities at the end of the quarter “ These statements were

materially misleading because they failed to disclose that there was no reasonable basis for


cash situation was so bad that it had instituted continuous and rigorous review of accounts

payable to decide which subcontractors and suppliers absolutely had to be paid to keep S&W’s

operations going, and which could be delayed. Its inability to pay subcontractors and suppliers

ensured snowballing losses as the Company failed to meet contract performance requirements.

265. With respect to TPPI, the March 31, 1999 10-Q essentially reported the 267.

statements made in the 1998 10-K, with the exceptions that, without any explanation, S&W

dropped the language suggesting that resumption of work on the project was possible and that

the backlog attributed to the TPPI project was reduced to $426 million. The March 31, 1999 10-

Q’s statements concerning TPPI were misleading for the same reasons explained in connection

with the 1998 10-K.










The June 28, 1999 Press Release


268. In the June 28, 1999 Release, Smith stated that S&W was “gratified in 270.

Cordova Energy’s confidence in our ability to deliver a cost-effective and technically superior

solution,” and that through S&W’s “extensive experience in developing power plants and in our

value engineering approach to save capital costs, we are able to offer our clients more capacity

and better performance for their investment.”

269. The June 28, 1999 Release was false and misleading in that it did not 271.

disclose that S&W had underbid in order to obtain the Cordova Energy project and that S&W

knew that it would actually lose money on the project.


270. On July 26, 1999, S&W issued a press release announcing its financial 272.

results for the quarter ending June 30, 1999. S&W reported revenues of $310.3 million, net

income of $6.2 million, and earnings per share of $0.48 (the “July 1999 Release”). S&W







phantom revenue and receivables from the TPPI project. The backlog figure was materially

misleading for essentially the same reason: it misled investors to believe that S&W would enjoy


272. The July 1999 Release quoted Smith as stating: “[B]ased on our improved 274.

operating performance during the second quarter, coupled with our higher margin business in

backlog, we believe that our profitability will continue to increase throughout the remainder of

1999.” This statement was materially misleading because, as noted above, the “improved

operating performance” was an illusion created by false profit margins built into S&W’s

percentage of completion accounting method, and the “higher margins” in backlog were a

fiction.










The June 1999 10-Q

274. On August 12, 1999, S&W filed its Report on From 10-Q for the quarter 276.

ended June 30, 1999, signed by Langford. S&W reported revenue of $310,310,000, net income

of $6,214,000, and earnings per share of $0.48. S&W reported total assets of $851,892,000, total





would never be realized due to the substantial numbers of projects that had been bid and sold at a


nonexistent revenue from the TPPI project.


reason: it misled investors to believe that S&W would enjoy continued strong revenues, when, in







278. The June 1999 10-Q also stated in the MD&A section that “[m]anagement 280.


financial condition. The Company has on hand and access to sufficient sources of funds to meet

its anticipated operating, dividend, and capital expenditure needs. At June 30, 1999, the

Company had bank lines of credit available totaling $120.8 million . . . . In addition, the

Company had $106.5 million outstanding under its banking facilities at the end of the quarter.


certain long-term debt that were outstanding at the end of the second quarter.” This statement

was materially misleading because the Company did not in fact have access to adequate

operating funds and because it failed to disclose that S&W was already in material default under

the new credit facility for failure to pay subcontractors and suppliers on a timely basis. As

explained in paragraphs 86-87 supra, by this time, S&W’s operating liquidity situation was so

bad that S&W had instituted a rigorous and continuous review of outstanding accounts payable

(some of which were 600 to 700 days overdue) to determine which vendors and subcontractors

could be stalled off to conserve operating funds and which had to be paid immediately to prevent

S&W’s business from collapsing, while vendors and subcontractors stopped work on S&W

projects, engaged in work slow-downs, and started filing liens. Smith and Langford had direct

knowledge of the severity of the operating liquidity situation, failed to disclose it, and instead

issued disclosures designed to reassure investors that the company had “on hand or access to”

funds sufficient not only to continue normal operations, but also to pay dividends and make

capital expenditures.

279. With respect to TPPI, the June 30, 1999 10-Q essentially repeated the 281.

statements made in the March 31, 1999 10-Q, except that the backlog attributable to TPPI was

reduced to $410 million and the “hypothetical” loss as of June 30, 1999 was stated to be $75

million. The statements concerning TPPI were materially misleading for the same reasons

explained in connection with the 1998 10-K.









281. On October 27, 1999, S&W issued a press release announcing its financial 283.

results for the quarter ended September 30, 1999 (the “October 27, 1999 Release”). S&W

reported revenue of $297.8 million, net losses of $6.9 million, and net loss per share of $0.52.

S&W reported backlog of $2.5 billion.






report nonexistent revenue from the TPPI project. The backlog figure was materially misleading

for essentially the same reason: it misled investors to believe that S&W would enjoy continued



283. The October 27, 1999 Release also stated:285.


Because of the losses in the third quarter, the Company requested waivers from its bank group regarding certain covenants in its principal credit agreement for which it is not in compliance, and the banks have waived those covenants until November 29, 1999. The credit agreement matures at the end of January, 2000. The Company will require additional short-term funding to continue normal operations, and it is in active discussions with its principal lenders to obtain such funding.

These statements were materially misleading because they failed to disclose that as of the end of

the third quarter, S&W was facing financial collapse. Its credit facilities were fully drawn, no

additional funds were available, and its lack of operating working capital made it impossible to

pay subcontractors, who were delaying work and filing liens against several S&W projects.

These failures in turn threatened impending defaults on major contracts, including the Maine

Yankee project and Tiverton, which would result in additional massive losses and unavailability

of credit and bonding to secure performance of additional work. Moreover, the expected

proceeds from the sale of S&W’s headquarters were committed to reduce bank indebtedness and

pay already past-due accounts, and would not be available to fund continuing operations.

Finally, although the October 1999 Release stated that S&W was negotiating with lenders to

provide funding beyond January 2000, it failed to disclose that due to impending defaults on

major projects and additional undisclosed massive losses, there was no reasonable likelihood that

adequate additional funding would be available. At the time of the release, Smith and Langford

both knew that S&W was facing imminent collapse.

284. The October 27, 1999 Release quoted Smith as stating:286.

[ ] i i l i f b kl f fi d i j b


* * * *

The unacceptable financial results of our engineering and construction business in the past 24 months were primarily caused by scope changes and cost increases on major international projects. The Company has taken strong measures to prevent these types of losses from recurring, including recruiting a new senior management team, revising bidding and contract execution procedures, implementing a more selective process to determine which prospects will be bid and establishing higher as-sold margins. The international projects that have severely impacted results are now complete with one exception, which should be competed this quarter, and should have no further negative impact on earnings.

* * * *

We continue to expect that the improved margins included in our substantial backlog of work will be realized, and our continuing drive to reduce operating expenses will improve financial results.

These statements were materially misleading in several ways. First, Smith’s claim that a “review

of backlog” had uncovered “a few” projects that would be completed at a loss was materially

misleading because it created the impression that a complete review had been conducted and that

all losses contained in the backlog had been recognized and charges had been taken, when, in

reality, the backlog contained further projects that were known to Smith and Langford to contain

massive losses that would ultimately have to be recognized and would severely impact S&W’s

revenues, earnings and net worth. Further, Smith’s claim created the impression that these “few”

projects had become unprofitable when, in fact, he knew they were bid on at a loss. Second,

Smith’s claim that new projects would be bid at “higher as-sold margins” was simply false. New

projects continued to be bid and sold at a loss “to get the business ” Smith’s statements were











The October 28, 1999 Press Report

286. Following S&W’s announcement that it was selling its corporate 288.

headquarters, Smith reassured the public that S&W was not nearing insolvency.

