23 :.''•. for the district of massachusetts'' adele...
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Case 1:00-cv-10874-RWZ Document 1 Filed 05/08/00 Page 1 of
STATES DISTRICT COURT' :'
23
:.''•.FOR THE DISTRICT OF MASSACHUSETTS''
ADELE BRODY, on behalf of herself andall others similarly situated, Civil ti No.
Plaintiff, C' 1, 4 ROL-against- SECURITIES CLASS _, cn --^
STONE & WEBSTER, INC., H. KERNERACTION COMPLAINT
SMITH and THOMAS LANGFORD,
Defendants. JURY TRIAL DEMANDED'
cR
Plaintiff, by her undersigned attorneys for her Class Action Complaint alleges, based,
inter alia, on the investigation conducted by her attorneys and their staffs, including reviews and
analyses of public filings with the Securities and Exchange Commission, securities analysts'
reports and press releases, news articles, and other media reports as to all other matters, as
follows:
NATURE OF THE ACTION
1. This is a securities class action on behalf of public investors who purchased the
securities of Stone & Webster, Inc. ("S&W" or the "Company") between April 27, 1999 and
April 28, 2000, inclusive (the "Class Period"). Named as defendants are S&W, H. Kerner Smith
and Thomas Langford. The case involves a manipulation of financial statements in which,
among other acts of deception, defendants knowingly or recklessly overstated S&W's results of
operations, revenues, expenses, net worth and income for the fiscal year 1999.
•
2. During the Class Period, defendants assured investors that the Company's
earnings were increasing each quarter. Indeed, the defendants stated that S&W was experiencing
G.'',
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record revenues and income. On April 30, 2000, the Company dropped a bombshell on investors
when it was disclosed that it will restate its 1999 financial results. In truth, the Company's
earnings were not in the amounts that had been represented by the Company during fiscal 1999
because defendants had improperly allocated revenue and expenses in violation of Generally
Accepted. Accounting Principles ("GAAP").
3. GAAP are those principles recognized by the accounting profession as the
conventions, rules and procedures necessary to define accepted accounting practice at a particular
time. Regulation S-X (17 C.F.R. § 210.4.01(a)(1)) states that financial statements filed with the
SEC which are not prepared in accordance with GAAP are presumed to be misleading and
inaccurate. Regulation S-X also requires that interim financial statements comply with GAAP.
17 C.F.R. § 2.10.10.01(a).
4. On April 30, 2000, the Company disclosed that it would restate its financials for
fiscal 1999. By restating its financials, the defendants admitted that the representations made in
the financial statements for fiscal 1999 were materially false and misleading when made. APB
No. 20 ¶ 13.
5. During the Class Period, S&W shares traded as high as $29 per share on October
1, 1999. On April 28, 2000, the last trading day before the initial disclosure of accounting
problems at S&W, the price of the Company's common stock closed at $13 3/16 per share. The
day after the full disclosure and announcement of the restatement, the price of S&W common
stock fell to a closing average price of to $6.25 per share - a loss of more than 53% of the value
of the stock since the initial revelation on April 30, 2000.
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JURISDICTION AND VENUE
6. This Court has jurisdiction over the subject matter of this action pursuant to
Section 27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78aa, and
28 U.S.C. § 1331.
7. The claims asserted herein arise under Sections I0(b), and 20(a) of the Exchange
Act, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule I Ob-5 promulgated thereunder by the Securities
and Exchange Commission (the "SEC"), 17 C.F.R. 240.1Ob-5.
8. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28
U.S.C. § 1391(b) and (c). The principal executive offices of S&W are located in this district, the
defendants transact business in this district, and many of the acts and transactions constituting the
violations of law alleged herein, including the preparation, issuance, and dissemination of
materially false and misleading statements to the investing public, occurred in this district.
9. In connection with the acts, conduct and other wrongs alleged herein, defendants,
directly and indirectly, used the means and instrumentalities of interstate commerce, including
the United States mails and interstate telephone communications.
THE PARTIES
The Plaintiff
10. Plaintiff Adele Brody purchased 100 shares of S&W common stock during the
Class Period, as represented in the attached Certification, and was damaged thereby.
