I don't know how many of you might have come across the SEC news release on
the Waste Management fraud but I was flabbergasted by the purple prose. I've
never seen the phrase "ill-gotten gain" used so many times in a single
document. See for yourselves:
Waste Management Founder, Five Other Former Top Officers Sued for Massive
Fraud
Defendants Inflated Profits by $1.7 Billion To Meet Earnings Targets;
Defendants Reap Millions in Ill-Gotten Gains While Defrauded Investors Lose
More Than $6 Billion
FOR IMMEDIATE RELEASE
2002-44
Washington, D.C., March 26, 2002 - The Securities and Exchange Commission
filed suit today against the founder and five other former top officers of
Waste Management Inc., charging them with perpetrating a massive financial
fraud lasting more than five years. The complaint, filed in U.S. District
Court in Chicago, charges that defendants engaged in a systematic scheme to
falsify and misrepresent Waste Management's financial results between 1992
and 1997.
The complaint names Waste Management's former most senior officers: Dean L.
Buntrock, Waste Management's founder, chairman of the board of directors,
and chief executive officer during most of the relevant period; Phillip B.
Rooney, president and chief operating officer, director, and CEO for a
portion of the relevant period; James E. Koenig, executive vice president
and chief financial officer; Thomas C. Hau, vice president, corporate
controller, and chief accounting officer; Herbert Getz, senior vice
president, general counsel, and secretary; and Bruce D. Tobecksen, vice
president of finance.
"Our complaint describes one of the most egregious accounting frauds we have
seen," said Thomas C. Newkirk, associate director of the SEC's Division of
Enforcement. "For years, these defendants cooked the books, enriched
themselves, preserved their jobs, and duped unsuspecting shareholders."
According to the complaint, the defendants violated, and aided and abetted
violations of, antifraud, reporting, and record-keeping provisions of the
federal securities laws. The Commission is seeking injunctions prohibiting
future violations, disgorgement of defendants' ill-gotten gains, civil money
penalties, and officer and director bars against all defendants.
"Defendants' fraudulent conduct was driven by greed and a desire to retain
their corporate positions and status in the business and social
communities," Newkirk said. "Our goal is to take the profit out of
securities fraud and to prevent fraudsters from serving as officers or
directors of public companies."
The complaint alleges that the defendants played the following roles in the
scheme:
Buntrock - the driving force behind the fraud. He set earnings targets,
fostered a culture of fraudulent accounting, personally directed certain of
the accounting changes to make the targeted earnings, and was the
spokesperson who announced the company's phony numbers. At the same time,
Buntrock posed as a successful entrepreneur. With charitable contributions
made with fruits of his ill-gotten gains or money taken from the company,
Buntrock presented himself as a pillar of the community. For example, just
10 days before certain of the accounting irregularities first became public,
he enriched himself with a tax benefit by donating inflated company stock to
his college alma mater to fund a building in his name. He was the primary
beneficiary of the fraud and reaped more than $16.9 million in ill-gotten
gains from, among other things, performance-based bonuses, retirement
benefits, charitable giving, and selling company stock while the fraud was
ongoing.
Rooney - in charge of building the profitability of the company's core solid
waste operations and at all times exercised overall control over the
company's largest subsidiary. He ensured that required write-offs were not
recorded and, in some instances, overruled accounting decisions that would
have a negative impact on operations. He reaped more than $9.2 million in
ill-gotten gains from, among other things, performance-based bonuses,
retirement benefits, and selling company stock while the fraud was ongoing.
Koenig - primarily responsible for executing the scheme. He also ordered the
destruction of damaging evidence, misled the company's audit committee and
internal accountants, and withheld information from the outside auditors. He
profited by more than $900,000 from his fraudulent acts.
Hau - principal technician for the fraudulent accounting. Among other
things, he devised many "one-off" accounting manipulations to deliver the
targeted earnings and carefully crafted the deceptive disclosures. He
profited by more than $600,000 from his fraudulent acts.
Tobecksen - another accounting expert who was Koenig's right-hand man. In
1994, he was enlisted to handle Hau's overflow. He profited by more than
$400,000 from his fraudulent acts
Getz - the company's general counsel. Getz blessed the company's fraudulent
disclosures and profited by more than $450,000 from his fraudulent acts.
The complaint alleges that defendants fraudulently manipulated the company's
financial results to meet predetermined earnings targets. The company's
revenues were not growing fast enough to meet these targets, so defendants
instead resorted to improperly eliminating and deferring current period
expenses to inflate earnings. They employed a multitude of improper
accounting practices to achieve this objective. Among other things, the
complaint charges that defendants:
avoided depreciation expenses on their garbage trucks by both assigning
unsupported and inflated salvage values and extending their useful lives,
assigned arbitrary salvage values to other assets that previously had no
salvage value,
failed to record expenses for decreases in the value of landfills as they
were filled with waste,
refused to record expenses necessary to write off the costs of unsuccessful
and abandoned landfill development projects,
established inflated environmental reserves (liabilities) in connection with
acquisitions so that the excess reserves could be used to avoid recording
unrelated operating expenses,
improperly capitalized a variety of expenses, and
failed to establish sufficient reserves (liabilities) to pay for income
taxes and other expenses.