287. During an interview with the Boston Globe on October 27, 1999, as 289.

reported in an article dated October 28, 1999, Smith advised that the Company was not

considering bankruptcy and that S&W “didn’t want anybody to think we had some crisis that

couldn’t be handled with strong management.”

288. This statement was materially false and misleading because, as Smith 290.

knew, S&W was insolvent and Smith knew that without an additional infusion of cash or a

buyer, S&W would have no choice but to file for bankruptcy.



$872,665,000, total liabilities of only $646,293,000, and total shareholders’ equity of

$226,372,000. S&W reported backlog of $2.5 billion.



accounting method for booking revenues and costs. Smith and Langford knew that those profit



recognize nonexistent revenue and receivables on the TPPI project.


reason: it misled investors to believe that S&W would enjoy continued strong revenues, when, in

reality, backlog represented a series of money-losing projects that would be a drain on S&W’s

bottom line.





293. The September 1999 10-Q also disclosed that S&W’s liquidity and 295.

financial condition had deteriorated. S&W reported that: losses incurred in the past 24 months

had negatively impacted S&W’s cash position; as of the end of the third quarter of 1999, S&W

had fully drawn the cash available to it under its credit facility; the amount of S&W’s past due


was not in compliance with certain covenants in its principal credit agreement and had received

waivers of those covenants until November 29, 1999; and the credit agreement would mature at

the end of January 2000 and S&W would require additional short-term funding to continue

normal operations, which it was attempting to obtain.

294. These disclosures were belated, inadequate and materially misleading. The 296.

disclosures downplayed the severity of S&W’s situation by making it appear as if S&W was

merely experiencing cash flow problems that could be alleviated by a new credit agreement and

that it had problems with a limited number of vendors. S&W failed to disclose that its liquidity

problems had been ongoing for over one year, S&W was already in default on several major

projects (including Maine Yankee, Tiverton and others), the Company knew it was not going to

be able to obtain additional operating funds, the Company was effectively insolvent, the

Company was paying all of its vendors late, some of its accounts were as late as 600-700 days,

and that work stoppages and delays were rampant and widespread.

295. Moreover, the 10-Q provided investors with a false assurance that whatever 297.

S&W’s cash flow problems, the Company still had over $300 million in net assets. This

representation gave shareholders comfort that the value of their S&W shares would be protected

even if S&W was unable to obtain financing. The Defendants knew this representation was false

because they knew that S&W’s net assets were fraudulently overstated.

296. With respect to TPPI, the September 1999 10-Q essentially repeated the 298.

statements made in the June 30, 1999 10-Q, with the exception that the backlog attributed to the








reports will add to evidence that the financial results publicly disclosed by Smith & Langford



The December 1, 1999 Restructuring Press Release

298. On December 1, 1999, S&W issued a press release (the “December 1999 300.

Restructuring Release”) and announced that it had reached an agreement “with its principal bank

lending group to expand and extend its current credit facility”.

299. The December 1999 Restructuring Release stated:301.

Under the agreement, Stone & Webster’s borrowing facility has been increased by $30 million to a maximum of $160 million and extended through May 31, 2000. A portion of the new funding is available immediately, with the remainder to be provided in two tranches based on specific events expected to occur by the middle of December. The previous $130 million facility had been scheduled to expire in January 2000.

* * * *

Stone & Webster also announced that substantial progress has b d i th i l d l f it h d t


300. Smith was quoted as saying:302.

In addition to the actions we are taking to address our liquidity issues and establish a longer-term capital structure, we are also continuing to focus on winning and executing projects successfully. We have an excellent backlog of business, which has been further strengthened by the recent influx of new orders in our power business. We also are seeing improved markets for our process and environmental operations.

301. The release also touted S&W’s future growth by stating that in the last 303.

month alone, “The Company announced approximately $500 million of new contract awards.”


Smith added that: “These new contracts speak well of Stone & Webster’s global

recognition and of the competencies of our people and our project execution”.

302. The December 1999 Restructuring Release was materially false and 304.

misleading in that the expansion and extension it touted was actually a restructuring demanded

by S&W’s lenders because S&W was in a workout situation. The restructuring was done so

S&W could remain operational while it sold assets for the benefit of its lenders. All of the

additional funds under the agreement were committed to its lenders from S&W’s prospective

headquarters sale.

303. S&W’s representation that the proceeds from its headquarters sale would 305.

be used to reduce debt and for general corporate purposes was false and misleading since the

proceeds were committed to pay the very banks who were providing this credit facility, the

purpose of which was to keep S&W afloat until the headquarters was sold and the banks could

obtain the proceeds. The representation that this credit agreement was a reflection of the

strength of S&W’s business was an outright falsehood.

304. Smith’s statements about the strength of the Company’s business and its 306.

competitive position were also outright falsehoods since he knew the Company’s new projects

were obtained by underbidding and that S&W was insolvent and on the verge of bankruptcy.

The December 16, 1999 ESOP Press Release

305. On December 16, 1999, S&W issued a press release announcing that it had 307.

sold one million shares of its common stock held in treasury to its Employee Retirement Plan


million in new capital as a result of the transaction, and that “[t]he Company’s management

believes that operating results for FY2000 will meet current analyst expectations after the

dilution resulting from the additional shares.”

306. The December 1999 ESOP Release was materially misleading in several 308.

respects. First, the statement that S&W would receive $15 million in additional capital was

materially misleading because it failed to disclose that, in essence, the money was already spent

and that S&W was facing imminent collapse due to lack of working capital and inability to raise


Retirement Plan had been determined fair to the Retirement Plan was materially misleading

because it failed to disclose that the fairness opinion was not based upon consideration of

S&W’s true financial condition – it was on the verge of financial collapse, and its stock was

essentially worthless. Third, the statement that management believed “operating results would

meet analyst expectations” was materially misleading because management knew that, absent

infusion of significant additional funds – which they had no reasonable basis to believe would

occur – S&W faced imminent bankruptcy, could not perform on its existing contracts, and, thus,

could not “meet analyst expectations” absent further manipulation of its financial statements.

The December 21, 1999 Building Sale Press Release

307. On December 21, 1999, S&W issued a press release (the “Building Sale 309.

Release”) announcing that it expects the sale of its headquarters building at 245 Summer Street

in Boston to Fidelity Corporate Real Estate LLC (“Fidelity”) to close on December 28, 1999 and


308. The Building Sale Release stated that “The Company plans to use the 310.

proceeds to reduce debt substantially and for other general corporate purposes”.


309. It quoted Smith saying:311.

This milestone significantly strengthens our financial position. We believe we are well positioned to benefit from the many opportunities we see on the horizon for our engineering and construction business, particularly in the power market, which is experiencing rapid growth due to deregulation and environmental requirements.

310. The Building Sale Release was materially false and misleading in that it 312.

represented that the sale would contribute to S&W’s future growth when, in fact, all of the

proceeds were committed to S&W’s existing lenders and even after payment of those amounts,

S&W would still be unable to pay its ordinary business expenses. In addition, Smith knew that

S&W was not well positioned for growth but instead was insolvent.

The December 28, 1999 Press Release

311. On December 28, 1999, S&W issued a press release announcing that it had 313.

been awarded an engineering, procurement and construction (“EPC”) contract from AES

Enterprise, Inc., for a 720-megawatt power plant to be built in Londonderry, New Hampshire

and that the award was the largest EPC contract S&W received in 1999 (the “December 28, 1999

Release”).

312. The December 28, 1999 Release was false and misleading in that it did not 314.



The December 30, 1999 Salomon Smith Barney Analyst Report

313 O D b 30 1999 S l S i h B i d l315


• S&W’s $2.5 billion in backlog and the profitable, high margin nature of that backlog;

• S&W’s strong cash position after the sale of its headquarters; and

• S&W’s recently awarded high margin projects.