The Defendants
11. Defendant S&W is a corporation with its executive offices and principal place of
business located at 245 Summer Street, Boston, Massachusetts 02210, The Company provides
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professional, engineering, construction and consulting services for power, process, governmental,
industrial, transportation and civil works projects. The Company, through its subsidiaries,
constructs from plans developed by others, makes engineering reports and business
examinations, undertakes consulting engineering work, and offers information management and
computer systems expertise to clients. It also offers a full range of services in environmental
engineering and sciences, including complete execution of environmental projects. In addition,
S&W offers advanced computer systems development services and products in the areas of
information systems, systems integration, computer-aided design, expert systems and database
management.
12. Defendant H. Kerner Smith ("Smith") is and was, during the Class Period, the
Company's Chairman, President and CEO.
13. Defendant Thomas Langford ("Langford") is and was, during the Class Period, the
Company's Executive Vice President and CFO.
PLAINTIFF'S CLASS ALLEGATIONS
14. Plaintiff brings this action as a class action pursuant to Rule 23(a) and (b)(3) of
the Federal Rules of Civil Procedure on behalf of a class consisting of all persons and entities
who purchased securities of S&W between April 27, 1999 and April 28, 2000 (both dates
inclusive), and were damaged thereby (the "Class"). Excluded from the Class are defendants
herein, officers and directors of S&W, members of their immediate families, and the heirs,
successors or assigns of any of the foregoing.
15. The members of the Class are so numerous that joinder of all members is
impracticable. While the exact number of Class members is unknown to the plaintiff at this time
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and can only be ascertained through appropriate discovery, the plaintiff believes there are, at a
minimum, thousands of members of the Class who purchased S&W securities during the Class
Period. The Company has over 13 million shares of its common stock outstanding, and trades on
the NYSE National Market under the symbol SW.
16. Common questions of law and fact exist as to all members of the Class and
predominate over any questions affecting solely individual members of the Class. Among the
questions of law and fact common to the Class are:
(a) whether the federal securities laws were violated by defendants' acts as
alleged herein;
(b) whether S&W issued false and misleading financial statements during the
Class Period;
(c) whether the Individual Defendants caused S&W to issue false and
misleading financial statements during the Class Period;
(d) whether defendants acted knowingly or recklessly in issuing false and
misleading financial statements;
(e) whether the market prices of S&W securities during the Class Period were
artificially inflated because of the defendants' conduct complained of herein; and
(f) whether the members of the Class have sustained damages and, if so, what
is the proper measure of damages.
17. Plaintiff s claims are typical of the claims of the members of the Class as plaintiff
and members of the Class sustained damages arising out of defendants' wrongful conduct in
violation of federal laws complained of herein.
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18. Plaintiff will fairly and adequately protect the interests of the members of the
Class and has retained counsel competent and experienced in class actions and securities
litigation. Plaintiff has no interests antagonistic to or in conflict with those of the Class.
19. A class action is superior to other available methods for the fair and efficient
adjudication of the controversy since joinder of all members of the Class is impracticable.
Furthermore, because the damages suffered by the individual Class members may be relatively
small, the expense and burden of individual litigation makes it impracticable for the Class
members individually to redress the wrongs done to them. There will be no difficulty in the
management of this action as a class action.
20. Plaintiff will rely, in part, upon the presumption of reliance established by the
fraud-on-the-market doctrine in that:
(a) defendants made public misrepresentations or filed to disclose material
facts during the class Period;
(b) the omissions and misrepresentations were material;
(c) the securities of the Company traded in an efficient market;
(d) the misrepresentations and omissions alleged would tend to induce a
reasonable investor to misjudge the value of the Company's securities; and
(e) plaintiff and members of the Class purchased their S&W stock between
the time the defendants failed to disclose or misrepresented material facts and the time the true
facts were disclosed, without knowledge of the omitted or misrepresented facts.
