UP'i -A

77IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOISEASTERN DIVISION

RICK SINGER, on behalf of himself and all otherssimilarly situated

V .Plaintiff,

NICOR, INC ., THOMAS L . FISHER andKATHLEEN L, HALLORAN,

n7

. .a

belief, except as to those allegations concerning Plaintiffs, which are alleged upo0 p anal .:

knowledge . Plaintiffs' information and belief are based upon, among other things, the investigation

of counsel, including without limitation : (a) review and analysis of filings made by Nicor Inc .

("Nicor" or the "Company") with the Securities and Exchange Commission (`°SEC") ; (h) Nicor's

press releases; (c) media reports about the Company; (d) publicly available trading data relating to

the price and volume of Nicor's common stock; (c) securities analysts reports on Nicor ; (f)

interviews with former employees of Nicor ; (g) Nicor and the Citizen Utility Board ("CUB") filings

with the Illinois Commerce Commission ("ICC") from 1999 through 2003 ; and (h) the Report to the

Defendants .

No. 02 C 5168

FE.H. :1 8 no .'4

tO

Judge George W. Lindberg car

PLAINTIFFS ' CONSOLIDATED CLASS ACTION COMPLAINTf ~.3

I .

INTRODUCTION

1 Plaintiffs , by and through their attorneys, allege the following upon infounationan d

Special Committee of Nicor's Board of Directors prepared by Sidley Austin Brown and Wood i n

reliance upon KPMG, L .L.P. ("KPMG") (the "Sidley Austin Report " or "Report") that was filed as

an exhibit in a Nicor Form 8-K filing with the SEC on October 31, 2002 .

I'd 91-

11 .

NATURE OF ACTION AND SUMMARY OF ALLEGATIONS

2. Plaintiffs bring this action as a class action on behalf of themselves and all other

persons or entities (the "Class") who purchased the common stock of Nicor on the open market

during the period November 24, 1999, the date Nicor announced the passage by the ICC of a ne w

Gas Cost Performance Based Rate ("GCPP" or "PBR") plan, through and including July 19, 2002

(the "Class Period"), the date Nicor announced the need to restate its prior financial results due t o

irregularities at Nicer Gas, arising from the PBR, and Nicor Energy, L .L.C . ("Nicor Energy" )

3 . During the Class Period, Nicer senior management , with the participation of it s

outside auditor Arthur Andersen, L .L.P. ("Arthur Andersen" or "Andersen"), entered into a common

plan and scheme to deceive investors and regulators by making material misrepresentations and

failing to state material facts concerning Nicor, Nicor Gas and Nicor Energy, thereby artificiall y

inflating Nicor's reported financial results and Nicor's common stock price in violation oFSectio n

10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C . § 78j(b), and Rule

101-5, 17 C.F.R. § 240 . 1 0b-5, promulgated thereunder . Nicor ' s fraudulent schemes were designed

to allow senior management to enrich themselves through the exercise of stock options and inside r

trading at artificially inflated prices .

4. Nicor is a holding company through which it operated its principal business Nico r

Gas, a natural gas distribution company serving customers in northern Illinois . Nicor also operated

and invested substantially in Nicer Energy, a joint venture with Dynegy, Inc . ("Dynegy") formed i n

1997. Although both entities provided natural gas to consumers in Illinois, Nicer Gas was strictly

regulated by the ICC while Nicor Energy was not .

-2-

i t

5 . Between 1996 and 1999, both Nicor's operating income and net income declined .

Operating income declined from $233,1 million in 1996 to $212 million in 1999, while net income

declined from $136 .2 million in 1996 to $124.4 million in 1999 . Faced with this negative

performance, Nicor management devised a plan to inflate its earnings . In 1998, Nicor management

formed an "Inventory Value Team" headed by Nicor Gas Controller, Jeffery Metz ("Metz") . The

inventory Value Team (the "Inventory Team") concluded that there was enormous potential for

earnings growth buried in Nicor's storage inventory . In 1998, Nicor had 110 billion cubic feet

("Bcf') of gas in storage inventory . Under the Last-In-First-Out ("LIFO") accounting treatment

employed by Nicor, 30% of this gas was treated as having been purchased between 1 .984 and 1996

at approximately $3 .00 per thousand cubic feet ("Mc1"), However, 70% of this gas in storage

inventory was treated as having been purchased between 1954 and 1975 at $ .30 per WE This

meant, according to Metz and the Inventory Value Team, that Nicor had about 75 Bcf of low-cost

gas in storage with a market value of between $100 to $200 million in excess of cost .

6 . The Inventory Team was well aware that Nicor faced two obstacles which prevente d

it from profiting from the sale of the low-cost gas inventory and boosting Nicor earnings -- the LIFO

accounting rules and ICC regulations . According to the LIFO accounting method under which Nicor

operated, current revenue had to be matched with the "cost" of the most recently acquired gas . Since

Nicor constantly needed to acquire new gas to operate, LIFO precluded Nicor from accessing the

lower cost older layers of gas in storage inventory unless it first sold the more recent and more costly

gas inventory layers . The second obstacle was that under ICC regulations, gas cost increases or

decreases had to be passed on to ratepayers dollar-for-dollar . Under the then existing regulatory

scheme, the only beneficiary of liquidating low-cost gas inventory would have been ratepayers -- the

-3-

liquidation would have never reached Nicor's earnings . The Inventory Team devised fraudulen t

schemes to overcome both obstacles .

7. To circumvent LIFO accounting procedures , the Inventory Team devised a schem e

whereby Nicor would physically inject into storage the new gas needed operationally, but used third-

party contracts which enabled Nicor to "defer" recording and paying for the actual purchase of th e

gas until some future date after it had "accessed" its older lower cost storage inventory . Under these

third-party contracts, which became known as "Storage Prefills," Nicor agreed to an upfron t

predetermined purchase price for the gas and also paid for storage costs including "interest"costs on

amounts financed by the third-party once the gas was delivered to Nicor . The third-party also gave

up all rights to retrieve the gas once it was put into Nicor's storage facilities . These Storage Prefill s

flagrantly violated Generally Accepted Accounting Principles ("GAAP") since all of the risks an d

rewards of ownership transferred to Nicor at the time of injection into storage . Nevertheless, Nicor

used Storage Prefills to improperly access its low-cost inventory and artificially inflate reporte d

Nicor operating income by approximately $12 .2 million in 2000 and $14 .9 million in 2001 . These

figures represented 18 .8% and 7% of reported Nicor operating income in 2000 and 2001 ,

respectively . (See Jill 64-66) .

8 . To circumvent the regulatory obstacle, the Inventory Team proposed and Nicor senio r

management implemented a new plan for Nicor to lobby the ICC to change the rules to allow Nicor

to "share" with ratepayers "cost savings ." Nicor knew the ICC would not approve a rule chang e

whereby ratepayers would get less than. what they were entitled to under existing rules . Existin g

rules required Nicor to pass on to consumers -- not Nicor -- any financial benefit from the sale o f

older gas which had been acquired more cheaply . As a result, Nicor fraudulently withheld from th e

-4-

i x

ICC its plan to liquidate its low-cost inventory, which would benefit Nicor . The IC"C was falsely told

only that the change was needed to incentivize Nicor to take risks and implement new programs t o

out gas costs and achieve "cost savings" for ratepayers . Indeed, when asked directly in the IC C

proceeding leading up to approval of the new plan if Nicor had " y" plans, studies or eve n

communications as to how Nicor might profit under the new scheme, Nicor responded that ther e

were "none ," The new regulatory scheme, known as GCPP or PBR p l an, was approved by the ICC

on November 24, 1999 . The PBR required a Benchmark gas cost figure be to calculated at the en d

of each year based on market gas prices . If Nicor's actual gas costs were below the Benchmark ,

Nicor would share with ratepayers on a 50/50 basis the difference between the Benchmark and actua l

costs -- the PBR savings . (See 11145-60) .

9 . Immediately upon passage of the PBR, and later in the Class Period, Nicor

implemented additional fraudulent schemes to artificially inflate the Benchmark and earnings in

2400 and 2001 . (When the Benchmark was higher, it was easier for Nicor to achieve "cost savings "

-- half of which. were recorded as additiona l Nicor earnings . )

10. On December 10, 1999, Nicor staged a "sale" of recently acquired gas ($3 .00 per

Mcf) at a loss since it was above the then current market price of $2 .20 Mcf. This sale violated

revenue recognition rules of GAAP and ICC. regulatory principles and should have been recorde d

in 2000, but instead was recorded in 1999 so that ratepayers -- still obligated to pay all gas cost s

dollar-for-dollar under the "pre-PBR" rules -- would be forced to sustain the loss entirely . By

recording this "sham sale" in 1999 instead of 2000, Nicor was able to remove its high-cost LIFO

inventory from its books prior to the start of the PBR plan. (See IT 61-63) .

-5-

4 S

11 . In the beginning of the second quarter of 2000, Nicor began the sustained practice o r

arranging new gas to be placed in its storage, by using Storage Prefills . In 2000, when gas prices

were inverted (higher in the summer than in the winter) -- so that under the Benchmark formul a

increased "withdrawals" would inflate the Benchmark figure -- Nicor contrived false "withdrawals"

by inventing the fiction of "virtual storage ." MI 67-70). In 2001, when fewer "withdrawals" woul d

inflate the Benchmark (i .e ., when summer prices were lower than winter prices), Nicor fraudulentl y

reduced "withdrawals" by designating actual "withdrawals" as "infield storage transfers" -- a cos t

that would not lower the Benchmark under the formula, (1173) . Furthermore, in 2001, Nicor forced

ratepayers to bear half the cost of Nicor' s insurance premiums --- a clear non -gas cost for which

ratepayers had no obligation under the PBR -- by linking Nicor' s insurance costs to gas sales to its

insurer, (T~ 71-72), Nicor also double-counted gas volumes between March and June 2001 . Finally ,

in 2001, Nicor materially overstated Nicor Energy' s "unbilled revenue" and understated certain

liabilities . (1I' 80-82) . These collective schemes required Nicor to restate its financial results fo r

1999, 2000, 2001 and the first two quarters of 2002 . (See ¶ 182 ) .

12 . These rampant fraudulent schemes also involved numerous members ofNicor senior

management including, David Cyranoski, Nicor Chief Financial Officer ; Katherine Halloran, Nicor

Executive Vice President of Finance and Administration ; Philip Cali, Nicor Executive Vic e

President of Operations ; George Behrens , Nicor Treasurer and Vice President ; Jeffery Metz, Nicor

Controller; and Lonnie Upshaw, Nicor Vice President of Supply . While engaged in these fraudulen t

practices, Nicor repeatedly touted its high ethical standards and stable earnings growth, an d

represented that the PBR resulted in cost savings and aligned the interests of Nicor with it s

ratepayers . Further, between March and June 2002 -- only days before the whistleblower disclosure

-6-

.4 d

of the fraudulent practices on June 15, 2002 -- Nicor management repeatedly lied under oath i n

proceedings before the 1CC concerning Nicor's performance under the PBR.

13, Nicor's manipulative practices gave Nicor management enormous control over it s

reported earnings. During the Class Period, Nicer met -- "to the penny" -- securities analysts '

earnings forecasts , This "success" resulted in numerous analyst "buy" recommendations and caused

Nicor common stock to reach $48 .00 per share in June 2002. This price inflation, in turn, allowed

Nicor management to profit from $6,348,675 in insider sales . Also, prior to the Class Period ,

Nicor's management was not in the practice of selling their stock or exercising stock options . In

fact, before Nicor Chairman, President and Chief Executive Officer Thomas L . Fisher ("Fisher")

exercised 75,000 stock options in November 2001, no single other option exercise by any membe r

ofNicor's senior management had occurred in the preceding three years . Between November 200 1

and February 2002, Fisher exercised 107,100 options , liquidating 65% of his then exercisable stock

options -- or 47% of his total holdings in Nicor common stock. in and around May 2002, in the

weeks leading up to the exposure ofNicor's alleged fraudulent practices, Katherine Halloran, Phili p

Cali and George Behrens followed Fisher ' s lead , liquidating 23%, 21% and 38%, respectively, o f

their currently exercisable options -- or 15%, 14% and 23%, respectively, of their total holdings i n

Nicor common stock .

14. It was only in mid June 2002, however, that Nicor's mountain of fraudulent practice s

began to be disclosed . On June 15, 2002, a Nicer employee whistleblower sent a detailed

memorandum to the CUB . The fourteen-page memorandum alleged that Nicor shortchange d

ratepayers by $133 million over the prior two years through manipulation of the PBR (the

"Whistleblower Memorandum" or "Memorandum") . The Memorandum prompted the CUB, o n

-7-

1 .1

June 27, 2002, to reopen a review of Nicor' s PBR plan . On June 28, 2002 , Nicor's common stock

price closed at $45 .75 per share -- down from $47.35 per share on the preceding day with 554,400

shares trading . On Friday, July 12, 2002, the Illinois Attorney General subpoenaed both the CUB

and the ICC demanding that the Whistlcblower Memorandum be turned over. Nicor's common

stock price declined from $43,20 on July 11, 2002 to $41 .81 per share on July 12, 2002, wit h

371,000 shares trading. On July 15, 2402, an article appeared in Grain's Chicago Business

describing the Whist] eblower Memorandum, the [JB proceeding and the Illinois Attorney General' s

activities in the matter . Nicor common stock declined again -- from $40 per share on July 15, 200 2

to $38 .31 per share on July 16, 2002, with 1,063,500 shares trading .

15. On July 18, 2002, Nicor issued a press release announcing a $2 .9 million second

quarter charge to reverse revenue recorded in the first quarter of 2002 with respect to the PBR

program. The press release indicated that a restatement of earnings recorded in 2000 and 2001 may

be required with respect to the PBR program . The press release further revealed accounting

irregularities at Nicor Energy, a joint venture with Dynegy, that resulted in a $3 . 7 million pre-tax

charge relating to estimates for "accrued unhillcd revenue" and an additional $2 .6 million pre-tax

charge for "unrecorded liabilities ." It was also announced that an "internal review" of Nicor

Energy's accounting practices had begun, and it was "unknown" whether additional adjustment s

would be required, Nicor common stock plummeted by 40% following the July 18, 2002 pres s

release -- from $38 .01 per share on July 18, 2002 to $22 .75 per share on July 19, 2002, with over 7

million shares trading .

16 . On July 18, 2002, Nicor's Board of Directors appointed a Special Committee of non-

management directors to investigate Nicor' s natural gas purchases , transportation , and storage

-8-

activities under the PBR in response to allegations made in the Whistleblower Memorandum . Scott

Lassar, of Sidley Austin Brown & Wood, and the accounting firm of PMG, LLP were appointed

by the Special Committee to conduct the investigation and submitted a report ( the "Sidley Austin

Report") to Nicor's Board of Directors on October 28, 2002 . The Sidley Austin Report detailed

numerous improper practices engaged in by the Company over the objection of various Company

personnel which "require[d] immediate attention ." In response, the Special Committee made a

recommendation that the Company "promptly take a re-audit of 1999-2001 and the first two quarters

of 2002 . "

17. On October 29, 2002, Nicor issued two press releases, the first of which announced

that "prior financials will be restated" and, therefore, cannot be relied upon . The release also

contained an "apology" from Nicor Chairman, President and Chief Executive Officer Thomas Fi slie r

stating: "1 apologize for the mistakes that occurred at Nicor . . . the intent of the PBR program was

to align customer and shareholder interest but clearly we failed to execute properly ." This "apology"

misstated the wrongs . Nicor did not merely make "mistakes," but rather devised premeditated

schemes beginning in 1998 and continuing through June 2002 to defraud investors and ratepayers .

The second press release announced that Fisher would be relinquishing his position as President of

Nicor and stated that someone other than Fisher would be "responsible for [the] administrative,

financial, regulatory and legal affairs for Nicor and Nicor Gas ." Defendant Philip Cali's executive

employment at Nicor ceased sometime thereafter .

18. As a result of defendants' fraudulent practices, it is calculated that members of the

Class sustained hundreds of millions of dollars in damages .

-9-

19. The plethora of manipulative practices and false. and misleading misrepresentation s

also could not have been achieved without either the knowledge or recklessness of Nicor's outsid e

auditor Arthur Andersen . Andersen purportedly conducted three audits during the Class Period bu t

failed to uncover any of the fraudulent practices . This failure rose to the level of fraud or

recklessness because, inter alia, Andersen had actual knowledge in early 2000 that Nicor wa s

accessing its older gas inventory, Any minimal examination of the contracts "supporting" thi s

practice would have revealed gross violations of GAAP .

IIi .

JURISDICTION AND VENU E

20. The claims alleged herein arise under Sections 10(b) and 20(a) of the Securitie s

Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t, and Rule 1Ob-5,17 C.F.R .

240 . 101 -5, promulgated thereunder .

21, The jurisdiction of this Court is based on Section 27 of the Exchange Act, 15 U.S.C.

§ 78aa and 28 U.S.C . § 1331 (federal question juri sdiction) .

22, Venue is proper in this District pursuant to Section 27 of the Exchange Act and 2 8

U, .C. 1391(b) since Nicor has its principal place ofbusiness in this District in Naperville, Illinois .

Also, many of the acts alleged herein, including the dissemination of the misleading statements a t

issue to the investing public, occurred in substantial part in this District .

23 . In connection with the acts, transactions and conduct alleged herein, defendants use d

the means and instrumentalities of interstate commerce , including the United States mails, interstate

telephone communications and the facilities of national securities exchanges and markets .

-10-

6 r

1V.

THE PARTIE S

24 . Lead Plaintiff, Local 804 1.B.T . and Local 447 1,A .M. - UPS Retirement Trust

("Teamsters Pension Fund" or "Lead Plaintiff'), purchased the publicly-traded securities of Nico r

at prices that were artificially inflated by defendants' misrepresentations and omissions during th e

Class Period and suffered damages thereby , as set forth in its certification previously filed with the

Court . The certifications previously fi led with the Court by other class members in connection wit h

the original complaints on file and/or the motions for appointment of lead plaintiffs are incorporate d

by reference herein .

Date Number of Shares Price Per Share

03/14/02 9,000 $44,1 4

25 . Additional Named Plaintiff, Detectives Endowment Association Annuity Fund ("DE A

Fund"), purchased the publicly-traded securities of Nicor at prices that were artificially inflated b y

defendants' misrepresentations and omissions during the Class Period and suffered damages thereby ,

as follows :

Date Number of Shares Price Per Shar e

07/10/2002 500 $43.8 5

The Teamsters Pension Fund and the DEA Fund shall be collectively referred to as "Plaintiffs . "

26. Defendant Nicor is an. Illinois corporation which maintains its principal executiv e

offices at 1844 Ferry Road, Naperville, Illinois 60563-9600. Nicor is a holding company. Its

principal subsidiary is Northern Illinois Gas Company (d/b/a "Nicor Gas Company"), purportedl y

-11-

one of the nations' largest distributors of natural gas . Nicor, a regulated natural gas distributio n

utility, serves two million customers in a service territorythat encompasses most o Fthe northern thir d

of Illinois, excluding the city of Chicago . Nicor also owns several other energy-related ventures ,

including a 50% interest in Nicor Energy, LLP, a retail energy marketing joint venture with Dynegy ,

Inc .