314. Based upon these representations, the report suggested a target price of 316.

$20.00 per share for S&W.

315. The report was materially false and misleading in that: S&W’s backlog 317.

represented money-losing projects obtained pursuant to S&W’s policy of underbidding; S&W

would still have no cash or liquidity after its headquarters sale; and its recently awarded projects

were obtained through its underbidding policy and did not represent profitable business, let alone

high margin business. In fact, S&W was insolvent at this point and was only still operating

outside bankruptcy while its lenders sought to recover the amounts owed them and S&W tried to

find a buyer.


316. On January 25, 2000, S&W issued a press release announcing its financial 318.

results for the quarter and year ended December 31, 1999 (the “January 25, 2000 Release”). For

the year, S&W reported revenue of $1.17 billion, net income of $20.5 million, and earnings per

share of $1.56. For the quarter, S&W reported net income of $79.8 million ($6.01 per share),

which included a gain of $151.3 million from sale of S&W’s headquarters building in Boston.

S&W reported backlog of $2.6 billion at year-end 1999.


figures were materially overstated because S&W had reported another $53 million total in

nonexistent revenue from the defunct TPPI project during 1999. Absent this phantom revenue

and receivables from TPPI, S&W would have reported a net loss for 1999 of $11.3 million, or

$0.86 per share. The backlog figure was materially misleading for essentially the same reason: it

misled investors to believe that S&W would enjoy continued strong revenues, when in reality the


line.

318. The revenue and earnings numbers were also misleading because, although 320.

they reflected a charge of $38 million for operating losses in the fourth quarter, they failed to

reflect additional losses known to Smith, Langford, and other S&W senior managers but not

reported, including but not limited to over $25 million in losses at the Tiverton project.

319. The January 25, 2000 Release quoted Smith as stating:321.

The results of our Engineering and Construction operations have improved significantly since the first quarter . . . . Provisions were taken for certain international projects in the first quarter, for which we are pursuing recovery from clients. We expect to realize recovery of a substantial portion of those costs in year 2000.

* * * *

. . . [W]ith our solid backlog of business, strength in the power sector, and anticipated improvements in process and environmental markets, we are well-positioned for the year 2000.

* * * *

Based on the aggressive actions we took in 1999 to reduce debt and overhead costs and strengthen our core engineering


We have made substantial progress in implementing our financial restructuring plans announced after our third quarter. Our liquidity has been improved through the sale of assets, the renegotiation of our bank facilities through May 31, 2000, and the sale of stock to our Retirement Plan. Our improved financial position has been reaffirmed to strengthen of our business and we have expanded our bonding capability with new surety arrangements. The system and controls we have implemented to reduce the number of non-performing projects and the continued reductions of overhead costs position the company for improved financial performance in 2000. When the construction markets return from their current 25 year lows, we will be one of the top performing firms in the industry.

These statements were materially misleading because: (1) performance of the Engineering &

Construction business had not improved, but instead was characterized by as yet undisclosed

massive losses and was crippled by lack of working capital; (2) S&W did not in fact expect to

recover any substantial portion of charges it took in 1999 from clients; (3) backlog was not

“solid”, but instead consisted of a series of defunct or money losing projects; (4) backlog was

irrelevant because S&W lacked the working capital to proceed with the projects; and (5) S&W’s

efforts at improving liquidity had failed to accomplish anything but paying certain bank

indebtedness, and no new working capital had been obtained or was likely to be obtained.










321. On March 20, 2000, S&W issued a press release (the “March 20, 2000 323.

Release”) announcing that it had been selected as the engineering, procurement and construction

(“EPC”) contractor by AES Enterprises, Inc., for a 730-megawatt power plant to be built in

Granbury, Texas.

322. In the March 20, 2000 Release, Smith stated that the selection showed 324.

S&W’s “core competency regarding engineering and construction services in the power

business.”

323. The March 20, 2000 Release was false and misleading in that it did not 325.

disclose S&W had underbid in order to obtain the project and that S&W knew that it would



The March 30, 2000 NT 10-K

324. On March 30, 2000, S&W filed a form NT 10-K, signed by Langford, 326.

announcing that its Report on Form 10-K for the year ending December 31, 1999 would be filed

late. In the Form NT 10-K, S&W reported information concerning the financial results of its

Engineering, Construction and Consulting business. It reported revenue of $1.168 billion,

income from continuing operations of $15.3 million ($1.17 per share), which included $92.2

million ($7.03 per share) from the sale of S&W’s corporate headquarters building, an operating

loss of $115 million for 1999, and backlog of $2,574,000,000 at year-end.

325. The Form NT 10-K also stated that the results for 1999 included charges 327.

totaling $122.6 million, including $74.2 million in the first quarter, $10.4 million in the third

quarter, and $38.0 million in the fourth quarter.

326. These disclosures were materially misleading because: (1) the revenue and 328.

earnings (loss) figures were materially overstated because they were derived from false profit

margins built into S&W’s percentage of completion accounting method and included $53 million

in nonexistent revenue from TPPI; (2) the backlog did not represent strong revenues going

forward, but instead a continuing series of losses; and (3) the reported charges failed to include

additional massive losses of which Smith, Langford and other senior S&W executives were

aware.


The 1999 10-K

327. On April 14, 2000, S&W filed its Report on Form 10-K for the year ended 329.

December 31, 1999, signed by Smith & Langford. S&W reported revenue of $1,167,848,000,

net income of $20,472,000, and earnings per share of $1.56. S&W reported total assets of

$933,296, total liabilities of only $608,947,000, and total shareholders’ equity of $324,349,000.

S&W reported backlog of $2,574,469,000.




would never materialize because of the substantial number of projects that had been bid and sold

at a loss “to get the business” and grow market share. The revenue and earnings (loss) numbers

were also materially misleading because they failed to include additional massive losses known

to Smith, Langford, and other senior S&W executives. Furthermore, as noted above, the revenue

figure included $53 million in phantom revenue and receivables from the defunct TPPI project,

without which S&W would have reported a net loss for 1999 of $11.3 million ($0.86 per share).

The backlog figure was materially misleading because it misled investors to believe that S&W

would expect continued strong revenue, when, in reality, the backlog represented a series of

money-losing or defunct projects that would be a drain on S&W’s bottom line.




330. With respect to S&W’s operating liquidity, the 1999 10-K stated:332.

As of the end of the third quarter of 1999, the Company had fully drawn the cash available to it under its credit facility and the amount of the Company’s past due trade payables had increased, with certain of the Company’s vendors and subcontractors having delayed work to be performed by them. As a result, provisions were established in the fourth quarter of 1999 for acceleration of certain of the affected projects. In order to improve the Company’s cash liquidity, the Company retained financial advisors who are continuing to work with the Company to arrange both interim and longer term financing, to restructure the Company’s balance sheet and assist with the planned sale of Nordic.

On November 29, 1999, the company reached an agreement with its principal bank-lending group to expand and extend its current credit facility. Under the agreement, the borrowing facility was increased by $30.0 to a maximum of $160.0 and extended through May 31, 2000. Upon sale of the Boston headquarters building, $140.0 of borrowings was repaid permanently reducing the amount available to be borrowed to $20.0. As of December 31, 1999, the entire $20.0 available for direct borrowings had been borrowed and $88.2 of letters of credit were outstanding under this new agreement. In addition, at December 31, 1999, $7.2 of letters of credit were outstanding under other bank arrangements. As of December 31, 1999, the company had foreign subsidiary banking facilities available totaling $8.4 of which $2.8 was utilized. The available amount for issuance of letters of credit was $11.8 as of December 31, 1999.