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THE FALSE AND MISLEADING STATEMENTS
21. On April 27, 1999, the Company issued a press release reporting its
financial results for the first quarter of fiscal 1999. The press release reported:
a net loss of $58.7 million or $4.50 per share, compared with netincome of $7.6 million, or $0.59 per share for the same period in1998. Gross revenue was $339.8 million, a 15.6 percent increasefrom the first quarter of 1998. Net revenue for the current quarter,after the adjustment for the loss provision, was $266.1 million.New orders were $148.8 million compared with $226.5 million forthe first quarter of 1998. Backlog was $2.5 billion compared to$2.6 billion at December 31, 1998. Operating loss for the quarterwas $67.4 million compared to operating income of $11.6 millionreported for the same period in 1998.
Mr. Smith commented: While we are extremely disappointed inour Engineering and Construction operating results, we are takingappropriate actions to improve our performance. We intend toaggressively pursue recovery of the extra costs incurred incompleting the projects that negatively affected our operatingresults. While new orders were somewhat lower than anticipatedin the first quarter, we expect to regain momentum over the nextfew quarters, based on projects in negotiation and the strongertrends in the power sector as well as recent increases in crude oiland petrochemical prices. We have also taken steps to be moreselective in avoiding high risk, low margin business. We expectthat the improved margins included in our backlog, and ourcontinuing drive to reduce costs and operating expenses, willproduce improved results in the second half of this year.
22. On May 13, 1999, S&W filed its Form 10-Q for the first quarter of fiscal 1999,
ended March 31, 1999 with the SEC. The Form 10-Q repeated the financial information
announced in the press release dated April 27, 1999, above, and stated that "all adjustments
necessary for a fair presentation of results of the interim periods have been made and such
adjustments were of a normal and recurring nature." The Form IO-Q was signed by defendant
Langford.
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23. On July 26, 1999 the Company issued a press release in which it announced
higher operating and net income for the second quarter of 1999 compared to the same period in
1998.
For the quarter ended June 30, 1999, Stone & Webster reported netincome of $6.2 million or $0.48 per share, compared with netincome of $0.7 million or $0.5 per share for the same period in1998. Operating income for the quarter was $7.7 million comparedwith operating income of $1.2 million for the same period in 1998.
Although the industrial and process sectors have been weak overthe past year, we are definitely encouraged by our second quarterresults, which reflect the actions a have taken to streamline ourbusinesses and strengthen our operational focus, said H. KernerSmith, Stone & Webster's Chairman and Chief Executive Officer.
For the six months ended June 30, 1999, Stone & Webster reporteda net loss of $52.5 million or $4.02 per share, compared with netincome of $8.3 million or $0.64 per share for the same period in1998; the current six months results were significantly impacted byprovisions of approximately $74.0 million to cover anticipatedcosts of completing two international projects, as reported for thefirst quarter of 1999. Operating loss for the six months ended June30, 1999 was $59.6 million compared with operating income of$12.8 million for the same period last year. Severance costsreduced operating income by $2.5 million in the current quarter.Revenue for the quarter was $310.3 million, a decrease of 2.1percent from the $317.0 million reported in the same period in1998. Revenue for the first six months of 1999 was $576.4 millioncompared with $374.4 million for the first six months of 1998.Backlog at June 30, 1999 was $2.6 billion, consistent with levelsreported in December 31, 1998.
Mr. Smith commented, provisions taken in the first quarter tocover the anticipated costs of completing two international projectsadversely affected the Company's financial performance in the firsthalf of 1999. However, based on our improved operatingperformance during the second quarter, coupled with our highermargin business in backlog, we believe that our profitability willcontinue to increase through the remainder of 1999. We alsobelieve our markets are now beginning to strengthen due to the
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recovery from oil sector prices and the Asian recession, as well asthe surge in power generation projects in North America.
24. On August 12, 1999, S&W filed its Form 10-Q for the second quarter of fiscal
1998, ended June 30, 1999 with the SEC. The Form 10-Q Repeated the financial information
announced in the press release dated July 26, 1999, above, and stated that "all adjustments
necessary for a fair presentation of results of the interim periods have been made and such
adjustments were of normal and recurring nature." The Form 10-Q was signed by defendant
Langford.