27 . Defendant Fisher has been a director ofNicor since 1988, Chairman ofits Hoard sinc e

1996, its Chief Executive Officer since 1995 and its President since 1994, as well as President an d

Chief Executive Officer of Nicor Gas since 1988 . Fisher signed Nicor's Forms 10-K for the years

ended December 31, 2000 and 2001 . In 2001, Fisher received $633,077 in salary, $499 ,200 in bonus

and exercised options in excess of $809,000 . During years 1999 and 2000, Fisher received a salar y

of $563,923 and $601,231, respectively, andbonuses of $268,983 and $175,81.3, respectively. Also,

during years 1999, 2000 and 2001, Fisher received as part of his compensation package stock option s

in the amounts of 35,000, 50,000 and 60,000 shares, respectively . During the Class Period, Fisher ,

while in possession ofadverse material non-public information, sold 127,100 shares -- or 47% of hi s

total holdings in Nicor common stock at between $38 .07 - $41 per share , reaping proceeds in exces s

of $4.9 million . On October 29, 2002, after the public release of the Sidley Austin Report, Fishe r

relinquished his position as President of Nicor .

28. Defendant Kathleen L . Halloran ("Halloran") was at all relevant times Nicor' s

Executive Vice President of Finance and Administration . Halloran signed Nicor's Forms 10-K for

the years ended December 31, 2000 and 2001 and its Forms 10-Q for 2000, 2001 and 2002 . In 2001 ,

Halloran received $271,539 in salary and a bonus of $165,000 . In years 1999 and 2000, Halloran

received a salary of $233,808 and $257,692, respectively, and bonuses of $87,472 and $68,875 ,

-12-

respectively . Also, during years 1999,2000 and 2001, Halloran received as part of her compensatio n

package stock options in the amounts of 8,000, 21,000 and 14,600 shares, respectively . During the

Class Period, on May 1, 2002, just six weeks before the Whistleblowcr Memorandum surfaced,

Halloran, while in possession of adverse material non-public information, sold 11,000 shares -- o r

15% of her total holdings in Nicor common stock at $46 .89 per share, reaping proceeds in excess o f

$515,000 .

29, Defendant George M . Behrens ("Behrens") was at all relevant time Nicor's Vic e

President of Administration and Treasurer . 12001, Behrens received $203,692 in salary and a

bonus of $86,520 . During years 1999 and 2000, Behrens received a salary of $180,923 and

$193,000, respectively, and bonuses of $42,905 and $30,725, respectively . Also during years 200 0

and 2001, Behrens received as part of his compensation package stock options in the amounts o f

13,800 and 8,400 shares , respectively . During the Class Period , on March 23, 2000 and May 27,

2002, just three weeks ahead of the Whistleblower Memorandum , Behrens , while in possession o f

adverse material non-public information, sold 7,500 shares -- or 23% of his total holdings in Nico r

common stock at between $45 .01 - $48 .79 per share, reaping proceeds in excess of $356,000 .

30. Defendant Philip S . Cali ("Cali") was at all relevant times during the Class Period th e

Executive Vice President of Operations at Nicor . In 2001, Cali received $271,154 in salary and a

bonus of $163 ,800. During years 1999 and 2000 , Cali received a salary of $234 , 173 and $261,173 ,

respectively, and bonuses of $92,963 and $59,719, respectively . Also, during years 1999, 2000 an d

2001, Cali received as part of his compensation package stock options in the amounts of 8,000 ,

21,600 and 14,500 shares, respectively . During the Class Period, on April 5, 2002, just weeks ahead

of the Whistleblower Memorandum, Cali, while in possession of adverse material non-publi c

-13-

information, sold 11,000 shares -- or 14% of his total holdings in Nicor common stock at $46 .21 per

share, reaping proceeds in excess of $508,000 . At some point afler the close of the Class Period ,

Cali's employment with Nicer was terminated .

31 . Defendant Arthur Andersen, independent public accountants, performed audits o f

Nicor's year- end financial statements and reviews of its quarterly financial statements and provided

Nicer with tax consulting services throughout the Class Period . Arthur Andersen has audited th e

financial statements of Nicor and its predecessor since 1954 . In fiscal year 2000, Andersen received

$408,300 for auditing Nicor's annual financial statements and reviewing its quarterly reports . In

2000, Andersen also charged Nicor an additional $144,800 in consulting fees . In fiscal year 2001 ,

Andersen received $433,600 for auditing Nicor's annual financial statements and reviewing it s

quarterly reports . Additionally, Andersen charged Nicor $195,475 in consulting fees, which include d

$150,200 in audit-related fees . Arthur Andersen's corporate headquarters are located at 33 W .

Monroe, Chicago, Illinois 60603 .

32. All defendants enumerated in paragraphs 27 - 30 will hereinafterbe referred to as the

Individual Defendants . The Individual Defendants, as officers and/or directors of the Company, are

control persons of the Company, within the meaning of Section 20 of the Exchange Act . By reason

of their positions with the Company, they were able to and did, directly and indirectly, in whole o r

in material part, control the content of public statements issued by or on behalf of the Company .

They participated in and approved the issuance of such statements made throughout the Class Period ,

including the materially false and misleading statements identified herein .

33 . By reason of their positions with the Company, the Individual Defendants had acces s

to internal Company documents, reports and other information, including the adverse material non-

-14-

public information concerning the Company's services, financial condition, and future prospects, an d

attended management atidlor board of directors meetings. As a result of the foregoing, they were

responsible for the truthfulness and accuracy ofthe Company's public reports and releases describe d

herein .

34. Nicor and the Individual Defendants, as officers of a publicly-held company, had a

duty to promptly disseminate, truthful and accurate information with respect to Nicor and to promptly

correct any public statements issued by or on behalf of the Company which had become false o r

misleading.

35 . Nicor and the Individual Defendants knew or recklessly disregarded that th e

misleading statements and omissions complained of herein would adversely affect the integrity o f

the market For the Company's stock and would cause the price of the Company's common stock t o

become artificially inflated . Each of the defendants acted knowingly or in such a reckless manne r

as to constitute a fraud and deceit upon Plaintiffs and the other members of the Class .

36 . Each defendant is liable , jointly and severally, as a participant in a fraudulent schem e

and course of business that operated as a fraud or deceit on purchasers of Nicor stock, including

making materially false and misleading statements . The scheme (i) deceived the investing publi c

regarding Nicor; (ii) artificially inflated the price of Nicor stock; and (iii) caused Plaintiffs and the

Class to purchase Nicor stock at artificially inflated prices .

V.

CLASS ACTION ALLEGATION S

37. Plaintiffs bring this action as a class action pursuan t to Rules 23 (a) and 23(b)(3) o f

the Federal Rules of Civil Procedure on behalf of a class consisting of all persons who purchase d

-15-

Nicor common stock during the period from November 24,1999 through and including July 19, 2002

(the "Class Period") and who suffered damages thereby . Excluded are the defendants, members of

the individual Defendants' families, any entity in which any defendant has a controlling interest or

is a parent or subsidiary of or is controlled by the Company, and the officers, directors, employees,

affiliates, legal representatives, heirs, predecessors, successors and assigns of any of the defendants

(the "Class") .

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

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

can only be ascertained through appropriate discovery, Plaintiffs believe there are, at a minimum,

thousands of members of the Class who traded during the Class Period . The Company had more

than 44.2 million shares of its common stock outstanding, of which there were approximately 27,500

common stockholders of record, as of March 8, 2002 .

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

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

questions of law and fact common to the Class are :

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

alleged herein ;

(b) whether Nicor issued false and misleading financial statements during theClass Period;

(c) whether the Individual Defendants caused Nicor to issue false andmisleading financial statements during the Class Period ;

(d) whether defendants acted knowingly or recklessly in issuing false andmisleading financial statements ;

(e) whether the market prices of Nicor securities during the Class Period were

-16-

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

(f) whether the members of the Class have sustained damages and , if so, whatis the proper measure of damages ,

40. Plaintiffs' claims are typical ofthe claims of the members of the Class. Plaintiffs, like

Class members, sustained darnages arising out of defendants' wrongful conduct in violation o f

federal law as complained of herein .

41, Plaintiffs will fairly and adequately protect the interests of the members of the Class

and have retained counsel competent and experienced in class actions and securities litigation .

Plaintiffs have no interests antagonistic to or in conflict with those of the Class .

42 . A class action is superior to other available methods for the fair and efficien t

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

Furthermore, because the damages suffered by the individual Class members maybe relatively small ,

the expense and burden of individual litigation make it impossible for the Class members

individually to redress the wrongs done to them . There will be no difficulty in the management o f

this action as a class action .

43 . Plaintiffs will rely, in part , upon the presumption of reliance established by the fraud-

on-the-market doctrine in that :

(a) defendants made public misrepresentations or failed to disclose materialfacts during the Class Period ;

(b) the omissions and misrepresentations were material ;

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

(d) the misrepresentations and omissions alleged would tend to induce areasonable investor to misjudge the value of the Company's securities ; and

-17-

(e) Plaintiffs and members of the Class purchased their stock between the timedefendants failed to disclose or misrepresented material facts and the timethe true facts were disclosed, without knowledge of the omitted ormisrepresented facts .

44. Based upon the following, Plaintiffs and members of the Class are entitled to th e

presumption of reliance upon the integrity of the market .

VI.

NICOR'S UNDISCLOSED FRAUDULENT SCHEMES AND PRACTICE S

A. PBR Fraud

1 . Background

45. The predominant contributor to Nicor's financial performance was Nicor Gas . Nicor

Gas represented 88 .9%, 90 .4%, 68 .1 %, and 91 .8% of Nicor's operating income in 1998, 1999, 2000

and 2001, respectively. Despite the size of its income contribution, the potential for Nicer Gas t o

increase earnings (and thus contribute more earnings to Nicor) was limited because Nicor's rate o f

return was regulated by the ICC . Indeed, Nicor's operating income declined from $233 .1 mill ion in

1996 to $212 million in 1999 . Prior to 2000, Nicor operated under a traditional rate regulation plan .

Under this traditional regulation plan, the rates that Nicor was authorized by the ICC to charge

ratepayers provided Nicor with a rate of return on its investment (or profit) of approximately 11% .

The rates charged by Nicor were materially adjusted monthly to provide a dollar-for-dollar recovery

of the actual gas costs incurred by Nicer . It was Nicor that elected this reimbursement scheme fo r

gas costs because it did not want to risk losses if gas costs increased dramatically .

46. Nicor utilized the LIFO accounting method to value gas in storage inventory. Under

the LIFO method, the quantity of gas in Nicar's storage inventory at the end of its fiscal year whic h

-18-

exceeded the quantity of gas in storage inventory at the beginning of the fiscal year was priced a t

Nicor's average cost of gas purchased in that year . In order for the quantity of gas in storag e

inventory at the end of the fiscal year to exceed the quantity of gas in storage inventory at th e

beginning of the fiscal year , injections into storage had to exceed withdrawals from storage . A LIFO

layer equivalent to the amount by which injections exceed withdrawals was established whe n

injections exceed withdrawals during a fiscal year. Conversely, LIFO layers were liquidated when

withdrawals exceed injections during a fiscal year . Under LIFO, the most recently or last establishe d

layers were liquidated first . Each year Nicor withdrew gas from storage during the winter to meet

the requirements of its customers . The gas withdrawn from storage was replaced each summer with

new gas purchased by Nicor . Operationally, Nicor was required to fill storage to capacity each year

to ensure reliable service . For numerous reasons, including declining sales, Nicor had established

numerous LIFO layers on its books which dated back to 1954 . That was because, over time, the

quantity of gas Nicor needed to be withdrawn from storage declined, and since the Company wa s

required to fill storage to capacity each year, storage injections exceeded withdrawals, which resulte d

in the establishment of numerous LIFO layers .

47 . It was in the context of declining earnings that in 1998 Nicor management formed th e

Inventory Team headed by Nicor Controller Metz. This Team produced an Inventory Value Ter m

Report ("Inventory Report"), which was presented orally to senior Nicor management in 1998 . The

Team and its Report determined that Nicor had substantial quantities of low -cost gas in LIFO storage

layers -- purchased at $ .30 per Mcf dating as far back as 1954 -- which could well become a sourc e

for substantial earnings improvement . The Inventory Report found that, while Nicor's most recent

LIFO layers representing 34 Bcf of gas were acquired . between 1984 and 1996 at prices of $3 .00 per

-19-

MMBtu', the older or "lower" layers representing 76 Bcf of gas were acquired between 1954 an d

1975 at prices of $ .30 per Mcf. This gave these lower layers a cost well below market value . The

market value of these lower cost layers was between $93 and $203 million in excess of cost .

4$ . However, because the ICC regulations provided for a dollar-for-dollarrecoveryof ga s

costs, Nicor was precluded from profiting from this low-cost gas in storage inventory . The Inventor y

Team recommended a two -step scheme to "capture" earnings from this low-cost inventory . First,

Nicor would have to convince the ICC that ratepayers would benefit from a modification of existing

regulations so as to allow Nicor to record as earnings gas "cost savings ." The ICC would have to

adopt a performance-based rate plan, whereby a "Benchmark" gas cost would be calculated pursuant

to a set formula and, if Nicor's actual gas costs were lower than Benchmark gas costs, Nicor would

split the difference 50/50 with ratepayers . Second, Nicor would have to use sham third-party

transactions to hold in abeyance the recording of purchases of new gas it needed to refill storage until

after it "accessed" or liquidated the older low-cost inventory needed to achieve "cost savings" an d

earnings inflation .

49 . The Inventory Report specifically raised the concern that the use of "third parties" to

access low-cost inventory might be viewed as a "deliberate scheme" to add to Nicor's financial

results or "shareholder value" as opposed to benefitting customers :

Use of a third-party to refill storage might also be viewed as adeliberate scheme to add shareholder value .

(Inventory Report, p. 4)

'One Mef is approximately equal to 1 MMBtu (million British Theriial Unit) . One Btu is

a measure of the amount of energy (heat) required to raise 1 gallon of water by 1 degree Fahrenheit.

-20-

50, The Inventory Report specifically rejected applying to the ICC for permission to

"access" low-cost inventory. The Report noted that even though this method was "low risk" becaus e

it was openly requesting the ICC's permission, this alternative had "low probability of success . "

Under the existing regulatory scheme , Nicer' s actual gas costs and savings were shared wit h

ratepayers dollar- for-dollar, whether the costs were $ .30 per Mcf or $3 .00 per Mcf, The ICC would

not approve a plan to give ratepayers 50% of a benefit to which they were entitled 100% :

This potential . means of releasing and capturing inventory value wasconsidered a low risk approach with little possibility of success . It islow risk since we would be making a request to the Commission forspecific authorization . It would have a. low probabilityaf beingsuccessful since storage inventory value is a_ function of gas costs,which iLgovemed by the G S C [Gas Suppl Charg .

(Inventory Report, p . 7)

51 . Nicer management adopted the scheme outlined in the Inventory Report -- liquidation

of inventory. This included not informing the ICC of Nicor's improper plan to liquidate inventory .

52. On March 1, 1999, Nicor petitioned the ICC for authority to implement a gas-cost

performance -based ("G PP" or "PBR ") plan under Section 9-244 of the Illinois Public Utilities Act

("Act") (220 I1.CS 519-Z44) .

53. In the proceeding before the ICC in 1999 seeking approval of the PBR, Nicor wen t

beyond merely withholding information . Despite all of management's activities in connection with

the Inventory Value Tearn and Inventory Report, Nicer misrepresented under oath that Nicer had n o

"analyses, studies or communications" examining the extent to which Nicer could profit under th e

PBR as follows:

Question : Please provide a copy of all projection, analyses and studiesprepared which examine the extent to which the Company

-21-

may profit under its proposal. Include copies of allcommunications which discuss the profit potential of theCompany's proposal .

Nicor Answer : The, Company has not performed any projections . analyses orstudies related to its potential performance under its proposalnor does the Company have any communications whichaddress this issue .

(ICC Docket No . 99-0127, Data Request)(emphasis added) .

54. The falsityof that response is confirmed bythe SidleyAustin Report, which described

in detail the Inventory Value Team, the Inventory Report, as well as "internal discussions" in 199 8

and 1999 that explained Nicor's motivation for seeking passage of the PBR :

During the course of our investigation, we have determined that one of the np imarvmotivations of the Company in entering into the PBR was to access and share thebenefit of delivering the low-cost LIFO gas (that is, gas that was being carried at alow-cost in Nicor's inventory) to the ratepayer. Prior to petitionin.g the ICC forapproval of the PBR, the Company had internal discussions regarding the significantamount of LIFO gas priced at historical prices dating back to 1954 . The Companyrealized that the liquidation of these low-cost LIFO layers under the traditional ratestructure would result in the book value of the gas inventory reductions being realizedonly by Nicor's ratepayers . The use of the PBR would provide a mechanism for theCompany to share in the benefits achieved from the sale of the low-cost .LIFO gas tothe ratepayer .

Naturally, by mitigating risk, the LIFO layers were critical to Nicor's decision toembark upon the PER, and we believe Nigor would not have agreedtQ the PBR hadit not known that the low-cost LIFO layers gentially ensured Nicor's success.

(inventory Report, pp . 18-19)(emphasis added) .

55. From March 1999 until November 23, 1999 , the date on which the PBR was

approved, Nicor engaged in a media blitz publicly claiming the PBR was necessary to incentiviz e

Nicor to take risks and to try to achieve "cost savings" under the PBR program. These statements

-22-

were false since Nicor knew it would achieve "cost savings" and earnings inflation without an y

additional "risks" through the improper liquidation of its low-cost inventory .

2 . PBR "Benchmark" Formula

56. The PBR took effect on January 1, 2000. The PBR provided that the Benchmark be

fixed based upon a specific formula. Under the formula, the "Market Index Cost" first had to b e

determined. Added to the Market Index Cost was a "Firm Delivery Adjustment" and a "Commodity

Adjustment." Subtracted from the sum of these three amounts was a "Storage Credit Adjustment "

(" CA" or "Storage Adjustment"). The Benchmark formula thus provided as follows :

Benchmark = (Market Index Cost + Firm Delivery Adjustment +Commodity Adjustment ) - Storage Credit Adjustment

57. The Market Index Cost represented the annual gas costs that the Company would hav e

incurred if all of its gas supplies were purchased . at prevailing Chicago city-gate market index price s

at the time the gas was sold to customers, The Market Index Cost component was determined b y

multiplying sales deliveries on a monthly basis by the Market Index price and summing the resultin g

monthly costs for an annual period .

58. The Firm Deliverability Adjustment reflected the costs incurred by Nicor on an annua l

basis to reserve firm transportation and storage capacity from interstate pipelines . The amount of

the Firm Deliverability Adjustment was fixed at $116,582,612 per year .

59. The Commodity Adjustment adjusted Benchmark gas costs to reflect historica l

variations between the Market Index Cost and the Company's actual gas costs after removing th e

variation accounted for by the Storage Credit Adjustment and the Firm Deliverability Adjustment .

In other words, the Commodity Adjustment accounted for differences between Nicor's actual ga s

-23-

costs and the Benchmark when observed over a historic period . The Commodity Adjustment Rate

established by the 1CC was $0 .168 per MMBtu .