The Company has experienced recurring operating losses and liquidity problems during the past year. To address these issues, on April 14, 2000, the Company completed negotiations and entered into an agreement with its current lending group to extend the credit facility to January 31, 2001. The amended credit facility contains certain quarterly financial covenants and stipulates that proceeds from the sale of the discontinued operation will be used to repay the outstanding direct borrowings and to provide support to the lending group for the Company’s outstanding letters of

dit Th i i d ill b d t h th


These statements were materially misleading because they suggested that S&W’s liquidity crisis

had been resolved by the extension and amendment of its credit facility, when, in reality, S&W

was out of cash, unable to pay its bills and unable to continue normal operations absent a sale.

April & May 2000: S&W’s Financial Collapse Is Finally Revealed

331. On April 30, 2000, S&W issued a press release announcing, among other 333.

things, that it “will revise its 1999 financial results to include a provision for a substantial cost

overrun on an ongoing project.” The press release provided the following explanation for the

cost overrun:

Company officials were recently notified of an unanticipated cost overrun on a key project by a major subcontractor related to estimates to complete work during the first half of the current year. As a result, the Company conducted a thorough review of this project and, based on this review the Company will record a provision of $27.5 million and will revise its 1999 financial statements and amend its 1999 Form 10-K.

S&W further reported that due to the additional charge and previously reported operating losses,

it was experiencing liquidity problems and absent an agreement with subcontractors extending

terms of payment, its ability to continue as a going concern would be in question.

332. There was no explanation how a $27.5 million charge could cause liquidity 334.

problems for a company that only eleven days earlier had reported over $20 million in net

income and net assets over $324 million.

333. In response to this announcement, the market price of S&W’s common 335.

stock fell from $13.8125 to $6.25 per share. The share price continued to decline during the next


which Jacobs would acquire substantially all of S&W’s assets in exchange for an immediate $50

million secured revolving credit facility, assumption of substantially all of S&W’s balance sheet

liabilities, and $150 million in cash and stock. S&W announced that in conjunction with this

transaction, it intended to file a voluntary petition for bankruptcy reorganization under Chapter

11.

335. Despite the fact that it had reported over $324 million in total shareholders’ 337.

equity in its audited financial statements for 1999 filed with its 1999 10-K, the May 8 press

release stated:

Stone & Webster cautioned that because the proposed sale of assets is expected to occur in the context of a pending Chapter 11 case, it is not possible to determine what value if any will ultimately be received by Stone & Webster’s stockholders.

Thus, it became suddenly apparent that S&W’s public statements, press releases, and financial

disclosures filed with the SEC had been grossly misleading. The market reacted accordingly –

on May 19, 2000, the first trading day after S&W’s announcement of its intention to file for

bankruptcy, the price of S&W’s shares plummeted to just over 70 cents.

336. The defendants’ materially false and misleading disclosures had operated to 338.

conceal from the market the fact that S&W was insolvent, its $324 million of net assets was a

mirage, and its common stock was worthless. The worthlessness of the shares was confirmed in

connection with S&W’s Chapter 11 case.

337. By the time S&W’s balance sheet assets and liabilities were transferred to 339.

h l b Sh G i h h b l h d li bili i


338. Thus, a company that had reported total assets of $915.3 million, 340.

total liabilities of only $610.3 million, and total shareholders’ equity of $305 million dollars in

its audited financial statements on May 9, 2000 in reality had a negative net worth which if only

20% of the claims are valid would be as much as $800 million. Stronger evidence of a massive

fraud is hard to imagine.

PRICEWATERHOUSECOOPERS’ PARTICIPATION IN THE FRAUD

339. Plaintiffs incorporate by reference all allegations above as if fully set forth 341.

herein.

340. Coopers and Lybrand, which merged with PriceWaterhouse in 1998 to 342.

form PWC, served as S&W’s purportedly “independent” outside auditor for over 50 years. In

recent years, PWC received over $1 million in fees per year from S&W for auditing, tax and

other consulting services.

341. As a result of its longstanding relationship with S&W and the nature of the 343.

accounting and auditing services rendered to the Company, PWC personnel, including Robert

Spear, the PWC audit partner responsible for the S&W account, were regularly present at

S&W’s corporate headquarters throughout the year and had continual access to and knowledge

of S&W’s private and confidential corporate financial and business information, including

internal monthly financing statements, Board minutes and internal memoranda, and thus was

aware of the true facts as alleged herein concerning the true nature of S&W’s actual financial

condition and business prospects. PWC therefore knew of or recklessly disregarded the


(collectively referred to as the “Financial Statements”) and PWC’s unqualified opinions thereon,

materially false and misleading:

(1) That S&W’s pattern of cost overruns and associated charges suggested that S&W was either underbidding contracts purposely, in which case, losses should have been booked to the income statement and the balance sheet, or S&W was unable to estimate costs accurately in which case they violated GAAP by using the percentage of completion method. In addition, PWC knew that S&W’s explanations for these charges were false and misleading in that S&W consistently attempted to blame these charges on “unanticipated” events that were the responsibility of third parties, rather than the fault of S&W.



(4) That S&W’s disclosures regarding TPPI were purposely misleading from the outset. That when S&W announced that work on TPPI had slowed, it had actually been suspended. That when S&W announced that it believed the project was likely to resume it had no basis for this


(5) That there were cost overruns, delays, subcontractor liens, and work stoppages at the Tiverton project throughout 1999 and early 2000 as a result of S&W’s inability to pay its bills.



(8) That S&W, on the verge of bankruptcy, sold 1 million shares of treasury stock to its employee retirement plan when S&W was effectively insolvent and on the verge of bankruptcy, and that S&W obtained a fairness opinion on the transaction by supplying its investment banker with false and outdated financial information.

342. Based upon PWC’s knowledge of these facts, PWC knew, or recklessly 344.

disregarded, that throughout the Class Period S&W fraudulently reported revenue and income,

had a policy and practice of underbidding projects, failed to disclose the inevitable losses

associated with its backlog figure, and also fraudulently reported its net assets.

343. Nonetheless, PWC issued an unqualified audit opinion dated February 12, 345.

1998 on S&W’s 1997 financial statements in which it stated that the financial statements were



is to express an opinion on these financial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financing statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stone & Webster, Incorporated and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.

344. PWC also issued an unqualified audit opinion dated February 12, 1999 on 346.

S&W’s 1998 financial statements in which it stated that the 1998 financial statements were


GAAS:

In our opinion, the accompanying consolidated balance sheets and related consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Stone & Webster, Incorporated and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of


obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluation the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.

345. PWC also issued an unqualified audit opinion dated February 14, 2000 on 347.

S&W’s 1999 financial statements in which it stated that the 1999 financial statements were


GAAS:

In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 14 (a) (1) (i) present fairly, in all material respects, the consolidated financial position of Stone & Webster, Incorporated, and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14 (a) (1) (ii) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by

d l i h ll fi i l


statements for the year-ended December 31, 1999 were presented in accordance with GAAP and,

as a result of their planning and performance of the audit, they had obtained reasonable

assurance that S&W’s financial statements were free of material misstatement.

347. PWC turned a blind eye to Smith and Langford’s systemic and pervasive 349.

scheme of underbidding projects, their fraudulent inflation of S&W’s backlog, and their

misleading statements about revenue and net assets. PWC issued unqualified audit opinions on

S&W’s Financial Statements, even though PWC knew or recklessly disregarded the fact that:

(a) the financial statements had not been prepared in conformity with GAAP and did not present

fairly, in all material respects, the financial position of S&W and its subsidiaries as of December

31, 1997, December 31, 1998 and December 31, 1999, and the results of their operations and

cash flow for the periods ending on those dates; and (b) PWC had not audited S&W’s Financial

Statements in accordance with GAAS.