25. On October 27, 1999, the Company issued a press release reporting its financial
results for the third quarter of fiscal 1999, ended September 30, 1999. The press release reported
"a net loss of $6.9 million or $0.52 per share, compared with net income of $2.2 million or $0.17
per share for the same period in 1998. Operating loss for the quarter was $4.6 million compared
with operating income of $3.9 million for the same period in 1998."
Several events contributed to the shortfall in earnings for thequarter. These included a provision of $10.4 million to coveranticipated costs to complete three major projects, a delay in therelease to start work on certain new projects which the Companyhas been advised it has won, and the impact of hurricanes andfloods in Southeast that adversely affected Stone & Webster's coldstorage business. The Company also anticipated some reversal ofpast losses through settlement of claims on certain projectsperformed in prior years, and although progress is being made innegotiations, no settlements were reached this quarter.
We are extremely disappointed in our third quarter operatingresults and the fact that these problems occurred after we posted animproved second quarter, said H. Kerner Smith, Stone &Webster's Chairman and Chief Executive Officer. Our Companyhas undergone over three years of restructuring and housecleaning.However, a critical review of our backlog of fixed-price projects byour new operating management team revealed a few projects that
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are forecast to exceed their cost estimates upon completion. Withthese provisions now made, we look forward to benefitting fromthe continued strength in the electric power market as well asstrong current performance in our consulting business. Theimproving process and industrial markets, which are emergingfrom a 20-year low, should contribute to increased business in thissegment as well.
For the nine months ended September 30, 1999, Stone & Websterreported a net loss of $59.3 million or $4.54 per share, comparedwith net income of $10.4 million or $0.81 per share for the sameperiod in 1998. The current nine months results were significantlyimpacted by provisions of approximately $74.0 million to coveranticipated costs of completing two international projects, asreported for the first quarter of 1999, and $10.4 million to coveranticipated costs of completing three domestic projects in thecurrent quarter. Operating loss for the nine months endedSeptember 30, 1999 was $64.3 million compared with operatingincome of $16.7 million for the same period last year. Revenue forthe current quarter was $297.8 million, a decrease of 15.0 percentfrom the $350.4 million reported in the same period in 1998.Revenue for the first nine months of 1999 was $874.2 millioncompared with $961.4 million reported in the same period in 1998.New orders were $719.4 million compared with $725.1 million forthe first nine months of 1998. Backlog at September 30, 1999 was$2.5 billion, down from $2.6 billion at December 31, 1998.
26. On November 15, 1999, S&W filed its Form 10-Q for the third quarter of fiscal
1998, ended September 30, 1999 with the SEC. The Form 10-Q repeated the financial
information announced in the press release dated October 27, 1999, above, and stated that "all
adjustments necessary for a fair presentation of results of the interim periods have been made and
such adjustments were of a normal and recurring nature." The Form 10-Q was signed by
defendant Langford.
27. On January 25, 2000, the Company issued a press release reporting financial
results for the fourth quarter and year ended December 31, 1999.
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For the quarter ended December 31, 1999, Stone & Websterreported net income of $79.8 million or $6.01 per share, whichincludes a gain of $151.3 million ($92.2 million after tax or $6.94per share) from the sale of the Company's headquarters building inBoston. This compares with a net loss of $59.7 million or $4.64per share for the same period last year. Operating loss was $44.3million and $91.6 million, respectively, for the quarters endedDecember 31, 1999 and 1998.
Full year revenue for 1999 was $1.17 billion, compared with $1.21billion for 1998. The Company reported net income of $20.5million, or 41.56 per share, for the year ended December 31, 1999,compared with a net loss of $49.3 million, or $3.83 per share, forthe year ended December 31, 1998.
The sale of Stone & Webster's headquarters building in the fourthquarter generated $187.0 million in gross proceeds which wereused to reduce bank debt and vendor payables, and increase cashequivalents. The Company has leased it s current corporateheadquarters through March 2002 and, after carefully examining itsworkplace needs, will seek a more cost-effective headquarters inthe Boston area.