60. The S CA adjusted the Benchmark to reflect the benefit that ratepayers historicall y

received as a result of Nicor's purchasing gas supplies during off-peak summer periods, when price s

are typically lower, injecting that gas into storage, and the withdrawal of those gas supplies to mee t

demand during peak winter periods, when prices are typically higher . This adjustment was necessary

because the Market Index Cost component was based on market prices at the time gas was delivere d

to sales customers (typically the winter when gas prices were high), not when gas was purchased by

the Company (typically the summer when gas prices were low) .

3. Nicor Stages "Phony Gas Sale" I n1999 In Order to inflate 2000 Earniu s

61 . In early December 1999, only weeks after the PBR was approved, Nicor sought t o

reduce its high-cost gas in storage inventory so that it could access the low-cost gas and thereb y

deflate actual gas costs and increase earnings under the PBR in 2000 . On December 10, 1999, Nicor

"sold" 19 .8 Bcf of its gas inventory in storage to Inventory Management and Distribution, LLC

(" "), a third-party gas storage company, with the provision to repurchase the gas in 2000 . Nicor

agreed to "repurchase" 2.8 Bcf of the gas in 2000, that it sold at $2 .20/Mcf in December 1999, and

15 .5 Bcf of gas at market prices between January and April 2000 . Nicor sustained a $13 .5 million

"loss" in 1999 from these gas sales ,

62. Nicor's recording of this gas sale in 1999 and its transactions with TMD violated SE C

Staff Accounting Bulletin 101 ("SAB 101 ") and one of the basic accounting p rinciples enumerate d

in Statement of Financial Accounting Concepts Statement No . 5, Reco tiition and Measurement in

-24-

Financial Statements of Business Enterprises (" FAC No. 5") . Nicor did not complete the earning s

process because it did not transfer the "risks" and rewards of ownership to the buyer, IMD . The

staging of invalid gas "sales" to IMD in 1999 was done to " sell" in 1999 high-cost gas in storage

inventory so that ratepayers would bare all the "cost" of this high priced gas . The market price fo r

gas in December 1999 ($2 .20 per Mcf) was below Nicor's storage inventory cost ($3 .00 per Mcf)

so Nicor knew the sale of Nicor' s gas to IMD would result in a loss. Under the PBR, effective

January 2000, if the sale was recorded in 2000, Nicor would have had to absorb half of the $13 . 5

million loss, but i f the sale occurred in 1999, the loss would be governed by the prior regulatory pla n

and the loss would be borne entirely by ratepayers . By recording the improper sale in 1 999, Nicor

was able to remove its more recent higher-cost inventory and thus enabled Nicor to improperl y

access its older lower-cost inventory layers in 2000 .

63. Nicor's misconduct was intentional as it occurred despite internal objection at thi s

time . On December 8, 1999, a meeting was held with a "number of officers from both the financia l

and gas areas " including, aNicor Supervisor in the Supply Group ; David Cyranoski, Chief Financia l

Officer; aNicor Manager of Rate Research ; a Nicor Manager in the Supply Group ; Ted Lenart, Nico r

Assistant Vice President of Supply Operations ; Metz, Nicor Assistant Vice President and Controller ;

a Nicor Accountant ; and Lonnie Upshaw, Nicor Vice President of Supply and Technical Services .

The "major topic of discussion" was the adverse impact on ratepayers if Nicor sold gas in storage

inventory to IMD in December 1999 . One of the meeting participants, Metz, recognized that

arranging for the IMD sale in December 1999 carried "negative perception" of manipulation t o

"avoid" the PBR . Metz's handwritten notes on one of the spreadsheets indicated that a "negative"

to doing the [MD sale in 1999 was the "perception impression of managing for PBR if we don't giv e

-25-

low price layers [lower priced gas inventory which would not result in a loss ] ." (Sidley Austin

Report , p . 23) .

4. Nicor Enters Into "Storage Prefills" Arrangements or PhonyThird-party Contracts To Ace ss Low-cost Inventory

64. To circumvent LIFO accounting requirements, Nicor's management implemented,

beginning the second quarter of 2000, "Storage Prelills ." Under these Storage Prelill arrangements ,

third parties injected gas into Nicor's on-system storage, but Nicor did not "recognize" the gas a s

having been purchased as part of its gas inventory at the time of injection . Rather, Nicor agreed to

"purchase" the gas injected by the third-party at a later date and at a predetermined price . Nicor

accepted the gas into its on- system storage and agreed to pay the carrying costs incurred by the third-

party from the date of the injection through the eventual date of purchase . In addition, the third-

party relinquished all rights to withdraw the gas from storage once it was injected into storage .

65. Nicor's accounting for the "Storage Prefills" violated FASB Statement No . 49,

Accounting for Product Financing Arrangements C'SFAS No . 49"), because all ofthe benefits and/or

risks of ownership of the gas transferred to Nicor at the time it received the gas in storage . These

Storage Prefills should have been viewed as product financings and should have appeared on Nicor' s

balance sheet as gas in storage inventory . Lonnie Upshaw, Nicor Vice President of Supply, state d

that Nicor entered into these Storage Prefill agreements in order to "create a transaction" to

demonstrate to Arthur Andersen that it was accessing low-cost storage inventory in 2000 and thu s

creating a LIFO inventory decrement ( i .e ., liquidating a LIFO layer) :

Beginning in the second quarter of 2000, Nicor's outside auditors,Andersen, began the process of imposing on Nicor additional burdensfor quarterly reporting of its LIFO, inventory dccrem nt . Andersenintended to ultimately require Nicor to establish to a "reasonabl e

-26-

certainty" that a LIFO decrement would occur at year end beforeNicor could include that decrement on its financial statements . As theyear proceeded, it became clear that the large majority of Nicor'srevenue under the PBR was recognized from the liquidation of thelow-cost LIFO layers, and thus meeting the auditing requirem. ntsimvosed by Andersen was essential to Nicor's ability to meet itsquarterly revenue targets,

Lonnie Upshaw explained that storage prefills were an attempt tocreate a transaction that would enable Nicor to provide Andersen'srequired "confirmation" that a LIFO decrement would be realized byyear end, and thereby permit LIFO decrements to be booked onNicor's quarterly balance sheets . The purpose of the prefill was toengage in a transaction that would have two essential characteri sties :(1) gas that would actually he stored in Nicor's on-system storage; but(2) gas that would not be "recognized" asp Nicor injection. The firstensured that Nicer could fill its storage fields--an operationalnecessity, and the second ensured that Nicor did not create a newhigh-cost LIFO layer through the process of refilling its storage fields ,

(Sidley Austin Report, p . 59)(emphasis added) .

66. 'Thus, the Storage Prefills were wrongfully accepted by Arthur Andersen as evidenc e

of Nicor' s improperly accessing its use o Clow-cost gas inventory to inflate earn ings under the PBR

in 2000 and 2001 .

5. Nicor Uses "Virtual Storage" to FabricateWithdrawals In The Winter of 2000

67. It was in Nicor's financial interest to make Benchmark costs as high as possible, so

that it could report as income the difference between Nicor's actual gas costs and Benchmark costs .

Nicer could manufacture cost savings and profit by either artificially lowering its gas costs and/o r

by inflating the Benchmark amount, through manipulation of storage injections and withdrawals vi a

the Storage Credit Adjustment . As alleged above , the formula used to determine the Benchmark

required that the Benchmark be based not only on market prices when gas was withdrawn from

-27-

storage and delivered to ratepayers (which was typically the winter) but also by the price at the tim e

gas was purchased by Nicor and injected into storage (which was typically the summer when the

prices are historically lower) . As alleged above, the SCA was determined by multiplying the total

number of units of gas withdrawn from storage during the year by the "Storage Credit Rate"

("SCR"), which was the difference between the market price of gas at the time o f' withdrawal and

the market price of gas at the time of injection . Because the SCR number was typically a positive

number reflecting the difference between higher winter gas prices and lower summer gas prices, th e

SCR generally lowered the Benchmark . However, in the event of higher gas prices in the summe r

than winter, the SCR would be a negative number, making the Storage Credit Adjustment positive ,

thereby increasing the Benchmark .

68 . In addition to its own on system storage facilities , Nicor also purchased storage

service from Natural Gas Pipeline Company of America ("NGPL") . In April 2000 , Nicor entere d

into a "managed service" arrangement with IMD where IMD would buy and store gas on Nicor' s

behalf under the service purchased from NGPL. Under this arrangement, IMD filled storage in th e

summer of 2000 and carried the gas on IMD's books and Nicor agreed to purchase the gas from TM D

later that year, but at the summer 2000 prices . This arrangement was designed to ensure that the ga s

withdrawn from Nicor's NGPL storage would not be classi lied as storage "withdrawals" under th e

PBR and, therefore, would not be subject to the Storage Credit Adjustment component of the

Benchmark. At the time this arrangement was structured in early 2000, it was believed that the SCA

would decrease the Benchmark and reduce Nicor's ability to achieve savings and earnings inflatio n

under the PBR. However, in the summer of 2000, gas prices hit historical highs . In August 2000 ,

at the Henry Hub, natural gas was trading in excess of $4.00 per decatherm ("Dth"), nearly doubl e

-28-

the prices in January 2000. Because of these high summer prices, the SCR upon which the SCA was

calculated became inverted at a negative $0 .68 per Dth . That is, storage withdrawals had the effect

of increasing rather than decreasing the Benchmark . Once Nicor became aware of the inverted 5CR

late in summer of 2000, it modified its arrangements with TMD, and recorded a 13 .5 Bcf "injection

and simultaneous withdrawal" creating the fiction of storage. This fictional storage was referred t o

by the Company as "virtual storage . "

69. This fraudulent practice, inflated the Benchmark by approximately $9 million in 2000 .

70. Nicor' s fabrication of virtual storage was executed in the face of internal opposition .

An e-mail memorandum dated September 18, 2000 by the manager of Rate Research, Albert Harms ,

to Behrens, Vice President of Administration and Treasurer, with copies to Metz, Assistant Vice

President and Controller, and Lonnie Upshaw, Vice President of Supply and Technical Services,

determined that "virtual storage" was inappropriate because it "artificially inflated the Benchmark,"

was "inconsistent" with Nicor's representations to the ICC, and did not "lower gas costs . "

Nevertheless, Nicor implemented "virtual storage" even though Behrens agreed its use wa s

inappropriate .

6. Nicor Improperly Causes Ratepayers To BearThe Cost Of Weather insurance Premium

71 . For purposes of the PBR, Nicor could only include as gas costs, the cost of gas tha t

was eventually sold to its ratepayers. Thus Nicor was prohibited from using costs associated with

the sale or gas to its insurance company in its PER calculations . Nevertheless, in August 2000,

senior management adopted a plan devised byDefendant Halloran, Nicor's Executive Vice President,

and approved by Lonnie Upshaw and Defendants Cali and Behrens, to offset extremely costl y

-29-

weather insurance -- a cost that could not be passed on to ratepayers through the PBR -- with the sal e

of gas to the insurer at a. discount . Specifically, Nicor purchased weather insurance from Aquila, Inc .

("Aquila"), which charged a $3 .5 million yearly premium but discounted $2 million of this cost afte r

Nicer agreed to sell gas to Aquila at a below market price . The plan was approved over the

"misgivings" of Behrens . A supply manager also said that when he learned of the transaction he was

"troubled" by the decision to "link weather insurance, a company derivative product, with a ga s

supply deal that would run through the PGA (the regulation prior to enactment of the PBR] ." (Sidlcy

Austin Report, p . 45) This same manager told Halloran and Upshaw that it "was not permissible t o

use costs that are passed through the PGA to offset non PGA costs of the Company. [Id . }

72. in mid-October 2000, Metz, Nicor's Controller and Assistant Vice President ,

questioned the propriety of the transaction but was told to "leave it alone" since it had already bee n

approved at the "highest levels . "

7, in The Winter of 2001 Nicor Conceals "Withdrawals"By Designating Gas Withdrawals as "Infield Transfers"

73 . Nicor's on -system storage facilities are known as aquifers . Certain injections and

withdrawals of gas from aquifers referred to as "infield transfers" are necessary in order to keep th e

gas pressures at desirable levels . If the gas pressure in the aquifer is too low, it would be difficul t

to withdraw gas when needed ; and if it was too high, gas maybe lost . Infield transfers, however, are

not considered movement of gas for the benefit of ratepayers and, thus, do not raise the Storag e

Adjustment and therefore do not lower the Benchmark . Nicor benefitted financially from lowerin g

the Storage Adjustment, which inflated the Benchmark . In 2001, gas supply employees headed by

Lonnie Upshaw were pressured by Nicor management to designate gas "withdrawals" as "infiel d

-30-

transfers" in order to artificially deflate the Storage Adjustment, which, in turn, artificially, inflate d

the Benchmark . Treating these withdrawals as infield transfers resulted in a higher Benchmark an d

thus made it easier for Nicor to achieve "cost savings" and report higher earnings . Indeed, a

historically unprecedented and physically impossible number of infield transfers were recorded b y

Nicor each day beginning on October 24, 2001 and continuing through December 17, 2001 . By

reducing actual withdrawals and treating them as "infield transfers," Nicor was able to artificiall y

inflate the Benchmark, thus enabling Nicor to realize significant cost savings and inflate income i n

2001 .

8 . 1Nieor Double C;ount.ed Gas Volum in 2001

74, In early 2001 . NGPL, Nicor 's p rimary interstate pipeline , delivered more gas to Nico r

then was reported being delivered . After the error was detected in June 2001, Nicor and NGP L

agreed to correct the error by reducing the quantity of gas in Nicor's storage account under one o f

the storage services Nicer purchased from NGPL. However, in Nicor's 2001 PBR Report to the IC C

and cost savings calculation, Nicor did not correct the error. Even though this overstatement was

first discovered in "mid-200 l" and then again in March 2002, Nicor, under the direction of Behrens ,

intentionally decided not to disclose or amend and re-file its erroneous 2001 PBR Report, The erro r

remained uncorrected until a 2002 PBR report was filed .

9. Nicor's 2002 Misrepresentationsto the ICC Between March and May 2002

75, Nicor's misrepresentations under oath continued in 2002 . When the PBR was

approved, the ICC mandated hearings after two years of implementation to determine if the program

was meeting its objectives. Between March and May 2002, Nicor witnesses, including Behrens, Vic e

-31-

President and Treasure ofNicor, and Dr. Karl A . McDermott, a Vice President at National Economi c

Research Associates, Inc. ("NERA"), gave sworn testimony that the PBR was meeting its objective s

and benefitting ratepayers . For examp le, Behrens testified under oath on March 8, 2002 that the PB R

was meeting all its objectives and the Nicor had "adapted its behavior" to benefit ratepayers ,

My testimony will demonstrate that the Program is meeting its objectives . In supportof this conclusion, my testimony addresses four areas . First, T will describe theProgram and its approval by the Commission. Second, I will discuss the financialresults of the GCPP for the past two years and how the Company has adapted itsbehaviors to take advanta&c ofopportunities to lower gas costs . Third, I will discussthe Company's objectives for the Program as approved by the Commission in DocketNo, 99-0127 and how the Program has met these objectives. Finally, I will alsodiscuss NICOR's actions to maintain system reliability, as required by Section 9-244(c) . In addition to my testimony, the Company also presents the direct testimonyof Dr, Karl McDermott, who will discuss the public policy issues supporting the useof a Performance Based Rate ("PBR"), and how the Program alias the interests ofconsumers and the Company .

The GCPP is meeting its objectives and has resulted in substantial benefits forcustomers . For the calendar years 2000 and 2001, customers received $12 .2 millionand $14.8 million, respectively, of savings relative to what gas costs would have beenunder traditional regulation, as established by the GCPP Benchmark . These savingson their own demonstrate the achievement of the Pro rmis objectives, as describedlater. They also validate the appropriateness of the GCPP and the resulting behaviorchanges that the program encourages . In addition, it is reassuring to note that theGCPP Benchmark effectively tracked market conditions during the past two years .For calendar years 2000 and 2001, the city gate price of gas varied between $1 .65 perMMBtu and $15.70 per MMBtu . Some parties to the original case postulated thatbecause of an alleged flaw in the Benchmark measurement, the Company would reapwindfall profits simply as a result of high gas prices . However, the results show thateven with record high city gate prices, the Company's savings (below the market-based Benchmark) was only a small percentage of overall gas costs . Because theProgram met its objectives, no revisions to the Program are necessary .

(Direct Testimony of George M . Behrens , before the ICC on March 8, 2002, ln .27-56)(emphasisadded) .

76. This testimony was riddled with material misrepresentations and omissions . For

example , Nicor' s undisclosed LIFO decrements made it unnecessary for Nicor to "adapt its

-32-

behavior ;" the PBR did not "align the consumer with Nicor" but rather allowed Nicor to defraud

consumers and inflate it financial results ; and the $12.2 million and $14 .8 million of "savings" was

achieved only by way of fraud thus creating a "windfall" for Nicor,

77, For the same reasons , the following testimony by Behrens as to Nicar ' s improve d

"corporate behavior," "major changes" and the PBR having "met its objectives" and "needing no

modifications" was also blatantly false .

Question : Has there been a change in corporate behavior toward supply gascosts?

Behrens: Yes . The Company has encouraged employees to take reasonable andprudent steps to manage price volatility and optimize asset flexibility,without compromising system integrity . Changes have been made tothe Company's approval processes to address the growing array offinancial futures and derivatives needed to manage price risk . TheCompany has also used physical . products and storage to moreeffectively manage price volatility . These changes are designed tolower costs for customers while still allowing the Company to provideat a minimum the same level of reliability in delivery .

(Behrens , March 8, 2002, In. 120-127).

78 . In addition to Behrens, Nicor put forth Dr . Karl A . McDermott, a Vice President a t

NERA, to testify before the ICC on March 8, 2002, McDermott, after reviewing the "organizational ,

operational and cultural changes" that had occurred as a result of the PBR, reiterated the sam e

misrepresentations as set forth by Behrens . McDermott testified that the "main attraction" of the

PBR was the "melding of customer and shareholder interests" and had thus far "been a success i n

meeting its objectives and should be continued as it currently exists ." McDermott's testimon y

contained a plethora ofblatant misrepresentations . For example, McDermott misrepresented Nicor' s

"behavioral changes" in its "management of capacity and storage assets ," touting Nicor's third-party

-33-

contracts as a method of "add[ing] value to NICOR assets," a practice which three months later wa s

revealed to be part of an overall plan and scheme to manipulate inventory costs and artificially iiiflat e

the price of Nicer common stock .

79 . In his rebuttal testimony before the JCC on May 8, 2002, Behrens affirmativel y

disagreed with the testimony of the ICC's experts and rebutted their testimony with blatant

misrepresentations , relying on Nicor' s "long history of responsible conduct" to refute the possibility

of fraudulent conduct. Behren's stated as follows :

The practical aspect of [prudence reviews for affiliate transactions] is that in morethan 20 years that gas procurement reviews have been conducted by the Commission,Staff has never even raised a concern about the prudence of Nicor Gas ' purchasingpractices and no purchases have been determined to be imprudent by theCommission , Mr. Zuraski offers no explanation to support why the Company wouldsuddenly change its long history of responsible conduct . Inde d, there is no evidence,and Staff offers none that the Company acted in such a manner during the first twoyears of the GCPP. Additionally , the Company would be violating 83111 . Adm . CodePart 525.40(d) if such actions occurred and the Company knowingly increased gassupply costs . There is no reason to assume or believe that the Company wouldviolate the law or the Commission ' s rules . Moreover , I submit that Nicor 's histo ricaltrack record provides ample reassurance regarding its . ►rocurementpractices .