348. Among other things, PWC knew or recklessly disregarded the fact that 350.

S&W’s Financial Statements violated GAAP and were materially false and misleading and

inherently unreliable because, as more fully described in paragraph 339 above, S&W

fraudulently recognized and reported revenue, and fraudulently reported net assets and made

misleading statements about backlog. In addition, PWC’s approval of S&W’s usage of

percentage-of-completion accounting violated GAAP because SOP 81-1 requires an entity

reporting under this methodology to be able to “to determine costs incurred on a contract with a

relatively high degree of precision.” PWC, as independent auditors, should have required that


(“SAS”) No. 69, “The Meaning of ’Presents Fairly in Conformity With Generally Accepted

Accounting Principles’ in the Independent Auditor’s Report.”

349. In certifying S&W’s Financial Statements, PWC also falsely represented 351.

that its examinations were made in accordance with GAAS. Under the AICPA Audit and

Accounting Guide for Construction Contractors, the auditor is required to:

(1) critically review representations of management, (2) obtain explanations of apparent disparities between estimates and past performance on contracts, experience on other contracts, and information gained in other phases of the audit, and (3) document the results of work in these areas.

GAAS provides that accounting data alone is not sufficient to support an opinion on financial

statements (SAS Nos. 31 and 48, AU §326.16). Before rendering an opinion, the auditor must

obtain evidential matter to support the financial statements. “Evidential matter” consists of the

underlying accounting data and all corroborating information available to the auditor. (AU

§326.15). Corroborating evidential matter includes both documents obtained during the

fieldwork and information obtained from inquiry, observation, inspection and physical

examination. (AU §326.17).

350. In addition, the Guide provides that the auditor should review at least the 352.

following information:

• A review of project engineer reports and interim financial data, including reports and data issued after the balance sheet date, with explanations for unusual variances or changes in projections. Of particular importance would be

i f i d d d i f


disputes, contract guarantees, and so forth that could affect total contract revenue and estimated cost to complete.

• Discussions with the contractor’s engineering personnel and project managers who are familiar with, and responsible for, the contract in process.

• A review of the reports of independent architects and engineers.

• A review of information received from the contractor’s attorney that relates to disputes and contingencies.

AICPA Accounting Guide for Construction Contractors: Major Auditing Procedures for Contractors.

351. PWC failed to comply with GAAS because it failed to take the steps 353.

identified above as required by GAAS and failed to design its audit plan to provide reasonable

assurance of detecting material error as required by SAS No. 82 and AU §316. Based upon the

numerous red flags set forth below, GAAS required PWC to develop an audit plan that

accounted for the risk that S&W’s financial statements included misstatements arising from

fraudulent financial reporting. (AU §315.16-18). At a minimum, PWC was required to

complete the field work described above. It did


not do so. These red flags included:




(4) That S&W’s disclosures regarding TPPI were purposely misleading from the outset. That when S&W announced that work on TPPI had slowed, it had actually been suspended. That when S&W announced that it believed the project was likely to resume, it had no basis for this claim as S&W had been told to terminate its equipment and subcontractor agreements. That S&W had no basis for claiming it could recover $332 million from equipment


and early 2000 as a result of S&W’s inability to pay its bills.




352. Other red flags were present at S&W, including (i) motivation for 354.

management to engage in fraudulent financial reporting such as tying bonuses, stock options and

other incentives to report unduly aggressive targets for operating results, financial position or

cash flow; (ii) a practice by management of committing to analysts, creditors and other third

parties to achieve what appear to be unduly aggressive or clearly unrealistic forecasts; (iii) high

turnover of project management and senior corporate management; (iv) inability to generate cash

flow from operations, while reporting earnings and earnings growth; (v) assets, liabilities,

revenues or expenses based on significant estimates that are subject to potential significant


353. PWC knowingly or recklessly failed to examine sufficient 355.

corroborating evidential data, including those areas of examination delineated in the AICPA

Construction Contractors Guide as required by GAAS prior to rendering its opinions. PWC’s

responsibility, as S&W’s independent auditor, was to obtain “sufficient competent evidential

matter . . . to afford a reasonable basis for an opinion regarding the financial statements under

audit” as to the “fairness with which they present, in all material respects, financial position,

results of operations, and its cash flows in conformity with generally accepted accounting

principles.” AU §§110, 150. PWC failed to do so because it failed to take any of the steps

required by the AICPA Guide. Had PWC taken those steps, it would have uncovered the

fraudulent nature of S&W’s financial reporting. Its failure to do so, despite its responsibility

under GAAP and GAAS, and the presence of the many red flags identified above, constitutes

either knowledge of the fraud or reckless disregard of it.

354. PWC also violated GAAS because its audits were not performed in 356.

accordance with GAAS in the following ways:

(a) PWC violated GAAS Standard of Reporting No. 1 that requires the audit

report to state whether the financial statements are presented in accordance with GAAP. PWC’s

opinion falsely represented that S&W’s Financial Statements were presented in conformity with

GAAP when they were not for the reasons herein alleged, and as evidenced by the restatement of

the 1999 financial statement and insolvency proceeding.

(b) PWC violated GAAS Standard of Reporting No. 4 which requires that,


fairly presented. PWC also failed to require S&W to restate its previously issued materially false

and misleading 1997 and 1998 financial statements and allowed S&W to make material

misrepresentations regarding the Company to its shareholders and to the investing public during

the Class Period. The failure to make such a qualification, correction, modification and/or

withdrawal was a violation of GAAS, including the Fourth Standard of Reporting.

(c) PWC violated GAAS General Standard No. 2 that requires that an

independence in mental attitude be maintained by the auditor in all matters related to the

assignment.

(d) PWC violated SAS No. 54 in that PWC failed to perform the audit

procedures required in response to possible improper acts by S&W in connection with its audit

of S&W’s Financial Statements. PWC knew or recklessly disregarded the fact that cost to

complete estimates prepared at the project level were overridden by senior management in order

to falsely portray viable projects.

(e) PWC violated GAAS and the standards set forth in SAS Nos. 1 and 53 at a

minimum by, among other things, failing to adequately plan its audit and properly supervise the

work of assistants and to establish and carry out procedures reasonably designed to search for

and detect the existence of errors and irregularities which would have a material effect upon the

financial statements, as such procedures are listed in the AICPA Construction Contractors’

Guide.

(f) PWC violated GAAS General Standard No. 3 that requires that due


(g) PWC violated GAAS Standard of Field Work No. 2 which requires the

auditor to make a proper study of existing internal controls, including accounting, financial and

managerial controls, to determine whether reliance thereon was justified, and if such controls are

not reliable, to expand the nature and scope of the auditing procedures to be applied. The

standard provides that a sufficient understanding of an entity’s internal control structure be

obtained to adequately plan the audit and to determine the nature, timing and extent of tests to be

performed. AU §150.02. In all audits, the auditor should perform procedures to obtain a

sufficient understanding of three elements of an entity’s internal control structure: the control

environment, the accounting system, and control procedures. AU §319.02. The control

environment, which includes management’s integrity and ethical values, is the foundation of

internal control and provides discipline, structure and sets the tone of an organization. After

obtaining an understanding of an entity’s internal control structure, the auditor assesses the

entity’s control risk. AU §319.02. Control risk is the risk that a material misstatement in an

assertion by management contained in a company’s financial statements will not be prevented or

detected on a timely basis by an entity’s internal control structure policies or procedures. AU

§319.29. The ultimate purpose of assessing control risk is to aid the auditor in evaluating the

risk that material misstatements exist in the financial statements. AU §319.61.