The results for our Engineering and Construction operations haveimproved significantly since the first quarter, and we areexperiencing improvement in end markets for power generationplants and service contracts awarded within the power industry,said H. Kerner Smith, Stone & Webster's Chairman and ChiefExecutive Officer.
New orders of $387 million were booked in the fourth quarter of1999; in addition, an important award for a 720-megawattcombined-cycle power plant will be booked in the first half of2000 after completion of owner financing; several others are innegotiation. Backlog was $2.6 billion at both December 31, 1999and 1998.
Engineering, Construction and Consulting revenue was $329million for the quarter ended December 31, 1999, compared with$275 million for the same period a year ago. Operating income forthe quarter, excluding non-recurring charges, was $6.8 million,compared with $6.6 million for the same period in 1998. Includingnon-recurring charges, the operating loss was $44.3 million,
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compared to a loss of $91.6 million for the quarter endedDecember 31, 1998. In the fourth quarter of 1999, while theCompany was working to improve its liquidity position, delays inpayments to vendors adversely impacted delivery of vendormaterials and services, and consequently, job scheduling andsequencing was affected. As a result, provisions of $38.0 millionwere established for additional expenditures to accelerate certainprojects an increased anticipated costs to complete other projects.In addition, a voluntary incentive retirement program in the fourthquarter of 1999 resulted in a non-cash charge of $13.1 million.
Engineering, Construction and Consulting revenue for 1999 was$1.17 billion compared with $1.21 billion in 1998. Operating lossfor 1999 was $115.0 million compared with an operating loss of$81.0 million reported in 1998. The Company's 1999 performancewas impacted by the fourth quarter items mentioned above and byprovisions of 474.2 in the first quarter and $10.4 million in thethird quarter to cover anticipated costs of completing twointernational projects, and three North American projects,respectively.
Based on aggressive actions we took in 1999 to reduce debt andoverhead costs and strengthen our core Engineering, Constructionand Consulting businesses, we are well prepared to compete intoday's and tomorrow's improving global environment and pursuenew opportunities as a strong, revitalized enterprise, said Mr.Smith.
We have made substantial progress in implementing our financialrestructuring plans announced after our third quarter, Mr. Smithsaid. Our liquidity has been improved through the sale of assets,the renegotiation of our bank facilities through Mary 31, 2000, andthe sale of stock to our retirement Plan. Our improved financialposition has reaffirmed the strength of our business, and we haveexpanded our bonding capability with new surety arrangements.The systems and controls we have implemented to reduce thenumber of non-performing projects and the continued reduction ofoverhead costs position to the Company for improved financialperformance in 2000. When the construction markets return fromthe current 25 year lows, we will be one of the top performingfirms in the industry.
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28. The statements in paragraphs 21-27, above, were false and misleading when made
because the defendants knew or recklessly disregarded the fact that the Company had not
properly allocated revenues and expenses for fixed contracts, and as such, its representations of
revenue growth and positive financial results were issued in violation of GAAP.
29. S&W violated the following generally accepted accounting principles in its
financial statements:
(a) That financial reporting should provide information that is useful to
present and potential investors and creditors in making rational investment, credit and similar
decisions (FASB Statement of Concepts No. 1, 134);
(b) That financial reporting should provide information about the economic
resources of an enterprise, the claims to those resources, and the effects of transactions, events,
and circumstances that change resources and claims to those resources (FASB Statement of
Concepts No. 1, ¶ 40);
(c) That financial reporting should provide information about how
management of an enterprise has discharged its stewardship responsibilities to owners
(shareholders) for the use of enterprise resources entrusted to it — to the extent that management
offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for
accountability to prospective investors and to the public in general (FASB Statement of Concepts
No. 1, ¶ 50);
(d) That financial reporting should provide information about an enterprise's
financial performance during a certain time period (FASB Statement of Concepts No. 1 ¶ 42);
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(e) That financial reporting should be reliable in that it represents what it
purports to represent --- that information should be reliable as well as relevant is a central
principle of accounting (FASB Statement of Concepts No. 2, 11 ¶ 58-59);
(f) That information is complete and nothing is left out that may be necessary
to insure that it validly represent underlying events and conditions (FASB Statement of Concepts
No. 2, ^ 79); and,
(g) That conservatism be used as a prudent reaction in uncertainty to try to
ensure that uncertainties and risk inherent in business situations are adequately considered
(FASB Statement of Concepts No. 2, 11 95, 97).