(Behrens ' Rebuttal Testimony, before the ICC, May 8, 2002, ln . 194-205)(emphasis added) .

B. Nicor Energy Fraud

80. On June 10, 1997, Nicor announced that it had formed a joint venture with NGC

Corporation (the predecessor of Dynegy) to offer a variety of energy services to industrial ,

commercial and residential customers in the Midwest . The joint venture, Nicor Energy, was no t

regulated by the ICC, unlike Nicor, Accordingly , Nicor Energy gave certain of its consumers the

option of purchasing gas at a fixed price per month -- rather than paying fluctuating prices based o n

the market price of gas . This enabled Nicor Energy to reap the rewards of acquiring gas below th e

-34-

fixed price, but it also exposed it to the risk of loss in the event the fixed rate paid by the customer s

was below the price at which the gas was acquired . By 2000, Nicor Energy had 100,000 natural gas

customers and 3,000 electric customers. In 2000 and 2001, Nicor Energy generated pre tax non-

operating income of $1 .4 million and $2 .4 million, respectively.

81, Because Nicor Energy sold gas to some customers at fixed prices, as an accoun t

practice, it estimated certain end of the period revenue, referred to as "unbilled revenue," based o n

past customer usage, This "estimate" of unfilled revenue created significant potential for revenu e

overstatement . As set forth below, Nicor disclosed on July 18, 2002 that it had improperly overstate d

"unbilled revenue" and also failed to record certain liabilities at Nicor Energy ,

82. The positive statements about revenue and earning contributions from Nicor Energy

in 2001 and the first half of 2002 were materially false and misleading because , as a result o f

accounting irregularities, including unbilled revenue and unrecorded liabilities, there were, in fact ,

no such gains .

VII .

NICOR'S MATERIALLY FALSEAND MISLEADING STATEMENT S

DURING THE CLASS PERIO D

83. As alleged above , Nicor's materially false and misleading statements and omissions

consist of the following:

(a) false statements concerning Nicor's high ethical standards and itscommitment to its investors and gas customers including statements in itsAnnual Reports and "Factbooks" in 1999 as "Because how we do things is asimportant as what we do" (1999) ; "Were there for you" (2000) ; and"Focusing on what matters" (2001) ;

-35-

(b) misrepresentations that Nicor maintained sufficient internal accounting andadministrative controls to assure the "integrity" and "reliability" of Nicor'sfinancial statements (1 128-130, 158) ;

(c) misrepresentations to the ICC in 1999 that no documents existed as to howNicor would profit under the PBR and misrepresentations to investors as tohow Nicor would perform under the PBRbefore its passage on November 23,1999 (¶¶ 85, 86) ;

(d) material omissions to the ICC of the existence of the Inventory Team,Inventory Team Report and Nicer's scheme to liquidate low-cost inventory;

(e) materially false and misleading statements concerning Nicor 's financialresults and performance under the PBR (¶¶ 89 , 92, 95, 98 , 99, 102, 104-105,109,115-117,120-121,124, 135, 137,139, 141-142,144,146, 148,151,155,157, 161, 164) ;

(f) materially false and misleading statements concerning Nicor Energy and itsfinancial performance (¶¶ 96, 138, 149, 156, 159) ; and

(g) misrepresentations under oath to the TCC between March and June 2002concerning Nicor 's performance under the PER over the prior two years . (~l~[75-79) .

84. As alleged above (~53), in the proceedings before the TCE. evaluating the PBR befor e

its passage , Nicor concealed its improper scheme to liquidate low-cost inventory and affirmativel y

misrepresented to the ICC that no "studies plans or communications" as to how Nicor would profi t

under the ICC existed. Thus, passage of the PBR was achieved by way of fraud . Nicor did not

intend to take risks to achieve cost savings but rather planned to create artificial cost savings b y

manipulation and improper accessing of low-cost inventory,

85 . The Class Period begins with the November 24, 1999 press release reported on PR

Newswire announcing the passage of the PBR . Defendant Fisher stated that the approval of the PB R

incentivized Nicer to provide further "cost savings " for ratepayers :

-36-

"While Nicor Gas has a long-standing record for keeping natural gascosts for its customers among the lowest in the nation, theperformance based rate plan establishes economic incentives for thecompany to reduce those costs even further .

86. On December 6, 1999, in a press release reported on the PR Newswire, Defendant

Fisher explained that the PBR would compensate Nicor for its "higher level of risk" in trying t o

"lower" gas costs for its customers, as follows :

The PBR offers the opportunity to achieve lower gas costs for ourcustomers, as well as achieve fair compensation for the company'shigher level of risk.

87. Securities analysts took note of management 's statements . On January 31, 2000 ,

Salomon Smith Barney reiterated its "buy' recommendation noting that the PBR "enhances earning s

capability ." Defendant Fisher's statements were also reflected in a Baird analyst report on January

6, 2000, which stated that the PBR "provides opportunity for EPS growth" and "risk" if "suppl y

prices exceed the Benchmark . "

88. The foregoing description of the " incentives" of the PBRplan to lower customer cost s

and Nicor's "higher levels of risk" under the PBR were false because Ni .cor's actual "incentive" was

the "low risk" and certainty of achieving earnings inflation through implementation of fraudulen t

practices as alleged herein in paragraphs 45 to 79 .

1999 Year End Statements

89. Nicor's 1999 Form 10-K filed with SEC on March 20, 2000 stated that the PBR

would be directly accretive to earn ings so that a 1% deviation from the Benchmark would add $ 3

million to Nicor's net income :

On January 1, 2000, Nicor Gas' PBR plan for natural gas costs went into effect.Under the PBR, Nicor Gas' total gas supply costs will be compared to a Benchmar k

-37-

tied to a market index . Savings and losses relative to the Benchmark will be sharedequally with customers . . . . Assuming a benchmark of $1 billion, each one-percentdeviation from the benchmark would affect net income by about $3 million .

(1999 10 -K, p. 14) .

90. The cover of Nicor's "1999 Factbook" published in May 2000 shows a photograp h

of a father and daughter fishing with the quote below the photograph stating : "Because how we do

things is as important as what we do ." This image was patently false in light of the schemes Nico r

was engaged in designed to deceive ratepayers , The 1999 Factbook also falsely again touted its plan s

for "innovative practices in areas including gas supply acquisition, pipeline transportation an d

storage management" to lower gas costs under the PBR. In fact, at the time of issuance Nicar ha d

already begun numerous fraudulent -- not "innovative"-- practices .

91 . The 1999 Factbook also stated that the "Benchmark was tied to a market index "

leading investors to believe the Benchmark was independent and accurate when Nicor knew it ha d

manipulated it as alleged in paragraphs 45 to 79 .

F3r'st Ouarter Ended March 31, 200 0

92 . On April 18, 2000, Nicor issued a release on PR Newswire announcing increased ga s

distribution earnings for the quarter ended March 31, 2000, from $61 .6 million in 1999 to $65 .6

million in 2000, or a $ .04 per share increase . Nicor stated the increase reflected positiv e

"contributions from the performance based rate plan on gas supply costs," The PBR " costs savings"

accounted for 25% or $ .Ol per share of the $ .04 per share increase in Gas Distribution income in the

quarter .

93 . Nicor's first quarter diluted earnings per common share of $ .83 met First Cal l

analysts' average estimate exactly - to the penny .

-38-

94, The positive impact of the PBR as described in the April 18, 2000 release , including,

Credit Suisse First Boston Report on April 18, 2000, Merrill Lynch Report on April 20, 2000, Baird

Report on April 18, 2000, and, Salomon Smith Barney Report on April 27, 2000 . In an analyst report

dated April 20, 2000, Merrill Lynch reiterated its long term buy recommendation noting income "was

positively impacted by . . . the performance based plan on gas supply costs."

95 . In its l0-Q for the quarter ended March 31, 2000, Nicor attributed revenue of $1 . 2

million to the PBR program, in the program's hrst quarter of operation . Nicor touted the PBR' s

results as a positive factor contributing to the increase in gas distribution income, as follows :

Results of the company's PBR plan are determined annually . On an interim basis, thecompany records an estimate of results attributable to the period . In the first quarter,Nicor recorded $1 .2 million of estimated PBR results as operating revenue .

Gas distribution operating income increased to $65 million from $61,6 million a yearago, The increase in operating income reflects the positive effect of customeradditions and contributions from the PBR plan ,

Gas distribution margin . Gas distribution margin, defined as operating revenues lesscost of gas and revenue taxes, which are both passed directly through to customers,increased $6 million to $163 .2 million in the first quarter . This increase is attributableto a combination of factors including customer additions, $1 .2 million from thecompany's PBR plan, higher margin deliveries and positive contributions fromsupply-related services .

(Nicor March 31, 2000 Form 10-Q, pp. 6-8) .

96. In the 10-Q, Nicer also reported $2,4 million in non-operating revenue, which wa s

comprised of improved results from its equity interest in Nicor Energy,

-39-

97 . The foregoing statements in paragraphs 92 to 95, touting the positive impact of the

PBR on operating revenue and gas margins, and the descriptions of the PBR as provided by Nico r

were false in light of Nicor's manipulative practices as alleged herein at paragraphs 45 to 63 .

Second Quarter Ended June 30, 20Q Q

98, On July 19, 2000, Nicor issued a press release to announce its higher second quarter

2000 earnings . Defendant Fisher touted Nicor's progress' in a number of [its] growth initiatives "

and the expectation of"signi [leant earnings per share growth in 2000," as follows :

We continue to believe the upward trend in operating results willcontinue and translate into signs (icant earnings per share growth in2000.

99. Specifically, Nicor also once again attributed the increase in gas distribution income

to, inter alia, "contributions from the gas performance-based rate plan ." The projected earning s

growth was false and misleading because Nicor knew that this growth would be derived in materia l

part from its fraudulent practices .

100. As a result ofNicor ' s statements , references to the PBR were contained in numerou s

analyst reports issued following the announcement ofNicor' s second quarter results including Baird,

CSFB, and Solomon Smith Barney Reports on July 19, 2000 and a Merrill Lynch report on July 20 ,

2000. In the July 19, 2000 press release, Nicor announced second quarter diluted earnings per

common share of$ .66, which exceeded First Call analysts' average estimate of $.65 by just one-cent .

101 . Following this announcement , Nicor' s common stock rose to $34,06 per share on Jul y

20, 2000 , up $0 .88 from the previous day's close of $33 , 18. The trading volume skyrocketed to 87%

higher than the previous trading day .

-40-

102, On August 8, 2000, Nicor filed its Form 10-Q with the SEC, for the quarter ende d

June 30, 2000, in which Nicor reported false and misleading information to its shareholders and th e

investing public, overstating revenue from the PBR as follows :

Results of the company's PBR plan are determined annually . On an interim basis, thecompany records an estimate of results attributable to the period . Nicor recorded $1 .0million and 2.2 million of estimated PBR results as operating revenue for the threc-and six-month periods, respectively.

Gas distribution operating income for the three- and six-month periods ended June30, 2000, increased $7 .5 million and $10 .9 million, respectively . Improvements forboth eriods reflect income related to a significant construction project, customeradditions and contributions from the as cost PBR 121an .

Gas distribution margin, defined as operating revenues less cost of gas and revenuetaxes, which are both passed directly through to customers, increased for the three-and six-month periods by $ 8 .1 million to $111 .3 million and $14 .1 million to $274.5million, respectively . Trn rovements for both periods reflect income related tosignificant construction ro'ect customer additions and contributions from the gascost PBR plan .

(Nicor June 30, 2000 Form iO-Q, pp . 5, 8, 9)(eu,phasis added) .

103 . These statements about the positive contributions of the PBR were materially fals e

and misleading in light of Nicor' s PBR manipulations .

104. In August 2000, in its "Quarterly Report 2," an update issued to Nicor shareholders ,

Nicor made false and misleading statements about the performance of the PBR and Nicor's "ne w

strategies to maximize the value" of its assets and operations under the PBR, as follows :

Results for both the quarter and six-month period reflect improvements in allbusiness segments including gas distribution . . . . Improvements for both periodsreflect income related to a significant construction project, customer additions andcontributions from the gas cost PBR plan .

-41-

PBR Plan U date Through the first half of 2000, Nicor Gas' financial results havebencfitted from the implementation of its PBR plan . . . . During the first half of theyear, Nicor Gas postedpre-tax income of $2 .2 million and will reduce customers' gascosts by an equal amount as a result of its PBR plan efforts . The company continuesto develop execute and monitor new strategies to maximize the value of its storageassets and pipeline transportation capacity to successfully manage the risks andrewards associated with therlan .

(Nicor August 2000 Quarterly Report, pp . 1, 2)(enmphasis added) .

105 . On September 14, 2000, Nicor filed a Form S-K with the SEC that stated that "[o] n

September 14 and 15, 2000, Nicor Inc . Will present to security analysts objectives and strategies for

building shareholder value and will provide an update of recent developments . The companyis filing

this Form S-K to give broad disclosure to such information." The 8-K was signed by Halloran . In

the attachment to the Form S-K, Nicor stated, with respect to the PBR plan, the following :

Through the first six months of this year, we have booked a little over $2 million pre-tax income from the program. Our success thus far can be attributed primarily to ourability to manage our storage requirements in unique ways and maximize the valueof our pipeline capacity. . . . As we are gaining experience with new techniques for-managing the commodity and related costs, we are increasingly confident that ourfinancial benefits will continue to improve . Obviously, there are some risks to thePBR as well, but to improve our likelihood of success, we've en . ed outside firmswith trading experience to advise us along the way.

(Nicor September 14, 2000 Form 8-K, p . 10)(emphasis added) .

106. After this announcement, Nicor's common stock increased to $37 .87 per share, up

from the prior day's close of $37 per share .

107. Following an analyst meeting with Nicor's -management , a Salomon Smith Barney

analyst, on September 20, 2000, raised its Nicor recommendation to "outperform," noting "a highe r

[earnings per share] contribution from performance based rate plan."

-42-

108 . The foregoing description in paragraphs 98 to 105, stating the PBR's positive incom e

effect and cost savings as well as the "risks" of the PBR was materially false and misleading in ligh t

ofNicor's fraudulent practices which improperly achieved cost savings without risk during this tim e

period as alleged herein in paragraphs 45 to 66 .

Third Quarter Ended September 30, 2Q0 0

109 . On October 24, 2000, Nicor issued a press release announcing its results of operation s

for the quarter ended September 30, 2000 . Nicor reported third quarter 2000 net income, excluding

an unusual charge related to the company's mercury inspection and repair program, of $27 million,

compared with net income of $19 .8 million in 1999 . The press release once again noted the PBR's

positive effect on earnings :

Gas distribution operating income, excluding the mercury-related charge, increasedin the third quarter to $41 .4 million, compared to $35 .4 million a year ago . For thenine months ended September 30, 2000, operating income increased to $153 .9million, excluding the mercury-related charge, compared to $137 .1 million in 1999 .improvements in both periods resulted from increased margins and income frompower- neration services, customer additions and contributions from the gas costPBR plan . Nine-month operating results for 2000 also benefitted from income relatedto weather insurance, which more than offset the adverse effect of the year-to-yearimpact of warmer weather .

(emphasis added) .

110. Following this announcement Nicor's common stock closed at $33 .50 per share, up

from the previous day's close of $33 .25 per share .

111 . The positive contribution of the PBR was again referenced in numerous analys t

reports following the announcement of third quarter results including in a Salomon Smith Barney

report on October 25, 2000 and the A .G . Edwards report on November 2, 2000 .

-43-

112. On October 25, 2000, Fitch, an international rating agency, affirmed Nicor's credi t

rating. Fitch's favorable rating was based in part on "Nicor's solid financial performance," whic h

was attributed to the PBR, as follows :

Regulation in Illinois has been favorable for gas utilities as reflected in Nicor Gas ;history of solid financial performance . In January 2000, the company instituted aperformance Benchmark-based plan for its natural gas costs . . . . Since theBenchmark for commodity prices changes with regional market prices, potentialfinancial exposure is minimized . Nicor Gas earned $7 .6 million in the first ninemonths of 2000 under the plan ,

113 . Upon the release of Fitch's positive rating on Nicor's debt, Nicor common stoc k

closed at $33 .81 per share, up from the prior day's close of $33 .50 per share .

114. Fitch's favorable rating of Nicor was the product of Nicer's false and misleading

reported financial results for the first nine months of 2000 which touted its ability to profit under the

PBR . This series of false and misleading statements perpetuated the Individual Defendants' common

plan and scheme to inflate the price of Nicor common stock and allowed them to benefit by selling

their shares at artificially inflated prices .

115 . In October 2000, Nicor issued its Quarterly Report to Shareholders which containe d

false and misleading statements that overstated improvements in revenue based on fraudulen t

contributions from the PBR in the third quarter and first nine months of 2000 .

Gas distribution operating income, excluding the mercury-related charge, increasedin the third quarter to $41 .4 million, compared to $35.4 million a year ago . For thenine months ended September 30, 2000, operating income increased to $153 .9million, excluding the mercury-related charge, compared to $137 .1 million in 1999 .Improvements in both periods resulted from increased margins and income frompower-generation services, customer additions and con tributions from the aka costPBR plan.

(Nicor October 2000 Quarterly Report to Shareholders , p . 2)(emphasi s added) .

-44-

116 . On November 7, 2000, Nicor filed its Form 10-Q for the quarter ended September

30, 2000 with the SEC, which contained false and misleading statements touting the profitability an d

performance of the PBR and boasting of its impact on operating revenue, as follows :

Results of the company's PBR plan are determined annually . On an interim basis, thecompany records an estimate of results attributable to the period, and results willlikely vary from quarter to quarter. Nicor recorded .S5 .4 million and 7 .6 million ofestimated PBR plan results as operating revenue for the three- and . nine-monthperiods, respectively .

Gas distribution operating income for the three and nine-month periods endedSeptember 30, 2000, decreased $142 million and $131 .2 million, respectively, whencompared to the corresponding prior-year periods . Gas distribution operating incomeexcluding the effect of the unusual mercury charge increased to $41 .4 million and$153 .9 million for the three- and nine-month periods, respectively . The impact of themercur charge ore than offset improvements in both periods related tocontributions from the g.As cost PBR plan, increased income from power-generationservices and customer additions .

For the third quarter , gas distribution revenues increased $41 .2 million primarily dueto higher natural gas prices, which are passed directly through to customers, and $5 .4million of revenues from the PBR plan . Year-to-date gas distribution revenueincreased $ 161 .8 million . The impact o [higher natural gas prices more than offset theeffect of warmer weather during the nine-month period . Year-to-date gas distributionrev nues also include $7.6 million from the PBR plan and $7 .3 million of estimatedweather insurance benefits .

Gas distribution margin. Gas -distribution margin , n, defined as operating revenues lesscost of gas and revenue tax expcnse, which are both pass directly through tcult mere increased for the three- and nine-month periods by $5.6 million to 98 .2million and $19 .7 million to $372 .7 million, respectively . Improvements for bothperiods reflect estimated results from the PBR pj4n, increased income from power-generation services and customer additions .