355. In determining the nature, timing and extent of audit procedures, the 357.

auditor should consider, among other factors, materiality and audit risk. Materiality is defined in

the FASB’s Statement of Financial Accounting Concepts No. 2 as “the magnitude of an omission


financial statements are materially misstated even when the auditor issues an unqualified opinion

on the statements. SAS No. 47 (Audit Risk and Materiality in Conducting an Audit) explains

how the auditor should integrate the concepts of materiality and audit risk into the planning and

execution of an audit engagement (AU §312.01).

356. PWC violated AU §312 - Audit Risk and Materiality in Conducting an 358.

Audit in its failure to measure and plan for the appropriate levels of materiality and risk

associated with S&W’s key projects. For example, PWC failed to conduct an extensive field

investigation on the TPPI project in light of the project’s known materiality. PWC also ignored

its professional responsibilities under SAS No. 53 - The Auditor’s Responsibility to Detect and

Report Errors and Irregularities by accepting S&W’s misleading estimates to complete its key

projects even though S&W had a pattern of missing these estimates. Thus, PWC failed to

exercise the “professional skepticism” required by SAS No. 53 in the planning and performance

of the audit.

357. As a result of its failure to accurately report on S&W’s Financial 359.

Statements, PWC utterly failed in its role as an auditor as defined by the SEC. SEC Accounting

Series Release No. 296, Relationships Between Registrants and Independent Accountants,

Securities Act Release No. 6341, Exchange Act Release No. 18044, states in part:

Moreover, the capital formation process depends in large part on the confidence of investors in financial reporting. An investor’s willingness to commit his capital to an impersonal market is dependent on the availability of accurate, material and timely information regarding the corporations in which he has invested or


independent professional judgment compels that result. [Emphasis added.]

ADDITIONAL ALLEGATIONS EVIDENCING DEFENDANTS’ SCIENTER

358. As alleged herein, defendants Smith and Langford had both the motive and 360.

opportunity to commit fraud. Their opportunity to cause S&W to issue false and misleading

disclosures to the investing public is obvious and beyond dispute: as the CEO and CFO of S&W,

they were the chief spokesmen for the Company in all public statements and dealings with

analysts and other market participants, and had control, responsibility, and direct involvement

with the contents of press releases and documents filed with the SEC and disseminated to the

market. Their motives to commit fraud were: (1) to position S&W for sale, so that they could

take advantage of their lucrative change of control agreements; and (2) concealing their own

mismanagement of the Company.

359. Smith and Langford’s scienter is demonstrated by much more, however, 361.

than motive and opportunity. Their conduct is inexplicable by anything other than the intent to

defraud. Examples of their patently fraudulent conduct include:

• The deliberate selling of jobs at a loss for the purpose of adding them to backlog, thereby creating the false impression of strong growth, despite warnings that this strategy would result in financial disaster for S&W.

• Their knowingly false claims that the work in backlog was expected to be performed at “improved margins,” when in reality the backlog increasingly consisted of loss contracts as a direct result of their program of underbidding.

• Their decision not to report losses on TPPI after the project


• Their failure to report losses on contracts they bid and sold at a loss as soon as the loss was determined, i.e., when S&W became committed to perform each loss contract, as required by GAAP.

• Their deliberate misrepresentations concerning the adequacy of S&W’s cash resources to fund normal operations during the period from mid-1998 through early 2000, which concealed S&W’s financial collapse from the investing public until S&W announced that it intended to file for bankruptcy.

Finally, the ultimate revelation of S&W’s true financial condition in the context of its Chapter 11

proceeding constitutes overwhelming evidence that Smith and Langford had succeeded in

perpetrating a massive fraud on the investing public. While it had reported total shareholders’

equity of over 300 million in its audited financial statements for 1999, it became clear in the

bankruptcy that S&W had a negative net worth of at least $800 million (assuming that only 20%

of the approximately $4 billion in claims filed against the estate were given effect).

360. As alleged herein, defendants acted with scienter in that defendants knew 362.

that the public documents and statements issued or disseminated in the name of the Company

were materially false and misleading; knew that such statements or documents would be issued

or disseminated to the investing public; and knowingly and substantially participated or

acquiesced in the issuance or dissemination of such statements or documents as primary

violations of the federal securities laws. As set forth elsewhere herein in detail, defendants, by

virtue of their receipt of information reflecting the true facts regarding S&W, their control over,

and/or receipt and/or modification of S&W’s allegedly materially misleading misstatements


361. As alleged herein, PWC either had knowledge of the fraud or recklessly 363.

disregarded it by ignoring the many red flags listed below:




(4) That S&W’s disclosures regarding TPPI were purposely misleading from the outset. That when S&W announced that work on TPPI had slowed, it had actually been suspended. That when S&W announced that it believed the project was likely to resume, it had no basis for this claim as S&W had been told to terminate its equipment and


and early 2000 as a result of S&W’s inability to pay its bills.




Spear and PWC had an obvious desire to continue to receive the millions of dollars in accounting

and consulting fees paid by S&W. Once the magnitude of S&W’s financial collapse began to

manifest itself, not later than the spring of 1999, in S&W’s inability to pay its vendors, PWC’s

audit team had a personal interest in concealing their reckless and unprofessional performance

on the S&W audits, which had permitted a massive fraud to be perpetrated on the investing

public. This motivation prevailed until the proposed transaction with Jacobs made disclosure

inevitable, at which point PWC devised an artifice to attempt to save face - forcing a belated

restatement of S&W’s 1999 financials based upon what was only a small portion of the fraud.


(a) S&W’s stock met the requirements for listing, and was listed and actively

traded on the NYSE, a highly efficient and automated market;

(b) As a regulated issuer, S&W filed periodic public reports with the SEC and

the NYSE;

(c) S&W regularly communicated with public investors via established market

communication mechanisms, including through regular disseminations of press releases on the

national circuits of major newswire services and through other wide-ranging public disclosures,

such as communications with the financial press and other similar reporting services;

(d) S&W was followed by several securities analysts employed by major

brokerage firms who wrote reports which were distributed to the sales force and certain

customers of their respective brokerage firms. Each of these reports was publicly available and

entered the public marketplace.

(e) the misrepresentations alleged herein would tend to induce a reasonable

investor to misjudge the value of S&W common stock; and

(f) plaintiffs and the Class purchased or otherwise acquired their common

stock during the Class Period without knowledge of the omitted or misrepresented facts.

363. As a result of the foregoing, the market for S&W’s securities promptly 365.

digested current information regarding S&W from all publicly available sources and reflected

such information in S&W’s stock price. Under these circumstances, all purchasers of S&W’s

securities during the Class Period suffered similar injury through their purchase of S&W’s


S&W’s GUIDANCE TO SECURITIES ANALYSTS AND USE OF THEM TO PROVIDE FALSE INFORMATION TO THE SECURITIES MARKET

364. As described below, among other wrongful conduct, defendants 366.

communicated materially false and misleading information to securities analysts to promote the

Company and to artificially inflate the price of S&W stock during the Class Period.

365. At all times relevant to this Consolidated and Amended Class Action 367.

Complaint, S&W was followed by securities analysts employed by brokerage houses and/or

broker/dealers which issued reports and made recommendations concerning S&W’s common

stock and securities to their clients.

366. In writing these reports, these analysts relied in substantial part upon 368.

information provided by the Company directly and through its public statements and reports and

conference calls, and upon information provided to the analysts privately by the Individual

Defendants and assurances by the Individual Defendants and the Company that information in

the analysts’ reports did not materially vary from the Company’s internal knowledge of its

operations and prospects.

367. Defendants used their communications with analysts to assure them that 369.

their estimates of S&W’s business were accurate and that the Company was on track to achieve

strong earnings and growth.