30. S&W materially overstated its revenue and earnings that were reported in the
Company's publicly disseminated financial statements for the interim period of fiscal year 1999.
As a result of defendants' actions, the financial statements were materially false and misleading
and failed to disclose the true financial status of S&W.
31. In light of the forgoing allegations, the Company had presented its results for the
interim periods of fiscal year 1999 in a manner which violated GAAP and principles of fair
reporting. Further, the adverse information misrepresented and/or concealed by defendants
during the Class Period is the type of information which, because of SEC regulations, regulations
of the national stock exchanges and customary business practice, is expected by investors and
securities analysts to be disclosed and is known by corporate officials and their legal and
financial advisors to be the type of information which is expected to be and must be disclosed.
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THE REVELATIONS
32. On April 30, 2000, the Company issued a press release in which it reported
financial results for the first quarter ended March 31, 2000, and stated that it will revise its 1999
financial results to include a provision for a substantial cost overrun on an ongoing project. The
Company also announced that it is currently engaged in substantive discussions regarding
possible strategic transactions, including the sale of all or part of its engineering and construction
business.
Company officials were recently notified of an unanticipated costoverrun on a key project by a major subcontractor related toestimates to complete work during the first half of the current year.As a result, the Company conducted a thorough review of thisproject and, based on this review, the Company will record aprovision of $27.5 million ($19.3 million after-tax or $1.47 pershare) and will revise its 1999 financial statements and amend its1999 Form 19-K.
As a result of the unanticipated overrun, coupled with previouslyreported operating losses, the Company is experiencing liquidityproblems and is in substantive discussions with potential lendersand strategic partners to provide interim and long-term financing.The Company has also initiated discussions with certainsubcontractors with regard to extended terms of payment.However, there are no assurances that these discussions will resultin any ultimate agreement. If these efforts prove unsuccessful, theCompany's independent public accountants have indicated that theCompany's ability to continue as a going concern will be broughtinto question and, upon issuance of the amended 1999 Form 10-K,the independent accountants will modify their report previouslyissued on April 14, 2000.
The issuance of a modified opinion by the Company's independentpublic accountants would be an event of default under theCompany's credit agreement with its principal bank lenders.Based on discussions with the agent bank for such lenders, theCompany expects to enter into a forbearance agreement with suchlenders if and when such event of default occurs.
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33. The response to this news by the market was swift, with the price of S&W
common stock dropping to $6.25, down $6.9375 or 53% of its value, in trading May 1, 2000,
34. An article published in The Boston Globe on May 2, 2000, stated that a cost
overrun at one project has created liquidity problems, forcing the Company to restate 1999
results and try to renegotiate payments. If its efforts aren't successful, the Company said, its
accountants think its "ability to function as a going concern will be brought into question." The
problems could also lead to default with lenders including Bank of America, though Stone &
Webster said it expects to enter into a "forbearance agreement" with banks in case of such
default. Solomon Smith Barney analyst Tobias Levkovich said bankruptcy "is a possibility" for
Stone & Webster if it can't arrange a sale or some other extensive partnership. According to the
article, even before the most recent cost overrun, related to work on an undisclosed domestic
power project, the Company's cash position had fallen dramatically. It listed $36.9 million in
cash and equivalents at the end of March, down from $106.5 million a the same time a year ago.
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CLAIMS FOR RELIEF
COUNT
(Against All Defendants For Violations ofSection 10(b) and Rule I0b-5 Promuleated Thereunder
35. Plaintiff repeats and re-alleges each and every allegation contained in the
foregoing paragraphs as if fully set forth herein.