(Nicor September 30, 2000 Form 10-Q, pp . 5, 10, 11, 12)(emphasis added) .

-45-

117 . The 10-Q repeated Nicor' s false and misleading statements in an attempt to deceiv e

investors and customers that the "Benchmark is tied to market prices,"and, as such, the PB R

program's performance would be insulated from market trends such as increasing gas prices, as

follows:

Higher natural gas prices also do not significantly affect Nicor Gas' PBR plan risks,since the PBR Benchmark is tied to market prices.

(Id., p . 14) .

118 . This statement is misleading because , although market prices are a factor in

computing the Benchmark, as explained by the Sidley Austin Report, Nicer had designed an d

employed various schemes during the Class Period to manipulate the Benchmark in order to inflate

Nicor' s revenue under the PBR, thereby artificially inflating Nicor's stock price .

119. The foregoing statements in paragraphs 109 and 115-117 touting the positive impact

of the PBR on operating revenue and income, and descriptions of the PBR plan to lower customer

costs were false in light of Nicor' s actual fraudulent practices as alleged herein at paragraphs 45 t o

66 .

Fourth Quarter and Year Ended December 31, 200 0

120. On January 24, 2001, Nicor issued a false and misleading press release to announc e

its fourth quarter 2000 financial results, attributing fourth quarter and year-end increased revenue t o

the PBR, as follows :

For the twelve months ended December 31, 2000, operating income increased to$212 .9 million, excluding the third quarter mercury-related charge, compared to$191 .7 million in 1999 . Improvements in both ds resulted primarily from

andincreased deliveries due to colder weather, customer additions increased marginsincome from power-generation services, and contributions from the gas cost PBRplan, These improvements more than offset higher costs such as bad debt expense,company use of natural gas and other impacts related to higher natural gas prices .

(emphasis added) .

-46-

121 . In the January 24, 2001 press release, Nicor announced fourth quarter and year-end

diluted earnings per common share of $ .87 and $1 .00, respectively. As a result ofNicor's elaborate

scheme to defraud investors, it was able to report fourth quarter diluted EPS of $ .87, which had

exceeded First Call analysts' average estimate of $ .85 by j ust two-cents . Although Nicor's year-end

diluted EPS appeared to have dramatically fallen short of Thompson/First Call analysts' $2 .83 per

share estimate, Nicor's earnings, excluding the unusual charge in the third quarter, were actually

$2 .94, beating analysts' expectations by $ .1 .1 .

122. After this announcement, Nicor's common stock jumped $,75 to $38 .44 per share on

January 24, 2001, up from the previous day's close of $37 .69 per share .

123. The foregoing statements in paragraphs 120 and 121, stating Nicor fourth quarter

2000 and year-end 2000 improved financial results were in part attributable to contributions from

the PBR, were false and misleading in light of Nicor's fraudulent practices as alleged herein at

paragraphs 45 to 70 .

2000 Annual Report

124. On February 23, 2001, Nicor issued its 2000 Annual Report . The 2000 Annual

Report disclosed that the PBR accounted for 18 .7% of total Nicor operating income -- $12 .2 million

of a total $64.9 . (Nicor 2000 Annual Report p. 15-16) .

125 . Once again, the PBR program's positive contribution to 2000 earnings was noted i n

a number of analyst reports, including a January 29, 2001 SSB report titled "GAS : PBR Helps 2000

Earnings; Mercury Situation Pending" and a February 1, 2001. A.G . Edwards report . Nicor'a Form

10-K for the year ended December 31, 2000 was filed on March 12, 2001 . The 2000 Form 10-K

contained the same data reflecting the PBR's positive contribution to 2000 operating income .

-47-

126, The 2000 Annual Report contained a letter to "Fellow Shareholders" from Defendan t

Fisher which contained the following statements of Nicor's "commitment" to customers an d

shareholders :

Fellow Shareholders : As I reflect on the events of the past year andthe significant progress that we made at Nicor in executing ourbusiness plan, I am struck by the theme of this year's annual report --We're There For You ." I believe it accurately captures the way wehave tried to operate our businesses over the years. We have workedhard to be there - for our customers, our communities, ourshareholders, and our employees . This commitment was neverdemonstrated more clearly than in the year 2000, as we metchallenges head-on, seized new opportunities, addressed the needs ofour customers, and promoted the value of working together . Theseare values that Nicor embraces and that will, in a very large way,contribute to our future success .

(Nicor 1000 Annual Report, p. 2) (emphasis added) . Nicor' s actual business conduct was entirel y

contrary to any ethical values or commitment to service .

127, The 2000 Annual Report also contained the following quote from a Nicer specialis t

under a photograph of a school classroom :

Nicor Gas is committed to providing solutions to our customers'energy needs. Our experience and knowledge of cost-savingalternatives and technologies assist our customers in their facility-management operations . Paul Flerick, Commercial Specialist, NicorGas .

(Id.p,7) .

128. The 2000 Annual Report also contained a "Management ' s Report" signed by

Defendants Fisher and Halloran . This Report falsely stated that Nicor maintained a "system o f

internal controls," which purportedly provided "reliability," and "integrity" to the Company' s

financial statements :

The company maintains a system of internal accounting andadministrative controls designed to provide reasonable assurance asto the integrity and reliability of the financial statements and th e

-48-

safeguarding of assets . Management monitors the system forcompliance and the internal auditors independently review itseffectiveness, making recommendations for possible improvements .In addition, as a part of its audit of the financial statements, ArthurAndersen LLP reviews and tests selected internal accounting controlssolely to establish a basis of reliance thereon in determining thenature, limiting and extent of audit tests to be applied . Managementtakes action on recommendations concerning the company's systemof internal controls that are believed to be cost-effective .Management believes that the system of internal controls is adequateto enable it to carry out its responsibilities discussed herein .

(M. p. 40) ,

129 . The Management Report also described oversight of the financial reporting proces s

by Nicor's Board of Directors and Andersen which, in light of Nicor's rampant misconduct wa s

entirely false .

The Board of Directors performs its oversight role for the company'sfinancial reporting process through its Audi( Committee whichconsists of four outside Directors . The Committee meets withmanagement, the internal auditors and Arthur Andersen LLP toreview the company's consolidated financial statements . Thesemeetings also include discussions of the overall scope and plans foraudits, the results of audits, evaluations of the company's financialreporting. The Committee meets regularly with the internal auditorsas Arthur Andersen LLP separately, without management present, tofacilitate any private communications .

(Id . p . 40) .

130 . Finally, management claimed to have given Arthur Andersen full access to al l

financial records and data,

Management has made available to Arthur Andersen LLP, thecompany's independent public accountants , all of the company'sfinancial records and related data and believes that all representationsmade to the independent public accountants during its audit werevalid and appropriate .

(Id . p . 40) . This disclosure underscores Andersen's recklessness in failing to discover any of Nicor' s

fraudulent practices over the course of three audits .

-49-

131 . Nicor' s reported financial results for the first quarter of 2001 had again managed to

exceed ThompsoniFirst Call analysts' estimates by pennies, and Nicor's actual diluted earnings pe r

share of $ .85 had again exceeded analysts' estimate of $ .83 by just two-cents ,

132 . Following this announcement, Nicor's common stock closed at $39 .35 per share on

April 18, 2001 .

133 . The foregoing statements , in paragraphs 124 to 131 , touting the PBR's 18 .7%

contribution to total Nicor Operating income and the numerous references to Nicor's high ethica l

standards and its commitment to its ratepayers or gas consumers were false and misleading in light

of Nicor' s fraudulent practices as alleged herein at paragraphs 45 to 72.

First Quarter Ended March 31, 2001

134, On April 18, 2001, Nicor issued a press release announcing its results for the quarte r

ended March 31, 2001 . Nicor reported first quarter 2001 diluted earnings per common share of $ . 8 5

compared to $ .83 per share in 2000. Net income of $38 .8 million was the same as 2000's firs t

quarter net income. The press release stated, inter alia, the following :

Operating income was $68 .0 million for the quarter, compared with $70 .2 million ayear ago . The decline in operating income relates primarily to the shipping segmentas there were substantially fewer construction projects and related volumes in theCaribbean region this quarter . This was partially offset by an improvement in Nicor'snon-traditional energy-related ventures ,

135 . As in previous quarters, the positive effect of the PBR was noted in analyst report s

including an April 19, 2001 Baird Report which stated : "Margins improved in 1Q'01 because o f

colder weather, increased income from gas supply services and contributions from the gas cos t

performance-based rate 121 (emphasis added) .

136. On May 9, 2001, Nicor filed its Form 1 O-Q with the SEC for the quarter ended March

31, 2001, Nicor falsely reporting that the PBR program had increased its reported operating revenu e

-50-

by $2 .5 million in first quarter 2001, up from $1 .2 million for the same period the prior year, as

follows:

Results of the company's PBR plan are determined annually . On an interim basis thecompany records an estimate of results attributable to the period . Nicor recorded $2 .5million of estimated PBR results as operatingrevenue_in the first quarter of 2001compared to $1 .2 million in the first quarter of 2000 .

Gas distribution margin, defined as operating revenues less cost of gas and revenuetaxes, which are both passed directly to customers without markup, increased $6.5million to $169.7 million in the first quarter . The increase was primarily due tocolder weather compared to last year, higher customer financing charges, largercontribution from gas supply-related services and improv results from the PBRplan . Increased company natural gas prices were detrimental to the current year'sresults . The positive contribution from colder weather on year-to-year operatingresults were partially offset by the impact of weather insurance benefits recorded lastyear .

(Nicor March 30, 2001 Form 10-Q, pp . 5, 10)(ernphasis added) .

137. In its Form 1 O-Q, Nicor touted a 92% increase in nonoperating income over the same

period for the prior year, attributing this increase to improved results from Nicor Energy as follows :

Nonoperating items . Other income increased to $4 .6 million from $2 .4 million a yearago. The increase reflects improved results from Nicor's retail energy marketingjoint venture . Increased interest income also contributed to the improvement in 2001 .

(ld.. p. 9.) This statement of Nicor Energy's positive performance was false and misleading as a

result of Nicor Energy' s subsequently disclosed accounting irregularities .

138. In May 2001, Nicor issued a List quarter update for 2001 "Nicor Quarterly Report t o

Shareholders," which touted the financial benefits of the PBR program -- "providing $2 .5 million

in pretax income during the first quarter 2001" and "pretax income of $12.2 million" i'or the fiscal

year 2000, as follows :

Gas Distribution PBR Plan Update . Nicor Gas' PBR plan continues to benefitfinancial results - providing $2 .5 million in pretax income during the first quarter,compared with $1 .2 million in the first quarter of 2000 . The PBR plan provides thecompany with economic incentives to lower gas costs through innovative practice s

-51-

in areas including: gas-supply acquisition, pipeline transportation and storagemanagement .

Nicar Gas' total supply costs arc compared to a market-sensitive Benchmark, and anysavings or losses are shared equally with customers . In 2000. Nicor gas posted pretaxincome of $12.2 million and reduced customers' gas costs by an equal amount as aresult of the PBR plan .

(Nicer Quarterly Report to Shareholders May 2001, p. 2)(emphasis added) .

139. The foregoing statements in paragraphs 135 to 139, stating that increased financia l

results at Nicor were a result of" improvement in the gas cost performance based rate plan," an d

Nicor Energy were materially false in light of Nicor's fraudulent PBR practices and Nicor Energ y

accounting irregularities alleged herein at paragraphs 45 to 73 .

Second Quarter Ended June 30, 2001

140, On July 3, 2001, Nicor issued a press release lowering its earning guidance for the

quarter ended June 30, 2001 due to "warner than expected weather" and "lower than anticipate d

results from Nicor Energy. "

141 . On July 19, 2001, Nicor issued a press release announcing its results of operations

for the quarter ended June 30, 2001, Nicor reported second quarter 2001 net income of $26 .7 million

compared with $30 .6 million in 2000. The press release stated, j rntealia , the following :

Operating income for both 2001 periods include $2 .1 million pre-tax income in thecompany's gas distribution segment for a partial recovery of previously recordedcosts relating to the company's mercury inspection and repairprogram . Excluding themercury-related recoveries, a decline in operating income for both periods occurredin all major operating segments .

Despite the challenges of the first half of this year, we believe that 2001 annualearnings should exceed last year, assuming normal weather for the remainder ot`theyear. Our earnings outlook is in the range of $3 .00 to $3 .10 per share for the year and$ .50 to S.60 per share for the third quarter. Said Thomas L . Fisher, chairman,president and chief executive officer, We believe that growing contributions toearnings from our non-regulated energy ventures . aloe with improvements in ourcore businesses will provide substantive results during the last half of 2001 ,

-52-

(emphasis added) .

142 . PBR's positive contribution to Nicor was again referenced in analyst reports including

CSFB Report on July 23, 2001 and a SSB Report on July 23, 2001 . The CSFB Report stated that

"[i]n 2Q'01 GAS benefitted from its performance based rate (PBR) plan . . . . "

143 . On August 1, 2001, Nicor filed its Form 10-Q with the SEC for the quarter ende d

June 30, 2001 . The 10-Q contained false and misleading statements touting the PBR's positiv e

impact on Nicor's financial results, as follows :

Nicor recorded $1 .7 million and $4.2 million of estimated PBR results as operatingrevenue for the three- and six-month Periods, respectively , compared to $1 .Q millionnd $2.2 million in the prior year periods .

Positive] affecting margin forboth poriods were hercustomertinancin charges,larger contributions from gas supply related services and improved results from thePBR Slav .

(Nicor August 2001 Form 10-Q, pp . 5, 12)(emphasis added) .

144. The foregoing statements inparagraphs 141 to 144, stating that Nicor's second quarter

2001 financial results benefitted from the PBR and that "growing contributions to earn ings from our

non-regulated energy ventures . . . will provide substantive results du ring the last halfof2001," were

materially false and misleading in light of Nicor's fraudulent practices and accounting irregularities

alleged herein at paragraphs 45 to 73 .

Third Quarter Ended September 30, 200 1

145 . On October 18, 2001, Nicor issued a press release announcing that financial results

for the third quarter had exceeded analysts' expectations, Nicor reported diluted earning per shar e

excluding "unusual mercury-related impacts" of third quarter 2000 of $ .61-- beating analysts '

expectations by just six-cents .

-53-

146, After this announcement, Nicor's common stock closed at $39 .33 per share on

September 18, 2001 .

147 . On October 31, 2001, Nicor filed a false and misleadin g Form 10-Q with the SEC fo r

the quarter ended September 30, 2001 that misrepresented the PBR program 's impact on th e

Company's financial results, as follows :

Nicor r corded $3 .3 million and $7 .5 rrnillion of estimated PBR results as operatingrevenue for the three- and nine- month periods, respectively, compared to $5 .4million and $7.6 million in the corresponding prior year periods .

Both the three- and nine-month comparisons were adversely affected by lowerdemand unrelated to weather. The three-month period also reflects lower PBR planresults, which may vary from quarter to quarter .

(Nicor October 31, 2002 Form 10-Q, pp . 5, 13)(ernphasis added) .

148. In the 10-Q, Nicor reported non-operating income for the quarter of $8 .0 million ,

compared to $6.4 million a year ago . Non-operating income year-to-date increased to S 12 .2 million

in 2001 from $9,9 million in 2000 . Nicor attributed the increase in non-operating income for the

quarter and year-to-date to increased interest income and improved results from Nicor Energy in the

third quarter .

149. The foregoing statements in paragraphs 146 to 149, were materially false an d

misleading because the reported earnings were artificially inflated as a result of Nicor's fraudulent

PBR practices and Nicor Energy's accounting irregularities .

Fourth Quarter and Year Ended December 31, 200 1

150 . On January 23, 2002, Nicor issued apress release announcing its results of operation s

for the fourth quarter and full year ended December 31, 2001 . Nicor reported fourth quarter 2001 ne t

income, operating income and diluted earnings per share of $45 . 2 million , $69.2 million and $1 .01

-54-

per share, respectively, as compared to $39 .9 million, $69,5 million and $.87 per share, respectively,

in 2000 . Defendant Fisher continued to mislead investors about Nicor's "progress in all of [its ]

growth objectives," as follows :

Gas distribution operating income, excluding mercury-related impacts, increased inthe fourth quarter to $60 .7 million, compared to $59 million a year ago. For thetwelve months ended December 31, 2001, operating income, excluding mercury-related impacts, decreased to $211 .4 million, compared to $212 .9 million in 2000 .The Chicago Hub and contributions from the company s PBR plan favorahlyimpacted both the quarter and twelve-month period .

(emphasis added) .

151 . Nicor continued to beat analysts' ea rn ing estimates by pennies, Fourth quarter 200 1

and fiscal year 2001 analyst expectations were $.97 and $3,06 per share, respectively . Nicor's

reported earnings of $1 .01 and $3 .17 per share for the same periods exceeded the Thompson/First

Call analysts' estimates by pennies . After this announcement, Nicor's common stock jumped S .53

to close at $41 .16 on January 23, 2002, up from the previous day's close of $40 .63 per share .

152. The positive "contributions from the company's performance-based rate plan" were

reiterated in analyst reports issued following this announcement including aBairdReport on Januar y

24, 2002 and a CSFB Report on January 28, 2002 .

153. The foregoing reported financial results in paragraph 151, attributing fourth quarte r

improved results to "contributions from the company's [PBR], were artificially inflated as a resul t

of Nicor's fraudulent PBR practices and Nicor Energy accounting irregularities ,

2001 Annual Report

154. On March 8, 2002, Nicor filed its 2001 Form 10-K annexing as an Exhibit its 200 1

Annual Report. The cover of the 2001 Annual Report contained a picture of a grandmother talkin g

to three young children with the caption "Focusing On What Matters Most ." In the Letter to "Fello w

Shareholders" contained in the Annual Report, Defendant Fisher continued the high ethical tenor o f

-55-

the cover. Fisher stated that Nicor was able to post higher earnings per share despite a year o f

challenges, such as September 11 ' , high gas prices and economic slowdown in the U .S. economy

because Nicor focused on "what matters most," as follows :

Nicor still was able to post higher per share earnings . Our achievements haveresulted from our tradition of emphasizing what matters most to our company- ourcustomers, our shareholders, the communities we serve and our employees . Thisyear's annual report theme, "Focusing on What Matters Most," renews thatcommitment, which has long been part of Nicor's heritage.

(Nicor 2001 Form 10-K, p . 2) .

155. The letter also touted the prospects of Nicor Energy as follows :

Dere elation throughout the natural as and electricity markets continues to provideopportunities for Nicor . We have already seen modest success at Nicor Energy, ourretail ever marketing joint venture, and at Nicor Services, or retail energyproducts and services business . So far, low customer acquisition costs, high marketpenetration and a solid reputation have been primary success factors for both of thesebusiness .

*****

through a numberNicor Energy is expected to achieve accelerated ' wth this yearofkey development . Beginning this spring, all of Nicor's 2 million customers andIllinois residential customers of public electric utilities will be able to choose theirenergy suppliers . The critical growth factor for Ni ar Energy is the ability to further-2cnetrate the Midwest gas andeleclricity markets as deregulation occurs .

(ld . p. 3 .)(emphasis added) .