368. Prior to and during the Class Period, it was the Company’s practice to have 370.

its top officers and directors, including the Individual Defendants, communicate regularly with

i i i l d i i fi l b i di h hi


and analyst briefings where defendants discussed relevant aspects of the Company’s operations

and financial prospects.

369. The defendants knew that by participating in these regular and periodic 371.

direct communications with analysts, the Company could disseminate information to the

investment community and that investors would rely and act upon such information (i.e., make

purchases and sales of the Company’s securities). The Individual Defendants had these

communications with analysts in order to cause or encourage them to issue favorable reports

concerning S&W – which the analysts did – and defendants used these communications to

falsely present the operations and allegedly successful prospects of S&W to the marketplace in

order to artificially inflate the market price of S&W’s common stock. Despite their duty to do

so, the Individual Defendants failed to correct these statements of which they were the sources or

which they had caused or facilitated during the Class Period.

370. The investment community and, in turn, investors, relied and acted upon 372.

the information communicated in these written reports, many of which recommended that

investors purchase S&W common stock and touted the purported appreciation prospects of the

shares. Defendants manipulated and inflated the market price of S&W stock by falsely

presenting to analysts, through regular meetings and during both telephonic and written

communications, the prospects of the Company and by failing to disclose the true adverse

information about the Company that was known only to them.

371. During the Class Period, the Individual Defendants occupied positions that 373.


INAPPLICABILITY OF STATUTORY SAFE HARBOR

372. As alleged herein, defendants acted with scienter in that defendants knew 374.

that the public documents and statements issued or disseminated in the name of the Company

were materially false and misleading or omitted material facts; knew that such statements or

documents would be issued or disseminated to the investing public; knew that persons were

likely to reasonably rely on those misrepresentations and omissions; and knowingly and

substantially participate or were involved in the issuance or dissemination of such statements or

documents as primary violations of the federal securities law. As set forth elsewhere herein in

detail, defendants, by virtue of their receipt of information reflecting the true facts regarding

S&W, their control over, and/or receipt of S&W’s allegedly materially misleading misstatements

and/or their association with the Company which made them privy to confidential proprietary

information concerning S&W which were used to inflate financial results and which defendants

caused or were informed of, participated in and knew of the fraudulent scheme alleged herein.

With respect to non-forward-looking statements and/or omissions, defendants knew and/or

recklessly disregarded the falsity and misleading nature of the information which they caused to

be disseminated to the investing public.

373. Defendants’ false and misleading statements and omissions do not 375.

constitute forward-looking statements protected by any statutory safe harbor. The statements

alleged to be false and misleading herein all relate to facts and conditions existing at the time the

statements were made. No statutory safe harbor applies to any of S&W’s false or misleading


looking statement pled because, at the time each forward-looking statement was made, the

speaker knew or had actual knowledge that the forward-looking statement was materially false

or misleading, and the forward-looking statement was authorized and/or approved by a director

and/or executive officer of S&W who knew that the forward-looking statement was false or

misleading. None of the historic or present tense statements made by defendants were

assumptions underlying or relating to any plan, projection or statement of future economic

performance, as they were not stated to be such assumptions underlying or relating to any

projection or statement of future economic performance when made nor were any of the

projections or forecasts made by defendants expressly related to or stated to be dependent on

those historic or present tense statements when made.

PLAINTIFFS’ CLASS ACTION ALLEGATIONS

375. This is a class action pursuant to Rule 23 of the Federal Rule of Civil 377.

Procedure on behalf of all persons and entities who purchased S&W common stock during the

Class Period and who suffered damages as a result of their purchases. Excluded from the Class

are defendants, the officers and directors of the Company, at all relevant times, members of their

immediate families and their legal representatives, heirs, successors or assigns and any entity in

which defendants have or had a controlling interest.

376. The members of the Class are so numerous that joinder of all members is 378.

impracticable. Throughout the Class Period, S&W common shares were actively traded on the

NYSE National Market under the symbol “SW.” While the exact number of Class members is


members of the Class may be identified from records maintained by S&W or its transfer agent

and may be notified of the pendency of this action by mail, using the form of notice similar to

that customarily used in securities class actions.

377. Plaintiffs’ claims are typical of the claims of the members of the Class. 379.

Plaintiffs will fairly and adequately protect the interest of the members of the Class and have

retained counsel experienced in class action and securities litigation. Plaintiffs have no interests

that are adverse or antagonistic to the Class.

378. A class action is superior to other available methods for the fair and 380.

efficient adjudication of this controversy. Because the damages suffered by many individual

Class members may be relatively small, the expense and burden of individual litigation makes it

virtually impossible for the Class members individually to seek redress for the wrongful conduct

alleged.

379. Common questions of law and fact exist as to all members of the Class and 381.

predominate over any questions solely affecting 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 the documents, releases, and statements disseminated to the

investing public and shareholders during the Class Period omitted and/or misrepresented

material facts about the business affairs, financial condition and future prospects of S&W;


(d) whether the market price of the S&W common stock during the Class

Period was artificially inflated due to the nondisclosures and/or misrepresentations complained

of herein; and

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

is the proper measure thereof.

380. Plaintiffs know of no difficulty which will be encountered in the 382.

management of this litigation which would preclude its maintenance as a class action.

381. The names and addresses of the record owners of the shares of S&W 383.

common stock purchased during the Class Period are available from the Company’s transfer

agent(s). Notice can be provided to such record owners by first class mail.

CLAIMS FOR RELIEF

COUNT I

Violations Of Section 10(b) OfThe Exchange Act And Rule 10b-5 Promulgated Thereunder Against All Defendants

382. Plaintiffs repeat and reallege each and every allegation contained above as 384.

if fully set forth herein.

383. This Count is asserted by plaintiffs and the Class against all defendants and 385.

is based upon Section 10(b) of the Exchange Act, 15 U.S.C. §78j(b), and Rule 10b-5 §240.10b-5,

promulgated thereunder.

384. During the Class Period, defendants carried out a plan, scheme and course 386.

f d t hi h i t d d t d th h t th Cl P i d did ( ) d i th i ti


scheme, plan and course of conduct, defendants, and each of them, took the actions set forth

herein.

385. Defendants (a) employed devices, schemes, and artifices to defraud; (b) 387.

made untrue statements of material fact and/or omitted to state material facts necessary to make

the statements not misleading; and (c) engaged in acts, practices, and a course of business which

operated as a fraud and deceit upon the purchasers of the Company’s securities in an effort to

maintain artificially high market prices for S&W’s securities in violation of Section 10(b) of the

Exchange Act and Rule 10b-5.

386. Defendants engaged in the fraudulent activity described above 388.

knowingly and intentionally, or in such a reckless manner as to constitute willful deceit and

fraud upon plaintiffs and the Class. Defendants knowingly caused their reports and statements to

contain misstatements and omissions of material fact as alleged herein.

387. As a result of defendants’ fraudulent activity, the market price of 389.

S&W securities was artificially inflated during the Class Period.

388. In ignorance of the true financial condition of S&W, plaintiffs and 390.

other members of the Class, relying on the integrity of the market and/or on the statements and

reports of S&W containing the misleading information, purchased S&W stock at artificially

inflated prices.

389. The market price of S&W stock has declined materially upon the 391.

public disclosure of the true facts which had been misrepresented or concealed as alleged herein.


COUNT II

Violations Of Section 20(a) Of The Exchange Act Against Individual Defendants



392. S&W committed a primary violation of Section 10(b) of the Exchange Act, 394.

15 U.S.C. §78j(b) and Rule 10b-5 §240.10b-5, promulgated thereunder by disseminating the

materially false and misleading statements described herein knowingly and intentionally or in

such reckless manner as to constitute willful deceit, causing the market price of S&W securities

to be artificially inflated during the Class Period, and causing damages to plaintiffs and other

members of the Class, who, in ignorance of S&W’s true financial condition, relied on the

integrity of the market and/or on the false and misleading statements in purchasing S&W stock.