36. During the Class Period, defendants engaged in a plan, scheme, conspiracy and
course of conduct, pursuant to which they knowingly or recklessly engaged in acts transactions,
practices and courses of business which operated as a fraud and deceit upon plaintiff and the
other members of the Class; made various untrue statements of material facts and omitted to state
material facts necessary in order to make the statements made, in light of the circumstances under
which they were made, not misleading; and employed devices, schemes and artifices to defraud
in connection with the purchase and sale of securities. Such scheme was intended to, and
throughout the Class Period, did: (a) conceal the adverse facts concerning the Company's
operations, particularly with respect to its financial condition; (b) artificially inflate and maintain
the market price of S&W securities; and (c) cause plaintiff and the other members of the Class to
purchase S&W securities at inflated prices.
37. Pursuant to the above plan, scheme, conspiracy and course of conduct, each of the
defendants participated directly or indirectly in the preparation and/or issuance of the quarterly
and annual reports, SEC filings, press releases and other statements and documents described
above, including statements made to securities analysts and the media that were designed to
influence the market for S&W securities. Such reports, filings, releases and statements were
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materially false and misleading in that they failed to disclose material adverse information and
misrepresented the truth about S&W's finances and business prospects.
38. By virtue of their positions at the Company, defendants had actual knowledge of
the materially false and misleading statements and material omissions alleged herein and
intended thereby to deceive plaintiff and the other members of the Class, or, in the alternative,
defendants acted with reckless disregard for the truth in that they failed or refused to ascertain
and disclose such facts as would reveal the materially false and misleading nature of the
statements made, although such facts were readily available to defendants. Said acts and
omissions of defendants were committed willfully or with reckless disregard for the truth. In
addition, each defendant knew or recklessly disregarded that mater facts were being
misrepresented or omitted as described above.
39. Information showing that defendants acted knowingly or with reckless disregard
for the truth is peculiarly within defendants' knowledge and control. As the senior managers and
directors of the Company, the Individual Defendants had knowledge of the details of the
Company's internal affairs.
40. The Individual Defendants are liable both directly and indirectly for the wrongs
complained of herein. Because of their positions of control and authority, the Individual
Defendants were able to and did, directly or indirectly, control the content of the statements of
the Company. As officers and directors of a publicly-held company, the Individual Defendants
had a duty to disseminate timely, accurate, and truthful information with respect to the
Company's business, operations, financial condition and prospects. As a result of the
dissemination of the aforementioned false and misleading reports, releases and public statements,
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the market price of S&W securities was artificially inflated throughout the Class Period. In
ignorance of the adverse facts concerning S&W's business and financial condition which were
concealed by defendants, plaintiff and the other members of the Class purchased S&W securities
at artificially inflated prices and relied upon the price of the securities, the integrity of the market
for the stock and/or upon statements disseminated by defendants and were damaged thereby.
41. During the Class Period, S&W securities were traded on an active and efficient
market. Plaintiff and the other members of the Class, relying on the materially false and
misleading statements described herein, which the defendants made, issued or caused to be
disseminated, or relying upon the integrity of the market, purchased S&W securities at prices
artificially inflated by defendants' wrongful conduct. Had plaintiff and the other members of the
Class known the truth, they would not have purchased said shares or would not have purchased
them at the inflated prices that were paid. At the time of the purchases by plaintiff and the Class,
the true value of S&W securities was substantially lower than the prices paid by plaintiff and the
other members of the Class_ The market price of S&W securities declined sharply upon public
disclosure of the facts alleged in this complaint.
42. By reason of the conduct alleged herein, defendants knowingly or recklessly,
directly or indirectly, have violated Section 10(b) of the Exchange Act and Rule 10-5
promulgated thereunder.
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Case 1:00-cv-10874-RWZ Document 1 Filed 05/08/00 Page 20 of 23
COUNT II
(Violations of Section 20(a) of theExchange Act Against The Individual Defendants)
43. Plaintiff repeats and re-alleges each and every allegation contained in the
foregoing paragraphs as if fully set forth herein.
44. (a) During the Class period, defendant Smith participated in the operation and
management of the Company, and conducted and participated, directly and indirectly, in the
conduct of S&W's business affairs. Because of Smith's senior positions, he knew the adverse
non-public information about S&W's inflated revenues and false financial statements.