156 . The operations section ofthe 2001 Annual Report disclosed that Nicorrecorded $14 .9

million increase in operating income . (Id. p. 4) . This amount represented 7% of Nicor operating

income of $211 .4 million in 2001 (excluding the 2001 effect of the unusual mercury-related impacts )

(Id , p, 13) .

157 . The 2001 Annual Report also contained the identical (except for dates ) "Management

Report" falsely stating Ni cor maintained sufficient "internal accounting and administrative controls "

-56-

to reasonably assure the "integrity" and "reliability" of Nicor's financial statements, (NicoT 200 1

Annual Report p, 35) .

Gas distribution operating income increased significantly in 2001 when compared tothe prior year . . . . Operating results for 2001 reflect increased contributions from theChicago Hub, which provides gas supply-related services, and from the company'sPBR poop . . . . The 2000 improvement primarily relates to higher gas deliveries,contributions from the PBR plan and increased income from power-generationservices .

Nicor's operating revenues rose sharply from $1 .6 billion in 1999 to almost $2 .3billion in 2000 . Gas distribution revenues increased over 40 percent compaTed to1999, reflecting significantly hi higher natural gas prices and related revenue taxesincreased deliveries resulting from colder weather and customer additions, andbenefits generated from the PBR .p1an.

Nicor's regulated utility, Nicor Gas, is generally not exposed to market risk causedby changes in commodity prices because of Illinois rate regulation allowing for therecovery of natural gas supply costs from customers, Although the company has aPBR plan for natural gas costs, the plan does not directly expose the company tocommodity price risk because actual gas costs are compared to a market-sensitiveBenchmark as opposed to a fixed Benchmark .

(ld. pp. 10, 11, 21)(emphasis added) .

158 . In its 2001 10-K, Nicor reported $28 .5 million in nonoperating income , up $2 . 9

million from 2000, which was attributed to improved results from Nicor Energy . Nicor touted Nico r

Energy's expanding presence in the Midwest and "modestly profitable" operations as the positiv e

contributing factors to Nicor' s improved financial results , as follows :

Nicor Energy was modestly profitable in, 2001 and 2000, generating pretaxnonoperating income for Nicor of $2 .4 million and $1 .4 million, respectively .

(Nicor 2001 Form 10-K, p . .20) .

159. The foregoing statements reporting positive contributions from the PBR and Nico r

Energy and that Nicor focused on "what matters most" and maintained sufficient "interna l

-57-

accounting and administrative controls" to reasonably assure the "integrity" and "reliability" wer e

materially false and misleading in light of Nicor 's fraudulent PBR practices and Nicor Energ y

accounting irregularities as alleged herein in paragraphs 45 to 79 .

First Qu;krter Ended March 31, 2002

160. On April 17, 2002, Nicor issued a press release announcing its results of operation s

for the quarter ended March 31, 2002 . Nicor reported first quarter 2002 net income, operating income

and diluted earnings per share of $39 .9 million, $61 .6 million and $ .90 per share, respectively, as

compared to $38 .8 million, $68 million and $ .85 per share, respectively, in 2001 . The press release

stated, inter alia, the following:

We are pleased that despite significantly warmer weather we posted an earningsimprovement for the quarter and believe our prospects for the year are good," saidThomas L. Fisher, chairman, president and chief executive officer . Our 2002earnin s outlook remains at $3 .10 to 53,25 per share and we anticipate that secondquarter earnin s will be in the range of $ .55 to $ . 65 per-share .

(emphasis added) .

161 . Thompson/First Call analysts' estimated Nicor's diluted earnings per share for the

quarter to be $ .88 . However, Nicor beat analysts ' earnings expectations by two-cents, reportin g

earnings of $ .90 per share . After this announcement, Nicor's common stock jumped $,61 to clos e

at $47 . 49 per share on April 17, 2002, up from the previous day's close of $46 . 88 per share.

1.62. On April 22, 2002, Nicor common stock . reached its Class Period intra-dayhigh price

of $49 . 00 per share .

163 . On April 25, 2002, Nicor Filed its Form 10-Q with the SEC for the quarter ended

March 31, 2002. The 10-Q contained the same misrepresentations about the results of operation s

as reported in the Company's April 17, 2002 press release . The 10-Q was signed by Defendant

-58-

Halloran . Nicor stated that the PBI( plan increased operating revenue by $2,9 million , as compared

to $2.5 million for the same quarter a year prior, as follows :

Nicor recorded $2 .9 million ofestimated PBR results as operating revenue in the firstquarter of 2002 compared to $2.5 million in the first quarter of 2001 .

(Nicor March 31, 2002 Form 10-Q, pp. 5-6) .

164. This announcement caused Nicor common stock to decline $.83 to $46.77 per share

on Apri 126, 2002, down from the previous day's close of $47 .60 per share .

165 . The foregoing statements in paragraphs 161 to 164, attributing a S19 million gain i n

operating revenue to the PBR, were false and misleading and later reversed upon the exposure o f

Nicor's fraudulent PBR practices as alleged herein at paragraphs 45 to 79 .

166 . On May 3, 2002, Nicor issued a press release announcing Deloitte &. Tour-he, LLP

("Deloitte &. Touche") had been appointed to replace Arthur Andersen as the independent auditors

for the Company. Arthur Andersen, which completed the review of the Company's financial

statements for the fiscal quarter ended March 31, 2002, had audited the accounts of Nicor and its

predecessor since 1954. The Company further announced that the decision to change auditors was

not the result of any disagreement between the Company and Arthur Andersen on any matter of

accounting principles or practices, financial statement disclosure, or auditing scope or procedure .

167 . As set forth above in paragraphs 75 to 79, between March and June 2002, Nicor

management lied under oath as to Nicor's performance under the PBR and the PBR program itsel f

The Truth Begins to Be Revealed

168. As reported on June 15, 2002, a Nicor employee-whistleblower sent th e

Whistlehlower Memorandum to CUB, which alleged that Nicor shortchanged ratepayers by $13 3

million over the prior two years through manipulation of the PBR . Accordingly, CUB moved on

June 27, 2002 before the ICC to reopen a review of Nicor's P13R plan . On June 28, 2002, Nicor' s

-59-

common stock price closed at $45 .75 per share -- down from $47 .08 per share on the preceding day.

On Friday, July 12, 2002, the Illinois Attorney General subpoenaed both the CLTB and the ICC

demanding the Memorandum be turned over. Nicor's common stock price declined from $43 .20 per

share on July 1 1 , 2002, to $41 .81 per share on July 12, 2002. On July 15, 2002, an article appeared

in Crain's Chicago Business describing the Memorandum, the CUB proceeding and the Illinois

Attorney General activities in the matter . Nicor common stock declined again -- from $40 per share

on July 15, 2002 to S38.31 per share on July 16, 2002 .

169. In its July 15, 2002 edition, released on Saturday, July 13, 2002, Crain's Chicago

Business reported that the Illinois Commerce Commission and state law enforcement officials were

alerted by a "whistleblower memo" from a current Nicor executive revealing the Company's

practices under the PBR program . As a result, the ICC announced it would commence an

investigation based on the allegations from the memo that Nicor boosted profits and overcharged its

customers by manipulating the PBR plan, The article stated, in part, the following :

The regulatory agency began looking into the matter after the Citizen's Utility Board(CUB) provided it with an in-depth memorandum believed to be written by a Nicorwhistle-blower . The Chicago-based utility watchdog group received thememorandum by fax on June 21 and does not know who wrote it, although the CUBbelieves the author has intimate knowledge of the PBR program .

****'K

The memo alleges that the utility shortchanged ratepayers by $133 million over thelast two years, a source familiar with the document says . While that claim is boundto come under fire from Naperville-based Nicor, the level of detail provided in thememo is prompting the ICC and law enforcement agencies to take it seriously .

Nicor's BPR program rewards the company if it delivers gas to its 2-million plussuburban Chicago customers at a price cheaper than a floating "Benchmark ." TheBenchmark is set using an average price from several gas prices indexes, adjusted forfactors like pipeline costs, which are fixed, and the timing of gas injections into andwithdrawals from storage facilities, which fluctuate .

-60-

Under the system, if Nicor's gas cost falls below the Benchmark, it splits thedifference with its ratepayers in the form of lower rates, keeping 50% of the savings .If the price exceeds the Benchmark, ratepayers and Nicor share the financial painequally.

The whistle-blower's memo alleges that the company used several methods to padits bottom line, according to a source familiar with the document . For example, thememo says the company took most of the gas it had in storage and sold it at a loss inlate 1999, immediately before the plan went into effect, resulting in $16 million incosts that were shouldered by taxpayers .

In addition, the memo alleges that Nicor took advantage of abnormally high gasprices in the summer of 2000 to manipulate the storage adjustment in order toartificially inflate the Benchmark price in 2001, making it easier to beat . That costratepayers about $70 million, the memo states, although it's not clear how thewhistle-blower arrived at that figure .

The source says the memo also raises concerns over two multimillion-dollar Nicorcontracts with consultants and losses that are allegedly linked to the company'sderivatives program. It also alleges that the company inflated the amount of gas itactually delivered to customers during three months last year, the source says .

170. On Monday, July 15, 2002, Nicor issued a press release announcing that it was

providing additional data to the Illinois Commerce Commission related to the PBR program in

connection with an anonymous document that was reported to the Citizen's Utility Board .

Nicor Gas today reported that it is fully cooperating with the Illinois CommerceCommission (ICC) to provide additional data related to the company ' s PBR program .Nicor Gas is providing this in connection with reports that an anonymous documentwas provided to the Citizen's Utility Board and the Illinois Commerce Commissionconcerning Nicor C~as' PBR program .

Nicor Gas' performance based rate program was originally approved by the IllinoisCommerce Commission and began in January 2000. The PBR provides an incentiveto Nicor Gas to purchase natural gas at costs below a market-based Benchmark, whilemaintaining a safe and reliable supply of natural gas .

"The PBR has resulted in a two-year savings of 27 million dollars for our customersbecause we outperformed the market-based Benchmark," said Don Ingle, Director ofCorporate Communications .

-61-

An TCC review of the PBR was established as part of Nicor Gas' original PBRprogram. "This review is the appropriate forum for evaluating the PBR and Nicor Gaswill continue to cooperate fully in the process, Ingle concluded .

171 . On Tuesday, July 16, 2002, the Chicago Tribune reported additional facts concerning

the Whistleblower Memorandum :

An internal memo for a Nicor Inc . executive to a colleague warned about the use ofa questionable accounting method to record the utility ' s natural gas purchases,according to a document provided by a whistle -blower .

But the warning went unheeded , allegedly costing ratepayers millions of dollars,according to sources familiar with the matter . The executive ' s correspondence,contained in a highly detailed fax from a Nicor whistle -blower, is part of an IllinoisCommerce Commission probe of the Company' s accounting practices . . . . The 2-year-old Nicor program has been under review since January .

Jerome Micrzwa , president of Exeter Associates , Inc., a utility consulting service,testified at an ICC hearing that Nicor distorted the Benchmark p rice . This involvedpurchasing gas in the summer of 1999 and withdrawing the gas from storage duringJanuary through March 2000 . But Nicor calculated the Benchmark as though it hadpurchased the gas in July of 2000 .

172. The price of Nicer common stock closed on Tuesday, July 16, 2002 at $38.31 per

share , down $3 . 50 per share or 8% from it closing price on Friday, July 12, 2002 .

173. After the close of regular trading on Thursday, July 18, 2002, Nicor issued a pres s

release announcing its preliminary results for the second quarter ended June 30, 2002, which were

well below the projections made by Fisher in the Company's April 17, 2002 press release . The July

18, 2002 press release announced a $2 .9 million second quarter charge to reverse revenue recorde d

in the first quarter of 2002 with respect to the PBR program . The Company also announced that a

restatement of prior period earnings may be required with respect to the PBR program. The pres s

release also revealed accounting irregularities at Minor Energy, a joint venture with Dynegy, that

resulted in a $10 .6 million charge to earnings for the six months ended June 30, 2002 . The press

release stated, in relevant part, the following :

-62-

Nicor Inc. today reported preliminary second quarter 2002 net income, operatingincome and diluted earnings per share of $17 .1 million, $44 .1 million and $ .38,respectively. This compares to second quarter 2001 net income, operating income anddiluted earnings per share of $26.7 million, $52.9 million and $ .59, respectively,

For the six months ended June 30, 2002, preliminary net income, operating incomeand diluted earnings per share were $57 million, $105 .7 million and $1 .28,respectively, This compares to net income, operating income and diluted earnings pershare for the same 2001 period of $65 .5 million, $120 .9 million and $1 .44,respectively .

Results for both the quarter and six-month period were negatively impacted by twosignificant factors ,

Other income included apre-tax loss of $9 .3 million and $10.1 million for the quarterand six-month period, respectively, related to the company's 50% ownership in NicorEnergy LLC, a retail energy marketing joint venture . Negative pre-tax .. adjustmentswere recorded for the quarter and six-month period of $1 .6 million and $4.3 million,rospectively, and resulted from a year-end 2001 independent audit . The quarter alsoincludes a $3 .7 million pre-tax adjustment. associated with a revy_ ion of the Lintventure's first quarter estimate for accrued unbilled revenue and a pre -W har a of

2 .6 million related primarily to Previously unrecorded liabilities . In the secondcarter, the owners of the venture and new Ni or Ener management commenced

a review of Nicor Energy's business strategy accounting practices, controls andfinancial results . It is unknown at this time whether additional adjustments will berequired, However, the review process to date uncovered irregularities in accountingat Nicor Energy that were part of the reason for the adjustments referred to above .

Second quarter results also include reversal of the $2 .9 million pre-tax earningsestimate for the company's gas distribution segment's PBR, program made in thefirst quarter . As a result of this reversal, the current six-month period f nancial resultsdo not include any earnings impact for the PBR program .

Under the PBR plan, Nicor Gas' total gas supply costs are compared to a Benchmarktied to a market index. Savings and losses relative to the Benchmark are sharedequally with sales customers . The company's earnings included pre-tax income of$14,9 million in 2001 and $12 .2 million in 2000 related to the program . There haverecently been allegations that the company acted improperly in connection with thePBR program, and the ICC has advised the company that it is reviewing theseallegations . Other governmental agencies are also reviewing these allegations . Thecompany has indicated that it will cooperate fully in the review o f the PBR program .

In response to these allegations, the Nicor Inc . board of directors today appointed aspecial committee of independent, non-management directors to conduct an inquiryinto issues surrounding natural gas purchases, sales, transportation and storage. BruceBickner, who is also chairman of the hoard's audit committee, will chair the specia l

-63-

committee. Other members of the committee are John Birdsall, Tom Donahue andJohn Jones. The special committee has retained Scott Lassar ofthe law firm of SidleyAustin Brown & Wood to advise the committee and to assist with the inquiry. Mr .Lassar was formerly the United States Attorney for the Northern District of Illinois .

The reversal for the first quarter reflects the uncertainties surrounding the review andthe resultant inability to reasonably estimate the probability of the PBR_program'scontinuation In addition it i possible that a a result of the allegations -relating toth PBR 12ro am the coan an will have to restate some prior period financial resultsor take a charge against future earning . Although the extent ofor need for any suchrestatement or charge is not currently known .

While our primary businesses remain solid, we are nonetheless managing throughsome challenging, but critical times in our retail energy marketing joint venture," saidThomas L. Fisher, chairman, president and chief executive officer . "Today, ourefforts are focused on stabilizing this joint venture, while adding more certainty to itsfinancial results. The Illinois Commerce Commission review process provides anappropriate forum for evaluating the PER and Nicor Gas will continue to cooperatefully in the process . With regard to our annual outlook, assuming normal weather forthe remainder of the year, we anticipate revised earnings per share of $2 .65 to $2 .80including second quarter adjustments discussed above and no income estimated forthe PBR; the third quarter portion is in the range of $ .40 to $ .50 per share .

(emphasis added) .

174. After Nicor ceased manipulating the PBR and engaging in accounting irregularitie s

it was unable to inflate its quarterly earnings with PBR-related income and was no longer able to

keep pace with analysts' expectations . Thompson/First Call analysts had projected second quarter

EPS of $ .65 . However, Nicor's reported diluted EPS was only $ .46 --missing analysts' estimate by

$ .19 . According to Nicor, this decrease was "primarily attributable to lower operating results in the

gas distribution segment and lower equity investment results from Nicor Energy . "

175, On July 19, 2002, Nicor issued a release supplementing its July 18, 2002 pres s

release :

To supplement Nicor Tnc .'s press release of July 18, the Company today indicatedthat while the ultimate disposition of the issues discussed regarding its Nicor EnergyLLC, a retail energy marketing joint venture , and the Nicor Gas PBR plan may havea material adverse effect on earnings in a particular period , they are not expected tohave a material adverse impact on the Company ' s liquidity or financial position .

-64-

share of operating results at Nicor Energy, a retail energy marketing joint venturewith Dynegy Inc . (Dynegy). These amounts include negative pretax adjustments of$2.3 million and $5 .6 million, respectively, related to a year-end 2001 independentaudit of Nicor Energy completed in May 2002 . In the second quarter, as a result ofthe audit findings, the owners of the venture and new Nicor Energy managementcommenced a review of Nicor Energy's business strategy, accounting practices,controls and financial results. The review process identified irregularities inaccounting and additional accounting errors and adjustments at Nicor Energy thatwere also part of the reason for the losses referred to above, It is unknown at thistime whether additional adjustments will be required, although the review offu ncialresults through June 30, 2002 is substantially complete. Year-to-date losses fromNicor Energy include some error corrections related to 2001 that the company doesnot consider material .

At June 30, 2002, Nicor held a $1 .3 million short-term note receivable from NicorEnergy at market interest rates and had outstanding guarantees of$14 million relatedto the joint ventures' borrowings under a line of credit and $4,4 million related toaccounts payable . Nicor's maximum exposure under its guarantee commitments onbehalf of Nicor Energy is $15 million related to the line of credit and $29 millionrelated to payables and other commitments . In addition, Dynegy has asked Nicor toguarantee up to $24 million of Nicor Energy accounts payable for gas and electricpurchases from Dynegy, and Nicor has not acted on this request . While it isreasonably possible that Nicor will be required to make payments under theguarantees, Nicor cannot estimate the amount, and no liability has been recorded .Nicor had a negative $4 .8 million equity investment in Nicor Energy at June 30,2002.

In April 2002, Nicor and Dynegy Inc . renegotiated their joint venture agreementextending the original agreement, which would have expired in mid-2002, by riveyears . Nicor Energy is dependent on the financial support of both equity investors,and Dynegy is the joint venture's primary energy supplier . If either equity investorfails to continue its support of the joint venture, the effect on Nicor Energy couldcause Nicor to make payments under the guarantees noted above .

As a result of the adjustments, review process and other matters referred to above,Nicor is currently evaluating alternatives to its continued involvement with NicorEnergy. The outcome of this evaluation cannot be reasonably estimated, although itis possible that the company may need to make payments under its guarantees .