Defendants' improper accounting practices were centralized at corporate
headquarters, according to the complaint. Each year, Buntrock, Rooney, and
others prepared an annual budget in which they set earnings targets for the
upcoming year. During the year, they monitored the company's actual
operating results and compared them to the quarterly targets set in the
budget, the complaint says. To reduce expenses and inflate earnings
artificially, defendants then primarily used "top-level adjustments" to
conform the company's actual results to the predetermined earnings targets,
according to the complaint. The inflated earnings of prior periods then
became the floor for future manipulations. The consequences, however,
created what Hau referred to as a "one-off" problem. To sustain the scheme,
earnings fraudulently achieved in one period had to be replaced in the next.
Defendants allegedly concealed their scheme in a variety of ways. They are
charged with making false and misleading statements about the company's
accounting practices, financial condition, and future prospects in filings
with the Commission, reports to shareholders, and press releases. They also
are charged with using accounting manipulations known as "netting" and
"geography" to make reported results appear better than they actually were
and avoid public scrutiny. Defendants allegedly used netting to eliminate
approximately $490 million in current period operating expenses and
accumulated prior period accounting misstatements by offsetting them against
unrelated one-time gains on the sale or exchange of assets. They are charged
with using geography entries to move tens of millions of dollars between
various line items on the company's income statement to, in Koenig's words,
"make the financials look the way we want to show them."
Defendants were allegedly aided in their fraud by the company's long-time
auditor, Arthur Andersen LLP, which repeatedly issued unqualified audit
reports on the company's materially false and misleading annual financial
statements. At the outset of the fraud, management capped Andersen's audit
fees and advised the Andersen engagement partner that the firm could earn
additional fees through "special work." Andersen nevertheless identified the
company's improper accounting practices and quantified much of the impact of
those practices on the company's financial statements. Andersen annually
presented company management with what it called Proposed Adjusting Journal
Entries ("PAJEs") to correct errors that understated expenses and overstated
earnings in the company's financial statements.
Management consistently refused to make the adjustments called for by the
PAJEs, according to the complaint. Instead, defendants secretly entered into
an agreement with Andersen fraudulently to write off the accumulated errors
over periods of up to ten years and to change the underlying accounting
practices, but to do so only in future periods, the complaint charges. The
signed, four-page agreement, known as the Summary of Action Steps (attached
to the Commission's complaint), identified improper accounting practices
that went to the core of the company's operations and prescribed 32 "must
do" steps for the company to follow to change those practices. The Action
Steps thus constituted an agreement between the company and its outside
auditor to cover up past frauds by committing additional frauds in the
future, the complaint charges.
Defendants could not even comply with the Action Steps agreement, according
to the complaint. Writing off the errors and changing the underlying
accounting practices as prescribed in the agreement would have prevented the
company from meeting earnings targets and defendants from enriching
themselves, the complaint says.
Defendants' scheme eventually unraveled. In mid-July 1997, a new CEO ordered
a review of the company's accounting practices. That review ultimately led
to the restatement of the company's financial statements for 1992 through
the third quarter of 1997. When the company filed its restated financial
statements in February 1998, the company acknowledged that it had misstated
its pre-tax earnings by approximately $1.7 billion. At the time, the
restatement was the largest in corporate history.
As news of the company's overstatement of earnings became public, Waste
Management's shareholders (other than the defendants who sold company stock
and thus avoided losses) lost more than $6 billion in the market value of
their investments when the stock price plummeted by more than 33%.
For additional information, see Litigation Release No. 17435. Previously,
the Commission instituted and simultaneously settled the following
proceedings against Andersen and four of its partners in connection with
Waste Management:
SEC v. Arthur Andersen LLP, et al., No. 1:01CV01348 (JR) (D.D.C.) [Release
No. LR-17039] (June 19, 2001)
In the Matter of Arthur Andersen, LLP, [Release No. 34-44444] (June 19,
2001)
In the Matter of Robert E. Allgyer CPA, [Release Nos. 33-7986, 34-44445]
(June 19, 2001)
In the Matter of Edward G. Maier CPA, [Release Nos. 33-7987, 34-44446] (June
19, 2001)
In the Matter of Walter Cercavschi CPA, [Release Nos. 33-7988, 34-44447]
(June 19, 2001)
In the Matter of Robert G. Kutsenda, CPA, [Release No. 34-44448] (June 19,
2001).
These releases may be found at the Commission's web site, www.sec.gov.
Contact: Thomas C. Newkirk, Associate Director, Division of Enforcement;
tel: (202) 942-4550
http://www.sec.gov/news/headlines/wastemgmt6.htm
----------------------------------------------------------------------------
----
Home | Previous Page Modified: 03/26/2002
Tom Walker
604 255 4812