(b) As an officer and director of a publicly owned company, Smith had a duty
to disseminate accurate and truthful information with respect to S&W's financial condition and
results of operations, and to correct promptly any public statements issued by S&W which had
become materially false or misleading.
(c) Because of his positions of control and authority as a senior officer and
director of S&W, Smith was able to, and did, control the contents of the various reports, press
releases and public filings which S&W disseminated in the marketplace during the Class Period
concerning the Company's results of operations. Throughout the Class Period, Smith exercised
his power and authority to cause S&W to engage in the wrongful acts complained of herein.
Smith, therefore, was a "controlling person" of S&W within the meaning of Section 20(a) of the
Exchange Act. In this capacity, he participated in the unlawful conduct alleged which artificially
inflated the market price of S&W securities.
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Case 1:00-cv-10874-RWZ Document 1 Filed 05/08/00 Page 21 of 23
45. (a) During the Class Period, defendant Langford participated in the operation
and management of the Company, and conducted and participated, directly and indirectly, in the
conduct of S&W's business affairs. Because of Langford's senior positions, he know the adverse
nonpublic information about S&W's inflated revenues and false financial statements.
(b) As an officer of a publicly owned company, Langford had a duty to
disseminate accurate and truthful information with respect to S&W's financial condition and
results of operations, and to correct promptly any public statements issued by S&W which had
become materially false or misleading.
(c) Because of his position of control and authority as a senior officer of
S&W, Langford was able to, and did, control the contents of the various reports, press releases
and public filings which S&W disseminated in the marketplace during the Class Period
concerning the Company's results of operations. Throughout the Class Period, Langford
exercised his power and authority to cause S&W to engage in the wrongful acts complained
herein. Langford, therefore was a "controlling person" of S&W within the meaning of Section
20(a) of the Exchange Act. In this capacity, he participated in the unlawful conduct alleged
which artificially inflated the market price of S&W securities.
46. Each of the Individual Defendants, therefore, acted as a controlling person of
S&W. By reason of their senior management positions and as directors of the Company, each of
the Individual Defendants had the power to direct the actions of, and exercise the same to cause,
the Company to engage in the unlawful acts and conduct complained of herein. Each of the
Individual Defendants exercised control over the general operations of the Company and
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Case 1:00-cv-10874-RWZ Document 1 Filed 05/08/00 Page 22 of 23
possessed the power to control the specific activities which comprise the primary violations
about which plaintiff and the other members of the Class complain.
47. By reason of the above conduct, the Individual Defendants are liable pursuant to
Section 20 of the Exchange Act for the violations of S&W.
WHEREFORE, plaintiff demands judgment against defendants as follows:
A. Determining that the instant action may be maintained as a class action under Rule
23, Federal Rules of Civil Procedure, and certifying the named class plaintiff;
B. Requiring defendants to pay damages sustained by plaintiff and the Class by
reason of the acts and transactions alleged herein;
C. Awarding plaintiff and the other members of the Class prejudgment and post-
judgment interest, as well as their reasonable attorney's fees, expert fees and other costs; and
D. Awarding such other and further relief as this Court may dem just and proper.
JURY TRIAL DEMANDED
Plaintiff demands a jury trial of all issues so triable.
Dated: May 8, 2000
BERMAN, DEVALERIO & PEASE, LLP
w Jeffrey C. Block (B O# 600747)Michael Sullivan (BBO# 637100 )One Liberty SquareBoston, MA 02109Telephone: (617) 542-8300
Attorneys for Plaintiff
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Case 1:00-cv-10874-RWZ Document 1 Filed 05/08/00 Page 23 of 23
OF COUNSEL:
WEISS & YOURMANJoseph fl. Weiss551 Fifth Avenue, Suite 1600New York, NY 10176Telephone: (212) 682-3025
THE LAW OFFICES OF JEFFREY S. ABRAHAMJeffrey S. Abraham60 East 42" Street, Suite 4700New York, NY 10165Telephone: (212) 692-0555
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