(Id, p . 8 . )

181 . On October 29, 2002, in a press release , Nicor announced the findings from th e

independent investigation into Nicor's business and financial matters . The Sidley Austin Repor t

revealed the various illegal and manipulative schemes designed and employed by Nicor to increas e

-67-

its earnings and inflate its stock price . In response to this report, Nicor announced that it woul d

restate its financials for fiscal year end 1999-200 1 and for the first two quarters of 2002, as follows :

Nicor today pledged to strengthen its policies and procedures to rectify shortcomingsin the implementation of Nicor Gas' PBR plan as outlined in an independentcounsel's report issued to a Special Committee appointed by Nicor's Board ofDirectors . Nicor also announced . . . that prior finances will be restated and thereforecaring! be relied upon; termination of its P8R plan effective 3anu . ry,1, 2003 : and itsintention to exit from its Nicor Energy joint venture .

After thorou lily reviewing the independent counsel's report, and. on behalf of ourentire senior leadership team, I apologize for the mistakes that occurred at Nicor Gasand I Wedge to take whatever measures are necess .ry to ensure that this does nothappen again," said Thomas L. Fisher, Nicor Chain-nan, Pr dent and CEO . Theintent of the PBR program was to align customer and shareholder interests, butclearly we failed to execute properly . We accept the findings and conclusions of thisreport and we will continue to cooperate fully with the yngoin Illinois CommerceCommission ICC review . "

Certain transactions increased customer costs in the aggregate amount ofapproximately $15 million. Examples of errors identified in the report include a late1999 wholesale transfer of natural gas from Nicor Gas storage inventory whichincreased customers' gas costs by approximately $6 .75 million . The report also foundthat operational transfers of natural gas between Nicor Gas' storage fields were notconsistently accounted for under the PBR ,

Additionally, the calendar year PBR calculations include the cost of gas charged tocustomers as well as volumes withdrawn from inventory . As a consequence ofchanges in both or those amounts, Nicor believes that PBR results in prior periodswill change and net income is required to be restated ,

The restatements will include the adjustment $ related ton tural gas inventoLry andaccrued gas costs corrections for PBR results, and for other out-of-period correctionsnot related to the PBR that are more properly reflected in periods other than the onesin which the were initially reported . These restatements could be materially affectedby ICC review .

-68-

Due to the uncertainties surrounding the gas distribution segment's PBR plan, thecompany's newly appointed independent public accountant have been unable tocomplete their review of the company's 2002 interim fin .racial results . Consequently,the c m.pany's reports on Form 10-Q for the first quarter, as amended, and secondquarter of 2002 are notpresently in compliance with the SEC's rule _requiring thefinancial results in uarterl reports to have such a review .

(emphasis added) .

179, On August 13, 2002, Nicor filed its Form 10-Q with the SEC for the quarter ende d

June 30, 2002 . The 10-Q reported a decrease in operating income by 23% and 16% for the second

quarter and six months ended June 30, 2002, respectively. The reversal of PBR program revenues

and the subsequent termination of the Program were given was primary reasons for the decrease in

operating income as follows :

Gas distribution operating income decreased in the second quarter to $37.9 million,from $49 . 1 million a year ago . For the six months ended June 30, 2002 , operatingincome decreased to $95 ,7 million , from $113 .7 mi ll ion in 2001 . The two 2rimaryfactors causin lower quarter and six-month pe riod results wQrc the PBR plan andhigher operating costs, including increased depreciation expense ,

Nicor Gas recorded PBR plan results of $(4 .2) million and $1 .7 million for thesecond quarter of 2002 and 2001, respectively, and $(1 .3) million and $4 .2 millionfor the six months ended June 30, 2002 and 2001, respectively, The year-to-date 2002period no longer includes any estimated PBR plan results related to the 2002 planyear due to the developments described in the PBR section beginning on page 9 . Theyear-to-dateperiod also includes negative pretax corrections X2001 PBRplanresuitsof $.4 million and $1 .3 million recorded in the three- and six-month periods endedJune 30, 2002, respectir.ely.

(Nicor June 30, 2002 Form 1U-Q, p . 14)(emphasis added) .

180. In the 1 Q-Q, Nicer revealed that an audit uncovered irregularities in accounting an d

additional accounting errors and adjustments at Nicor Energy, resulting in a non-operating pre-tax

loss of $5.7 million and $10.9 million for the quarter and the six-month periods, as follows :

In 2002, other income included a pretax loss of $5 .7 million and $10,9 million for thequarter and six-month periods, respectively, related to the company's 50-percen t

-66-

176. On July 19, 2002, Nicor common stock closed at $22.75 per share , down $15 .75 per

share or 41% from its closing price on July 18, 2002, and down $26 .25 per share or 54% from its

Class Period high price of $49 .40 .

Post Class Period Event s

177. On July 25, 2002, Nicor issued its "2002 Mid-Year Report to Shareholders" whic h

reported the reversal of PIER earnings, uncertainties about the PBR's results and the "inability t o

reasonably estimate the probability of the PBR's continuation," as follows :

Second quarter results also include reversal of the $2 .9 million pretax earningestimate for th company's was distribution segment's PBR_Dro m for _the firstquarter . Asa result of this reversal, th current six-month period financial results donot include earnings impact for the PBR program .

The reversal for the first quarter reflects the uncertainties surroundin the review andthe resultant inability to reasonably estimate the probability of the PBRpr am',",continuation.

(Nicor 2002 Mid-Year Report to Shareholders, p . 1)(emphasis added) .

178 . On August 12, 2002, Nicor announced in a press release that its six months ende d

2002 earnings would be reduced from the preliminary earnings announcement on July 18, 2002 due

to a review of the PBR program and Nicor Energy. Nicor further reported that due to the

uncertainties surrounding Nicor Energy and the PBR, Nicor's newly appointed accountants could

not perform the quarterly review required by the SEC :

Preliminary second quarter and six months ended earnings, which were announcedon July 18, included adjustments associated with the gas distribution segment's PBRplan and several items affecting Nicor Energy . It is possible that the outcome of thes e

period financial results or take charges against future earnings . Those charges couldbe material to earnings in a particular period. The ou.com.e of these items is notexpected to have a materi al adverse i in act on the om an 's liquidity or financialcondition.

-65-

Due to uncertainties surrounding, the PBR . Nicor Gas has not recorded any PBRresults related to the 2002 PBR plan year . Also, in a letter dated October 28, 2002NicorGas informed the ICC that it is terminating its PBR plan effective January 1,2003 .

(emphasis added) .

S I,ENTER ALLEGATIONS

182. The intentional and/or reckless nature of the conduct by Nicor and the Individual

Defendants is reflected b y the following :

(a) The formation in 1998 of the Inventory Team, issuance of the InventoryReport in 1998 and implementation in 1999 through 2002 of the inventoryliquidation schemes (1J 47-51 ) ;

(b) Nicor's misrepresentations and omissions about the LIFO inventoryliquidation scheme in ICC proceedings prior to passage of the PBR (11152-55);

(c) Nicor senior management's adoption of the improper 1999 gas sales overinternal objections articulated in the December 1999 meeting (111161-63) ;

(d) Nicor senior management's recording of phony gas "withdrawals" by usin g"virtual storage" was implemented over internal objections in September2000 (1110 67-70) ;

(e) Nicor senior management's improper imposition on ratepayers of insurancepremium costs occurred over internal objection in 2000 (¶¶ 71-72) ; and

(f) Nicor senior management's misrepresentations under oath in proceedingsbefore the ICC between March and June 2002.

183 . The scienter of Nicor and the Individual Defendants is further reflected i n

management's desire to exercise "control" over its reported earnings in order to meet analyst

earnings forecasts . During the Class Period, Nicor was followed closely by a number of securities

analysts including : A.G. Edwards & Sons ; IBC World Markets ; Credit Suisse First Boston ; Edward

Jones ; Merrill Lynch Global Securities ; Robert W. Baird & Co .; Salomon Smith Barney ; SNL

-69-

Financial ; and Standard & Poor's . As a result of the fraud, Nicor consistently met or exceeded ,

within pennies, analysts' earnings expectations for each quarter as reported in ThompsonlFirst Cal l

as follows :

Nicor Inc .First Call Earnings Estimates vs A .ctuals

Q 1(March )

Q2(June)

Q3(September)

Q4(December)

Fisca lYear

2000 Estimates .83 .65 .49 .85 2.8 3

2000 Actuals .83 .66 (1 .37)2 .87 1 .001

2001 Estimates .83 .69 .55 ,97 3 .06

2001 Actuals .85 .59 .734 1 .01 3 .1 7

2002 Estimates .88 .65 .63 .87 3 .1 9

2002 Actuals .90 .465 .68 N/A N/A

'This financial figure is the "diluted loss per common share"obtained from Nicor's Form 10-Q for the quarter ended September 30, 2000 filed with the SEC on or about November 7, 2000, Thisdiluted loss of $1 .37 was a result of an "unusual charge of $148 million" "recorded as operatingexpense in the third quarter of 2000 related to the company's mercury inspection and repairprogram." Since the after-tax effect of this charge was $1 .96 per share, excluding the unusual charge,the diluted earnings per common share was $.59 .

'This financial figure is the"diluted earnings per common share" obtained from Nicor's Form10-K for the year ended December 31, 2000 filed with the SEC on or about March 12, 2001 .However, excluding the unusual charge in the third quarter, the diluted earnings per common sharewas $2 .94 .

4This financial figure is the "diluted earnings ( .loss) per share"obtained from Nicor's Form10-Q for the quarter ended September 30, 2001 filed with the SEC on or about October 31, 2001 .Excluding the "unusual mercury-related impacts" of third quarter 2000, Nicor's diluted earnings pershare was $ .61 .

'This financial figure is the "diluted earn ings per share" obtained from Nicor 's Form 10-Qfor the quarter ended June 30 , 2002 filed with the SEC on or about August 13, 2002 . This decreaseis "primarily attributable to lower operating results in the gas distribution segment and lower equityinvestment results from NicorEnergy, LLC (Nicor Energy), the company 's 50-percent-owned retailenergy marketing joint venture .

-70-

1$4. Nicor's scienter is also reflected in the motivation to profit from insider sales . After

the implementation of the PBR, the Individual Defendants continued to amass an enormous number

of stock options , exercisable at future dates . The Individual Defendants did not foresee the IC C

uncovering their elaborate, multi-layered fraud and anticipated exercising these options based o n

future artificially inflated stock prices as a continued result of their fraud under the PBR plan .

During the Class Period, the "positive" earnings performance presented to analysts inflated Nicor

common stock , which then drove stock prices into the mid to high $40s dollar range . In the weeks

leading up to the whistleblower employee's exposure of Nicor's alleged fraudulent practices, Nicor' s

insiders exercised stock options, a practice that had not occurred in the preceding three years, an d

liquidated substantial portions of their holdings in Nicor common stock at these artificially inflated

prices :

THOMAS FISHER, CHAIRMAN, CHIEF EXECUTIVE OFFICER,PRESIDENT, AND DIRECTOR

Date Shares Price Proceeds

11/07/2001 95,000 $38.07 - $38.80 $3,652,000

02/19/2002 32,100 $41 .00 $1,316,100

TOTAL 127,100 $4 ,968,100

KATHLEEN HALLORAN, EXECUTIVE VICE PRESIDENTOF FINANCE AND ADMINISTRATIO N

Date Shares Price Proceeds

05/01/2002 11,000 $46,89 $515,790

-71-

PHILIP CALI, EXECUTIVE VICE PRESIDENTOF OPERATION S

Date Shares Price Proceeds

04/05/2002 11,000 $46.21 $508,31 0

GEORGE BEHRENS, VICE PRESIDENT OFADMINISTRATION AND TREASURER

Date Shares Price Proceeds

03/27/2002 2,500 $45 .01 $112,525

051231200 2

1 TOTAL

5,000

7,500

$48 .79 $243,95 0

$356,47 5

NICOR'S VIOLATIONS OF GAA P

185. At all relevant times, Nicor represented that its financial statements , when issued,

were prepared in conformity with GAA.P. GAAP are the uniform rules, conventions and procedures

that define accepted accounting practice at a particular time. As set forth in SFAC No, 1, Objectives

of Financial Reporting by Business Ente rises, one of the fundamental objectives of financia l

reporting is to provide accurate and reliable in formation concerning an entity's financial performanc e

during the period being presented . Paragraph 42 of SFAC No. 1 states as follows :

Financial reporting should provide information about an enterprise's financialperformance during a period . Investors and creditors often use information about thepast to help in assessing the prospects of an enterprise . Thus, although investmentand credit decisions reflect investors' and creditors' expectations about futureenterprise performance, those expectations are commonly based at least partly onevaluations of past enterprise performance .

186. The SEC re wires that public companies file quarterly and annual financial statement s

that are prepared in conformity with GAAP_ SEC Rule 4-01(a) of Regulation S-X states that

"[flinancial statements filed with the Commission which are not prepared in accordance wit h

-72-

generally accepted accounting principles will be presumed to be misleading or inaccurate ." 17 C.F.R.

210.4-01(a)(1) .

187. Management is responsible for preparing financial statements that conform with

GAAP . The AI PA Professional Standards provide that ,

The financial statements are management's responsibility . . . . Management isresponsible for adopting sound accounting policies and for establishing andmaintaining internal controls that will, among other things, record, process,summarize, and report transactions (as well as events and conditions) consistent withmanagement's assertions embodied in the financial statements . The entity'stransactions and the related assets, liabilities and equity are within the directknowledge and control of management . . . . Thus, the fair presentation of financialstatements in conformity with generally accepted accounting principles is an implicitand integral part of management's responsibility .

AU § 110.03

188. The Company's financial statements for its fiscal years ended December 31, 1999 ,

December 31, 2000, and December 31, 200 1 'violated GAAP by improperly recognizing revenue an d

expenses, and failing to properly account for inventory ,

189. Nicor violated the requirements ofFASB statement No. 49 which sets forth standard s

with respect to the accounting for product financing arrangements . One type of product financing

arrangements is an arrangement in which a sponsor (the enterprise, in this case Nicor, seeking to

finance product pending its future use or resale) arranges for another entity (in this case IMD) to

purchase a product on behalf of the sponsor and, in a related transaction, agrees to purchase the

product from the other entity . [SFAS 49 par. 3b] . Nicor's "Storage-Prefill" transactions as

described in paragraphs 63-65 above, are just this type of arrangement .

190. Under SFAS No . 49 product financing arrangements are considered borrowing

transactions that, in substance, are no different from transactions in which the sponsor of th e

transaction obtains third-party financing to purchase inventory . Even though legal title to the

-73-

inventory may not pass to the purchaser under the product financing arrangement, the risks and

benefits of ownership are transferred by the other entity to the purchaser . SFAS No . 49 requires that

the sponsor record the inventory and the related liability for the financing when the product is

purchased by the other entity in this type of transaction if the product financing arrangement has both

of the following characteristics ,

(a) The financing arrangement requires the sponsor to purchase the product, asubstantially identical product, or processed goods of which the product is acomponent at specified prices, The specified prices are not subject to change except

for fluctuations due to finance and holding costs. This characteristic ofpredetermined prices also is present if, among other things, the sponsor is not

required to purchase the product but has an option to purchase the product, theeconomic effect of which compels the sponsor to purchase the product ; for example,an option arrangement that provides for a significant penalty if the sponsor does notexercise the option to purchase . [SFAS No. 42 115(a) ]

(b) The payments that the other party will receive on the transaction are established bythe financing arrangement, and the amounts to be paid by the sponsor will beadjusted, as necessary, to cover substantially all fluctuations in costs incurred by theother entity in purchasing and holding the product (including interest) . [SPAS No . 421~ 5(b) .

Nicor's "Storage Prefill" inventory transactions had the two characteristics set forth in SFAS No . 49

115(a) and 5(b) in that Nicor had agreed to purchase the gas at a fixed price and it was clear that Nicor

agreed to pay IMD its carrying costs including interest and storage costs . They also had other

characteristics that commonly exist in product financing arrangements in that the pre-fill gas was to

be used or sold by Nicor (SFAS 49 ¶4(b)) and was stored in Nicor's on system facilities (SFAS 49,

¶ 4(c)). Pursuant to the arrangement, IMD gave up its right to withdraw the gas once it was injected,

thereby transferring all of the risks and benefits of ownership to Nicor . Therefore, Nicor's "Storage

Prelill" inventory transactions should have been accounted for at the time of receipt as product

financings . Accordingly, the pre-fill gas should have been recorded on Nicor's balance sheet as

inventory with a related liability to IMD for the agreed-upon purchase price .

-74,-

191, SFAC No, 5~j 83 and 84 sets forth the basic principles for revenue recognition by an

entity .

(a) SFAC No . 5, 1183(a), states that "Revenues and gains generally are notrecognized until realized or realizable , Revenues and gains are realized whenproducts , . . or other assets are exchanged for cash or claims to cash .Revenues and gains are realizable when related assets received or held arereadily convertible to know amounts of cash or claims to cash, . . ."

(b) SFAC No. 5,1(83(b), states that "Revenues are not recognized until earned .An entity's revenue-earning activities involve delivering or producing good s

, . and revenues are considered to have been earned when the entity hassubstantially accomplished what it must do to be entitled to the benefitsrepresented by the revenues . "

(c) SFAC No. 5, ¶84(a), states that "The two conditions (being realized orrealizable and being earned ) are usually met by the time product ormerchandise is delivered . . . to customers , and revenues from manufacturingand selling activities and gains and losses from sales of other assets arecommonly recognized at time of sale (usually meaning delivery) . "

(emphasis added) .

192. By recognizing revenue from the sale to IMD in December of 1999, Nicor violated

SFAC No. 5, which sets forth general revenue recognition principals and SEC Staff Accountin g

Bulletin No. 101, Revenue Recog i ion in Financial Statement ("SAB 101"), which indicates that

revenue is realized or realizable and earned when all of the following criteria are met .

(a) Persuasive evidence of an arrangement exists ,

(b) Delivery has occurred or services have been rendered ,

(c) The seller' s price to the buyer is fixed or determinable, and

(d) Collectibility is reasonably assured .

As required by the above guidelines, Nicor never completed the earnings process because it neve r

transferred the risks and rewards of ownership of the gas to IMD, Under the December 1999 sales

agreement with IMU, Nicer sold 19.8 Bcf of gas to IMD at $2 .20 per Mcf. Nicor agreed to

-75-

repurchase the gas over the ensuing four months at the then current first of the month index price .

Since Nicor had an obligation to repurchase the gas from IMD, it had a continuing involvement with

the gas and thus it never effectively delivered the product to D and thus never completed the

earnings process .

193 . The doctrine that revenue is not to be accounted for until the earnings process is

complete is a well established principle of GAAP, and it has been reaffirmed by the SEC on

numerous occasions, including Accounting and Auditing enforcement Release No. 817 (September

19, 1996), which states :

Under APB Statement No. 4, which was rescinded in March 1993, revenue wasgenerally recognized when (1) the earnings process was complete or virtuallycomplete, and (2) an exchange had taken place . This revenue recognition concept hasbeen carried forward in FASB Statement of Financial Accounting Concepts No, 5para. 83-84, and in other authoritative literature and continues to provide thefoundation for revenue recognition in accordance with GAAP .

In addition, Accounting and Auditing Enforcement Release No . 812 (September 5, 1996) states :

Generally Accepted Accounting Principles (' GAAP") provide that revenue shouldnot be recognized until an exchange has occurred, the earnings process is complete,and the collection of the sales price is reasonably assured . These conditionsordinarily are met when products are exchanged for cash or claims to cash, and whenthe entity has substantially performed the obligations which entitle it to the benefitsrepresented by the revenue .