393. Individual Defendants acted as controlling persons of S&W within the 395.

meaning of Section 20(a) of the Exchange Act, 15 U.S.C. §78t, as alleged herein. By virtue of

their high-level positions, and their ownership and contractual rights, participation in and/or

awareness of the Company’s operations and/or intimate knowledge of the false financial

statements filed by the Company with the SEC and disseminated to the investing public, the

Individual Defendants had the power to influence and control and did influence and control,

directly or indirectly, the decision-making of the Company, including the content and

dissemination of the various statements which plaintiffs contend are false and misleading.

Individual Defendants were provided with or had unlimited access to copies of the Company’s


394. In particular, both of the Individual Defendants had direct and supervisory 396.

involvement in the day-to-day operations of the Company and, therefore, are presumed to have

had the power to control or influence the particular transactions giving rise to the securities

violations as alleged herein, and exercised the same.

395. As controlling persons within the Company, Individual Defendants are 397.

liable pursuant to Section 20(a) of the Exchange Act for S&W’s primary violation of Section

10(b) and Rule 10b-5. As a direct and proximate result of the Individual Defendants’ wrongful

conduct, plaintiffs and other members of the Class suffered damages in connection with their

purchases of the Company’s securities during the Class Period.

COUNT III

Violations of Section 18 of the Exchange Act Against All Defendants



397. As set forth above, in reports filed with the SEC, defendants made or 399.

caused to be made statements which were, at the time and in light of the circumstances under

which they were made, false or misleading with respect to material facts.

398. Plaintiffs read and relied upon each statement from the reports and 400.

documents filed with the SEC, including the Form 10-Qs for the quarters ended March 31, 1998,

June 30, 1998, September 30, 1998, March 31, 1999, June 30, 1999, September 30, 1999 and

March 31, 2000, and the Form 10-Ks for fiscal years 1997, 1998 and 1999.


401. Defendants knew or should have known by exercising due diligence that 403.

such statements were false and misleading because defendants: (a) knew or had access to the

materially adverse non-public information about S&W’s financial results and then existing

business conditions; (b) participated in drafting, reviewing and/or approving the misleading

statements, releases, reports and other public representations about S&W which were filed with

the SEC; and (c) had an obligation to inform themselves of the accounting policies and

procedures, as well as the financial statements of the Company.

402. Defendants’ conduct resulted in the Company issuing false and misleading 404.

statements with respect to its revenues, income, earnings per share and backlog. Defendants’

conduct also resulted in the Company misrepresenting that its financial statements for the Class

Period were presented in conformity with GAAP or principles of fair reporting.

403. In connection with the purchase of S&W securities, plaintiffs had a right to 405.

rely and reasonably did rely upon the false and misleading statements of the Company’s

financial status in reports and other documents filed with the SEC.

404. When the truth was finally revealed about the false and misleading 406.

statements made by defendants in reports and other documents filed with the SEC, plaintiffs

were significantly damaged by the resulting impairment of shareholder equity and the drop in the

stock’s trading price.

405. By virtue of the foregoing, defendants have violated Section 18 of 407.

the Exchange Act.


WHEREFORE, plaintiffs pray for relief and judgment, as follows:

(a) Determining that this action is a proper class action, and certifying plaintiffs

as class representatives under Rule 23 of the Federal Rules of Civil Procedure;

(b) Awarding compensatory damages in favor of plaintiffs and the other Class

members against all defendants, jointly and severally, for all damages sustained as a result of

defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

(c) Awarding plaintiffs and the Class their reasonable costs and expenses

incurred in this action, including counsel fees and expert fees; and

(d) Awarding such other and further relief as the Court may deem just and

proper.


JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury on all claims so triable.

Dated: January 4, 2001 Jay W. EisenhoferSidney S. LiebesmanGRANT & EISENHOFER, P.A.1220 North Market Street, Suite 500Wilmington, DE 19801Telephone: (302) 622-7000Facsimile: (302) 622-7100

Lead Counsel for Plaintiffs

Norman M. Berman (BBO# 040460)Alicia M. Duff (BBO# 637963)BERMAN, DEVALERIO & PEASE, LLPOne Liberty SquareBoston, MA 02109Telephone: (617) 542-8300Facsimile: (617) 542-1194


Steven G. SchulmanSamuel H. RudmanMILBERG WEISS BERSHAD HYNES& LERACH LLPOne Pennsylvania Avenue, 49th FloorNew York, NY 10119Telephone: (212) 594-5300Facsimile: (212) 868-1229


Joseph H. WeissWEISS & YOURMAN551 Fifth Avenue, Suite 1600New York, NY 10176Telephone: (212) 682-3025Facsimile: (212) 682-3010

Steven E. CauleyCAULEY & GELLER, LLP11311 Arcade Drive, Suite 201Little Rock, AR 72212Telephone: (501) 312-8500Facsimile: (501) 312-8505

Plaintiffs’ Executive Committee Members


Dated: November 6, 2006 /s/ Sidney S. Liebesman Jay W. EisenhoferSidney S. LiebesmanGRANT & EISENHOFER P.A.Chase Manhattan Centre1201 North Market StreetWilmington, DE 19801Telephone: (302) 622-7000Facsimile: (302) 622-7100

Lead Counsel for Plaintiffs

Of Counsel:

MILBERG WEISS BERSHAD & SCHULMAN LLPAriana J. TadlerOne Pennsylvania PlazaNew York, NY 10119Telephone: (212) 594-5300

Norman M. Berman (BBO# 040460)Bryan A. Wood (BBO# 648414) BERMAN, DEVALERIO, PEASE,TABACCO, BURT & PUCILLOOne Liberty SquareBoston, MA 02109Telephone: (617) 542-8300Facsimile: (617) 542-1194



CERTIFICATE OF SERVICE

I HEREBY CERTIFY that on January 4, 2001, copies of the foregoing was served upon the following counsel of record as followsthis date, the foregoing Second Consolidated and Amended Class Action Complaint was electronically filed with the Clerk of the Court using the USDC ECF system, and thus served on all counsel identified in the resulting Notice of Electronic Filing, and further, was sent via First Class Mail, postage prepaid to:

By Hand-Delivery:

Jordan D. HershmanTesta Hurwitz & Thibeault, LLP125 High StreetBoston, MA 02110Attorneys for Defendant H. Kerner Smith

William G. MeserveRopes & GrayOne International PlaceBoston, MA 02110Attorneys for Defendant Thomas Langford

Thomas J. DoughertySkadden, Arps, Slate, Meagher & Flom LLPOne Beacon Street, 31st FloorBoston, MA 02108Attorneys for Defendant Stone & Webster, Inc.

______________________________Sidney S. Liebesman

C:\Docx97\convert\Consol Amend Compl FINAL.wpd


Matthew E. Miller, EsquireFoley Hoag, LLP World Trade Center West 155 Seaport Boulevard Boston, MA 02210 Attorneys for Defendant PricewaterhouseCoopers LLP

Nancy B. Reiner, EsquireRobert L. Harris, EsquireBrown Rudnick Berlack Israels LLP One Financial Center Boston, MA 02111Attorneys for Defendant Stone & Webster, Inc

Dated: November 6, 2006 /s / Sidney S. Liebesman Sidney S. LiebesmanGrant & Eisenhofer P.A.Chase Manhattan Centre1201 North Market StreetWilmington, DE 19801Tel: 302-622-7000Fax: 302-622-7100


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