194 . Nicor continued to violate FSAC No. 5 and SAB 101 by recognizing revenue fro m

its storage agreement with TMl] entered into in April 2000 . Pursuant to Nicor's premeditated and

developed strategies to optimize the value of its storage, Nicor entered into a storage agreement with

LM-D . This agreement covered the storage Nicor leased from NGPL . The agreement required IMD

to inject a certain amount of gas into storage during the summer of2000 . In return, Nicor had agreed

to repurchase from IMD in No vember 2000, December 2000 and January or February 2001 a portion

-76-

of the amount injected into storage by LMD . As set forth in the paragraphs above , because Nicor had

an obligation to repurchase the gas from TMD, the transaction cannot be recognized as a sale .

DEFENDANT ARTHUR ANDERSEN 'S GAAS VIOLATIONS AND SC1ENTElt

195 . Most gas companies value their gas inventory under the LIFO method . As a result,

it was not unusual for a gas company with substantial storage capability such as Nicor , to have

valuable low-cost inventory. However, what was highly unusual was that a gas company operating

under the LIFO method . would be able to incur LIFO decrements and access its low -cost inventory.

This is because operationally , a gas company the size of Nicor must constantly acquire new gas and

maintain its inventory to meet demand . As a result, it would be difficult for Nicor to both meet its

operational needs and incur a bona fide LIFO decrement . In 2000 , Andersen knew Nicor was

"accessing " older low-cost inventory in its earnings. This fact alone was highly unusual and should

have caused careful audit scrutiny . Even minimal scrutiny would have revealed that Nicor's

accounting for the third -party contracts it used to justify accessing the low-cost inventory violated

GAAP . Such minimal scrutiny wou ld also have uncovered "virtual storage" and the physically

impossible amount o tinfield trans fers in 2001 . Finally, the rampant income manipulations by senior

Nicor management during the Class Period could only have occurred in the absence of meaningful

administrative and accounting controls ,

196 . Andersen served as Nicor 's purportedly "independent " outside auditors from as early

as 1954 .

197 . Andersen ' s unqualified audit opinions with respect to Nicor's financial results for the

years ended December 31, 2000 and December 31, 2001 gave assurance to Nicor ' s Board and the

investing public that : ( 1) Arthur Andersen had audited Nicor ' s financial statements in accordance

with generally accepted auditing standards ("GAAS") ; (2) it had planned and performed the audits

-77-

to obtain reasonable assurance that the financial statements were free of material misstatement ; (3)

in its opinion, Nicor's financial statements presented fairly, in all material respects, the financial

position of Nicor in conformity with generally accepted accounting principles ("GAAP") ; and (4)

Arthur Andersen's audits provided a reasonable basis for its opinions .

Red Flags Known to Andersen in the Audits of theFiscal 2000 and 2001 Financial Statements

198. Andersen had actual knowledge in 2000 that Nicor was taking the unusual step of

accessing its low-cost, older gas inventory . Despite this knowledge, Andersen turned a blind eye in

its 2000 and 2001 audit to Nicor's pervasive fraudulent schemes to achieve such access and issued

unqualified audit opinions on Nicor's financial statements for its fiscal years ended December 31,

2000, and December 31, 2001 .

199, Speci Really, Andersen's reckless disregard for the following risk characteristics and

"red flags" relating to Nicor's new PBR computation in its fiscal 2000 and 2001 financial statements :

(a) Andersen knew that in 1999 Nicor lobbied for a new regulatoryscheme which became effective in 2000 and created the potential forearnings manipulation ;

(b) Andersen, either intentionally or recklessly, ignored the improperthird-party contracts entered into in 2000, 2001 and 2002 which weredesigned and used to inflate earnings under the PBR ;

(c) Andersen, either intentionally or recklessly, ignored Nicor'srecognition of revenue for gas which was never actually sold ;

(d) Andersen, either intentionally or recklessly, ignored Nicor's failure torecord the purchase of certain gas inventory as a product financing byrecording the inventory as an asset on its balance sheet and as aliability owed to IMD for the agreed upon purchase price;

(e) Andersen , either intentionally or recklessly , ignored, Nicor's LIFOdecrements , which coincidentally began after the effective date of thePBR; and

-78-

(f) Andersen, either intentionally or recklessly, ignored the fact thatbetween October 24, 2001 and December 17, 2001, Nicor recordedwithdrawals of gas as "In-Field Transfers" on a daily basis, with theexception of just one day, which was both unusual in amount andfrequency ,

A proper i nvestigation of these red flags would have revealed Nicor' s management participation i n

the wrongdoings alleged herein.

200. Pursuant to AICPA Professional Standards AU Section 316, "The auditor has a

responsibility to plan and perform the audit to obtain reasonable assurance about whether the

financial statements are free of material misstatement, whether caused by error or fraud ." AU

Section 316 .01 . AU Section 316 lists three categories of Risk Factors that should be considered by

the auditor for purposes of meeting this obligation . One of those categories is (AU § 316 .16) :

Management's characteristics and influence over the controlenvironment . These pertainto management's abilities, pressure, styleand attitude relating to internal control and the financial reportingprocess .

201, Among the risk factors pertaining to this category are the following (AU § 315.17) :

(a) "An excessive interest by management inmaintaining or increasing the entity's stockprice or earnings trend through the use ofunusually aggressive accounting practices ."

(b) "A practice by management of committing toanalysts, creditors and other third parties toachieve what appear to be unduly aggressiveor clearly unrealistic forecasts . "

(c) "Domination of management by . . . a smallgroup without compensating controls such aseffective oversight by the board of directors oraudit committee . "

202. Nicor's switch to the PBR plan was a new audit area that presented Andersen with

a high degree of audit risk and it needed to focus on thi s area with an audit strategy characterized by ,

-79-

among other things, heightened professional skepticism and expanded audit procedures designed to

obtain more persuasive evidence that Nicor's financial statements were not materially misstated .

Such procedures would include careful investigation of the third-party contracts Nicor was relying

upon to justify the LIFO decrements, the substantial December 1999 "sales" which inflated earnings

in 2000, and the impossibly high volume of infield transfers in 2000 .

203 . Andersen failed to assess the appropriate amount of audit risk with respect to th e

factors that were part of the PBR Benchmark calculation . It's audit procedures should have been

designed to review each of the critical elements of the PBR Benchmark, Professional standards are

replete with guidance about how the auditor must respond to a high degree of audit risk in developing

an overall audit strategy . Examples include the following :

1. S.AS 22 requires auditors , in planning the audit , to take intoconsideration , "considerations that may require extension ormodification of audit tests , such as the risk of material errorsor fraud . . ." [AU § 331 par, 03 ]

2. Statement on Auditing Standard No . 47, Audit Risk andMateriality„ in conducting an Audit states :

Whenever the auditor has concluded that there issignificant risk of material misstatement of thefinancial statements, the auditor should consider thisconclusion in determining the nature, timing, or extentof procedures . . .Higher risk may cause the auditor toexpand the extent of procedures applied, apply moreprocedures closer to or as of year end, particularly incritical audit areas, or modify the extent o fproceduresto obtain more persuasive evidence. [AU § 312 par .17]

204. Arthur Andersen also failed to exercise due professional care in the performance of

its audits by exercising the appropriate level of professional skepticism. Professional skepticism is

defined in SAS No . 1, as follows :

_80-

Professional skepticism is an attitude that includes a questioning mind and a criticalassessment of audit evidence . The auditor uses the knowledge, skill, and abilitycalled for by the profession of public accounting to diligently perform, in good faithand with integrity, the gathering and objective evaluation of evidence . [AU § 230 par .47]

205 . Each of the risk factors referred to above existed at the Company, yet Anderse n

recklessly disregarded them for purposes of planning and performing its year-end audits of th e

Company.

206. Had Andersen performed its duties in accordance with GRAS, Nicor' s fraudulen t

scheme and practices would have been revealed . Contrary to its representations : ( 1) Andersen did

not conduct its annual audits in 2000 and 2001 in accordance with GAAS ; (2) it did not properly plan

it's audit by gaining a sufficient understanding of Nicor' s business practices ; (3) it did not conduct

its audits with a heightened degree of professional skepticism ; and (4 ) it did not have a reasonable

basis for its unqualified audit opinions at December 31, 2000 and 2001 . Specifically , Andersen

violated the follow auditing standards :

(a) Andersen violated General Standard No . 3 in that it did not exercisedue professional care in its performance of its audits and thepreparation of its reports ;

(b) Andersen violated Standard of Field Work No .1 in that its audits werenot adequately planned or supervised;

(c) Andersen violated Standard of Field Work No . 3, in that it did notobtain sufficient competent evidential matter to afford it a reasonablebasis for its opinions on Nicor's financial statements ;

(d) Andersen violated Standard of Reporting Neal in that its reportsstated that Nicor 's financial statements were presented in accordancewith GAAP when they were not; and

(e) Andersen violated Standard of Reporting No. 4 in that it issued itsopinions when it had an insufficient basis for expressing its opinionsas its audits had not been conducted in accordance with GAAS .

_gl_

207. Andersen's opinions, which represented that Nicor's fiscal 2000 and 2001 financial

statements were presented in conformity with GAAP, were materially false and misleading because

Andersen knew or was reckless in not knowing that Nicor's financial statements violated GAAP .

In the course of rendering its unqualified audit opinions on Nicor's 2000 and 2001 financial

statements, Andersen knew it was required to adhere to each of the herein described standards of

GAAS . Andersen, in issuing its unqualified opinions, knew or recklessly disregarded that by doing

so it was engaging in gross departures from GAAS, thus making its opinion false and misleading ;

nevertheless Andersen issued such opinions knowing or recklessly disregarding that GAAS had been

violated .

20$, Andersen knew or recklessly disregarded facts which indicated that it should not have

issued unqualified opinions on Nicor's 2000 and 2001 financial statements and should have

withdrawn, corrected or modified its opinions lbr those fiscal years to recognize Nicor's improper

accounting noted above.

209. As a result of its failure to accurately report on Nicor's 2000 and 2001 financial

statements, Andersen utterly failed in its role as an auditor as defined by the SEC . SEC Accounting

Series Release No . 296, Relationships Between Registrants and Index. endent Accountants , Securities

Act Release No. 6341, Exchange Act Release No . 18044, states in part :

Moreover, the capital formation process depends in large part on theconfidence of investors in financial reporting . An investor'swillingness to commit his capital to an impersonal market isdependent on the availability of accurate, material and timelyinformation regarding the corporations in which he has invested orproposes to invest . The quality of information disseminated in thesecurities markets and the continuing conviction of individualinvestors that such information is reliable are thus key to theformation and effective allocation of capital . Accordinaly, the auditfunction must be meaningfully performed and the accountants'independence not c rn romised. The auditor must be free to decid e

-82-

questions against his client's interests if his independent professionaljudgment compels that result .

(Emphasis added) .STATUTORY SAFE HARBOR

210. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly fal se forward-looking statements pleaded in thi s

Complaint to the extent that said forward-looking statements were not identified as a "forward-

looping statement" when made or to the extent that meaningful cautionary statements identifying

important factors that could cause actual results to differ materially from those in the forward-looking

statements did not accompany those forward-looking statements . Alternatively, to the extent that

the statutory safe harbor does apply to any forward-looking statements because at the time each of

those forward-looking statements was made, the speaker knew the forward-looking statement was

false and the forward-looking statement was authorized and/or approved by an executive officer of

the Company who knew that those statements were false when made .

COUNT I

Against Nicor and the Individual Defendants ForViolation of Section 10(b) of the Exchange Act and

Rule 101 -5 of the Securities and Exchange Commissio n

211 . Plaintiffs repeat and reallege each and every allegation contained in the foregoing

paragraphs as if fully set forth herein .

212. This Count is asserted against all defendants and is based upon Section 10(h) of the

Exchange Act, 15 U .S.C. § 78j(b), and Rule I Ob-5 promulgated thereunder .

213, During the Class Period, defendants, singularly and in concert, directly engaged in

a common plan, scheme, and unlawful course of conduct, pursuant to which they knowingly or

recklessly engaged in acts, transactions, practices, and courses of business which operated as a frau d

-83-

and deceit upon plaintiffs and the other members of the Class, and made various deceptive and

untrue statements of material facts and omitted to state material facts in order to make the statements

made, in light of the circumstances under which they were made, not misleading to plaintiffs and the

other members of the Class . The purpose and effect of said scheme, plan, and unlawful course of

conduct was, among other things, to induce plaintiffs and the other members of the Class to purchase

Nicor common stock during the Class Period at artificially inflated prices .

214. During the Class Period, defendants, pursuant to said scheme, plan, and unlawful

course of conduct, knowingly and recklessly issued, caused to be issued, participated in the issuance

of, the preparation and issuance of deceptive and materially false and misleading statements to the

investing public as particularized above .

215 . Throughout the Class Period, Nicor acted through the Individual Defendants, who m

it portrayed and represented to the financial press and public as its valid representative . The

willfulness, motive, knowledge, and recklessness of the Individual Defendants are therefore imputed

to Nicor, which is primarily liable for the securities law violations while acting in his official

capacities as Company representatives, or, in the alternative, which is liable for the acts of the

Individual Defendants under the doctrine of respondent superior .

216. As aresult ofthe dissemination of the false and misleading statements set forth above ,

the market price of Nicor common stock was artificially inflated during the Class Period . In

ignorance of the false and misleading nature ofthe statements described above and the deceptive and

manipulative devices and contrivances employed by said defendants, Plaintiffs and the other

members of the Class relied, to their detriment, on the integrity of the market price of the stock in

purchasing Nicor common stock . Had Plaintiffs and the other members of the Class known the truth ,

-84-

they would not have purchased said shares or would not have purchased them at the inflated prices

that were paid .

217. Plaintiffs and the other members of the Class have suffered hundreds of millions of

dollars in damages as a result of the wrongs herein alleged in an amount to be proved at trial .

218. By reason of the foregoing, defendants directly violated Section 10(b) of the Exchang e

Act and Rule 10b-5 promulgated thereunder in that they : (a) employed devices, schemes, and

artifices to defraud; (b) made untrue statements of material facts or omitted to state material facts in

order to make the statements made, in light of the circumstances under which they were made, not

misleading; or (c) engaged in acts, practices, and a course of business which operated as a fraud and

deceit upon plaintiffs and the other members of the Class in connection with their purchases ofNicor

common stock during the Class Period .

COUNT LI

Against Arthur Andersen LLP ForViolation of Section 10(b) of the Exchange Act

and Rule lOb-5 of the Securities and Exchange Commission

219. Plaintiffs repeat and rcallege each and every allegation contained in the foregoing

paragraphs as if fully set forth herein .

220. This Count is asserted against Arthur Andersen and is based upon Section 10(b) of

the Exchange Act, 15 U .S .C. § 78j(b), and Rule 14b-5 promulgated thereunder .

221 . During the Class Period, Andersen, singularly and in concert, directly engaged in a

common plan, scheme, and unlawful course of conduct, pursuant to which it recklessly engaged in

acts, transactions, practices, and courses of business which operated as a fraud and deceit upon the

members of the Class, and made various deceptive and untrue statements of material facts and

omitted to state material facts in order to make the statements made, in light of the circumstance s

-85-

under which they were made, not misleading to the members of the Class . The purpose and effect

of said scheme, plan, and unlawful course of conduct was, among other things, to induce the

members of the Class to purchase Nicor common stock during the Class Period at artificially inflated

prices .

222. During the Class Period, Andersen, pursuant to said scheme, plan, and unlawful

course of conduct, recklessly issued, caused to be issued and participated in the preparation and

issuance of deceptive and materially false and misleading statements to the investing public as

particularized above .

223. Asa result of the dissemination of the false and misleading statements set forth above,

the market price of Nicor common stock was artificially inflated during the Class Period . In

ignorance of the false and misleading -nature ofthe statements described above and the deceptive and

manipulative devices and contrivances employed by Andersen, the members of the Class relied, to

their detriment, on the integrity of the market price of Nicor common stock in purchasing same. Had

the members of the Class known the truth, they would not have purchased said securities or would

not have purchased them at the inflated prices that were paid .

224. The members of the Class have suffered hundreds of millions of dollars of damages

as a result of the wrongs herein alleged in an amount to be proved at trial .

225. By reason of the foregoing, Andersen directly violated Section 10(b) of the Exchang e

Act and Rule 1Ob-5 promulgated thereunder in that they: (a) employed devices, schemes, and

artifices to defraud ; (b) made untrue statements of material facts or omitted to state material facts in

order to make the statements made , in light of the circumstances under which they were made, not

misleading ; or (c) engaged in acts , practices , and a course of business which operated as a fraud an d

-86-

deceit upon the members of the Class in connection with their purchases of Nicor common stoc k

during the Class Period .

COUNT III

Against The Individual Defendants ForViolation of Section 20(a of the Exchange Ac t

226 . Plaintiffs repeat and reallege each and every allegation contained in each of the

foregoing paragraphs as if set forth fully herein .

227. The Individual Defendants , by virtue of their positions, stock ownership and/or

specific acts described above, were, at the time of the wrongs alleged herein, control persons within

the meaning of Section 20(a) of the 1934 Act.

228. The Individual Defendants had the power and influence and exercised the same t o

cause Nicor to engage in the illegal conduct and practices complained of herein .

229. By reason of the conduct alleged in Count I of the Complaint, the Individua l

Defendants are liable for the aforesaid wrongful conduct, and are liable to plaintiffs and to the other

members of the Class for the substantial damages which they suffered in connection with thei r

purchases of Nicor common stock during the Class Period .

PRAYER FOR RELIEF AND JURY DEMAN D

WHEREFORE, I lainti ffs, on their own behalf and on behalf of the Class, pray for j udgment

as follows :

A. Declaring this action to be a proper class action and certifying Plaintiffs as clas s

representatives under Rule 23 of the Federal Rules of Civil Procedure ;

B . Awarding compensatory damages in favor of Plaintiffs and the other members of th e

Class against all defendants, jointly and severally, for the damages sustained as a result of th e

wrongdoings of defendants, together with interest thereon ;

-87-

C. Awarding Plaintiffs the fees and expenses incurred in this action , including reasonable

allowance of fees for Plaintiffs' attorneys and experts ; and

D. Granting such other and further relief as the Court may deen7 just and proper.

JURY DEMAND

Plaintiffs demand a trial by jury of all issues so tr iable.

February 14, 2003 Respectfully submitted,

By.Marvin A. MillerJennifer Winter SprengelLori A . FanningMILLER FAUCHER and CAFFERTY LLP30 North La Salle StreetSuite 3200Chicago, Illinois 60602(312) 782-488 0

Plaintiffs' Liaison Counsel

Samuel P. SpareJoel P . LaitmanChristopher LornettiJay P . SaltzmanSCHHENCOLD & SPORN, P.C.19 Fulton StreetNew York, New York 1003 8(212) 964-0046

Plaintiffs' Lead Counsel

Daniel L. BergerBERNSTEIN LITOWITZ, BERGER & GROSSMAN1285 Avenue of the Americas33rd FloorNew York, New York 10019(212) 554-1400

-88-

Katharine M. RyanSCHIFFRIN & BARROWAY, LLPThree Bala Plaza EastSuite 400Bala Cynwyd, Pennsylvania 19004(610) 667-7706

Plaintiffs' Counsel

-89-